Business
The Story
The atmosphere inside the Sales Corridor of an MNC beverage company became immensely tensed because the five medium scale distributors from the same region had severely threatened Regional Sales Manager (RSM) and Territory Commercial Manager (TCM) for immediate resignations from distribution agreements. The TCM was impatiently waiting for arrival of all concerned Area Sales Managers (ASM) and Market Development Officers (MDO) along with RSM to find the solution of grave cut-pricing issue emerged during past six months, which had subsequently ruined the confidence of major distributors who missed their monthly, quarterly and semi-annual sales targets during 2014.
The past complaints and negotiations had all proven meaningless because the issue still prevailed and the distribution partnership with the MNC had actually become a loss-making business. The problem all started due to 10% extra discount offered to certain key accounts, which started forwarding the discounting advantage to small retailers and wholesalers through their Customer Development Centers. The market deemed this discounting benefit as ‘cut-price’, which although skyrocketed sales of key accounts but adversely affected distributor interests. Consequently, the sales from distribution channel reduced substantially because of lower retail demand. Distribution partners frequently complained and negotiated with TSM and RSM for revision of discounting strategy and sales volume for respective key accounts followed by provision of extra incentives to restore distributors’ competitiveness in market. Despite several assurances during preliminary negotiations, the grave issue was still unresolved that in turn compelled distributors to form an alliance / coalition for negotiations with MNC because they share a common interest. The distributors would like to negotiate on complete elimination of over-discounting to key accounts and increase in distributor incentives otherwise they would cease beverage acquisition from MNC and submit resignations. The atmosphere in corridor’s meeting room was quiet because the perturbed TSM, RSM and ASMs were genuinely aware of the high bargaining power of multi-party distributor alliance. Should MNC adopt integrative or distributive negotiation strategies to retain its existing distributors?
Analysis Report
The core problem of the aforementioned case is that the MNC’s senior sales managers implemented an incorrect discounting strategy by offering significantly higher discounts to certain key accounts, which then forwarded those discounts to small retailers and wholesalers to enhance sales figures. It should be highlighted that key accounts use approach of over-the-counter sales compared to the distributors that use shop-to-shop coverage model. Hence, the distributor’s cost structure is entirely different from key accounts because it maintains warehousing, logistics and sales facilities to accomplish distribution targets. The distribution system designed for channel partners could only lead to profitability when the distributors achieve their targets. Hence, the cut-pricing issue is genuinely an outcome of company’s flawed sales strategy, which adversely affected relationships with channel partners.
It should also be stressed that the concerned TSM and RSM failed to resolve distributors’ woes and complains. The negotiations between sales personnel and channel partners routinely took place regarding procurement strategies, revision of targets, benefit of schemes, retailer issues, trade discount claim and others. However, the core issue was not addressed because until then the multi-party distributor alliance was not formed. It is imperative that ASM, RSM and TSM respect their valued partners and secure their business interests to enhance market penetration and business development. However, it could be inferred that the MNC sales personnel were considering distribution partners as investors and a source for primary target accomplishment. In fact, the failure of managers to negotiate effectively on the cut-pricing issue also adversely affected their performance appraisal and company growth because the distributors’ target deficit simultaneously translates into deficit of managers.
The researcher would like to highlight that the ideal strategy for MNC was integrative negotiations for retention of existing distributors that have strong market awareness, reputation and channel network. The negotiations between alliance of five distributors and MNC sales team initiated with a two-point agenda that the incentives of distributors must be increased and the discounting strategy for key accounts should be reversed. In other words, the unity among distributors increased their bargaining power and forced the sales team to use integrative negotiation tactic because otherwise the channel partners had straight-forwardly announced resignations. In fact, it should also be revealed that MNC sales team initially opted for a distributive negotiation approach to bargain secretly with two distributors and settle a side agreement by offering some cash incentives; however, the alliance members guarded their dignity and countered the MNC tactic by refusing any partial settlement offer. In this way, the alliance rejected distributive strategy and forced the company to use integrative negotiation approach for revitalization of distribution relationships.
Hence, the managers finally initiated the integrative negotiations to communicate MCN’s commitment for relationship sustainability and to restore partners’ business confidence by addressing genuine needs and interests. The negotiations resulted in revision of distributors’ cash and non-cash incentives, reversal of current-year sales targets and reduction in discount percentage through exchange of information and ideas with channel partners for mutual gains.
