Working Papers

A Strategic Framework for Diagnosing Manufacturer-Reseller Conflict

Jan 1, 1988

Subject
Managing conflicts between manufacturers and resellers.

Type of Report
Proposes a conceptual framework for manufacturers to use in deciding how to deal with different kinds of conflicts between them and their resellers.

Objective
To provide a tool for the strategic management of a common problem in channel relationships, namely disagreement between a manufacturer and its jobbers, distributors, retailers, and so forth. By using the proposed diagnostic framework, the authors suggest that manufacturers can classify manufacturer-reseller conflicts and develop appropriate strategies for dealing with them.

Method
Proposes a model of manufacturer-reseller conflict that relates the intensity of disputes, the frequency with which they occur, and the importance of the disputes to the manufacturer-reseller relationship. A conceptual framework is then proposed which permits conflict to be diagnosed and treated strategically. Numerous implications for management are drawn.

Audience
Manufacturers employing almost any type of distribution system should benefit from a diagnostic analysis of their channel conflicts.

Main Poins
Conflicts between a manufacturer and its resellers–its jobbers, distributors, retailers, and so forth–are to some degree inevitable. Differences in ultimate goals and objectives will always produce at least some disagreement. What matters is not whether conflict exists but whether it is damaging the relationship–and whether it can be managed.

The conflict between manufacturers and resellers can be measured in terms of the frequency and intensity of disagreements, as well as by the relative importance of the conflict (stated here as importance to the manufacturer). By defining conflict as the product of these three measures, it is possible to classify conflict levels as low, medium, or high. It also becomes possible to analyze the conflicts, determine their sources, and implement strategies to deal with them.

The conflicts themselves arise from several sources. The three sources that are treated in this paper are: 1) differences in “key factors”–goals, desired target accounts, desired product lines, and interpersonal relations; 2) differences in channel design; and 3) differences in channel policies. Using the proposed framework, it is possible to assess whether different types of conflicts between manufacturers and resellers are likely to lead to high-level conflict, medium-level conflict, or low-level conflict.

Implications
Conflicts need not be unmanageable. Innovative managers should be able to control how much conflict there is in their dealings with resellers, and they should be able to affect the type and seriousness of the conflict as well.

There are four steps to reviewing conflict levels with resellers:

  • First, use the proposed framework to identify the sources of conflict.
  • Second, estimate, from the manufacturer’s perspective, the total impact of these conflict sources. Ask resellers to assess the impact as well.
  • Third, if the conflict levels are judged to be too high, rework those aspects of the channel design and channel policies that produce the most conflict.
  • Fourth, develop skills for dealing with the types of conflict most likely to affect the relationships.

Clearly, management has some discretion in selecting strategies that will be profitable and still generate relatively little conflict. Management can also judge whether alternative strategies, which may generate more conflict, are so much more profitable that they should be adopted anyway.

Different channel policies and designs can dramatically affect conflict levels; thus it is in this area that management can often act to manage conflict.

One-step, single-channel distribution networks are simple and rarely generate high levels of conflict. But the manufacturer is to some degree dependent on the loyalty and long-term health of only a few resellers. Additionally, manufacturers who commit themselves to a single-channel distribution system may find themselves out-maneuvered by the growth of non-traditional channels.

Dual or multi-channel distribution systems, which can help alleviate the problems of a single-channel system, require some degree of market partitioning. Such partitioning can work as long as all the manufacturer’s resellers accept the logic behind it.

Some manufacturers try to minimize cross-channel conflict, either by setting up different channels for different markets (vertical marketing) or by selling variations of similar products to competing channels (second brand strategies).

Manufacturers may also try to gain higher density without necessarily appointing different reseller companies. Manufacturers may align themselves with aggressive national or regional resellers whose ambitions lead them to establish intensive outlet networks. If these resellers expand to cover more “pockets” in the total market, then the manufacturers are spared the conflicts that could arise from coverage overlaps. Such manufacturers are practicing selective corporate coverage with intensive outlet coverage.

Another strategy which strengthens manufacturers’ control over distribution is forward integration. But owning its primary distribution channel can prove troublesome unless the manufacturer has, or can acquire, the skills required to run a reseller business.

Franchising enables the manufacturer to achieve medium control at medium cost. It avoids the high costs of full ownership but provides the benefits of moderate to strong control. While franchising is never entirely free from conflict, it has proven successful for many manufacturers.

Researchers’ Comments
The researchers observe:

“Manufacturer-reseller conflict has high costs for both parties. For example, in 1982 Kroy, Inc., makers of lettering machines for offices, decided to drop its 1,000 independent dealers in favor of direct selling via sales branches. Incensed at being dropped, Kroy’s former dealers found products competitive with Kroy’s and fought back in the marketplace. Kroy’s profits dropped 33 percent. The company eventually abandoned direct selling and has asked former dealers to ‘forgive and forget’ past treatment. Less than half have done so. The moral? Many products are inherently ‘dealer products’ because they are semi-complex but relatively small-ticket items. For manufacturers of these products, cordial relations with extensive dealer networks are major strategic assets!

“The framework suggests that there is always some conflict between manufacturers and resellers simply because of the required coordination and cooperation between two differently positioned organizations. Accordingly, it is important for the ‘contact people’ such as the CEO, salesforce, and marketing staff, to be skilled listeners and forget about dogma; instead they should substitute a balanced objectivity, tact, and humor. If an executive is easily rattled, find someone else for the channel contact. Keep a long-term perspective on skirmishes as they develop; losing distribution in an area is seldom catastrophic because substitutes can be found in time. Even in the short term, most losses in one area are balanced by gains in another. Therefore, develop a good sense of timing and don’t overplay a hand because of short-term boom or bust options. Finally, all channel players need to develop a sense of team play.

“This framework was not spawned by traditional theory about power and dependence; rather it comes from our experiences as managers, consultants, and researchers. We observed the main strategic levers that managers employ in designing and managing channels. We then envisioned a base level of conflict because of market turbulence, different positionings, and so forth (the so-called ‘key factors’) which, like a modest level of stress in humans, seemed to be quite healthy. But certain designs and policies raised the manufacturer-reseller conflict well beyond the point of being mildly dysfunctional for one or both partners. Unfortunately, not all the consequential behavior (non-support, substituting products) is easily visible.

“Other researchers have developed measures of conflict. We encourage the development of instruments to operationalize all twelve constructs presented here. Researchers who would like to operationalize these constructs and test even parts of the framework are encouraged to contact us because we ourselves are particularly interested in examining the interaction between channel policies and channel design.”

About the Authors
Allan J. Magrath is Director of Marketing Services with 3M Canada. Kenneth G. Hardy is Professor of Business Administration at the University of Western Ontario.

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