Recession Strategy

8/2/2019 Recession Strategy

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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. 82102

ISSN 1069-031X

In a recession economy, consumers tend to be more sensitiveabout price, and firms have difficulty obtaining necessaryresources 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 observingthe current recession and the resultant price war in Asian coun-tries, the authors examine marketing decisions by retailers in arecession 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 thisstudy to thrive in a recession. A value-centric strategy outper-

forms all other approaches.

The purpose of this article is to consider how retailersrespond to severe price competition in a recession economy.Many events can trigger a regional recession. Examples inAsian countries in recent years are the Asian financial crisisfrom 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 nationaleconomy. Evidence from the Great Depression in the 1930ssuggests that the economic environment plays a key role inthe ability of consumers to spend (Flacco and Parker 1992) orto consume (e.g., Hill, Hirschman, and Bauman 1997). Theseexternal causes exert great influence on the mentalities ofconsumers, 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 consumerdemand is high and consumers are willing to splurge, it

makes sense for managers to place nonprice tactics at ahigher priority than pricing. However, in an economic down-turn, the rapidly shrinking market share that results frominsufficient demand might draw practitioners to consider apredatory-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 abruptdownturn, industrial supply must adjust itself to thedecreasing market demand. However, because of the down-

Retail Pricing Strategies in RecessionEconomies: The Case of Taiwan

Ting-Jui Chou andFu-Tang Chen


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83Retail Pricing Strategies

ward rigidity in rectifying the level of supply, it is notuncommon that the demand fails to meet the supply. Severecompetition in the marketplace becomes unavoidable andeventually causes retail prices to tumble. The continualdecline in retail price can force inferior players to withdrawfrom the marketplace. Decreasing supply may not be able toprevent 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 Japaneserefer to this as price destruction or Kakaku hakai(squall),which shows the enormous power that such price wars havein destroying economic systems. In this study, we use theterm price destruction to express this extraordinary stateof price competition.

There are two forces that moderate how effectively firms canrespond to this bitter economical ordeal. For the supply side,many researchers have stressed the role of organizationalresources as the mainstay in strategic marketing (e.g., Hunt

and Morgan 1995, 1996; Wernerfelt 1989). A companysstrength in both tangible and intangible resources is amongthe key issues that must be taken into account for effectivepricing decisions (Rao, Bergen, and Davis 2000). For thedemand side, consumer price sensitivity and brand aware-ness may be influential in deciding the extent to which firmswill use a predatory-pricing strategy. On the one hand,predatory pricing may attract price-sensitive consumers. Onthe other hand, price is often used as a cue for consumers tojudge brand equity (Teas and Agarwal 2000; Yoo, Donthu,and Lee 2000). Thus, consumers may perceive a reduction inprice as a reduction in product quality.

Meanwhile, consumers tend to exhibit different levels ofprice sensitivity across market segments (Rao, Bergen, andDavis 2000). Such variations in consumer price sensitivitymay provide a strategic cue for organizations that operate indifferent markets to prioritize pricing tactics. Both organiza-tional and market factors influence pricing decisions. Orga-nizations in different market conditions display variations inpricing behavior to respond to the strategic coupling of theircompetitors (Sudhir 2001).

It is often difficult for firms to obtain the necessary resources

for effective pricing in a sluggish economy. Previous studieson pricing appear to overlook the possible effect of economicenvironment on the effectiveness of a pricing strategy. Thisstudy examines the strategic responses of retailers to pricedestruction caused by a recession economy by observing thecurrent recession and the resultant price competition inAsian countries. As an environmental factor in strategic mar-keting decisions, price destruction is an important issue thatfirms in a recession economy are unable to escape. On the


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one hand, organizational resources are a key determinant forselection of suitable strategies; on the other hand, the possi-

ble responses from consumers affect the outcomes. Thisstudy examines a strategic response framework to pricedestruction as a compromise between organizationalresources and market characteristics. We examine the effec-tiveness of such pricing strategies using empirical fieldwork.

As we stated previously, a recession economy can causesevere price destruction and can force retailers to reactstrategically. Resource-abundant firms may use a predatory-pricing strategy to maintain their predominant position in amarket, 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 arecession economy. Many studies have pointed out that theoveruse 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 perceptionof the quality of products or services). Firms need to considerboth 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 priceattacks by competitors and preserve their competitive edge.Nevertheless, most companies need to participate in a pricewar. The most cost-efficient companies may be able to sur-vive by driving the firms that are short on resources out ofthe market (Guiltinan and Gundlach 1996). It is understand-

able that resources, whether intangible or tangible, are thekey for companies to outperform their competitors duringepisodes of price destruction. Thus, as stated by theresource-based school of thought, a resource-based viewshould replace the product-based view in marketing decisionmaking (Wernerfelt 1989). A resource-based approach tomarketing suggests that a long-term cultivation of corporate-level resources and capabilities will bring the organization asustainable competitive advantage (Barney 1986). Indeed,since the 1960s, models of strengths, weaknesses, opportuni-ties, and threats have been widely applied to strengthenorganizations competitive advantage by promoting both

environmental analyses and resource-based strategies. Firmsmake a constant effort to use internal strengths to seek exter-nal opportunities and to eliminate potential damages fromoutside threats.

Several studies have tried to provide taxonomies of organiza-tional resources. Coyne (1986) conceptualizes organizationalresources as having certain assets and as being able to carryout strategies. Subsequent studies (e.g., Chatterjee and Wern-

LITERATURE REVIEW

Internal Influences on Pricing


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erfelt 1991; Grant 1991) further define organizationalresources as assets and competences, where assets can betangible or intangible and competences embrace both indi-vidual and organizational capabilities. An organization isable to outperform its opponents when these maintainedresources are significant, rare, inimitable, and ignored byothers (Tampoe 1994). Hunt and Morgan (1995, 1996) echo

this view in a much more concise framework. In theirresource-advantage theory of competition, organizationalresources are based on dimensions of relative resource-produced value and relative resource costs. Nine distinctgroups of organizational resources are strategically identifiedas having varied values. Firms are advised to select resourcesthat are compatible with themselves and that enhance theircapability in acquisition and cultivation in order to build uplong-term competitive advantage.

Although the availability of organizational resources is animportant perspective in the consideration of an aggressive

or predatory-pricing strategy, the demand-side effects of sucha strategy are another concern. Most consumers are sensitiveto price. As Mazumdar and Papatla (2000) note, consumerstend 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 comparisonsmade among available brands. As long as consumers useprice as an index for shopping, firms can use price to influ-ence consumer behavior.

For example, Miller, Ogden, and Latshaw (1998) show howprice can be used to trigger consumer behavior. In their

analysis, they manipulate price and product features toinfluence consumers preferences for an assortment of prod-ucts. They find a negative connection between price leveland willingness to buy. However, when a product featureskey values that fit with consumers needs, firms can raise theprice 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 canincrease loyalty to the brand and thus allow for more roomfor price to rise. Indeed, for a costly purchase, consumerstend to believe that a price is fair when they agree with it. Tosome extent, price can be subordinate to product worthiness

in the consumption decision.

In contrast, reference price can also be used to signal productquality (Teas and Agarwal 2000; Yoo, Donthu, and Lee 2000).Chapman and Wahlers (1999) report a positive link betweenreference price and consumers opinion about product qual-ity. Although a high-priced product (the actual price) canrequire 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


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price) of a product, the greater is the esteem in which con-sumers hold the product. Therefore, perceived value is thetrade-off between perceived sacrifice and perceived prestige.Yoo, Donthu, and Lee (2000) also observe that a frequent useof price deals results in an unfavorable quality perceptionand blocks brand associations and awareness. These findingsecho traditional beliefs in brand management that consumer

preference for a certain brand can be easily damaged afterprice promotion (e.g., Guadagni and Little 1983; Ogilvy1963; 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 pricequalitybond. As Hoch and colleagues (1995) demonstrate, consumerdemographic 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, therebyweakening the connection between price and product qual-ity. Raghubir and Corfman (1999) also report the role ofindustrial conditions and the use of experience in condition-ing the use of price as a quality cue in consumption. Theyargue that pricequality bonds tend to be diluted when pricepromotion is common in the relevant industry.

In summary, industrial conditions, consumer demographics,price sensitivity, and perceived quality are correlated. Whenfirms 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, amongconsumers with higher incomes), price promotion can down-grade perceived product quality and thus damage brandequity. Consequently, a serious loss in market share mayoccur because of the causal relationship between brandequity and business performance (Chaudhuri 1999).

Internal and external factors have a great impact on pricingdecisions. Among internal factors, an organization withfewer resources may not be able to compete directly with or

may be ruined by industrial giants, which often have moreresources than small firms. Even when large firms are indebt, their ability to borrow resources from financial marketsdemonstrates their competence. The creation and mainte-nance of leading brands that encourage a frequent and loyalconsumption pattern requires resources. Small firms sufferfrom this double jeopardy (e.g., Ehrenberg, Goodhardt, andBarwise 1990; Martin 1973).

Strategic Pricing in aRecession Economy


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Small firms are limited in both structure and system andthus have lower sunk costs than do large firms; however,small firms tend to be strategically nimble (Grinyer andYasai-Ardekani 1981; Stasch et al. 1999). It is much easier forsmall firms to shift between niche markets with minimumloss. It is also possible for them to follow the key playersactions but with more flexible combinations of price and

nonprice promotional tactics (Shama 1993). Consequently,small firms may demonstrate higher survival rates than largefirms (Duncan and Handler 1994).

Among external factors, in certain markets in which productinformation is redundant and brand differentiation is signifi-cant, customers tend to exhibit strong brand awareness andthus a lower sensitivity to price (Kalra and Goodstein 1998).In contrast, in a market in which product differentiation issmall, price tends to be consumers dominant considerationin 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 potentialdefacement 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 asituation, firms that are able to build up enough prestige orprovide extra values for their customers will prosper.

On the basis of both dimensions of organizational resourcesand market characteristics, we identify four types of strategicresponses 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 ResponseFramework to PriceDestruction

ConsumerCharacteristics

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


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Value-Centric Approach. We propose a value strategy forfirms that have more resources in value-based competenciesthan in assets and that operate in a market in which con-sumers are relatively less sensitive to price but are moredriven by brand prestige or product quality. To tackle pricedestruction, firms can use value-based competences to cre-ate, extend, and maintain customer values through continual

product innovations, loyalty programs, and value-addedservices. The purpose is to create irreplaceable values of thefirm to its customers and to avoid price competition. There-fore, we apply the following hypothesis to the situation ofprice destruction:

H1: When firms are rich in resources and operate in amarket in which consumers are insensitive to price

but are more interested in brand prestige or productquality, a value-centric strategy is significantly andpositively associated with business performance.

Predatory-Pricing Approach. Predatory pricing is suitable forfirms that have more tangible than intangible assets and thatoperate in a market in which consumers are less concernedabout brand prestige or quality but are highly sensitive toprice. When these firms are confronted with price destruc-tion, the most rational response is for them to use theirmonopolistic strength in monetary resources to join the pricewar in an attempt to obtain the greatest possible market shareand to destroy the competitors customer base. To reach thisstrategic outcome, these firms are often among the first tolaunch a preemptive strike and to use the lowest price avail-able to beat their rivals.

H2: When firms are rich in resources and operate in amarket in which consumers are less concerned about

brand prestige or quality but are sensitive to price, apredatory-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 attractcustomers with a more frequent and loyal purchase patternin 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 ifconsumers are especially fastidious about product quality or

brand prestige and are insensitive to price. Small brandsshrink when competition in the market is high. They canexpect 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. Incontrast, as the market lapses into severe price competition,


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small firms with inferior cost structures would not be able toafford such financial losses. Such a dilemma implies a diffi-cult situation for the firms to stay in the market. It would bemore sensible to retreat from the current market. Small firmsare able to switch to other niche markets much more easilythan the large ones. Therefore, a retreat strategy may providethe best solution.

H3: When firms are deficient in resources and operate ina market in which consumers are insensitive toprice but are more interested in brand prestige orproduct quality, a retreat/detour strategy is signifi-cantly and positively associated with businessperformance.

Price-Follower Approach. Inevitably, firms must compete inprice when consumers in the market are more sensitive toprice than to other product attributes. This means that smallfirms 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 survivebecause consumers place less emphasis on brand prestige.However, cash-strapped small firms never gain an edge inprice competition. As a result, these firms may need toexploit strategic flexibility or executive efficiency. For pricecompetition, these firms cannot compete directly with theresource-abundant ones. However, they can be price follow-ers that trail price leaders pricing strategies and selectivelyuse 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 thesefirms to tackle price competition.

H4: When firms are deficient in resources and operate ina market in which consumers are less concernedabout brand prestige or quality but are sensitive toprice, a price-follower strategy is significantly andpositively 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 by3.26%, 4.42%, and 1.58% for the second, third, and fourthquarters, respectively. Meanwhile, unemployment ratesincreased from 2.99% (December 2000) to 5.22% (December2001) and to a historic high of 7.46% (December 2002).Demand for consumer goods was shrinking, too, as is evidentin 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 orthird year of the recession, and the shakeout effect had begunto appear in the retail industry. For example, after three

waves of severe price attacks between mid-2001 and early2002, McDonalds had forced the third-largest restaurantchain, Americas Favourite Chicken, out of the market. In thethird quarter of 2002, even McDonalds itself had started toclose some of its unprofitable stores. The economic situationin the marketplace seemed to meet the purpose of our study.By using questionnaires as the primary instrument for thestudy, we obtained research data from senior managers ofTaiwanese retail firms. Because a goal of this study is to seekfirms strategic responses (with two dimensions) to pricedestruction that lead to business performance, four con-structs formed the research instrument: organizational

resources, priceprestige trade-off, strategic responses, andbusiness performance.

Organizational Resources. We developed five measurementitems to represent the extent of organizational resources (seeTable 1). These measures embrace two broad ideas of organi-zational resources, as we discussed in previous sections:competences and assets. Because competences reflect anorganizations ability to learn, to think, to intuit, and torespond to its internal and external world, they are relativelyunquantifiable. This study uses innovativeness as presented

by the percentage of annual research-and-development input

that accounts for total costs (Hunt 1997; Verdin andWilliamson 1994); the mode of organizational learning, thatis, whether it is more like a bottom-up process for knowledgesharing 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 trainingand education (Hunt 1997; Verdin and Williamson 1994), tointerpret the intangible part of organizational competences.For the asset part of organizational resources, we assume thatthe larger the scale of a firm, the more tangible resources wecan 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) tomeasure organizational assets.

PricePrestige Trade-Off. This study assumes that there aretwo typical types of the priceprestige tie with respect toconsumer behavior: (1) price sensitivity over brand prestigeand (2) brand prestige over price. As this study argues, whenconsumers admire prestigious brands, they tend to be lesssensitive to price and to develop a greater awareness about

Measures


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TaxonomyofEnvironmentalContingencies

ResourceAbundance

ResourceAbundance

ResourceScarcitywith

ResourceScarcity

withBrandConsciousness

with

PriceSensitivity

BrandConsciousnes

s

withPriceSensitivity

Samplesize

n=23

n=15

n=24

n=27

(25.84%)

(16.85%)

(26.97%)

(30.34%)

OrganizationalResources

Averagenumberofstores

520

392

75

30

Averageannualresearch-and-de

velopmentinputthataccountsfortotalcosts

3.40%

2.14%

3.66%

3.08%

Averageannualexpenditureon

on-the-jobtrainingandeducation

3.04%

3.54%

3.26%

3.08%

Modeofknowledgesharing

Mixed

Bottom-up

Highlybottom-up

Bottom-up

Averagenumberofemployees

2120

3200

338

421

ConsumerBrandConsciousness

Averagenumberofmajorcompetitors

34

45

34

45

Consumerbrandranking

12

23

12

34

Rankingofrelativemarketshare

12

34

12

34

Howeasytheproduct/servicecanbeimitated

Easy

Veryeasy

Easy

Easy

Relativepricingcomparedwith

thatofcompetitors

Higher

Lower

Higher

Average

Product/serviceuniqueness

Unique

Average

Unique

Unique

Product/servicewithgreatoriginality

Unique

Average

Unique

Unique

Distinctivecorporateidentificationsystemsasperceivedbycustomers

Average

Average

Distinct

Obscure

Table 1.Taxonomy of Firms Accordingto Resources and BrandConsciousness


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brands. However, when consumers are sensitive to price,they tend to lose interest in the potentially glamorous effectof 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), weincluded 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, productor 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 strategicresponses on the strategic response framework to pricedestruction (see Table 2). We propose four distinct types ofstrategic approaches: value-centric, predatory pricing,retreat/detour, and price follower. We measured variablesthat 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 byproviding value-added features, promotion of loyalty pro-grams, and intensive use of nonprice promotions. Threeitems measure the ability of firms to use a predatory-pricingapproach: triggering of a preemptive price strike, use of thelowest price available in all cost for price competition, anduse 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, andexploration of other niche markets for a possible switch.Finally, two items measure the extent to which firms use aprice-follower approach: no voluntary triggering of a pricewar and use of a minimum price promotion by an accompa-nying greater scale of nonprice promotions.

However, we based the classification of these variables onour industrial experiences. Further examinations of con-struct validity and reliability are required. This study usesexploratory factor analysis to identify true dimensions

underlying these measurement items, in which constructvalidity can be easily accessed through the KaiserMeyerOlkin measure of sampling adequacy and Bartletts test ofsphericity. We also measured Cronbachs alpha to ensureconstruct reliability.

Business Performance. We based measures of business per-formance mainly on previous studies of strategic manage-ment (Varadarajan 1986; Venkatraman and Ramanujam 1986)


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Component

1

2

3

4

Communalities

Predatory-PricingApproach(=.849)

Lowestpriceinallcostforprice

competition

.8

62

.755

Triggeringofapreemptiveprice

strike

.8

20

.760

Morefrequentpricepromotionthancompetitors

.8

07

.690

Avoidanceofapricewar(recoded)

.7

92

.311

.727

Price-FollowerApproach(=.872)

Extensiveuseofnonpricepromotions

.808

.631

Useofnonpricepromotionsinsteadofpricepromotion

.791

.701

Promotionofloyaltyprograms

.693

.334

.607

Novoluntarytriggeringofapric

ewar

.569

.318

.447

Value-CentricApproach(=.735)

Aggressiveintroductionofnewproducts

.818

.680

Enrichmentofproductbenefitsbyvalue-addedfeatures

.795

.704

Frequentproductupdates

.514

.307

.436

Retreat/DetourApproach(=.6

38)

Attempttowithdrawfromthecurrentmarket

.813

.679

Explorationofothernichemarketsforapossibleswitch

.807

.696

Eigenvalue

3.0

08

2.319

1.821

1.366

Accumulatedpercentageofvarianceexplained

23.1

4

40.98

54.98

65.50

Notes:Extractionmethodisprincipa

lcomponentsanalysis.RotationmethodisVari

maxwithKaisernormalization.KaiserMeyerOlkinmeasureofsamplingadequacy=.700;Ba

rtlettstestofsphericity=

347.370(p

Recession Strategy

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