Environmental conditions facing organizations are often described as falling along a continuum ranging from benign to hostile. Benign environments afford a safe setting for business operations in which competition is relatively predictable and orderly. Hostile environments, on the other hand, are characterized by precarious industry settings, intense competition and harsh business climates. Hostility is an environmental dimension which by its definition poses a threat to firm viability and performance, and a growing body of research has focused upon its relationship to competitive behavior and firm performance (e.g., Covin & Slevin, 1989, Davis, Morris & Allen, 1991). However, the results of much of this research are fragmented and somewhat contradictory. In fact, the only recurrent theme in this literature is that the degree of environmental hostility facing businesses and the pace of environmental change are increasing (Miles & Arnold, 1991; Morris & Paul, 1987; Miller & Friesen, 1983).

The adverse effects of increased environmental hostility probably poses the greatest threat to small businesses due to their limited resources and relative inabilities to survive the consequences of poor managerial decisions (Covin & Slevin, 1989). Learning to compete in a hostile environment will become increasingly important. This is particularly true for small rural retailers which face the continuing and rapid expansion of large discount chain stores into their markets. Rural retailing markets were once quite benign. Environmental conditions were relatively stable, as demonstrated by the longevity of many firms in those markets. The existing small merchants generally competed in an orderly manner. However, the entry of a large discount chain store most often dramatically disrupts this tranquility for many local merchants, with the newly located chain store often taking market share from the existing businesses. Unfortunately, the existing literature is of limited value to small retailers which confront a recently created hostile environment. Most of the prior research has focused on the appropriateness of various competitive behaviors of either large or industrial firms (e.g., McGinnis & Kohn, 1993; Zahra, 1993).

This paper attempts to fill this void by reporting the results of a study in which the competitive behaviors of small retailers in hostile and benign environments were examined. Specifically, we surveyed local retailers located in and around five Midwestern communities in which Wal-Mart had recently opened a store. The competitive behaviors of local merchants who believed Wal-Mart’s arrival created a hostile environment were then compared to the behaviors exhibited by merchants that did not believe the mass-merchandiser’s entry into the area caused an increase in the degree of environmental hostility. The purpose of this study was to identify and contrast the patterns of competitive behavior associated with high performance in an environment perceived as either hostile or benign.


The literature describes hostile environments as "risky, stressful, and dominating" (Khandwalla, 1977, p 335) due to the presence of precarious industry settings and intense competition (Covin & Slevin, 1989). A hostile environment can be viewed as negative, uncertain and the source of unfavorable conditions beyond the immediate control of the firm (Miles, Arnold and Thompson, 1993). Managers within hostile environments will likely be confronted with smaller decision windows, diminishing opportunities, changing constituencies, increased resource specialization, lack of predictable needs, fragmented markets, greater risks of obsolescence and a general lack of long-term control (Davis, et al., 1991). However, the findings regarding the impact of environmental hostility on the competitive behavior of small retail firms are not fully understood.

The relationship between competitive behavior and firm performance is context specific, especially the environmental context (see Lumpkin & Dess, 1996: Davis, et al., 1991). Prior research has studied the effects of distinct dimensions of competitive behavior on firm performance within hostile or benign environments. The research suggests that environmental hostility may elicit more perilous behavior on the part of the firm (e.g., Khandwalla, 1977). Ettlie (1983) proposed a link between perceived environmental hostility and strategic moves which foster innovation and entrepreneurship. Empirical research tends to support this proposition. For example, in a study of conservative and entrepreneurial firms, Miller and Friesen (1982) found that the latter faced significantly higher degrees of environmental hostility.

Davis, Morris, and Allen (1991) surveyed 98 managers to evaluate the impact that perceived environmental turbulence had on the entrepreneurial behavior and marketing activities of manufacturing firms. They discovered that perceived turbulence had a significant causal impact on both the entrepreneurship and marketing orientations of the sampled firms. Similar findings were discovered by McGinnis and Kohn’s (1993) survey of manufacturing logistics managers and Zahra’s (1993) study of large consumer and industrial goods manufacturers.

Several empirical studies have examined the impact of increased environmental hostility on a firm’s competitive behavior by focusing on firms within specific industry contexts -- business sectors which had experienced dramatic environmental changes or shifts. Smith and Grimm (1987), for example, capitalized on the deregulation of the railroad industry to examine the changes in competitive behavior of railroad companies as the industry went from tightly regulated to highly competitive. They discovered that the competitive behavior of railroad companies facing the increased environmental hostility created by deregulation became more aggressive and innovative. Meyer, Brooks, and Goes (1990) documented the changes in competitive behavior of San Francisco hospitals during the 1980s as that industry underwent dramatic changes. The results of their longitudinal study indicated that hospitals generally adopted more entrepreneurial competitive behavior in response to the increased hostility.

In one of the few studies that focused explicitly on the relationship between environmental hostility and the competitive behavior of small firms, Covin and Slevin (1989) argued that "small firms in hostile environmental settings will devote their competitive efforts to prevailing environmental conditions by aggressively trying to gain or maintain their competitive advantage" (1989: 77). Such an advantage, they argued, would most likely result from the proactive, innovative, risk-taking behavior of entrepreneurial firms rather than the passive and reactive behavior of conservative firms. The results of their study of 161 small manufacturers generally supported their assertions.

In contrast to the foregoing arguments, some researchers contend that firms should strive to minimize the uncertainties associated with operating in hostile environments by adopting relatively passive or risk adverse competitive behavior (Miles, et al., 1993). Small firms are encouraged to engage in relatively passive behavior because their limited resources make them extremely vulnerable to poor managerial decisions. A study of 169 furniture manufacturers by Miles, Arnold, and Thompson (1993) discovered significant negative correlations between environmental hostility and entrepreneurial competitive behavior. Similar results were produced by Miller and Friesen’s (1983) study of 50 large Canadian industrial firms.

Taken together, the existing literature suggests that hostile and benign environments require small firms to exhibit certain competitive behaviors in order to succeed. However, the relationship between environmental hostility and small firm behavior has not been fully explored. The present study examines the interplay between patterns of competitive behavior, environmental hostility, and small firm performance by addressing the following two research questions.

1. Do the patterns of competitive behavior of small firms in hostile and benign environments differ?

2. Do differences in firm performance exist among the distinct patterns of competitive behavior in hostile and benign environments?


While not totally unforeseeable, the entry of a Wal-Mart into a local market is a turbulent, unsettling event (see Taylor & Archer, 1994; Welles, 1993; Ozment & Martin, 1990). Applying the "zero-sum game" principle to the local market, the opening of a discount mass merchandiser, like Wal-Mart, will have an substantial impact on local trade. The new stores will take a sizeable slice of the fixed retail pie, with existing local merchants often being the losers (Stone, 1995).

A hostile environment is thereby created; one characterized by precarious industry settings and intense competition (Covin & Slevin, 1989). Hostile environments are also often stagnant, where one competitor's gains are another's losses (Morris & Paul, 1987). Under these hostile circumstances, there can be numerous responses, and smaller, better performing firms will often realize the need to change and compete differently than their lower performing counterparts (Covin & Covin, 1990). The arrival of a Wal-Mart is thus a perfect context in which to study the competitive behavior of retailers as they respond to a newly created hostile environment.


The data was collected from a census (i.e., a total population) of the 658 retail merchants located in five rural Midwestern communities and the communities of the adjoining counties where Wal-Mart had opened a store between 1989 and 1993. The sample was also limited to towns with populations of less than 25,000 inhabitants and which were more than 20 miles from a major metropolitan area. This limitation helped to better elucidate the explicit impact of Wal-Mart’s arrival and the subsequent change in environmental hostility.

The data was collected through a mail survey. Initially a booklet including a cover letter of explanation, the questionnaire, and a postage-paid return envelope were sent to each retailer. The list of retailers in the communities where the Wal-Mart opened and the surrounding communities was acquired from American Business Lists, a marketer of mailing lists. A reminder postcard was then sent to all potential responders approximately one week later. Finally, a second booklet with a cover letter and postage-paid return envelope were sent to nonrespondents approximately three weeks later.

The survey booklet was adopted from existing strategic management, marketing and small business literature (e.g., Conant, Smart & Solano-Mendez, 1993; Robinson & Pearce, 1988; Shama, 1993; Stone, 1995). The questionnaire addressed four primary areas. First, the questionnaire solicited information concerning Wal-Mart's impact on the local merchant. Next, the strategy of the participating retailer was measured using 24 competitive method questions. The questions were adopted from the previous work of Conant, Smart & Solano-Mendez (1993) and Robinson & Pearce (1988). The questionnaire collected data concerning the competitive methods which the retail organization emphasized since Wal-Mart opened its store. A five point, Likert-scaled response was used: e.g., 1 = no emphasis ... 5 = major, constant emphasis. Third, the local merchant was asked to compare its performance relative to other local businesses on three dimensions: net income after taxes, total sales growth over the past three years, and overall store success or performance. Finally, the survey instrument solicited descriptive information about the responder's merchandise categories, age/years in operation, approximate annual sales, and number of employees. The survey booklet was pretested on six small retailers not included in the study's sample to determine if there were any interpretation difficulties. No problems were discovered and the pretest respondents were not troubled by any of the questions or their abilities to rate the position of their companies.

The performance of the sampled firms was operationalized using subjective self-report measures. The subjective method was chosen over objective data because small firms are often reluctant to disclose financial information, objective data are not readily available, and reporting of the data may be inconsistent across industries. Due to the cross-industry design of the study, making objective comparisons may also be misleading (Covin & Slevin, 1989). Organizational performance measures are meaningful, when assessed comparatively or relatively (Conant, Smart & Solano-Mendez, 1993). Previous research has found that subjective assessments of organizational performance are quite consistent with objective performance data both internal and external to the organization (see Dess & Robinson, 1984; Venkatraman & Ramanujam, 1986).

Altogether, 238 of the 658 surveys were returned, representing a response rate of roughly 36 percent. To detect any potential nonresponse bias, a comparison of the early and late responding firms was performed (see Armstrong & Overton, 1977). This extrapolation method assumes the late or last respondents in a sample are similar to theoretical nonrespondents. The similarities found between the early and late responders in this study can be interpreted as suggesting the absence of response bias (Miles & Arnold, 1991). One of the purposes of the study was to identify patterns of competitive behavior by producing a taxonomy (an empirically derived classification framework) of generic strategy patterns utilized by the local retailers. To do this, we employed factor analysis of the responses to identify how many distinct patterns of competitive behavior existed. The 24 competitive methods were factor analyzed using a principal components analysis with varimax rotation. A factor loading of .40 was utilized because factor loadings greater than or equal to .40 can be considered more important than those below this level (Hair, Anderson and Tatham, 1987).

As part of the taxonomy creation, the items contained in each factor were employed in a cluster analysis (FASTCLUS in SAS). Cluster analysis is appropriate when attempting to classify groups and group members. Nonhierarchical clustering techniques are useful for large databases (Hair, Anderson and Tatham, 1987). We labeled each strategic group attempting to capture the nature of each strategic behavior.

For purposes of determining performance differences among utilized strategies, each strategic cluster identified was compared, using ANOVA and Tukey pairwise comparisons, along the three performance dimensions (net income after taxes, total sales growth over the past three years, and overall store success or performance).

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