“Gap” and “Eul” refer to the first (甲) and second (乙) of the ten heavenly stems. In contracts, the party with the initiative is called the “Gap” and the opposite party the “Eul.” I have often been surprised to find that some professionals in their mid-to-late 30s, with a fair amount of work experience in Korea, regard abusing organizational power and position, or “gapjil,” as a way of getting work done efficiently. Gen Z would look at the many kinds of gapjil I experienced in college and the military in the 1990s, and in my career starting in the early 2000s, and see something absurd from a developing country. In this section, we will focus mainly on situations that can arise in B2B sales and distribution.
Let’s narrow it down to “manufacturers” and “distributors.” Who is the “gap”? The manufacturer or the distributor? Just as animals establish who ranks higher with a mere exchange of glances, in B2B relationships you can tell who the “gap” is the moment business cards are exchanged. It is not decided only by revenue or company size. I believe it is decided by who holds the capabilities or resources the other side needs at that moment. In B2B distribution this is called “Power”: the ability to make the other side do what it does not want to do. The easiest way is to own and control a resource the other side wants. In 2010, when tensions between Japan and China rose after a Chinese fishing boat captain was detained by the Japanese coast guard near the Senkaku (尖閣) Islands, China held a powerful resource Japan lacked: rare earths. China used its Power by restricting rare earth exports to Japan, and Japan had to back down.
Power matters in B2B distribution because it keeps either side from chasing profit at the other’s expense. If distribution is run around the distributor with no constraints, distributors and dealers will keep pushing for higher margins. Compared with the past, large Korean retailers have grown and gained formidable power. They can easily influence product suppliers. From the distributor’s side, if the manufacturer becomes too powerful and competition among distributors turns fierce, distributors are more likely to be pushed around by the manufacturer’s “gapjil” (abuse of power). The best approach is for both sides to recognize their interdependence, rein in one-sided profit maximizing, and work to maximize the shared benefit of the whole distribution channel.
Let’s look at the types of “power” that make gapjil effective.
1. Coercive power
Here are some examples of coercive power used by manufacturers on distributors and dealers. For dealers that fail to expand the market or grow sales and are unwilling to share market and customer information, you can make them earn less in various ways, that is, lower their profitability. You can charge them more than other dealers for the same products, or signal that you will cut their existing margin or commission rate at contract renewal. To improve profitability, a dealer must raise market share to grow sales or lower the price it pays the manufacturer, so gapjil that limits profitability is extremely painful. Another example of coercive power is cutting benefits that dealers have long received and come to take for granted: display tools, equipment and fixtures, training for dealer staff, sales incentives, advertising support, trade show participation support, back margin, and so on. When benefits they have always received shrink, that also becomes heavy pressure. “Delivery delays” are also a subtle form of gapjil that is hard to spot, as I heard directly from a sales manager at a large corporation. A salesperson in his 30s managing dealers told me that when a dealer owner in his 50s does not follow his lead, he politely cites various unavoidable reasons and pushes that dealer to the very back of the delivery queue until the owner gives in. Above all, the biggest threat is “termination of the relationship,” right? The higher the share of a dealer’s sales that comes from one manufacturer, the greater the pressure on that dealer.
A word of caution: avoid this kind of “coercive power” whenever possible. They say a sword is most fearsome in its sheath. Coercive power is meant for the last moment, when everything else has failed. If you use it lightly, the relationship will be badly damaged, perhaps beyond repair. However, take the “coordination game” from game theory, where everyone benefits if all cooperate and take the same action. If using coercive power to force change reliably produces a better outcome, people may in the long run even be grateful for the pressure. Japan’s push to receive data through smartphone apps instead of exchanging it on floppy disks might be one such example.
2. Expert power
Knowledge-based “expert power” is a good way for headquarters or the manufacturer to gain the upper hand over dealers. Except for a few department heads and executives, the person managing dealers at a manufacturer is usually younger and less experienced than the dealer owner. Without knowledge of the product and the industry as a whole, it is easy to feel pressured when building relationships and negotiating with dealers. So manufacturers must keep investing in training over the long term to build the expertise of their dealer-management salespeople. New product information, success stories from other markets, competitor analysis, new marketing & sales methods: only by clearly outpacing dealers in professional knowledge and building experience quickly can you gain the power to manage dealer owners effectively. But never hand this accumulated knowledge and experience to distributors generously and all at once. Release it in small doses, just enough to leave them wanting more, until they are hooked. Of course, this knowledge must deliver real performance for them. Then dealers come to depend on the expertise of the manufacturer’s sales organization and salespeople. That is the foundation for exercising “gapjil” effectively.
A word of caution. To use knowledge-based “expert power” properly with distributors, you need an objective view of reality and mutual trust. A manufacturer’s salesperson who lacks knowledge and experience can get entangled in various ways by a seasoned dealer owner and, before long, become a mouthpiece for the dealer’s interests at headquarters. That would hurt their standing in their own company. Manufacturer salespeople must recognize that, while the manufacturer and the dealer share the same interest in growing sales and expanding the market, their interests differ on the product supply price. Know where to draw the line.
3. Referent power (influence)
In English, this is called referent power. Suppose you are selling Korean-made chemical materials to Taiwanese semiconductor manufacturers. If your company has references showing massive volumes supplied to Samsung Electronics, SK hynix, Micron, and others, and your material applies an innovative new technology to improve existing processes and cannot be replaced, you hold real referent power (influence). Even a small booth in the corner of an overseas trade show will draw a line of visitors. Now you get the enviable task of choosing the best distribution partner. Conversely, if you have few references and the new technology is unproven in the market, your referent power (influence) is weak. In that case, you can work through a distributor with dominant market reach, or look for a small but strong distributor with outstanding “expert power.” In those relationships, the manufacturer becomes the “eul.”
The relationship between luxury brands and department stores makes this easier to understand. Hermès, Louis Vuitton, and Chanel, known in Korea as “Er-Ru-Sha” (Ermes, Rui Vuitton, Shanel), diversify their luxury distribution channels in the Korean market while keeping tight control over them, preserving an air of exclusivity and scarcity. For department stores, luxury makes up a growing share of sales and has a huge effect on the store’s own brand, so the two sides are surely competing fiercely for referent power (influence). Who holds the upper hand, the luxury brand or the department store?
4. Legal power
In B2B distribution, legal power is a critical factor. The biggest source of conflict between manufacturers and distributors is usually a dispute over territory. Svenu, launched in 2013 by Hwang Hyo-jin, a well-known StarCraft BJ on AfreecaTV, entered the apparel market quickly with very aggressive marketing. Setting aside quality problems and design plagiarism, I believe the biggest reason the business folded in 2016, just three years later, was distribution. The company dumped products at rock-bottom prices through channels other than its properly contracted dealers. That is an extreme case of a CEO’s moral hazard and outright illegality, but similar problems do come up: a manufacturer sells the same product directly through another channel during the period and in the region covered by a dealer contract, or a dealer resells products it received at a discount as promotional stock for one period and region in a different region. That is why a legal contract is a good way for both sides to exercise their rights and hold each other accountable for violations. When a manufacturer’s referent power (influence) is low, it will want a longer contract term; when its referent power grows, it will be tempted to shorten the term and use coercive power to adjust the dealer’s margin rate.
Whether it is responding to anti-dumping duties, protecting the manufacturer’s patents, invalidating a competitor’s patents, or asserting or challenging trademarks, the legal team’s role in contract negotiation, risk management, intellectual property protection, and dispute resolution will keep growing. Manufacturers need to prepare ahead for the new standards, laws, and regulations emerging to protect legal rights and interests and avoid risk.
To be continued