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Finding balance

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Article

Kim, Stephen, K. and David I. Gilland, “Working More or Working Less? Contingent Allocation of Reseller Effort in Distribution Channels.” Industrial Marketing Management 64 (2017) 44-56.

Summary

The article examines the motivations for resellers to allocate effort toward representing supplier products, particularly when the reseller represents multiple suppliers. The authors suggest that resellers balance different, changing and incompatible challenges that make high performance outcomes difficult. They identify four general challenges that resellers balance: economics, adaptation, stability and harmony. These challenges affect the allocation of reseller effort in different ways depending on the volatility and stagnancy of the reseller’s territory. The study uses 26 semi-structured depth interviews and a survey of 162 distributors from the brewing industry to test their hypotheses. The authors find that reseller allocation of effort is affected by the interaction of the four challenges and the two types of territory characteristics.

What this means for food and agribusiness

The proliferation of products in the agribusiness input supply sector places increasing pressure on suppliers to find ways to influence their retailers to represent their products in the best ways to farmer customers. Retailers face pressure to manage an increasing number of products, provide sound advice on the right products for farmers to use for their given situations, and maintain a healthy relationship with suppliers. In addition, the retailer is often allocating time and effort to multiple products, including seed, crop protection products, fertilizer products, micronutrients, feed products, etc. Ultimately, the allocation of effort is a difficult choice for the retailer.

The research study reviewed here provides some interesting insights into how we think about this allocation of effort decision for both the agricultural supplier and the agricultural retailer. Their model suggests that part of the difficulty for the retailer in making the allocation decision is facing multiple competing objectives. They argue that retailers are balancing economic, adaptability, stability and harmony matters that are often competing concerns, making it hard to find an optimal solution. They define these concerns as:

  • Economic concern – Retailer’s concerns about ability to meet or exceed all financial objectives, such as revenue, profits, contributions and cash flow.
  • Adaptation concern – Retailer’s desire to successfully respond to changing conditions in industry, technologies and environments. Suggesting a preference for flexible processes and systems that allow for adaptation to constant change.
  • Stability concern – Retailer’s desire to align marketing and channel activities, both internally and with suppliers and other constituents. That is, decisions on ordering, pricing, logistics and marketing should be consistent with the supplier and within the retailer’s territory.
  • Harmony concern – Retailer’s desire to establish low conflict, supportive relationships with channel members. A harmonious channel would be characterized by low conflict, high amounts of trust, and a willingness to embrace change.

The authors note that these concerns have varying impacts on the retailer at different times. Sometimes economics might be the dominant concern, while at other times, adaptation might be the dominant concern. In any case, more effort allocated to one of these concerns often leads to an imbalance in another area of concern.

The study finds that the balancing of these concerns interacts with the nature of the retailers’ territory to ultimately determine how much effort the retailer decides to allocate to the supplier. The two key territory characteristics they identify are:

  • Territory volatility – The speed of market change faced by the retailer. High volatility in the retailer’s market creates adaptation challenges because the retailer is unable to react rapidly enough to align resources with the supplier to tackle problems.
  • Territory stagnancy – The severe lack of resources within the retailer’s territory, such as economically challenging conditions, few buyers, limited access to credit or a weak demand for the retailer’s product line.

The research finds a key set of interactions among the concerns and the territory characteristics. In particular, they find that when territory volatility is high the retailers choice of effort toward the target supplier will:

  1. Decrease when the retailer’s economic concerns increase.
  2. Decrease when the retailer’s adaptation concern increases.
  3. Increase when the retailer’s stability concern increases.
  4. Decrease when the retailer’s harmony concern increases.

The study also finds that when territory stagnancy is high, the retailer’s choice of effort toward the target supplier will:

  1. Increase as the retailer’s economic concerns increase.
  2. Decrease as the retailer’s stability concerns increase.

These results have some interesting implications for both agricultural suppliers and agricultural retailers. On the supplier side, it seems imperative to understand the key performance concerns of the retailer. Each retailer will have different levels of concern across the four broad categories suggesting that a “one-size-fits-all” approach to incentive plans for getting retailers to allocate effort to your products might be misguided. For example, if the retailer has high concern for economic performance, the incentives might be cash infusions through increased margin opportunities, low-interest loans or profit sharing schemes. If the retailer concern is more about adaptation, then you might think about adjusting product offerings or providing new services and support that the retailer can modify to pursue new opportunities or attract new customers. If the retailer is concerned about stability, then instituting and enforcing policies that reduce territory encroachment by competitors or dissuade competitor from selling off the price sheet might be more effective at enticing the retailer’s effort to represent your products. Finally, the supplier should always stay informed about the conditions in the retailer’s territory. Being able to anticipate upcoming threats and opportunities in a territory can allow you to adjust your incentive systems and other efforts to support the retailer.

From the retailer perspective, the research suggests that there is not an optimal allocation of effort to suppliers. The changing competitive landscape and competing nature of the various concerns means there is no single solution for doing business. As one concern area is recognized and addressed, you should be on guard that another area is likely to arise requiring a different approach. One way to help deal with the dynamism of the agricultural input marketplace is to seek suppliers that recognize this need for flexibility. Good supply partners will have an array of incentives to employ depending on the concern/territory condition you are facing.

One final note: The authors conducted this research in the beer industry. This industry’s unique circumstances around state and federal regulations may have implications on the findings of the study. It would be fascinating and informative to conduct a similar study in the agribusiness industry to compare and contrast with the findings in this article. My hypothesis is that the effects of volatility and stagnancy in the market territories might have even more impact in our industry where territory boundaries are much less defined and/or non-existent.

AUTHOR
Allan Gray
Allan Gray
October 31, 2017