Managing marketing mix is important to firms. Among product, price, place and distribution, channel management is particular challenging for sales subsidiaries in host countries. Marketing channel or
distribution channel can be regarded as the process of transferring particular products or services from producers to consumers (EI-Ansary & Stern, 1972). Two general research areas of marketing channels
(Frazier, Sawhney, & Shervani, 1990); one relates to the structure of a channel, answering the question of how the channel is generally organized to fulfill its basic purpose of creating value for a firm’s customers, while the other relates to the behavior dimensions of the channel, addressing the question of how channel members perceive, build, and deal with inter-firm relationships that exist within channel.
Channel Structure
In early days, most academics applied the transaction cost theory (TCE) to discuss “make- or-buy”
issues (Coase, 1937; Williamson, 1979; Williamson, 1981). The TCE argues that when making the
make-or-buy decision, firms need to take into account both the sales volume and possibility of being taking advantage by others firms, into consideration. Anderson and Coughlan (1987) and Kim and Daniels (1991) pointed out that ownership of transaction-specific assets, service requirements, product differentiation, cultural similarly would be more likely for a manufacturer to adopt a direct selling approach. Some studies followed a functional approach and claimed that distributors in host countries are in a better position to fulfill contact efficiency function, information providing function and customer service function. While the TCE perspective does not consider the marketing capacity of external distributors, the functional
approach reduces validity when transaction cost issues are concerned. Kim (2001) proposed to integrate both the TCE and functional approach in order to increase explanatory power.
With the advent of the Internet, multichannel strategies have become one of the popular means in B2B marketing. Multichannel strategies help firms to interact with clients. B2B marketers often adopt
multichannel strategies (Moriarty & Moran, 1990) while customers choose the channels to fulfill their needs by their own preferences (Sharma & Mehrotra, 2007). Several advantages of multichannel strategies include increasing number of potential clients, p r o v i d i n g better customer services and generating higher levels of satisfaction (Moriarty & Moran, 1990). Notwithstanding these benefits, multichannel strategy may also incur disadvantages including channel conflict. Multichannel strategy contains numerous modes, for
examples, using vertical integration (i.e., direct sales) and independent distribution concurrently (i.e., termed dual channel system) or only using several types of independent distributors (e.g., distributors for medical
devices and farm machinery) to serve different types of customers (e.g., clients in medical and agricultural sectors) concurrently (termed multiple independent channel system) (Dutta, Bergen, Heide, & John, 1995;
Gabrielsson, Kirpalani, & Luostarinen, 2002; Hardy & Magrath, 1988, pp. 15-22; Kabadayi, 2011).
Kabadayi (2011) uses the TCE perspective to explain why some manufacturers adopt dual channel systems while others choose multiple independent channel system. Dual channel system enables manufacturers to prevent independent distributors to take advantages of them due to lock-in effect and opportunism and thus it provides safeguard for manufactures. To summarize, dual channel system helps manufacturers to gather all pieces of useful information and use them to evaluate the performance of independent channel members as well as to control the behaviors of channel members. Bergen and Heide (1995) show that dual channel system assists firms in resolving channel conflict more swiftly and transmitting information more effectively between integrated channel and independent channel. However, Habrielsson, Kirpalani and Luostarinen (2002) hold an opposite view. They argue that dual channel system, in fact, heats up the competition
between manufacturers and distributors. They suggest that dual channel strategy would be more appropriate when manufactures have more bargaining power. Channel intermediaries are another consideration when manufacturers consider an indirect sales approach. In selling personal computers, channel intermediaries include wholesalers, resellers, and retailers. Resellers can be dealer chains (or corporate resellers), local dealers, indirect fax, telephone or Internet resellers and value-added resellers; retailers can be PC superstores, PC stores and general merchandising stores. Firms determine the types of channel intermediaries based on the size of their customers. Firms use small dealers or distributors for small customers, sales force or value-added resellers for medium-sized consumers, and key account sales force for larger clients (Sharma
& Mehrotra, 2007). Wholesalers often purchase large amount of products from manufacturers with the hope to receive special discount from list prices and sell to their customers. Valued -added Resellers (VARs) request product discount from manufacturers and add value to already existing solutions. Different from the two, system integrators (SIs) hire technical specialists to solve customers’ problems in some specific markets. SIs buy products directly from wholesalers or manufacturers. Often, manufacturers need to persuade SIs to purchase their products because SIs operate in some regions that manufacturers have
difficulty to enter. When doing business with SIs, fixed prices are always guaranteed by manufacturers as the development of solution for particular customers takes months even years to complete.
Each channel member provides distinctive value -added activities. For instance, Taiwanese high- tech firms use wholesalers, VARs and SIs as their main distribution channels. In the information technology industry, different distributors play different functions: wholesales have professional and technical personnel and they possess software services and data processing capabilities; VARs integrate software and hardware to solve the specific needs of a particular customer and thus provide end-users “one-stop shopping service”;
and SIs are similar to VARs but offer professional services for complex, system-oriented or
solution-oriented products (Gorchels, Edward, & Chuck, 2004). However, “intermediary types” have various definitions depending on the industries or even the customers. Therefore, firms should pay attention to the functions or services offered by each intermediary instead of how it is called. According to Friedman and Furey (1999), the more complex a product, the greater degree for manufacturers to adopt “high t o u c h channels” (e.g., distributors, VARs, and direct sales force). High touch channels define as channels that can provide quality service and support to the needs of end-customers. Comparing with high touch channels, low touch channels (e.g., the internet, telemarketing, and retail stores) cost less but offer lower degree of interaction with customers (Friedman & Furey, 1999).
Channel Management
Channel management is an activity a MNC needs to engage after it determines its channel structure in a foreign market. A foreign firm needs to persuade channel members to perform certain sales and service activities so that its goals in a host market can be achieved. There is an extensive literature on channel management addressing several issues such as incentives, power, conflict and cooperation (EI-Ansary &
Stem, 1972; Gaski, 1984; Gassenheimer, Sterling, &
Robicheaux, 1996; Hunt & Nevin, 1974; Rawwas, Vitell, & Bernes, 1997). This study will focus on conflict, relationship and incentives.
Conflict
Conflict management has long been considered as one important issue in channel behavior research.
Levy (1981) holds that “the concept of conflict is central to marketing channel management”. Channel conflict is defined as a perceived situation in which the goals of distributors and manufacturers are not congruent (Etgar, 1979; Gaski,1984). It is manifested when two parties cannot make mutual agreement toward problems (Brown & Day, 1981). Without settling down the issue, channel cooperation, satisfaction, and performance would be affected (Duarte & Davies, 2003; Magrath & Hardy, 1989; Rosenbloom, 1973).
Rosenbloom (1973) believes that conflict can have both advantages and disadvantages. While the former can stimulate management to review channels policies and activities, the latter reduces th e efficiency of distribution and lowers the performance of manufacturers. Kolter and Keller (2006) categorize three types of channel conflict: (1) horizontal channel conflict indicating conflict that members in the same channel level encounter; (2) vertical channel conflict referring to conflict that members in different channel levels face;
and (3) multichannel conflict which is caused by having multiple distribution channels in the same market.
Goal incompatibility, role incongruence, resource scarcity, perceptual difference in realities, expectation differences, decision domain disagreements, and communication difficulties have been identified as the causes of channel conflict (Cadotte & Stem, 1979; Etgar, 1979; Stem, EI-Ansary, & Coughlan, 1996).
Magrath and Hardy (1989) indicate that channel length, variety and density are associated with conflicts: (1) channel length: conflict decreases when manufacturers have shorter channel length; (2) channel variety (single/dual/multiple): conflicts are lower for single channel or multiple channels with each channel member possessing distinctive competences; and (3) channel density (exclusive/selective/intensive): compared with exclusive and intensive channels, channel conflicts would be higher for selective channels because they generate greater uncertainty and a sense of territorial infringement among distributors. Magrath and Hardy (1989) further enumerate the conflict zones regarding to the channel design of manufacturers by pointing firms should adopt different ways to manage conflicts. . For instance, dual channel system is in the zone of high conflict and short channel length is in the zone of low conflict.
Relationship.
Friedman (2002) indicates that due to the complexity of multi-channels nowadays, firms attempt to reduce channel conflict always comes apart. Therefore, building and managing relationship is gaining importance. Channel cooperation is a joint effort with voluntary actions of members at different levels to achieve objectives mutually (Sibley & Michie, 1982; Skinner, Gassenheimer, & Kelley, 1992). A healthy cooperative relationship often brings benefits along, for examples, raising internal capabilities, and assisting members solve conflicts (Mehta, Larsen, & Rosenbloom, 1996). Moriarty and Kosnik (1987) recommend that manufacturers in high-tech industries need to build relationships with channels and customers.
McKenna (1987) further expands their view and stresses that developing relationships can overcome fear, uncertainty and doubt (FUD) among channels. Morgan and Hung (1994) note that relationship marketing seems as an effective tool for partners to build long-term relationships. Relationship marketing indicates to
“all marketing activities directed towards establishing, developing, and maintaining successful relational exchanges.” Studies have shown that relationship marketing actually helps manufacturers and distributors developing a stronger relationship and influences performance positively (Crosby, Evans, & Cowles, 1990;
Morgan & Hun, 1994). A strong brand gives bargaining power to a manufacturer in B2B business (Glynn, 2010) and distributors tend to be cooperative (Kasulis, Morgan, Griffith, & Kenderdine, 1999). On the contrary, a weaker brand means that a manufacturer has to rely on deals to win the cooperation from distributors (Curhan & Kopp, 1987). From the resource-based view (RBV), brands undoubtedly can be considers as a market-based asset which creates relational rents from external business partners. For distributors, brands raise customer needs, increase sales volume and profit, and generate useful market information. The influence of brand has been studied extensively in the consumer literature (e.g. Krishnan, 1996) but only a few researchers pay attention to B2B context. To B2B buyers, brands can serve as a mechanism of risk reduction. Risk reduction is more important when a purchase is complicated and need additional services and supports (e.g., purchasing high-tech products) (Mudambi, 2002). Consequently, a manufacturers’ strong brand not only creates transactional value and reduces risk, but also increases the level of value expectation of buyers (McQuiston, 2004). In addition, strong inter- firm relationship helps
distributors to strengthen values (Subramani & Venkatraman, 2003). Ghosh and John (1999) claim firms with strong brands can achieve better channel governance than inter-firm relationship. Combs and Ketchen (1999) find out that unknown brands compel manufacturers to invest more resources on developing inter-firm cooperation. Anselmi (2000) suggests that weaker brands developing friendly relationship with distributors receive more profit than strong brands pursuing relational exchange.
Incentives.
Applying governance mechanisms, such as incentive programs, to control independent channel intermediaries ensure channels to function effectively. Channel incentives are defined as behaviors or policies described in an agreement or a contract that are designed to motivate active intermediary support of a manufacturer’s agenda (Gilliland, 2003). Incentives are generally recognized as the most effective way to motivate channel intermediaries (Williamson, 1991). By using incentive programs, intermediaries would honor the requests of manufacturers and perform the expected behaviors (Gilliland, 2003). Designing attractive compensations for independent channel intermediaries to work effectively is the priority for manufacturers (Chiu & Desai, 1995; Zenger & Marshall, 2000). Though monetary rewards are used commonly when intermediaries achieve expected performance, some incentives have no direct connection towards performance (e.g., co-op advertising kits and sales support information) but contribute to the increasing of sales or profit margins of intermediaries. In addition to trade discounts and other means of direct compensations, channel incentives also include information shared, promises made, and support tools provided to distributors (Gilliland, 2003; Rubin,1990). Incentives can be categorized into three types: (1) financial incentives, such as free merchandise (Kasulis et al., 1999; Rosenbloom, 1999); (2) sales support incentives which offering advertising and promotional resources (Gorchels et al. 2004; Kasulis & Spekman, 1980); and (3) managerial support offering training to sales staff (Hultink & Atuachene-Gima, 2000;
Rosenbloom, 1999), sales employee support (Kasulis et al., 1999) and management training. Eisenhardt (1985), John and Witz (1989) and Kraft (1999) divide incentives into outcome-oriented (i.e., based on objective measures of outcomes) and behavior-oriented (i.e., subjective and complex measures to evaluate
behavior). Gilliand (2003) believes that although these studies try to classify incentives into two to three categories, in fact, manufacturers often adopt a complex array of tools. By examining manufacturers in high-tech industries, he categorized 59 manufactures’ incentives into 16 subcategories and 5 major categories according to their control purposes. First, credible channel policies: manufacturers offer these policies to signal dedication to devote themselves in a distributor- based selling model. Second, market development support: incentives offered by manufacturers to distributors to promote their brands and this method indicate manufacturers’ control of specific tasks of distributors. Third, supplemental contact incentives refer to programs designed to enhance distributor competences through a means of extra-high levels of information and communication and manufacturers use this kind of incentive to control
distributors’ quality and efficiency of task performance. Fourth, high-powered incentives refer to the use of monetary compensation to manage distributors’ performances and outputs. Fifth, end-user encouragements:
in this method, manufacturers develop unique channel values through joint activities with distributors with the purpose to control the length of distributor relationship. Gilliland (2004) further suggests that incentive methods should be corresponding to specific objectives. High-power incentives are more suitable when manufacturers focus on achieving sales goals. Credible channel policies, supplemental contact and capability-based market development are appropriate for fulfilling the purpose of sustaining cooperation between manufacturers and distributors and lowering conflict generation.. For the reasons above, incentives assist firms to raise performance as well as build and sustain relationships with their distributors.