Frontiers of Management (Routledge Revivals)

Research and Practice

Roger Mansfield

• Publisher: Routledge
• Year: 2014
• ISBN:
  9781317961284
• Edition: 1
• Topic: Business
• Subtopic: Business General
• Index: Business

This edited collection, first published in 1989, stems from the second annual meeting of the British Academy of Management, held at Cardiff Business School in 1988. With the focus on important areas of change affecting management practice and theory – in markets, technology and organizational structure - this volume contains a selection of material presented at the conference by leading scholars in the field. Their contributions provide multi-disciplinary views of organizational strategy, across a wide spectrum of business and industry, which will be of significant interest to any students of business structure and management.

Section Three

Strategy and Organization

Chapter eleven

The linkage between strategy, strategic groups and performance in the UK retail grocery industry

Pam Lewis and Howard Thomas

This chapter examines the strategy-performance consequences of strategic group membership for firms in the UK retail grocery industry. Indeed, a focal theme in the strategic groups literature (Caves and Porter, 1977; Caves, 1984; Cool and Schendel, 1987; McGee and Thomas, 1986; Porter, 1979) is that there is a theoretical relationship between strategic groups and financial performance. In particular, it is argued that profitability may differ systematically among groups in an industry because of mobility barriers, market factors and firm specific asset profiles.

However, the empirical evidence linking performance differences with strategic groups is not extensive and is conflicting. Cool and Schendel (1987) studying the US pharmaceuticals industry found performance differences in terms of market share but differences in profitability between groups were not observed. Further, differences were not found for risk and risk-adjusted performance. It has been shown that, in the UK brewing industry, within-groups variations in performance were greater than between-groups variations and it was concluded that ‘differential firm strategies and asset endowments outweigh interfirm commonality of strategic characteristics in accounting for performance differences’ (Johnson and Thomas, 1987: 31). In contrast, Fiegenbaum and Thomas (1987) found some support for the strategic group-performance linkage. In their study of the US insurance industry they found differences between groups for certain measures of economic performance, also for risk measures for returns and market share, and for a risk-adjusted measure associated with economic performance.

Where the linkage appears absent or equivocal, it could be because there is no such linkage; or it could be that the relationship has not been shown because the groups identified within existing studies have used a wide range of approaches (McGee and Thomas, 1986) which have generally not adequately captured the differences in the strategies adopted by firms in competitive environments. Taking the latter argument, we examine whether performance differences (using multiple indicators of performance) exist when groups are formed using the more commonly accepted grouping techniques, namely, first, ‘using the relative size of a firm in an industry as a proxy for strategic group membership’ (Porter, 1979) and, second, more correctly, forming strategic groups from key strategic dimensions reflecting firms’ scope and resource commitments (Cool and Schendel 1987; Hofer and Schendel, 1978).

We then reverse the procedure and question whether we can explain actual performance differences through a discriminant analysis model based on the key competitive strategic dimensions. In essence, we divide the firms into ‘high’, ‘medium’ and ‘low’ performers using actual performance results over the study period and then examine whether we can discriminate among these performance groups using the key strategic dimensions as predictor variables.

We discuss the results of our procedures and conclude that performance differences (in terms of ROS) do exist across some strategic groups defined in terms of key scope and resource commitments but there are no such differences across groups defined in terms of size. Further, we confirm the value of our strategic dimensions by showing, through our discriminant analysis model, that they have predictive validity in explaining performance differences identified in the study.

We speculate that further careful longitudinal studies of the strategy- performance linkage should be undertaken and should include competitive effects in the modelling of industry structure.

Theoretical development

The term ‘strategic groups’ was originally coined by Hunt in his doctoral dissertation (1972) to contribute to his exploration of the performance of the white goods industry in the 1960s. Porter (1980: 129) provides the accepted definition of a strategic group in terms of the similarity of competitive behaviour:

A strategic group is the group of firms in an industry following the same or a similar strategy along the strategic dimensions … Usually, however, there are a small number of strategic groups which capture the essential strategic differences among firms in the industry.

The main studies in the area are summarized in McGee and Thomas (1986), Cool (1985) and Fiegenbaum (1987). The relationship between strategy strategic groups and performance has been documented in Caves and Porter (1977), Caves (1984), Cool and Schendel (1987), McGee and Thomas (1986) and Porter (1979). The burden of these writings is that it is not clear, based on empirical evidence, whether performance differs among strategic groups.

From a theoretical viewpoint, the main contributions to the explanation of intra-industry performance differences are found in the work of Caves and Porter (1977) and Porter (1979, 1980). They argued that profit rates may differ systematically among groups in an industry and offered explanations ranging from mobility barriers and market factors to firm-specific factors in order to explain such differences. Indeed, Porter (1979, 1980) concentrated more attention on firm than on group performance and emphasized the role of firm-specific factors including asset profiles and execution ability in strategy implementation to explain intra-industry performance differences. Two theoretical possibilities may, therefore, be advanced in researching intra-industry performance differences. First, that there may be performance differences across groups but second, that the uniqueness of firm strategies directed to achieve distinctive sets of assets (capital, financial, human) may better predict within-industry performance differences.

Studies within retailing have been concerned more with the structure of retailing and retailer strategies than the relationship between strategy and performance. Killen and Pattison (1987) detailed the structure as consisting of major supermarkets, medium-sized supermarkets, small independents and co-operatives. Lewis and Killen (1987) and McGee (1978) analysed retailer strategies in the UK. Building on this work to progress towards the linkage between strategy and performance, this chapter addresses the following propositions.

1. Although the UK retail grocery sector is dominated by a small number of large multiples, they differ from each other along a number of merchandise, store portfolio and service dimensions. We would therefore expect to be able to identify a number of distinct groups. For example, we might expect to observe firms operating superstores offering a wide range of merchandise clustered in one group and firms operating a large number of small, limited-range stores in another group.
2. Hatten and Hatten (1987) argued that asymmetric barriers are a necessary condition for growth in concentrated markets, like grocery retailing, where growth is a zero sum game. Further, they argued that the markets of the weaker firms are ‘virtually contestable’ in Baumol’s (1982) sense. Thus entry into and out of some groups is easier than others. This would lead us to expect that some groups would be better defined and more highly defended than others. We might therefore observe a core of stable groups.
3. Economies of scale and scope are important drivers in this industry, both at the firm (buyer-power) and store level. This would lead us to expect to find performance differences between groups.
4. Lippman and Rumelt’s (1982) concept of ‘uncertain immitability’ indicates that it is hard to replicate other competitors’ successful strategies even with full knowledge of their strategic choices with respect to scope and resource deployment. This would lead us to expect that firms within strategic groups will not necessarily achieve the same level of profitability. We would therefore expect to observe some performance differences within groups.

Methodology

The aim of the research was to examine the linkage between strategy and performance by examining strategic groups within the UK retail grocery sector. In the following paragraphs we discuss the rationale for focusing on that sector. We discuss the sample, the strategic dimensions and the methodology employed in forming strategic groups and testing the linkage.

Sample

The UK retail grocery sector is a static market where considerable consolidation is continuing to take place. Competition is for market share and the major players are moving to large out-of-town stores where they can offer a ‘one-stop’ shopping proposition to the car-owning population. The sector is dominated by a small number of large multiples, with the largest five businesses accounting for over 50 per cent of the market. In addition to these, the sector contains a large number of independent and co-operative societies which, jointly, account for approximately 30 per cent of the market. Positioned between the market leaders and the small independents and co-operatives are a number of medium-sized multiples. This research concentrates on the sixteen largest store groups, which account for more than 60 per cent of the sector. Table 11.1 gives a list of these stores.

Table 11.1 Stores in sample

Consolidation within the industry continued throughout and after the study period (1982–1986). In 1986 Fine Fare was acquired by the Dee Corporation and, in 1987, Safeway was acquired by Argyll and Hillards by Tesco. Thus the original sample of 16 has by now (1987) been reduced to 13 store groups. Future consolidation will be influenced by the regulation of monopoly and the possibility of overcapacity in the sector.

Despite the relatively small number of major players in the sector, they differ along a number of product, store, site and service dimensions. It would not appear unreasonable, therefore, to expect that a group structure would be discernible. This structure, encompassing major supermarkets, medium-size markets, small independents and co-operatives, is discussed in detail in an earlier paper (Lewis and Killen, 1987), which presents an in-depth analysis of the industry (see also Killen and Pattison, 1987).

Choice of strategic dimensions

Hofer and Schendel (1978) and Cool and Schendel (1987) argue that the key strategic dimensions discriminating between businesses and, therefore, forming the basis of strategic groups are those associated with scope and resource commitment decisions. Indeed, Cool and Schendel (1987: 1106) define a strategic group as: ‘A set of firms competing within an industry on the basis of similar combinations of scope and resource commitments.’

The key dimensions in the present study included variables reflecting both of these commitments (see Table 11.2). The resource variables consisted of a store size variable and advertising. Economies of scale at the store level are an important source of competitive advantage within this industry. Average store size is therefore included as a proxy variable to reflect firms’ strategy and ability to exploit these economies, since other adequate proxies for scale economies (e.g. degree of capital intensity) were not readily available. Advertising to sales was the other differentiating resource commitment variable, included because it reflected the importance of promotional expenditures in generating store traffic in supermarkets.

Table 11.2 Variables

The scope variables included a mix of store portfolio, merchandise strategy and focus variables. Supermarket operators are increasingly becoming managers of significant property portfolios and one of the major areas of competition is in the acquisition and development of out-of-town sites for large superstore developments (Segal-Horn, 1987; Killen and Pattison, 1987). The number of stores is included to reflect this crucial competitive dimension. It encompasses both the geographic spread and the store policy of the major players. Food sales as a proportion of supermarket sales measures the extent to which stores are moving away from selling mainly food items. Given that expenditure on food is not rising significantly, diversification into non-food, higher value-added items offers both an avenue for expansion and a possible competitive advantage. The number of food lines differentiates between limited range stores (e.g. Kwik Save) and others which offer a wide range of food items (e.g. Safeway and Waitrose). The proportion of lines which are own label lines indicates another form of differentiation. Further, own label products offer a guarantee of quality and increase the retailer’s power vis-à-vis the food manufacturer. Finally, supermarket sales as a proportion of group sales reflect the firm’s focus on supermarket activities.

These seven strategy variables outlined above formed the basis of the grouping procedures.

In order to examine the existence of a linkage between strategy and performance, it was also necessary to derive performance measures for the companies concerned. Ginsberg and Venkatraman (1985) argue that multiple linkages exist between strategy and performance. It was desirable therefore to employ more than one measure of performance. As in a number of earlier studies (Cool and Schendel, 1987, 1988; Johnson and Thomas, 1988), accounting data were the initial source of performance data. ROS (return on sales) was a measure which was particularly relevant in the retail sector, where trading margins are small. In addition, there is significant capital investment taking place within the UK retail grocery sector as store groups change not only their store locations but also their store formats. Some measure of capital efficiency was therefore required. ROCE (return on capital employed) was used here because it appear...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Original Title Page
• Original Copyright Page
• Table of Contents
• Tables
• Figures
• Preface
• Section One: Understanding Management
• Section Two: Technology and Innovation
• Section Three: Strategy and Organization
• Index