the supply in the direction they want (often lower prices, faster delivery, less work for them, ‘better’ specifications, i.e. into commodity markets).
In such circumstances the options open to the supplier are highly constrained, the two most open being either:
• to adopt an active sales ‘PUSH’ strategy – hoping to load the intermediary’s stockrooms and soak up lots of their cash thus encouraging them to sell on down the chain (but intermediaries will be very wary of this happening)
OR
• to go direct to the ‘end’ customer. This ploy violates the inter- mediary’s belief that customers downstream belong to them, NOT to the supplier. This will produce a great deal of ill will, friction and conflict in the chain, and may even mean that the chain, often en masse, will boycott that supplier, leaving the ‘direct route’
their only route to market.
Legitimate power is based in law, typically within a tightly defined contract.
In this context the roles of channel members are clearly defined and rules and regulations are written down in detail. Control actions will gener- ally be based on deviations from contractual obligations. This power base is a very common feature of franchized distribution channels.
Expertpower is based on knowledge, typically related to technology although marketing and financial skills are sometimes also significant.
To be effective, this power base must be perceived as being credible, the strength of the power base being related to the exclusivity of the knowledge base.
Referentpower is amongst the strongest of the power bases, yet it is also the least tangible. Fundamentally, it is based on trust and respect, both of which can only be built up over time, i.e. when one party works in the joint best interest of all others.
Reward power is principally based on performance-related inducements, for example, bonuses for achieving specific targets. This power base also embraces non-financial rewards such as training, marketing supports, business advice, goodwill and so on. Reward power is closely related to referent power and often uses expert power (in the form of training etc) as part of the overall reward package.
Coercive power is founded on the threat that if something is not done then a punishment of some form will be exercised. The premises of this is ‘do this or else…’ Coercive power is often closely related to legiti- mate power in the sense that it is typically enforceable with reference to a contract.
An important aspect of dependency relationships is the principle of coun- tervailing power. People in organizations react to power by building a defence against it, particularly if the exercised power is perceived to be unfair or oppressive. All five bases of power will elicit some form of countervailing power. The strongest resistance is typically against coercive power, particularly where its use is seen as oppressive or its legitimacy is not accepted. A typical reaction to unacceptable power exercised by one member of the chain, will be for the others to ‘cheat’, and this adds inefficiencies to the ‘route’ and raises its costs.
Absence of cheating in a Japanese Kiretzue ensures that, where these still exist, their supply chains are a powerful source of competitive advantage.
Channel atmosphere
This is a concept which links levels of satisfaction to the degree of consensus which exists within the channel relationship. The predomi- nant use of reward power creates an atmosphere of satisfaction and consensus which, in turn, leads to high levels of co-operation within channel relationships.
Conversely, the predominant use of coercive power typically generates an atmosphere of dissatisfaction and dissent which, in turn, leads to high levels of conflict within channel relationships.
High performance supply chains exist where a positive atmosphere and co-operation between channel members underpins the relationship. Low performance supply chains exist where a negative atmosphere and conflict between channel members is the norm.
The channel can become the competition
THE ‘OPERATOR A’ CASE:
The conventional wisdom, by those who have little or no experience of working within channels of distribution, is that markets are orderly and well managed. The manufacturer and their customers the OEM1and in turn, their customers the distributors etc, all work in a fashion which if not necessarily orderly is well managed, so as to pass their goods or services down the ‘value chain’2toward the end consumer in the most efficient way possible.
Distributors and retailers often refer to this activity as ‘supply-chain management’ (inferring, often with good cause nowadays, that they are in control of their suppliers). BUT the ‘value chain’ is not often that friendly, co-operative or well managed – indeed many ‘value chains’ are often characterized by intense rivalry within the channel – each link in the chain trying as best it can to out-do each others link and thus gain more control of its own destiny and hence obtain better margins.
(1i.e. those firms who buy components from other manufacturers, for their assemblies, and sell these assemblies to their customers in turn, e.g.
automobile manufacturers who frequently do not make many of the compo- nents used in their vehicles but source these from other firms.
2A ‘value chain’ is that aspect of the distribution channel where goods and/or services gain value on their way to the eventual consumer – these values are paid for via the so-called ‘food chain’ which is the process of the income so gained from the consumer working its way back up the channel.)
Take the example shown below, which is a fairly recent real-life case – but where this author has seen fit to:
• disguise the names of the protagonists to avoid being sued – and –
• simplify the actual situation for the sake of clarity.
This case is to do with winning and completing a contract for the instal- lation of the exchanges, ‘switches’, base stations etc for mobile telephones, in a small country which, at that time, was in the process of de-regulating its telephony. That is to say it was opening-up its national telephones communications network to competition. Two more ‘oper- ators’ were to be added to the market so as to compete with the former national telephone monopoly, which we will call ‘Operator C’.
Each ‘operator’ was to have a separate infrastructure of hardware (i.e.
the exchanges, ‘switches’, base stations etc) and there were three firms competing to supply these facilities. We will call them ‘Finlia’, Swedric’
and ‘Sotel’.
Finlia won the contract to supply the infrastructure for the first new Operator ‘A’ and commenced to complete their work.
A ‘Software & Systems’ supplier worked with Finlia to provide the neces- sary software – which would dictate the design of the ‘switches’ in the exchange and would drive the base stations etc. This done, Finlia subcon- tracted-out the production of the necessary integrated circuits (I/C’s) to its three producers of silicone chips (Finlia had a policy of never buying more than 40% of its hardware requirements from any one supplier).
The physical installation work was done by one of the many interna- tional firms who specialize in this activity; we shall call this firm – the
‘Installation Partner’.
This happy and ideal state of affairs is shown in Figure 4.4 below.
FIGURE 4.4: AN ORDERLY MARKET – (TO BEGIN WITH)
However, it does not end there. Such complex systems require regular maintenance and consequently many spare parts. Finlia had won the contract from Operator ’A’ at a very competitive price, intending to make its margins on the maintenance service that would follow. And this is where it got nasty, as shown simplistically in Figure 4.5 following.
In no particular chronological order:
• the ‘Software & Systems’ partner by-passed both Finlia and the Installer Partner to offer its services direct to Operator ‘A’ at a price below that to be charged by Finlia,
• each of the three ‘chip’ makers, using the design developed for Finlia, offered their services* to Finlia’s competition one of whom was tendering for the new business from Operator ‘B’ – and to top it all –
Installer Partner Software
& Systems
FINLIA
Swedric
Sotel
Chip Maker
A
Chip Maker
C
Chip Maker
B
Operator
C
Operator
A
Operator
B
Consumers
• The Installer Partner – offered to work directly with both Operator
‘A’ and Operator ‘B’, again at a lower price than Finlia was hoping to charge.
(*Using the experience, if not the exact I/Cs designs, gained via their work for Finlia on the Operator ’A’ contract.)
FIGURE 4.5: THE ‘CHANNEL’ BECOMES THE COMPETITION
It has been said that Niccolò Machiavelli had distribution channels in mind when he said – to paraphrase him – that ‘success in life is about lying, cheating, stealing and stabbing people in the back – without getting caught’ – i.e. the end justifies the means.
Installer Partner Software
& Systems
FINLIA
Swedric
Sotel
Chip Maker
A
Chip Maker
C
Chip Maker
B
Operator
C
Operator
A
Operator
B
Consumers