Distribution channel management: power considerations

I.F. Wilkinson
Bowersox et al.[1], in their well-known book on physical distribution management, stress the underlying importance of overall distribution channel behaviour to PDM: At the outset it is clear that the distribution channel is of fundamental importance to a treatment of physical distribution, because the channel is the arena within which marketing and logistics culminate into consumer transactions. Therefore, for a proper understanding of physical distribution, one should develop a sound insight into the overall nature of total distribution channels. Increasingly, it is becoming recognized that a study of the behavioural dimensions of distribution channels, particularly power and conflict, as well as economic factors, is essential for a complete understanding of channel behaviour. This article is concerned with the nature and importance of power relations between firms in distribution channels. The role of power in channel systems is discussed and then the factors affecting the way in which power is used and the factors determining the results of such use are considered. Last, several implications which flow from the analysis regarding firms management of their relations with others, are summarized. For the purposes of this article, power can be regarded simply as the ability of a firm to affect the decision making and/or behaviour of another to some degree, no matter what the source of this ability is. Influence in turn refers to the degree of effect on another firms behaviour which results from the use of power. Throughout the discussion the term influencor is used to refer to the firm using power and the term influencee is used to denote the firm which is the subject of this use of power. The role of power in distribution channels Channels of distribution can be viewed as social systems comprising a set of interdependent organizations, which perform all the activities (functions) utilized to move a product and its title from production to consumption[2-4]. Because of this interdependency there arises a need for some form of cooperation between channel members and co-ordination of activities. This cooperation and co-ordination is necessary in order to ensure predictability and dependability between members which will allow individual organizations to plan effectively. Also, conflict arises in channels, because members sometimes
This article was first published in International Journal of Physical Distribution, Vol. 4 No. 1, 1973, pp. 4-15.

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International Journal of Physical Distribution & Logistics Management, Vol. 26 No. 5, 1996, pp. 31-41. MCB University Press, 0960-0035

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have incompatible goals, differing ideas as to the functions each should perform, and differing perceptions of reality. This conflict needs to be controlled so that it does not disrupt channel functioning. Power or, rather, the use of power by individual channel members to affect the decision making and/or behaviour of one another (whether deliberate or not), is the mechanism by which the channel is organized and orderly behaviour preserved. This is not meant to imply that organizations necessarily set out deliberately to organize the channel, but that this organization of the channel arises out of individual organizations adjusting their behaviour to one another in relation to the power they each have and use. However, in some channels, firm(s) may assume a leadership role and make deliberate attempts to organize the channel, making use of their power. Power is the means by which cooperation between individual channel members activities are co-ordinated and the means by which any conflict between firms is controlled[5,6]. Bierstedt[7], in a general context, has aptly summarized the role of power in any system: Power supports the fundamental order of society and the social organizations within it, whenever there is order. Power stands behind every association and sustains its structure. Without power there is no order. The study of power must be, therefore, an important part of the study of distribution channel behaviour and will have important implications for the study of physical distribution management. Moreover, the study of power is of increasing importance today as the need for effective co-operation and coordination of activities between channel members grows. Two basic, though not necessarily unrelated, forces underline this trend. First, with the increasing rate of technological change being experienced today and the constant introduction of new products, the tasks of marketing become more complex and, as Alderson[8] has argued: The more complex the marketing task becomes the more necessary it is for a channel to operate as an integrated whole in order to attain efficiency. Channels cannot operate as integrated wholes without effective co-operation and co-ordination between their members. The second force concerns the changing nature of the environment which channels are facing in the 1970s. In a general context, Emery and Trist[9] have pointed out that the type of environment increasingly facing organizations of all kinds is such that no longer can individual organizations cope effectively by themselves. One aspect of this is the situation of the organizations comprising a distribution channel. The rise of consumerism and the increasing concern being given to mans effects on his natural environment create problems with which individual organizations cannot cope alone. Partly, these problems can be met by better co-operation and co-ordination between organizations in distribution channels. However, these environmental changes also suggest the need for some degree of co-operation and co-ordination between whole channels. These two forces increase the importance of the study of power because cooperation and co-ordination require some form of power structure.

Having established the critical importance of power considerations in channels in particular, the use of power by firms, the discussion moves on to consider in detail the firms use of power. This is an area that has been strangely neglected in the literature, which has been mainly concerned with the sources of power and its distribution in channels. In particular, the discussion centres on the factors affecting the nature and extent to which power will be exerted in a given situation, the factors affecting the outcome of any such exertion and, lastly, the nature of feedbacks produced by the use of power. First, however, a short digression on the various methods of using power would seem appropriate. Methods of using power Most methods of influence discussed in the literature are capable of being formulated in terms of two broad types: the setting up of rewards or positive sanctions for compliance; and the setting up of punishments or negative sanctions for non-compliance. The setting up of rewards or positive sanctions The setting up of economic rewards such as increased sales or profits is one form and is likely to be very important in the channel context. Rewards or positive sanctions may be in terms of any resource valued by a subject firm (or influencee) including social values. For example, if firm A makes use of firm Bs attitude towards it, this can be a form of reward because, if B admires or respects A, then it obtains direct satisfactions, i.e. rewards, from complying with As wishes and, if B believes A has the right to influence him, it is likely to obtain a certain satisfaction out of performing its duty as it sees it. Rewards may also be indirect. A supplier, through its expertise, may be able to give valuable information and/or training to a manufacturer, which allows the latter to improve performance and thereby gain rewards. An example would be the sales courses run by manufacturers for retail sales personnel. The setting up of punishments or negative sanctions The setting up of punishments or negative sanctions also includes more than economic penalties. In extreme form negative sanctions involve physical force which is very rare in channel contexts, but there could be threats of disapproval or loss of prestige. Furthermore, a negative sanction can be indirect, and an example of this would be the withholding of information or the giving of false or misleading information. If a firms power is founded on a legitimate base, be it formal or informal, this can be viewed as a use of power based on negative sanctions[10,11]. If the legitimate power is founded on laws and regulations then conditions of punishment will be formally stated. On the other hand, if the legitimacy is based purely on the influencees belief that the influencor has the right to guide his/her behaviour, then the potential punishment will be more in the form of the influencees sense of failing to carry out his/her duty.

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The only method of influence that is not easily interpreted in terms of these two types arises when a firm uses its power to control anothers environment rather than by operating directly on it, e.g. when one firm controls anothers information supply, though not directly sending information. In this way the firm may circumscribe the range of behaviours the other firm considers and thus affect its behaviour. A retailer may be able to affect the behaviour of other firms in the channel, e.g. manufacturers or wholesalers, to the extent that he can control the flow through the channel of information concerning consumer purchasing behaviour, which the retailer derives directly from his/her experience of consumer shopping. However, if (say) manufacturers have sources of information about consumer behaviour independent from that provided by the retailers, e.g. through market research, then the retailers ability to influence in this manner will be limited. Beier[12] has pointed to the tendency in some parts of the literature to restrict analysis of the exercise of power to a face-to-face situation where the benefits and cost of changing or not changing his current behaviour are clearly outlined to the influencee. As Beier argues, although the situation may be quite fundamental, the face-to-face situation is not always present when one firm influences another: A broader approach is therefore useful and this is generally provided by discussing power in terms of controlling the perceived alternatives or the environment of other actors thus the specific bargaining framework need not be present. Factors affecting the use of power by firms This section considers the various factors which could affect a firms decision as to how it will use its power in a particular situation. The argument is primarily descriptive, isolating the various factors which are likely to affect a firms decisions regarding use of power, but it is partly normative suggesting how firms should use their power. It must be recognized that a conscious decision by a firm to use its power is not always necessary. A firm may anticipate the wishes of another and adjust its behaviour accordingly. This section, however, focuses on those situations in which a decision is made to use power in an attempt to change the decision making and/or behaviour of others. Two factors that are likely to be important in determining the use of power are the rewards a firm perceives it will gain and the costs it perceives will be incurred. If the rewards and costs involved are known, then the best behaviour would be to use power such that there is the maximum net gain, i.e. rewards minus costs. However, the rewards and costs involved will depend on a number of factors (as is discussed below) and perfect knowledge is unlikely. Instead, there is likely to be a tendency to use more power where expected rewards are greater in relation to expected costs, and less in situations where expected costs appear great in relation to expected rewards. Expected rewards The extent of the rewards to be expected will depend on the objectives of the influencor and the place of a particular influencee in the scheme of things.

Generally, it is to be expected that the more important one firm is to another, the greater will be the rewards expected from influencing it. If A is a manufacturer and B a very important customer, then Bs behaviour is likely to have important consequences on the profits and sales of A. Therefore, ceterus paribus, it is to be expected that this customer will be the subject of more influence from the manufacturer than others. The magnitude of the disagreement or conflict between firms will also affect the benefits to be derived from influencing one another. If A and B are in complete agreement over a particular behaviour of B, then there is no need for A to try to change Bs behaviour. But, if A and B disagree, then A will need to use its power to try to change Bs behaviour:
Power does not manifest itself in the open until the possibility of conflict arises: it surfaces as part of a state of flux, that is, when an incipient relationship is being negotiated or, as is frequently the case, when an on-going relationship is being re-negotiated[13].

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The crucial factor is what A believes B will do in the absence of As intervention. This will depend on As past experience of Bs behaviour and As model of the world. Expected costs Costs can be both direct and indirect. If the method of influence chosen requires the setting up of rewards or punishments, this will involve a certain direct cost to the influencor, depending on the magnitude of the sanctions established. Direct costs would involve the costs of communicating the wishes of the influencor to the subject and also the costs too of keeping informed of the subjects behaviour. This is particularly necessary when a firm has to know when to grant a reward or dispense a punishment, something that is too easily ignored. Indirect costs include opportunity costs the use of power in one direction may well preclude its use in another, if only because of the limited span of attention possible at a given time. Therefore, attempts to change the behaviour of one firm may have to be weighed against the benefits to be gained from using this power in another direction. Opportunity costs may occur over time. For example, if a firm depletes some of its economic resources in order to set up rewards and/or punishments for another, it may reduce its stock of resources such that it is unable to set up rewards and/or punishments in future situations. Naturally, this would depend upon the rewards gained from the earlier use of power. Expertise can be a particularly non-durable source of power. Once the expert advice has been given, this source of power may disappear. Other sources of power, however, are not really affected by their use and may even be enhanced through use. For example, if firm A has the legal right to ask firm B to keep its prices within certain bounds, there is no loss of this legitimate power through use. In the case of rewards, continued use over time in a given relationship may generate a certain identification on the part of the influencee with the influencor which adds to the latters sources of power.

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A second form of indirect cost is the conflict that may be generated through the use of power. If a firm is forced to do something it had not planned to do, this could affect the extent to which the firm is willing to co-operate in future situations. The extent of the conflict generated will, in part, depend on the method of influence used. In the distribution channel the use of economic sanctions would seem to be the most conflict-charged method of influence, especially when profits and sales are affected. A third form of indirect cost occurs when the influencee is stimulated to retaliate by attempting to change the influencors behaviour in some manner contrary to its wishes. This could result in a battle of strength that might be detrimental to both parties. Galbraiths concept of countervailing power is relevant here. He argues that: ... private economic power is held in check by the countervailing power of those subject to it. The first begets the second[14]. Galbraith is pointing to the tendency of firms, subject to power, to develop countervailing power of their own which will hold the original power holders power in check, e.g. by grouping together in buying units in the case of retailers. The reactions of the influencee is likely to be governed to a large extent by the degree of conflict generated by the use of power. If the firm subject to power feels forced into doing something much against its will, it is likely to become antagonistic and search for means of exercising countervailing power. But if it is felt that a preferable behaviour has been suggested, no conflict and no search for means of exercising countervailing power may ensue[15]. The costs to a firm of exercising its power can be used to define a firms useable power:
power is not useable to the degree that it penalises the possessor, either directly or because of counter power held by the other person(Thibault and Kelley, quoted in[3]).

In terms of the costs and rewards associated with the use of power, the limit of a firms useable power can be defined as that point at which the costs of using greater power exceed rewards. The power holders perceptions of its own power As well as the expected rewards and costs involved in using power, another factor which will affect a firms use of power, is its perception of its own power. Generally, it is to be expected that a firm will use more of its power the more it perceives it to have. If a firm believes it is weak then it is unlikely to make a strong attempt to change anothers behaviour. However, a firm may be forced to attempt some use of power at times, as a last resort for example. Therefore, over time, there is a learning process whereby a firm learns more about its ability to affect others behaviour. In this manner, firms operating together in a channel for some considerable time are likely to obtain a reasonably accurate picture of the extent of their power over one another. As part of a larger piece of research, the author was able to conduct a crude empirical examination of the factors affecting a firms use of power in an actual

channel context[16]. Relationships were found to exist between a use of power indicator and some of the variables described in this section. The main result, though, was that different types of firm on the channel studied appeared to be using power in different ways. Thus some appeared to be building up weak and/or newly formed relations while others were concentrating on already strong established relations. However, before any definite conclusion can be drawn, a much more thorough investigation is required. The outcome of the use of power The degree to which a firms use of power will be successful in modifying the decision making and/or behaviour of another in line with its wishes, will be a function of two basic variables the incentives to comply with its wishes that the influencor can establish for the influencee, i.e. the strength of the influence and the amount of resistance of the influencee. The strength of the influence The strength of the influence will depend on the costs to the influencee of refusing to comply, including any negative sanctions imposed for noncompliance such as reduced business or respect and the value of the opportunities foregone by not complying, i.e. any rewards or positive sanctions foregone. These costs will depend on two factors. First, they will depend on the needs and values tapped by the influencor. The more important they are, the stronger the influence. In the channel context the motive bases of profits, costs and sales will be fundamental. The limit of a firms ability to set up incentives to comply for another firm in a particular situation, i.e. the maximum strength of its influence, is the limit of its power in that situation. In the case of rewards or punishments, the influencees estimate of the probability that the influencor will provide the promised reward or carry out the threatened punishment, is important. If it is believed that the influencor will not carry out a threat or promise, then no costs may be seen as associated with noncompliance, and the incentives to comply are correspondingly reduced. The resistance of the influence The extent to which a firm resists the demands of another will affect the outcome of any attempt to change its decision making and/or behaviour. A number of factors would seem to be important. A firm may not be the only one attempting to change a particular firms behaviour and other firms, that are also attempting to do so, may be pulling this firm in other directions from that desired. Thus, it is important to be aware of the network of relations in which any firm is placed. Second, there may be a certain disutility associated with complying with anothers wishes, which will lead to resistance. This will depend on the degree to which the changed behaviour is incompatible with the pre-existing position and the strength of the subject firms anchorage in the pre-existing position[17,18]. The pre-existing position would include the firms beliefs,

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attitudes and behaviours and, in another context, Cartwright has commented that: ... the more important of these are Bs [the firms] own direct experience of reality, his needs and internalised values, his defence mechanisms, states previously induced by other agents and his reference groups. It is because of such anchorages that influence attempts so often encounter opposition[17]. These would seem to have parallels in the channel situation. In the distribution channel the long established firm may have become set in its ways and resist any changes far more than the younger firm. Last, research suggests that the personality of the people involved in a power relationship may be an important determinant of the degree of resistance (for a summary of the major findings see [17]). Writers researching the area of small group behaviour have found a relationship to exist between personality characteristics and the extent to which a person is likely to yield to the judgement of others, e.g. it has been shown that the more self-confidence a person has, the less likely he is to yield to the judgments of others[17, p. 33]. In the channel context the basic unit of analysis is the firm, but it is individuals who represent the firm and who negotiate on its behalf, and therefore these findings relating to personality are also relevant. The resistance of the influencee implies that some minimum amount of power must be brought to bear, in order to overcome this resistance, before any rewards can be forthcoming. Because of this, Beier[12] has introduced the concept of a firms effective power over another, which denotes the extent to which it can move another firm from its present position. Effective power would be equal to useable power minus the amount of power necessary to overcome resistance. This is likely to vary according to the particular decision making and/or behaviour area being considered. In some situations it is conceivable that a firm is particularly susceptible to influence from other firms (negative resistance). A factor affecting this would be the nature of the decision/behaviour area involved. If substantial uncertainty, anxiety or risk surrounds a particular decision/behaviour area, a firm may actively seek guidance from others or at least be more receptive to communication from some firms[20,21]. Feedback Attempts to change a firms decision making and/or behaviour will produce certain feedbacks which affect the relationship between the influencor and influencee. Some of these have already been alluded to in the foregoing discussion. First, a firms perceptions of its power over another will be updated depending on the outcome. It may find that its power is not as great as originally perceived or it may have been underestimating its strength. In any case it would seem advisable for firms to experiment a little at using their power in order to gain a clearer understanding of their position. The use of power may alter the nature of the relationship between the firms involved. For example, forcing a firm to behave in some manner by threatening

complete withdrawal of business or financial assistance may lead to the development of unfavourable attitudes, which are detrimental to future transactions. But if an improved position results for the influencee, as he/she sees it, the opposite will occur. This resistance of the influencee will thus depend to a certain extent on the outcome of previous encounters. The outcome of the use of power may contribute materially to the resources of a firm and thereby to its power. Firm B might be an important supplier of raw materials to firm A, and A may be dissatisfied with the quality of the materials it has been receiving and therefore attempt to make B improve. If B does comply with As demands, this may result in increased sales and profits to A which add to its sources of power. On the other hand, if A uses up some of its resources in setting up rewards and/or punishments for B this may deplete its power base to a certain extent. Third, the dependence of the influencee on the influencor could be affected. To take a simple example, A may have changed firm Bs behaviour by providing it with valuable advice and information; B now possesses this information and no longer depends on A for it. Last, a firms perceptions as to the future benefits to be derived from using its power in a particular relationship could change. If B modifies its behaviour in line with As wishes, the conflict which originally stimulated the use of power may be eliminated and therefore there is no longer any need for the exercise of power, although some small useage may be necessary to prevent B relapsing into the undesired behaviour. Conclusions The isolation of the various factors underlying the way power is used and the results of such use provide a useful basis to guide firms in planning how to use their power more effectively and/or resist the power of others better. Thus, a firm can attempt to discover if it is the resistance of the power subjects or its inability to set up strong incentives in important motive base areas that is thwarting it. Or is it that the subject firms are being pulled in different directions by other firms ? Figure 1 summarizes the factors involved. The analysis has pointed to the possible indirect costs associated with the use of power. In particular, the degree of conflict that the use of power may produce could eventually disrupt channel performance and, therefore, firms need to search for the least conflict-charged methods of using their power[22,23]. The conflict generated is also important because it can stimulate those being influenced to search for means of exercising countervailing power, which could result in legal/political pressure being brought to bear that may not be in the best interests of the channel. The existence of feedback effects introduces certain dynamic elements into channel power relationships. Over time the pattern of power relations between firms could change dramatically depending on how firms make use of their power and the nature of the outcomes.

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Motive bases tapped

Feedback

40

A's perception of its power over B Strength of As influence

Bs perception of the probability of A rewarding or punishing

As power over B

As use of its power over B Rewards perceived by A Cost perceived by A direct and indirect

Results of As use of power

Resistance of B

Figure 1. Flow chart summary of factors affecting firm As use of power over firm B and the result obtained

Importance of B to A

As dissatisfaction with Bs behaviour

Disutility associated with the change

Use of power by other firms

Feedback

The analysis has indicated that a firms use of power is likely to affect its future power position through the feedbacks it produces. A firm must therefore ensure that its use of power in the short-term results in feedbacks which will place the firm in a favourable position in the long term. Injudicious use of power in the short term, to reap short-term gains, could result in conflict and retaliation which could affect the long-term viability of the firm. The principle on which firms should act is aptly summarized by Alderson in his power principle: in order to prevail in the struggle for survival (a firm) must act in such a way as to promote the power to act[24]. A similar sentiment, but in a broader context, is also expressed by Emery[25]: ... planning should actively seek to extend the choices man can make, not dictate them.
Notes and references 1. Bowersox, D.J., Smykay, E.W. and La Londe, B.J., Physical Distribution Management, 2nd ed., Collier-Macmillan, New York, NY, 1968. 2. This section draws heavily on the writings of Louis Stern (see, for example [3,4]). 3. Stern, L.W. and Neskett, J.L., Conflict management in interorganizational relations a conceptual framework, in Stern, L.W. (Ed.), Distribution Channels: Behavioural Dimensions, Houghton Mifflin, Boston, MA, 1969, pp. 288-305.

4. Stern, L.W., The interorganisational management of distribution channels prerequisites and prescriptions, in Fisk, G. (Ed.), New Essays in Marketing Theory, Allyn & Bacon, Boston, MA, 1971, pp. 301-14. 5. Stern and his colleagues argue that, for effective channel organization, a centre of power within the channel is necessary (see [3,4,6]. 6. Wilkinson, I.F., Power and influence structures in distribution channels: normative and descriptive aspects, European Journal of Marketing, Summer 1973, pp. 119-29. 7. Bierstedt, R., An analysis of social power, American Sociological Review, Vol. 15 No. 6, December 1950, p. 735. 8. Alderson, W., Factors governing the development of distribution channels, in Clewett, R.M. (Ed.), Marketing Channels for Manufactured Products, Irwin, Homewood, IL, 1954, p. 31. 9. Emery, F.E. and Trist, E.L., The causal texture of organisational environments, in Emery, F.E. (Ed.), Systems Thinking, Penguin, Harmondsworth, 1969, pp. 241-57. 10. In general a firm can be said to possess some form of legitimate power over another firm if the latter believes the firm has the right to influence it. In many cases this belief may be founded on a legal basis, e.g., purchase agreements, contracts, etc., but it may also be more informal. Beier and Stern suggest, for example: the largest firm could be considered the leader by other channel members. If this is the case, then legitimate power may be available to the large firm. 11. Beier, F.J. and Stern, L.W., Power in the distribution channel, in Stern, L.W. (Ed.), Distribution Channels: Behavioural Dimensions, Houghton Mifflin, Boston, MA, 1969, p. 103. 12. Beier, F.J., Power in the channel of distribution: an interdisciplinary approach, unpublished doctoral dissertation, Ohio State University, Columbus, OH, 1969. 13. Bannester, E.M., Sociodynamics: an integrative theorem of power, authority, influence and love, American Sociological Review, June 1969, p. 374. 14. Galbraith, J.K., American Capitalism, Penguin (Pelican) Books, London, 1963, p. 125. The discussion of the concept of countervailing power is renewed in Chapter 5. 15. For a more complete discussion of countervailing power see [6]. 16. Wilkinson, I.F., Power relations between organisations in distribution channels an empirical examination, unpublished PhD thesis, University of New South Wales, 1972. 17. Cartwright, D., Influence, leadership and control, in March, J.G. (Ed.), Handbook of Organization, Rand McNally & Co., Chicago, IL, 1965, p. 33. 18. For the purposes of this thesis resistance and opposition can be treated as synonymous. An interesting example of the resistance of retailers to a change in distribution policy by an apparently powerful manufacturer is provided by Cunningham[19]. 19. Cunningham, M., Innovation in sales and distribution marketing theory seminar, University of Strathclyde, May 1973. 20. Some research evidence on individuals responsiveness to communication lends support to this argument (see, for example[21,22]). 21. McLaughlin, B., Learning and Social Behaviour, Free Press, New York, NY, 1971, p. 180. 22. A discussion of the ways in which power can be used to improve channel functioning is contained in[23]. 23. Heskett, J.L., Stern, L.W. and Beier, F.J., Bases and uses of power in interorganisational relations, in Bucklin, L.P. (Ed.), Vertical Marketing Systems, Scott, Foresman, Glenview, IL, 1970, pp. 75-91. 24. Alderson, W., Marketing Behaviour and Executive Action, Wiley, New York, NY, 1957, p. 51. 25. Emery, F., The next thirty year concepts, methods and anticipations, Human Relations, Vol. 20 No. 3, 1967, p. 202.

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