The Power of Trust in Manufacturer-Retailer Relationships

1. The Power of Trust in Manufacturer-Retailer Relationships Presented By: Suna Eric Joe Paul Shanina

2. Overview: • Do Manufacturers and Retailers that trust each other generate greater profits? • Is trust stronger than fear? • Benefits, limits, and creation of trust • Power vs. Trust relationship

3. Shift of Balance of Power: • Retailers now control access to consumers, due to rise of: • Specialty superstores/Mega retailers • Buying Alliances • Mergers & Acquisitions • Since 1988: Survey on Manufacturer-Retailer relationships • Is the use of fear and intimidation the most effective way to manage the relationship? • Or does trust produce greater benefits?

4. Survey Result: Exploiting power may work in the short run, but it is Self-defeating in the long run. 3 Main Reasons: 1. “Exploiting power unfairly can come back to haunt a company if it’s position of power changes.” 2. “When companies systematically exploit their advantage, their victims ultimately seek ways to resist.” 3. “By working together as partners, retailers and manufacturers can provide the greatest value to customers at the lowest possible cost.”

5. Nature of Trust • Dependability • Honesty • Leap of Faith

6. Blind Trust • Study conducted on a major replacement auto-part manufacturer and 429 of its retailer • 218 retailers that the manufacture had a high level of trust for, distrusted the manufacture

7. Benefits of Trust • Commitment • Higher Sales • Goodwill • Realize the full potential • Lower monitoring cost • “Going the extra mile”

8. Limits of Trust • Both parties have to participate • There will be areas of difference • The relationship is not exclusive • Rarely all-encompassing

9. Effects of Interdependence High Organization’s Dependence Low Low Partner’s Dependence High

10. Creating Trust • Distributive Justice • How the pie is shared • Procedural Justice • Perceived fairness of powerful party’s process for managing the relationship

11. Distributive Justice • Perceived fairness of the outcomes received • How the benefits and burdens are divided between partners • Create long-term partnerships • Marks & Spencer example

12. Principles of Procedural Justice • Bilateral Communication • More powerful party is willing to engage in open communication with its partner • Marks & Spencer-CEO meets counterparts in supplier’s organizations periodically • Keycards to home office are given to suppliers • Trips with suppliers to trade shows to enhance mutual understanding and identify new ideas together

13. Principles of Procedural Justice(continued) • Impartiality • The more powerful party deals with channel partners equitably • Marks & Spencer attempts to ensure that everyone gets a fair share of the business when it has multiple manufacturers supplying a single product category • Tries to minimize major changes in volume of business awarded to suppliers from year to year • A sensitive issue-lawsuits accusing manufacturers of not using the same pricing and promotion schedules for all retailers

14. Principles of Procedural Justice(continued) • Refutability • The more vulnerable partner can appeal the more powerful party’s channel policies and decisions • Dealer advisory councils where manufacturers can air their concerns • Marks & Spencer has a rule where their supplier can always appeal their decision to a higher level in the company

15. Principles of Procedural Justice(continued) • Explanation • The more powerful party provides its partners with a coherent rationale for its channel decisions and policies • Marks & Spencer explains its policies and actions to its suppliers

16. Principles of Procedural Justice(continued) • Courtesy • Treating a partner with respect is crucial for building the interpersonal chemistry that is the foundation of successful manufacturer-Retailer relationships • Relationships between companies are actually relationships between people on either side • Affects the way personnel are assigned to accounts • “Two Tough Companies Learn to Dance Together”

17. Power Game Create Fear Pursue Self-Interest Avoid dependence by playing multiple partners by raising their switching costs Retain flexibility for self but lock in Partners by raising their switching costs Trust Game Create Trust Pursue Fairness Create interdependence by limiting the number of partners Both parties signal commitment through specialized investments, which lock them in Power Vs. Trust

18. Primarily unilateral Communication Coercion Closed or Formal, detailed & short-term Use competitive bidding frequently Reduce conflict through detailed contracts Resolve conflicts through the legal system Bilateral Communication Expertise Open or Informal long-term Check market prices occasionally Reduce conflict potential by selecting partners with similar values Resolve conflicts through mediation or arbitration Power Vs. Trust(continued)

19. Moving from Power Game to Trust Game • Past practices have to be unlearned before a new relationship based on trust can begin • Select partners that bring distinctive competencies and similar values • Establish a flexible and informal relationship • Look for opportunities to benefit everyone • Encourage employees to build personal ties

20. Reorganizing • Recruit people who will work well with other channel members • Fire those who do not work well with other channel members • Replace power driven employees with relationship managers • Develop incentive and performance programs • Joint educational Programs

21. “Success in rapidly changing environment will go to those who learn to make the leap of faith”