Given the prior foundation, the challenge in developing this conceptual framework was to identify conditions that influence the roles of channel members and the resulting knowledge that must be transferred and integrated within the channel. Relevant conditions would be those influencing whether intermediaries must “make demand” or “meet demand.” Physical distribution functions are most prominent within channel management in “meet demand” channel contexts.
What roles intermediaries must carry out and what capabilities they must develop appear to be based on conditions at the industry and supplier levels of analysis (cf. Mauri and Michaels 1998; Coughlan et al. 2006). An industry refers to a group of suppliers and intermediaries attempting to conduct business for a product category in a specific market (cf. Harrigan 1983; McGahan and Porter 1997). Within an industry, product, customer, competitor and intermediary characteristics are likely to impact whether channel members are active in “making demand” or in merely “meeting demand,” which will impact the amount and types of knowledge that must be transferred and integrated across channel members. Within a supplier organization, the positioning and dominance of the brand in the marketplace, and the culture of the organization are expected to impact the role of intermediaries within channels of distribution.
Propositions within an industry level of analysis are first presented. This is followed, in turn, by the development of propositions associated with a supplier level of analysis. The need for knowledge transfer and integration to enhance organizational capabilities underlies the development of each proposition in the conceptual framework.
Industry Level of Analysis
Product differentiation is the extent to which end-customers in an industry perceive significant variation to exist in product qualities and performance across supplier brands and product lines (cf. Burnham, Frels and Mahajan 2003). Within some industries, high levels of product differentiation exist, with individual suppliers possessing brands with strong and distinct images (e.g., stereo speaker industry; digital signal processor industry involving specialized semi-conductors). In other industries, products are viewed as less distinct or distinguishable from one another (e.g., Microsoft Windows-based desktop computers; MRO items).
When significant product differentiation exists in an industry, suppliers as a group need to transfer knowledge to intermediaries about their firms, the inherent features and benefits of their brands relative to competitors, and appropriate marketing and selling efforts (Burnham et al. 2003). Further, once knowledge is transferred, suppliers need to take steps to ensure that intermediary personnel process and utilize the knowledge, especially tacit knowledge, in enhancing their marketing and selling capabilities for their respective brands. Manufacturer heterogeneity reduces the extent to which knowledge concerning one provider is applicable to another provider (Schmalensee 1982), increasing the uncertainty and the “cost of thinking” associated with decision making for both intermediaries and end-customers alike (Shugan 1980; Alba and Hutchinson 1987). Thus when industry product differentiation is high, suppliers need to craft strong relationships with intermediaries in order to facilitate knowledge transfer and the ability of intermediary personnel to understand the basis on which to sell individual brands of products to end-customers.
Under such conditions, intermediary management should recognize that knowledge transfer and integration are important in enhancing its marketing and especially sales personnel's capabilities to adequately sell to and service its own end-customers. As a result, intermediaries should be at least somewhat receptive to supplier overtures to build and maintain strong exchange relationships.
In contrast, when product differentiation in an industry is low, there will be less knowledge to transfer and integrate among channel members. Product knowledge is not as important to share; marketing and sales efforts of intermediaries do not require as much supplier input. As a result, suppliers would appear to have less motivation to invest in building relationships with intermediaries because the knowledge they need to transmit to them is more rudimentary in nature. Intermediaries are unlikely to be that receptive to relationship building, as uniqueness of supplier products is not the basis for their business as much as their own service initiatives.
Thus, when products tend to be undifferentiated within an industry, knowledge sharing among channel members should focus more on physical distribution functions. Suppliers will transfer knowledge to intermediaries on terms, ordering patterns, minimum-sized orders and delivery options. Order cycle times, inventory carrying costs, inventory turnover and stock-outs will be critical indicators of performance. Because efficiency and controlling costs are of such relevance for undifferentiated products, physical distribution functions will play a primary role in channel management.
Proposition 1: Product differentiation in an industry will be inversely related to the importance of physical distribution functions vis-à-vis other channel management functions.
Distribution intensity is the extent to which channel members align with numerous other firms in an industry (Fein and Anderson 1997). When distribution intensity is high, suppliers will utilize a large number of intermediaries per trade area and intermediaries will align with numerous suppliers and carry a number of competitive brands (e.g., the digital signal processor industry involving suppliers like Hitachi, Toshiba and Texas Instruments, and distributors like Arrow and Avnet).
High distribution intensity is expected to reduce the likelihood of knowledge transfer and integration in channel relationships in industries where significant product differentiation exists. High distribution intensity promotes market coverage and convenience (e.g., one-stop shopping) for end-customers, but leads to intrabrand competition and less loyalty among channel members (cf. Frazier and Lassar 1996; Fein and Anderson 1997). While there are potential benefits to knowledge transfer and integration because of industry product differentiation, the atmosphere of exchange in these channel relationships due to intrabrand competition and low loyalty are expected to undermine knowledge sharing behaviors to some degree. That is, when end-customers can purchase the same brands of products from numerous intermediaries, returns on intermediary investments with individual suppliers are less certain (e.g., the automobile industry in major metropolitan market areas).
In contrast, when suppliers and intermediaries are exclusive or at least highly selective in whom they do business with in an industry, the connection between industry product differentiation and the need for a broad variety of knowledge sharing should be enhanced. In such cases, the motivation to share and process knowledge between firms should be relatively high because of the commitment channel members are showing to one another (Fein and Anderson 1997). The common identity that may develop between a supplier and its intermediaries can be important to end-customers and heighten the desire for knowledge transfer and integration even more (e.g., channel relationships in the construction equipment industry). Low levels of intrabrand competition are likely to promote channel member support of the differentiated brands they carry (Mathewson and Winter 1984; Winter 1993).
Proposition 2: The inverse relationship between product differentiation in an industry and the importance of physical distribution functions vis-à-vis other channel management functions is weakened by distribution intensity.
Product complexity is the extent to which products in an industry are perceived by end-customers as simple and stand-alone versus diverse, multifaceted, and system-oriented (cf. Hoyer and MacInnis 2004). High product complexity is present when end-customers perceive a product to be difficult to understand and use, partly because of the number of functions designed into the product (Rogers 1995; Griffin 1997; Novak and Eppinger 2001; Burnham et al. 2003). Rapid technological advancement in an industry can also contribute to product complexity, as can the lack of technology standardization where multiple technology designs and standards exist in an industry (e.g., bar coding equipment) (Robertson and Gatignon 1986).
End-customers are likely to perceive higher risks when products are more complex (e.g., the automobile industry). Difficulty in understanding the product may lead to decision-making uncertainty, increasing perceptions that an unknown negative outcome may occur (Holak and Lehmann 1990). Similarly, the large number of features or attributes often associated with complex products makes both information collection and direct comparisons of attributes across alternatives more costly for end-customers (Shugan 1980; Wernerfelt 1985). In such cases, intermediary personnel must possess the explicit knowledge to properly serve end-customers, who “… tend to be influenced by the information conveyed by others when the offering is high in complexity” (Hoyer and MacInnis 2004, p. 399; also see Sheth and Parvatiyar 1995).
Therefore, when product complexity is high in an industry, suppliers will need to transfer a large amount of product knowledge to associated channel members and encourage the personnel of these firms to integrate and use such knowledge in their marketing and sales efforts. Building strong relational exchanges among channel members will be critical in this channel context, as interfirm collaboration arrangements are efficient mechanisms to transfer and integrate explicit knowledge where knowledge cannot be completely embodied within the product being exchanged (Grant and Baden-Fuller 1995). The capabilities of intermediary personnel to explain products and their functioning to end-customers are critical when product complexity is high in an industry.
In the opposite case, when a product can be purchased by end-customers with most pertinent knowledge embedded in and around the product itself (i.e., low product complexity), the need for knowledge transfer and integration across channel members should be relatively low (Grant and Baden-Fuller 1995). Product type (e.g., memory chips) or product packaging and point-of-sale material (e.g., detergents) is often sufficient to facilitate end-customer search and purchase behaviors when product complexity is low.
For noncomplex products, therefore, there should be less need to focus deeply on products and how intermediaries should sell them when transferring knowledge among channel members. Intermediary personnel do not need to develop capabilities relating to understanding many and varied product attributes. Instead, knowledge about physical distribution functions is likely to be frequently shared among channel members; physical distribution becomes a more important component of channel management for noncomplex products.
Proposition 3: Product complexity in an industry will be inversely related to the importance of physical distribution functions vis-à-vis other channel management functions.
End-customer heterogeneity is the degree to which end-customers in an industry differ with respect to tastes and preferences (cf. Achrol and Stern 1988). In some industries, end-customers tend to be relatively homogeneous in their tastes and preferences (e.g., ultra-sound equipment for hospitals; customer credit evaluation software for banks), while in other industries, tremendous diversity can exist across different market segments and vertical niches (e.g., lighting products; racing and mountain bicycles).
When product complexity is high and considerable heterogeneity exists among end-customers in an industry on tastes and preferences, a truly challenging task confronts channel members. Not only do intermediary personnel need to grasp the functioning and operation of complex products, they need to understand how different segments of end-customers will react to these products in the purchase process. Benefits sought by end-customers will vary considerably across market segments. As a result, the magnitude of the knowledge on products, customers, marketing efforts and selling skills that must be transferred and integrated across channel members will be truly sizeable in this industry context.
The advantages of promoting relational exchange among channel members when a complex product category is involved are likely to be even greater when end-customer heterogeneity is high in an industry. Customer diversity is likely to increase task complexity, because it increases the knowledge and skills required to serve the entire market (Day 1994). In such cases, the need to “customize” product offerings for individual customers or customer segments should be high, requiring intelligence sharing, close coordination and teamwork among channel members. Without significant relationship building, the motivation and knowledge needed by intermediaries to sell complex products to a diverse group of customers are both likely to be low.
When noncomplex products are involved, but high end-customer heterogeneity exists, there will be a greater need to share and utilize knowledge on customer characteristics and marketing efforts across channel members. Some relationship building will be necessary. While still important, physical distribution functions and related knowledge sharing will play a somewhat lesser role in channel management, as a result.
Proposition 4: The inverse relationship between product complexity in an industry and the importance of physical distribution functions vis-à-vis other channel management functions is strengthened by end-customer homogeneity.
End-customer expertise is the ability of end-customers in an industry to perform product-related tasks successfully (Alba and Hutchinson 1987). End-customers gain expertise in a product category as they gain significant product-related experiences (Park, Mothersbaugh and Feick 1994).
When end-customers in an industry possess a high level of expertise, suppliers of complex products should have less need to share extensive knowledge about products and marketing efforts with associated intermediaries. End-customers already have the wherwithal to make purchase decisions without that much outside assistance (cf. Hoyer and MacInnis 2004). Expertise in a product domain allows consumers to more rapidly and accurately evaluate options and learn new product-related information on their own, even when industry product complexity is high (Alba and Hutchinson 1987). Obviously, a good deal of knowledge must still be shared with channel members, but less than what would be the case if end-customers lacked understanding of product functioning and accompanying benefits. A good example is in the computer hardware industry (e.g., main frame and mini-computer systems) in the business-to-business arena where many end-user organizations have specialized departments with the expertise to make buying decisions and provide specialized services with little assistance from available channels.
Proposition 5: The inverse relationship between product complexity in an industry and the importance of physical distribution functions vis-à-vis other channel management functions is weakened by high end-customer expertise.
Product line extensiveness represents the breadth and depth of product lines within an industry (cf. Kekre and Srinivasan 1990; Nijssen and Agustin 2005). Some industries and the associated suppliers have a broad and deep group of product lines where the number of SKUs is massive (e.g., the lighting products' industry with GE and Phillips among the suppliers). Other industries have a relatively narrow and shallow group of product lines.
When suppliers in an industry offer a broad and deep product line, associated intermediaries must grasp, at least to some extent, how all the SKUs fit together. Further, the demands on the physical distribution system increase as product line extensiveness increases. More SKUs must be ordered; minimum order sizes must be understood; terms must be grasped; inventory levels must be managed; delivery and receipt of orders must be tracked. All of this requires that a large amount knowledge on physical distribution functions be transferred and integrated among channel members.
When supplier product lines in an industry are more limited in their breadth and depth, there is likely to be less need for knowledge transfer and integration among channel members. The SKUs in total should be easier to grasp by intermediary personnel, including which customers should be linked to which products. The existence of close relationships between channel members to facilitate knowledge sharing is likely less necessary under such conditions.
Proposition 6: Product line extensiveness in an industry is positively related to the importance of physical distribution functions vis-à-vis other channel management functions.
Industry financial performance is the degree to which suppliers and intermediaries in an industry are experiencing sales growth and adequate margins. At any point in time, there is considerable variation in financial performance across industries (cf. Porter 1980).
Where financial performance of firms in an industry is weak, initiatives to transfer knowledge across channel members and build stronger relational exchanges are likely to be few and far between. Instead, programs to cut costs and make operations more efficient and profitable in the short-run are likely to take precedence. For example, personal computer and software distributors (e.g., Tech Data; Ingram-Micro) are currently faced with gross margins in the 2% range. Accordingly, they have eliminated their outside sales forces and have primarily become “order takers” for supplier products over the telephone and the Internet. The interest of these distributors in the transfer of knowledge from their suppliers has been curtailed to a significant degree as they learn to survive under such economic conditions.1
In contrast, in industries where financial performance is relatively strong, more slack resources will exist. Intermediary management will likely be more interested in doing what is necessary to improve organizational capabilities for the long-term. Greater attention to sharing knowledge on products, customers and marketing skills is likely to take place when economic conditions in an industry are positive.
Proposition 7: Financial performance of firms in an industry is inversely related to the importance of physical distribution functions vis-à-vis other channel management functions.
Supplier Level of Analysis
Supplier brand positioning is the degree to which a supplier attempts to convey to targeted end-customers that its brand has superior ability to perform (cf. Frazier and Lassar 1996). Some suppliers position their brands at or near the “high end” of the product continuum with the connotation that their products are of highest quality at a high but fair price (e.g., Callaway golf clubs; Rolex watches; Cannondale bicycles; Calphalon gourmet cookware). Other suppliers position their brands at or near the “low end” of the product continuum, with the message that end-customers can receive acceptable product quality at a relatively low price (e.g., Northwestern golf clubs; Timex watches; Raleigh bicycles). Other suppliers position their products somewhere in between.
Suppliers who position brands at the high-end must work with their intermediaries in an attempt be meet high end-customer expectations (cf. Nijssen and Agustin 2005). End-customers expect more from brands that are promised to provide the very highest levels of quality, especially when product-related services are involved (e.g., customized fitting of an expensive racing bicycle) (cf. Santos and Boote 2003). Intermediaries will play a vital role in ensuring that the desired brand image of the supplier is actually established with end-customers through intermediary merchandizing, selling and customer service capabilities. While the supplier must be concerned about explicit knowledge reaching intermediary personnel in such cases (e.g., communicating the functional features of cookware in terms of how well they cook and clean), the transfer of tacit knowledge to intermediary personnel about the high-end brand is even more critical (e.g., communicating the nonfunctional features of cookware as to the sleekness of design and the prestige of ownership). Without a relatively high level of relational exchange, the explicit and tacit knowledge necessary to adequately inform intermediary personnel and build up intermediary capabilities will never be effectively transferred and utilized. Thus the transfer and integration of explicit and especially tacit knowledge on a wide variety of issues should be extreme for suppliers of high-end brands.
End-customer expectations are lower for brands positioned at or near the low-end of the product spectrum (cf. Santos and Boote 2003). Intermediaries must make such products readily available to end-customers and price the products appropriately. While overall capability development within the intermediary organization is simply not as important for low-end brands, intermediaries must grasp how to efficiently and effectively order, receive and place them. The importance of physical distribution functions in channel management should be heightened as a result.
Proposition 8: Supplier positioning of brands is inversely related to the importance of physical distribution functions vis-à-vis other channel management functions.
Supplier market position reflects the supplier's standing in an industry in terms of market share in its served market (Porter 1980). There can be market share leaders in the general industry, as well as market share leaders in narrower customer segments and vertical niches.
A supplier of a high-end brand should have its efforts to build and maintain a relatively high level of relational exchange in its channel relationships enhanced when its market position is strong in an industry (e.g., Caterpillar; Lexus). When sales of a high-end brand are doing well, this provides some verification as to the effectiveness of the positioning and the ability of the supplier and associated intermediaries to work together to serve a set of demanding end-customers. Intermediary motivation to gain and utilize supplier knowledge and further support sales of the brand should be enhanced. Knowledge on physical distribution functions will represent only a small portion of all the knowledge shared between channel members.
On the other hand, if a supplier's market position is weak or declining, the overall financial incentives (e.g., sales, gross margin dollars) will be less compelling to associated intermediaries in supporting the positioning of a high-end brand. The supplier's intended brand positioning may not be working, failing to register with targeted end-customers. Under such conditions, intermediaries may be unwilling to invest a lot of time and energy into the channel relationship, causing problems in the knowledge transfer and integration process. Knowledge on product benefits and customer characteristics may be transferred to channel members, but left unprocessed by channel member personnel; intermediaries often carry many more product lines and SKUs than their personnel can adequately grasp (cf. Szulanski and Jensen 2006). Still, intermediaries must understand the steps needed to order and adequately receive these products, making a focus on the transfer and integration of knowledge on physical distribution functions relevant.
Proposition 9: The inverse relationship between supplier positioning of brands and the importance of physical distribution functions vis-à-vis other channel management functions is strengthened by a strong supplier market position.
Supplier product newness represents the degree to which a supplier's product portfolio consists of new products recently introduced to the marketplace (Meyer and Roberts 1986; Wathen 1993). Some suppliers frequently introduce new products into the marketplace, whereas other suppliers are less aggressive in developing and introducing new products.
When supplier product newness is high, the firm will be challenged to get knowledge about the new products disseminated among its intermediaries. The challenge will be greater to the extent that the new products incorporate a new core technology or provide substantially higher customer benefits relative to previous products in the line (cf. Chandy and Tellis 2000). The marketing of new products places unique demands on both intermediaries and end-customers in the adoption process (Hultink, Atuahene-Gima and Lebbink 2000). Clearly, close channel relationships are likely necessary for suppliers that frequently introduce new products into the marketplace; they may enable the transfer and integration of knowledge about the new products into intermediary organizations. The marketing and sales capabilities of intermediaries may need enhancing as the new products are incorporated into their offerings, as the purchase of a new product can be a potentially high risk situation to end-customers because of unfamiliarity (Donnelly and Etzel 1973).
In contrast, when supplier product newness is low, the firm will have less unique knowledge to transfer to intermediary organizations for integration by their personnel. The level of relational exchange required by the supplier in its channel relationships is likely lower as a result. Out of the total amount of knowledge that needs to be transferred and integrated across channel members, knowledge on physical distribution functions should comprise a relatively large proportion.
Proposition 10: Product newness in a supplier organization is inversely related to the importance of physical distribution functions vis-à-vis other channel management functions.
Supplier market orientation is the extent to which a supplier focuses deeply on the needs and preferences of end-customers, and competitor initiatives (cf. Day 1994). Significant variation exists in the market orientation of different suppliers, even among those in the same industry (cf. Jaworski and Kohli 1993).
When a supplier organization is market-driven, it attempts to center its decision making on an understanding of customer needs and competitor actions. The culture of a market-oriented firm is driven by the gathering, dissemination and utilization of market knowledge. Such supplier organizations are likely to frequently share market knowledge with associated intermediaries, informing them of viable customer segments, customer beliefs and preferences, competitor strategies, and their own product lines and value propositions. As a result, suppliers with a high market orientation are expected to devote significant resources to building and maintaining a relatively high level of relational exchange in their channel relationships. As Day (1994) argues, channel bonding capabilities are valuable to market-driven organizations, as they promote market sensing capabilities and intelligence sharing within channel systems (also see Anderson and Weitz 1992).
Of course, knowledge about physical distribution functions will also be shared by a market-oriented supplier. However, such knowledge should represent a small proportion of total knowledge shared; other types of explicit and tacit knowledge should dominate.
When a supplier organization lacks a strong market orientation, its personnel will have less market knowledge and should place less value on sharing it with associated intermediaries. Less attention to building strong channel partnerships should exist. In such cases, more attention in a relative sense should be devoted to sharing knowledge about physical distribution functions, ensuring product orders can be placed and fulfilled in an efficient and effective manner.
Proposition 11: The market orientation of a supplier organization is inversely related to the importance of physical distribution functions vis-à-vis other channel management functions.
Environmental volatility is the frequency of change and turnover in marketing forces in a supplier's external environment (Achrol and Stern 1988). First, when environmental volatility is high, a market-oriented supplier is likely to focus even more on the gathering, dissemination and utilization of market knowledge. Such efforts are an attempt to better deal with the uncertainty facing the firm in its decision making (cf. Pfeffer and Salancik 1978); more market knowledge will enable the firm to confront uncertainty head-on and prosper from it compared with competitor organizations.
Second, when environmental uncertainty is high, the market-oriented supplier is likely to increase the amount of market knowledge it shares with associated channel members. High uncertainty creates additional contingencies that lead to more difficulties in long-range planning and making product-mix, inventory and pricing decisions. Under such conditions, the benefits of coordinated actions with its intermediaries should be even higher (Pfeffer and Salancik 1978). Market-driven organizations facing turbulent external environments will likely recognize the special benefits of channel bonding (Day 1994). In contrast, when a market-oriented supplier faces low volatility in its external environment, additional effort to gather more market knowledge and share such knowledge with associated intermediaries are unlikely to occur (Pfeffer and Salancik 1978).
The transfer and integration of knowledge on physical distribution functions is likely to diminish to some degree in the face of high environmental uncertainty for market-oriented suppliers. Understanding customers and competitors in a time of rapid change, and generating sales and market share are likely to take center stage for market-oriented firms under such conditions, lessening the amount of total knowledge transferred on physical distribution among channel members. In contrast, when suppliers who lack a high market orientation are confronted with a highly uncertain environment, they are likely to become more conservative and center on efficiency and lessening total costs. Under such conditions, the transfer and integration of knowledge on physical distribution functions among channel members becomes of major importance in the drive for channel efficiency.
Proposition 12: The inverse relationship between market orientation within a supplier organization and the importance of physical distribution functions vis-à-vis other channel management functions is strengthened by environmental volatility.