1 September 2005 | Member Edition

Research in Brief

Mitigating channel conflict

Some partners are more important than others. Girish Nair and Darren Pleasance The McKinsey Quarterly, 2005 Number 3
Situation

Conflict between channels is a perennial issue that every sales group faces,1 and one that is increasingly relevant to high-tech companies. These businesses have traditionally sold their hardware, software, and networking products through a combination of distributors, resellers, and retailers. In recent years, however, sales through direct channels have grown as fast as, and in some cases faster than, those through traditional stores or resellers. Strong online sales by Dell and others have inspired many high-tech vendors, including one particular hardware maker, to invest in Internet sales channels.
Complication

Pursuing a direct-sales channel can alienate a company's sales partners, who see the shift as a threat to their revenues. For the hardware maker, a negative reaction from an important retail partner was enough to delayand almost derailthe company's ambition to sell its products over the Web. Indeed, this retailer threatened to develop its own competing brand of products if the manufacturer pursued direct sales too aggressively. Such a move on the retailer's part would have hurt the manufacturer's revenues before the direct channel could compensate for them.
Resolution

The manufacturer looked for creative ways to maintain its profitable relationships without abandoning its direct-sales effort. It evaluated the relative importance of each partner and channel (exhibit) as well as its contribution to each partner's revenues and profits. Through this analysis, the manufacturer was better able to estimate the likely reaction of its partners and to develop strategies to retain the most important ones. Certain relationships required more attention. The manufacturer decided to exclude a

lucrative product line from its Web-based channel, for instance, in order to preserve an important retailer's revenues. Furthermore, the manufacturer gave customers the option of ordering products over the Web or picking them up at the partner's store, thus giving the retailer an opportunity to sell related products and services. The exercise prompted the manufacturer to reduce the number of sales partners it employed, ensuring that even if total sales through retailers declined, its most important partners wouldn't be hurt.

Implications

This type of channel conflict often seems paralyzing. If manufacturers view it as a chance to review and prioritize their sales partners, however, they may find that the real risks are more manageableand less daunting. To maintain or improve profitability for all parties, a manufacturer must not only communicate clearly to its valued partners its need to embrace direct-sales channels but also attend to these relationships.

About the Authors

Girish Nair is a principal in McKinsey's Seattle office, and Darren Pleasance is a principal in the Silicon Valley office.
Notes
1

For more on managing channel conflict, see Joseph B. Myers, Andrew D. Pickersgill, and Evan S. Van Metre, "Steering customers to the right channels," The McKinsey Quarterly, 2004 Number 4, pp. 3647. Site Map | Terms of Use | Updated: Privacy Policy | mckinsey.com Copyright 1992-2005 McKinsey & Company, Inc.