Channel conflict between a manufacturer and their channel partners, or between channel partners themselves, can be a major source of frustration for all parties. While the complete elimination of channel conflict may not be a viable goal, some action to mitigate the worst of the impact is certainly required. Clear differentiation between channel partners and a clear focus on each partners unique value proposition for customers may be the key.
According to Kaplan and Norton “Strategy is based on a differentiated customer value proposition. Satisfying customers is the source of sustainable value creation.” Clearly any company that is going through a transformational strategy must also transform its value proposition in order to communicate this new relevance to customers.
A useful tool for conceptualising the value proposition for your company is something called the “Value Proposition Canvas” (see image below). On the right hand side is a chosen market segment, with the typical customer needs (jobs) in that segment along with gains they are seeking and pains they wish to void. On the left hand side are the company’s product and services, interpreted in the form of the gain creators and pain relievers which they can bring to that specific segment. The tool can be used to evaluate multiple market segments to understand how the company’s solutions might be most effective as Gain Creators or Pain Relievers for each particular niche.
Once the leadership team have identified a strong “fit” between both sides, they have the basis of a strong value proposition for the company.
It is critical that the transformational strategy is re-interpreted into the language of a new value proposition so that both staff and customers can understand and communicate it in terms of how it provides gains and solves pains for the customer.
According to the National Federation of Independent Business (NFIB), over the lifetime of a business only 39% are profitable, another 30% of businesses achieving break even, the other 30% lose money and 1% cannot say. Clearly, making a poor strategic choice for the direction of the business transformation will have disastrous consequences.
In order for the executive team to make the best choice for the company they need to formally evaluate their strategic options, and determine which of these is the best “strategic fit” for the company going forward.
The Ansoff Matrix (also known as the Product/Market Expansion Grid) developed all the way back in 1957 still provides business leaders with a quick and simple way to think about the risks of growth. This tool allows the VAR leadership team to compare options from the perspective of Current versus New Products, and Current versus New Markets. The matrix is a useful way to analyse strategic options in terms of their risk profile.
The Matrix shows four strategies a VAR can use to grow. It also helps you analyze the risks associated with each one. The idea is that, each time you move into a new quadrant (horizontally or vertically), risk increases. This helps the channel sales leadership team weigh up the risks of each strategy and decide which strategic option best matches their risk appetite.
The tool outlines four generic strategies for growth:
Market penetration, in the lower left quadrant, is the safest of the four options. Here, you focus on expanding sales of your existing product in your existing market: you know the product works, and the market holds few surprises for you. This is not a serious option for a VAR seeking to transform their business.
Product development, in the lower right quadrant, is slightly more risky, because the VAR is introducing a new product into their existing market. It may be a product that they have developed themselves, or simply taking on new products from a different Vendor partner. This strategy also encompasses new licensing models e.g. selling the same product on a subscription model rather than the traditional licensing model.
With market development, in the upper left quadrant, the VAR is putting an existing product into an entirely new market. You can do this by finding a new use for the product, or by adding new features or benefits to it. For example, many ERP systems were once far beyond the budget of SME’s, but new licensing models made them more affordable for the “mid-market”.
Diversification, in the upper right quadrant, is the riskiest of the four options, because you’re introducing a new, unproven product into an entirely new market that you may not fully understand.
A word of caution must be highlighted for the expansionary channel partner who decides to pursue one of the higher risk strategies. They risk the all too common flaw of channel partners of becoming a “Jack of All Trades and Master of None”. This is the ultimate VAR-killer, as it leads to an undifferentiated market position and a “Me-Too” value proposition.
A major driver of channel conflict is the simple lack of clear differentiation between channel partners. Manufacturers need to help their channel partners understand the differentiated value that they bring to the market, and clearly carve out their own space in the marketplace. Using some of the above strategies will help channel partners to compete in market niches where they have clear differentiation based on their unique value proposition.