SSRN Id3678752
SSRN Id3678752
SSRN Id3678752
ABSTRACT
A majority of organized brick-and-mortar lifestyle retailers in India believe that the brick-and-
mortar retailing model ensures economies of scale as they keep opening new stores. Having
more stores might help retailers to gain product sourcing advantages in addition to generating
additional revenue to the firm but at the same time, it fails to provide any other benefits towards
economies of scale as every new store comes with new one-time capital expenditures and
recurring fixed expenses. Another misconception is that lifestyle retailing must follow an
organizational structure (OS) that is adopted by their parent company and hence a majority of
OS adopted by lifestyle retailers in India is dependent on organizational form. This study was
not limited to just recommending a rational OS based on exploratory research and existing
theories in the OS domain. Once the ROLS-b was designed, we have experimented with the
proposed rational OS on one of the ten lifestyle retailers in the study to test the validity and
reliability. Experimentation results empirically and qualitatively demonstrate that the existing
belief of brick-and-mortar lifestyle retailers in India which assumes economies of scale and
long-term firm’s sustainability as the retailer increases the store count is just a misconception
and does not hold. On the other hand, when we experimented the ROLS-b for over twelve
months at over 25 percent stores of a select retailer, results demonstrate that these stores which
have gone through the treatment have shown 5.34 times improvement in the store-level profit
and 1.97 times in the firm-level profit in addition to eliminating a majority of gaps found in the
existing OS that was leading to diseconomies of scale and deteriorating firm’s performance.
Firm’s Sustainability: ‘Sustainability’ as an area of research has attracted a large number of researchers
wherein a majority of the studies have focussed on sustainability concerning the environment and very
few have focussed on the firm’s sustainability. Despite various researchers defining a firm’s
sustainability from different perspectives, we found Wirtenberg, Harmon, Russell, and Fairfield’s
definition suitable for our study. They define a firm’s sustainability as a 'company's ability to achieve its
business goals and increase long-term shareholder value by integrating economic, environmental, and
social opportunities into its business strategies' [46]. We believe that the term ‘company’s ability’ in this
definition though looks simple has a larger meaning that indicates firm’s capability in adapting rational
Marketing Mix that is driven by a well-defined OS and optimized degree of integration that is inevitable
to achieve firm’s long-term sustainability that encompasses economical, environmental and social
interests. In addition to achieving a rational mix of “4P’s” such as product, price, promotion, and place
what determines the long term sustainability of a lifestyle retailing firm is how their OS is designed that
ensures i) equal and high weightage to overall store performance-related key result areas (KRAs) and
In a nutshell, a majority of past studies corroborate with our hypothesis that the OS plays an important
role in conquering diseconomies of scale and protecting a firm’s long-term economical sustainability
that would also indirectly improve environmental and social interests of a firm.
3. PURPOSE AND OBJECTIVES OF THE STUDY:
The prevailing assumption is that a majority of lifestyle retailers in India are bewildered with various
theories, perspectives, models, frameworks, and strategies available in the OS domain and hence, they
are not able to design an appropriate OS that can conquer diseconomies of scale and protect firm’s
sustainability. There is a wide gap in the understanding of interlinkage between theories, perspectives,
models, and frameworks available in the domain that is globally accepted as one of the most efficient
organizational designs. This gap can be reduced if we can demonstrate the correlation among various
theories, perspectives, models, and frameworks available in the existing literature with the empirical
pieces of evidence from India in this study and transpire the research outcomes into a rational OS design
which would then be useful for organized brick-and-mortar lifestyle retailers in India to design
appropriate strategies concerning organizational design. The need for this research indeed was originated
due to various gaps found in theoretical, descriptive, empirical literature available in the OS domain such
as i) a majority of studies have focussed on diseconomies of scale concept in a manufacturing context
and not service context; ii) a majority of studies have focussed on firm’s sustainability in the
environmental context and not enough studies focussed on economical contexts; iii) absence of an
integrated OS design for lifestyle retailers in the Indian context; iv) a majority of lifestyle retailers in
India follow and practice OS incorporated by consumer goods, hospitality and restaurant brands and
retailers, and, most importantly v) lifestyle retailers in India are unable to overcome diseconomies of
scale and protect firm’s long-term sustainability. The present study proposes to a) understand lifestyle
retailing market in India; b) understand evolution and performance of Indian lifestyle retailers; c)
understand the existing OS of a few select lifestyle retailers; d) evaluate congruity of existing
organization structure vis-à-vis diseconomies of scale and firm’s sustainability; e) analyze
recommendations from previous research studies appropriate in the Indian context; f) design a rational
OS that would help lifestyle retailers in India overcome diseconomies of scale and protect firm’s
sustainability; vii) test the ROLS-b framework in a real retail environment; viii) evaluate test results,
findings, and insights.
4. APPROACH AND METHODOLOGY:
Qualitative Primary Research: Series of open-ended direct interviews were conducted with employees
selected through convenience sampling representing different departments/functions of select lifestyle
retailers in India to understand their perspective and attitude towards existing OS, economies of scale,
diseconomies of scale, and firm’s sustainability.
Quantitative Primary Research: In the first stage, ten organized lifestyle retailers in India were
selected who can represent, a) different product categories such as fashion, functional, life-stage specific,
product-specific, gender-specific, and need specific products; b) offering single-product category and
multiple-product categories; c) serving different consumer target groups at low, mid-low, mid, mid-high,
high, and premium price positioning; d) having single and multiple stores; e) offering single brand and
multiple brands; f) having presence across Tier-1, Tier-2, and Tier-3 cities; g) having stores across the
high street, malls, institutions, and neighborhoods, h) organizational forms, and i) new and established
retail store image. The second stage was to evaluate the last 5 years' overall performance of firms. In the
third stage, 25 percent of the stores of one of the lifestyle retailers in the study were selected through
systematic random sampling to undergo experimentation wherein the proposed ROLS-b framework was
applied for twelve months’. In the fourth stage, all the data was collected before experimentation from
all the stores belonging to the control and experimental group. The fifth stage was to collect post-test
data from the control and experimental group of stores and in the last stage the collected data from pre
and post-tests periods were subjected to various statistical analyses and inferences were drawn.
5. EVALUATING EXISTING ORGANIZATIONAL STRUCTURE:
Qualitative: Before the empirical study, we were able to derive qualitative insights by conducting open-
ended direct interviews with employees representing all the departments/functions of different types of
lifestyle retailers chosen for the study. Chart 1 captures OS commonly adopted by the brick-and-mortar
lifestyle retailers in the study. The qualitative exploratory survey indicates that their existing OS has
many gaps that were leading to diseconomies of scale and deteriorating the firm’s profitability as listed
below.
a) Chief Executive Officer (CEO) or Managing Director (MD) had retained a majority of decision-
making authorities across departments and functions in the OS (Gap 1).
b) None of the functional heads (FH) were authorized to make strategic-level decisions and they
were limited to only tactical-level decision making (Gap 2).
c) Each FHs were specialists in their area and communication efficiency (conversations-for-action
among them was merely dependent on relationship and understanding among them (Gap 3).
d) All the FHs were horizontally integrated into the OS (Gap 4) with every function in the OS being
vertically integrated with department heads (DH) who have sub-specialization required for the
function.
e) Due to horizontal integration among FHs the coordination among DHs of various functions and
the efficiency of communication (conversations-for-action) was dependent on the relationship
and understanding among their respective FHs (Gap 5).
Board of Directors
Quality Assurance Store Managers Consumer Data Inventory Control Training &
Team Team Analytics Team Team Development Team
In summary, a majority of lifestyle retailers in the study were unaware of the role of OS in conquering
diseconomies of scale and protecting long-term firm’s sustainability. The existing OS was indirectly
forcing the retailers toward diseconomies of scale, besides, slowly losing their interest in the firm and
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Table 1: Mapping gaps identified in the qualitative research with existing literature
Leading to
Affecting Firm's
S. No. Diseconomies of Conformity with the Literature
Sustainability
Scale
Gap 1 [7], [8], [29], [35], [57], [59], [61]
[7], [8], [9], [19], [29], [31], [35], [41], [51], [62],
Gap 2
[64], [65], [69], [72], [80], [81]
Gap 3 [7], [8], [14, [49], [57], [71], [80], [81]
[7], [8], [14], [15], [17], [19], [20], [25], [26], [29],
Gap 4
[30], [39], [62], [65], [69], [72]
[7], [8], [14], [23], [26], [37], [38], [39], [40], [41],
Gap 5
[25], [64], [80]
[7], [8], [19], [25], [26], [34], [32], [47], [70], [77],
Gap 6
[78], [79]
Gap 7 [7], [8], [34], [32], [47], [70], [77], [78], [79]
[7], [8], [16], [17], [23], [32], [40], [75], [76], [82],
Gap 8
[83], [84]
Empirical: Evaluating the last five years data of lifestyle retailers in the study as shown in table 2 and
chart 2 indicates that the firm-level profitability did not improve despite 117 percent increase in the store
count over five years in addition to not bringing any economy of scale advantages to firms. The glaring
observation was that the store count was significantly and negatively associated (R: -0.688 with a 2-
tailed sig value of 0.003) with the firm-level profitability, whereas the association with the store-level
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Table 2: Association among store counts, economies of scale, and the firm’s overall performance
Salary as
Growth in Salary as Retail Profit as
Percentage of
Store Headcount Mix Salary Mix Percentage of Percentage of
Overall
Year Count Revenue Revenue
Expenses
(year on
year) Firm Store
Non-SSO SSO Non-SSO SSO Non-SSO SSO Non-SSO SSO
Level Level
1 21.43% 14.07% 85.93% 57.50% 42.50% 7.41% 10.78% 11.96% 6.88% -14.65% -6.69%
2 15.29% 13.91% 86.09% 47.16% 52.84% 7.09% 10.99% 15.18% 7.16% -11.79% -9.60%
3 27.55% 15.91% 84.09% 52.11% 47.89% 6.93% 12.36% 15.08% 7.86% -14.83% -7.58%
4 8.00% 16.72% 83.28% 43.92% 56.08% 7.16% 10.40% 15.68% 6.89% -8.20% -0.67%
5 12.59% 15.21% 84.79% 40.23% 59.77% 8.28% 10.59% 16.58% 6.67% -15.14% -8.58%
30.00%
20.00%
10.00%
0.00%
1 2 3 4 5
-10.00%
-20.00%
-30.00%
Growth in Store Count Retail Profit as Percentage of Revenue Firm Retail Profit as Percentage of Revenue Store
(year on year) Level Level
Chart 2: Association among store counts, economies of scale, and the firm’s overall performance
Existing literature, exploratory qualitative primary finding, and empirical evaluation indicate that the
existing OS of select organized brick-and-mortar lifestyle retailers in India is irrational as it seriously
fails to gain economies of scale and protect firm’s long-term sustainability expected due to expansion in
addition to inducing loss of motivation and interest among all the stakeholders in the brick-and-mortar
lifestyle retailing model. This brings us to the key research problem as to a) is there a different way to
approach the OS, and if yes b) what could be a rational OS to overcome diseconomies of scale and protect
the firm’s long-term sustainability. Considering recommendations from past studies and insights from
this study we would now attempt to design a rational OS for organized brick-and-mortar lifestyle retailers
in India.
6. DEVELOPMENT OF ROLS-b :
A. Functional-Level Integration: The level of horizontal integration among various functions was
significantly reduced i.e., seven functions that were functioning independently, and reporting to the
CEO/MD was regrouped and reduced to three functions.
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Head of
Head of SSO Head of Finance
HRD
Product Sourcing
Store Managers Information Financial MIS
& Quality Audits Team Payroll Team
Team Technology Team Team
Assurance Team
All the changes A, B, and C are expected to eliminate gaps that lead to diseconomies of scale such as
excessive rigidity; unexplained wage differential; insularity; R&D cost control; alienation; low job
satisfaction; insularity from reality; monitoring costs and inadequate effort levels; cost-consciousness;
low motivation levels; risk aversion; increase in administration; poor understanding of changing market
needs; perpetuation of organization form; low productivity by the R&D; limits to entrepreneurship;
weaker incentives in bureaucracies; specialization leading to poor communication; information loss;
communication losses; poor coordination levels; information signal delays; lower efficiency levels;
control-loss in addition to improvising elements that are responsible for long-term sustainability of a
firm such as the role of human resource development; creativity and innovations that are consumer-
centric; situational leadership style; organizational capabilities; positive stakeholder influences; business
practices; ability to face changing market environments; effective conversations-for-action; attention to
strategic change; management capabilities to efficiently use resources (physical, human and financial);
leadership effectiveness; rightsizing of human resources; leadership styles; competitive dynamics and
strategic consistency; humanistic and ethical approaches beyond economic criteria; favorable employee
attitudes; favorable relationships between the people inside and outside the organisation; perspectives of
people in the bottom of the hierarchy on people above them in the hierarchy; positive response to switch
leadership; strategic planning capabilities; reputation building; control-self assessment; organizational
culture; market-orientation; relevant training; sales personnel empowerment; need-based sales pitch by
the sales personnel; performance evaluation systems; customization level of consumer communications;
consumer orientation; store image.
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Visual
Inventory Control
Merchandising Sales Personnel
Team
Team
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Empirical Analysis: Pre-test post-test real treatment effect has shown an increase in the headcount mix,
salary mix, salary as a percentage of revenue generated and salary as a percentage of overall retail
expenses of SSO function and a decrease of all these parameters in the Non-SSO functions in addition
to a significant and positive real treatment impact on the overall store-level and firm-level profitability
in the experimental group of stores that was expected by the ROLS-b as shown in table 3.
Table 3: Pre-test post-test real treatment effect across key factors in the experimental group as a
percentage change over their pre-test period
Post-Test
Particulars Experimental
Group
Headcount Mix - SSO 9.7%
Headcount Mix - Non-SSO -54.0%
Salary Mix - SSO 30.5%
Salary Mix - Non-SSO -45.3%
Salary as Percentage of Revenue - SSO 93.7%
Salary as Percentage of Revenue - Non-SSO -49.6%
Salary as Percentage of Overall Expenses - SSO 69.1%
Salary as Percentage of Overall Expenses - Non-SSO -76.4%
Retail Profit as Percentage of Revenue - Store Level 502.6%
Retail Profit as Percentage of Revenue - Firm Level 118.2%
Pre-test post-test real treatment effect has also shown a significant improvement in the absolute revenue
generation, contribution to the overall firm’s revenue, absolute gross earnings generation, contribution
to the overall firm’s gross earnings, store-level retail profit, firm-level retail profit, and most importantly
consumer repeat store visit rate in addition to a significant reduction in the firm-level advertisement
costs, warehouse and logistics costs and a significant increase in the Regional SSO employee cost and
catchment-level advertisement costs that was expected by the ROLS-b in the experimental group of
stores as shown in table 4.
Table 4: Pre-test post-test real treatment effect across key factors in the experimental group as a
percentage change over their pre-test period
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Tables 5 demonstrate the magnitude of change in the key parameters of the experimental group of stores
during pre-test and post-test periods over the control group of stores. One can observe an increase in the
headcount mix, salary mix, salary as a percentage of revenue generated and salary as a percentage of
overall retail expenses of SSO function and a decrease of all these parameters in the Non-SSO functions
in addition to a significant and positive improvement in the overall store-level and firm-level profitability
in the post-test period.
Table 5: Percentage variance between experimental and control group during pre and post-test periods
across key factors
Pre-Test Post-Test
Particulars Experimental Experimental
Group Group
Headcount Mix - SSO 0.0% 9.7%
Headcount Mix - Non-SSO 0.0% -54.0%
Salary Mix - SSO 0.0% 30.5%
Salary Mix - Non-SSO 0.0% -45.3%
Salary as Percentage of Revenue - SSO -40.8% 14.7%
Salary as Percentage of Revenue - Non-SSO 0.0% -49.4%
Salary as Percentage of Overall Expenses - SSO 0.0% 69.1%
Salary as Percentage of Overall Expenses - Non-SSO 0.0% -76.4%
Retail Profit as Percentage of Revenue - Store Level -66.5% 1651.4%
Retail Profit as Percentage of Revenue - Firm Level -29.0% 1719.6%
Tables 6 demonstrate the magnitude of change in the key factors of the experimental group of stores
during pre-test and post-test periods over the control group of stores. One can observe a significant
improvement in the absolute revenue generation, absolute gross earnings generation, store-level retail
profit, firm-level retail profit, and most importantly consumer repeat store visit rate in the post-test
period.
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