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Relationship Appraisal: A route to improved reseller channel performance
NORTH- HOLLAND
Relationship Appraisal A Route to Improved Reseller Channel Performance
Stuart A. Hanmer-Lloyd This study reports on research conducted within the computer hardware market into the development of a manufacturer~distributor relationship appraisal process. Criteria for the appraisal are identified from both parties, along with their views on such a process being introduced. Conclusions are drawn that provide valuable guidelines for organizations considering following this particular route with their distributors. A brief overview of the relevant literature related to manufacturer~distributor relationships is also provided for contextual rigor.
INTRODUCTION Over the last several years growth in the information technology business has slowed dramatically to a single-digit figure. There has been an increase in the level of global competition and, as a result, gross profits have gradually fallen especially in the hardware segment of the computer market. This has caused many of the companies to look at the cost structure of their business to reduce it as a per-
Address correspondence to Stuart Hanmer-Lloyd, Senior Lecturer, Bristol Business School, University of the West of England, Frenchay Campus, Coldharbour Lane, Frenchay, Bristol BSI6 IQY, United Kingdom.
centage of revenue. Traditionally the majority of computer hardware products were sold by the manufacturer direct to the end user using the manufacturer's own sales force. This typically costs the manufacturer over 20% of revenue. In addition to reduced market growth, a trend toward standardization of hardware has evolved as well as increased customer expertise. These factors combined together to encourage manufacturers to explore channels of distribution that are more cost effective. However, the management of channels in itself poses a challenge to the manufacturer. This article reports on an approach being developed to manage this relationship in an effective and cost-efficient way through a relationship appraisal process. Thus the focus of the study is to identify, first, the views of a computer hardware manufacturer and their authorized distributors about what criteria they would like to see in the appraisal process and, second, what issues need to be addressed to successfully implement such a process. However, prior to reporting on the methodological approach adopted in this study and the subsequent results and conclusions drawn, an overview of the literature on manufacturer/distributor relationships is presented to set this research in context. Its contribution to the development of the methodology should also be noted.
Industrial MarketingManagement25,
173-185 (1996) © Elsevier Science Inc.. 1996 655 Avenue of the Americas, New York, NY 10010
0019-8501/96/$15.00 SSDI 0019-8501(95)00062-F
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Relationship appraisal mechanisms require that areas of conflict are clearly identified. LITERATURE OVERVIEW The growing literature on the manufacturer/distributor relationship demonstrates quite clearly its importance to marketers. A variety of issues has been addressed that were important to understand within the framework of the research reported later; indeed, it helped guide both the methodology and topics that were to be investigated. In attempting to initialize a relationship appraisal process within a manufacturer/supplier-distributor situation, it was important to understand both parties perspectives, so literature was reviewed in this area. In addition, it was important to recognize that conflict can arise, and although the intention is to minimize and manage the conflict, some understanding of its causes from the literature is pertinent. Finally, other research has been carried out in the field of vendor appraisal and successful channel management, and this is worth noting in the approach to this particular case. The changing nature of the computer market has led manufacturers to use distributor/resellers and the reasons for this development align with the explanations provided in previous literature. For example, Stern et al. (1989) gave reasons why manufacturers have varying channel structures that include resellers as: • To increase the efficiency of the exchange process • To break bulk and create assortments of complementary goods • To make transactions routine • To facilitate the search process with respect to customers Jackson and d~,mico (1989) have studied the use of distributors in a variety of industrial markets and have drawn up a set of product and market conditions in which it is common to use a distributor. They concluded that distribSTUART HANMER-LLOYD is a Senior Lecturer in Marketing at Bristol Business School, University of the West of England, Bristol, United Kingdom.
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utors are generally used under the following conditions with several of these fitting very closely with the trends in the computer market. These conditions were: • The product is a standard item • The product is technically simple • There is a high gross margin on the product. Markets are large, in terms of number of customers • Customers order frequently • Customers require a short lead time The nature of the market and related products, being hightech, also has a bearing. Moriarty and Kosnik (1988) recommend that manufacturers in the high-tech markets need to build relationships with channels and customers. Expanding on this recommendation, McKenna (1987) has stressed that developing relationships can overcome fear, uncertainty, and doubt (FUD) among channels. It will be seen later that these issues are particularly important to consider in building a relationship appraisal process. There are decisions to be made around the options of intermediary to be used by manufacturers where the requirements can differ between products and markets. Writers, such as McTavish and Maitland (1980), Gorey (1983), and McKinnon (1989), identify many of these options. There can also be conflict between the intermediaries, see for example POwers (1989) and Dimberline (1990). Computer manufacturers are faced .with a range of intermediaries because of the large number of different sized customers. Figure 1 presents an example of these varying channels for IBM personal computers and is reproduced from Stern et al. (1989). The literature also contains more quantitative/analytical methods of choosing and optimizing the choice of marketing channel. Lilien and Kotler (1983) use a weightedfactor score method to evaluate alternatives. Corstjens and Doyle (1979) develop a model to solve decisions on channel choice, number of channels, and pricing strategy between channels; Rangan et al. (1986) develop an analytical model based on cost/revenue principles. Whereas the Corstjens and Doyle (1979) model selects the optimum num-
C h a n n e l s n e e d to b e treated as
strategic assets. ber of intermediaries and optimum price (1986) model selects the optimum number of intermediaries and preferred intermediary network for a fixed price structure. The fundamental difficulty with these quantitative models is that the quality of their output is only as good as that of their input. To generate meaningful results, accurate hard data (e.g., demand and cost curves), which are generally not easily available, are required. Also, as Rangan et al. (1986) comment, the optimum analytical result may be at odds with the manager's judgments, and the differences have to be reconciled and managed. In an attempt to understand the manufacturer/supplierdistributor relationship, several authors, including Webster (1975, 1976), Shipley (1984), and Narus et al. (1984), have examined the views of each participant. It became apparent that the distributor's view of himself was different from the manufacturer/supplier's view of the distributor (see Table 1), and these differences in perceptions need to be recognized when attempting to build a relationship appraisal process. In view of this disparity of views about the role of the distributor, it is perhaps not surprising that there is an extensive collection of literature on conflict and power in marketing channels. This will be briefly reviewed as the research was carried out against a backdrop of change and possible conflict situations arising between the manufacturer and their distributors.
CONFLICT AND POWER IN MARKETING CHANNELS Conflict is one of a number of behaviorial dimensions that have been studied in channel systems. Some authors have listed the following as the most popular areas of study: bargaining, conflict, cooperation, power, performance, member roles, member satisfaction, and political economy. An exhaustive review of the literature in the mid 1980s, grouped according to the preceding headings, has been produced by Hunt et al. (1985). The importance of conflict has been emphasized in the
study of channel behavior, for example, as Levy (1981) comments "the concept of conflict is central to marketing channel management" Power in a relationship is one of the primary driving factors in how a relationship develops. Power can exist with both parties of the relationship. The amount of power each member has, and uses, influences how the relationship develops. Work by Lusch (1976) then Gaski (1984) concluded that power was the causative factor in conflict between channel members. The idea is challenged by Etgar's (1978) work, which claims that where a high degree of conflict exists, this encourages the use of coercive power. In other words conflict causes the use of power. What may perhaps be concluded is that the use of power within conflict situations is extremely likely. The five types of power used between channel members are well described by Etgar (1978) and include: reward power, coercive power, expert power, referent power, and legitimacy power. These five power sources have been subsequently reduced by, inter alia, Gaski (1984) to a binary set of coercive and noncoercive power. A more recent study by Butaney and Wurtzel (1988) suggested that distributors prefer a more diffuse power structure. This is in line with the approach taken more recently where partnerships and long-term relationships are predicted (Christopher et al. 1991; Crosby et al. 1990). Although the arguments for relationships and partnerships are currently advocated, it should be recognized that areas of conflict can arise, and these are important to identify for any relationship appraisal mechanism to be effective. A useful model to help understand the causes of conflict was developed by Magrath and Hardy (1988b) and is reproduced in Figure 2. Examining this model helps identify attributes that should be considered in a channel management audit or relationship appraisal process. Various writers have examined these variables and others to ascertain their importance in particular situations. For example, Shipley's (1987b) study of British distributors showed poor delivery service to be the greatest cause of distributor dissatisfaction, whereas the study by Narus et
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G o o d c o m m u n i c a t i o n s are vital to effective channel management. al. (1984) showed this to be a relatively insignificant problem. Etgar (1979) found that divergent expectations and lack of communications as possible causes of conflict. Rosenberg and Stern (1970) suggest causes of conflict to include differences in perceived roles and perceptions of reality. Problems may also be magnified in the supplier/distributor relationship because of the differences in outlook as mentioned by Webster (1975, 1976) previously. Frazier and Sheth (1985) developed a normative model that suggests the most appropriate behavior to influence others in a channel relationship, depending upon attitudes and behaviors in that relationship. The more analytical studies of Shipley (1987b) and Narus et al. (1984) do not mention the more behaviorial sources of conflict explicitly. This may be due to the questionnaire-based methodology. However, it is easy to understand how conflicts of this nature can arise; in a study by Hill and Blois (1989) on the usage of distributors by small manufacturers, the majority of the
manufacturers studied did not use distributors because of anecdotal evidence about their motivations, with little or no evidence to support these views! Although the importance of possible conflict in channels must be recognized, other research has advocated strategies to increase cooperation and improve channel management. SUCCESSFUL CHANNEL MANAGEMENT
Mallen (1973) investigated cooperation, conflict and power with parameters of "forced" versus "agreed upon" terms. His major conclusion was that "the channel must cooperate and act as a unit for the maximization of channel profits" Guiltinan et al. (1980) found that cooperation appeared to be related to the effectiveness of channel communications, the degree of uncertainty reduction, and the extent of participative decision-making. In the case described later, a centrally coordinated distribution system
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The relationship appraisal process must b e interactive a n d constructive. TABLE 1
Distributors' Self-Image Versus Manufacturers' View of the Distributor Distributors' self image
First and foremost an independent businessperson Emphasizes ability to provide a broad range of products and full customer serx,ice A large and desirable customer of the supplier Is more customer-orientated than supplier oriented
Manufacturers" view of the The distributor is part of the channel structure distributor The distributor is unwilling to carry sufficient stock to ensure the best customer service The end-users of the product are the suppliers" customer, not the distributors' The distributor is there to handle small accounts and physically distribute the goods The distributor's sales-force are only ordertakers, unable to develop new accounts or markets, nor to provide technical service The distributor has a poor level of management experience and competence. There is no provision for management succession when the principal of the company retires and financial control is poor
exists; Guiltinan et at. (1980) found that if centrally coordinated distribution systems exist then they are more likely to be perceived effective if channel members are made to feel a part of the decision-making structure. Previous research by Pearson and Monoky (1976) found that channels that were performing well exhibited more cooperative dimensions, whereas low performance channels manifested more conflict dimensions. Interestingly, the body of literature on methods of successful channel management for a supplier often appears in the general management literature, whereas the analyses of channel conflict often more frequently appear in the management science type literature. Typical articles on successful channel management are those by Rosenbloom (1978), Narus and Anderson (1986a), Hardy and McGrath (1988a, 1988b), and Cespedes (1988a, 1988b). These are, in the main, studies which draw on anecdotes or short case histories of (American) companies to illustrate their points.
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FIGURE 2. Modeling conflictual attributes. Source: Hardy, K. G., and Magrath, A. J. (1988b).
There is a great deal in common in the basic principles put forward in these articles. A brief view of their ideas is useful to the relationship appraisal approach advocated in this study (see Table 2). Almost without exception, the articles are written with the assumption that it is the manufacturer/supplier who is controlling the relationship, and the methods put forward fall, perhaps not surprisingly, into analysis/planning/implementation/control models, with some additional useful insights produced by later authors. Finally, before turning to the specific appraisal issues in the current research reported here, it is worth commenting on the term vendor management. Formal vendor or supplier appraisals became popular in the early 1960s primarily as a tool to select a supplier for short-term business. Vendor management, as it is now known, has developed rapidly following the acceptance of just-in time (JIT) manufacturing philosophy. JIT depends on a high level of vendor performance, and the literature reported previously shows 177
Relationship appraisal criteria should be kept to an agreed minimum. TABLE 2 Strategies for Successful Channel Management: The Literature
Author
Analysis
Planning
Implementation
Cespedes (1988b): 5-point plan
Be clear about the market (market research) Recognize that there may be a variety of distributors which can be useful Define the role of the intermediary Compare efficiency and effectiveness of distributors
Cespedes (1988a): 4 Key areas
Ensure products are appropriate to the available channels
Introduce products to the appropriate channel Supply a sufficiently large range of products to interest the distributor Supply a complementary range of products
Hardy and Magrath ( 1988b): 10-point plan
Treat channels as strategic assets Understand the partner's motivation Pursue realistic policies based on good analysis
Definitive objectives, clearly communicated Division of tasks between supplier and intermediary Ensure margins are correct
Evaluate the function of each channel member with time
Help to develop the sales representatives Predict and contain conflict Audit channels
Hardy and Magrath ( 1988a):
Treat channels as strategic assets Analyze end-customers and resellers
Communicate a clear marketing strategy
Naurus and Anderson (1986a): 3-point plan
Gain a deep understanding of a distributor's requirements Talk to them Market research
Build working relationships with distributor Show commitment Good communication Actively manage the partnerships Define conflict Keep promises Plan for future
Rosenbloom (1978):
Find out the needs and problems of channel members Market research Distributor's councils
Provide support for channel members Partnerships Distributor conferences
that both the manufacturer/supplier and the distributor view each other, at times, as the vendor. Vendor relationships in this market have undergone a significant change in the last decade. Where once contracts were short-term, suppliers numerous, competition often price based, contracts are now increasingly long-term, exclusive, and based more on technology, quality, responsiveness, dependability, as 178
Control
Be sensitive to the power situation, keep people happy but maintain as much control as possible
Provide leadership to motivate channel members
well as cost. Helper (1991) classifies the relationship between supplier and customer, by the method they use to resolve conflicts. She describes an "exit" relationship as one where if a customer has a conflict, they find a new vendor. This is contrasted with the "voice" relationship in which the customer works with the vendor to resolve the conflict. The measurement dimensions in describing a
HIGH
"voice versus exit" relationship are information exchange and commitment. Figure 3 shows this model diagrammatically. Helper claimed that in all cases the performance of voicebased relationships was better than any other. This is an important piece of work in that it links the concept of a cooperative business relationship to improved long-term performance of both partners. The objective, therefore, of modern vendor management is to move closer to the concept of a voice-based relationship rather than exit-based relationships. However, it is also recognized that the majority of business relationships need to be monitored and appraised to maximize effectiveness and efficiency. Giunipero (1990) found that more than 45 % of all companies utilize a formal quantitative rating system in making procurement decisions. It is not appropriate to review attributes of satisfaction measurement in this study; however, their importance to the appraisal measurement process is recognized. For further information on this issue, readers are referred to an excellent review of the literature by Lewis and Mitchell (1990). The review of the literature reported previously has confirmed the importance of the nature of the relationship between suppliers and distributors for their mutual success. Problem areas have been identified and guidelines for successful relationships have been outline. Most writers
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Source: Helper, S. (1991). agree on the broad prescriptions as to what makes a channel successful. These are: • Find out what the channel member's needs and problems are by sitting down and discussing the issues • Provide support for the channel members on a regular basis • Provide leadership to motivate channel members Hardy and McGrath also cite two key activities. These are the need to treat channels as strategic assets and also
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Results and Conclusions 179
to monitor their performance and constantly seek ways to use them to gain competitive advantage. The criteria for examining a relationship are multiple and complex and have been touched on in a general way in this review. The following sections of this article report on the research conducted and the conclusions reached in relation to implementing a relationship appraisal approach.
RESEARCH AIMS AND METHODOLOGY The overall aim of the research reported in this article was to identify the measurement criteria and implementation issues involved in developing a relationship appraisal system between a computer hardware supplier and their authorized distributors. The specific objectives being: • To identify the key measurement attributes to be used in the appraisal system from both the manufacturer's and distributor's perspective. • To identify those issues that were considered to be important in the successful implementation of such a relationship appraisal system. Although it is recognized that the research relates to one specific manufacturer and industry, the conclusions reached by the research raise important issues for other manufacturers who are considering introducing appraisal systems with their distributors and thus improve their channel management activity. The research methodology can be described diagrammatically (see Figure 4) where it is shown to contain both qualitative and quantitative stages. Following on from a review of the relevant literature on channel management and relationships, a brief overview of which appeared earlier, the empirical data collection took place in two phases with the manufacturer's personnel and distributors. Phase I was an exploratory, qualitative stage and involved five semi-depth interviews with key distributor personnel to generate relevant appraisal variables and implementation issues. For the manufacturers a focus group was conducted with five business managers and three distribution program managers- again the purpose was to generate appraisal variable and implementation issues. Phase II of the research enlarged on the sample size so that the response rate represented a significant percentage of the authorized distributors (more than 80 % of turnover) and the relevant managers who interacted with those distributors. For the distributors, the data were gathered via six focus groups with each group consisting of six distributors.
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The focus groups were segmented on size of organization and position held within the company. In practice this meant that the presidents of wholesalers would form the first group, whereas the product managers of small distributors formed the sixth group. It was felt that members of an organization of different sizes and levels may have different perspectives regarding appraisal performance criteria. To help identify the relative importance of the identified criteria and to add to distributor interest, the distributors in the focus groups took part in the $100 model test. This invited the distributors to allocate "spend" up to $100 in total to performance criteria by their level of importance, more money spent meant the attribute was relatively more important. This method appeared to appeal to the distributors who felt that allocating real money made them think much more carefully about how they "spent it" To gather the views of the manufacturer's personnel, the results of the exploratory research were distributed to a cross-functional set of managers. These functions included manufacturing, credit control, logistics, sales management, and marketing management. Comments were requested with respect to the selected criteria and their relative importance as well as the implementation issues involved in introducing an appraisal mechanism. This was a questionnaire-based approach delivered using the manufacturer's electronic mail system. Twenty managers were identified as having important contact with the distributors, and they all completed a questionnaire and returned it to the researcher. The $100 test was not used with the manufacturer's personnel- a simple Likert scale was used to identify the relative importance of the attributes to be used within the appraisal system. It should be recognized that although it was important for the research to identify the manufacturer's and distributor's suggested appraisal criteria and their relative importance, it was especially important for the manufacturer to understand the various issues that were important in implementing the concept of a relationship appraisal system. The results reflect this priority.
RESEARCH RESULTS During the exploratory stage of Phase I, the distributors identified 11 attributes that were important to them and which could be influenced by the manufacturer (see Figure 5). As an evaluation of satisfaction in relation to the attribute was also identified, this may have impacted on the relative importance measure; however, the major role for this stage of the research was the generation of a list of attributes-and this was achieved. This potential con-
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FIGURE5. Ratings of attributes by importance (hatched bars) and satisfaction (solid bars).
FIGURE6. Ratings of attributes (all groups) by % total
cern was eliminated from Phase II of the research process with the distributors through the integration of both relative importance and current manufacture performance into a single measure. Phase I of the manufacturer's responses initially produced more than 25 attributes that were considered to be important in how well a distributor performed. After discussion
within the group, these were reduced down to 15 and are produced in Table 3. The emphasis on financial performance can, at once, be identified as a particularly important area for the manufacturer to monitor. Sales development activity is also important as this is likely to provide the future success for both the distributor and manufacturer. Expectations around gaining information about the distributor's customers remain low, in line with many other markets. It was interesting to note that payment performance was seen as much more important in the U.K. than in Germany, perhaps reflecting the overall economic situation. However, this does suggest that the weighting of the criteria, even the criteria themselves, could change over time and between different business environments. Phase II of the research among the six "groups" of distributors posed two main questions. First, what attributes, that the manufacturer can influence, are important to your (distributor) success. Second, of these attributes where, with a limited resource ($100) would you, if you were representing the distributor, allocate the resource to improve the business performance over the next year. The results are presented in Figure 6. The distributors identified 10 main areas where it was felt attention should be paid, and these formed the basis for the criteria of relationship appraisal mechanism from a distributor perspective. The results clearly show that or-
TABLE 3
Manufactureds Criteria for Evaluating Distributor's Performance Weighting Business planning
Financial performance
Sales development
Total
Business plan quality Monthly order forecast Safety records Inventory size reports Customer sales report Customer profile report Quota Payment performance Compliance with minimum lot size Compliance with cancellation procedure Compliance with warranty procedure Quality of pre- and postsales Adequate inventory level Effectiveness of promotional material Effective use of manufacturers' resources
7 6 1 I 3 2 25 10 8 3 4 12 6 6 6 100
(solid bars).
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TABLE 4 Manufacturer's Revised Distributor Appraisal Criteria
Original Weighting Business planning
Financial pertormance
Sales development
Total
Business plan quality Monthly order tbrecast Customer sales report Customer profile report Quota Payment performance Compliance with minimum lot size Compliance with cancellation procedure Quality of pre- and postsales Adequate inventory level Effectiveness of promotional material Effective use of manufacturers resources
New Weighting
7 6 3 2 25 10
8 5 5 3 30 10
8
5
3 12 6
3 8 8
6
6
6
6
100
100
der fulfilment by the manufacturer was the most important issue for the distributor, and this accounted for nearly onefifth of the vote. The opportunity for distributors to be more flexible in their pricing decisions came an important second with 15 % of the vote, which indicated the very competitive nature of the marketplace. In third place was the requirement for a clearer communication of the manufacturer's distribution strategy which scored 13 %. This was needed not only to reassure the distributor of future manufacturer support, but also helped distributors puts their plans together for the future. Distributor support activities, e.g., joint promotions and technical backup where needed, achieved 12% of the vote and again was felt to demonstrate manufacturer commitment to the distributor. There was a difference between support and "interference" and distributors did expect their relative autonomy to be respected by the manufacturer. Time-to-market for new products also received a 12 % vote, and this was emphasized by the distributors because the changing technology in the market often led to competitive advantage for both parties. Quality of products and innovation were perceived equally at just over 7 %. It should be noted that the issue of good communications between the manufacturer and distributors arose on a frequent basis and to a large extent was felt to span many of the attributes identified by the distributors as important. Many distributors stated that "the manufacturer's performance against most attributes would be improved through better communications?' Finally, the effect of the manufacturer's corn-
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munications strategy to the final marketplace was identified as an attribute of importance, which should be included in any relationship appraisal system. Distributors felt that the manufacturer had a duty to create a positive image for its company and its products which would, in turn, be helpful to the distributors in selling the manufacturer's products. The results of the survey among the manufacturer's personnel in relation to relevant distributor appraisal criteria are presented in Table 4. The new weightings are shown next to the original weighting identified in the earlier exploratory research. It can be seen that three of the criteria, safety records, compliance with warranty procedure, and inventory size reports are generally felt to be unnecessary appraisal criteria, which reduces the total number of appraisal criteria to 12, which was felt by the manufacturer to be "about the right number of criteria to be manageable" The relative weighting of the criteria remained reasonably consistent with the Phase I results, which was not unexpected given that the sample in Phase I was drawn from the same population as the Phase II population. That the strength of importance of the distributor achieving quota increased by one-fifth to an overall level of 30% was perhaps notable. The only other attribute that showed any real change was the quality of pre- and postsales, which decreased in importance from a weighting of 12% to 8%. The obvious importance of the financial targets being achieved by the distributors remained vital to the manufacturer's appraisal criteria. An important aspect of the research was to understand both the distributors' and manufacturers' opinions in relations to the introduction of an appraisal system. Previous research has tended to focus on the appraisal criteria, but it is recognized here that process is vitally important to the successful implementation of an appraisal system. To achieve this, both the distributor's and the manufacturer's sample were invited to comment on the issues they felt were important in successfully implementing an appraisal system.
Distributor's Perspective It was expected that there would be a significant difference between the manufacturer's and distributor's expectations of acceptable performance for certain attributes. • It was felt that a significant amount of attention should be given to ensuring that the attributes were clearly defined. • The performance levels for each attribute needed to be explicitly stated. • The larger distributors, with larger market share,
•
•
•
•
•
stressed that they expected to be dealt with more as an employee, being given direction and rewarded for good performance and vice versa. Concern was expressed regarding the time required to implement the appraisal. It was suggested that two per year be carried out and up to a maximum of 3 hours per appraisal was acceptable. All distributors agreed that their local manufacturer's representative should be present during the appraisal. They did, however, stress that they would like to have an opportunity to express their opinions directly to sales and marketing management within the manufacturer. None of the distributors questioned openly expressed any reservation regarding the concept of a formal business review process. They did stress the need for it to be interactive and constructive. There was concern by the smaller distributors that they would not be measured equitably with other distributors operating in larger markets. All distributors agreed that although the appraisal document would be useful, it would be the discussion around this framework that would be of most value.
Manufacturer's Perspective •
• •
•
•
•
•
It was felt that to have more than 10 attributes would be prohibitive from an administrative perspective, tending to be a chore rather than a tool to enhance business performance. Criteria and expectations against the identified criteria must be clearly communicated well in advance. It was important that distributors saw the benefits of the appraisal program, seeing it as a consultative tool, rather than just another bright idea by a manufacturer. The appraisal program should be linked to an awards program, e.g., distributor of the year, and, therefore, care must be taken to ensure it is fairly implemented. This would further increase motivation. Differentiating marketing programs to different tiers of performers was seen as potentially demotivating to those in the lower tiers. Concern existed that the smaller regions within Europe should be measured on performance relative to their competitors within that region, not to other large companies in the larger European countries of Germany, U.K., and France. All distributors must have a reasonable opportunity to reach number one position. Marketing management saw the program as an opportunity to facilitate contact with their largest customers, establishing customer needs directly.
CONCLUSIONS The primary research reported previously has identified the appraisal criteria that both a manufacturer and their authorized distributors felt were important. It also, and importantly, went on to explore the views of both parties on the issues that would be important in successfully implementing a relationship appraisal process. These issues are important to identify for a manufacturer who may be considering introducing such a process, Increasingly, manufacturers are seeking opportunities to gain competitive advantage through the successful management of their channels. This research identified not only the important appraisal attributes that should be utilized in this process, but also the participant's opinions about the condition that would increase the probability of successfully implementing a relationship appraisal system. Thus, in planning a relationship appraisal process the research suggests that: • Manufacturer/distributor coordination appears to be related to the effectiveness of channel communication, the degree of uncertainly reduction and the extent of participative decision making. A joint performance review achieves these aims. • Conflict is exaggerated by restricted and poor communications between the manufacturer and their distributors. • The relationship appraisal process, if conducted properly, should be viewed as a motivational tool by both the distributors and the manufacturer. • Those personnel from the distributor and the manufacturer who were in direct daily contact should be responsible for managing the appraisal process. • The concept of a customer care panel, as suggested by Boggis (1990) where line management from both the distributor and manufacturer are invited to the appraisal, received support from both sides. • There was common agreement that the appraisal process must be simple and of negligible cost, although still being thorough and covering the agreed appraisal attributes. • Much of the value of the appraisal process was around the development of a structured communications line between the manufacturer and the distributor. • Both the manufacturer and distributors expected small incremental improvements in performance to be seen because of the resulting increase in customer satisfaction. • Comparison between large and smaller distributors should not be made through the appraisal process; thus, the validity of using the appraisal to judge in a distributor competition is seriously questioned. In addition, using
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the appraisal system in this way could dilute the focus away from building a mutually beneficial relationship, the primary objective of the appraisal. • The manufacturer's proposal to reward better performing distributors, judged by the appraisal process, with a higher allocation of technical support was seen to be difficult to manage and, therefore, abandoned.
provide to organizations who are contemplating going along this route a possible methodological approach to eliciting the respective views of the channel partners as well as issues to note in identifying criteria and implementing a relationship appraisal process.
In terms of the appraisal attributes, several conclusions from the research can be drawn.
REFERENCES
• Evaluation of infrequent activities performance was not really discussed by either the manufacturer or the distributor; however, they would need to be addressed in an appraisal process. • The appraisal criteria suggested by the distributors resembled those of a customer service model (Gronroos 1982). Both technical and functional attributes were present, which suggests that the distributor envisages the manufacturer operating a service model. • The manufacturer-developed attributes were much more focused on the functional qualities of the distributors, where financially agreed targets should be achieved. The softer relationship development issues were viewed as of more importance by the distributors. • Whereas some authors (Weiters and Ostrom 1979) recommend eight or fewer attributes, in this case the distributors recommended 10 and the manufacturer identified 12 appraisal criteria. There was agreement, however, that the number of criteria should be kept to a minimum but disagreement over the removal of criteria with nominal weights; the manufacturer arguing that although they were not that significant, by virtue of their nature, they needed to be present in the appraisal. • Both the manufacturer and the distributors agreed that the benefits of using particular attributes needed to be made clear to both parties for them to become a focus of the appraisal. This relates to the process and attribute issues of the system. The research reported in this article, although relating to one particular market, the computer hardware market, has clearly shown that both the manufacturer and distributors concerned feel they can develop greater customer satisfaction and, therefore, potential competitive advantage through a relationship appraisal process. It requires that both parties are fully consulted over the attributes to be used within the appraisal, but also, and importantly, a recognition that attention must be paid to the process of implementation so that complexity, cost, and perceived threat to both parties are minimized. This study is intended to
184
Bolton, R. N., and Drew, J. H., Impact of Service Changes on Customer Attitudes, Journal of Marketing 55(1), 1-9 (1991). Bryman, A., Research Methods and Organizational Studies. Unwin Hyman, London, 1989. Butaney, G., and Wortzel, L. H., Distributor Power versus Manufacturer Power: The Customer Role, Journal of Marketing 52, 52-63 (January 1988). Cespedes, F. V., Channel Management Is General Management, California Management Review 98-120 (Fall 1988a). Cespedes, F. V., Control versus Resources in Channel Design: Distribution Differences in One Industry, Industrial Marketing Management 17, 215-227 (1986b). Christopher, M., Payne, A., and Ballantyne, D., RelationshipMarketing: Bringing Quality CustomerService and Marketing Services Together. ButterworthHeinemann, Oxford, 1991. Churchill, G. A., and Suprenaut, C., An Investigation into the Determinants of Customer Satisfaction, Journal of Marketing Research 491-504 (Nov. 19, 1982). Corey, E. R., Industrial Marketing: Casesand Concepts, 3rd Ed. Prentice Hall, New Jersey, 1983. Corstjens, M., and Doyle, P., Channel Optimization in Complex Marketing Systems, Management Science 25(10), 1014-1025 (1979). Crosby, L. A., Evans, K. R., and Cowles, D., Relationship Quality in Services Selling, Journal of Marketing 53(3), 68-81 (1990). Dimberline, C., Specialists Discounted, Electrical Times 24-26 (August/September 1990). Etgar, M., Intrachannel Conflict and Use of Power, Journal Marketing Research IS, 273-274 (May 1978). Etgar, M., Selection of an Effective Channel Control Mix, Journal Marketing 42(3), 53-58 (1978). Etgar, M., Sources and Types of Intrachannel Conflict, Journal of Retailing 55, 61-75 (1979). Fields, G., How Manufacturers Can Build Close Ties with Their Agencies, Agency Sales Magazine 13(10), 4-9 (1983). Frazier, G. L., and Sheth, J. N., An Attitude-Behavior Framework for Distribution Channel Management, Journal of Marketing 49(3), 38-48 (1985). Gaski, J. F., The Theory of Power and Conflict in Channels of Distribution, Journal of Marketing 48, 9-29 (Summer 1984). Giunipero, L., Motivating and Monitoring JIT Supplier Performance Journal of Purchasing and Materials Management, 26(3), 19-24 (1990) Gronroos, C., StrategicManagementand Marketing in the Service Sector, Swedish School of Economics and Business Administration, Helsingfors, 1982. Hardy, K. G., and Magrath, A. J., Planning for Better Channel Management, Long Range Planning 21(6), 30-37 (1988a). Hardy, K. G., and Magrath, A. J.. Ten Ways for Manufacturers to Improve Distribution Management, Business Horizons 31, 65-69 (November/ December 1988b).
Helper, S., How Much Has Really Changed between U.S. Automakers and Their Suppliers? Sloan Management Review 32(4) 15-28 (1991). Hill, S. M., and Blois, K. J., Industrial Distributors and Small Manufacturers, European Journal of Marketing 23(2), 154-162 (1989).
Narus, J. A., Reddy, N. M., and Pinchak, G. L., Key Problems Facing Industrial Distributors, Industrial Marketing Management 13, 139-147 (1989).
Hlavacek, J. D., and McCuistion, T., Industrial Distributors-When, Who, and How? Harvard Business Review 96-101 (March/April 1983).
Nickolaus, N., Marketing New Products with Industrial Distributors, Industrial Marketing Management 19, 287-299 (1990).
Hunt, S. D., Ray, N. M., and Wood, V. R., Behavioral Dimensions of Channels of Distribution: Review and Synthesis, Journal of Academy Marketing Science 13(3), 1-24 (1985).
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Jackson, D. M., and d'Amico, M. F., Products and Markets Served by Distributors and Agents, Industrial Marketing Management 18, 27-33 (1989). Levy, M., Customer Service: A Managerial Approach to Controlling Marketing Channel Conflict, International Journal Physical Distribution and Materials Management 11(7), 38-52 (1981). Lewis, B. R., and Mitchell, V. W., Defining and Measuring the Quality of Customer Service, Marketing Intelligence and Planning 8(6), 11-17 (1990).
Narus, J. A., and Anderson, J. C., Turn Your Industrial Distributors into Partners, Harvard Business Review (66-71 (March/April 1986a).
Rangan, V. K., Zoltners, A. A., and Becker, R. J., The Channel Intermediary Selection Decision: A Model and an Application, Management Science 32(9), 1,114-1,122 (1986). Rosenberg, L. J., and Stern, L. W., Towards the Analysis of Conflict in Distribution Channels: A Descriptive Model, Journal Marketing 34, 40-46 (1970). Rosenbloom B., Conflict and Channel Efficiency: Some Conceptual Models for the Decision-Maker, Journal Marketing 37, 25-30 (July 1973).
Lilien, G. L., and Kotler, P., Marketing Decision Making: A Model Building Approach. Harper and Row, New York, 1983.
Rosenbloom, B., and Anderson, R., Channel Management and Sales Management: Some Key Interfaces, Journal Management Science 13(3), 97-106 (1985).
Lusch, R. F., Sources of Power: Their Impact on lntrachannel Conflict, Journal of Marketing Research 13, 382-390 (November 1976).
Shapiro, B. P., Making Money through Marketing, Harvard Business Review 135-142 (July/August 1979).
Magrath, A. J., and Hardy, K. G., Factory Salesmen's Roles with Industrial Distributors, Industrial Marketing Management 16, 163-168 (1987).
Shipley, D. D., What British Distributors Dislike about Manufacturers, Industrial Marketing Management 16, 153-162 (1987b).
Magrath, A. J., and Hardy, K. G., A Strategic Paradigm for Predicting Manufacturer-Reseller Conflict, European Journal Marketing 23(2), 94-108 (1989).
Shipley, D. D., Selection and Motivation of Distribution Intermediaries. Industrial Marketing Management 13, 249-256 (1989).
Mallen. B., Functional Spin Off: A Key to Anticipating Change in Distribution Structure, Journal of Marketing 37, 18-25 (July 1973). McKenna, Eugene F., Psychology in Business: Theory and Applications. Lawrence Erlbaum, East Sussex, 1987, p. 222. McKinnon, A. C., Physical Distribution Systems. Routledge, London, 1989. McTavish, R., and Maitland, A., Industrial Marketing. Macmillan, London, 1980.
Moriarty, R. T., and Kosnik, T. J., High-Tech versus Low-Tech: Where's the Beef?. Harvard Business School Working Paper 9-588-012 (1988).
Stern, L. W., E1-Ansary, A. I., and Brown, J. R., Management in Marketing Channels. Prentice-Hall International, New Jersey 1989. Timmerman, E., An Approach to Vendor Performance Evaluation, Journal of Purchasing and Materials Management 22(4), 2-8 (1986). Webster, F. E., Perceptions of the Industrial Distributor, Industrial Marketing Management 4, 257-264 (1975). Webster, F. E., The Role of the Industrial Distributor in Marketing Strategy, Journal of Marketing 40, 10-16 (July 1976). Wieters, C. D., and Ostrom, L. L., Supplier Evaluation as a New Marketing Tool, Industrial Marketing Management 8(2), 161-166 (1979).
185
Relationship Appraisal A Route to Improved Reseller Channel Performance
Stuart A. Hanmer-Lloyd This study reports on research conducted within the computer hardware market into the development of a manufacturer~distributor relationship appraisal process. Criteria for the appraisal are identified from both parties, along with their views on such a process being introduced. Conclusions are drawn that provide valuable guidelines for organizations considering following this particular route with their distributors. A brief overview of the relevant literature related to manufacturer~distributor relationships is also provided for contextual rigor.
INTRODUCTION Over the last several years growth in the information technology business has slowed dramatically to a single-digit figure. There has been an increase in the level of global competition and, as a result, gross profits have gradually fallen especially in the hardware segment of the computer market. This has caused many of the companies to look at the cost structure of their business to reduce it as a per-
Address correspondence to Stuart Hanmer-Lloyd, Senior Lecturer, Bristol Business School, University of the West of England, Frenchay Campus, Coldharbour Lane, Frenchay, Bristol BSI6 IQY, United Kingdom.
centage of revenue. Traditionally the majority of computer hardware products were sold by the manufacturer direct to the end user using the manufacturer's own sales force. This typically costs the manufacturer over 20% of revenue. In addition to reduced market growth, a trend toward standardization of hardware has evolved as well as increased customer expertise. These factors combined together to encourage manufacturers to explore channels of distribution that are more cost effective. However, the management of channels in itself poses a challenge to the manufacturer. This article reports on an approach being developed to manage this relationship in an effective and cost-efficient way through a relationship appraisal process. Thus the focus of the study is to identify, first, the views of a computer hardware manufacturer and their authorized distributors about what criteria they would like to see in the appraisal process and, second, what issues need to be addressed to successfully implement such a process. However, prior to reporting on the methodological approach adopted in this study and the subsequent results and conclusions drawn, an overview of the literature on manufacturer/distributor relationships is presented to set this research in context. Its contribution to the development of the methodology should also be noted.
Industrial MarketingManagement25,
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Relationship appraisal mechanisms require that areas of conflict are clearly identified. LITERATURE OVERVIEW The growing literature on the manufacturer/distributor relationship demonstrates quite clearly its importance to marketers. A variety of issues has been addressed that were important to understand within the framework of the research reported later; indeed, it helped guide both the methodology and topics that were to be investigated. In attempting to initialize a relationship appraisal process within a manufacturer/supplier-distributor situation, it was important to understand both parties perspectives, so literature was reviewed in this area. In addition, it was important to recognize that conflict can arise, and although the intention is to minimize and manage the conflict, some understanding of its causes from the literature is pertinent. Finally, other research has been carried out in the field of vendor appraisal and successful channel management, and this is worth noting in the approach to this particular case. The changing nature of the computer market has led manufacturers to use distributor/resellers and the reasons for this development align with the explanations provided in previous literature. For example, Stern et al. (1989) gave reasons why manufacturers have varying channel structures that include resellers as: • To increase the efficiency of the exchange process • To break bulk and create assortments of complementary goods • To make transactions routine • To facilitate the search process with respect to customers Jackson and d~,mico (1989) have studied the use of distributors in a variety of industrial markets and have drawn up a set of product and market conditions in which it is common to use a distributor. They concluded that distribSTUART HANMER-LLOYD is a Senior Lecturer in Marketing at Bristol Business School, University of the West of England, Bristol, United Kingdom.
174
utors are generally used under the following conditions with several of these fitting very closely with the trends in the computer market. These conditions were: • The product is a standard item • The product is technically simple • There is a high gross margin on the product. Markets are large, in terms of number of customers • Customers order frequently • Customers require a short lead time The nature of the market and related products, being hightech, also has a bearing. Moriarty and Kosnik (1988) recommend that manufacturers in the high-tech markets need to build relationships with channels and customers. Expanding on this recommendation, McKenna (1987) has stressed that developing relationships can overcome fear, uncertainty, and doubt (FUD) among channels. It will be seen later that these issues are particularly important to consider in building a relationship appraisal process. There are decisions to be made around the options of intermediary to be used by manufacturers where the requirements can differ between products and markets. Writers, such as McTavish and Maitland (1980), Gorey (1983), and McKinnon (1989), identify many of these options. There can also be conflict between the intermediaries, see for example POwers (1989) and Dimberline (1990). Computer manufacturers are faced .with a range of intermediaries because of the large number of different sized customers. Figure 1 presents an example of these varying channels for IBM personal computers and is reproduced from Stern et al. (1989). The literature also contains more quantitative/analytical methods of choosing and optimizing the choice of marketing channel. Lilien and Kotler (1983) use a weightedfactor score method to evaluate alternatives. Corstjens and Doyle (1979) develop a model to solve decisions on channel choice, number of channels, and pricing strategy between channels; Rangan et al. (1986) develop an analytical model based on cost/revenue principles. Whereas the Corstjens and Doyle (1979) model selects the optimum num-
C h a n n e l s n e e d to b e treated as
strategic assets. ber of intermediaries and optimum price (1986) model selects the optimum number of intermediaries and preferred intermediary network for a fixed price structure. The fundamental difficulty with these quantitative models is that the quality of their output is only as good as that of their input. To generate meaningful results, accurate hard data (e.g., demand and cost curves), which are generally not easily available, are required. Also, as Rangan et al. (1986) comment, the optimum analytical result may be at odds with the manager's judgments, and the differences have to be reconciled and managed. In an attempt to understand the manufacturer/supplierdistributor relationship, several authors, including Webster (1975, 1976), Shipley (1984), and Narus et al. (1984), have examined the views of each participant. It became apparent that the distributor's view of himself was different from the manufacturer/supplier's view of the distributor (see Table 1), and these differences in perceptions need to be recognized when attempting to build a relationship appraisal process. In view of this disparity of views about the role of the distributor, it is perhaps not surprising that there is an extensive collection of literature on conflict and power in marketing channels. This will be briefly reviewed as the research was carried out against a backdrop of change and possible conflict situations arising between the manufacturer and their distributors.
CONFLICT AND POWER IN MARKETING CHANNELS Conflict is one of a number of behaviorial dimensions that have been studied in channel systems. Some authors have listed the following as the most popular areas of study: bargaining, conflict, cooperation, power, performance, member roles, member satisfaction, and political economy. An exhaustive review of the literature in the mid 1980s, grouped according to the preceding headings, has been produced by Hunt et al. (1985). The importance of conflict has been emphasized in the
study of channel behavior, for example, as Levy (1981) comments "the concept of conflict is central to marketing channel management" Power in a relationship is one of the primary driving factors in how a relationship develops. Power can exist with both parties of the relationship. The amount of power each member has, and uses, influences how the relationship develops. Work by Lusch (1976) then Gaski (1984) concluded that power was the causative factor in conflict between channel members. The idea is challenged by Etgar's (1978) work, which claims that where a high degree of conflict exists, this encourages the use of coercive power. In other words conflict causes the use of power. What may perhaps be concluded is that the use of power within conflict situations is extremely likely. The five types of power used between channel members are well described by Etgar (1978) and include: reward power, coercive power, expert power, referent power, and legitimacy power. These five power sources have been subsequently reduced by, inter alia, Gaski (1984) to a binary set of coercive and noncoercive power. A more recent study by Butaney and Wurtzel (1988) suggested that distributors prefer a more diffuse power structure. This is in line with the approach taken more recently where partnerships and long-term relationships are predicted (Christopher et al. 1991; Crosby et al. 1990). Although the arguments for relationships and partnerships are currently advocated, it should be recognized that areas of conflict can arise, and these are important to identify for any relationship appraisal mechanism to be effective. A useful model to help understand the causes of conflict was developed by Magrath and Hardy (1988b) and is reproduced in Figure 2. Examining this model helps identify attributes that should be considered in a channel management audit or relationship appraisal process. Various writers have examined these variables and others to ascertain their importance in particular situations. For example, Shipley's (1987b) study of British distributors showed poor delivery service to be the greatest cause of distributor dissatisfaction, whereas the study by Narus et
175
G o o d c o m m u n i c a t i o n s are vital to effective channel management. al. (1984) showed this to be a relatively insignificant problem. Etgar (1979) found that divergent expectations and lack of communications as possible causes of conflict. Rosenberg and Stern (1970) suggest causes of conflict to include differences in perceived roles and perceptions of reality. Problems may also be magnified in the supplier/distributor relationship because of the differences in outlook as mentioned by Webster (1975, 1976) previously. Frazier and Sheth (1985) developed a normative model that suggests the most appropriate behavior to influence others in a channel relationship, depending upon attitudes and behaviors in that relationship. The more analytical studies of Shipley (1987b) and Narus et al. (1984) do not mention the more behaviorial sources of conflict explicitly. This may be due to the questionnaire-based methodology. However, it is easy to understand how conflicts of this nature can arise; in a study by Hill and Blois (1989) on the usage of distributors by small manufacturers, the majority of the
manufacturers studied did not use distributors because of anecdotal evidence about their motivations, with little or no evidence to support these views! Although the importance of possible conflict in channels must be recognized, other research has advocated strategies to increase cooperation and improve channel management. SUCCESSFUL CHANNEL MANAGEMENT
Mallen (1973) investigated cooperation, conflict and power with parameters of "forced" versus "agreed upon" terms. His major conclusion was that "the channel must cooperate and act as a unit for the maximization of channel profits" Guiltinan et al. (1980) found that cooperation appeared to be related to the effectiveness of channel communications, the degree of uncertainty reduction, and the extent of participative decision-making. In the case described later, a centrally coordinated distribution system
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The relationship appraisal process must b e interactive a n d constructive. TABLE 1
Distributors' Self-Image Versus Manufacturers' View of the Distributor Distributors' self image
First and foremost an independent businessperson Emphasizes ability to provide a broad range of products and full customer serx,ice A large and desirable customer of the supplier Is more customer-orientated than supplier oriented
Manufacturers" view of the The distributor is part of the channel structure distributor The distributor is unwilling to carry sufficient stock to ensure the best customer service The end-users of the product are the suppliers" customer, not the distributors' The distributor is there to handle small accounts and physically distribute the goods The distributor's sales-force are only ordertakers, unable to develop new accounts or markets, nor to provide technical service The distributor has a poor level of management experience and competence. There is no provision for management succession when the principal of the company retires and financial control is poor
exists; Guiltinan et at. (1980) found that if centrally coordinated distribution systems exist then they are more likely to be perceived effective if channel members are made to feel a part of the decision-making structure. Previous research by Pearson and Monoky (1976) found that channels that were performing well exhibited more cooperative dimensions, whereas low performance channels manifested more conflict dimensions. Interestingly, the body of literature on methods of successful channel management for a supplier often appears in the general management literature, whereas the analyses of channel conflict often more frequently appear in the management science type literature. Typical articles on successful channel management are those by Rosenbloom (1978), Narus and Anderson (1986a), Hardy and McGrath (1988a, 1988b), and Cespedes (1988a, 1988b). These are, in the main, studies which draw on anecdotes or short case histories of (American) companies to illustrate their points.
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FIGURE 2. Modeling conflictual attributes. Source: Hardy, K. G., and Magrath, A. J. (1988b).
There is a great deal in common in the basic principles put forward in these articles. A brief view of their ideas is useful to the relationship appraisal approach advocated in this study (see Table 2). Almost without exception, the articles are written with the assumption that it is the manufacturer/supplier who is controlling the relationship, and the methods put forward fall, perhaps not surprisingly, into analysis/planning/implementation/control models, with some additional useful insights produced by later authors. Finally, before turning to the specific appraisal issues in the current research reported here, it is worth commenting on the term vendor management. Formal vendor or supplier appraisals became popular in the early 1960s primarily as a tool to select a supplier for short-term business. Vendor management, as it is now known, has developed rapidly following the acceptance of just-in time (JIT) manufacturing philosophy. JIT depends on a high level of vendor performance, and the literature reported previously shows 177
Relationship appraisal criteria should be kept to an agreed minimum. TABLE 2 Strategies for Successful Channel Management: The Literature
Author
Analysis
Planning
Implementation
Cespedes (1988b): 5-point plan
Be clear about the market (market research) Recognize that there may be a variety of distributors which can be useful Define the role of the intermediary Compare efficiency and effectiveness of distributors
Cespedes (1988a): 4 Key areas
Ensure products are appropriate to the available channels
Introduce products to the appropriate channel Supply a sufficiently large range of products to interest the distributor Supply a complementary range of products
Hardy and Magrath ( 1988b): 10-point plan
Treat channels as strategic assets Understand the partner's motivation Pursue realistic policies based on good analysis
Definitive objectives, clearly communicated Division of tasks between supplier and intermediary Ensure margins are correct
Evaluate the function of each channel member with time
Help to develop the sales representatives Predict and contain conflict Audit channels
Hardy and Magrath ( 1988a):
Treat channels as strategic assets Analyze end-customers and resellers
Communicate a clear marketing strategy
Naurus and Anderson (1986a): 3-point plan
Gain a deep understanding of a distributor's requirements Talk to them Market research
Build working relationships with distributor Show commitment Good communication Actively manage the partnerships Define conflict Keep promises Plan for future
Rosenbloom (1978):
Find out the needs and problems of channel members Market research Distributor's councils
Provide support for channel members Partnerships Distributor conferences
that both the manufacturer/supplier and the distributor view each other, at times, as the vendor. Vendor relationships in this market have undergone a significant change in the last decade. Where once contracts were short-term, suppliers numerous, competition often price based, contracts are now increasingly long-term, exclusive, and based more on technology, quality, responsiveness, dependability, as 178
Control
Be sensitive to the power situation, keep people happy but maintain as much control as possible
Provide leadership to motivate channel members
well as cost. Helper (1991) classifies the relationship between supplier and customer, by the method they use to resolve conflicts. She describes an "exit" relationship as one where if a customer has a conflict, they find a new vendor. This is contrasted with the "voice" relationship in which the customer works with the vendor to resolve the conflict. The measurement dimensions in describing a
HIGH
"voice versus exit" relationship are information exchange and commitment. Figure 3 shows this model diagrammatically. Helper claimed that in all cases the performance of voicebased relationships was better than any other. This is an important piece of work in that it links the concept of a cooperative business relationship to improved long-term performance of both partners. The objective, therefore, of modern vendor management is to move closer to the concept of a voice-based relationship rather than exit-based relationships. However, it is also recognized that the majority of business relationships need to be monitored and appraised to maximize effectiveness and efficiency. Giunipero (1990) found that more than 45 % of all companies utilize a formal quantitative rating system in making procurement decisions. It is not appropriate to review attributes of satisfaction measurement in this study; however, their importance to the appraisal measurement process is recognized. For further information on this issue, readers are referred to an excellent review of the literature by Lewis and Mitchell (1990). The review of the literature reported previously has confirmed the importance of the nature of the relationship between suppliers and distributors for their mutual success. Problem areas have been identified and guidelines for successful relationships have been outline. Most writers
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Source: Helper, S. (1991). agree on the broad prescriptions as to what makes a channel successful. These are: • Find out what the channel member's needs and problems are by sitting down and discussing the issues • Provide support for the channel members on a regular basis • Provide leadership to motivate channel members Hardy and McGrath also cite two key activities. These are the need to treat channels as strategic assets and also
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Results and Conclusions 179
to monitor their performance and constantly seek ways to use them to gain competitive advantage. The criteria for examining a relationship are multiple and complex and have been touched on in a general way in this review. The following sections of this article report on the research conducted and the conclusions reached in relation to implementing a relationship appraisal approach.
RESEARCH AIMS AND METHODOLOGY The overall aim of the research reported in this article was to identify the measurement criteria and implementation issues involved in developing a relationship appraisal system between a computer hardware supplier and their authorized distributors. The specific objectives being: • To identify the key measurement attributes to be used in the appraisal system from both the manufacturer's and distributor's perspective. • To identify those issues that were considered to be important in the successful implementation of such a relationship appraisal system. Although it is recognized that the research relates to one specific manufacturer and industry, the conclusions reached by the research raise important issues for other manufacturers who are considering introducing appraisal systems with their distributors and thus improve their channel management activity. The research methodology can be described diagrammatically (see Figure 4) where it is shown to contain both qualitative and quantitative stages. Following on from a review of the relevant literature on channel management and relationships, a brief overview of which appeared earlier, the empirical data collection took place in two phases with the manufacturer's personnel and distributors. Phase I was an exploratory, qualitative stage and involved five semi-depth interviews with key distributor personnel to generate relevant appraisal variables and implementation issues. For the manufacturers a focus group was conducted with five business managers and three distribution program managers- again the purpose was to generate appraisal variable and implementation issues. Phase II of the research enlarged on the sample size so that the response rate represented a significant percentage of the authorized distributors (more than 80 % of turnover) and the relevant managers who interacted with those distributors. For the distributors, the data were gathered via six focus groups with each group consisting of six distributors.
180
The focus groups were segmented on size of organization and position held within the company. In practice this meant that the presidents of wholesalers would form the first group, whereas the product managers of small distributors formed the sixth group. It was felt that members of an organization of different sizes and levels may have different perspectives regarding appraisal performance criteria. To help identify the relative importance of the identified criteria and to add to distributor interest, the distributors in the focus groups took part in the $100 model test. This invited the distributors to allocate "spend" up to $100 in total to performance criteria by their level of importance, more money spent meant the attribute was relatively more important. This method appeared to appeal to the distributors who felt that allocating real money made them think much more carefully about how they "spent it" To gather the views of the manufacturer's personnel, the results of the exploratory research were distributed to a cross-functional set of managers. These functions included manufacturing, credit control, logistics, sales management, and marketing management. Comments were requested with respect to the selected criteria and their relative importance as well as the implementation issues involved in introducing an appraisal mechanism. This was a questionnaire-based approach delivered using the manufacturer's electronic mail system. Twenty managers were identified as having important contact with the distributors, and they all completed a questionnaire and returned it to the researcher. The $100 test was not used with the manufacturer's personnel- a simple Likert scale was used to identify the relative importance of the attributes to be used within the appraisal system. It should be recognized that although it was important for the research to identify the manufacturer's and distributor's suggested appraisal criteria and their relative importance, it was especially important for the manufacturer to understand the various issues that were important in implementing the concept of a relationship appraisal system. The results reflect this priority.
RESEARCH RESULTS During the exploratory stage of Phase I, the distributors identified 11 attributes that were important to them and which could be influenced by the manufacturer (see Figure 5). As an evaluation of satisfaction in relation to the attribute was also identified, this may have impacted on the relative importance measure; however, the major role for this stage of the research was the generation of a list of attributes-and this was achieved. This potential con-
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FIGURE5. Ratings of attributes by importance (hatched bars) and satisfaction (solid bars).
FIGURE6. Ratings of attributes (all groups) by % total
cern was eliminated from Phase II of the research process with the distributors through the integration of both relative importance and current manufacture performance into a single measure. Phase I of the manufacturer's responses initially produced more than 25 attributes that were considered to be important in how well a distributor performed. After discussion
within the group, these were reduced down to 15 and are produced in Table 3. The emphasis on financial performance can, at once, be identified as a particularly important area for the manufacturer to monitor. Sales development activity is also important as this is likely to provide the future success for both the distributor and manufacturer. Expectations around gaining information about the distributor's customers remain low, in line with many other markets. It was interesting to note that payment performance was seen as much more important in the U.K. than in Germany, perhaps reflecting the overall economic situation. However, this does suggest that the weighting of the criteria, even the criteria themselves, could change over time and between different business environments. Phase II of the research among the six "groups" of distributors posed two main questions. First, what attributes, that the manufacturer can influence, are important to your (distributor) success. Second, of these attributes where, with a limited resource ($100) would you, if you were representing the distributor, allocate the resource to improve the business performance over the next year. The results are presented in Figure 6. The distributors identified 10 main areas where it was felt attention should be paid, and these formed the basis for the criteria of relationship appraisal mechanism from a distributor perspective. The results clearly show that or-
TABLE 3
Manufactureds Criteria for Evaluating Distributor's Performance Weighting Business planning
Financial performance
Sales development
Total
Business plan quality Monthly order forecast Safety records Inventory size reports Customer sales report Customer profile report Quota Payment performance Compliance with minimum lot size Compliance with cancellation procedure Compliance with warranty procedure Quality of pre- and postsales Adequate inventory level Effectiveness of promotional material Effective use of manufacturers' resources
7 6 1 I 3 2 25 10 8 3 4 12 6 6 6 100
(solid bars).
181
TABLE 4 Manufacturer's Revised Distributor Appraisal Criteria
Original Weighting Business planning
Financial pertormance
Sales development
Total
Business plan quality Monthly order tbrecast Customer sales report Customer profile report Quota Payment performance Compliance with minimum lot size Compliance with cancellation procedure Quality of pre- and postsales Adequate inventory level Effectiveness of promotional material Effective use of manufacturers resources
New Weighting
7 6 3 2 25 10
8 5 5 3 30 10
8
5
3 12 6
3 8 8
6
6
6
6
100
100
der fulfilment by the manufacturer was the most important issue for the distributor, and this accounted for nearly onefifth of the vote. The opportunity for distributors to be more flexible in their pricing decisions came an important second with 15 % of the vote, which indicated the very competitive nature of the marketplace. In third place was the requirement for a clearer communication of the manufacturer's distribution strategy which scored 13 %. This was needed not only to reassure the distributor of future manufacturer support, but also helped distributors puts their plans together for the future. Distributor support activities, e.g., joint promotions and technical backup where needed, achieved 12% of the vote and again was felt to demonstrate manufacturer commitment to the distributor. There was a difference between support and "interference" and distributors did expect their relative autonomy to be respected by the manufacturer. Time-to-market for new products also received a 12 % vote, and this was emphasized by the distributors because the changing technology in the market often led to competitive advantage for both parties. Quality of products and innovation were perceived equally at just over 7 %. It should be noted that the issue of good communications between the manufacturer and distributors arose on a frequent basis and to a large extent was felt to span many of the attributes identified by the distributors as important. Many distributors stated that "the manufacturer's performance against most attributes would be improved through better communications?' Finally, the effect of the manufacturer's corn-
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munications strategy to the final marketplace was identified as an attribute of importance, which should be included in any relationship appraisal system. Distributors felt that the manufacturer had a duty to create a positive image for its company and its products which would, in turn, be helpful to the distributors in selling the manufacturer's products. The results of the survey among the manufacturer's personnel in relation to relevant distributor appraisal criteria are presented in Table 4. The new weightings are shown next to the original weighting identified in the earlier exploratory research. It can be seen that three of the criteria, safety records, compliance with warranty procedure, and inventory size reports are generally felt to be unnecessary appraisal criteria, which reduces the total number of appraisal criteria to 12, which was felt by the manufacturer to be "about the right number of criteria to be manageable" The relative weighting of the criteria remained reasonably consistent with the Phase I results, which was not unexpected given that the sample in Phase I was drawn from the same population as the Phase II population. That the strength of importance of the distributor achieving quota increased by one-fifth to an overall level of 30% was perhaps notable. The only other attribute that showed any real change was the quality of pre- and postsales, which decreased in importance from a weighting of 12% to 8%. The obvious importance of the financial targets being achieved by the distributors remained vital to the manufacturer's appraisal criteria. An important aspect of the research was to understand both the distributors' and manufacturers' opinions in relations to the introduction of an appraisal system. Previous research has tended to focus on the appraisal criteria, but it is recognized here that process is vitally important to the successful implementation of an appraisal system. To achieve this, both the distributor's and the manufacturer's sample were invited to comment on the issues they felt were important in successfully implementing an appraisal system.
Distributor's Perspective It was expected that there would be a significant difference between the manufacturer's and distributor's expectations of acceptable performance for certain attributes. • It was felt that a significant amount of attention should be given to ensuring that the attributes were clearly defined. • The performance levels for each attribute needed to be explicitly stated. • The larger distributors, with larger market share,
•
•
•
•
•
stressed that they expected to be dealt with more as an employee, being given direction and rewarded for good performance and vice versa. Concern was expressed regarding the time required to implement the appraisal. It was suggested that two per year be carried out and up to a maximum of 3 hours per appraisal was acceptable. All distributors agreed that their local manufacturer's representative should be present during the appraisal. They did, however, stress that they would like to have an opportunity to express their opinions directly to sales and marketing management within the manufacturer. None of the distributors questioned openly expressed any reservation regarding the concept of a formal business review process. They did stress the need for it to be interactive and constructive. There was concern by the smaller distributors that they would not be measured equitably with other distributors operating in larger markets. All distributors agreed that although the appraisal document would be useful, it would be the discussion around this framework that would be of most value.
Manufacturer's Perspective •
• •
•
•
•
•
It was felt that to have more than 10 attributes would be prohibitive from an administrative perspective, tending to be a chore rather than a tool to enhance business performance. Criteria and expectations against the identified criteria must be clearly communicated well in advance. It was important that distributors saw the benefits of the appraisal program, seeing it as a consultative tool, rather than just another bright idea by a manufacturer. The appraisal program should be linked to an awards program, e.g., distributor of the year, and, therefore, care must be taken to ensure it is fairly implemented. This would further increase motivation. Differentiating marketing programs to different tiers of performers was seen as potentially demotivating to those in the lower tiers. Concern existed that the smaller regions within Europe should be measured on performance relative to their competitors within that region, not to other large companies in the larger European countries of Germany, U.K., and France. All distributors must have a reasonable opportunity to reach number one position. Marketing management saw the program as an opportunity to facilitate contact with their largest customers, establishing customer needs directly.
CONCLUSIONS The primary research reported previously has identified the appraisal criteria that both a manufacturer and their authorized distributors felt were important. It also, and importantly, went on to explore the views of both parties on the issues that would be important in successfully implementing a relationship appraisal process. These issues are important to identify for a manufacturer who may be considering introducing such a process, Increasingly, manufacturers are seeking opportunities to gain competitive advantage through the successful management of their channels. This research identified not only the important appraisal attributes that should be utilized in this process, but also the participant's opinions about the condition that would increase the probability of successfully implementing a relationship appraisal system. Thus, in planning a relationship appraisal process the research suggests that: • Manufacturer/distributor coordination appears to be related to the effectiveness of channel communication, the degree of uncertainly reduction and the extent of participative decision making. A joint performance review achieves these aims. • Conflict is exaggerated by restricted and poor communications between the manufacturer and their distributors. • The relationship appraisal process, if conducted properly, should be viewed as a motivational tool by both the distributors and the manufacturer. • Those personnel from the distributor and the manufacturer who were in direct daily contact should be responsible for managing the appraisal process. • The concept of a customer care panel, as suggested by Boggis (1990) where line management from both the distributor and manufacturer are invited to the appraisal, received support from both sides. • There was common agreement that the appraisal process must be simple and of negligible cost, although still being thorough and covering the agreed appraisal attributes. • Much of the value of the appraisal process was around the development of a structured communications line between the manufacturer and the distributor. • Both the manufacturer and distributors expected small incremental improvements in performance to be seen because of the resulting increase in customer satisfaction. • Comparison between large and smaller distributors should not be made through the appraisal process; thus, the validity of using the appraisal to judge in a distributor competition is seriously questioned. In addition, using
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the appraisal system in this way could dilute the focus away from building a mutually beneficial relationship, the primary objective of the appraisal. • The manufacturer's proposal to reward better performing distributors, judged by the appraisal process, with a higher allocation of technical support was seen to be difficult to manage and, therefore, abandoned.
provide to organizations who are contemplating going along this route a possible methodological approach to eliciting the respective views of the channel partners as well as issues to note in identifying criteria and implementing a relationship appraisal process.
In terms of the appraisal attributes, several conclusions from the research can be drawn.
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• Evaluation of infrequent activities performance was not really discussed by either the manufacturer or the distributor; however, they would need to be addressed in an appraisal process. • The appraisal criteria suggested by the distributors resembled those of a customer service model (Gronroos 1982). Both technical and functional attributes were present, which suggests that the distributor envisages the manufacturer operating a service model. • The manufacturer-developed attributes were much more focused on the functional qualities of the distributors, where financially agreed targets should be achieved. The softer relationship development issues were viewed as of more importance by the distributors. • Whereas some authors (Weiters and Ostrom 1979) recommend eight or fewer attributes, in this case the distributors recommended 10 and the manufacturer identified 12 appraisal criteria. There was agreement, however, that the number of criteria should be kept to a minimum but disagreement over the removal of criteria with nominal weights; the manufacturer arguing that although they were not that significant, by virtue of their nature, they needed to be present in the appraisal. • Both the manufacturer and the distributors agreed that the benefits of using particular attributes needed to be made clear to both parties for them to become a focus of the appraisal. This relates to the process and attribute issues of the system. The research reported in this article, although relating to one particular market, the computer hardware market, has clearly shown that both the manufacturer and distributors concerned feel they can develop greater customer satisfaction and, therefore, potential competitive advantage through a relationship appraisal process. It requires that both parties are fully consulted over the attributes to be used within the appraisal, but also, and importantly, a recognition that attention must be paid to the process of implementation so that complexity, cost, and perceived threat to both parties are minimized. This study is intended to
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