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MD SECTION 5. HIERARCHICAL FIT

45,3
Levels of strategy and
performance in UK small retail
484
businesses
Phil Megicks
University of Plymouth, Plymouth, UK

Abstract
Purpose – This study aims to investigate the way in which small retailer performance is influenced
by strategy at different levels. It also aims to propose that business level strategy is more important to
success than functional level strategy in small retail firms, as this is what enables them to distinguish
their business from competitors and effectively set about competing in their markets.
Design/methodology/approach – Data were collected from a mail survey of 305 independent
retailers in the UK. Multivariate statistical methods were used to develop appropriate variables and
explore the relationships between level of strategy and performance.
Findings – The results indicate that business level strategy variables have a significant influence on
performance whereas functional levels do not when their combined effects are analysed using
hierarchical regression modelling.
Research limitations/implications – The caveats normally associated with survey methods
apply, as do those related to the use of cross-sectional, self-report, and managerial perceptions data.
Implications for retail strategy theory and small retailers’ performance are addressed.
Practical implications – The importance of business level strategy generally and its specific
elements are considered with a view to providing guidance to management decision makers and policy
advisors.
Originality/value – Reliable measures for retail strategy variables are developed in the paper. The
research distinguishes the performance effects of retail business strategy from retail functional
strategy and supports the view that business strategy decisions are superior in their market
significance over operational retail mix decisions.
Keywords Corporate strategy, Small enterprises, Retailers, Business performance, United Kingdom
Paper type Research paper

Management Decision
Vol. 45 No. 3, 2007
pp. 484-502
q Emerald Group Publishing Limited
0025-1747
DOI 10.1108/00251740710745098
Introduction
At the beginning of the twenty-first century the challenges facing small retail
businesses in the UK have never been so daunting. The increased threat of the
powerful multiple chains across all product sectors, changing demographic and
technological conditions, and the evolution of customer purchasing patterns has meant
that a strategic imperative exists for all businesses operating in this context to assess
their business position. This has been highlighted by a recent parliamentary
investigation of the future of the high street (APPSSG, 2006), which suggests that the
landscape of retailing in the UK will change significantly if current trends pertain, and
that the future existence of many small shops is threatened. Yet against this backdrop
of well-documented problems for small retailers it is clear that many small shopkeepers
run successful businesses and that such achievement is likely to stem from the
adoption of strategies appropriate to the market conditions that they face and their Levels of
own unique capabilities or distinctive competences (McGee and Petersen, 2000). strategy and
Of particular concern therefore to small retailer decision makers and policy advisors
to the sector is the extent to which different strategies may influence performance. performance
Indeed the very nature of strategy in these small enterprises has encountered only
limited previous interest from researchers especially in the UK (e.g. Byrom et al., 2001;
Megicks, 2001), and particularly with regard to how the strategy at different levels 485
(Hofer and Schendel, 1978) might be influential in determining success or failure. It is
our contention that given the competitive intensity of the retail industry and their
limited resource base, smaller shops may have a tendency to focus attention on
implementing operational “functional” level strategies revolving around the retail mix
when faced by the day-to-day necessity to attract, satisfy, and keep customers.
However this may be to the detriment of more medium and long-term thinking about
how to compete in their markets which requires attention to “business” level strategies,
and which may ultimately determine future performance outcomes (Conant and White,
1999). This paper investigates the proposition that business level strategy is essential
to small retailer success by initially reviewing the extant literature on retail strategy,
its relationship with performance and its specific application in a small retailer context.
It then moves on to develop a classification of functional and business level strategy
variables relevant to retail competition using data from small retail enterprises in the
UK. Next the relationship between variables at the different levels and measures of
store performance is analysed. The results of the study are then discussed and
particular attention is given to implications of the research for theory and practice.
Finally the limitations of the research are noted and areas for future investigation
identified.

Theoretical considerations
Strategy in retailing
A review of the retail strategy literature identifies only a relatively limited number of
studies that have examined strategic behaviour in firms from an empirical standpoint
(e.g. Park and Mason, 1990; Alexander and Veliyath, 1993). Within the existing body of
work, researchers have tended to utilise approaches that concentrate on a particular
aspect or level of strategy to form strategic types and in many instances examine their
relationship with business performance (e.g. Conant et al., 1993; McGee and Petersen,
2000). The greater bulk of studies have adopted inductive approaches based around
clustering techniques to identify post hoc strategic types (e.g. Hawes and Crittenden,
1984; Lewis and Thomas, 1990) and a small number of studies have used a priori
approach to identifying pre-existing conceptual strategic types in retailing (e.g. Segev,
1987; Moore, 2005). In both instances however, establishing retail strategies has, in the
main, been guided by the application of strategic positioning theory drawn from
outside the retail sector at the business level, and its adaptation to a retail context at the
functional level through the retail mix.
This line of development is evidenced in some of the early inductive studies of retail
business strategy where Porter’s (1980) generic strategy framework has been used as a
basis for classification. A number of researchers have considered retailers’ strategic
options in terms of differentiation, low cost and focus strategies (e.g. McGee, 1987;
Wortzel, 1987; Dwyer and Oh, 1988; Helms et al., 1992). Consequent variations on
MD generic strategy have emanated from such work including sales service and
45,3 merchandise differentiation, and price leadership, together with combined low-cost and
differentiation strategies. Others (e.g. Doyle and Cook, 1980; Walters and Knee, 1989;
Park and Mason, 1990) on the other hand have broadly adapted the Ansoff (1957)
product market approach to retailing which has given rise to business strategy options
relating to productivity improvement, integration, consolidation, repositioning, market
486 development, penetration, and diversification. In a more recent study by Moore (2005),
the researcher applied the Miles and Snow (1978) theoretical typology to the retail
sector and found some evidence to support the presence of three of the four strategic
business level archetypes in the retail industry and a link with retail performance.
Functional level strategy in retailing was investigated in a study by Hawes and
Crittenden (1984) who derived competitive strategy types using cluster analysis of
retail marketing activities and identified differences in performance between the
groups. Furthermore, an alternative stream of research on retail strategy, which
predominantly identifies variations in functional level retail strategy and performance,
considered strategic groups of retailers in industry structure studies based on their
scope of activities and resource allocation (e.g. Lewis and Thomas, 1990; Carroll et al.,
1992; Flavian and Polo, 1999).

Small retailer strategy

Conventional normative assessment of strategy within the small retail business sector,
particularly in the UK, has been developed against a backdrop of the limitations of the
business form (see Kirby, 1986). Thus it is proposed that strategies should be adopted
that avoid the low price and differentiation domain of the large retailer and emphasise
a focused offer (Watkin, 1986). This is consonant with the accepted wisdom of small
business strategists who propose customer service and product specialisation or
customisation as appropriate strategic positions (Covin and Covin, 1990). Moreover,
some commentators such as Berman and Evans (1989) have identified small retailers
as having a strategic advantage in being able to adapt speedily to changing market
conditions. Thus it is argued that configuring and implementing targeted strategies as
a basis for success with no predetermined positioning being deemed preferential is a
particular capability of these enterprises. Results of the sparse number of studies that
provide empirical evidence of the strategies adopted by small retailers and their effects
on performance tend to concur with this view in as much as they identify wide-ranging
inductive strategic types at the functional level. This is indicated by the work of Fiorito
and LaForge (1986), which considered the strategic use of retail marketing mix
variables and identified differences in strategic type on this basis. Similarly Conant
et al. (1993) adopted functional marketing strategies to define strategy types among
small retailers and concluded that firms that choose to compete in clearly defined ways
generally achieve superior levels of performance. This study was extended by McGee
and Rubach (1996) to take account of environmental conditions in the retail strategy
and performance relationship. Finally in a study by Megicks (2001), both business and
functional level retail strategy variables were combined to define competitive strategy
types amongst small retailers and draw associations with store performance. In so
doing, although it was possible to identify strategies at different levels that
distinguished better performing small retailers, it was not possible to assess their
relative importance.
Research questions Levels of
Drawing on the research to date it is clear that, although there have been a number of strategy and
attempts to identify the way that strategy is shaped in the retail sector and to judge the
extent to which performance relates to types of strategy adopted, the relative performance
significance of different levels of strategy has yet to be evaluated. Variation in research
design and the market sector studied has led to equivocal results in defining the
hierarchy of retail strategies and their importance in terms of business success. In the 487
small retailer segment of the market, where the vast majority of firms compete and
where the pressure of competition is at its peak, there is a gap in the research to define
strategy at the business as well as the functional level and evaluate the extent to which
performance is influenced by their relative effects.
Following previous lines of investigation presented above the current research
adopts an approach that considers comprehensive business-level strategies within the
small retail sector which focus on how firms compete in their chosen business in
conjunction with functional-level strategy that focuses on the operational aspects of
delivering those strategies in the market. The nature of small retail businesses requires
that success is dependent on delivering value to customers and at the functional-level
this is encapsulated in the retail marketing mix strategies adopted. The emphasis is
therefore on the marketing dimension of strategy in the retail mix at the operational
level which dominates competitive behaviour and subsumes all other functional areas
in the way that offers are configured and delivered to customers in support of the
specific business-level strategies pursued (see Park and Mason, 1990).
Thus given the need to examine the nature of strategy in a small retailer context
along with the way in which strategy influences the performance of small retail
businesses, this research develops measures for retail strategies at different levels and
assesses their relative impact on store performance. It specifically addresses the
following two research questions:
(1) Within the context of small retail firms, what strategic alternatives are available
at the functional and business level?
(2) What is the relationship between retail strategies at the different levels and
small retailer performance?

Research methodology
Sample and data collection
A postal survey of 2,000 owner-managers of a cross-section of independent retail
businesses in urban in rural locations in the UK was administered using a two-wave
mailing regime. A random sample of retail businesses with fewer than ten outlets (the
UK definition of independent retailers) across a range of product market sectors was
drawn from a Dun & Bradstreet MarketPlace database. Standard approaches to
maximising responses were adopted including a covering letter explaining the
significance of the study to understanding the factors affecting small retailer
performance and the promise of a copy of the study results to each respondent.

Survey instrument and measures

The research instrument used to elicit retail strategy in respondent firms was based on an
adaptation of two previous studies which explored operational methods of retail
competition and small retailer strategic types: Conant et al. (1993) and Megicks (2001). The
MD questionnaire included multiple item batteries of statements relating to retail functional
45,3 strategy (31) and retail business strategy (20) measured on 1 to 7 Likert-type scales
assessing the degree of emphasis placed on each within the business. In addition four
separate subjective self-report business performance measures for overall performance,
change in turnover, change in return on investment (ROI) and change in customer
retention were employed which were adapted from past research in the small retailer field
488 (Conant et al., 1993; Kara et al., 2005). Additional data were collected for descriptive
analysis and control purposes relating to business and respondent characteristics.
The adoption of this approach is in harmony with many previous studies of this
type and permits the multivariate analysis of the nature and effects of strategy using
the large data sets that self-report measures permit (Hambrick, 1980). Previous
research also supports the use of subjective managerial assessments of retail
performance based on the understanding that they are quite consistent with secondary
published performance data external to the business (Venkatraman and Ramanujam,
1986) in addition to objective performance data internal to the business.

Analysis and results

Response rates and descriptive statistics
In total 305 usable questionnaires were obtained representing an effective response
rate of 16.6 per cent (returned survey packets, incomplete questionnaires, and
businesses reporting themselves ineligible/no longer trading were discounted).
Comparison of key study variables between mailings using appropriate comparison
tests at the 0.05 level indicated no significant differences between the two waves, which
satisfied concerns of non-response bias as suggested by Armstrong and Overton’s
(1977) extrapolation technique.
Nearly half of the respondents (49 per cent) described themselves as proprietors, 30
per cent as partners, 16 per cent as directors, and only 5 per cent as managers of the
retail businesses surveyed. Approximately 31 per cent were female and 69 per cent
male, and the average age of respondents 50 years. The mean number of outlets was
1.2 with 70 per cent of all respondents operating from a single outlet. Annual sales
turnover averaged around £410,000; responding businesses employed over five staff
and had been running for approaching 16 years on average.

Data analysis
Survey data were analysed in a two-stage approach which initially involved
classifying retail strategy variables at the functional and business level by means of
factor analysis and reliability evaluation. Subsequently the relationship between retail
strategy and performance was investigated using multiple regression analyses to
assess the relative impacts of retail strategies at different levels.

Distinguishing retail strategy variables

In order to clarify the nature of strategic retailing behaviour at different levels amongst
small retailers, factor analysis was adopted to identify distinct aspects of retail
functional and retail business strategy. Analysis was undertaken separately for the
two different levels of strategy using 31 and 20 items respectively adopting a principal
components method with varimax rotation in both cases. Factors were extracted using
scree plot inspection and identifying factors with eigen values greater than 1.0. Further
refinement of the variables was undertaken using criteria for scale reliability analysis Levels of
assessing Cronbach’s alpha coefficients for the resultant scales with items deleted, strategy and
item-to-total correlations, and the cross-loading of items on different factors (Hair et al.,
1998). Consequently items were dropped from further analysis if the reliability of the performance
resultant factors were improved. The results of these analyses are presented in Tables I
and II; deleted items are indicated in italics.
A total of seven separate internally consistent functional strategies were identified 489
for small retailers and were labelled accordingly based on the nature of the items
loaded on each. High quality merchandise and service (RFS1) defines an operational
focus on top-end product and full service support for customers. The second factor,
store operations and product uniqueness (RFS2), puts an emphasis on the internal feel

Retail functional strategy factor loadings (n ¼ 305)

Retail functional item RFS1 RFS2 RFS3 RFS4 RFS5 RFS6 RFS7

Customer service 0.690

Links with suppliers 0.678
After-sales service 0.633
Pre-sales advice 0.605
High quality merchandise 0.578
Higher priced lines 0.475
Ordering service 0.453
Returns and exchange 0.388
Card payment facilities 0.371
Layout and merchandise presentation 0.743
Lighting and sound 0.728
Staff training 0.668
Store location 0.638
Stocking different products 0.522
Lower priced lines 0.673
Range of products 0.641
High stock levels 0.625
Selection in range 0.576
Traditional merchandise 0.562
Internet-based promotion 0.732
Computerised sales and purchasing 0.686
Direct mail advertising 0.623
Credit terms 0.562
Promotional offers 0.767
Sales 0.665
Advertising in press 0.526
Involvement in community 0.734
Sponsorship of local events 0.679
Supplier merchandising support 0.638
Stocking recognised brands 0.573
Up-to-date lines 0.493
Notes: The extraction method was principal components analysis with Varimax rotation and Kaiser
normalisation. The total variance explained was 57.47 per cent. Loadings under 0.35 have been Table I.
suppressed. The Kaiser-Meyer-Olkin measure of sampling adequacy was 0.791. Bartlett’s test of Factor analysis results
sphericity Approx. Chi-square = 3,404.624 (significance = 0.000). Communalities range from 0.347 to for retail functional
0.751 strategy variables
MD
Retail business strategy factor loadings (n ¼ 305)
45,3 Retail business item RFS1 RFS2 RFS3 RFS4 RFS5 RFS6

Grown from high quality service 0.861

Grown from serving new customers 0.809
Retain customer loyalty through service 0.698
490 Clear view of customers and what is offered 0.637
Consolidated by closing outlets 2 0.411
Grown by integration 0.794
Grown by opening new stores 0.738
Grown by introducing mail order 0.643
Consolidated by increasing efficiency 0.815
Consolidated by cutting costs 0.804
Clear positioning compared with competitors 0.488
Compete through a specialist range 0.783
Compete through a unique range 0.693
Compete through exclusive distribution 0.639
Low costs from supplier relations 0.825
Low costs from efficiency 0.722
Cut prices to improve competitiveness 0.664
Expanded by diversifying 0.770
Grown by widening range 0.668
Changed with customer needs 0.503
Notes: The extraction method was principal components analysis with Varimax rotation and Kaiser
Table II. normalisation. The total variance explained was 64.47 per cent. Loadings under 0.35 have been
Factor analysis results suppressed. The Kaiser-Meyer-Olkin measure of sampling adequacy was 0.884. Bartlett’s test of
for retail business sphericity Approx. Chi-square ¼ 2,082:939 (significance ¼ 0:000). Communalities range from 0.493 to
strategy variables 0.781

of the store, its location, and the difference of its products. Product range and low price
(RFS3) conveys a functional strategy that concentrates on the availability of standard
products at prices set below the competition. Factor four, online and direct marketing
(RFS4), reflects a combination of computerised selling, purchasing, and direct
marketing, and indicates more innovative strategic operations amongst small retailers
that have adopted internet-based activities. Sales promotion (RFS5) is a standard
combination of marketing communications methods in retail businesses. The sixth
factor, local involvement (RFS6), indicates that the retailer is engaged with the local
community particularly through sponsorship opportunities. The final factor brand
merchandising (RFS7), highlights an emphasis on the provision of up-to-date, branded
products which are supported through in store merchandising by suppliers. The
refined variables achieved Cronbach’s alpha coefficients ranging from 0.65 to 0.78
which are above the acceptable threshold of 0.60 (Finkelstein, 1992) for assessing
internal consistency in research of this type where scale development is not the
primary intention of the study (McDougall and Robinson, 1990).
Retail business strategy amongst small retailers may be characterised in six ways
according to the analysis undertaken in this research. Customer service focus (RBS1)
indicates an emphasis on growth through a targeted high quality retail service
provision resulting in retaining existing and capturing new customers. The second
retail business strategy factor, channel expansion (RBS2), identifies the business
growing through managing its channels including integrating activities, new store Levels of
openings, and mail order. Third, consolidation (RBS3) emphasises cost reductions and strategy and
efficiency savings as a strategic option. Specialisation (RBS4) suggests a focus on the
uniqueness and specialist nature of merchandise provided by a retailer. performance
The fifth factor, low cost (RBS5), indicates striving for lower costs and a low price
competitive positioning based on efficiency and supplier relations. The last retail
business strategy to be revealed is diversification (RBS6) through expanding the range 491
of merchandise offered and changing the business in line with evolving customer
needs. Cronbach alpha results for these variables varied from 0.63 to 0.84 and were
similarly deemed internally consistent on the same basis as the functional strategy
variables.

Retail strategy and performance

The models used to establish associations between retail strategy and performance
were based on ordinary least squares regression using the enter method to identify
independent effects and a hierarchical regression routine to identify combined effects
of the two sets of variables. Descriptive statistics for the independent and dependent
variables that formed a basis for the regression undertaken are provided in Table III.
Pearson’s product moment correlation coefficients between the main study variables
and the performance measures are presented in Table IV. The pattern of correlations

Number of Cronbach’s a
items coefficient Mean SD

Retail functional strategy variables

RFS 1: high quality merchandise and service 9 0.78 5.21 1.12
RFS 2: store operations and product uniqueness 5 0.78 5.26 1.16
RFS 3: product range and low price 5 0.72 5.22 1.10
RFS 4: online and direct marketing 3 0.69 2.67 1.63
RFS 5: sales promotion 3 0.73 3.41 1.69
RFS 6: local involvement 2 0.65 4.26 1.60
RFS 7: brand merchandising 3 0.67 4.94 1.46
Retail business strategy variables
RBS 1: customer service focus 4 0.84 5.72 1.09
RBS 2: channel expansion 3 0.65 2.93 1.04
RBS 3: consolidation 2 0.74 4.12 1.57
RBS 4: specialisation 2 0.71 4.66 1.81
RBS 5: low cost 3 0.63 3.64 1.42
RBS 6: diversification 3 0.66 4.55 1.40
Performance measures
Overall performance 1 – 5.18 1.24
Change in turnover 1 – 4.94 1.51
Change in ROI 1 – 4.39 1.43
Change in customer retention 1 – 5.08 1.35
Control variables
Years running business – – 15.70 11.26 Table III.
Number of staff – – 5.20 7.21 Regression variable
Number of outlets – – 1.22 0.90 definition and statistics
 MD
45,3

492

Table IV.

and performance
variables (n ¼ 305)
Correlations of strategy
Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1. RFS 1
2. RFS 2 0.47 * * *
3. RFS 3 0.46 * * * 0.47 * * *
4. RFS 4 0.34 * * * 0.23 * * * 0.16 * *
5. RFS 5 0.33 * * * 0.33 * * * 0.31 * * * 0.43 * * *
6. RFS 6 0.37 * * * 0.30 * * * 0.27 * * * 0.13 * 0.28 * * *
7. RFS 7 0.48 * * * 0.43 * * * 0.45 * * * 0.28 * * * 0.47 * * * 0.34 * *
8. RBS 1 0.54 * * * 0.38 * * * 0.32 * * * 0.14 * 0.19 * * 0.18 * 0.25 * * *
9. RBS 2 0.03 0.04 0.09 0.19 * * 0.17 * * 0.36 * * * 0.13 * 2 0.07
10. RBS 3 0.20 * * 0.08 0.16 * * 0.15 * 0.11 * 0.08 0.08 0.29 * * * 0.17 * *
11. RBS 4 0.40 * * * 0.26 * * * 0.10 0.10 0.03 0.05 20.04 0.40 * * * 0.03 0.14 *
12. RBS 5 0.07 20.03 0.26 * * * 0.06 0.28 * * * 0.08 0.14 * 0.14 * 0.15 * * 0.30 * * * 20.10
13. RBS 6 0.37 * * * 0.35 * * * 0.38 * * * 0.17 * * 0.29 * * * 0.26 * * * 0.28 * * * 0.51 * * * 0.17 * * 0.22 * * * 0.33 * * * 0.22 * * *
14. Overall
performance 0.15 * * 0.20 * * * 0.16 * * 0.07 0.12 * 0.12 * 0.13 * 0.33 * * * 0.14 * 0.03 0.08 0.08 0.18 * *
15. D turnover 0.21 * * * 0.28 * * * 0.15 * * 0.09 0.14 * 0.15 * * 0.15 * * 0.43 * * * 0.04 0.02 0.13 * 0.07 0.31 * * * 0.54 * * *
16. D ROI 0.21 * * * 0.28 * * * 0.19 * * 0.16 * * 0.20 * * 0.11 0.16 * * 0.37 * * * 0.04 0.04 0.20 * * * 20.01 0.25 * * * 0.50 * * * 0.64 * * *
17. D Customer
retention 0.30 * * * 0.29 * * * 0.18 * * 0.03 0.13 * 0.15 * * 0.09 0.48 * * * 20.02 0.04 0.23 * * * 0.03 0.26 * 0.44 * * * 0.70 * * * 0.58 * * *

Notes: * Correlation is significant at the p , 0:05 level (two-tailed); * * Correlation is significant at the p , 0:01 level (two-tailed); * * * Correlation is significant at the p , 0:001 level (two-tailed). Correlations between
control variables and other variables are not shown
shows associations between variables at the same level and at different levels and also Levels of
relationships between the strategy variables and the performance measures. Although strategy and
there are some instances of quite significant correlations between variables they are
not indicative of multicollinearity (. 0.8 as proposed by Field (2005)). Moreover such performance
patterns provide insights into the way in which functional level strategies and business
level strategies are inter-related and how they separately and jointly contribute to
small retailer performance, which is further examined in the regression analyses that 493
follow.
Independent effects. In the first run of regression models separate analyses were
undertaken for the effects on the four performance measures of the retail functional and
retail business strategy variables; three business descriptor variables were also
included in the models as control variables. The results of the analyses at the different
levels of retail strategy are outlined in Table V.
Independent effect models for the functional strategy variables are distinguished by
their low levels of explanation of variance in the dependent variable (as depicted by the
adjusted R 2) with only the customer retention model displaying a respectable level of
explanation (0.132); the other three models all explain less than 10 per cent of the
variance in their respective dependent variable. The models for the business strategy
variables are however more robust and explain a greater proportion of variance in the
dependent variables. The adjusted R 2 values range from 0.125 to 0.233 and can be
considered acceptable indicators of relationship in exploratory research of this type.
The limited explanatory power of the overall models is reflected in the independent
effects of the functional level variables on performance with only five independent
effects being significant across all the models. The RFS2 variable is significant in the
models for turnover (b ¼ 0:181, p , 0:01), ROI (b ¼ 0:173, p , 0:01), and customer
retention (b ¼ 0:172, p , 0:01). In addition in the customer retention model the RFS1
(b ¼ 0:288, p , 0:001) and RFS7 (b ¼ 20:149, p , 0:05) variables are also significant,
the latter being negatively related to performance.
Summarising these effects, there is a generally positive effect of store operations
and product uniqueness on small retailer performance. Furthermore, there is also a
significant positive association between high quality merchandising and service and
customer retention and a negative effect of brand merchandising and customer
retention.
In the business strategy models, however, although substantially more variance is
explained, only two more significant effects are present but higher b values are
apparent. In all four of the models the RBS1 variable is highly significantly associated
with performance: overall (b ¼ 0:400, p , 0:001), turnover (b ¼ 0:409, p , 0:001), ROI
(b ¼ 0:333, p , 0:001), and customer retention (b ¼ 0:458, p , 0:001). In addition
RBS2 varies significantly with overall performance (b ¼ 0:178, p , 0:01), and both
overall performance and turnover are significantly and negatively affected by RBS3.
From these results there is clear evidence to suggest that customer service focus is
strongly and positively associated with the performance of small retailers. Channel
expansion strategy is also positively related to the overall performance measure, and a
Consolidation business strategy appears to be negatively associated with overall
performance and the turnover measure.
The contrast in the capability of the two separate sets of strategy factors to assess
variation in the dependent variables is apparent when the R 2 values are compared for
 MD
45,3

494

Table V.
Regression results

retail functional and

(independent effects):

performance (n ¼ 305)
business strategies and
Overall performance D turnover D ROI D customer retention
b t b t b t b t

Retail functional strategy

Running 0.008 1.081 20.148 2.640 * * 20.069 21.220 2 0.142 2 2.594
Staff 0.070 0.139 0.126 2.019 0.085 1.361 0.052 0.855
Outlets 0.019 0.311 0.013 0.212 0.020 0.336 0.028 0.477
RFS1 0.048 0.643 0.119 1.650 0.095 1.309 0.288 4.088 * * *
RFS2 0.127 1.788 0.181 2.637 * * 0.173 2.508 * * 0.172 2.571 * *
RFS3 0.060 0.855 0.004 0.060 0.058 0.846 0.032 0.488
RFS4 2 0.027 2 0.394 20.037 20.576 0.030 0.460 2 0.124 2 1.957
RFS5 0.025 0.363 0.021 0.312 0.083 1.215 0.074 1.117
RFS6 0.037 0.578 0.041 0.668 20.014 20.233 0.025 0.414
RFS7 0.008 0.109 20.007 20.100 20.039 20.543 2 0.149 2 2.153 *
F-value 1.755 4.018 * * * 3.613 * * * 5.625 * * *
Adjusted R 2 0.024 0.090 0.079 0.132
Retail business strategy
Running 0.041 0.742 20.131 22.495 * 20.053 20.967 2 0.166 2 2.213
Staff 0.074 1.254 0.129 2.317 * 0.129 2.211 * 0.049 0.891
Outlets 2 0.021 2 0.347 20.008 20.141 0.001 0.009 0.009 0.168
RBS1 0.400 5.827 * * * 0.409 6.333 * * * 0.333 4.914 * * * 0.458 7.125 * * *
RBS2 0.178 3.074 * * 0.046 0.849 0.048 0.830 0.004 0.078
RBS3 2 0.121 2 1.997 * 20.118 22.075 * 20.073 21.230 2 0.091 2 1.614
RFS4 2 0.052 2 0.840 20.035 20.607 0.070 1.158 0.065 1.129
RFS5 0.028 0.481 0.017 0.304 20.037 20.643 0.002 0.036
RFS6 2 0.018 2 0.277 0.122 1.953 0.066 1.006 0.027 0.443
F-value 5.824 * * * 10.714 * * * 6.789 * * * 11.245 * * *
Adjusted R 2 0.125 0.223 0.146 0.233
Difference in R 2 0.101 0.133 0.067 0.101
F-value for difference in R 2 32.896 * * * 54.545 * * * 30.187 * * * 37.228 * * *
Notes: Standardised regression coefficients are displayed in the table; Significance: * p , 0:05, * * p , 0:01, * * * p , 0:001
each of the models and the performance outcomes. The F-value test of the difference Levels of
between the R 2 for the business and functional strategies regression models in each strategy and
instance indicates highly significant results which suggests that the business level
strategy is superior in explaining differences in performance. performance
Combined effects. To ascertain the combined effects of the two sets of variables,
hierarchical regression analysis (Neter et al., 1996) was employed which involved
initially entering the retail functional strategy variables in the four performance 495
models. The retail business strategy variables were then also entered in a separate run
of the same four models. The result of this type of analysis enables the effects of the
two sets of variables to be evaluated in a combined model and also assesses the extent
of the relative influence of the two sets of effects through identifying the significance of
the change in R 2 between the first and second models. Table VI presents the results of
the combined regression and hierarchical analysis for the four performance dependent
variables models. In all instances the analysis reveals a major distinction between the
influence of the functional level variables and the business level variables on retail
performance. When combined with the business level variables none of the functional
level variables have a significant effect on performance for any of the outcome
measures. In contrast a number of business level variables have significant effects in
the various models. Indeed all the significant effects remain the same as in the
independent models for the business level variables and the independent effects
previously apparent in the functional models, have now been superseded by the
business level effects. Further, the change in the R 2 value for all four hierarchical
models is highly significant (p , 0:001) which indicates that adding the business level
variables into the regression after the functional level variables has a significant
impact on the models’ explanatory power.
In assessing the combined effects there is potential for the previously significant
effects displayed at the functional level to have been eliminated due to multicollinearity
with the business level factors, thus not enabling the separate effects of all variables to
be distinguished. However in the analysis undertaken here advanced diagnostics
methods used to investigate the existence of multicollinearity in regression models
detected no such problem. The variance inflation factors and tolerance levels were
inspected for all variables in the combined effect models and came within the accepted
bounds proposed by Neter et al. (1996). The tolerance levels for each variable were well
within the recommended cut-off value (0.10), with the minimum value at 0.416. The
variance inflation factors were also all far below the recommended cut-off value (10),
with the highest value at 2.406.

Discussion and implications

The purpose of this study was to identify strategies adopted at different levels by small
retailers and investigate the comparative effects on business performance in this
context. The findings of the analysis undertaken suggests that a hierarchy of effects
exists in the relationship between strategy and performance with business level
strategy providing a superior basis for understanding small shop performance
compared with functional strategy. This is supported through a comparative analysis
of the independent effects of strategies at the different levels on performance, but more
importantly by an analysis of the combined effects, which affords greater explanation
of variation in performance when the business level strategies are included. Therefore
 MD
45,3

496

Table VI.

strategies and
Regression results

performance (n ¼ 305)
functional and business
(combined effects): retail
Overall performance D turnover D ROI D customer retention
b t b t b t b t

Running 0.054 0.943 2 0.114 22.121 * 20.038 2 0.677 2 0.109 22.054 *

Staff 0.067 1.086 0.119 2.041 * 0.094 1.551 0.052 0.908
Outlets 20.023 20.370 2 0.006 20.107 0.001 0.022 0.017 0.305
RFS1 20.076 20.904 2 0.067 20.849 20.105 2 1.287 0.071 0.913
RFS2 0.102 1.429 0.121 1.807 0.089 1.287 0.099 1.504
RFS3 0.031 0.444 2 0.047 20.706 0.063 0.912 0.017 0.258
RFS4 20.022 20.339 2 0.004 20.064 0.047 0.730 2 0.092 21.507
RFS5 0.014 0.199 2 0.008 20.118 0.096 1.408 0.070 1.090
RFS6 20.021 20.321 0.031 0.507 20.009 2 0.147 0.044 0.712
RFS7 0.011 0.149 0.007 0.104 0.006 0.086 2 0.116 21.713
RBS1 0.403 5.369 * * * 0.410 5.810 * * * 0.332 4.522 * * * 0.420 6.037 * * *
RBS2 0.186 2.909 * * 0.036 .604 0.034 0.545 0.001 0.022
RBS3 20.117 21.912 * 2 0.114 21.993 * 20.071 2 1.190 2 0.084 21.479
RBS4 20.043 20.630 2 0.031 20.493 0.086 1.296 0.030 0.479
RFS5 0.028 0.444 0.037 0.632 20.061 2 0.985 2 0.003 20.050
RFS6 20.042 20.605 0.109 1.668 0.019 0.282 0.005 0.084
F-value 3.478 * * * 6.938 * * * 4.420 * * * 6.938 * * *
Adjusted R 2 0.115 0.216 0.153 0.278
Change in R 2 0.106 * * * 0.137 * * * 0.089 * * * 0.131 * * *
Change in F-value 5.185 * * * 7.600 * * * 4.451 * * * 7.459 * * *
Notes: Standardised regression coefficients are displayed in the table; * p , 0:05, * * p , 0:01, * * * p , 0:001
from undertaking the hierarchical analysis it is possible to substantiate the view that Levels of
business level strategy is an essential contributor to success in small retail businesses. strategy and
This is very much in keeping with the belief that if small shopkeepers have a clear
understanding of how to compete in their markets and distinguish themselves from performance
competition then they will reap the performance benefits (Robinson et al., 1986; Conant
and White, 1999).
Notwithstanding this overall conclusion it is also possible to assess the specific 497
effects of individual strategies at the two levels considered, albeit that in the case of
retail functional strategy this can only be regarded as indicative of a situation where
decisions are made in isolation from business strategy. At an operational level
therefore it is worth noting the positive effects of store operations and product
uniqueness on all-round performance, and the positive and negative effects of high
quality merchandising and service and brand merchandising on customer retention
respectively. The business level results are however much more meaningful as they are
consistent across independent and combined effect models.
It is clear that a customer service focus business strategy is an important factor in
influencing small retailer performance across the board. This supports both the
conventional view that growth and success can be derived from a focused approach,
together with a pragmatic understanding of small retailer capabilities enabling the
provision of high-level service quality. There also appears to be some support for the
positive effect of channel expansion strategy on overall performance, which may satisfy
the motivation of retailers to grow their business in this way. Interestingly results also
suggest that consolidation is negatively associated with performance overall and change
in turnover which may reflect the difficulties of operating under a tight cost and
efficiency regime, and could preclude expansion and reduce sales growth opportunities.
In addressing the two research questions there are a number of important
implications for researchers, practitioners, and policy advisors. From a retail strategy
research viewpoint, this study develops a set of functional and business level strategies
that are indicative of competitive behaviour in the small retailer sector in the UK and in
so doing makes a significant contribution to understanding levels of strategy in the UK
small retail business sector which has not been examined empirically hitherto.
Theoretically this provides a basis for further examination of retail activity across the
sector particularly in terms of identifying the applicability of these strategies to
individual retail product markets. Furthermore they may offer insights into whether
such strategic distinctions are relevant to small retailers in different economies at
varying stages of development, with perhaps less hostile and dynamic environments to
cope with. This research also makes a contribution to understanding the relationship
between strategy and performance in small retail businesses, and presents a clear
indication of the superiority of business level strategy over functional level strategy in
influencing business success. Within this it also suggests that hybrid business strategies
which are defined by prevailing market circumstances and the firms’ capabilities to
enable a distinctive positioning are likely to provide a platform for success.
The managerial implications of this research are important as they offer small retail
owner-managers insights into the nature of the strategic options that they potentially
have at their disposal at the different levels and the way that these might contribute to
their business performance. It indicates to decision makers in these small enterprises
the importance of developing business level strategy which addresses the question
MD “How do we compete in our markets?”, and the need to reflect on strategic direction
45,3 rather than simply focusing in on operational aspects of their retail business functions.
In the competitive retail environments that small shops reside it is all too easy to forego
the big issue of business strategy for the expediency of day-to-day affairs, and
consequently overlook the major determinant of long term success. Owner-managers
must be aware of this and spend time and resource on understanding and enacting
498 their business position based on clearly defined segmentation and targeting policies.
The need for essential planning mechanisms are therefore apparent, which should stem
from knowledge of the catchment area’s consumer behaviour and competitive
conditions, and a clear vision of the particular benefits the store provides to its
customers. Small shop decision makers should note that high performing businesses
have grown through both attracting and keeping customers, and that superior service
quality is a major factor in their success. Indeed it would appear that this is a
prerequisite for success in the small shop sector as customers expect this to be a
distinguishing feature in comparison with multiple operators, and that every effort
should therefore be made to ensure that it is consistently delivered throughout the
business. From this perspective there is a strong requirement for staff training in
customer care, product knowledge, and in particular individualised customer attention.
Moreover there may be opportunities to match the traditional skills of the shopkeeper
in these respects with innovative approaches afforded by new information
technologies when providing service, and also when planning the development of
the future direction of the business. In so doing the significance of building
relationships with customers over time should be underscored along with the
complementary necessity of ensuring that good relationships with suppliers are
maintained.
The findings are also of significance to policy advisors including trade associations,
business networks, government departments, and training agencies who offer
guidance and support to the small retailer sector. Prominence should be given to an
understanding of the superiority of business level strategies over those implemented at
the functional level, and embedding this principle in business support mechanisms.
The importance of a focus on satisfying specific customers” needs and service quality
should also be stressed. The opportunities presented by channel expansion should also
be highlighted to practitioners, as should the possible shortcomings of consolidation. In
practical terms an integrated and accessible training programme for small shop
owner-managers is required that replaces the current fragmented provision in the UK.
National, regional, and local support agencies should provide funding for training
current decision makers which ensures that they have the skills to enact business
strategies through market knowledge processes, and implement them through relevant
operational skills. In particular the importance of market research to clarify target
customer groups and identify the dimensions of service quality that they value should
be included in the skills development agenda of small shop managers. Similarly, as the
independent retail sector is regarded as having low barriers to entry and therefore
offers a relatively easy start-up opportunity for many potential entrepreneurs, there is
a need for a programme of awareness building among this audience that concentrates
on the significance of business strategy in future success. Given the time pressures on
small shop managers and decision makers there is scope for informal support
initiatives to be encouraged that enable networks of small retailers to be established
and business strategy to be facilitated. Such groups which at a local level can share Levels of
market knowledge to enable better strategy development, can also promote operational strategy and
effectiveness through exchanging good practice in key areas such as customer service
and supplier relationship management. They may also provide a stimulus for performance
innovative approaches to fulfilling customer needs through the merchandise and
service offers that small shops use as a basis for distinguishing themselves from their
larger rivals. With this in mind there appears to be an opportunity to share insights 499
into the potential strategic response of small shops to an increasingly complex milieu
of values that shape the retail environment which combine social, sustainable, and
ethical proposes in addition to economic ones. In light of the recent parliamentary
report into the future of small shops in the UK, this research may offer some direction
to the continued debate as to the best way forward for small retailers, particularly as it
may be possible to learn from those businesses in the sector that reap the rewards of
clearly defined business level strategy. Equally, within the bounds of the constraints
presented below, there are comparable lessons to be learned for small shop decision
makers in other countries and the appropriate policy making bodies that mirror those
of the UK. Whatever the stage of development of the retail sector in terms of its
polarised structure and the growth of multiple players, the main findings of this
research relating to the imperative of business strategy are likely to have relevant
implications for the future success of small retail businesses in any nation.

Limitations and directions for further research

As with all empirical studies adopting this form of research design and analysis
techniques there are methodological caveats that need to be added. In the first instance
the limitation of the perceptual measures used and the collection of data from single
informant in each organisation should be noted and future research would be
strengthened by the surveying of multiple informants and the use of objective
measures, particularly when gauging firm performance. Furthermore, because of the
cross-sectional data used, causality between the performance and strategy measures
cannot be firmly established which would require a future longitudinal study. The
nature of the sample is that it covers all retail businesses but in a single geographical
market limits generalisability of the findings to specific product markets in the sector
and other national markets. In these cases the measures that we have derived may not
be a valid representation of competitive activity and thus future research in particular
product markets and in different countries may offer further evidence of the
appropriateness and comprehensiveness of the scales developed. The results are also
limited in their ability to explain variability in performance, which suggest the
inclusion of additional explanatory variables in the models. One such set of factors
could be the interaction effects of the strategies at the different levels on each other
which have not been included in this research, and could be incorporated in a further
study. As business environmental conditions are generally regarded as a key factor in
influencing success and failure in small retail businesses further research should also
be undertaken to understand the effects of the intensity of competition and the
dynamics of the market. Moreover, the fit between strategy, environment, and
performance is a potentially significant area for additional research especially the
investigation of whether the identified relationships between strategy and performance
are moderated by environmental conditions. It may be that there are variable effects of
MD the levels of strategy on performance under different conditions, not only across the
45,3 UK sector, but also in specific product and national small-scale retailing industries.
This research focuses on the measurement of different types of strategic behaviour
undertaken by small retailers and in that regard is presenting a derivative picture of
the outcomes of the strategic process within these firms. Research to investigate how
strategy at different levels is developed within small retailers would appear to be
500 immensely important and in particular, given the findings presented here,
understanding how business level strategy is formulated and put into practice in
different environmental circumstances. Thus further routes of study are presented in
the way that resources and capabilities, planning processes, information and
knowledge management, and decision-maker orientation shape strategy internally and
facilitate its effective implementation in the market.

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About the author

Phil Megicks is Associate Dean of the Faculty of Social Science and Business at the University of
Plymouth, and Head of the Small Business and Services Research Unit at the Plymouth Business
School. He has published widely on small business management and strategy, particularly in the
retailing and service industries. To complement this work he is also actively engaged in
consumer shopping research and the ethical dimension of buying. Phil Megicks can be contacted
at: phil.megicks@plymouth.ac.uk

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