Retail Pricing Strategies in Recession Economies: The Case of Taiwan

ABSTRACT

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 resourceabundant retailers are able to use strategies proposed in this study to thrive in a recession. A value-centric strategy outperforms 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 downturn, 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 triggering 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-

Ting-Jui Chou and Fu-Tang Chen

Submitted December 2002 Accepted October 2003 Journal of International Marketing Vol. 12, No. 1, 2004, pp. 82102 ISSN 1069-031X

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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 disequilibrium 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 companys 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 awareness 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 organizational and market factors influence pricing decisions. Organizations 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 marketing decisions, price destruction is an important issue that firms in a recession economy are unable to escape. On the

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one hand, organizational resources are a key determinant for selection of suitable strategies; on the other hand, the possible 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 effectiveness of such pricing strategies using empirical fieldwork.

LITERATURE REVIEW

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 predatorypricing strategy to maintain their predominant position in a market, but resource-scarce firms must join the pricedestruction 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 prestige of the brand (Chapman and Wahlers 1999). It is dangerous for firms to rush into price competition without considering 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 forming a sustainable strategy to cope with price destruction. To deal with the price destruction caused by a falling economy, 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 survive by driving the firms that are short on resources out of the market (Guiltinan and Gundlach 1996). It is understandable 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 corporatelevel resources and capabilities will bring the organization a sustainable competitive advantage (Barney 1986). Indeed, since the 1960s, models of strengths, weaknesses, opportunities, 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 external opportunities and to eliminate potential damages from outside threats. Several studies have tried to provide taxonomies of organizational 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-

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erfelt 1991; Grant 1991) further define organizational resources as assets and competences, where assets can be tangible or intangible and competences embrace both individual 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 resourceproduced 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 consumption decisions, in which price information is accumulated 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 influence 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 products. 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 observation: 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 quality. Although a high-priced product (the actual price) can require a certain amount of sacrifice on the part of consumers, it is equally true that the higher the price (reference

External Influences on Pricing

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price) of a product, the greater is the esteem in which consumers 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 pricequality 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 sensitivity than competitive variables. To be insensitive to price suggests 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 quality. Raghubir and Corfman (1999) also report the role of industrial conditions and the use of experience in conditioning the use of price as a quality cue in consumption. They argue that pricequality 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 offensive or defensive, they need to consider possible consequences 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 downgrade 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 maintenance 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).

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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 players 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 significant, 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 consumers are sensitive to price, it would suit firms with plentiful monetary resources to adopt an aggressive pricing strategy and thus have fewer concerns about the potential defacement of brand equity. When customers are less sensitive to price and more inclined to embrace strong brand prestige, 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 valuecentric approach, (2) the predatory-pricing approach, (3) the retreat/detour approach, and (4) the price-follower approach.

Organizational Resources Abundant Scarce

Figure 1. A Strategic Response Framework to Price Destruction

Less sensitive to price; emphasis on prestige Consumer Characteristics Sensitive to price; overlook brand prestige

Value strategy

Retreat strategy

Predatory strategy

Follower strategy

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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 consumers 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 create, 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. Therefore, we apply the following hypothesis to the situation of price destruction: H1: 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 destruction, 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 available to beat their rivals. H2: 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 positively associated with business performance. Retreat/Detour Approach. When firms are small and deficient 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 strategy not only is ineffectual but also worsens brand equity. In contrast, as the market lapses into severe price competition,

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small firms with inferior cost structures would not be able to afford such financial losses. Such a dilemma implies a difficult 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. H3: 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 significantly 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 competition 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 followers that trail price leaders pricing strategies and selectively use aggressive pricing as a marketing tool to initiate consumers awareness of their nonprice promotional tactics. Thus, nonprice promotions with a colorable signal of predatory pricing constitute the most sensible strategy for these firms to tackle price competition. H4: 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 international trade, Taiwan has been ravaged by severe unemployment 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

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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, McDonalds had forced the third-largest restaurant chain, Americas Favourite Chicken, out of the market. In the third quarter of 2002, even McDonalds 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 constructs formed the research instrument: organizational resources, priceprestige 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 organizational resources, as we discussed in previous sections: competences and assets. Because competences reflect an organizations 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 training, 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 (Chatterjee and Wernerfert 1991; Hunt 1997) and the number of employees (Grant 1991; Verdin and Williamson 1994) to measure organizational assets. PricePrestige Trade-Off. This study assumes that there are two typical types of the priceprestige 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

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Taxonomy of Environmental Contingencies Resource Abundance with Brand Consciousness n = 23 (25.84%) n = 15 (16.85%) n = 24 (26.97%) Resource Abundance with Price Sensitivity Resource Scarcity with Brand Consciousness Resource Scarcity with Price Sensitivity n = 27 (30.34%)

Sample size

Organizational Resources 520 3.40% 3.04% Mixed 2120 3200 Bottom-up 3.54% 2.14% 3.66% 3.26% Highly bottom-up 338 392 75 30 3.08% 3.08% Bottom-up 421

Average number of stores

Retail Pricing Strategies

34 12 12 Easy Higher Unique Unique Average 34 Very easy Lower Average Average Average 23 45 34 12 12 Easy Higher Unique Unique Distinct 45 34 34 Easy Average Unique Unique Obscure

Average annual research-and-development input that accounts for total costs

Average annual expenditure on on-the-job training and education

Mode of knowledge sharing

Average number of employees

Consumer Brand Consciousness

Average number of major competitors

Consumer brand ranking

Ranking of relative market share

How easy the product/service can be imitated

Relative pricing compared with that of competitors

Product/service uniqueness

Product/service with great originality

Distinctive corporate identification systems as perceived by customers

Table 1. Taxonomy of Firms According to Resources and Brand Consciousness

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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 consciousness: 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 distinct corporate identification systems as perceived by customers (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 valuecentric strategy: aggressive introduction of new products, frequent product updates, enrichment of product benefits by providing value-added features, promotion of loyalty programs, 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 possible, 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 accompanying greater scale of nonprice promotions. However, we based the classification of these variables on our industrial experiences. Further examinations of construct 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 KaiserMeyer Olkin measure of sampling adequacy and Bartletts test of sphericity. We also measured Cronbachs alpha to ensure construct reliability. Business Performance. We based measures of business performance mainly on previous studies of strategic management (Varadarajan 1986; Venkatraman and Ramanujam 1986)

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Component 1 .862 .820 .807 .792 .311 2 3 4 Communalities .755 .760 .690 .727

Retail Pricing Strategies

.808 .791 .693 .569 .334 .318 .631 .701 .607 .447 .818 .795 .514 .307 .680 .704 .436 .813 .807 3.008 23.14 2.319 40.98 1.821 54.98 1.366 65.50 .679 .696

Predatory-Pricing Approach ( = .849) Lowest price in all cost for price competition Triggering of a preemptive price strike More frequent price promotion than competitors Avoidance of a price war (recoded)

Price-Follower Approach ( = .872) Extensive use of nonprice promotions Use of nonprice promotions instead of price promotion Promotion of loyalty programs No voluntary triggering of a price war

Value-Centric Approach ( = .735) Aggressive introduction of new products Enrichment of product benefits by value-added features Frequent product updates

Retreat/Detour Approach ( = .638) Attempt to withdraw from the current market Exploration of other niche markets for a possible switch

Eigenvalue Accumulated percentage of variance explained

Notes: Extraction method is principal components analysis. Rotation method is Varimax with Kaiser normalization. KaiserMeyerOlkin measure of sampling adequacy = .700; Bartletts test of sphericity = 347.370 (p < .000).

Table 2. Exploratory Factor Analysis for Response Strategies to Price Destruction

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but added a question that verified how thoroughly the strategies are implemented (see Table 3). All measures used fivepoint Likert-type scales. Thus, the measures include how thoroughly the strategies are implemented (one item), relative 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 testretest with a two-week interval and Cronbachs alpha to examine reliability of instruments before we conducted fieldwork. Thirty managers from different levels of seniority in the retail industry participated in the pretest session. 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 carrying out these strategies. We examined only constructs of organizational resources and priceprestige trade-off. Correlation coefficients from testretest showed that all variables except one (i.e., we are establishing strong brand identification) 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 unreliable 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 organizational resources were a combination of ratio and nominal scales. Cronbachs alpha of the priceprestige 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 starting point for data collection, we used member directories provided by the Taiwan Chain-Store and Franchise Association (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 hundred 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 decisions to a certain extent. A comparison of organizational scale variables (i.e., number of employees, registered capital,

Measures Assessment

Data Collection

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Retail Pricing Strategies

Environmental Contingencies Resource Abundance with Brand Consciousness Value-Centric .677** .360* .308 .418** .425** .203 .537** .093 .374** .381** .369** .081 .370** .013 Predatory Pricing Resource Abundance with Price Sensitivity Resource Scarcity with Brand Consciousness Retreat/Detour .179 .141 .252 .035 .291* .280* .289* .331* .188 .106 .289 .271 .194 .131

Resource Scarcity with Price Sensitivity Price Follower

Performance Measures

Thoroughness of the strategies implementation

Immediate increase in relative market share

Increase in relative market share in the long run

Immediate increase in total customer satisfaction

Increase in long-term total customer satisfaction

Immediate increase in sales growth rates

Increase in net profits

*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

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and number of stores) between the sample and the population shows no significant difference from a two-sample t-test.

RESULTS

AND

DISCUSSION

Taxonomy of Environmental Contingencies

We employed cluster analysis to distinguish samples with different resource endowments and different incumbent market situations (whether customers were brand conscious). 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 abundance with brand consciousness, resource scarcity with brand consciousness, resource abundance with price sensitivity, 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 cluster centers of all priceprestige 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 components analysis and Varimax rotation to classify firms strategic responses to price destruction. We ensured construct validity using a test of the KaiserMeyerOlkin measure of sampling adequacy (.700) and Bartletts test of sphericity (347.370, p < .000). Although the measurement items allocated to each dimension slightly stray from the original design, the four-dimension solution is similar to the proposed taxonomy of strategic responses (see Table 2). We conducted the reliability test for four dimensions of measurements based on the result of factor analysis. Cronbachs 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 environmental contingency, we selected factor scores of proposed correspondent strategy to correlate with performance variables (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, signaling 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 H1 is confirmed. Predatory-pricing strategy presents mixed effects for performance, with immediate positive effects on sales and market-share growth and negative effects on long-term cus-

Strategic Responses to Price Destruction

Contingent Strategic Responses and Performance

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tomer satisfaction and net profit. H2 is partially supported. Although the measurement of customer satisfaction was possibly biased because we used self-reports from the firms, this pessimistic outlook for long-term customer satisfaction suggests that managers are aware of the possible penalties of a predatory-pricing strategy. Predatory pricing has the temporary 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 destruction if severe recession continues for many years. We propose two more strategies, showing that resource-scarce firms also illustrate difficulties in dealing with price destruction. A price-follower strategy can point only to the ease or feasibility of strategy implementation, not to business performance. A retreat/detour strategy creates even more misery, with significant, negative effects on long-term customer satisfaction as well as an immediate decrease in sales growth rates and net profits. Therefore, we reject H3 and H4. It is unfortunate 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 recession. Results of correlation analyses suggest that a valuecentric 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. Empirical 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 inherent market characteristics, we advise firms to invest more efforts in innovation to enrich product benefits from valueadded features, to introduce new products, and to update existing products more often. These efforts prevent a particular product from direct price competition by signaling a different quality from that of its antecedents. They also serve as a cue to foster brand prestige because the efforts represent a firms 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 sample firms in the current study may distort the proposed strategyperformance bonds in this model. Second, compared with the research based on European or American samples, Taiwanese firms are relatively small or medium-sized enterprises. The firm-level definitions of resource abundance or scarcity may need to be adjusted to the local situation. It is

CONCLUSION

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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 innovators dilemma for small firms to defend themselves 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 domination of resource-abundant firms. The small sample firms, though niche marketoriented 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 Company, with more than 3000 convenience stores on the tiny island, happens to be the major player among online category 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 performance. 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 providing an alternative view about pricing in different economic settings. In general, early marketing academics dismissed 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 marketing (Ailawadi, Lehmann, and Neslin 2001). However, in practice, pricing has been ranked the top priority in business administration (Villa and Wilson 1999). Industrial observations also suggest that consumers are increasingly price sensitive (Smith 2003), which undoubtedly calls for managerial attention to strategic pricing (Handler 1996). Moreover, the

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few studies on pricing seem to overlook the possible effect of the national economic condition on the effectiveness of pricing, 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 contingent management of pricing practices. This study also urges international marketers to pay attention 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 wellestablished models that todays practitioners rely on for marketing 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). Marketing theories should be amended to reflect the real commercial world (Sheth and Sisodia 1999). This study used a research setting whose samples fell into a severe price competition 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 marketing 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: TingJui.Chou@unisa.edu.au). Fu-Tan Chen is Chief Financial Officer, 7-Eleven Co. Taiwan (email: loadstar@mail.7-11.com.tw).

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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.

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