Channel Intermediaries and Manufacturer Performance: An Exploratory Investigation in an Emerging Market☆
Graphical abstract
Introduction
Channel intermediaries (hereafter, intermediaries) are the entities that facilitate the distribution of a manufacturer’s products to end consumers (Kumar, Scheer, and Steenkamp 1995). These intermediaries typically include dealers, wholesalers, distributors, retailers, and institutional buyers,1 and they are essential elements of any distribution chain as they transport the bulk of a nation’s manufacturing output (Krafft et al. 2015). For example, in the U.S., the wholesale distribution market reached a record high of $6.01 trillion in 2018, up 7.5% from 20172 ; in India, the retail distribution market is projected to grow to $1.1 trillion by 2021 (from $672 billion in 2017)3 . In addition to these substantial figures, many academic studies (Watson et al., 2015, Arnold and Palmatier, 2012, Bailey and Bakos, 1997, Dahlquist and Griffith, 2014, Coughlan, 1985) and managerial insights (Fites 1996) support the notion that intermediaries are the backbone of a manufacturer’s success. Accordingly, the extant literature has proposed several strategies, including aligning brands with the retail store format (Kumar, Sunder, and Sharma 2015), inventory sharing (Zhao, Deshpande, and Ryan 2005), and the management of power, relationships, and commitment (Brown, Lusch, and Nicholson 1995; Lassar and Kerr 1996) to manage intermediaries.
Despite the abundance of studies in the domain of intermediary management, most studies focus on relationships between the two interacting parties, i.e., manufacturers and intermediaries, by ignoring the fact that manufacturers typically 1) deal with multiple intermediary types; 2) operate in different markets (with different demands and consumption capacities), and 3) sell a variety of products to meet heterogeneous customer needs. Further, most existing studies were carried out in the context of developed markets, where intermediaries are largely organized. Marketplace evidence confirms that emerging market manufacturers typically sell multiple products across multiple markets (e.g., rural and urban) by managing multiple types of intermediaries (EGEDE 2013). Hence, the suggested insights from the literature regarding intermediary management may not apply to manufacturers managing intermediaries in a multi-product, multi-intermediary type, multi-market, and emerging economy context.
Motivated by the gaps in the literature and marketplace evidence, to develop an implementable intermediary management strategy (across multiple markets, intermediaries, and product types) for emerging market manufacturers, we conduct three related studies. We start with a qualitative study (labeled as Study 1) by interviewing managers of manufacturers and intermediaries across different industries. Study 1 reveals that managers do not have specific intermediary management strategies, apart from offering tangible (e.g., cash discount) and intangible (e.g., a foreign vacation) benefits. Study 1 also suggests that manufacturers’ push of products (without a proper understanding of the demand) decreases the intermediary satisfaction. Lastly, and most importantly, Study 1 suggests that some form of distribution alignment across the intermediary, market, and product types can improve both manufacturers’ profits and intermediaries’ satisfaction. Thus, Study 1 not only motivates but also guides our other two studies.
Building on Study 1, we lean on the Governance Value Analysis (GVA) framework (Ghosh and John, 1999, Ghosh and John, 2005) that explores the three-way alignment among resources, specific investments, and governance to argue that the alignment of intermediaries with the product and market types can be a strategy for manufacturers to increase their profit and intermediaries’ satisfaction. Accordingly, our research objectives become the following:
- 1
Develop an implementable and effective intermediary alignment strategy for emerging market manufacturers at the market and product type levels.
- 2
Quantify the impact of the developed intermediary alignment strategy on the manufacturer’s profitability and intermediary satisfaction in the field.
Developing a multi-market-intermediary-product distribution alignment strategy for manufacturers (i.e., our first research objective) requires quantifying the differential impacts of various intermediary-, market-, and product-type combinations on the manufacturer’s revenue performance. To quantify these differential impacts, we use a robust empirical approach (labeled as Study 2) and data from an emerging market construction product4 manufacturer. Using the estimated empirical model as an input, we quantify the revenue impact of increases/decreases in the number of intermediaries across various combinations. This analysis advises the manufacturer to increase its distribution i) in the urban and semi-urban markets (but not in the rural markets); ii) to the dealers (but not to the institutional buyers); and iii) of the premium product except in the urban market (but not of the non-premium product), to boost its revenue.
Given the distribution alignment strategy developed based on Study 2, we attempt to quantify the impact of its implementation on manufacturer profitability and intermediary satisfaction (i.e., our second research objective). We achieve this by a regional field study (labeled as Study 3). Study 3 suggests that the recommended alignment (from Study 2) boosts the manufacturer’s profit by 13%, and intermediaries’ satisfaction by 7.71%.
We contribute to the literature by developing an implementable and effective intermediary management strategy that emerging market manufacturers can use to boost their profitability and intermediary satisfaction. Our recommended approach has the flexibility of allowing manufacturers to effectively manage their intermediaries across multiple markets, intermediaries, and product types. By doing so, the paper shows that increased attention must be directed to managing intermediaries through implementable and effective strategies other than those outlined in the distribution channel literature. Further, the paper shows that along with the existing relational governance strategies (e.g., offering tangible and intangible benefits (Heide 1994; Chatterji, Cunningham, and Joseph 2019)), realigning intermediaries with the product and market types can be a sustainable strategy for increasing profitability (Palmatier et al. 2006).
Besides, we show that even when there are multiple layers (such as various intermediaries, markets, products, etc.), the GVA model can explain the effect of the suggested relational governance strategies (i.e., the alignment at the intermediaries, products, and market levels). Thus, we extend the GVA model’s scope and open the door for future research in this space. Moreover, our Study 3 contributes to the extant literature (Geyskens, Steenkamp, and Kumar 1999a) by showing that the field implementation of empirical results is critical not only to verify empirical findings but also to help manufacturers improve their performance and intermediaries’ satisfaction. Finally, as regards to marketing strategy and practice, we contribute by demonstrating that manufacturers should not require all intermediaries to distribute all types of products in every market. Managers should understand and evaluate the market-intermediary-product level demand first and decide how to distribute their products accordingly.
Section snippets
Literature Review
This section aims to provide a brief overview of the literature on retail distribution strategies, channel governance, emerging markets, and the theoretical lens that we lean on to link the channel governance to manufacturer performance and intermediary satisfaction. Moreover, we provide a distinct understanding of how we contribute to the existing literature on distribution channels, governance, and intermediary satisfaction.
A Comprehensive Analysis of the Role of Intermediaries in Manufacturer Performance
Given the dearth of research investigating implementable strategies to increase manufacturers’ profitability by managing intermediaries, we directly contact manufacturers and intermediaries to understand what they think can be done to fulfill the dual goal of increasing manufacturers’ profitability and intermediaries’ satisfaction, as discussed in Study 1.
Study 1 (Qualitative)
The qualitative study aims to identify strategies that might help manufacturers increase profitability and intermediary satisfaction. With qualitative research, we attempted to generate themes to understand the required strategies (Corley and Gioia 2011). We conducted “theoretical sampling” (Breckenridge and Jones 2009) to identify and recruit managers and intermediaries. Our selected respondents come from four industries (construction products, fast-moving consumer goods (FMCG), heavy
Study 2: Empirical Investigation
Study 1 suggests, and the GVA model supports that the distribution alignment of the intermediary (such as dealer, retailer, institutional buyer, etc.), product (such as premium vs. non-premium), and market types (such as urban, rural vs. semi-urban, etc.) may benefit a manufacturer and its intermediaries. Hence, in Study 2, we link various combinations of intermediary, product, and market types to the manufacturer's profitability through an empirical investigation.
Study 3: Field Implementation
In Study 3, we intend to implement the insights gained from Study 2 to show that empirical insights can guide managerial decision-making. With Study 3, we aim to answer a) whether alignment increases the manufacturer’s profitability; b) whether alignment increases intermediaries’ satisfaction; c) whether alignment causes an increase in dealers’ satisfaction, and d) whether the dealers’ satisfaction is related to manufacturers’ profitability. Accordingly, our field implementation in Study 3
Model Robustness
To check the robustness of our proposed model, we estimate two alternative models. In our first robustness check, we incorporate the price of the focal product as an additional control into our proposed model and account for price endogeneity. We strictly follow the existing literature (Papies, Ebbes, and Van Heerde 2017; Bombaij and Dekimpe 2019) to identify a potential instrument for price and the arguments for using it. We use the cost of raw materials as our instrument, in line with the
Discussion
In this paper, we use three related studies to identify how a manufacturer can manage intermediaries to increase its profit and intermediaries’ satisfaction. In Study 1, we identify through template analysis and text analytics tools that some sort of alignment of product, market, and intermediary may be beneficial to manufacturers. Insights suggest that such alignment can also increase intermediaries’ satisfaction. In terms of theory, we build on the GVA model to demonstrate why alignment of
Limitations and Future Research Directions
We first caution readers to be aware of the potential constraints inherent in our data and field implementations. Although we emphasize the value of exploring, investigating, and implementing strategies that can help manufacturers manage intermediaries for their own and the latter’s welfare, we have met certain limitations. First, we emphasize that the results of our study may only be generalized to other industry contexts in any emerging market with the utmost caution. Our empirical study and
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Authors thank the participants of the JR Thought Leadership Conference on Metrics and Analytics in Retailing, Atlanta, for their valuable insights, comments, and suggestions on the earlier version of the manuscript. The authors thank the data providing manufacturer for its support. The authors also thank the participating intermediaries and the managers in the qualitative study for their insights and support. Finally, the authors thank the managers of the data providing manufacturer who are instrumental in implementing the insights from the research and providing us the results. Some parts of this paper are also parts of Tarun K. Sharma’s dissertation for the Executive Fellow Programme in Management at the Indian Institute of Management, Indore, India.