Dec 4, 2007

Cool Power Drives Distribution Channel Innovation

Power - and its more important result, influence - has always been at the heart of channel management and channel conflict. Historically, that channel power has been based on the twp types of power most familiar - and comfortable - to old school leaders. Reward power and its close relative coercion.

In a world where most distribution systems are dominated by a small concentration of large, high-share channel players (think Wal-Mart and Home Depot in retail, Ferguson and Grainger in wholesale), power becomes increasingly central to success. Unfortunately, old school leaders (and they still control most executive teams today) learned about power from the likes of Robert Malott, the former Chairman and CEO of big Chicago manufacturer FMC. Malott spoke for many of them when he declared, "Leadership is demonstrated when the ability to inflict pain is confirmed". (Fortune, 11/28/07).

But today its downstream distribution players that are inflicting all the pain. And traditionally strong branded product manufacturers are struggling with huge management challenges that have emerged in the strategic direction of dominant retailers: reverse auctions to buy product from lowest bidders, backward-integrating into the manufacturer’s domain, contracts that secure intellectual property rights for ideas arising in day-to-day relationships, increased favoritism toward licensed house brands.

But old schoolers' attempts to meet force with force have been largely ineffective, and the brand companies they are stewarding are suffering as a result.

A parallel concentration of four mega consulting firms - advising leading companies on both sides of the manufacturing-distribution struggle - continue to propose worn out strategies: move production overseas to compette better with private label price points, create sub brands and exclusive SKUs, go direct on the internet, hold the line in negotiations, acquiese and build volume. A leading business association's latest management book, ominously titled "Working at Cross Purposes", warns that ..."win-win is dead and shared prosperity – if it ever existed – was a fantasy".

The biggest downside of outdated, muscular (think military) coercive channel management power is the level of distrust, anger, resistance and revenge such actions evoke in their target. While rewards might seem more attractive, remember that offering a reward implicitly pointts to the fact that you can withold it - ala coercion. Luckily, a few signs of fresh air and new thinking are emerging.

New leaders are emerging, and they recognize that there are many more bases of pwer than reward and coercion. A new generation of cororpate leaders are starting to embrace what Harvard's Joseph Nye calls 'cool power', and goes on to say that ..."we need soft power to bring people to share our values and help us pursue common goals. Today's businesspeople are in a similar situation...[but] let's change the terms... generals and CEOs don't like 'soft'...let's call the traditional kind of power that we used to value 'hot power' and the new kind 'cool power' ..."

We like Professor Nye's perspective, and it's one that executives would be wise to adopt when they turn to managing their distribution systems and their largest distribution partners. There are at least four other bases of power that are significantly moreeffective in adversarial environments: Expertise, Referent, Legitimate, and Information. At their heart lies a great deal of lasting influence that accrues to any company - indeed, any person - whose magnetism is based on profiund desire by another party to be associated with them because they are valued experts, provide attractive status, are revered as close advisors, and can provide critical insights.

The best case example? Steve Jobs of Apple Computer. Apple's single-digit market share in computers is by traditional standards meaningless. Jobs has never had any market power, no big distribution network, no giant factories. But a few years ago he had a good idea, the iPod, and even that wasn't a new kind of product; it was a better-conceived, better-designed version of an existing one. He's now doing something similar in phones. He had no hot power, indeed no presence at all in the phone business. Yet the major wireless service providers were competing for the right to offer the iPhone because they wanted Jobs' power to attract customers with his superior ideas. Cool power trumped hot power.

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