Power in the Marketing Channel.doc

power in the marketing channelnumerous concepts of power exist in the literature1. dahl, for example, argues that "ahas power over b to the extent that he can get b to do something that b would not oth-erwise do.s miller and butler argue that power simply refers to a persons ability tocontrol the behavior of others.46 etziono views power as the capacity to overcome partor all of the resistance to change in the face of oppositiun" price suggests that the es-sence of power is the capacity to influence the behavior of others." as we can see from this discussion, there are numerous views on the concept ofpower. yet there is a common theme running through all of them: power has to dowith the capacity of one party to control or influence the behavior of another party orparties. thus, when we use the term power in a marketing channel context we are refer-ring to the capacity of a particular channel member to control or influence the behavior ofanother channel member(s). for example, when hewlett-packard co. heard that dellcomputer corp. was considering selling its own line of dell printers, hp decided todrop dell as a channel member," dell had been selling hp printers for more than eightyears, often bundling them with package deals on dell computers. hp apparently feltthat its action might dissuade dell from implementing its plan. but den paid little atten-tion to hips move because, as the worlds largest pc maker at that time, it enjoyed apowerful position as a reseller of printers. not only can dell have printers made to sellunder its own name, but other manufacturers such as lexmark, xerox corp., and seikoepson corp. were only too happy to continue selling printers through dell. the key to determining which channel members are likely to have the most power inany given situation lies in an understanding of the sources or bases of power available tothe channel members.bases of power for channel controlfrench and raven define a power base as the source or root of the power that one partyexercises over another. they delineate five such power bases: reward power, coercivepower, legitimate power, referent power, and expert power.soreward power this source of power refers to the capacity of one channel member toreward another if the latter conforms to the influence of the former. this power base ispresent in virtually all channel systems. the rewards are usually manifested in the per-ceived or actual financial gains that channel members experience as a result of conform-ing to the wishes of another channel member. channel members-whether at theproducer, wholesaler, or retailer levels-will, in the longer run, remain viable membersonly if they can realize financial benefits form their channel membership. there areexceptions to this general proposition when the channel relationship is based on contrac-tual agreements that constrain the abilities of channel members to cease membership inan unprofitable channel. but even in this case, when the contract expires, the channelmember who believes that the financial rewards from the channel have not been suffi-cient, is likely to leave the channel. an example of a manufacturers attempt to solicit channel members on the basis ofreward power is shown in figure 4.5, an advertisement that appeared in discount storenews, a trade magazine that has widespread following among discount stores and massmerchandisers. the headline of the advertisement for the hoover steamvac deluxe saysall aboard." later copy in the advertisement continues the train metaphor by saying."youll want to climb on for sales and profit. . if youre not carrying steamvac deluxewith the attached tools, you could be left standing at the station." the manufacturer,hoover, is holding out the reward of high sales and profits in an attempt to get retailersto carry this product. in the advertisement hoover also promises additional rewards inthe form of continuing promotional support to keep the product moving off retailersshelves. hoovers success in getting retailers to become channel members who will ag-gressively sell this product will depend heavily on the power to reward members for theirservices. if the manufacturer fails to convince the channel members that it is able to offerthem sufficient rewards, the manufacturers influence attempts in terms of getting chan-nel member support and follow-through are unlikely to meet with much success.coercive power coercive power is essentially the opposite of reward power. in thiscase a channel members power over another is based on the expectation that the formerwill be able to punish the latter upon failure to conform to the formers influence at-tempts. coercive power occurs frequently in channel relationships. take, for example,the case of the gallo wine co., the nations largest manufacturer of wines. gallo, whichproduces a huge variety of wines, used a form of full-line forcing (see chapter 3) to co-erce independent wine distributors to carry more than 40 different brands of its wine,even though most of the distributors did not want many of these brands. given gallosgreat power, the distributors had little choice. gallo simply would not sell the dealers itsfast-moving, highly profitable wines unless they were willing to carry many of gallosslow moving and, in some cases, poor-quality wines as well. most of the distributorscould not afford to do without the better gallo products, and so they were forced to ac-quiesce to gallos coercion. the situation became so onerous for the distributors that thefederal trade commission (ftc) stepped in and ordered gallo to stop the practice.in this example, gallo s capacity to use coercive power stemmed from its great size anddominant position in the industry. it was thus able to exert very substantial pressure on itswholesalers to conform to its wishes. if they did not choose to behave as gallo wantedthem to. gallo could cut them off with no significant loss to itself. this is typical of theoperation of coercive power in the marketing channel. the firms that are able to use itarc either large or in a very advantageous position-one resulting from a near-monopolyor a formal contractual status such as that enjoyed by many franchisors. in the absence ofexternal constraints (such as government action if a law is violated, as in the case of gallo),powerful channel members are in a position, at least in the short run, to dominate theweaker channel members, even to the extent of using threats and coercion. we should point out that such powerful firms are not limited to producers or man-ufacturers. wholesalers and retailers in a dominant position by virtue of their size ormonopoly positions in particular trade areas may also resort to the use of coercivepower. for example, walmart, the worlds largest retailer, has come under attack frommanufacturers, wholesalers, and smaller retailers who claim that walmart has usedcoercive power to enforce its channel policies. a case in point is walmarts announce-ment that it would no longer buy through brokers and sales representatives but onlydirect from manufacturers. this announcement created such a stir that an organization,the coalition of americans to save the economy (case). was formed to combatwalmarts power play. figure 4.6 shows an advertisement used by case to solicitmembers to fight back.legitimate power this power base stems from internalized norms in one channelmember which dictate that another channel member has a legitimate right to influencethe other, and that an obligation exists to accept the influence. in an intraorganizationalsystem, as typified by a large business firm, legitimate power is pervasive and routinelyaccepted. indeed, it would be extremely difficult for the organization to operate withoutit. at each level in the chain of command, the subordinate recognizes that his or hersuperior has a legitimate right to influence behavior and that the obligation exists toorders from the sales manager, who in turn takes orders from the vice president of mar-keting, and so on. in an interorganizational system such as the marketing channel, on the other hand,legitimate power does not operate in the same fashion and is by no means a pervasive orwell-accepted phenomenon. given that many channels are comprised of independentbusiness firms, there is no definite superior-subordinate relationship, and there are noclear-cut lines of authority or chains of command. it is only in contractually-linkedchannels that anything approaching an. organizational structure based on legitimatepower exists. consequently, for more loosely-aligned marketing channels, legitimatepower is a virtually non-existent power base. a manufacturer selling through indepen-dent wholesalers, for example, cannot order the wholesaler to do something based onany legitimate power vested in the manufacturer that the wholesaler is obliged to acceptthe manufacturer can, of course, offer inducements or use coercion (for example,threaten to drop the wholesaler) if the wholesaler refuses to comply with the manufac-turers influence attempt. but in these cases, the power bases involved would be rewardand coercion, respectively, rather than a legitimate base. in general then, the channel manager operating a loosely-aligned channel cannot relyon a legitimate power base to influence channel members. he or she must instead resorteither to other power bases or to restructuring the channel into a more formal systemsuch as a contractually-linked vertical system in an attempt to increase a legitimatepower base. some of the strongest legitimate power bases are held by franchisors because legiti-macy accrues to the franchisor through the franchise contract agreement with itsfranchisees. these contracts almost always spell out the specific rights and obligationsof the parties. with few exceptions, the bulk of the legitimate power base is held bythe franchisor rather than by the franchisees. for example, southland corporation,the franchisor of 7-11 stores, has a contractual agreement with its franchisees thatplaces southland in a highly dominant position. southland is entitled to 52 percentof its franchisees gross profits. southland also handles all of the franchisees book-keeping and sends them a monthly check for their net profits. if a franchisees perfor-mance falls below a specified level, southland can close down the franchisee with only72 hours notice.referent power when one channel member perceives his or her goals to be closelyallied to, or congruent with, those of another member, a referent power base may exist.in other words, they may see each other as being in the same reference group. hence,when this situation prevails, an attempt by one of the channel members to influencethe behavior of the other is more likely to be seen by the latter as beneficial to theachievement of his or her own goals. for example, retailers or wholesalers who wantto be identified as "leading," "high quality," or "prestigious" firms will use as their ref-erence group those manufacturers whose products are consistent with the image theyare attempting to project. this, in turn, gives those manufacturers a referent powerbase over the intermediaries who seek to sell their products. in the case of manufac-turers who have very desirable products, the referent power base can be quite high,thus providing the manufacturers with substantial influence over channel membersselling their products. see the advertisement in figure 4.7 by sylvan learning center,a franchisor of educational programs. the ad stresses the pride the company feels inbeing a world leader in supplementary education that has enhanced the lives of morethan a million children. this advertisement, which appeared in the wall street journal,was aimed not only at seeking new franchisees but also at reinforcing a sense ofbelonging and pride that sylvan franchisees feel by being associated with a renownededucational organization. giant channel members such as macys, the worlds largest department store chain,can also be influenced by referent power. to maintain and enhance its fashion image,which is crucial to macys competitive strategy to differentiate itself from discount massmerchandisers such as walmart and target, its shelves must be stocked with well-knownnational brands such as polo by ralph lauren, liz claiborne, jones apparel group, andmany others.52 macys is much larger than most of the manufacturers whose brands itsells and is thus capable of wielding substantial coercive power to force concessions onprice and terms of sale from these manufacturers. its inclination to exercise such power,however, is mitigated somewhat by its need to be associated with fashionable merchan-dise. so, in a very real sense the referent power available to manufacturers of well-knownbranded products can offset, at least to some degree, the coercive power available to gi-ant retailers.expert power this base of power is derived from knowledge (or perception ofknowledge) that one channel member attributes to another in some given area. in otherwords, one channel members attempts to influence the others behavior is based onsuperior expertise. expert power is quite common in the marketing channel. many manufacturers pro-vide retailers with management assistance relevant to various phases of the retailers op-erations. procter & gambles (p&g) efficient assortment program. which helps retailersselling p&g products to carry the right assortments of p&g products to meet the partic-ular needs of consumers in different markets with a minimum of excess inventory, is onesuch example. the program is advertised in trade publications such as discount storenews to inform existing and potential channel members about the program. retailerswill often make changes based on the advice received out of respect for the expertise ofthe manufacturer or wholesaler who offers it. in franchised channels, expertise is a crucial power base for the franchisor to influ-ence franchisees. though obviously the franchisor may also use other power bases, par-ticularly legitimacy, the use of expert power is extremely important in gainingcooperative compliance from franchisees. the franchisees expect the franchisor to offerexpertise on a regular and continuing basis. indeed, one of the principal values of thefranchise to the franchisee is the expertise of the franchisor in the particular line of busi-ness.s3 the advertisement for dairy queen shown in figure 4.8, that appeared in thewall street journal, stresses the expert power base with the headline "franchise withexperience." this indicates to prospective franchisees that dairy queen knows what itis doing through the best teacher of all-experience. franchisees that become a part ofthe dairy queen organization would therefore have the benefit of the kind of expertisethat only the experience of a well-established franchise organization can provide. expert advice can also flow up the channel from franchisee to franchisor becausesometimes franchisees are in a position to "feel the pulse" of the consumer market betterthan the franchisor. consider the case of subway sandwich shops.s during the "greatrecession" of 2007-2008, the $5 footlong sandwich became a huge success. but it was asubway franchisee not the franchisor that came up with the idea for the footlong. stuartfrankel, the owner of two small subway shops in miami noticed that sales were slow onthe weekends. he began to offer footlongs for s5 instead of the usual s6 and sales ex-ploded by double digits! within weeks, the s5 footlong became a big hit throughout theentire subway franchise system. apparently. frankels expertise, which in this case washis ability to "read the market; was lacking at franchisor, subways headquarters.using power in the marketing channelfrom the standpoint of the channel manager in the producing or manufacturing firm,power must be used to influence the behavior of the channel members toward helpingthe firm to achieve its distribution objectives. thus, the channel manager must usethe available power bases in order to exercise power in the marketing channel. thisraises two basic channel management issues: (1) which power bases are available? and(2) which base or bases should be used?identifying the available power bases in most cases, dealing with the issue isstraightforward because the power bases available to the channel manager at any giventime can usually be readily identified. generally, they are a function of the size of theproducer or manufacturer relative to channel members, the organization of the channel,or a particular set of circumstances surrounding the channel relationship. with respect to size, typically a large producer or manufacturer dealing with relativelysmall channel members at the wholesale or retail levels has high reward and coercive powerbases available and vice versa. on the other hand, giant retailers such as home depot.walmart, and amazon3 are larger than most of the manufacturers supplying then-hence, such "power or dominant" retailers have high levels of reward and coercive powerrelative to the mostly smaller manufacturers from whom they buy. such differe