Subject: Managing the Digital Enterprise | Channel Conflict (text only)
From: <Saved by Microsoft Internet Explorer 5>
Date: Tue, 23 Jan 2001 10:59:17 -0500

Switch to graphics version

MANAGING THE DIGITAL ENTERPRISE

PROFESSOR MICHAEL RAPPA

CHANNEL CONFLICT

The hallmark of revolutionary technical change in the marketplace, such as with the emergence of the Internet, is the destruction of traditional business practices -- and firms that adhere to the status quo too long. Managers are forced to "cannibalize" their own profitable businesses only to see a diminished return on investment. If they don't, a competitor will do it for them.

One aspect of the Internet that has received much attention is the web's ability to close the gap between buyer and seller, thereby eliminating layers of middlemen or intermediaries in the distribution channel. For those in the middle, the notion of "disintermediation" is surely an unwelcome turn of events. Since the process of disintermediation is usually not instantaneous, managers find themselves caught in the uncomfortable position of needing to placate business partners in the distribution channel while taking steps toward the eventual demise of these relationships.

Some examples of how channel conflicts are playing out in different segments of the business world:

The Encyclopedia Britannica, a 32-volume set that sells for $1,250 in book form has been placed on the Internet free of charge after being sold door-to-door for decades by salesmen. The company will continue to sell compact disc and print versions.

After years of denial, Merrill Lynch has moved into the business of low-cost online trading, a move that has created concern among its 14,800 brokers. Many fear that Merrill will cannibalize its existing business by offering online trades far below what brokers have charged.

Much depends on the nature of the channel relationships. In some cases a synergy is possible, whereby the web operation takes advantage of having a storefront. For example:

Banana Republic wants you to love what you ordered. So if you are unhappy with a purchase from the company's web site, you can return it via courier or you can visit a Banana Republic store near you to arrange the exchange or refund.

CVS, the largest drugstore chain in the US with 4,200 stores, combines an online pharmacy with a traditional brick-and-mortar pharmacy chain such that consumers can place a prescription order online and choose between same-day in-store pick up at a CVS pharmacy or optional overnight or regular delivery.

General Motors' BuyPower gives prospective buyers on line details about every make and model, independent third party competitive comparisons, and access to the new vehicle inventories of nearly 6,000 dealerships. You also can apply online for financing, send e-mail to a dealer to get the best purchase price, and schedule a test drive.

Ace Hardware, a cooperative of independently owned stores, has partnered with OurHouse.com to offer 220,000 products online and to set up online storefronts for Ace outlets that wish to participate. OurHouse.com will set up the stores' web sites for free, and will drive traffic to their off-line stores. In return, the stores will share the revenue from their online stores. OurHouse.com will set up kiosks within Ace's retail stores to let customers order products not available in the stores.

Levi Strauss will discontinue sales from its Levi's and Dockers Web sites after Christmas, due to high costs and poor sales. Instead, J.C. Penney and Macy's will sell Levi merchandise on their sites. Levi's web endeavor angered its retail partners, who had been barred from selling Levi's and Dockers over the web. One problem is that consumers had to send returns through the mail instead of being able to take them to the stores.

The problem of channel conflict is made more complicated by the introduction of new intermediaries that serve the special needs of e-commerce. Delivery, for example, becomes a critical part of overall customer satisfaction.

Question to ponder:

What products and services do you see as most likely to have the highest levels of disintermediation? Discuss it in the Forum.

Learning Objectives:

Describe channel conflict;
Understand the difference between physical value chain and virtual value chain and the activities in each;
Identify characteristics of customer loyalty and other channel influences;
Identify business challenges in implementing channel changes.

Things to read:

Changing Channels in the Automotive Industry
Evan Hirsh, et al., Booz Allen Hamilton
PDF | 588K

The Ripple Effect of E-Commerce
Bill Sheldon, Oxford Consulting

Click, Brick and Mortar
Network Solutions

The Big Squeeze
Alorie Gilbert and Beth Bacheldor, Information Week

In the news:

Will Bricks-and-Mortar Merchants Grow Complacent
Bob Tedeschi | 12.25.00

Amazon.com Plans to Offer Cars Online
Keith Bradsher | 08.24.00

GM Proposes Online Site for Car Sales
Saul Hansell | 08.12.00

Stephen King Sows Dread in Publishers With His Latest E-Tale
David D. Kirkpatrick | 07.24.00

Music Industry Heartbreakers, Dream Makers
Alex Berenson | 06.25.00

Record Labels Are Hearing an Angry Song
Alec Foege | 06.11.00

Insurance Companies Cautiously Enter the Internet Waters
Bob Tedeschi | 03.20.00

Hungry minds:

The Future of Purchasing and Supply
Center for Advanced Purchasing Studies
PDF | 448K

Competition and cooperation: Libraries and publishers in the transition to electronic scholarly journals
Andrew Odlyzko, AT&T Research
PDF | 80K

Places to visit:

Banana Republic

CVS

Encyclopedia Britannica

General Motors

Merrill Lynch

On the airwaves:

E-Businesses Learn from the Oldtimers
Elaine Koury, National Public Radio | 12.22.00

Business to Business E-Commerce
John McChesney, National Public Radio | 02.03.00

Previous topic:

Auctions

Next topic:

Trust

© 2001 Michael Rappa