Strategic Alliances in DistributionMktg 427 – Chapter 7

Learning Objectives

1. Define and describe strategic alliances in distribution2. Understand the motives of strategic alliances for both

downstream and upstream members3. Understand how strategic alliances outperform ordinary

channels

Introduction• Marketing channels typically are composed of multiple

companies, each pursuing its own interests. Because these interests are competing, channel members often fail to cooperate with each other and even work at cross-purposes.

• STRATEGIC ALLIANCES in distribution are forged in order to solve the problem. In a well functioning alliance, two parties in a marketing channel function as if they were ONE.

What is a Strategic Distribution Alliance?…when two or more organizations have a

connection that cause them to function according to a perception of a single, shared interest.

Committed parties:-Desire relationship to continue indefinitely

(Commitment)-Are willing to sacrifice to maintain and grow

the relationship

Motives for creating a distribution alliance• Upstream Motives (Must respect downstream first)• Acheive better coverage and to do so at a lower cost• Higher motivation and better representation• coordinated marketing efforts• small players to giants (mergers) trend • erect barriers to entry • logistics cost reduction

Motives for creating a distribution alliance• Downstream Motives• Assure stable supply• More successful marketing efforts• Differentiate from other distributors

Do Alliances outperform ordinary channels?• At first glance, the answer seems to be YES.• Committed parties trust each other, and trust today enhances

performance tomorrow.

• Trusting parties will:• Do more for each other• Find it easier to come to agreements, to work out conflicts and

work with each other.• Help parties cope with unfavorable outcomes and turn them

around.

• TRUST is social capital, organizations use it to increase their effectiveness

Do Alliances outperform ordinary channels?• Differentiation and commitment go together• Manufacturers whose marketing strategy is to differentiate their

offerings (as opposed to cost leadership) are more likely to build closer relationships with their channel members.

• Much more important in many industrial markets where channel, rather than advertising, has a high impact on the brand’s image.

• Channel partnerships generate more profits together

• However, alliances are very difficult and very costly to create. There is no guarantee that spending enough time and money will make commitment happen.

Building Alliance Commitment by incorporating mutual vulnerability

• Expectations of Continuity• Necessity of Mutuality• Gauging Commitment• Actions Binding Distributors to Suppliers• Actions Binding Suppliers to Distributors

Building Alliance Commitment by incorporating mutual vulnerability• Expectations of Continuity• “The minimum requirement”• A channel member who wants to build commitment into a

relationship must begin by building the expectations that the prospective partners will be doing business with each other for a long time.

• What inspires a channel member’s confidence that a business relationship will last?

1. Trust2. Communication3. Balanced power4. Combined stakes

Building Alliance Commitment by incorporating mutual vulnerability• Necessity of Mutuality• The next step in alliance building is to earn the other party’s

commitment. • Seriously asymmetric commitment is rare. This is because

partners to an alliance do their calculations. They do not accept the obligations of being committed unless they believe their counterpart is also committed, also ready to assume obligations.

• Channel members are prone to deception of commitment. They are well informed of the true state of the relationship based on what it does – or what it has done. (The past lingers)

• Symmetric Commitment must be established

Building Alliance Commitment by incorporating mutual vulnerability• Gauging Commitment• Gauge based on past behavior1. Have you had an acrimonious past with the supplier?2. What actions do you see the supplier taking to tie itself to

doing business with you?

• For example, in distribution, the greater the degree of selectivity you see the supplier exercising in its coverage of your market, the more you believe that a supplier is truly committed.

• Exclusivity – higher commitment

Building Alliance Commitment by incorporating mutual vulnerability• Gauging Commitment• Idiosyncratic (to you) investments are otherwise known as

credible commitments, pledges or company-specific investments. When you see a manufacturer invest in you in this fashion, your confidence in their commitment soars because they are erecting a barrier to their own exit from their relationship with you.

1. Supplier personnel facilities dedicated to you, the distributor2. The Supplier’s stock of learning about your company3. Compatible reporting systems4. Investments (Training programs)5. A location near you, at a remove from your competitors

Building Alliance Commitment by incorporating mutual vulnerability• Actions that bind distributors to suppliers

• It starts with Calculation: The distributor enters the relationship when it believes the pay-offs will justify the cost

1. Distributor dedicates resources to a supplier (personnel, joint marketing efforts, etc.)

2. Two-way communication – freely exchanging information, getting involved with supplier’s efforts, advice.

Building Alliance Commitment by incorporating mutual vulnerability• Actions that bind Suppliers to Distributors

• Starts with verification of downstream members ability and motivation.

1. Training, Mingling the supplier’s brand image with the distributors image, and other similar investments

2. Two-way communication

Building Commitment bymanaging daily interactions• Manufacturing Trust

Relative to your confidence in each other’s integrity and concern for mutual well-being• Economic Satisfaction

• Positive affective response to economic rewards from the union

• Non-economic Satisfaction• Psychosocial affect – relationship valued

• Choosing Partner and Setting• Need complementary capabilities that can be exploited for

competitive advantage• Decision Making Process

• Centralization hurts trust

Life of Marketing Channel PartnershipMarketing Channel Relationship Stages:

1. Awareness2. Exploration3. Expansion4. Commitment5. Decline and Dissolution

Conditions of potential success

1. One side has special needs

2. The other side has the capability to meet the needs

3. Each side faces barriers to exiting the relationship

References• Marketing Channels 7th Edition (Anderson, El-Ansary)• Strategic Alliances in Distribution by Duane Weaver (ch 11)