Perreault−McCarthy: Basic
Marketing: A
Global−Managerial
Approach, 14/e- Place and Development
of Channel Systems
Text © The McGraw−Hill
Companies, 2002314 Chapter 11
In traditional channel systems,the various channel members make little or no
effort to cooperate with each other. They buy and sell from each other—and that’s
the extent of their relationship. Each channel member does only what it considers
to be in its own best interest; it doesn’t worry much about the effect of its policies
on other members of the channel. This is shortsighted, but it’s easy to see how it
can happen. The objectives of the various channel members may be different. For
example, General Electric wants a wholesaler of electrical building supplies to sell
GE products. But an independent wholesaler who carries an assortment of products
from different producers may not care whose products get sold. The wholesaler just
wants happy customers and a good profit margin.Specialization has the potential to make a channel more efficient—but not if the
specialists are so independent that the channel doesn’t work smoothly. Because
members of traditional channel systems often have different objectives—and dif-
ferent ideas about how things should be done—conflict is common.
There are two basic types of conflict in channels of distribution. Vertical con-
flicts occur between firms at different levels in the channel of distribution. For
example, a producer and a retailer may disagree about how much shelf space or pro-
motion effort the retailer should give the producer’s product. Or conflict may arise
if a producer that wants to reduce its excess inventory pushes a wholesaler to carry
more inventory than the wholesaler really needs.
Recently there was vertical conflict between big recording companies—like Sony,
Warner Music, and Capitol-EMI—and their retail outlets that wanted to sell used CDs
as well as new releases. Retailers were responding to consumers who liked the low cost
of used CDs, but the recording companies argued that the used CDs ate into their sales
and deprived artists of royalties. When Wherehouse Entertainment (a large retail music
chain) started to sell used CDs—at about half the price of new ones—several record-
ing companies said that they would halt cooperative advertising payments to any
retailer that sold used CDs. Garth Brooks, the best-selling artist at the time, under-
scored the conflict and the recording companies’ point of view. He said that he would
not release his new CDs to any stores that were selling used CDs.^11
Horizontal conflicts occur between firms at the same level in the channel of dis-
tribution. For example, a furniture store that keeps a complete line of furniture on
display isn’t happy to find out that a store down the street is offering customers
lower prices on special orders of the same items. The discounter is getting a free
ride from the competing store’s investment in inventory. And nothing gets an inde-
pendent retailer more charged up than finding out that a chain store is selling some
product for less than the wholesale price the independent pays.
Traditional channel systems are still typical, and very important, in some industries.
The members of these channels have their independence, but they may pay for it too.
As we will see, such channels are declining in importance—with good reason.^12Potential channel conflicts should be anticipated and, if possible, resolved. Usu-
ally the best way to do that is to get everyone in the channel working together in
a cooperative relationship that is focused on the same basic objective—satisfying
the customer at the end of the channel. This leads us away from traditional chan-
nels to cooperative channel relationships and the channel captain concept.Each channel system should act as a unit, where each member of the channel
collaborates to serve customers at the end of the channel. In this view, cooperation
is everyone’s responsibility. However, some firms are in a better position to take the
lead in the relationship and in coordinating the whole channel effort. This situa-
tion calls for a channel captain—a manager who helps direct the activities of a
whole channel and tries to avoid or solve channel conflicts.Traditional channel
systems involve weak
relationships
Conflict gets in the way
Cooperative
relationships share
common objectives
Channel captain can
guide channel
relationships