Multiple channel systems in Services - Doutor Filipe Coelho

This article was downloaded by: [b-on: Biblioteca do conhecimento online UC] On: 19 November 2014, At: 04:54 Publisher: Routledge Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

The Service Industries Journal Publication details, including instructions for authors and subscription information: http://www.tandfonline.com/loi/fsij20

Multiple channel systems in services: pros, cons and issues a

Filipe J. Coelho Assistant Professor & Chris Easingwood Professor of Marketing

b

a

Faculdade de Economia da Universidade de Coimbra , Av. Dias da Silva, 165, 3004-512, Coimbra, Portugal b

Head of Marketing and Strategy , Manchester Business School , Manchester, M15 6PB, England Published online: 25 Jan 2007.

To cite this article: Filipe J. Coelho Assistant Professor & Chris Easingwood Professor of Marketing (2004) Multiple channel systems in services: pros, cons and issues, The Service Industries Journal, 24:5, 1-29, DOI: 10.1080/0264206042000276810 To link to this article: http://dx.doi.org/10.1080/0264206042000276810

PLEASE SCROLL DOWN FOR ARTICLE Taylor & Francis makes every effort to ensure the accuracy of all the information (the “Content�) contained in the publications on our platform. However, Taylor & Francis, our agents, and our licensors make no representations or warranties whatsoever as to the accuracy, completeness, or suitability for any purpose of the Content. Any opinions

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

and views expressed in this publication are the opinions and views of the authors, and are not the views of or endorsed by Taylor & Francis.

The accuracy of the Content should not be relied upon and should be independently verified with primary sources of information. Taylor and Francis shall not be liable for any losses, actions, claims, proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or howsoever caused arising directly or indirectly in connection with, in relation to or arising out of the use of the Content.

This article may be used for research, teaching, and private study purposes. Any substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing, systematic supply, or distribution in any form to anyone is expressly forbidden. Terms & Conditions of access and use can be found at http://www.tandfonline.com/page/terms-andconditions

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

Multiple Channel Systems in Services: Pros, Cons and Issues FILIPE J. COELHO and CHRIS EASINGWOOD

The number of companies in the services sector making use of two or more channels of distribution to market their products is increasing steadily, and this strategy is expected to become the dominant channel design. Nonetheless, research on the design of multiple channel systems is decidedly sparse. This article attempts to make a contribution to this topic by discussing the possible benefits of a multi-channel distribution strategy, the possible drawbacks and by discussing a number of issues that emerge.

Finally the potential contribution of a number of research perspectives to a better understanding of the drivers of a multiple channel system is discussed.

Distribution channels have been defined as ‘sets of interdependent organisations involved in the process of making a product or service available for consumption or use’ [Stern, El-Ansary and Coughlan, 1996: 1]. When making channel choices, firms can choose from a wide variety of alternatives.

The two extremes are: the company performs all distribution functions itself, i.e. adopts a completely integrated channel, or the company uses intermediaries to execute most of the distribution functions. A wide variety of intermediate alternatives exist in between, such as joint ventures and franchising. However, it should be noted that single channel strategies are becoming less frequent choices.

Companies are increasingly using a multiple channel strategy for most or all of their products – a multiple channel strategy is employed when a firm makes a product available to the market through two or more channels of distribution. Frazier [1999: 232] observed that multiple channels ‘are now becoming the rule rather than the exception’. Easingwood and Storey

Filipe J. Coelho is Assistant Professor, Faculdade de Economia da Universidade de Coimbra, Av. Dias da Silva, 165, 3004-512 Coimbra, Portugal. Chris Easingwood is Professor of Marketing and Head of Marketing and Strategy, Manchester Business School, Manchester M15 6PB, England.

The Service Industries Journal, Vol.24, No.5, September 2004, pp.1–29 ISSN 0264-2069 print=1743-9507 online DOI: 10.1080=0264206042000276810 # 2004 Taylor & Francis Ltd.

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

2

THE S ERVI CE INDUSTRIES JOURNAL

[1996], having surveyed 153 financial products, noted that multiple channel systems represented 85 per cent of distribution strategies.

However, the literature has not matched the practical importance of multiple channels. In fact, there are few systematic and rigorous investigations into the drivers of multiple channel strategies. This weakness in the literature remains despite it being repeatedly noted by several important writers in the area of distribution channels [see Bradach and Eccles, 1989; Dutta et al., 1995; Frazier, 1999; Klein, Frazier and Roth, 1990]. Bradach and Eccles [1989: 100], for example, observed that in most studies channel arrangements have been artificially and dichotomously classified as either direct or indirect, ignoring ‘the obvious and fascinating issue of why companies so often both make and buy’. Dutta et al. [1995: 189] acknowledged that multiple channels ‘have been virtually ignored’ and Frazier [1999: 226], along similar lines, stated ‘the use and management of multiple channels have been barely touched on’.

The seriousness of this gap becomes more evident with the observation by Anderson and Coughlan [1987] that once a channel decision is made it tends to be reinforced over time, regardless of whether the decision taken is actually the right one. As one manager stated to us, History has a strong influence on channels. There is almost a default of what you had in the past, the baggage that you carry. Sometimes if you were starting from scratch you would never have the same channels that you carry because of what has happened in the past. You are rethinking the channels you ought to be operating but part of your decisions are constrained by the fact that the investment in infrastructure and systems has already been made in certain channels and dismantling would be more expensive than keeping them going. There are also social issues, people issues.

For the above reasons, and given the long-term character of distribution channels, the channel decision process must be the subject of a ‘systematic evaluation procedure’ from start to finish [Rangan 1987: 156]. This will ensure that in the design of distribution channels the important factors are taken into account, and that a long-term and dynamic perspective is employed.

In order to enhance the discussion on the determinants of multiple channel systems, we review their potential benefits and drawbacks, and discuss important issues that these raise at the channel design stage. It is our reasoning that such benefits and drawbacks provide relevant inputs into the multi channel move decision, and therefore must be part of the research into the determinants of multiple channel strategies. The benefits that can be obtained from such a distribution strategy have sometimes been mentioned in the literature, but its potential problems have been discussed less frequently. The importance of

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

3

these factors in the design of multiple channels has seldom, if ever, been discussed. Consequently, this article has the potential to help managers better assess the extent to which a multiple channel strategy is worthwhile to consider, and to alert them to related factors that should be taken into account at the channel design stage. Furthermore, this article also provides insights that can and should be included in empirical research into the determinants of multiple channel strategies.

This work is organised as follows. Firstly, we present the major methodological choices associated with the study. This is followed by a review of the potential benefits and drawbacks that can be generated by multiple channels.

Then we discuss and demonstrate how important are the considerations of these potential benefits and drawbacks at the design stage of these channel systems. This discussion is complemented with excerpts of ongoing discussions we are having with some managers in the financial services industry on the determinants of multiple channel strategies. Finally, we present some suggestions for future research.

METHODOLOGY

The nature of this article is necessarily exploratory in nature. The first step was to look at the available, if scarce, literature on multiple channels in order to derive a set of potential pros and cons for multiple channels. In the same vein, the authors have also looked at the general and financial press, searching for supporting evidence and key issues facing those companies adopting multiple channels. Finally, these insights have been complemented with exploratory insights of a qualitative nature gained from interviews with about 30 key informants in financial services organisations. Interviewed companies covered different sectors of the industry, namely unit trusts, mortgages, personal pensions and motor insurance, in order to ensure a sample with varying channel strategies. A convenience sampling procedure was followed, aiming to secure a sample of companies with a range of organisational characteristics and distribution strategies.

The interviewees typically hold sales and marketing executive responsibilities and senior marketing manager/business analyst positions, although there are also some corporate marketing and strategy planners, distribution strategy managers, a chief executive, an operations director and an assistant general manager. Reliance on the key informant technique is widely popular in marketing research. Campbell [1955] demonstrated that key informants are able to provide accurate data when they are in a position that provides them with specialised knowledge about the research interest, and when they are able and willing to talk to the researcher. In this vein, John and

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

4

THE S ERVI CE INDUSTRIES JOURNAL

Reve [1982: 522] found that information they collected from single informants on more perceptual, less concrete phenomena to have good validity and reliability. Nonetheless, we should note that several studies have criticised the reliance on a single informant to measure organisational characteristics, arguing instead for the utilisation of multiple informants within organisations.

For example, Phillips [1981] observed that high-ranking people compared to their counterparts at lower ranks, provided more reliable information for certain issues, but not for others. This author points out that different informants may have different information sets or may give different weights to different events/facts or developments.

The selection of the financial services industry as the basis for obtaining the empirical evidence was driven by the fact that multiple channels are common in the distribution of financial services. This situation is evident from the general and financial press, as well as from academic literature [see, for example, Easingwood and Storey, 1996]. Examples of the channels being used by financial services organisations include branch networks, direct sales forces, different types of intermediaries (Independent Financial Advisers, brokers, branded retailers), telephone, direct mail, direct response advertising, Internet, digital TV and supermarket outlets. In addition, we should note that the financial services industry is also characterised by increasing uncertainty, due to changes in the competitive, regulatory, technological and consumer arenas. Concomitantly, both new types of intermediaries and direct channels are being used or experimented with. Given the limited understanding of distribution in dynamic environments, the financial services sector provides a rich context for conducting research.

THE POTENTIAL BENEFITS OF MULTIPLE CHANNELS

Multiple channels can deliver a number of benefits (see Table 1), in particular a sales increase through better satisfaction of a company’s current customer TABLE 1 THE PROS AND CONS OF MULTIPLE-CHANNEL SYSTEMS

The Pros 3 † † † 3 3 3

Sales increase Extended market coverage Improved satisfaction of the customer Target Cost reduction More and better information Reduction of Business Risks

The Cons 3 3 3 3

Customer resentment and confusion Channel conflict Cost augmentation Loss of distinctiveness

MULTIPLE CHANNEL SYSTEMS IN SERVICES

5

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

target and also through an extended coverage of the market, a reduction in distributions costs, more and better information, and a reduction of business risks.

Sales Increase Extended Market Coverage. In general, one of the most important benefits is the extended coverage of the marketplace, i.e. ability to access segments of the market that were not previously reached by the company. Many markets are becoming increasingly fragmented and demanding. Companies are facing more experienced consumers, who are also wealthier and better educated.

Consumers are therefore becoming more demanding and the market fragmented. They want more finely tuned offers, i.e. they require products, prices, communication messages and a delivery format that more precisely serves their individual needs. The mass market is increasingly a rarity for most products.

Each distribution channel has a specific cost structure and certain capabilities that constrain the range and intensity of the goods and services it can provide, therefore influencing the needs it can fulfil and ultimately, the sales volume it can generate. Direct marketing channels, for example, can only provide low levels of personal contact, therefore being of limited assistance to some customers. These channels are not so effective at providing advice for complex products. This is probably one of the reasons why direct marketing channels have not made significant inroads into the distribution of personal pensions in the UK. High personal contact channels such as tied agents and direct sales forces still prevail in the distribution of such complex products. Nonetheless, the limited assistance of direct marketing channels is complemented with a very low cost structure that new entrants into the UK financial services industry, which do not have to face the hurdles of traditional channels, have been using to offer more competitive products. Consequently, different channels enable a company to develop more purposely tailored offers to access new market segments. At Wells Fargo, Internet customers are seven years younger on average, earn 60 per cent more than the median customer, and buy more financial services [Denton, 1997].

[Insurance company] [Developing new channels] in motor insurance is also a way to get into another segment of the market. So the Internet people . . . in particular Direct Line and Iron Trades are actually targeting a different segment by offering a monthly policy.

Therefore, a company that uses multiple channels can serve the different needs of additional segments, thereby increasing its sales volume and ensuring a company’s growth. It has been noted that several industrial goods producers

6

THE S ERVI CE INDUSTRIES JOURNAL

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

have been using multiple channels to target consumer segments and vice versa [Quelch, 1987].

Improving the Satisfaction of Current Customers. Adding new channels, apart from extending the offer to more customers in more effective ways, is also a way to meet the evolving needs of a company’s current customer target [Ennew, Wright and Watkins, 1989; Chandler, Goodrich and White, 1984].

Recently, consumers have become less loyal (as a result of mounting competitive industry, for example) and often demand more quality and 24-hour service. The growth in the number of partnerships in which both individuals work has reduced the available time to spend on shopping. Consumers have also been seeking more leisure time. Understandably, they are less willing, for example, to visit bank branches.

Additionally, their purchasing behaviour is becoming more sophisticated.

They may use the Internet or a call centre to obtain information, and still end up at the company’s branch, where they can find more effective information and feel reassured enough to execute the transaction. These trends, coupled with an increased penetration of telephones and computers, have allowed companies to explore alternative ways to best meet the evolving needs of their customers. Not surprisingly, banks have enabled their customers to submit their stock exchange orders through the branch network, the telephone, the Internet and even through home banking.

[Bank] [The telephone] was a conscious decision by us that people don’t have the time to go around. If they see features of our product they are more likely to phone up, just ask the details and deal with it through the post.

Hence, the utilisation of multiple channels enables companies to improve the satisfaction levels of their current customer targets, improving the probability of repurchases and decreasing the probability of defection to competitors.

Cost Reduction Another potential benefit provided by the utilisation of multiple channels is that companies can often increase their sales volumes while reducing their absolute or relative distribution costs. This is the case when the company substitutes low for high cost channels, or when the costs of distribution actually increase but yield a smaller ratio of costs to sales, given the lower costs of running some alternative channels.

Different distribution channels frequently imply different investment needs and operational costs. Implementing and running a direct sales force or branch network is much more expensive than running a call centre or

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

7

direct mail campaigns. As transaction costs over the Internet have been estimated to be one-tenth of the cost of branch transactions, the American bank Wells Fargo is expecting a cost saving of $84 million a year as soon as its online customers reach the one million figure. This bank is also obtaining lower cost/sales ratios for kiosk branches that it is installing at supermarkets [Denton, 1997].

In the UK, some estimates indicate that employing and keeping a teleoperative involves a 40 per cent cost saving when compared to keeping a salesperson in the field, and that a transaction over the phone is 66 per cent more cost effective than a transaction over the counter [Reed, 1997]. Some of the reasons why the distribution of products through remote channels can be very cost effective is that such operations require lower investment needs and can be settled at non-expensive locations, both in terms of land and labour inputs. This yields much lower operational costs when compared to, for example, branch networks.

Over recent years companies have been under pressure to cut costs, particularly selling costs, which have been escalating at a high and unaffordable pace. Since channels such as telemarketing cost only a small fraction of other channels’ costs, it is not surprising to discover that companies are increasingly replacing direct sales forces and branch networks with direct marketing techniques.

[Pensions company] [The multi-channel move is] a bit of a cost drive.

Digital TV isn’t the cheapest distribution channel at the moment but in time will be. There’s a [company name] pilot in [city] with some cable TV providers . . . So it is something we are looking at. We have to drive our costs down, we need slick administration procedures.

We need to try and push the administrative costs to the individual.

For example, we set up a web site where everyone can go and type in their details, send it to us electronically, . . . that saves time and administrative expenses.

Finally, the increased sales volumes emanating from a higher customer satisfaction and extended market coverage can also generate cost savings.

These savings come from larger-scale economies in production, research and development, marketing and with inventories. These are economies that can provide a valuable ‘strategic flexibility’ [Quelch, 1987: 52].

More and Better Information A company that moves along the multi-channel route is increasing its means to access the marketplace to collect information about consumers and the market. Information is increasingly acknowledged as having a potentially dramatic impact on competitiveness [Porter and Millar, 1985; Prahalad and

8

THE S ERVI CE INDUSTRIES JOURNAL

Hamel, 1990].1 The impact of information (and of information technology) can be seen at three different levels [Porter and Millar, 1985]:

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

.

.

.

Information often leads to changes in the industry’s structure and thus to changes in competition rules. In the financial services industry, the utilisation of direct marketing techniques enabled insurance companies to regain some channel power over intermediaries and to change channel relationships. Entry barriers were probably heightened as a consequence of the increased importance of information. But the new channel moves also allowed customers to do more shopping around, leading to a higher buyer power and, thus, to a lower price structure, as happened in the airline industry [see Reuer and Kearney, 1994].

Information can be a tool to develop advantages over competitors. With an improved marketing database, more refined customer profiles can be developed, enabling a company to develop more customised offers and to better define its targets. Besides providing more differentiating possibilities, information can also be used to increase a firm’s competitive scope and to reduce costs across value chain activities.

Information often leads to the development of new businesses, such as selling the processing of credit card accounts’ abilities to others.

Clearly, this information advantage will be more important in more information-intensive industries, where the ‘information content of the product’ and the ‘information intensity of the value chain’ are higher, such as the airline and the financial service industries [Porter and Millar, 1985]. In this context, it is important to recognise that an industry information sensitivity can be built by companies’ efforts, as the airline industry has demonstrated [Reuer and Kearney, 1994].

Reduction of Business Risks Another benefit accruing from the utilisation of multiple channels is a reduction of business risks. A company relying on a single channel, for example intermediaries, may find itself in a vulnerable position, having to respond to the strategies that the channel dictates. Such companies may find it difficult to influence the prices, product mix and promotions of its distributors, and to obtain support for the expensive activities involving new product launches. In addition, companies might find themselves in the hands of intermediaries because it is frequently the intermediaries who ‘own’ the customers, making the decision for them. These problems are more likely when intermediaries can choose from a wide variety of suppliers, who are therefore forced to compete aggressively.

MULTIPLE CHANNEL SYSTEMS IN SERVICES

9

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

Therefore, the utilisation of multiple channels can, to some extent, enable companies to cope with the above adverse consequences [Achrol, Reve and Stern, 1983]. This strategy enables firms to multiply their sources of revenue, reducing their vulnerability, vis-a`-vis other more powerful actors.

The probability of being held hostage by others is reduced.

[Unit trust company] [Intermediaries] have a lot of choice in general.

Between ourselves and the intermediaries, who are in charge of the relationship, we are the ones who are desperate for business from the intermediaries. So they hold the balance of power. They can give this business to somebody else. They make the decision for the consumer. But it’s more and more the case that as the direct business is growing they are losing part of it and bankassurers, big one-stop shop factories are increasing their share of the market. So intermediaries are under pressure.

The utilisation of multiple channel structures also enables companies to reduce business risks by allowing them to serve additional segments. This can be particularly important in the presence of volatile environments. In these circumstances, the needs and preferences of consumers, and the composition and size of segments change rapidly. Therefore, companies focused on a single channel will be in a risky position, whereas those companies relying on a multi-channel system will be in a safer position, because they have diversified their revenue sources.

[Pensions provider] We don’t know the way it will go. We can guess and so we need to have as many distribution channels open to us as possible.

If it turns out that everybody goes to IFAs for pensions, than we ought to make sure we can support IFAs. If it turns out suddenly that everybody goes to building societies than we need to have that channel open. So we must develop all these distribution channels waiting to see which one turns out to be the right one. If you are not ready and if it turns out that everybody buys pensions off the Internet, and you haven’t started developing your Internet capability, than you are already 6 months behind everybody else. And the market is just moving so quickly that you can’t afford that.

Other Benefits Finally, another benefit that multiple channels can potentially deliver is the facilitation of testing and fine-tuning of marketing strategies [Quelch, 1987]. With such a channel strategy, products can first be launched for one segment through one channel, and subsequently for others. This may enable

10

THE S ERVI CE INDUSTRIES JOURNAL

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

the company to correct product characteristics, its price or communication message, and therefore avoid costly mistakes and/or improve its marketing efficiency and effectiveness.

THE PROBLEMS WITH MULTIPLE CHANNELS OF DISTRIBUTION

As has already been discussed, developing multiple channels of distribution can help a company to increase its efficiency, effectiveness and adaptability and to fine-tune a firm’s offer to environmental changes. However, companies must temper these benefits with the potential disruptive effects and costs which such systems can generate [Cespedes and Corey, 1990; Easingwood and Storey, 1996; Moriarty and Moran, 1990]. In particular, we should emphasise customer resentment and confusion, channel conflict and an increase in distribution costs (see Table 1).

Customer Resentment and Confusion With a multiple channel system, companies run the risk of creating consumer confusion and resentment. The cause of this problem is the increased likelihood that the product will be marketed with different prices and/or service levels through different channels.

As has been mentioned before, different channels have different cost structures and have different capabilities. Consequently, distinct channels are likely to provide different levels of service and advice, and charge different prices. In the desperate search for sales growth, some companies end up selling the same product through different channels under very different terms and conditions. In this context, smart buyers can attempt to use the ‘discount’ channel and end up obtaining the same product (though yielding lower margins for the supplier) as those who buy through the more expensive channel. The latter are likely to get upset when they find out they could get the product cheaper. Even when products are adapted to different channels, which therefore have a stronger rationale for charging different prices, consumer confusion and resentment can emerge. Customers may not notice the slight differences in such products, namely because the satisfaction of their needs may not be significantly affected by such differences. Consequently, they are likely to feel ‘cheated’ and to voice their complaints, generating bad word-of-mouth and end up deserting the company.

[A multi-channel insurance company] We do get people writing in to the chief executive saying “why is it that the price I got from my broker is different from the price that you offered when I rang direct?” And we have to explain it.

MULTIPLE CHANNEL SYSTEMS IN SERVICES

11

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

Channel Conflict A major problem that can emerge with multiple channels is conflict, either inside or outside the organisation. Channel conflict occurs for many reasons, one of the most important being that there are multiple units competing for the same customers, therefore reducing the sales potential of existing channels. In addition, there is an increased likelihood that a customer will use different channels on different occasions, therefore creating the problem of ‘who owns the customer’. This is a serious issue given that latecomer channels might free ride on the initial channel’s efforts to win the customer.

Adding new channels to a distribution system usually implies changes in the roles and, consequently, in the compensation of existing channels, which is also likely to raise conflicts. Additionally, because distribution channels are not only economic but also social systems, commitments among channel members are also likely to generate resistance to change. Conflict can also arise due to the channels fighting for the company’s limited resources, namely in terms of promotional assistance or product development efforts. A further barrier is compensation systems that may incentivise entrenched behaviours.

Channel conflict can be internal and/or external.

Internal channel conflicts are likely to arise when a company with a direct channel adds other direct and/or indirect channels. In this situation, the preexisting channel will probably face a reduced sales potential, given the new competition it encounters from other internal units or from the new intermediaries used by the company. Multiple channels are also likely to lead to changes in the managerial support and resources received by internal units.

The lack of confidence in new internal units or in intermediaries’ capacities, and the fear of losing autonomy, may cause a reduction in motivation in the pre-existing channel and an increase in conflict. For example, managers have reported that it can be quite difficult for a salesperson to work alongside intermediaries who can have markedly different goals and motivations and can even sell competitors’ products [see Cespedes and Corey, 1990].

External channel conflicts are prone to surface when a company with an indirect channel adds other indirect and/or direct channels to its distribution system. Dissatisfaction among existing intermediaries is likely to occur, leading to inferior service levels and to a bias towards competitors’ products.

Some intermediaries may even terminate working relationships with the manufacturer, which may be seen as a competitor, often directly or indirectly (through other intermediaries) selling at lower prices and with lower service levels, thus reducing their own sales potential. These conflicts are more likely to arise and are particularly acute when a company’s previous indirect channel is a high-cost, high-service provider [Easingwood and Storey, 1996].

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

12

THE S ERVI CE INDUSTRIES JOURNAL

When General Electric decided to market its electrical products through competing retailers, a considerable number of its distributors terminated working relationships with the company, and relationships that had taken many years to develop went through significant turmoil [Frazier and Antia, 1995].

For companies simultaneously adding direct and indirect channels, both internal and external channel conflicts are likely to develop. For companies designing their distribution systems from new, internal or external conflicts are less likely to emerge, given that no expectations are broken, though preventive measures are required.

With both types of conflict the likely consequences of conflict include attrition and lack of co-operation among channel participants, lower service levels, intermediary preference towards competing products, degradation of communication flows and, ultimately, customer dissatisfaction and loss of market share.

Not surprisingly, the potential for channel conflict restricts the number of channels used by companies. Levi, which had made a great display of selling its jeans directly through the Internet in 1998, had to stop this channel because of strong opposition by its other retail channels [Anonymous, 2000: 16]. Life insurance companies in the UK have also been precluded from, or at least have been delaying the introduction of other channels, because of the effect on their direct sales forces.

[Unit trust company] If we were going to adopt direct channels in a more committed fashion . . . we would have other concerns, because we would set the direct channels in direct competition with brokers and intermediaries. It can be seen as a hostile move and damage these relationships . . . We don’t want to jeopardise the relationships with intermediaries.

[Unit trust company] [Multiple channels can create conflict with intermediaries] if you are not careful with the way you market to different channels. The classical example might be that you market to a client (direct) that is also a client of a financial adviser. You must be sure that they don’t get mailed. Otherwise the adviser would be straight on the phone ‘Hey, what are you doing, you are writing to my clients’. You have to be very careful, and conflicts tend to rise. It is a possibility, but it’s something that has not happened frequently because we are trying to be very careful about making sure that we do not upset existing channels.

Cost Augmentation Another problem is related to distribution costs. It was previously mentioned that one of the advantages accruing from the utilisation of multiple channels is

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

13

a reduction in distribution costs. For a number of reasons, however, instead of demonstrating an absolute or relative decrease, these costs may in fact increase.

The implementation of a multi-channel structure frequently requires investment needs. A building society that had previously been dealing exclusively through its branch network will face investment needs and an increase in operational costs with the establishment of, for example, a call centre and/or a sales force to deal with intermediaries. Costs will probably increase at least in the short term given the need to hire more employees to support, monitor and control the enlarged set of channels. These will require differentiated products and prices, support programmes, performance evaluation mechanisms and compensation schemes and give rise to different conflicts. The costs for coordinating a more complex structure are also likely to escalate.

The cost reduction may not take place as well because the replacement of high-cost by low-cost channels may fail to attain its aims. Banks and building societies, for example, have been investing in ATMs and call centres, hoping to reduce branch traffic and, therefore, prune overall distribution costs.

However, these cost savings have not been forthcoming, at least not to the degree that was expected. This outcome has two major causes.

Firstly, the implementation of additional channels often requires the development of new capabilities, which is a difficult task to achieve. The functioning of an organisation is stored in routines and involves tacit knowledge, ‘not consciously known or articulatable by anyone in particular’ [Teece, 1984: 106]. Hence the development of capabilities, which involves the process of acquisition, interpretation, evaluation, absorption and diffusion of new information, can be very difficult and costly.

Not surprisingly, many companies end up facing an increase in costs because the process of establishing and organising additional channels runs into difficulties. Firms frequently lack, amongst others, appropriate routines to: delineate the roles of each of the channels in the system; assess their individual costs and allocate human and financial resources among channels; appraise and reward the performance of different channels and to develop appropriate tailored support programmes.

[Bank] We have a superb call centre . . . but it just added extra costs.

[The activities of the call centre] so far have been primarily service banking, anticipating a reduction in customer branch traffic and hopefully saving money . . . What we haven’t at the moment is the selling skills base that we need. We have very confident people operating the telephone, but we must take salesmanship into the telephone.

Second, costs may also increase because customer behaviour may not evolve as expected. With the development of multiple channels, companies

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

14

THE S ERVI CE INDUSTRIES JOURNAL

frequently attempt to migrate low-value products and consumers from highcost/high-service channels to low-cost/low-service channels. However, this migration often finds a serious obstacle: the behaviour of consumers. Changing the behaviour of customers is not an easy task, particularly when it comes to behaviour that is deeply rooted. Such changes tend to occur in a piecemeal rather than a rapid fashion. The failure of many ‘dotcoms’ is a proof of that.

In addition, there is evidence that customers have been using these new channels in addition to more traditional ones, and not as an alternative. So, instead of reducing costs, a company may end up increasing its cost base.

Finally, it should be added that the possible need to adapt marketing offers to different segments may also lead to more inventory costs and less efficient production runs.

Other Problems A multi-channel system enables a company to increase its sales volume by allowing the company to serve additional segments. However, with this development a company also runs the risk of losing its distinctiveness, diluting its brand image.

[Pensions company] We are establishing the [company’s brand] in the IFA channel and we will not sell direct. [The company brand] is an IFA brand, it has a lot of brand value, and we don’t want to dilute it by trying to do it direct.

[Insurance company] We have separated the direct from indirect businesses. So if we keep these identities separate we can create a brand value and communicate that personality in a specific way.

[Pensions company] That is a brand we invented to sell exclusively through the intermediary.

DISCUSSION

Research on distribution channels can be divided into the two broad areas of design and management [Frazier, Sawhney and Shervani 1990; Rangan, Corey and Cespedes, 1993; Stern, El-Ansary and Coughlan, 1996]. Distribution channels design is concerned with how to build distribution structures that fulfil the essential role of creating value for consumers, involving issues such as distribution intensity, channel integration, development of multiple channels, intermediary structure and the allocation of work flows across the channel. The other area of channel research is focused on the management of channel relationships, involving questions, for example, about co-ordination mechanisms and the concepts of power, conflict and their sources and use.

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

15

The research on the drivers of multiple channels, which is urgently needed, is in the broad area of channel design, whereas many of the benefits and drawbacks of multiple channel strategies are issues of channel management.

Channel conflict, for example, may be a consequence of a company’s inability to define appropriate roles and compensation mechanisms. Nonetheless, we must be aware that channel design and channel management are interrelated issues. In this context, it has been recognised that channel management issues should be addressed at the channel design stage [Rangan, Menezes and Maier, 1992; Stern, El-Ansary and Coughlan, 1996; Stern and Reve, 1980; Stern, Sturdivant and Getz, 1993)] We now discuss several questions emerging from the potential benefits and drawbacks associated with multiple channel systems, and whose scrutiny at the channel design stage appears to be of extreme importance.

Are We Interested in Sales Growth by Extending Our Market Reach?

Multiple channels can provide extended market coverage. Consequently, this suggests that those companies with expansionary motives will be more likely to develop such channel strategies than those lacking ambitious market plans. In fact, it is the case that many building societies have been trying to expand their geographical scope through telemarketing operations, associated with direct response advertising and direct mail, and even through the Internet. These are channels that tend to cost a fraction of branch costs, one of the reasons why they are a preferred option for smaller organisations wanting to expand their geographical coverage. Similarly, many unit trust and pension companies were highly committed to increasing the weight given to direct marketing channels, which are predicted to have a major role in the distribution of unit trusts and pensions, given, for example, the level of competitive intensity, the reduction of charges that is being imposed by the government, and the increasing sophistication of consumers.

Expansionary motives do raise other questions, such as: do we have the capabilities to serve additional segments? The answer to this question is frequently influenced by the business the company is in. In financial services, for example, serving additional segments, namely through direct marketing channels, will imply, for example, product simplification, which is not difficult to achieve, given the nature of these services. For instance, several financial services organisations were observed to be pursuing multiple affinity channels, namely with hospitals, colleges, animal rights associations, football clubs, county councils and professional associations. Product modifications were minimal, involving at most amending the price and offering a few product options to fit each target group. In other sectors, however, company image and/or operational limitations might impose more restrictions on the segments that a company can effectively serve.

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

16

THE S ERVI CE INDUSTRIES JOURNAL

In addition, it is worth noting that many companies have established alliances to enable them to pursue their expansion ambitions faster and with fewer resources. For example, the Bank of Scotland and the Royal Bank of Scotland established ventures with major UK supermarket chains. These new channels proved to be highly cost effective, enabling RBS to add 400,000 new customers and Bank of Scotland 600,000 [Feuchtwanger, 1997], whilst building their position in England outside their home base.

[A multi-channel unit trust company] Growth is more important than profits. We can make money in the long run. Getting a critical mass is important, initially.

[A pensions company about its investment in direct marketing channels] There were segments of the market where we were not really penetrating and we can do that with multiple channels.

[Building society] We are aware that competitors will also be there [in the Internet] but we think it is an opportunity for us to slash costs and expand out of our immediate area without the costs of developing branches.

Hence, a company’s expansionary motivations might constitute a significant driver of the multi-channel route. In this context, companies will find it useful to address the following questions prior to the development of multiple channels: .

. . .

Can we achieve our desired sales growth by relying on our current targeted customers?

What are the channels used by alternative segments?

Can such segments give us significant sales growth?

Do we have the image and competencies to reach other market segments?

Can We Significantly Improve the Satisfaction of Our Current Customer Target through Multiple Channels?

Customer needs are evolving rapidly and competition is increasingly fierce.

This means that channel strategies that worked well in the past are less likely to continue satisfying a company’s customer target group. Consequently, it becomes important to frequently assess the extent to which the existing channel structure still delivers the same or more value to customers than competitors’ channels. Increasing satisfaction gaps can push the company into the multi-channel route. If companies fail to attend to the evolving needs of their customer base they put their survival at risk. In such highly competitive environments the levels of consumer switching behaviour tend to be higher because price competition is intense, and accessing and

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

17

comparing information on competitors’ offers is easy and virtually costless, as is switching between suppliers [Butaney and Wortzel, 1988; Porter, 1980]. This competitive pressure is the result of the liberalisation of financial services, the entrance of new players into the market, and pressure from the government to simplify products and reduce charges.

Companies use additional channels, not just to attend to the differentiated purchasing behaviours of their increasingly fragmented customer target, but also to improve the level of after-sales service provided to customers.

For example, companies have been making a more extensive usage of telemarketing, direct mail and even electronic mail to deal with inquiries and to extend the level of information provided to customers. Therefore, improving the satisfaction of a company’s target base might involve developing a wider range of channels to provide additional means with which customers can access their suppliers as well as adding extra selling capability.

In this context, it should be noted that the trend towards consumer multichannel usage has been taking place in a fiercely competitive environment, paralleled by technological developments. In competitive environments companies must emulate the moves of its competitors. As noted by Miller and Droge [1986], strong competition imposes the adoption of industry norms on companies if they want to escape extinction. Hence, when competitors launch new channels or service facilities, others have to follow soon.

This explains why the successful launch of eSchwab led Merrill Lynch and many banks to establish Internet brokerage services.

[Unit trust company] There is a very broad range of needs . . . some customers will require advice, others will be sophisticated enough to make decisions for themselves, or they want to have low cost and go by discount brokers . . . some will be prepared to pay for advice, some will want to go to discount.

[Pensions company] We use the telephone for after sales service, more than we did 4 years ago because the IFAs were very defensive of their customer base. They didn’t like the providers phoning the customer, but the customer is saying we want to contact the provider direct now and the IFAs also are having margin pressures and so some are trying to push more of the servicing to the supplier.

In summary, trying to improve customer satisfaction may provide the impetus to a multi-channel route. In this context, and following the above discussion, companies should address the following issues: . .

How are the needs of our customer target evolving?

Are they still satisfied with our current distribution strategy?

18 .

.

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

.

THE S ERVI CE INDUSTRIES JOURNAL

How can new/other channels/technologies improve the way we deliver value to our customers?

How can other channels improve our competitive position?

What new channels are competitors using and betting on?

Can Our Cost Structure Be Improved with the Utilisation of Multiple Channels?

The fact that multiple channels can help streamline a company’s distribution costs makes this a potent stimulus to the multi-channel route. In a highly competitive world, the search for efficiency is paramount. Companies are under pressure to compress all their sources of costs. As distribution can be a very important source of costs, the prospect of efficiency gains in this area can be an important stimulus to the multi-channel move. For instance, several hotel chains have discovered the low cost of the web as a distribution channel, and are planning to offer prices at a 10 per cent discount to the prices customers pay through online travel agencies [Anonymous, 2002].

This potential gain raises the following question: Why are some companies not efficient at a particular point in time? One reason can be historical.

In the UK personal pensions business, many companies used to have a direct sales force going door-to-door collecting just a few pounds a month.

The high charges enabled the utilisation of such a high cost channel, which also provided the high levels of service expected by customers. Today, competitive pressures have forced margins down so that a direct sales force appears as an increasingly inefficient and inappropriate sales channel. Not surprisingly, many companies have been downsizing and redesigning the role of their direct sales forces, as well as devising new channels capable of delivering the service in much more efficient ways. It is the long-term character of distribution channels that can be a source of distribution inefficiency at a certain point in time.

It is this potential reduction in distribution costs associated with the utilisation of multiple channels that has been driving banks and building societies to move low value-adding activities away from the branch network to channels such as ATMs, EFTPOs, telephone and other technologically related channels.

However, and as noted before, companies must be aware that such investments may in fact add to costs, because customers may fail to adjust their behaviours as intended, and the company may fail to appropriately manage the increased organisational complexity.

[Insurance company] I think we are looking for less costly channels, because out of the price you have to recover the cost of the claim, the cost of acquiring the business, and the cost of handling the business.

MULTIPLE CHANNEL SYSTEMS IN SERVICES

19

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

New channels, such as the Internet, have the potential to reduce costs.

Competitive pressure is so high that we have to look at new channels to be more efficient at delivering our product.

In summary, attempting to reduce the company’s distribution costs may constitute a powerful determinant of the multi-channel move. It would be sensible therefore to address the following issues: . . .

. .

.

What is our cost structure?

What is the cost structure of alternative channels?

Are there any other channels/technologies that could perform more efficiently some of the functions performed by existing channels?

Can we migrate low value-added products to lower cost channels?

What will be customers’ reaction to such a change in distribution channels?

What is the risk of cost proliferation with a multiple channel strategy?

Can We Use Information Generated through the Utilisation of Multiple Channels to Improve Our Business Performance?

Moving into multiple channels can provide a company with valuable information that has the potential to improve its competitive positioning. Adding a direct channel, for example, will provide direct access to consumers.

It also provides new opportunities for cross selling, which, in turn, can provide additional resources for investing in new channels. Hence, the benefits associated with the acquisition of new information can provide a significant impetus to the adoption of multiple channels.

In this respect it is relevant to note a recent trend associated with single product direct marketing insurance companies. Lacking sufficient scope economies, many of these have become brokers, selling the products of other companies, making use of their information to cross-sell products.

Companies like Direct Line and Virgin have added to their product range to enable them to increase cross-selling activity and make a more efficient use of their databases and operational capacities.

Information, properly interpreted, can lead to new company structures, better positioning, and to new businesses. Therefore, and in order to maximise the returns from a multiple channel strategy, companies examining the relevance of the multi-channel route should address the following key questions: . .

What new information can we gain by going multi-channel?

Can we improve our marketing proposition with this additional information?

20 .

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

.

THE S ERVI CE INDUSTRIES JOURNAL

To what extent can we use this information to improve the cross selling of our product range?

Can we use this information to market products from other companies?

How Important is it to Diversify Our Business Risks?

A multi-channel strategy can help a company reduce its dependence, and therefore the risks, associated with the utilisation of a single channel or the servicing of a small number of segments. To cope with this situation, an ‘organisation may develop alternative sources. By scattering its dependence, it prevents the concentration of power over it. It need not concede power to a single element of the task environment’ [Thompson, 1967]. Consequently, companies may reduce risk by moving towards multi-channels. Users of a single intermediary channel may feel particularly vulnerable, as it is the supplier that is most in need of business from the intermediary. In addition, the intermediary interacts with and owns the customer. The intermediary may even make the decisions for their customers, one of the reasons the customer may be more loyal to the intermediary than the service supplier.

Direct business, in contrast, has the advantage of giving the company more control over its customer profile.

Another reason why multi-channel adoption can help companies reduce their business risks concerns volatility amongst their target customers. The financial services market is changing fast, as a result of supply and demand drivers. Companies may find it difficult to spot the most important channels of the future, particularly for pensions and unit trusts. This uncertainty has been driving many companies to experiment with new channels, such as the telephone, Internet and digital TV. These experiments are important because they allow a company to learn about the technology, consumer behaviour and the environment. If the market turns in the opposite direction expected, the firm will be able to stop its initial investments and minimise its losses, which is essential if the company is to be in a position to make further investments [Day and Wensley, 1988: 7]. It is these learning devices that ensure adatability, which is key for learning organisations [Senge, 1995].

[Unit trust company] Advertising is expensive, but you can control your distribution, the big advantage, whilst IFAs can turn off the tap; they are not under our control. Direct gives you more comfort, more balance.

[Pension company] From an organisation perspective we wanted to diversify distribution. In particular, the IFA market is extremely competitive and intermediaries act as a controller of the manufacturer, forcing the price down and requiring a commission. And also they are in control of the customer, which is perhaps the biggest single issue for us. We have about [several million customers] who technically

MULTIPLE CHANNEL SYSTEMS IN SERVICES

21

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

don’t belong to us, because most of our business comes from IFAs. And that is quite a risky position to be in. We decided to move from a single channel to multiple distribution . . . The bigger reason is we wanted not to rely on IFAs. Hence, multiple channels can help a company reduce its dependence on particular channels and its vulnerability towards environmental change.

Companies need to address the following issues: . . .

.

Are we too dependent on intermediaries, or on any other channel?

What is the pace and direction of change in our customers’ needs?

Is our focused strategy putting us in danger because of changing customers’ needs?

What other new channels are on the horizon?

What is the Potential for Customer Confusion and Resentment?

A company that uses multiple channels risks increasing the level of intra-brand competition. In this context, building supportive relationships with different channels becomes more difficult. As a result, channels might start shedding duties and ride on other channels’ efforts, namely in terms of advertising, selling and servicing efforts. Discrepancies in prices, after-sales services and selling efforts are therefore more likely to develop between channels.

The co-ordination of distribution activities, which is extremely important for some products, becomes increasingly complex and difficult to ensure [Frazier, 1999], endangering a firm’s intended position [Cespedes, 1988; Frazier and Lassar, 1996].

In addition, when consumers are very concerned with a specific purchase, they tend to seek out more information as well as personal sources of information before making their purchase decisions [Bucklin, Ramaswamy and Majumdar, 1996; Schiffman and Kanuk, 1990], in order to ensure that the product fits their needs and that they do not lose important benefits.

Consequently, the range and quality of the output services provided by a specific channel can strongly influence the way customers’ needs are satisfied.

Not surprisingly, many companies still bet on personal sales channels for relatively complex products like pensions, whereas relatively simple products like motor insurance sell through both personal and direct marketing channels.

Notwithstanding, there are companies selling simple products through single channels. The reason is that they can then cultivate good relationships with intermediaries, so that the intermediary can understand the idiosyncrasies of the supplier. In a similar vein, some companies manage to pursue the multi-channel route by establishing different brands to avoid confusion.

22

THE S ERVI CE INDUSTRIES JOURNAL

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

[Building society] More complaints are coming through intermediaries than through direct channels. We end up paying compensation for their faults.

[Pensions company] Sales force is an expensive strategy but we need to have them because our customers need a high level of financial advice, they are not financially sophisticated . . . We see the telephone as dangerous especially with the new products that they don’t understand, like the stakeholder pension.

[Insurance company] They take time to learn our ways of doing things.

We want credit checks and also the education level . . . that is different to what all insurers want . . . so they have to learn how to do that.

In order to avoid alienating its customers, companies considering the multi-channel move should address issues such as: . . . .

. .

What is the complexity of our product?

Does it require extensive selling and servicing efforts?

Can we effectively adapt our offer for different channels?

What is the risk of our product ending up being sold in different channels with significantly different services and prices?

What is the potential for alienating our customer target?

Will we be able to adequately control the activities of the different channels in the distribution system?

What is the Potential for Destructive Channel Conflict?

Conflict among channels can adversely affect a firm’s outcomes. In this context, it is likely that companies anticipating seriously disruptive conflict will avoid the development of multiple channels. Consequently, potential channel conflict will constitute a powerful deterrent to the multi channel move, helping to explain why some companies do not move along the multi-channel route.

In fact, many companies were observed not to engage in multi-channel selling as this could jeopardise their relationships with their intermediaries.

However, other companies were actively pursuing the multi-channel route, though taking the necessary steps to avoid conflict, including differentiating products and prices that move through different channels, charging the same price when they sell the same product across channels, paying a commission to intermediaries when their customers buy direct, and even creating separate companies to deal with different channels. Many suppliers believe that intermediaries, though not liking their suppliers going

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

23

multi-channel, are increasingly reconciled to such a move, given the level of competitive intensity facing their suppliers in the UK financial services industry.

In addition, recall that obstacles and resistance to the evolution of the channel strategy may come from internal as well as external sources. A few companies were observed to have delayed the introduction of multiple channels, due to opposition from the channels due for downsizing.

However, it should be noted that this resistance only seemed to delay the introduction of additional channels, rather than constituting a perennial obstacle to the multi-channel route. At some point in time, companies seem to find the determination to make the costly and painful decisions associated with such changes in distribution strategy, including completely closing down their direct sales force.

[Insurance company] We have separated the direct from indirect businesses. One of the major reasons is that [company name] sells primarily through brokers and . . . there is a political sensitivity that . . . if you sell through insurance brokers and then if you sell direct to the public at lower prices, insurance brokers don’t like it. So, one way of avoiding that conflict is by creating different companies to deal with different channels.

[Pensions company] We are going from single to multi-channel. We have people here who don’t want to change . . . By next year our salesforce will be considerably smaller than what we have now. Affects people’s futures, so it’s real business.

A company considering the development of a multiple distribution system should address the following questions: . . . .

.

Are channels compatible with each other?

What is the potential for destructive conflict?

Can we manage the potential conflict?

Is it possible to demarcate each channel’s customers or functions in such a way that conflicts are not likely to appear?

Can we compensate channels for the economic losses they may suffer resulting from the development of a multiple channel strategy?

Do We Have the Capabilities and Resources Required by a Multiple Channel Strategy?

The development of a multi-channel distribution strategy tends to require additional channel capabilities. A company adding direct marketing channels

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

24

THE S ERVI CE INDUSTRIES JOURNAL

to its distribution structure will have, for example, to acquire expertise on building, mining and managing databases. Adding an outlet chain to a catalogue business will require capabilities related to selecting the location of outlets, merchandising, inventory management, sales staff training and so on.

Consequently, moving into multiple channels without the required capabilities is likely to result in less than optimal benefits and in a higher likelihood of the problems that can be associated with a multi-channel strategy actually happening, namely conflict, customer resentment and cost augmentation.

It is therefore likely that a company’s perception of its channel capabilities will influence its channel choices, therefore helping to explain why some companies take the multi-channel route and others do not. In fact, a number of companies have been making limited utilisation of additional channels because they lack people with expertise in needed areas. The lack of internal expertise isn’t a major concern, as long as a company has the resources to obtain such expertise outside, but this was not always the case.

The issue of financial resources is a key matter in its own right. Developing additional channels frequently brings additional investment needs, such as in building call centres or an Internet site enabling transactions online. Some smaller companies indicated that they were constrained by their limited size, but others were able to make extensive utilisation of multiple channels by organising their limited resources in very creative ways. For instance, some smaller building societies, lacking the financial resources to create adequate call centres, invested in direct response advertising in local newspapers, directing part of the resulting calls to their branch networks.

[Unit trust company] The basic problem with channel strategies and the development of a channel is that . . . we often have the ideas to develop channels but not the system to back that up. How reliable is your client and broker database, how easy is it for your systems to segment your database, how reliable is that breakdown, and these are top problems for fund managers. Our database is far more complex than we wanted . . . So it is very difficult for us to get our database accurate.

And that is a major drawback for our marketing strategy and business development.

[Building society] We are not doing any DRA at all. We appear in the best buy tables and that is our advertising at the moment.

[Unit trust company] We can’t afford DRA. If you are going to do something like this as a campaign you probably have got to spend £10 m a year, and you have to have people in the office answering the phone.

MULTIPLE CHANNEL SYSTEMS IN SERVICES

25

Consequently, and despite all the attractive benefits that a multiple channel strategy can yield, companies must scrutinise issues relating to capabilities and resources that are raised by the development of such strategies, namely: .

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

. . . . .

What are the capabilities required by other channels?

Do we have such capabilities?

Can we develop them in a reasonable time?

Can we acquire them in the market at an affordable price?

Do we have the resources to support such a channel move?

Can we creatively mobilise our resources to address the multi-channel challenge?

CONCLUSION AND DIRECTIONS FOR FUTURE RESEARCH

The development of multiple channel systems in services is becoming increasingly popular. Despite this popularity and the significant impact of such strategies, the drivers of these channel systems have not been examined in sufficient depth in the existing literature on services distribution theory.

Given the embryonic state of research into the emergence of multiple channels, there is a pressing need for both theoretical developments and empirical investigations. In particular, there is a need to develop guidelines so that managers can make more systematic decisions on multiple channel strategies.

This article has provided a discussion of some of the most important positive and negative outcomes that can be generated by a multiple channel strategy. A clear understanding of these issues is required in order to make informed channel decisions. In particular, it should help companies to identify the net benefits to be expected from such a distribution strategy and whether it is worthwhile to pursue the strategy.

In addition, it was demonstrated that the potential benefits and drawbacks that can be created by this channel strategy provide insights that can help understand why some companies adopt multiple channels and others do not, along with key managerial issues that a company should focus on and discuss prior to developing multiple channels. Therefore, these benefits and drawbacks should be incorporated into empirical research on the drivers of multiple channel strategies. In a similar vein, Erramilli and Rao [1993] have claimed that integration may have benefits and costs that have not been appropriately incorporated into research of distribution channels integration.

Research into multi-channels should also look at those theoretical perspectives that have been used in other channel design issues, and which may therefore have some explanatory power vis-a`-vis the adoption of multiple channels.

These include transaction cost theory, the resource-based view of the firm and the environmental uncertainty concept from the organisational – environment

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

26

THE S ERVI CE INDUSTRIES JOURNAL

interface literature. Transaction cost theory, with its concepts of asset specificity, behavioural uncertainty and environmental uncertainty, has been widely applied in research into channel integration and can therefore have a potential explanatory power over the multi-channel choice. In fact, this theoretical perspective has already been applied, though in a limited way but with some success, into the emerging research on multiple channels (see Dutta et al., 1995).

A growing research trend has been an assessment of the impact of a firm’s bundle of resources and capabilities to explain organisational performance, governance modes and the organisation of economic activity in general.

The resource-based view of firms shifts the attention away from a perfect market for factors assumed by transaction cost theory, to how firms develop different bundles of resources and capabilities over time. Despite it being at an early stage of development, and despite its measurement difficulties [Collis, 1991; Madhoc, 1997; Yeoh and Roth, 1999; Williamson, 1999], this perspective has already been used with some success to explain, in the distribution area, international entry modes.

The impact of the environment on an organisations’ structures, internal processes (e.g. information systems and decision processes) and interorganisational arrangements has long been acknowledged [see, for example, Aldrich, 1979; Lawrence and Lorsh, 1967; Perrow, 1970; Thompson, 1967].

As a consequence, a substantial amount of theoretical and empirical research has been undertaken to understand the organisation–environment interface.

The idea that the environment should affect organisational choices arises from the observation that ‘the maintenance of organisations depends upon some degree of exchange with outside partners’ [Child, 1972: 3]. This idea that organisations are influenced by and influence the environment has embedded an open systems perspective in research thinking, and can be very useful for understanding exchanges and governance issues in a distribution channels’ context. The concept of environmental uncertainty has in fact been considered to be a ‘key organising concept’ for analysing channel environments. In particular, Stern and Reve [1980] and Achrol, Reve and Stern [1983] considered environmental uncertainty to be a major dimension in their framework for analysing the environment of marketing channels, affecting issues such as channel control, co-ordination, conflict, integration and power-dependence relations, therefore constraining strategy choice. A question of particular importance is the impact of different types of environmental uncertainty, e.g., environmental heterogeneity, volatility, interconnectedness and conflict on multi-channel usage. In addition, it should be considered that the environmental uncertainty dimensions that have been developed within the organisational environment literature complement transaction cost economics, which takes environmental uncertainty as one of its major

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

27

explanatory variables. One issue that remains to be addressed is whether environmental uncertainty has effects only when associated with asset specificity, or has effects on its own.

Every theoretical perspective has strengths and weaknesses [Williamson, 1999], and because they offer different arguments to explain the same phenomena, they can be seen as competing perspectives. However, none can provide a complete account for explaining channel design issues, and for this reason they also complement each other.

Closely related to the present paper is quantitative research into the relationship between the number of channels and the various dimensions of channel performance. Channel performance is intrinsically linked to the accomplishment of organisational goals. Consequently, the potential contribution of different channel arrangements to organisational goals will be a major issue affecting choice over the number of channels in the mix.

In summary, this article has provided an overview of multi-channel design and management and highlighted a number of issues that will hopefully help researchers set their agendas. It is clear that there is much scope for future research into multiple channel strategies, and that such research can be expected to produce some valuable findings.

ACKNOWLEDGEMENT Dr. Filipe Coelho gratefully acknowledges a research grant from Fundac¸a˜o para a Cieˆncia e Tecnologia (Portugal).

NOTE 1. For example, the knowledge acquired by airlines through computer reservation systems allowed them to move into direct marketing distribution [Reuer and Kearney, 1994].

REFERENCES Achrol, Ravi Singh, Torger Reve and Louis W. Stern, 1983, ‘The Environment of Marketing Channel Dyads: A Framework for Comparative Analysis’, Journal of Marketing, Vol.47, Fall, pp.55– 67.

Aldrich, Howard E., 1979, Organisations and Environments, Englewood Cliffs, NJ: Prentice-Hall.

Amit, Raphael and Paul J.H. Schoemaker, 1993, ‘Strategic Assets and Organizational Rents’, Strategic Management Journal, Vol.14, pp.33–46.

Anderson, Erin and Ann Coughlan, 1987, ‘International Market Entry and Expansion Via Independent or Integrated Channels of Distribution’, Journal of Marketing, Vol.51, January, pp.71–82.

Anonymous, 2000, ‘Shopping around the Web’, The Economist Internet Survey, 26 February– 3 March, pp.16.

Bradach, Jeffrey L. and Robert G. Eccles, 1989, ‘Price, Authority, and Trust: From Ideal Types to Plural Forms’, Annual Review of Sociology, Vol.15, pp.97–118.

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

28

THE S ERVI CE INDUSTRIES JOURNAL

Bucklin, Louis P., Venkatran Ramaswamy and Sumit K. Majumdar, 1996, ‘Analysing Channel Structures of Business Markets Via the Structure-Output Paradigm’, International Journal of Research in Marketing, Vol.13, No.1, pp.73– 87.

Butaney, G. and L.H. Wortzel, 1988, ‘Distributor Power Versus Manufacturer Power: The Customer Role’, Journal of Marketing, Vol.52, January, pp.52–63.

Campbell, D.T., 1955, ‘The Informant in Quantitative Research’, American Economic Journal of Sociology, Vol.60, pp.339–42.

Cespedes, Frank V., 1988, ‘Control vs. Resources in Channel Design: Distribution Differences in one Industry’, Industrial Marketing Management, Vol.17, pp.215–27.

Cespedes, Frank V. and Raymond Corey, 1990, ‘Managing Multiple Channels’, Business Horizons, Vol.33, July–August, pp.67– 77.

Chandler, Donald G., James W. Goodrich and Duane E. White, 1984, ‘Developing Winning Distribution Strategies’, The Bankers Magazine, Nov.–Dec., pp.30– 40.

Child, John, 1972, ‘Organizational Structure, Environment and Performance: The Role of Strategic Choice’, Sociology, Vol.6, January, pp.2– 22.

Collis, David J., 1991, ‘A Resource-Based Analysis of Global Competition: The Case of the Bearings Industry’, Strategic Management Journal, Vol.12, Summer, pp.49– 68.

Day, G.S. and R. Wensley, 1988, ‘Assessing Advantage: A Framework for Diagnosing Competitive Superiority’, Journal of Marketing, Vol.52, April, pp.1–20.

Denton, Nick, 1997, ‘Click Here for a Great Deal: The Internet is Creating a New Model for Marketing Financial Services that Could Radically Alter the Industry’, Financial Times, 30 April.

Dutta, Shantanu, Mark Bergen, Jan B. Heide and George John, 1995, ‘Understanding Dual Distribution: The Case of Reps and House Accounts’, Journal of Law, Economics, and Organisation, Vol.11, No.1, pp.189–205.

Easingwood, Christopher and Storey, Christopher, 1996, ‘The Value of Multi-Channel Distribution Systems in the Financial Services Sector’, The Service Industries Journal, Vol.16, No.2, pp.223– 41.

Ennew, Christine, Mike Wright and Trevor Watkins, 1989, ‘Personal Financial Services: Marketing Strategy Determination’, International Journal of Bank Marketing, Vol.7, No.6, pp.3 – 8.

Erramilli, M. Krishna and C.P. Rao, 1993, ‘Service Firms’ International Entry Mode Choice: A Modified Transaction Cost Analysis Approach’, Journal of Marketing, Vol.57, July, pp.19– 38.

Feuchtwanger, A., 1997, ‘Business Day: Supermarkets are Queuing up to be the ‘Superbanks’’, Evening Standard, 28 November.

Frazier, Gary L., 1999, ‘Organizing and Managing Channels of Distribution’, Journal of the Academy of Marketing Science, Vol.27, No.2, pp.226– 40.

Frazier, Gary L. and Kersi D. Antia, 1995, ‘Exchange Relationships and Interfirm Power in Channels of Distribution’, Journal of the Academy of Marketing Science, Vol.23, No.4, pp.321–6.

Frazier, Gary L. and Walfried M. Lassar, 1996, ‘Determinants of Distribution Intensity’, Journal of Marketing, Vol.60, October, pp.39– 51.

Frazier, Gary L., Kirti Sawhney and Tasadduq Shervani, 1990, ‘Intensity, Functions, and Integration in Channels of Distribution’, in V.A. Zeithaml (ed.), Review of Marketing, Chicago, IL: American Marketing Association, pp.262–98.

John, G. and T. Reve, 1982, ‘The Reliability and Validity of Key Informant Data from Dyadic Relationships in Marketing Channels’, Journal of Marketing Research, Vol.19, November, pp.517– 24.

Klein, Saul, Gary L. Frazier and Victor J. Roth, 1990, ‘A Transaction Cost Analysis Model of Channel Integration in International Markets’, Journal of Marketing Research, Vol.27, May, pp.196– 208.

Lawrence, Paul R. and Jay W. Lorsch, 1967, Organisation and Environment: Managing Differentiation and Integration, Boston, MA: Harvard University.

Madhoc, Anoop, 1997, ‘Cost, Value and Foreign Market Entry Mode: The Transaction and the Firm’, Strategic Management Journal, Vol.18, No.1, pp.39–61.

Downloaded by [b-on: Biblioteca do conhecimento online UC] at 04:54 19 November 2014

MULTIPLE CHANNEL SYSTEMS IN SERVICES

29

Miller, D. and C. Droge, 1986, ‘Psychological and Traditional Determinants of Structure’, Administrative Science Quarterly, Vol.31, No.4, pp.539–60.

Moriarty, Rowland and Ursula Moran, 1990, ‘Managing Hybrid Marketing Systems’, Harvard Business Review, November–December, pp.146–55.

Perrow, Charles, 1970, Organizational Analysis: A Sociological View, London: Tavistock Publications.

Phillips, L.W., 1981, ‘Assessing Measurement Error in Key Informant Reports: A Methodological Note on Organizational Analysis in Marketing’, Journal of Marketing Research, Vol.18, November, pp.395–415.

Porter, M.E., 1980, Competitive Strategy: Techniques for Analysing Industries and Competitors, London: The Free Press.

Porter, Michael E. and Victor E. Millar, 1985, ‘How Information Gives You Competitive Advantage’, Harvard Business Review, July–August, pp.149–60.

Prahalad, C.K. and Gary Hamel, 1990, ‘The Core Competence of the Corporation’, Harvard Business Review, May–June, pp.79–91.

Quelch, John A. 1987, ‘Why not Exploit Dual Marketing?’, Business Horizons, January– February, pp.52–60.

Rangan, V. Kastury, 1987, ‘The Channel Design Decision: A Model and an Application’, Marketing Science, Vol.6, No.2, pp.156–81.

Rangan, V. Kastury, E. Raymond Corey and Frank Cespedes, 1993, ‘Transaction Cost Theory: Inferences From Field Clinical Research on Downstream Vertical Integration’, Organisation Science, Vol.4, No.3, pp.454–77.

Rangan, V. Kastury, A.J. Melvyn Menezes and Maier, E.P., 1992, ‘Channel Selection for New Industrial Products: A Framework, Method, and Application’, Journal of Marketing, Vol.56, July, pp.69–82.

Reed, David, 1997, ‘Direct Response TV: In the Line of Fire’, Marketing Week, November, pp.13.

Reuer, Jeffrey J. and Terrence J. Kearney, 1994, ‘Information Advantage and the Development of Direct Selling Strategies in the Airline Industry’, Journal of Marketing Channels, Vol.3, No.4, pp.1–18.

Schiffman, Leon G. and Leslie Lazar Kanuk, 1991, Consumer Behaviour, 4th ed., London: Prentice-Hall International Editions.

Senge, P.M., 1995, ‘The Leader’s New Work: Building Learning Organizations’, in H. Mintzberg et al. (eds), The Strategy Process, European Edition, London: Prentice Hall, pp.41–52.

Stern, Louis W. and Torger Reve, 1980, ‘Distribution Channels as Political Economies: A Framework for Comparative Analysis’, Journal of Marketing, Vol.44, Summer, pp.52–64.

Stern, Louis W., Adel I. El-Ansary and Anne T. Coughlan, 1996, Marketing Channels, 5th ed., London: Prentice-Hall International.

Stern, Louis W., Frederick D. Studirvant and Gary A. Getz, 1993, ‘Accomplishing Marketing Channel Change: Paths and Pitfalls’, European Management Journal, Vol.11, No.1, pp.1–8.

Teece, David J. 1984, ‘Economic Analysis and Strategic Management’, California Management Review, Vol.26, No.3, pp.87–110.

Thompson, James D. 1967, Organizations in Action, London: McGraw-Hill.

Williamson, Oliver E. 1999, ‘Strategy Research: Governance and Competence Perspectives’, Strategic Management Journal, Vol.20, No.12, pp.1087–1108.

Yeoh, Poh-Lin and Kendall Roth, 1999, ‘An Empirical Analysis of Sustained Advantage in the U.S. Pharmaceutical Industry: Impact of Firm Resources and Capabilities’, Strategic Management Journal, Vol.20, No.7, pp.637–53.