Introduction

Consumers and producers in low-income markets are subjects of interest for marketing, management, strategy implementation researchers and practitioners who analyze business opportunities (^{Toledo-López, Díaz-Pichardo, Jiménez-Castañeda, and Sánchez-Medina, 2012}). The reason is that one major goal in management and business research is to clarify and identify sources of profitability differences among firms (^{Spanos, Zaralis, and Lioukas, 2004}). Some researchers have examined the impact of market forces, such as substitute products and entry barriers, while others have analyzed the implementation of different types of strategies.

Authors refereeing to market forces support that these forces are an important determinant of firm profitability (^{Gupta, Polonsky, Woodside, and Webster, 2010}; ^{Uçmak and Arslan, 2012}). However, competitive strategy effects on firm performance have predominated the discussion on medium and large firm’s profitability (^{Spanos et al., 2004}). Thus, the results of these studies might differ in strategies, skills, and market factors that affect small businesses’ performance in emerging economies, indicating that little has been studied on the influences of market forces, competitive strategies and small business performance in low-income markets of emerging economies (^{Spanos et al., 2004}; ^{Acquaah, Amoako-Gyampah, and Jayaram, 2011}; ^{Ingenbleek, Tessema, and van Trijp, 2013}; ^{London, 2016}).

Emerging economies are characterized by a large number of small businesses run by low-income entrepreneurs. Most of these firms (small businesses) perform in the informal and traditional sector of the economy. Also, they contribute directly and indirectly to the local economy and preserve traditional means of production and doing business (^{Viswanathan, Sridharan, Ritchie, Venugopal, and Jung, 2012}; ^{Christensen, Parsons, and Fairbourne, 2010}; ^{Wankel, 2008}). Mexico’s low-income entrepreneurs and their small businesses earn a daily income through daily face-to-face negotiations; they represent a 57% of the workforce, and 97% of total registered economic entities, respectively (^{London and Hart, 2004}; ^{Toledo, Hernández, and Griffin, 2010}; ^{INEGI, 2014}).

Despite the economic, social and cultural importance of small businesses around the world and in Mexico, there is a shortage of literature that helps to understand how these businesses operate in low-income markets (^{Viswanathan et al., 2012}), and how strategy implementation and the market forces might help to enhance their performance (^{Viswanathan et al., 2012}). The present study attempts to identify which strategy and market forces are the most influential on small business performance in emerging economies such as Mexico’s. Thus, it provides evidence of small business´s competitive strategies and the market forces present in a low-income market of an emerging economy.

The document is comprised of five sections. In the first, the literature is reviewed and the questions it seeks to answer are presented. In the second, the research design, the sample, and the measurement instrument are explained. In section three, the empirical results of the applied model are shown. In section four, the conclusions are presented and in the final section, the discussions and implications of the study are presented, as well as its limitations.

Methodology

The proposed relationships are tested using a sample of 141 small businesses operating in low-income markets from the central valleys of the states of Mexico, Puebla, Oaxaca, and Chiapas in southern México. 46.8% of participants are women. 39.1% have secondary school, 28.4% unfinished primary, 7.8% have technical studies, 4.3% have no studies, and just 3.5% of the respondents have a college education. 31.9% of the artisans have 11 to 20 years of experience.

Qualitative and quantitative data were gathered in a single questionnaire and contextual observations were made to compare and contrast the opinion of business owners. To analyze the data a hierarchical regression and Pearson’s correlation analyses were used. This study is based on the phenomenon´s direct observation and primary data collection.

To collect the data, the authors applied 141 face-to-face questionnaires. The sample size was arbitrary, and a snowball sampling technique was used. This technique allows overcoming some difficulties that derive from the characteristics of low income and literacy of the response unit, as well as the atmosphere of violence affecting the country. The technique consisted of a first contact with the representative of the artisans in each community, who is commissioned of reporting to the entrepreneurs the objective of the research. The authors interviewed the entrepreneurs that accepted to participate in the survey. Respondents were asked about aspects related to actions aimed at differentiation, cost leadership, performance and identifying environmental forces.

The survey was conducted using a selection criterion for the study population. This criterion was the number of employees that a business has and the product offered to the public, which must be manufactured products made of clay, wood or textiles. The study analyzed 141 small handicraft businesses that serve and operate in the Mexican low-income market. The designed questionnaire was applied to owners or managers of these small businesses as a response unit.

To measure small business performance respondents were asked to assess relative growth and financial performance by indicating the degree of sales, earnings and production. To measure competitive strategies, respondents were asked to rate the importance they give to each activity related to differentiation and cost leadership. To measure market forces (environmental forces) respondents were asked to rate the degree in which each force (substitute products, the threat of new entrants, customers and suppliers bargaining power) is perceived and identified. Table 1 shows the items used. During the data collection, a total of 161 observations were collected during November and December 2016. A good response rate is ensured since the respondents’ names were not asked. Also, it was assured the use of the data was purely academic and scientific. Thus, a response rate of 87% was achieved.

Results

To test the relationship between the variables a Pearson’s correlation analysis is performed and a hierarchical regression analysis to test the influences of competitive strategies and market forces have on performance.

Table 2 shows the results of Pearson’s correlation ( r ) analysis. This analysis reported that the cost leadership strategy relates positively with the threat of substitute product (r=0.277, p≤0.010), the bargaining power of buyers (r=0.257, p≤0.010) and small business performance (r=0.263, p≤0.010). In the presence of substitutes product, the low-income entrepreneurs lower their product prices to compete and increase sales. However, customer bargaining power a might increase since the existence of a substitute product, so customers have the power to bargain and ask for a better price. A differentiation strategy relates positively to small business performance (r=0.298, p≤0.010), and in a greater manner than cost leadership.

Table 2 shows that cost leadership and differentiation have a minor positive relation with small business performance than a hybrid competitive strategy (0.348, p≤0.010). On the other hand, it is found that none of the market forces relate to performance only with cost leadership. This first approach discloses how strategies, market forces, and small business performance relate to one another in a low-income market context.

A hierarchical regression analysis is used to see which pure generic strategy has a greater effect on Mexico’s small business performance and which market force has a greater influence on performance. So, a simple, multiple and moderator regression models are given by the equations one, two and three; used to establish the models of the analysis.

The regressions included two or more competitive strategy and market forces, which can present problems of high correlation among them, known as multicollinearity (^{Wülferth, 2013}). Another problem that arises in this type of variables is the correlation between the residuals of the variables (^{Prusty, 2010}). Following ^{D’Arcy, Hovav, and Galletta, (2009)}, we applied the variance-inflation factor (VIF) for multicollinearity and for the correlation of errors, we applied the test Durbin-Watson (D-W) (^{Bollen, 1989}). The values of D-W were close and above 2 (Table 3), while VIF values were close to 1 (Table 2). The highest VIF value is 1.314, which is well below the usual cut-off value of 10 (^{Hair, Hult, Ringle, and Sarstedt, 2014}).

Table 3 shows regressions results for small business performance. From the two control variables, the experience was statistically significant in four out of six models. The positive effect of pure and hybrid competitive strategies can be seen in models 2 and 3. That indicates that small businesses in low-income market pursue pure strategies, being the differentiation strategy the one with a greater effect on performance (Model 2; β4 =0.250; p≤0.010). However, a hybrid competitive strategy works better (Model 3; β3 =0.371; p≤0.010). In addition, the market forces that affect small business performance can be seen in models 4 and 5. These forces are a threat of a substitute’s product, and supplier and buyer bargaining power. The latter is the most influential when competitive strategies are included in the model (Model 5; β7 =-0.210; p≤0.050). However, while competitive strategies remain significant as a hybrid variable comprised of cost leadership and differentiation, the environmental forces do not (Table 3; Model 6).

To explore how the market forces influence the relationship between competitive strategies and performance, a moderator analysis is performed. To test moderation, only the significant variables identified in Table 3 were taken. This means that market forces are comprised by the threat of substitute’s product, supplier and buyer bargaining power, while competitive strategies will be pure and hybrid, which means the effect of the moderator is tested on differentiation, cost leadership and competitive strategy (hybrid). According to ^{Baron and Kenny, (1986)} and ^{Etchebarne, O’Connell, and Roussos´ study, (2008)} there is moderation when the interaction, called moderator, is statistically significant. In addition, moderation is partial when the effect of the independent variable is not reduced to zero.

The results presented in Table 4 show that none of the market forces (threat of substitute’s products, buyers or suppliers bargaining power) affect cost leadership strategy. The above due to the called moderator, which is not statistically significant (Table 4, Model 1, β3a =-0.024; β3b =0.029, β3c =-0.096, β3d =-0.044, p≥0.100). This might be explained as a result that a cost leadership strategy is a result of lowering prices to achieve the daily income goal, thus lowering their product prices to cost levels so as not to incur in losses. Instead, a partial moderator effect of environmental forces is present when a differentiation strategy is implemented to reduce the effect of the threat of substitute’s product on small business performance, as well as buyers bargaining power (Table 4, Model 2, β3a =-0.318; β3b =0.234, β3d =-0.345, p≤0.010).

Moreover, the same moderator effect occurs when it is assessed with a hybrid competitive strategy (Table 4, Model 3, β3a =-0.255, p≤0.010; β3b =0.234, p≤0.050; β3d =-0.345, p≤0.010). In summary, the moderator effect occurs when it is evaluated with a pure differentiation strategy and a hybrid competitive strategy. Thus, these two forces (threat of substitute’s product and buyer bargaining power) are the most relevant in a low-income market as well as in emerging economies like Mexico. Therefore, small business performance is explained by the following regression equations, which represent the models in Table 4 with the better R2.

Discussion and Conclusions

The aim of this study was to contribute to the applicability of the theory of competitive advantage in low-income markets of emerging economies. It focused on answering specific questions such as: do strategies, market forces and small business performance relate to one another in a low-income market context? What is the pure generic strategy that has a greater effect on these small business´ performance? What are the market forces that have

a greater influence on small Mexican business performance? What are the relationships between pure and hybrid generic strategies and performance in an emerging context? How do market forces influence that relationship?.

The study revealed that a differentiation strategy is the most influential on small business performance. Besides it demonstrates that in this context a hybrid competitive strategy is a better choice to enhance performance. This is supported by other research which analyzes different organizations (^{Morschett, Swoboda, and Schramm-Klein, 2006}; ^{Pertusa-Ortega et al., 2009}). For example, ^{Pertusa-Ortega et al. (2009)} find that businesses usually use different types of hybrid strategies, which are associated with higher levels of performance, mainly those strategies with an emphasis on innovation differentiation.

Several studies show the effect of market forces on small business performance (^{Barutcu and Tunca, 2012}; ^{Dulčić, Gnjidić, and Alfirević, 2012}; ^{Ucmak and Arslan, 2012}; ^{Yunna and Yisheng, 2014}). In this matter, ^{Barutcu and Tunca (2012)} mention that market forces create some positive and negative impacts on business performance. For example, market forces might make it easier to start new businesses, allow a business to deal with problems efficiently and harmonize access to information, but market forces also might decrease competitive advantages, increase pressures for price discounting, and decrease suppliers switching cost and barriers (^{Barutcu and Tunca, 2012}).

The findings of this study indicate that in low-income markets, market forces, such as the threat of a new entrant, do not have a significant effect on small business performance or competitive strategies. That is because entry barriers are represented by “traditions and customs” between communities where entrepreneurs live. That shows the existence of informal institutions that allow the producer to have some benefit but not enough so their business can succeed.

For example, competitors outside the community are not allowed to open a business within the community. This does not mean the substitute products pressure decreases since the productive structure of the business is not based on quality. So Asian substitute products, which incorporate quality processes and a mass production affect the competitive actions of these small businesses radically. Also, customers bargaining power is characterized by its link with tourism since the “haggling” of prices has become a common practice among the consumers.

While it is true that some businesses have access to raw materials, the quality and quantity of raw material that suppliers offer, sometimes is not optimal, since there are few suppliers. Also, suppliers in most cases are people from the community who take advantage of the situation of some entrepreneurs to sell more expensively and reduce the number of available materials. Finally, it is important that in a low-income market, such as in Mexico, rivalry might be minimum or null, because of the informal institutions deriving from the “traditions and customs” of the entrepreneurs and their communities.

In the sectors where low-income entrepreneurs operate, a low-level of education is a common factor, which makes decision making difficult. In contrast to findings of ^{Pertusa-Ortega et al. (2009)} and ^{Barutcu and Tunca (2012)}, in this study, we analyzed how the entrepreneur experience and education level might affect implementing a competitive strategy when environmental market forces exist. We find that education level does not affect implementing a competitive strategy, neither help in identify market forces, but entrepreneur experience had a significant positive effect on the implementation of competitive strategies.

That is because Mexican small businesses have a remarkable cumulative learning process due to trans-generational renewal present in these small family businesses. So, the role of experience of entrepreneurs on the implementation of competitive strategies, is similar to findings of ^{Hernández, Domínguez, Moreno and Rodriguez (1998)}. They found that the entrepreneur’s experience is a decisive factor on the implementation of a differentiation strategy. According to the authors entrepreneur experience helps to continuous improvement of the product quality.

In this study, we found results similar to some studies of Mexico adding a hybrid competitive strategy and the analysis of market forces. For example, ^{Dominguez, Hernández, and Toledo, (2004)} found that the most influential factor on the competitiveness of small businesses is a differentiation strategy. Meanwhile, ^{Jiménez Castañeda, Domínguez Hernández, and Martínez (2009)} found that pricing strategy is the most implemented in craft businesses, which allows a business to increase its sales volume. ^{Toledo-López et al., (2013)} found that most implemented strategy is a differentiation one. Whilst a cost leadership is not a result of cost reduction on production, advertising, and business logistics; instead, it is a result of the impact of wholesale. we found that a hybrid, competitive strategy is the one with a greater effect on small business performance.

^{Jiménez Castañeda, Martínez and Nieto Delgado (2016)} explain that low-income entrepreneurs constantly make changes in their products because customers usually look for something unique and original (“good, beautiful and cheap”). So, this study also finds similarities because brand differentiation is a result of the creativity of artisan who implements innovative changes in product design, brand identification and product packaging; which allows the business to generate a daily income and a competitive advantage against competitors.

^{Parnell (2011)} found that a differentiation strategy is positively associated with performance, but a low-cost orientation was positively associated with performance only in a developed economy context such as the United States. This study supports Parnell’s findings (2011) that successful firms are more likely to pursue differentiation strategies while those in emerging economies emphasize on cost leadership strategies (^{Parnell, 2011, p. 160}). His assumption was not supported in this present study.

According to ^{Morschett et al. (2006)} differentiation and cost leadership strategies can be applied simultaneously depending on the business objective. Thus, similarities are found in the way in which entrepreneurs select the strategy, the predominant strategy being that of product differentiation since a cost leadership strategy is used when the consumer is not willing to buy a piece at a certain price. So, entrepreneurs lower their prices to increase sales volumes, but not profits.

The relationship between differentiation strategies and cost leadership coincides with that found by ^{Kaya, (2015)}, in such a way that these two strategies have a high degree of association and the strategy that most affects the performance is the differentiation one. Another explanation for hybrid or combined strategy to deliver competitive advantage is that modern technologies and flexible production processes allow firms to simultaneously reduce costs and differentiate products. Small businesses operating in low-income market produce in short periods of time, which allow them to increase inventory volume so when a high sale volume is required they do not see it as a problem. Besides, it allows them to focus on different designs and products.

This study concurs with other researchers that each economic sub-sector is different, so the behavior of small businesses in different types of markets -low and high income- varies depending on in which country it is located. However, the analysis of these types of businesses is fundamental to develop specific and global policies that can help work in pro of the sustainable development of small business (^{Morschett et al., 2006}; ^{Viswanathan and Sridharan, 2009}; ^{Toledo-López, Mendoza-Ramirez, & Sanchez-Medina, 2016}).

Conclusions

Implications, Limitations and Future Research

This study shows how small businesses in low-income markets implement strategies to improve performance and deal with market forces, that are represented by substitute products, suppliers, and buyers. This is important because it might allow government, researchers and other institutions to identify which factors prevent businesses in a low-income market to achieve a competitive advantage.

Furthermore, the informal institutions present in most Latin American contexts diminish the threat of new entrants, specifically in Mexico; traditions and small business community customs establish some of the local market rules. This serves as a basis for public policy programs that allow these businesses to grow and move away from informality. Besides, this might be important to those firms attempting to explore low-income market as a profitability opportunity.

Small businesses operating in a low-income market have managed to overcome extreme poverty levels because of their ability to generate a daily income. This sector has a creative potential and a segment of customers that in recent years prefers buying handmade products, so developing this sector through the link with tourism would facilitate their access to new markets. As a result a positive impact on poverty reduction would be achieved. In the specific case of this study, the artisanal sectors have a close link with tourism, so by knowing more about these businesses´ operation, their needs, and strengths; a strategy could be designed to help attract tourism and create benefits for participating agents. This would help improve the environment in which the businesses operate, as it would increase the influx of tourism, improve infrastructure, and increase the number of customers and suppliers, among others.

Finally, it is important to carry out studies that cover sectors that have been neglected, such as low-income markets, where economic crises and other phenomena represent externalities for these businesses which are vulnerable sectors of the economy. Small business, have a potential for survival that many other businesses do not, have which opened the door for the development of public policies that combine the traditional business vision and the results of research -such as this one-. It is important to mention policy implementation, as well as studies that help improve small businesses, should not seek to homogenize businesses, but instead create a competitive environment that enhances local and global economic development. Since it has been observed the support from some public policies focused on this type of businesses has effects on the perceived benefits for the entrepreneurs, but little effect on the growth and effectiveness of the business. Thus, public policy must generate policies that do not isolate businesses from market impacts, but should drive them to compete in the most appropriate way (^{Dominguez et al., 2004}).

The limitations of this study are related to the unit of analysis and its context. The results are applicable to small businesses operating in markets similar to those in Mexico. The use of scales, interviews, and observation of the environment provides a considerable degree of subjectivity to the study, specifically business performance that was measured through owner perception on their growth. For future research, we recommend the study be extended to a much larger sample in another context to cover low-income markets. And so, we suggest conducting an analysis, that includes small, medium and large businesses, and tangible and intangible resource variables as moderators and mediators. This would allow having a complete model and a holistic view of the competitive advantage formation.