Best Buy Failure in China (International Business) Essay

In the world today, there are many companies getting involved in international business, and developing to become a multinational company. Why do these firms want to take the multinational route? One of the dominant frameworks to explain the existence of these multinational companies is the Ownership-Location-Internalisation (OLI) paradigm (Dunning & Lundan 2008). Running an international business is different from running a domestic business. International business requires you to recognise and understand the cultural differences between countries. Failing to recognise and understand this difference could possibly lead to many difficulties, or worse still, failure. In this essay, I will be discussing the difficulties that Best Buy Co. Inc. faced, and its eventual failure due to the lack of understanding of the cultural differences in its host country, China. The rise of China has matured into hope for the entire consumer electronics industry. The country’s 1.3 billion consumers and their fast increasing buying power have transformed China into the world’s largest consumer electronics market, a market opportunity that multinational giants cannot afford to neglect (Chen & He 2005). As such, Best Buy was just one of the many multinational companies that tried to enter the Chinese market. Best Buy Co. Inc. Best Buy is a multinational retailer of consumer electronics from the United States and operates in the United Kingdom, Canada, Turkey, Mexico, China as well as its home country. Started as the Sound of Music in 1966 as an audio specialty store by Richard M. Schulze, it was later changed to Best Buy Co., Inc. by the board of directors in 1983 and is now the leading consumer electronics retailer in the United States (Pederson 2004). Best Buy sells consumer electronics as well as a wide selection of related merchandise such as music, mobile phones, computers, computer software, DVDs, Blu-ray discs, video games, digital cameras, video cameras as well as home appliances. The multinational used a two-track approach to enter the Chinese market. The consumer electronics giant first opened a sourcing office in Shanghai in 2005 and began its efforts to expand into the Chinese market in May 2006 by foreign acquisition. The multinational invested $108 million to obtain a majority stake in China’s fourth largest consumer electronics retailer, Jiangsu Five Star Appliance (Bloomberg 2006). Soon after in December 2006, the company used the greenfield mode of entry and opened its first â€Å"Best Buy† store that followed their own US business model, in Shanghai’s busy Xujiahui shopping district. By imposing a US business model, Best Buy intended to convince fastidious Chinese customers with helpful and dependable service in clean, pleasant outlets. The chairman and general manager of Best Buy China, Lu Weiming declared that they were confident with the store model they had, which will differentiate them from competitors and consequently help them win the consumers’ heart (Kurtenbach 2006). The company later opened another eight stores, which increased the total number of â€Å"Best Buy† stores in China to nine. Problem Identification According to the China Daily on March 21, 2011, Jiangsu Five Star Appliance continued to expand. However, Best Buy’s expansion was slow and was not running as smoothly as anticipated. â€Å"The multinational brought in a Western business model and it failed to sufficiently attract the Chinese clients and customers,† said Chen Can, a senior analyst from Analysys International (China Daily 2011). Best Buy’s business model in the US, where the brand markets itself as delivering a better service than competitors, did not go well in China. After being in the Chinese market for five years, the company only managed to open nine stores, capturing less than one per cent of the Chinese market as according to analysts. Failing to catch on in the Asian country, the company decided in February, 2011, to close its headquarters along with all its nine stores (Birchall, Strauss & Waldmeir 2011). Causes of the problem Even though the company opened a sourcing office in 2005, the multinational still had a lot to learn about the Chinese and the way they did business. â€Å"The lesson we learned is that we got too far ahead of the Chinese consumer in how business is done in China,† said Brian Dunn, Best Buy’s Chief Executive (Groth 2011). He said the company’s mistake had been to open big box stores with fixed prices that were staffed entirely by Best Buy’s blue-shirted employees (Jopson & Waldmeir 2011). Clearly, Best Buy entered the Chinese market in 2006 with a lack of knowledge of the local consumer’s culture. International strategy is a strategy where the firm uses the core competency, which it developed at home, as its main competitive weapon in the foreign market (Sumantra & Nitin 1993). This is the strategy which Best Buy used. The company did not enter China with the intention to hire local talent who knew how to be successful in China. Rather, it entered the country intending to create talent that knew how to be successful in the United States (Adam 2011). When the multinational first entered the Chinese market, many people hoped that it would successfully replace the prevailing, yet widely criticised Chinese business model that focused on price-centred competition (Ni 2011). Imposing their core competency in the US model, the company offered â€Å"a concept ahead of the consumer,† said retail analyst Paul French of Access Asia which was based in Shanghai (Macleod 2011). Best Buy provides a premium shopping experience for its consumers, to which the Chinese consumers were ultimately not willing to pay for (Jopson 2011). Consumers in China are generally different from consumers in the United States. Wei and Salil (2010) stated that the Chinese consumers have a higher cognitive age perception, lower levels of physical health status and lower life satisfaction levels as compared to their American counterparts. Eastman et. al. (1997) conducted a study and found that there were statistically significant differences between the two, such that Chinese consumers were more materialistic than those in the United States. Eastman’s research was later backed up by Schmitt’s (1999) studies. In addition, Schmitt found that the Chinese consumers were more brand conscious and would go shopping with brands as a key influencing factor. The cross-cultural study above is just one of the reasons as to why Best Buy failed to attract consumers in China. For instance, the company’s store in China generally divides up electronics and other large-ticket items by category (Birchall, Strauss & Waldmeir 2011). However, the Chinese are inclined to put more faith in brand names than consumers in the US do. Due to this reliance on brands as a deciding factor, the Chinese consumer would generally prefer items in the store to be categorised according to their make rather than function. Another cause of the company’s failure in attracting Chinese customers lies in the fact that all sales staff in the store were the company’s direct employees who donned the ubiquitous blue Best Buy uniform. This was a stark difference to the scene in typical Chinese outlets, where consumers were accustomed to subsections of electronics stores being manned by the manufacturer’s own employees, who were also able to offer specialist knowledge (Jopson 2011). At the same time, Best Buy’s market research showed that Chinese consumers liked to try out new products. While this was true, what eventually happened was that the Chinese shoppers would first go to Best Buy to try out products, before promptly marching across the street to one of the other Chinese retailers and buying the said product for less (Adam 2011). This was partly due to the pricing in Best Buy stores, which was based on a fixed-price policy (Jopson 2011) and only served to push the Chinese consumer even further away. As stated by Montlake (2006), bargaining is a way of life in China. Chinese consumers like bargaining and they are used to negotiating with the salesperson to get a discount, which was not an option in Best Buy. Not only is bargaining not an option, the prices at Best Buy were also set at a premium as it followed the company’s US model of offering high-quality service and a better shopping experience to consumers, such as the opportunity to try products before making a purchase. However, that did not seem to suit the immature Chinese market very well (Ni 2011). Purchasing decisions made by Chinese consumers are determined by price and not service (Birchall, Strauss & Waldmeir 2011). At the same time, Chinese consumers had the perception that Gome and Suning, two of Best Buy’s biggest competitors, were able to under cut Best Buy’s prices significantly (Adam 2011). Chinese consumers care more about price than service (D’Altorio 2011). The Chinese do not penny-pinch and save because they like to, but because they have to. They voluntarily tax themselves so as to protect against the absence of a welfare safety net. If a Chinese consumer gets old, he will need that money to survive, since state pensions remain inadequate. As his parents age, he will need to support his elders, especially since he is likely to be their only child, a result of the country’s one child policy. This reality is what perpetuates and engenders the low-cost, bargain basement Chinese retail environment (French 2007). To top it off, Best Buy’s choice of a Chinese name left many consumers pondering over its decision. A country steeped in traditions and superstitions, many Chinese consumers commented that the company’s Chinese name, â€Å"Bai Si Mai†, was a bad one as it literally meant â€Å"to buy after thinking 100 times† (Ni 2011). Overall, the company’s business model, like its Chinese name, showed a lack of understanding for the Chinese culture. It tried too hard to educate Chinese consumers about high-end service value when lower prices were typically the only value that motivated them to make quick decisions. The consumer electronics giant’s overconfidence in transforming the Chinese consumer philosophy finally hurt its performance in the Chinese market. Maintaining only a small market presence in China, Best Buy not only failed to please its consumers, but its suppliers too, who did not receive many orders from the company (Ni 2011). Proposed Solutions There are huge cross-cultural differences between the US and China. Therefore, one change I will make if I was Best Buy is to take up a multi-domestic strategy instead of the international strategy adopted by the company. Multi-domestic strategies involve a high degree of customisation to the local market place (Hout, Porter & Rudden 1982). This is important, noting the huge cultural gap between the China and the US. Hill, Hwang and Chan (1990) also stated that a multi-domestic strategy is based on the belief that national markets differ widely with regard to consumer preferences and taste, competitive conditions, operating conditions and social structures. According to organisational capabilities theory, in order to leverage its competitive advantages in the foreign market, an enterprise must understand its business environments and adapt its operation modes to the host country (Xu, Hu & Fan 2011). This is also in line with the multi-domestic strategy, to which Anne-Wil (2002) has highlighted the need of multi-domestic companies to deal with markets where products tailored to local circumstances are required; and to be able to do so, companies need to be well aware of the local market and be well-integrated into it. This can be easier achieved by acquiring an existing company that possesses a knowledgeable work force and good connections in the local market. As such, the mode of entry decided upon by a multinational is a critical and strategic decision. To support the multi-domestic strategy and aligning with conditions in China, I will still first enter the Chinese market using foreign acquisition. Foreign acquisition involves having to invest in a local firm and in this case, I will be investing in Jiangsu Five Star Appliance. Acquiring Jiangsu Five Star Appliance will create access to local resources as well as knowledge of the Chinese retail environment within a much shorter span of time (Cristina & Garcia-Canal 2004). Acquisition is also a more effective way of exploiting foreign resources and markets as compared to joint ventures or licensing, as supported by the transaction cost theory (Hennart 2010). Tapping on the knowledge and expertise of Jiangsu Five Star Appliance, I will then use the greenfield method, which is the setting up of a new company legally independent from parents, to set up a Best Buy store in China (Cristina & Garcia-Canal 2004). By using a multi-domestic strategy, the management seen in the greenfield approach will be more similar to that of acquisitions (Anne-Wil 2002). The consequent Best Buy outlets will then be managed and accustomed to the Chinese market. For instance, as most Chinese consumers shop by brands, the store will therefore be segregated by brands rather than product category. Sections of the store will also be rented out to brand manufacturers and their designated areas will be staffed with their own sales team, so that consumers can receive specialised knowledge as well as bargain for a lower price. The store will not be carpeted or provide services like allowing consumers to test out the product before purchase. This is to prevent the Chinese consumers from having the perception that the store is pricier as compared to competitors, especially since China is a highly price-conscious market. As French (2007) aptly stated, â€Å"win on price and you win, period†. It is therefore of utmost importance to have a lower price as compared to competitors. In order to provide lower prices, I will acquire the real estate, instead of renting or leasing the property like my two biggest competitors Gome and Suning do. This will provide me with a great advantage as I can lower rental prices for the manufacturers, who can then pass the accumulated savings down to the Chinese consumers. Noting the Chinese aversion to inauspicious names, I will also conduct sufficient research and preparation into choosing a Chinese name for the store before its opening. Instead of using a direct sound conversion of the brand name like â€Å"Bai Si Mai†, I will translate the brand name by meaning instead, such as â€Å"Zui Hao Mai†. This literally means â€Å"best buy†, and doubles up as a call that encourages consumers not to miss out on a deal. Conclusion In conclusion, China is a huge and growing market with tonnes of opportunities that multinationals cannot afford to neglect. However, there is a huge cultural divide between China and countries from the west like the United States. Entering the Chinese market will require multinationals to recognise and understand the cultural difference between their homeland and the Chinese market. Best Buy failed in China due to a lack of knowledge and understanding of cross-cultural differences. Although the company chose the correct mode of entry by first using foreign acquisition followed by the greenfield approach, it failed because it adopted an international strategy thinking that Chinese consumers will welcome the same offerings that reflect its core competency in the US — value-added service. Thinking it could import its success in the US to China by focusing on the same areas, Best Buy’s targeted service approach failed to take off in a climate governed by financial sensitivity. While focusing on providing consumers with a great shopping experience, the company failed to consider a fundamental portion of the retail environment — price, which affects Chinese consumers much more than service. To improve on this situation, I would first enter the Chinese market through foreign acquisition, so that I may gain access to knowledge about the culture in China before starting on the greenfield route. However, instead of using an international strategy, I will opt for the multi-domestic strategy by adapting my operations towards the needs of Chinese consumers. This would circumvent the issues that led to the company’s downfall in China. Due to the country’s rich traditions, its people are habitual and tend to shy away from the unfamiliar. Should Best Buy have chosen to use a multi-domestic strategy, it would have realised the need to customise its offerings in accordance to local tastes and might have gone on to capture a larger share of China’s consumer electronics market. Reference List Adam, M. 2011, ‘Bye-Bye, Best Buy (China): You had it coming’, Adam Minter of Shanghai Scrap, 22 February, Viewed 22 August 2012, Anne-Wil, H. 2002, â€Å"Acquisitions versus Greenfield investments: International strategy and management of entry modes†, Strategic Management Journal, vol. 23, no. 3, pp. 211-227. 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