Communications of the ACM
Coping with Internet Channel Conflict
As e-business grows at an incredible speed and consumers widely adopt the Internet in their daily life, manufacturers may have an unprecedented opportunity to develop new marketing and sales channels [6]. Using Internet channels, manufacturers can sell their products directly to their customers, bypassing traditional intermediaries such as distributors, resellers, dealers, and retailers. Additionally, if used properly, Internet channels enable manufacturers to communicate directly with their customers [2], provide consistent purchasing experiences [6], gather richer and more valuable customer information, reduce advertising costs, and create a new market, while also providing competitive services and pricing for consumers.
As manufacturers change their business strategy toward direct online sales, however, the relationship between manufacturers and intermediaries can deteriorate [1]. This is called Internet channel conflict, a conflict that occurs when Internet and traditional bricks-and-mortar channels destructively compete against each other when selling to the same markets. The prior balance of the power structure between the channel members may break down, increasing the risk of financial losses, lawsuits, protective legislation, trust destruction, and market shrinkage [3, 5]. Intermediaries that fear the negative effects of disintermediation may fight back against manufacturers. For instance, Wal-Mart and Home Depot warned Black & Decker that they would take its products off their shelves should Black & Decker start selling its products through the Internet. Just one month after it started selling guitars online at a 10% discount, Gibson Musical Instruments backed away from its disintermediation efforts due to strong resistance from intermediaries. Confronted with dealer complaints, Ford executives recently agreed to discontinue direct online car sales at a future date. According to a recent survey of the home furniture industry, 66% of manufacturers said Internet channel conflict is the biggest obstacle to their online sales.
Conflict occurs when parties disagree over substantive issues or when emotional antagonism creates friction between parties. Conflict that is detrimental must be reduced or eliminated.
Because the intensity and frequency of channel conflicts continue to increase, channel conflict management is an urgent issue in the e-business era. Since Internet channel conflict has not received proportionate focus from researchers, stakeholders are at a loss, since they do not have the know-how to cope with their Internet channel conflicts. In this article, we provide a groundbreaking strategic framework, and suggest practical guidelines for Internet channel conflict management.
In general, conflict occurs when parties disagree over substantive issues or when emotional antagonism creates friction between parties. Conflict that is detrimental to an organization must be reduced or eliminated. To this end, researchers have developed several conflict management strategies. One major effort applies the concept of concern to the arena of conflict management. Individuals' concerns are defined as their needs, desires, formal objectives, and standards of behavior. Recently, Rahim developed a general model [7] of conflict management that integrates previous efforts; it consists of two concern dimensions (self and others) and five specific strategies (obliging, integrating, avoiding, dominating, and compromising), as illustrated in Figure 1.
As a practical approach to developing the best Internet conflict management strategy for a company, we suggest a four-stage approach, which we describe in detail here.
Stage I. Identifying an Organization's Internet Channel Conflict Management Environment
In order to select an appropriate Internet channel conflict management strategy, a company must identify its channel conflict management environment. We suggest this environment can be measured by adopting and modifying version II of Rahim Organizational Conflict Inventory (ROCI-II), a successfully applied instrument designed to identify an individual's or an organization's conflict management style [8] (see Table 1). Given its successful application in diversified individual and organizational behaviors, this measurement scheme may be adapted to measure an organization's Internet channel conflict management style. In this study, the scheme was revised to fit the Internet channel conflict domain, and named the Internet channel conflict measurement (ICCM) instrument (see Table 1).
After all top managers responsible for Internet channel decisions answer the ICCM questions, each organization can identify its predominant Internet channel conflict management style through averaging all scores and performing basic statistical calculations.1 If two or three styles are found to have similarly high scores, a focus group study may be used to select which is most appropriate.
Stage II. Searching for Other Success Cases
After identifying a company's channel conflict management style, the next step is to get more detailed information based on the experiences of other companies. It is important to examine existing success stories in Internet channel conflict management. "Success" means Internet channel conflict has been fully or partially resolved by applying a specific conflict management strategy. Such stories may be found in e-business magazines, the news media, and some practitioner-oriented journals, as well as on Web sites such as digitalenterprise.org/channels/ channel.html. We searched for success stories using Internet search engines such as Lexis-Nexis, ABI-Informs, Prospect, and Google, with the keywords channel conflict, Internet channel, hybrid channel, and conflict management, and found 20 success cases as shown in Table 2.2
After analyzing the cases, we identified five channel conflict management strategies (see Figure 2): intermediary support strategy, differentiation strategy, conflict avoidance strategy, channel absorption strategy, and compromising strategy. In Figure 3 we mapped each case onto its appropriate strategic domain.
Intermediary support strategy is used by manufacturers with low concern for self but high concern for intermediaries. In this situation, manufacturers adopt a passive Internet channel strategy, and use their Web sites to support existing intermediaries. For example, a manufacturer may develop e-business infrastructure for its intermediaries, advertise product information instead of product sales, and give e-customers the location of the nearest local intermediaries. Jeans company Levi Strauss developed its Web site as an advertising center. Rather than sell its brands online, Levi Strauss uses its Web site to provide information about its brands and products. The site also provides location and contact information for the nearest department stores and retailers that sell Levis. Using a similar strategy, H.E. Butt Grocery Company provides customers with a list of retailers and their locations on its Web site, instead of selling products directly online. Wes & Willy, a boy's casual clothing company, provides the nearest store information with a variety of resources for children. Finally, Colgate-Palmolive redefined its e-business site as an oral health information provider. Through oral hygiene FAQs, and information in the form of Dental Professional World and Kids World, it introduces its product groups, but does not sell any products on its Web site.
Differentiation strategy is used in situations in which manufacturers have high concern both for self and their intermediaries. Such manufacturers seek ways to differentiate themselves from their intermediaries. To do this, they utilize strategies such as market and product differentiation to minimize the cannibalization of existing channels.
Using the market differentiation strategy involves separating customers into groups, and addressing each group using different channels. For example, Xerox sells copy machines to its small and home office (SOHO), and retail markets using online direct channels, while also selling machines to the industrial sector through regional retailers. Texas Instruments uses the Internet to sell low-volume high-priced semiconductors to large customers such as Sun Microsystems, while relying on distributors like Arrow and Hamilton-Hallmark to sell high-volume, low-priced products such as memory chips. Similarly, Tenneco Automotive allows its wholesale customers, but not repair shops, to place orders through its Web sites.
Using the product differentiation strategy involves selling different products through different channels. Kendall-Jackson, a wine producer, initiated online wine sales to 13 states. To avoid channel conflict, Kendall-Jackson sold Artisans & Estates, a rarely carried wine, on its Web site, while distributing other wines through existing intermediaries. Similarly, Acer Group sells only bundled products on its Web site, and Sega sells game bundles unavailable from intermediaries to avoid channel conflicts. Finally, Gap Inc. has developed maternity clothing lines for exclusive sale on the Internet.
Conflict avoidance strategy is used by manufacturers with low concern for self and others. Such manufacturers engage in online selling directly, while simultaneously attempting to alleviate intermediaries' concerns. These manufacturers are successful in "sneaking" into direct Internet channel sales, but only by making some sacrifices. When Estee Lauder started Clinique.com to sell its cosmetics online, it developed several strategies to reduce conflicts with physical stores. For instance, its Web site advertises gift availability at bricks-and-mortar stores, or recommends the pretrial of its products at department stores before purchasing them online. Through these efforts to maintain the trust of its retailers, Estee Lauder dramatically reduces adverse reactions from intermediaries. General Motors also applied the avoidance strategy. By including lists of dealers and their home pages on its Web site, it gives e-buyers the channel choice between the company itself and its dealers. The e-buyer can then buy cars from GM's Web site directly or from the dealers listed on the GM Web site. Similarly, 3M started its online direct sales with an extended joint Web site, which included retailers such as Office Depot, Office Max, and Staples.
Channel power, the ability to control the decision variables of the marketing strategies of channel members at different distribution levels, is the most frequently recognized causative factor of channel conflicts.
Channel absorption strategy, which is the reverse of the intermediary support strategy, is used by manufacturers with a high concern for themselves and a low concern for intermediaries. Such manufacturers adopt an aggressive strategy and push intermediaries to accept their decisions. In some cases, manufacturers sever relationships with previous intermediaries and sell their products exclusively on the Internet. In other cases, they aggressively merge their previous intermediaries into their company to remove the channel conflict.
Dell employed the channel absorption strategy when initiating its pioneering direct online sales. Relinquishing the benefits of its previous bricks-and-mortar intermediary channels, it sold all its products on the Internet. Using the same strategy, Gateway severed its relationship with its previous intermediaries, and began basing its business only on direct Internet sales. Nike took this strategy a step further by making a contract with Fogdog to sell its products on Fogdog's Web site. As compensation for granting this online sales opportunity to Fogdog.com, Nike got a 12% stake in Fogdog, even though it still sells its products through its own Web site, and through traditional retailers.
Compromising strategy. This dimension involves use of a give-and-take strategy; that is, manufacturers launch online sales, but also pursue mutual benefits through sharing market and consumer information, and sharing the benefits generated by direct sales with intermediaries. Two types of compromising strategies exist: information sharing-strategy and profit-sharing strategy.
The information-sharing strategy involves sharing information collected through online sales between manufacturers and intermediaries. For example, 3M launched a joint Web site with U.S. Office Products (USOP), the fourth largest online retailer. 3M has 600,000 customer email addresses while USOP has 800,000. Instead of competing with each other, they share their customers on the same Web site and exchange customer information. Employing a similar strategy, VF Corp., the maker of Wrangler, Healthtex, and Jantzen Swimware, exchanges customer data, such as buying habits, with its intermediaries. This strategy enables VF Corp. to gain more information about customer needs and preferences, while maintaining a trust relationship with retailers [4].
Manufacturers that employ the profit-sharing strategy share profits derived from online sales with intermediaries. For instance, Wes & Willy developed its Web site to share profits with its retailers. When a retailer orders an out-of-stock item on its Web site, Wes & Willy sends the item directly to customers, but shares profits from the order with retailers. Similarly, Compaq gives intermediaries a 6% agent's fee when current clients of intermediaries purchase products on Compaq's Web site.
Stage III. Considering Other Channel Factors
Before making their final choice of channel conflict management strategy, managers should pay special attention to other channel-related factors such as channel power, dependency, environment, and product characteristics.
Channel power, the ability to control the decision variables of the marketing strategies of channel members at different distribution levels, is the most frequently recognized causative factor of channel conflicts. Manufacturers should consider their relative channel power, and the possibility of retaliation by bricks-and-mortar distributors before deploying an Internet channel. When a manufacturer holds a powerful channel position, it may have more concern for self, and may therefore choose more self-oriented Internet channel conflict management strategies, such as the differentiation strategy and the channel absorption strategy.
Channel dependency has three components: the relative size of a business's contribution to profits; the commitment of one channel member to another member in terms of the relative importance of the latter's marketing policies; and the difficulty in effort and cost faced by a channel member in attempting to replace another member as a supply source or as a customer. High channel dependency is known to promote trust and commitment between channel members because of their shared interests. Contrary to channel power, channel dependency positively affects manufacturers' concern for intermediaries [2].
It is clear that firms must invent a new channel strategy to exploit [internet] opportunity, while minimizing channel conflict problems with their existing intermediaries.
Channel environment is characterized by specific market situations, the existence of consumer groups, and channel-related laws. For example, if competitors in the same market adopt an Internet channel and are successful, manufacturers will often choose an aggressive strategy focused on their own concerns. The existence of consumer groups monitoring products can also affect the strategy selection. For instance, a consumer protection group can protest the online sales of grocery products through a site such as www.grocerygateway.com, since monitoring the quality of grocery products purchased online is difficult. Further, channel-related laws can affect strategy choices. For example, wine Web sites such as www.wine.com cannot sell their products over some state lines through the Internet, since each state has different liquor laws.
Product characteristics are those characteristics that determine a product's ability to be sold online. Some products are easily adapted to the e-commerce environment based on their characteristics. For instance, a product with high standardability and deliverability, such as a computer or an audio CD, can easily be sold via the Internet. Manufacturers tend to have confidence in products with features well suited to online selling, and therefore tend to apply a more self-concerned strategy. Dell is a good example of a company that selected the strongest self-oriented Internet strategy. It gave up its previous bricks-and-mortar channel based on the strategic judgment that its products have appropriate characteristics for Internet sales.
Stage IV. Making a Final Strategic Choice
At this stage, managers should make their final choice of Internet channel conflict management strategy through the consideration of their channel conflict management environment and other channel factors. Companies do not need to select only one strategy. After considering their organizational resource capabilities, and the costs and benefits of multiple channel conflict management strategies, companies can select and combine multiple strategies for a unique competitive advantage. For example, 3M utilized the channel avoidance and compromising strategies, while Wes & Willy applied intermediary support and compromising strategies.
Conclusion
Companies are still in the initial stages of entering Internet sales channels, focusing most of their efforts on signaling to the market that they are Web-savvy companies. Only a few innovative companies have taken this strategic opportunity and turned it into a success. Whether or not management thinks Internet channels will replace current bricks-and-mortar channels, it is clear that firms must invent a new channel strategy to exploit this new opportunity, while minimizing channel conflict problems with their existing intermediaries [9]. To this end, this article has proposed practical guidelines for Internet channel conflict management. By suggesting measurement scales for channel conflict management styles, possible alternative channel conflict management strategies, and other important channel factors, we hope to help companies select the appropriate strategy.
References
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2. Frazier, G.L. Organizing and managing channels of distribution, Journal of the Academy of Marketing Science 27, 2 (1999), 226240.
3. Ghosh, S. Making business sense of the Internet. Harvard Business Review (1998), 127135.
4. Gilbert, A. and Bacheldor, B. The big squeeze. Informationweek (Mar. 27, 2000), 4656.
5. Leda, S. Internet channel conflicts. Stores (Dec. 1999), 2428.
6. Maruca, R.F. Retailing: confronting the challenges that face bricks-and-mortar stores. Harvard Business Review 77 (1999), 159168.
7. Rahim, M.A. Managing Conflict in Organizations, 3E, Quorum Books. Westport, CT, 2000.
8. Rahim, M.A. Rahim Organizational Conflict Inventory-II. Consulting Psychologists Press, Palo Alto, CA, 1983.
9. Shaffer, G., and Zettelmeyer, F. The Internet as a medium for marketing communications: channel conflict over the provision of information. MIT Working Paper E-Commerce Forum (1999).
10. Wilson, R. Manufacturer's dilemma: to sell or not to sell directly. Web Commerce Today (May 15, 1998).
Footnotes
1 For example, after summation of the answers marked by all top managers, a company can identify its Internet channel conflict management style through calculating basic statistics such difference of mean (mi) and standard deviations (ó1) of each style using the analysis of variance (ANOVA) technique.
2There are special Web sites that provide success stories of Internet conflict management (for example, digitalenterprise.org/channels/channel.html).
Figures
Figure 1. The conflict management model.
Figure 2. Internet channel conflict management strategy.
Figure 3. Success stories mapped onto their Internet channel conflict management strategies.
Tables
Table 1. Internet channel conflict measurement.
Table 2. Internet channel conflict management success stories.
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