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Retail Pricing Strategies in Recession Economies: The Case of Taiwan

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In a recession economy, consumers tend to be more sensitive about price, and firms have difficulty obtaining necessary resources for effective pricing. However, previous studies into pricing appear to overlook the possible effect of economic environment on the effectiveness of a pricing strategy. By observing the current recession and the resultant price war in Asian countries, the authors examine marketing decisions by retailers in a recession economy. The authors propose a contingent model, based on organizational resources and consumer price consciousness, to guide the examination of the strategy-performance bond. The results show that only resource-abundant retailers are able to use strategies proposed in this study to thrive in a recession. A value-centric strategy outperforms all other approaches.
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82
Ting-Jui Chou and Fu-Tang Chen
ABSTRACT
Submitted December 2002
Accepted October 2003
© Journal of International Marketing
Vol. 12, No. 1, 2004, pp. 82–102
ISSN 1069-031X
In a recession economy, consumers tend to be more sensitive
about price, and firms have difficulty obtaining necessary
resources for effective pricing. However, previous studies into
pricing appear to overlook the possible effect of economic envi-
ronment on the effectiveness of a pricing strategy. By observing
the current recession and the resultant price war in Asian coun-
tries, the authors examine marketing decisions by retailers in a
recession economy. The authors propose a contingent model,
based on organizational resources and consumer price con-
sciousness, to guide the examination of the strategy–
performance bond. The results show that only resource-
abundant retailers are able to use strategies proposed in this
study to thrive in a recession. A value-centric strategy outper-
forms all other approaches.
The purpose of this article is to consider how retailers
respond to severe price competition in a recession economy.
Many events can trigger a regional recession. Examples in
Asian countries in recent years are the Asian financial crisis
from 1997 to 1999; the terrorist attack of September 11, 2001;
and the recent outbreak of severe acute respiratory syndrome
(i.e., SARS). Each has played a part in slowing a national
economy. Evidence from the Great Depression in the 1930s
suggests that the economic environment plays a key role in
the ability of consumers to spend (Flacco and Parker 1992) or
to consume (e.g., Hill, Hirschman, and Bauman 1997). These
external causes exert great influence on the mentalities of
consumers, who respond to the marketing stimuli provided
by the firms and form the prevailing consumption culture
(Lastovicka et al. 1999).
In a prosperous economy in which aggregate consumer
demand is high and consumers are willing to splurge, it
makes sense for managers to place nonprice tactics at a
higher priority than pricing. However, in an economic down-
turn, the rapidly shrinking market share that results from
insufficient demand might draw practitioners to consider a
predatory-pricing strategy (Cunningham and Hornby 1993,
p. 53). Indeed, the economic situation plays a key role in trig-
gering such a variety of strategies. When there is an abrupt
downturn, industrial supply must adjust itself to the
decreasing market demand. However, because of the down-
Retail Pricing Strategies in Recession
Economies: The Case of Taiwan
Ting-Jui Chou and
Fu-Tang Chen
83
Retail Pricing Strategies
ward rigidity in rectifying the level of supply, it is not
uncommon that the demand fails to meet the supply. Severe
competition in the marketplace becomes unavoidable and
eventually causes retail prices to tumble. The continual
decline in retail price can force inferior players to withdraw
from the marketplace. Decreasing supply may not be able to
prevent the continual fall in retail price that is due to the
downward trend of consumer demand. Such market disequi-
librium causes cutthroat price competition. The Japanese
refer to this as “price destruction” or Kakaku hakai (squall),
which shows the enormous power that such price wars have
in destroying economic systems. In this study, we use the
term “price destruction” to express this extraordinary state
of price competition.
There are two forces that moderate how effectively firms can
respond to this bitter economical ordeal. For the supply side,
many researchers have stressed the role of organizational
resources as the mainstay in strategic marketing (e.g., Hunt
and Morgan 1995, 1996; Wernerfelt 1989). A company’s
strength in both tangible and intangible resources is among
the key issues that must be taken into account for effective
pricing decisions (Rao, Bergen, and Davis 2000). For the
demand side, consumer price sensitivity and brand aware-
ness may be influential in deciding the extent to which firms
will use a predatory-pricing strategy. On the one hand,
predatory pricing may attract price-sensitive consumers. On
the other hand, price is often used as a cue for consumers to
judge brand equity (Teas and Agarwal 2000; Yoo, Donthu,
and Lee 2000). Thus, consumers may perceive a reduction in
price as a reduction in product quality.
Meanwhile, consumers tend to exhibit different levels of
price sensitivity across market segments (Rao, Bergen, and
Davis 2000). Such variations in consumer price sensitivity
may provide a strategic cue for organizations that operate in
different markets to prioritize pricing tactics. Both organiza-
tional and market factors influence pricing decisions. Orga-
nizations in different market conditions display variations in
pricing behavior to respond to the strategic coupling of their
competitors (Sudhir 2001).
It is often difficult for firms to obtain the necessary resources
for effective pricing in a sluggish economy. Previous studies
on pricing appear to overlook the possible effect of economic
environment on the effectiveness of a pricing strategy. This
study examines the strategic responses of retailers to price
destruction caused by a recession economy by observing the
current recession and the resultant price competition in
Asian countries. As an environmental factor in strategic mar-
keting decisions, price destruction is an important issue that
firms in a recession economy are unable to escape. On the
84
Ting-Jui Chou and Fu-Tang Chen
one hand, organizational resources are a key determinant for
selection of suitable strategies; on the other hand, the possi-
ble responses from consumers affect the outcomes. This
study examines a strategic response framework to price
destruction as a compromise between organizational
resources and market characteristics. We examine the effec-
tiveness of such pricing strategies using empirical fieldwork.
As we stated previously, a recession economy can cause
severe price destruction and can force retailers to react
strategically. Resource-abundant firms may use a predatory-
pricing strategy to maintain their predominant position in a
market, but resource-scarce firms must join the price-
destruction war. However, even for the wealthiest firms,
aggressive pricing may not be the solution for success in a
recession economy. Many studies have pointed out that the
overuse of price as a promotional tool may damage the pres-
tige of the brand (Chapman and Wahlers 1999). It is danger-
ous for firms to rush into price competition without consid-
ering the possible side effects (i.e., the consumer perception
of the quality of products or services). Firms need to consider
both internal and external influences on pricing when form-
ing a sustainable strategy to cope with price destruction.
To deal with the price destruction caused by a falling econ-
omy, the most prestigious brands may be able to resist price
attacks by competitors and preserve their competitive edge.
Nevertheless, most companies need to participate in a price
war. The most cost-efficient companies may be able to sur-
vive by driving the firms that are short on resources out of
the market (Guiltinan and Gundlach 1996). It is understand-
able that resources, whether intangible or tangible, are the
key for companies to outperform their competitors during
episodes of price destruction. Thus, as stated by the
resource-based school of thought, a resource-based view
should replace the product-based view in marketing decision
making (Wernerfelt 1989). A resource-based approach to
marketing suggests that a long-term cultivation of corporate-
level resources and capabilities will bring the organization a
sustainable competitive advantage (Barney 1986). Indeed,
since the 1960s, models of strengths, weaknesses, opportuni-
ties, and threats have been widely applied to strengthen
organizations’ competitive advantage by promoting both
environmental analyses and resource-based strategies. Firms
make a constant effort to use internal strengths to seek exter-
nal opportunities and to eliminate potential damages from
outside threats.
Several studies have tried to provide taxonomies of organiza-
tional resources. Coyne (1986) conceptualizes organizational
resources as having certain assets and as being able to carry
out strategies. Subsequent studies (e.g., Chatterjee and Wern-
LITERATURE REVIEW
Internal Influences on Pricing
85
Retail Pricing Strategies
erfelt 1991; Grant 1991) further define organizational
resources as assets and competences, where assets can be
tangible or intangible and competences embrace both indi-
vidual and organizational capabilities. An organization is
able to outperform its opponents when these maintained
resources are significant, rare, inimitable, and ignored by
others (Tampoe 1994). Hunt and Morgan (1995, 1996) echo
this view in a much more concise framework. In their
resource-advantage theory of competition, organizational
resources are based on dimensions of relative resource-
produced value and relative resource costs. Nine distinct
groups of organizational resources are strategically identified
as having varied values. Firms are advised to select resources
that are compatible with themselves and that enhance their
capability in acquisition and cultivation in order to build up
long-term competitive advantage.
Although the availability of organizational resources is an
important perspective in the consideration of an aggressive
or predatory-pricing strategy, the demand-side effects of such
a strategy are another concern. Most consumers are sensitive
to price. As Mazumdar and Papatla (2000) note, consumers
tend to use reference price as a supplementary guide for con-
sumption decisions, in which price information is accumu-
lated either from previous experiences or from comparisons
made among available brands. As long as consumers use
price as an index for shopping, firms can use price to influ-
ence consumer behavior.
For example, Miller, Ogden, and Latshaw (1998) show how
price can be used to trigger consumer behavior. In their
analysis, they manipulate price and product features to
influence consumers’ preferences for an assortment of prod-
ucts. They find a negative connection between price level
and willingness to buy. However, when a product features
key values that fit with consumers’ needs, firms can raise the
price while keeping a preference for the product stable.
Chaudhuri and Holbrook (2001) provide a similar observa-
tion: Brand affect resulting from a wanted hedonic value can
increase loyalty to the brand and thus allow for more room
for price to rise. Indeed, for a costly purchase, consumers
tend to believe that a price is fair when they agree with it. To
some extent, price can be subordinate to product worthiness
in the consumption decision.
In contrast, reference price can also be used to signal product
quality (Teas and Agarwal 2000; Yoo, Donthu, and Lee 2000).
Chapman and Wahlers (1999) report a positive link between
reference price and consumers’ opinion about product qual-
ity. Although a high-priced product (the actual price) can
require a certain amount of sacrifice on the part of con-
sumers, it is equally true that the higher the price (reference
External Influences on Pricing
86
Ting-Jui Chou and Fu-Tang Chen
price) of a product, the greater is the esteem in which con-
sumers hold the product. Therefore, perceived value is the
trade-off between perceived sacrifice and perceived prestige.
Yoo, Donthu, and Lee (2000) also observe that a frequent use
of price deals results in an unfavorable quality perception
and blocks brand associations and awareness. These findings
echo traditional beliefs in brand management that consumer
preference for a certain brand can be easily damaged after
price promotion (e.g., Guadagni and Little 1983; Ogilvy
1963; Scott and Yalch 1980).
However, a few studies oppose this assertion (e.g., Davis,
Inman, and McAlister 1992). This inconsistency may be
because of contingent factors that moderate the price–quality
bond. As Hoch and colleagues (1995) demonstrate, consumer
demographic variables, such as age, education, family size,
and income, show a much stronger impact on price sensitiv-
ity than competitive variables. To be insensitive to price sug-
gests that these consumers tend to give more weight to other
product values, such as quality or hedonic attributes, thereby
weakening the connection between price and product qual-
ity. Raghubir and Corfman (1999) also report the role of
industrial conditions and the use of experience in condition-
ing the use of price as a quality cue in consumption. They
argue that price–quality bonds tend to be diluted when price
promotion is common in the relevant industry.
In summary, industrial conditions, consumer demographics,
price sensitivity, and perceived quality are correlated. When
firms introduce an aggressive pricing strategy, whether offen-
sive or defensive, they need to consider possible conse-
quences induced by the price cut. In certain conditions (e.g.,
an industry in which price promotion is rarely used, among
consumers with higher incomes), price promotion can down-
grade perceived product quality and thus damage brand
equity. Consequently, a serious loss in market share may
occur because of the causal relationship between brand
equity and business performance (Chaudhuri 1999).
Internal and external factors have a great impact on pricing
decisions. Among internal factors, an organization with
fewer resources may not be able to compete directly with or
may be ruined by industrial giants, which often have more
resources than small firms. Even when large firms are in
debt, their ability to borrow resources from financial markets
demonstrates their competence. The creation and mainte-
nance of leading brands that encourage a frequent and loyal
consumption pattern requires resources. Small firms suffer
from this double jeopardy (e.g., Ehrenberg, Goodhardt, and
Barwise 1990; Martin 1973).
Strategic Pricing in a
Recession Economy
87
Retail Pricing Strategies
Small firms are limited in both structure and system and
thus have lower sunk costs than do large firms; however,
small firms tend to be strategically nimble (Grinyer and
Yasai-Ardekani 1981; Stasch et al. 1999). It is much easier for
small firms to shift between niche markets with minimum
loss. It is also possible for them to follow the key player’s
actions but with more flexible combinations of price and
nonprice promotional tactics (Shama 1993). Consequently,
small firms may demonstrate higher survival rates than large
firms (Duncan and Handler 1994).
Among external factors, in certain markets in which product
information is redundant and brand differentiation is signifi-
cant, customers tend to exhibit strong brand awareness and
thus a lower sensitivity to price (Kalra and Goodstein 1998).
In contrast, in a market in which product differentiation is
small, price tends to be consumers’ dominant consideration
in buying decisions. Therefore, in a market in which con-
sumers are sensitive to price, it would suit firms with plenti-
ful monetary resources to adopt an aggressive pricing strat-
egy and thus have fewer concerns about the potential
defacement of brand equity. When customers are less sensi-
tive to price and more inclined to embrace strong brand pres-
tige, aggressive pricing can endanger brand image. In such a
situation, firms that are able to build up enough prestige or
provide extra values for their customers will prosper.
On the basis of both dimensions of organizational resources
and market characteristics, we identify four types of strategic
responses to price destruction (see Figure 1): (1) the value-
centric approach, (2) the predatory-pricing approach, (3) the
retreat/detour approach, and (4) the price-follower approach.
Figure 1.
A Strategic Response
Framework to Price
Destruction
Consumer
Characteristics
Less sensitive to price;
emphasis on prestige
Sensitive to price;
overlook brand prestige
Organizational Resources
Abundant Scarce
Value
strategy
Predatory
strategy
Retreat
strategy
Follower
strategy
88
Ting-Jui Chou and Fu-Tang Chen
Value-Centric Approach. We propose a value strategy for
firms that have more resources in value-based competencies
than in assets and that operate in a market in which con-
sumers are relatively less sensitive to price but are more
driven by brand prestige or product quality. To tackle price
destruction, firms can use value-based competences to cre-
ate, extend, and maintain customer values through continual
product innovations, loyalty programs, and value-added
services. The purpose is to create irreplaceable values of the
firm to its customers and to avoid price competition. There-
fore, we apply the following hypothesis to the situation of
price destruction:
H
1
: When firms are rich in resources and operate in a
market in which consumers are insensitive to price
but are more interested in brand prestige or product
quality, a value-centric strategy is significantly and
positively associated with business performance.
Predatory-Pricing Approach. Predatory pricing is suitable for
firms that have more tangible than intangible assets and that
operate in a market in which consumers are less concerned
about brand prestige or quality but are highly sensitive to
price. When these firms are confronted with price destruc-
tion, the most rational response is for them to use their
monopolistic strength in monetary resources to join the price
war in an attempt to obtain the greatest possible market share
and to destroy the competitors’ customer base. To reach this
strategic outcome, these firms are often among the first to
launch a preemptive strike and to use the lowest price avail-
able to beat their rivals.
H
2
: When firms are rich in resources and operate in a
market in which consumers are less concerned about
brand prestige or quality but are sensitive to price, a
predatory-pricing strategy is significantly and posi-
tively associated with business performance.
Retreat/Detour Approach. When firms are small and defi-
cient in resources, it is relatively difficult for them to attract
customers with a more frequent and loyal purchase pattern
in favor of their brands. This means that strong brands have
been dominating the market and have left little leeway to the
weak ones. This unfavorable situation can be exacerbated if
consumers are especially fastidious about product quality or
brand prestige and are insensitive to price. Small brands
shrink when competition in the market is high. They can
expect an even greater decline in market share. However,
when consumers use price as a quality cue, a price-cut strat-
egy not only is ineffectual but also worsens brand equity. In
contrast, as the market lapses into severe price competition,
89
Retail Pricing Strategies
small firms with inferior cost structures would not be able to
afford such financial losses. Such a dilemma implies a diffi-
cult situation for the firms to stay in the market. It would be
more sensible to retreat from the current market. Small firms
are able to switch to other niche markets much more easily
than the large ones. Therefore, a retreat strategy may provide
the best solution.
H
3
: When firms are deficient in resources and operate in
a market in which consumers are insensitive to
price but are more interested in brand prestige or
product quality, a retreat/detour strategy is signifi-
cantly and positively associated with business
performance.
Price-Follower Approach. Inevitably, firms must compete in
price when consumers in the market are more sensitive to
price than to other product attributes. This means that small
firms are not necessarily vulnerable to market disadvantage
caused by the weak brand equity. By joining the price com-
petition game, small brands might still be able to survive
because consumers place less emphasis on brand prestige.
However, cash-strapped small firms never gain an edge in
price competition. As a result, these firms may need to
exploit strategic flexibility or executive efficiency. For price
competition, these firms cannot compete directly with the
resource-abundant ones. However, they can be price follow-
ers that trail price leaders’ pricing strategies and selectively
use aggressive pricing as a marketing tool to initiate con-
sumers’ awareness of their nonprice promotional tactics.
Thus, nonprice promotions with a colorable signal of preda-
tory pricing constitute the most sensible strategy for these
firms to tackle price competition.
H
4
: When firms are deficient in resources and operate in
a market in which consumers are less concerned
about brand prestige or quality but are sensitive to
price, a price-follower strategy is significantly and
positively associated with business performance.
We selected the Taiwanese retail industry to test this model.
Now in its heyday as one of the top ten countries in interna-
tional trade, Taiwan has been ravaged by severe unemploy-
ment and a decline in exports since 1999. Especially in 2001,
changes in the gross domestic product of Taiwan dropped by
3.26%, 4.42%, and 1.58% for the second, third, and fourth
quarters, respectively. Meanwhile, unemployment rates
increased from 2.99% (December 2000) to 5.22% (December
2001) and to a historic high of 7.46% (December 2002).
Demand for consumer goods was shrinking, too, as is evident
in the changes of the Taiwanese consumer price index,
METHOD
90
Ting-Jui Chou and Fu-Tang Chen
which decreased from 1.26% in 2000 to –.25% in 2002.
These indexes present a clear sign of recession, as Shama
(1978, 1993) suggests.
During the time of our study, Taiwan was in its second or
third year of the recession, and the shakeout effect had begun
to appear in the retail industry. For example, after three
waves of severe price attacks between mid-2001 and early
2002, McDonald’s had forced the third-largest restaurant
chain, America’s Favourite Chicken, out of the market. In the
third quarter of 2002, even McDonald’s itself had started to
close some of its unprofitable stores. The economic situation
in the marketplace seemed to meet the purpose of our study.
By using questionnaires as the primary instrument for the
study, we obtained research data from senior managers of
Taiwanese retail firms. Because a goal of this study is to seek
firms’ strategic responses (with two dimensions) to price
destruction that lead to business performance, four con-
structs formed the research instrument: organizational
resources, price–prestige trade-off, strategic responses, and
business performance.
Organizational Resources. We developed five measurement
items to represent the extent of organizational resources (see
Table 1). These measures embrace two broad ideas of organi-
zational resources, as we discussed in previous sections:
competences and assets. Because competences reflect an
organization’s ability to learn, to think, to intuit, and to
respond to its internal and external world, they are relatively
unquantifiable. This study uses innovativeness as presented
by the percentage of annual research-and-development input
that accounts for total costs (Hunt 1997; Verdin and
Williamson 1994); the mode of organizational learning, that
is, whether it is more like a bottom-up process for knowledge
sharing and decision making or a top-down despotism
(Coyne 1986; Hall 1992; Tomer 1987); and intensity in train-
ing, measured by annual expenditure on on-the-job training
and education (Hunt 1997; Verdin and Williamson 1994), to
interpret the intangible part of organizational competences.
For the asset part of organizational resources, we assume that
the larger the scale of a firm, the more tangible resources we
can gather. Therefore, we used the number of stores (Chatter-
jee and Wernerfert 1991; Hunt 1997) and the number of
employees (Grant 1991; Verdin and Williamson 1994) to
measure organizational assets.
Price–Prestige Trade-Off. This study assumes that there are
two typical types of the price–prestige tie with respect to
consumer behavior: (1) price sensitivity over brand prestige
and (2) brand prestige over price. As this study argues, when
consumers admire prestigious brands, they tend to be less
sensitive to price and to develop a greater awareness about
Measures
91
Retail Pricing Strategies
Taxonomy of Environmental Contingencies
Resource Abundance Resource Abundance Resource Scarcity with Resource Scarcity
with Brand Consciousness with Price Sensitivity Brand Consciousness with Price Sensitivity
Sample size n = 23 n = 15 n = 24 n = 27
(25.84%) (16.85%) (26.97%) (30.34%)
Organizational Resources
Average number of stores 520 392 75 30
Average annual research-and-development input that accounts for total costs 3.40% 2.14% 3.66% 3.08%
Average annual expenditure on on-the-job training and education 3.04% 3.54% 3.26% 3.08%
Mode of knowledge sharing Mixed Bottom-up Highly bottom-up Bottom-up
Average number of employees 2120 3200 338 421
Consumer Brand Consciousness
Average number of major competitors 3–4 4–5 3–4 4–5
Consumer brand ranking 1–2 2–3 1–2 3–4
Ranking of relative market share 1–2 3–4 1–2 3–4
How easy the product/service can be imitated Easy Very easy Easy Easy
Relative pricing compared with that of competitors Higher Lower Higher Average
Product/service uniqueness Unique Average Unique Unique
Product/service with great originality Unique Average Unique Unique
Distinctive corporate identification systems as perceived by customers Average Average Distinct Obscure
Table 1.
Taxonomy of Firms According
to Resources and Brand
Consciousness
92
Ting-Jui Chou and Fu-Tang Chen
brands. However, when consumers are sensitive to price,
they tend to lose interest in the potentially glamorous effect
of brand and to display a lack of brand consciousness and
brand knowledge. By drawing on brand studies (Aaker 1996;
Cobb-Walgren, Ruble, and Donthu 1995; Keller 1993), we
included eight variables in the construct of brand conscious-
ness: average number of major competitors, consumer brand
ranking, ranking of relative market share, ease of imitability,
relative pricing compared with that of competitors, product
or service uniqueness, product or service originality, and dis-
tinct corporate identification systems as perceived by cus-
tomers (see Table 1).
Strategic Responses. We based the measures of strategic
responses on the strategic response framework to price
destruction (see Table 2). We propose four distinct types of
strategic approaches: value-centric, predatory pricing,
retreat/detour, and price follower. We measured variables
that describe each approach with five-point Likert-type
scales ranging from “totally disagree” to “totally agree.”
Five items measure the extent to which firms use a value-
centric strategy: aggressive introduction of new products, fre-
quent product updates, enrichment of product benefits by
providing value-added features, promotion of loyalty pro-
grams, and intensive use of nonprice promotions. Three
items measure the ability of firms to use a predatory-pricing
approach: triggering of a preemptive price strike, use of the
lowest price available in all cost for price competition, and
use of price promotion more often than competitors do.
Three items measure the extent to which firms use a retreat/
detour approach: avoidance of a price war as much as possi-
ble, an attempt to withdraw from the current market, and
exploration of other niche markets for a possible switch.
Finally, two items measure the extent to which firms use a
price-follower approach: no voluntary triggering of a price
war and use of a minimum price promotion by an accompa-
nying greater scale of nonprice promotions.
However, we based the classification of these variables on
our industrial experiences. Further examinations of con-
struct validity and reliability are required. This study uses
exploratory factor analysis to identify true dimensions
underlying these measurement items, in which construct
validity can be easily accessed through the Kaiser–Meyer–
Olkin measure of sampling adequacy and Bartlett’s test of
sphericity. We also measured Cronbach’s alpha to ensure
construct reliability.
Business Performance. We based measures of business per-
formance mainly on previous studies of strategic manage-
ment (Varadarajan 1986; Venkatraman and Ramanujam 1986)
93
Retail Pricing Strategies
Component
1234Communalities
Predatory-Pricing Approach (α = .849)
Lowest price in all cost for price competition .862 .755
Triggering of a preemptive price strike .820 .760
More frequent price promotion than competitors .807 .690
Avoidance of a price war (recoded) –.792 .311 .727
Price-Follower Approach (α = .872)
Extensive use of nonprice promotions .808 .631
Use of nonprice promotions instead of price promotion .791 .701
Promotion of loyalty programs .693 .334 .607
No voluntary triggering of a price war .569 –.318 .447
Value-Centric Approach (α = .735)
Aggressive introduction of new products .818 .680
Enrichment of product benefits by value-added features .795 .704
Frequent product updates .514 .307 .436
Retreat/Detour Approach (α = .638)
Attempt to withdraw from the current market .813 .679
Exploration of other niche markets for a possible switch .807 .696
Eigenvalue 3.008 2.319 1.821 1.366
Accumulated percentage of variance explained 23.14 40.98 54.98 65.50
Notes: Extraction method is principal components analysis. Rotation method is Varimax with Kaiser normalization. Kaiser–Meyer–Olkin measure of sampling adequacy = .700; Bartlett’s test of sphericity =
347.370 (p < .000).
Table 2.
Exploratory Factor Analysis for
Response Strategies to Price
Destruction
94
Ting-Jui Chou and Fu-Tang Chen
but added a question that verified how thoroughly the strate-
gies are implemented (see Table 3). All measures used five-
point Likert-type scales. Thus, the measures include how
thoroughly the strategies are implemented (one item), rela-
tive market share (two items for immediate and long-term
effects), total customer satisfaction (two items for immediate
and long-term effects), immediate sales growth rates (one
item), and increase in net profits (one item).
We used test–retest with a two-week interval and Cronbach’s
alpha to examine reliability of instruments before we con-
ducted fieldwork. Thirty managers from different levels of
seniority in the retail industry participated in the pretest ses-
sion. However, because more than half of the participants
were in lower positions within their companies, they may
not have been able to sense cooperative-level strategic
responses to price destruction and the possible effects of car-
rying out these strategies. We examined only constructs of
organizational resources and price–prestige trade-off. Corre-
lation coefficients from test–retest showed that all variables
except one (i.e., “we are establishing strong brand identifica-
tion”) were significant at least at the p < .05 level, and
83.33% of coefficients were greater than .5. This suggests a
good stability of instrument design. We dropped the unreli-
able measurement item from the final questionnaire. For
construct reliability, we used only the construct of price–
prestige trade-off because variables in the construct of orga-
nizational resources were a combination of ratio and nomi-
nal scales. Cronbach’s alpha of the price–prestige trade-off
construct shows good construct reliability at .875.
The focal point of this research was firms in the Taiwanese
retail industry. To obtain access to respondents, as the start-
ing point for data collection, we used member directories
provided by the Taiwan Chain-Store and Franchise Associa-
tion (TCFA). Established in 1991, TCFA is the first and
largest industrial association that services Taiwanese retail
firms. At the time of the study, 192 firms were affiliated with
TCFA, covering 60 types of retail trades with a total of 20,000
stores.
Questionnaires were sent to all affiliated firms with the help
of TCFA. Follow-up telephone calls were made one week
after the questionnaires reached the respondents. One hun-
dred fifteen respondents replied, but 21 responses were
unusable because of the intentional omission of company
names. This resulted in a 49% effective response rate and 94
usable replies. Among them, corporate-level senior managers
answered 79% of questionnaires. This suggests that data
acquired for this research reflect firms’ true strategic deci-
sions to a certain extent. A comparison of organizational
scale variables (i.e., number of employees, registered capital,
Measures Assessment
Data Collection
95
Retail Pricing Strategies
Environmental Contingencies
Resource Abundance Resource Abundance Resource Scarcity with Resource Scarcity
with Brand Consciousness with Price Sensitivity Brand Consciousness with Price Sensitivity
Performance Measures Value-Centric Predatory Pricing Retreat/Detour Price Follower
Thoroughness of the strategies’ implementation .677** –.013 –.179 .331*
Immediate increase in relative market share .360* .370** –.141 .188
Increase in relative market share in the long run .308 .081 –.252 .106
Immediate increase in total customer satisfaction .418** –.093 .035 .289
Increase in long-term total customer satisfaction .425** –.374** –.291* .271
Immediate increase in sales growth rates .203 .381** –.280* .194
Increase in net profits .537** –.369** –.289* .131
*p < .05.
**p < .01.
Notes: We conducted correlation analysis independently for each correspondent strategy variable under incumbent type of environmental contingencies.
Table 3.
Contingent Strategic Responses
and Performance
96
Ting-Jui Chou and Fu-Tang Chen
and number of stores) between the sample and the popula-
tion shows no significant difference from a two-sample t-test.
We employed cluster analysis to distinguish samples with
different resource endowments and different incumbent
market situations (whether customers were brand con-
scious). We made an effort to classify firms with tangible and
intangible resources; however, this did not result in a good
sample classification. Instead, we chose abundance or
scarcity of resources to distinguish samples with different
amounts of resources. On the basis of such classifications,
we divided firms into four distinct groups: resource abun-
dance with brand consciousness, resource scarcity with
brand consciousness, resource abundance with price sensi-
tivity, and resource scarcity with price sensitivity. We used
analysis of variance to examine the effectiveness of such a
classification. Results show that the differences among clus-
ter centers of all price–prestige trade-off variables between
two groups are significant at least at the p < .05 level. The
resultant classification of firms is shown in Table 1.
We used exploratory factor analysis with principal compo-
nents analysis and Varimax rotation to classify firms’ strate-
gic responses to price destruction. We ensured construct
validity using a test of the Kaiser–Meyer–Olkin measure of
sampling adequacy (.700) and Bartlett’s test of sphericity
(347.370, p < .000). Although the measurement items allo-
cated to each dimension slightly stray from the original
design, the four-dimension solution is similar to the pro-
posed taxonomy of strategic responses (see Table 2). We con-
ducted the reliability test for four dimensions of measure-
ments based on the result of factor analysis. Cronbach’s
alphas for the constructs are all satisfactory (ranging from
.638 to .872), suggesting good construct reliability.
On the basis of taxonomy of environmental contingencies, we
used correlation analysis to estimate the connections between
strategic responses and business performance. For each envi-
ronmental contingency, we selected factor scores of proposed
correspondent strategy to correlate with performance vari-
ables (Table 3). As we expected, the value-centric strategy
shows significant and positive affects on most performance
measures. The thoroughness of strategy implementation
shows the strongest feedback to value-centric strategy, signal-
ing that the firms in this category are fully aware of their
stand in the marketplace. Therefore, the positive results in
performance are not surprising to us, and H
1
is confirmed.
Predatory-pricing strategy presents mixed effects for per-
formance, with immediate positive effects on sales and
market-share growth and negative effects on long-term cus-
Contingent Strategic
Responses and Performance
RESULTS AND DISCUSSION
Taxonomy of Environmental
Contingencies
Strategic Responses to Price
Destruction
97
Retail Pricing Strategies
tomer satisfaction and net profit. H
2
is partially supported.
Although the measurement of customer satisfaction was pos-
sibly biased because we used self-reports from the firms, this
pessimistic outlook for long-term customer satisfaction sug-
gests that managers are aware of the possible penalties of a
predatory-pricing strategy. Predatory pricing has the tempo-
rary effect of increasing sales and gaining market share, but it
is not the best weapon to sustain a long-term competitive
edge. It cannot be a general strategy to tackle price destruc-
tion if severe recession continues for many years.
We propose two more strategies, showing that resource-scarce
firms also illustrate difficulties in dealing with price destruc-
tion. A price-follower strategy can point only to the ease or
feasibility of strategy implementation, not to business per-
formance. A retreat/detour strategy creates even more misery,
with significant, negative effects on long-term customer satis-
faction as well as an immediate decrease in sales growth rates
and net profits. Therefore, we reject H
3
and H
4
. It is unfortu-
nate that this study cannot provide practicable suggestions
for small and floundering firms. Under the laws of the jungle,
resource-scarce firms simply cannot survive in a longer reces-
sion. Results of correlation analyses suggest that a value-
centric strategy is the best approach for firms to survive, given
the constraints imposed by environmental contingencies.
This study highlights a contingent view of how retailers can
tackle price competition caused by economic recession.
Overall, the contingent model is not fully supported. Empir-
ical evidence shows that only resource-abundant firms are
able to use the strategies we propose in this study. Among
them, the value-centric strategy outperforms all others.
Although the use of these strategies is subject to their inher-
ent market characteristics, we advise firms to invest more
efforts in innovation to enrich product benefits from value-
added features, to introduce new products, and to update
existing products more often. These efforts prevent a particu-
lar product from direct price competition by signaling a dif-
ferent quality from that of its antecedents. They also serve as
a cue to foster brand prestige because the efforts represent a
firm’s aptitude for product innovation.
There are two possible reasons to account for the inability of
current empirical results to support this proposed contingent
model fully. First, the relatively small economic scale of sam-
ple firms in the current study may distort the proposed
strategy–performance bonds in this model. Second, compared
with the research based on European or American samples,
Taiwanese firms are relatively small or medium-sized enter-
prises. The firm-level definitions of resource abundance or
scarcity may need to be adjusted to the local situation. It is
CONCLUSION
98
Ting-Jui Chou and Fu-Tang Chen
understandable that firms scarce in resources have difficulty
implementing effective strategies that lead the firm through the
crisis.
Christensen (1997) has provided the well-respected theory of
the innovator’s dilemma for small firms to defend them-
selves in cruel real-world competition, but we have yet to
validate this theory. We focus on a short-term de facto state
that occurs right after the emergence of price destruction
caused by recession; the time limitation did not enable us to
observe the possible occurrence of the small sample firms’
disruptive technologies, intended to overturn the domina-
tion of resource-abundant firms. The small sample firms,
though niche market–oriented in nature, were still unable to
ride the second disruptive wave efficiently, as Christensen
(2001) describes. In contrast, the resource-abundant firms
appear to be the ones that best use the disruptive waves. For
example, the largest retailer in Taiwan, the 7-Eleven Com-
pany, with more than 3000 convenience stores on the tiny
island, happens to be the major player among online cate-
gory stores, category discounters, lifestyle-focused stores and
catalogs, and mall-based stores. Small firms have a difficult
time competing with large firms, even in the niche markets.
In addition, because Taiwan is still in its early stage of the
recession, it may be premature to use the Taiwanese sample
to test the contingent model, because both capable and less
capable firms coexist in the market. Time may be the best
way to distinguish sustainable and unsustainable marketing
strategies, especially for less profitable firms. Information
provided by the struggling firms may distort the truth that
strategically correct behaviors can produce good perform-
ance. We advise future researchers to use Japanese samples
to test the current model. Because the Japanese economy has
been in recession for approximately one decade, currently
thriving firms may provide evidence to prove the vigor of
certain strategies.
This study contributes to international marketing theory by
highlighting the strategic importance on pricing and by pro-
viding an alternative view about pricing in different eco-
nomic settings. In general, early marketing academics dis-
missed the strategic importance of pricing in managerial
decisions (Guiltinan 1976; Udell 1964). The subsequent
scholarship in marketing followed a similar pattern of
thought that accorded pricing a minor role in strategic mar-
keting (Ailawadi, Lehmann, and Neslin 2001). However, in
practice, pricing has been ranked the top priority in business
administration (Villa and Wilson 1999). Industrial observa-
tions also suggest that consumers are increasingly price sen-
sitive (Smith 2003), which undoubtedly calls for managerial
attention to strategic pricing (Handler 1996). Moreover, the
99
Retail Pricing Strategies
few studies on pricing seem to overlook the possible effect of
the national economic condition on the effectiveness of pric-
ing, regardless of the truth that practitioners tend to
encounter different economic environments in international
marketing. This study asserts that pricing is more important
in a recession economy and provides an insight into the con-
tingent management of pricing practices.
This study also urges international marketers to pay atten-
tion to strategic dynamics when they operate in markets with
different economic conditions. For decades, the United
States has been the country of origin for many mainstream
marketing concepts. To some extent, the concepts have been
developed in times of economic prosperity. Many well-
established models that today’s practitioners rely on for mar-
keting decisions are a reflection of samples that have proved
the theory. Most marketing tools developed by theorists for
practitioners are tailored to affluent customers. Indeed,
building marketing models requires empirical evidence to
show that the theory is consistent with the practice (Moorthy
1993). Marketing theories developed in a particular period
may not be applicable to another period (Winer 1999). Mar-
keting theories should be amended to reflect the real com-
mercial world (Sheth and Sisodia 1999). This study used a
research setting whose samples fell into a severe price com-
petition caused by a recession economy. Research findings
from the recession economy can be compared with those of
the prosperous ones. We advise international marketers to be
aware of the diversity in strategies for both types of
economies. In so doing, they might be prepared for market-
ing in different economic climates and be better equipped for
any possible economic crises in the future.
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THE AUTHORS
Ting-Jui Chou is Senior Lecturer,
International Graduate School of
Management, University of South
Australia (e-mail: Ting-
Jui.Chou@unisa.edu.au).
Fu-Tan Chen is Chief Financial
Officer, 7-Eleven Co. Taiwan (e-
mail: loadstar@mail.7-11.com.tw).
ACKNOWLEDGMENTS
The authors thank Dr. John Dawes
and the three anonymous JIM
reviewers for their encouragement
and important comments on various
aspects and previous versions of this
article. The authors also gratefully
acknowledge Miss Ting-Ting Chou
for her help with data collection.
Special thanks to the second JIM
reviewer for his or her great patience
and invaluable suggestions on the
conceptual, organizational, and
English-language problems.
101
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This paper explored various strategies that department stores can implement to stimulate growth during a recession. It makes use of a questionnaire survey to provide insight on what business strategies were used, with a particular focus on whether or not to invest in marketing and R&D, effective cost-cutting measures as well as effective competition strategies. The impact of these strategies on business growth is tested in the department store industry in South Africa during the recession of 2008-2010. While the department stores in the study sample reported that they invested in marketing and R&D, initiated cost-cutting measures, and proactively gathered competition intelligence information, statistical analysis shows that only cost-cutting strategies successfully stimulated business growth. This study highlights that the implementation of a strategy is fundamental to its success at stimulating business growth. Consequently; the most effective implementation strategies were explored and recommendations were made. Keywords: Business growth, recession, competition strategy, R&D, Marketing, cost-cutting, Marketing Mix, Competition Intelligence.
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