The Promise of Channel Stewardship
For many companies, distribution channels serve neither customers nor channel partners well. In a new book, Harvard Business School professor V. Kasturi Rangan outlines the concept of channel stewardship. An excerpt from Transforming Your Go-to-Market Strategy.
Editor's Note— Most company distribution systems are designed ad-hoc when needed, and serve neither value chain partners nor end users well—just look at the frustrating new-car buying process set up by American auto makers. At the same time, says Harvard Business School marketing professor V. Kasturi "Kash" Rangan, distribution channels are the hardest to change of all the elements of marketing strategy. Clearly, companies need a new strategy for going to market, he says. In his new book Transforming Your Go-to-Market Strategy, Rangan introduces the concept of the channel steward—the one actor in the chain best positioned to create a process that benefits all. In this excerpt, Rangan discusses the promise of channel stewardship. (Look for an HBS Working Knowledge interview with Rangan next month.)
Senior managers of most of the companies involved in moving goods or services from suppliers to end users would agree: Their distribution channels are outdated and unwieldy, serving neither customers nor channel partners as well as they should.
In a few cases, distribution channels are streamlined and satisfying for all participants. In some cases, technology has improved things dramatically. But in most scenarios, distribution channels, taken as a whole, seem more like a repository of lost opportunities than an effective delivery system that appropriately serves and rewards all participants. Powerful channel members routinely impose their will; weaker participants suffer along because they see no way out; and customers . . . ? Despite much talk of customer-focused companies, customers are often ignored when it comes to distribution.
Most participants agree on the problem, but solutions have been elusive. From our decades of research, teaching, and working with top managers of companies that have tried to improve their go-to-market strategies, we have learned that almost everyone agrees it is difficult to effect significant change in distribution channels. Even though technology has made access to customers easier, transactions faster, and business processes more integrated, distribution channels tend to exhibit a strong inertia. Of all the elements of a company's marketing strategy, distribution channels are perhaps the hardest to change.
Three primary factors explain why:
1. Any change in distribution necessarily involves many different parties and is influenced by a host of factors. Intermediary relationships, institutional commitments, legal restrictions, entrenched customer behavior, and competitive practices often limit the type and extent of changes that a firm can realistically make.
2. Within companies, channels often are functions in search of a home. The various components of a channel (whether within a supplier or within a third-party vendor) may be able to improve operations by taking advantage of new technologies, but usually there is no one at the helm guiding the activities of the entire channel. CEOs typically have an overarching perspective but an insufficient grasp of the details, and CMOs (chief marketing officers) often view go-to-market decisions as being tactical. What passes for channel strategy often rests with sales divisions, but their primary motivation is to sell and they neither craft channel strategies nor lobby decision makers for change. The focus is on quantitative targets; channel tactics for effecting sales transactions are taken for strategy. No one has an eye on the go-to-market system as a whole, and no one steps back to assess the state of a channel in light of market changes, such as shifting technological capabilities, competitive actions, and customer buying behaviors.
3. As a result of this lack of leadership, a channel and its norms become deeply embedded as the primary way of reaching customers. Even when a channel gets a leader, it is hard to facilitate change in an ingrained system that has evolved without guidance and has no inherent logic. So channel management is often cosmetic and rarely affects channel design, even though channel design often contributes to the problems that require managing.
Companies need a new approach to going to market—one that we call channel stewardship. Put simply, channel stewardship is the ability of a given participant in a distribution channel—a steward—to craft a go-to-market strategy that simultaneously addresses customers' best interests and drives profits for all channel partners. A channel steward can be a manufacturer, an assembler, a service provider, an intermediary, or any other participant in the value chain to the customer. Within a company the stewardship function might reside with the CEO, a top manager, or a team of senior managers.
Despite much talk of customer-focused companies, customers are often ignored when it comes to distribution
An effective channel steward considers the channel from the customer's point of view. With that view in mind, the steward then advocates for change among all participants, transforming disparate entities into partners having a common purpose.
When a channel has an effective steward, all participants along the way to the end customer understand, perhaps for the first time, the levers that motivate their partners up and down the line. As a result, all participants are better primed for the give-and-take required to create a value proposition that is as attractive as possible to customers and to the various channel participants.
Consider these questions:
- How does a manufacturer design channels for a new product, especially when it has an incumbent channel? It is often assumed that the incumbent channel will get the new products, but a host of problems can occur when existing distributors, although important and useful for a certain portfolio of products, are no longer appropriate for a different subset.
- How can you overcome resistance from a powerful channel partner, such as a brand-name manufacturer or a strong intermediary, over issues such as price discounting or shelf-space allocation? When are power plays appropriate? When should you exercise power? When should you give in to power? What are the consequences for partner relationships and channel performance?
- When a new channel, or a multiple-channel scenario, offers prospective market coverage, how does a supplier trade off the risks of alienating a loyal franchised retail channel against the benefits of accessing new customers? The problem is exacerbated when the new channel is a low-cost alternative such as the Internet.
Such issues are perennial in channel management. Despite the widespread use of channel partners in accomplishing go-to-market goals, two important aspects of channel management—assessing performance and setting goals—are only weakly developed and enforced. Misunderstandings of partner roles and responsibilities are common.
Many typical channel issues appear to be tactical but in fact have long-term implications. A channel steward is better positioned to have a clear perspective on these issues and is likely to foster a similarly unbiased view on the part of other participants.
Moreover, with an effective channel steward in place, all participants understand that you can seldom make dramatic improvements immediately. As a result, they gain the patience to implement changes having long-term benefits, as opposed to changes having only short-term results. Technology, for example, can facilitate major, immediate changes in a process, but only stewardship can ground those changes by ensuring that all parties truly understand why a change is necessary and how it will benefit them over the long term. Effecting change in an ingrained distribution channel—in many, if not most, existing channels—is a difficult challenge, but therein lies the opportunity.
Put another way, channel stewardship, as we define it, is anchored in the principle of evolutionary change. This should not be confused with incremental change. Stewardship means constantly guiding and directing changes in channel design and management to align the channel with customer needs while driving profit for all channel partners.
Make no mistake: What we advocate in this book is not always easy. The analyses and processes we recommend are meant to be adaptive and continuous, and they are aimed at reaching the ultimate goal in steps, with the understanding that the goal itself may continue to evolve.
The rewards of channel stewardship
The concept of channel stewardship is meant to appeal to any organization in the distribution channel that wants to bring a disciplined approach to channel strategy. As mentioned, a channel steward might be the maker of the product or service (such as Procter & Gamble or American Airlines); the maker of a key component (such as microchip maker Intel); the supplier or assembler (such as Dell or Arrow Electronics); or the distributor (such as W. W. Grainger) or retailer (such as Wal-Mart). A channel steward might be any entity in the channel value chain that has a stake in addressing the needs of end users; a smaller player might not have much freedom to maneuver, but it needs a channel strategy to ensure its financial success and perhaps nudge the powerful players toward stewardship.
The examples in this book illustrate acts of stewardship by suppliers (including makers of products and providers of services) and intermediaries (distributors, agents, and retailers). Undoubtedly, effective stewards guide the course of their channel's evolutionary destiny and thus their own bottom line. That's why any member that has the opportunity should attempt to take charge.
Channel stewardship has two important outcomes. The primary (and obvious) purpose is to expand value for the steward's customers and bottom line. The main reason any partner would want to participate in a channel with an effective steward is to expand the pie for itself, perhaps by increasing the size of the market or increasing existing customers' purchases through the channel.
A second, more subtle outcome is a more tightly woven, and yet adaptable, channel. Stewardship is not a social welfare system, where all intermediaries, regardless of their role or performance, are encouraged to stay in the system. Far from it. Stewardship involves careful construction and management of channel relationships so that the valuable members are suitably rewarded and the less valuable members are weeded out.
When a channel has an effective steward, the goal is a distribution system that includes only those activities that add discernable value for customers and corresponding rewards for the channel partners. The focus is first on identifying what must be done; only then does it turn to where that work will reside.
The consequences of not having a steward
A typical channel system evolves without a channel steward. When a product is new, the sole aim of most suppliers is to get the product in the hands of users. All parties that assist in that goal are welcomed, within the broad restraints of cost. As sales revenues grow, so do channels, with many arrangements consecrated by personal relationships and the preferences of a few key decision makers. Informal rules get made on how the system operates.
Then one day when a firm has grown enough, it discovers that it has a channel footprint. Whether this organically grown, haphazardly nurtured channel is appropriate for the task at hand is not usually open for discussion. Usually, the more pressing question is how to build on what is already available to fulfill future sales goals. So appendages are built, and a maladapted structure emerges.
Now layer on the natural pressures that are brought to bear on a channel in the course of a day, a week, or a year, along with the management decisions made to deal with those pressures.
For example, suppose a product manager discovers that she is well below target on a new product launch. Her first inclination is to meet with her sales counterpart and closely reexamine the launch program. They discover that the distribution channel is not aggressively pushing the new product. Their own sales force resources are constrained. The few available salespeople must stay focused on generating and maintaining demand for the company's other product, a market leader in its category. They therefore contemplate a channel incentive program; a special promotion is planned, more trade promotion and advertising are planned, and channel margins are enhanced.
This is channel management as most of us know it, but we might as well call it "bandage" management. The manager is "managing" the channel, but because the channel wasn't carefully designed in the first place, she likely does not have any real insight into how to identify and address the root causes. The foundation of any good channel strategy is its design architecture. With a good design, day-to-day management of channels is not onerous. But when difficult management issues crop up, often they are a signal of deeper problems. If we don't address the core design issues, we don't gain much by way of channel strategy.
Rohm and Haas managers faced this kind of situation when their new Kathon MWX biocide did not achieve its launch targets.1 They realized that a reason for the initial failure was that the company had used an existing channel. This channel was well suited to take another product—the Rohm and Haas 886 liquid biocide—to a specific set of customers: those having large coolant tanks used in metal cutting. These were sophisticated customers, and the role of the intermediary (called a formulator) was to provide outstanding maintenance services. The new product, however, was intended for operations that were supported by smaller (fifty-gallon) tanks. Customers for the new product were small and dispersed, and they were unsophisticated in understanding the properties of metal-cutting coolants. They were usually accessed by a second tier of dealers (industrial supply shops). These dealers in turn were served by the same formulators who served the large customers.
Given that both products performed the same function (extending the life of the metal-working fluid by eliminating bacteria) and both had the same channel entry point (the formulators), Rohm and Haas had used the same channel. But the end-use market for the new product was so different that the company needed to rethink its entire go-to-market strategy rather than just its channel incentive programs. Design problems usually don't get fixed by tactical actions.
Designing and managing a channel
In a typical arrangement, a supplier has four alternative channels to reach its customers:
1. It can go through a stocking distributor to a retail company, which then serves end users. (In the service analogy, the distributor becomes a consolidator.)
2. It can go through an agent, such as a jobber or a broker (instead of a distributor), to retail.
3. It can go directly to retailers.
4. It can go directly to end users.
Figure 1-1 illustrates these key dimensions of channel design and management. These choices are not mutually exclusive, so a combination is a viable alternative.
Designing channels requires answering certain questions: which channel options to choose, how many partners to include at each level, and how they should be governed. In contrast, whereas design involves structural aspects of the channel, management involves the formal or informal rules that govern the day-to-day behavior of the various channel members (including the supplier).
The two elements of channel strategy should go hand in hand. You cannot resolve design issues—such as whether to adopt a direct or an indirect channel or, if indirect, how many levels are appropriate—without a sense of how distribution policies and practices are translated. Similarly, you cannot govern the channel and set sales targets without a good handle on channel costs and margins and other operating features. When you choose multiple channels, conflict becomes a management issue. Even when you choose a single option, you may have to address questions of coverage and dealer intensity. In short, channel design and management should be interactive and integrative components of channel strategy.
Unfortunately, however, most firms—regardless of their place in a given channel—do not manage their go-to-market strategies in that inclusive way. Once they carve out a profile, channel structures slowly calcify and get cemented in place. The structural aspects of figure 1-1, captured under the heading "Channel Design," evolve only very slowly. Most firms end up using the other side—"Channel Management"—to respond to environmental changes.
But as most channel managers would readily admit, channel management, by itself, cannot be effective unless a concerted effort is made to translate much of that information into knowledge that drives long-term change in channel design. But that rarely happens. Worse, because channel management's immediate job is to facilitate the flow of products and services, often it takes on a day-to-day, tactical flavor. It may even end up doing a heroic job of achieving sales targets in a changing environment without making a dent in the channel structure. The problem is that even when an industry reaches a new equilibrium as a result of changes in its environment, you are still stuck with an unchanged underlying channel system. The system is ineffective for the new environment (in fact, it is obsolete), but the efforts of channel managers usually hold it together, continuously propping up any major breakdown.
1. Discussion of Rohm and Haas is drawn from V. Kasturi Rangan and Susan Lasley, "Rohm and Haas (A) New Product Marketing Strategy," Case 587-055 (Boston: Harvard Business School, 1986, revised 1993).
Excerpted by permission of Harvard Business School Press from Transforming Your Go-to-Market Strategy: The Three Disciplines of Channel Management. Copyright 2006 V. Kasturi Rangan. All rights reserved.
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