Failure of Internationalization Strategy in BestBuy in China

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Table of Contents

Introduction
Macro and micro environment
Business Entry mode
Segmentation, targeting and positioning
Recommendations
Conclusion
References

Introduction

Best Buy was founded by Richard Schulze in 1969. The company was first established as a car audio and a single room store and later developed into an international retailer of electronics, entertainment products and home office products.

In 2001, Best Buy Company was considered as the best company that supplied electronics in the Western countries. In the same year, the company was considered as the largest and most successful retail store of electronics worldwide.

Best Buy is one of the companies in the United States which has managed to enter into the markets of Canada, United Kingdom, Mexico, Turkey and China (Cheng, 2009, p.52).

Best Buy employs direct investment strategy for global market development. The company entered the international market of China by forming a joint venture with the China’s Five Star Appliance Limited.

By acquiring Five Star Appliance, the company gained popularity in China and expanded its business by opening nine stores. The nine stores of the company were located in Hangzhou, Beijing and Suzhou. This paper seeks to explain the mode of entry that Best Buy used to enter into the Chinese market and why it failed.

To explain this issue, the paper examines the macro and micro environment of the Chinese market as well as the segmentation, positioning and brand name of Best Buy Company (Ehrmann, 2009, p.10).

Macro and micro environment

Micro environment consists of the following factors; marketing intermediaries, suppliers, the company and the competitors.

In the fiscal year 2009, twenty five suppliers of electronics accounted for over sixty six percent of the merchandise purchased whereby Sony, Samsung, Hewlett-Packard, Toshiba and Apple accounted for one-third.

Best Buy enters in short-term agreements with its suppliers since it usually gets its products from the Asian manufacturers (Hollensen, 2012, p.50).

The strategy of obtaining products directly from the manufacturers has enabled Best Buy to offer private-label products, which harmonizes the existing product line. The suppliers of Best Buy products have a high bargaining power since there are only a few suppliers in the electronic industry.

Many retail shops in the industry like Best Buy have no power to bargain on the prices given, but only buy from the manufacturers like LG, Samsung and Sony in order to satisfy the needs of their clients (Lee & Carter, 2012, p.94).

Dool & Lowe (2012, p.68) indicate that the bargaining power of the suppliers is lowered by some of the factors like competition among suppliers and the need to ensure that the products manufactured get out of the shelves in order to reach the end user. Manufacturers rely heavily on retail shops to make their sales.

In this case, Best Buy has a bargaining power since it is recognized as the leading retail shop of electronics across the world. Best Buy has therefore the power to lower the bargaining power of its suppliers hence purchasing products at a fair price in order to make sales in the competitive market.

Circuit City which is the main competitor of Best Buy has faced a lot of business challenges since 2006 and Best Buy was expected to take the larger share of Circuit in order to expand its shares in the Chinese market.

Apart from Circuit City, discount retail shops have been a threat to Best Buy since they have taken a larger share in the market (Hollensen, 2012, p.58).

In Porter’s Five Forces, the theory considers internal rivalry as a major force in the retail industry of consumer electronics. Lee & Carter (2012, p.96) indicate that in the electronic industry, there are seven major retail companies and other private owned retail companies, which serve a specific segment of the market.

Best Buy is regarded as a dominant player under this category, but it mainly faces stiff competition from discount retailers such as Costco and Wal-Mart. In China the company faced a stiff competition from the local retail industries and from other online retail companies like Amazon.

The electronic industry products are not differentiated and customers can easily access them from any shop due to the main difference is pricing. Companies tend to compete on price, goodwill and the quality of services offered.

Customers are therefore forced to consider buying from shops with little prices, as well as good reputation. In the current world, many people go for electronics because of the emphasis on technology. Best Buy Company does not face any competition from the substitute of products in the market (Cheng, 2009, p.54).

The bargaining power of buyers in the electronic industry is relatively low because customers do not have the ability to purchase in large quantities. For example, a customer cannot purchase fifteen DVD players from Best Buy in order to control the price in the market (Chen & Kwan, 2010, p.12).

During its first three years in China, Best Buy made big profits after the joint venture with Five Star Appliances that the company anticipated for greater benefits in the subsequent years.

Unfortunately the sales of the company started going down as the company opened more and more branches within the country (Ehrmann, 2009, p.10).

Jiang & Kotabe (2011, p.7) indicate that when the company started operating under a new name ‘Baisimai’ which in Chinese language means “to buy after thinking hundred times,” the company lost its grip in the market as many people viewed it as a company with counterfeit products.

Macro environment refers to the societal forces that affect the operations of the company. They include the economy of the country, demographics, technology, cultural factors and the politics of the region. China is a country with a large population which investors think it can sustain their businesses.

Statistics indicates that China has an ageing population whereby a larger percentage are the people aged forty five years and above.

This population did not favour the operations of Best Buy in the country since most of the products sold by Best Buy involve modern technology which the older generations do not value (Ehrmann, 2009, p.10).

In the modern world, China is considered as a middle-income county with high expectations that it will join the world’s high income countries if its economic growth is well maintained.

The increased wages in the country increase the country’s income hence boosting the demand for luxury products such as the products that Best Buy sales in the market (Ingram, 2009, p.9).

The Chinese culture is said to be changing due to the issues of globalization in the business sector. For an investor to succeed in the Chinese market, they have to enter into the market by gaining trust among the customers first.

This is due to the fact that Chinese people lay more emphasis on the value that an investor brings into their country and whether that particular value the potential investor brings into the country is trustworthy.

Best Buy Company failed to succeed in the Chinese market because it failed to build trust with the targeted clients first before opening its nine shops in the country (Enright, 2012, p.12).

Business Entry mode

Best Buy has a business strategy with two goals to accomplish. The first goal is to ensure customer satisfaction by providing a wide range of products at a very low price in order to satisfy the customer’s needs.

Another strategy which Best Buy may implement is internationalization whereby the company aims to expand its business into the international market.

This is the business strategy that Best Buy has been applying for many years to achieve its success, and it believes that the strategy will continue sustaining the business worldwide (Hollie, 2012, p.10).

Best Buy operates under a model of customer-centricity whereby its focus is on ensuring that customers are treated in a unique manner by meeting their needs without any interference.

By using customer-centric strategy, Best Buy has always differentiated itself from other retail shops since it was recognized as a company that offered both middle and high end electronics, as well as excellent support services to its clients (Digital Trends blog, 2012, p.13).

The internationalization business strategy of Best Buy Company has worked well in countries like Canada and United Kingdom even though it failed in China.

When Best Buy first expanded its businesses to the China, it formed a joint venture with Five Star Appliances, which was a great move for the company since it managed to increase its sales as well as its profit margins.

This was successful because the company managed to fill the cultural gap between the company and the host country (Scarpelli, 2011, p.8).

After five years of operating the nine shops in China, the company closed its nine shops in China in 2011 after realizing that it has been running losses with no prospects of improving its sales. The failure of the company in China was due to a number of factors which were not predicted by the company.

In its entrance into the Chinese market the company failed to change its mode of entry in order to adjust to the needs and demands of the new market, instead it adopted the same entrance mode it had used in the Western countries (Ehrmann, 2009, p.8).

Best Buy Company entered the Chinese market with the notion that existing local retailers had poor business strategies of competing prices and so it thought it could succeed with its business strategy, which proved to be the best in the United States.

As much as the U.S allows huge stores to provide their services at cheaper prices, local retailers in China offer their products at a relatively cheaper price because they are able to acquire labour at a very low cost as well as benefit from other factors like low costs of electricity and rent (Digital Trends blog, 2012, p.13).

This is the reason that made Best Buy lose customers at the onset of its business because it sold its products at a higher price in comparison with other local retail shops.

Enright (2012, p.12) indicates that the Chinese people go for cheap products irrespective of their quality and this made it hard for Best Buy to penetrate the market.

The company’s strategy of satisfying the customer’s needs at a very low price contributed into the failure of the business since the company failed to compete with other local retail shops. The Best Buy’s model aimed at satisfying the consumers and suppliers which was a wrong move.

This is because the idea of reducing its prices between suppliers as well as concentrating in offering customer services failed to work in a small market like China.

Offering services like testing the products before buying created no impact to the business because the Chinese people do not value such services (Jannarone, 2011, p.21).

Michault (2012, p.5) indicates that the local retail shops managed to overtake Best Buy because they use a strategy of leasing separate parts of stores to retailers of different brands after which they are able to make profits from the entrance fee charged and the profits they get after sharing the profits earned by each retailer.

The company was aimed at pleasing its suppliers which was impossible because the suppliers of Best Buy failed to make good returns since the company did not manage to grab a better share of the market.

Best Buy was therefore required to adopt a new business strategy which considered the needs of the Chinese market, as well as adaptation to the cultural need of the market (Kirk, 2012, p.12).

The company’s brand name contributed to the failure of the business because customers did not find any reason to go there for their cheap products since they always imagined that the company sold counterfeit products as their brand name suggested (Latev, 2011, p.16).

Michault (2012, p.6) an analyst of Chinese market, points out that Chinese market is still a market with a relaxed government, low-end consumer awareness and a market full of ethnicity.

It should also be noted that the company failed to capitalize on the opportunity of online sales; instead it focused on physical locations assuming that the country was not undergoing any evolution.

The clients changed their style of shopping and they now prefer online shopping where prices are relatively low and products are availed at their destination at no costs. This contributed to its failure because it lost its share market to its small competitors like Amazon (Scarpelli, 2011, p.8).

Best Buy Company was aimed at building large stores in China rather than opening small and convenient shops which could have cut down the production costs hence the increase in the profit margin.

The company failed to differentiate its products which were also a major problem since they contributed to its failure in the Chinese market (Hollie, 2012, p.12).

The company anticipates for getting back to the Chinese market since its management argues that there is a big potential.

The management of the company argues that they are planning to use the business strategy they used to enter into the Canadian market. The company needs to localize its products as well as its sales formats in order to gain a competitive edge in China (Chua & Ingram, 2009, p.21).

Segmentation, targeting and positioning

In order to succeed in any business, the management has an obligation to understand the targeted market before venturing into the business. It is recommended that a company needs to understand the segment of the market and define clearly its targeted market in order to position itself strategically to attract the customers.

Currently, China is considered as a country with a changing segment since it is registered as a country with the largest demand population of mobile and the Internet, as well as a world’s largest market for cars (Ingram, 2009, p.10).

Jiang & Kotabe (2011, p.8) indicate that Best Buy Company analyzed its segment in China and identified a large market for electronic products. After identifying the potential market in China the company failed to understand the needs and desires of the Chinese customers.

In China, it is only the rich who go for luxury products and services and so they despise the poor. The rich go for cheaper products regardless of the quality. Best Buy introduced its products into the market with high prices which made customers not to buy their products.

Positioning is another crucial factor to consider when entering into a new market. Best Buy Company positioned itself by forming a joint venture with Five Star Suppliers.

This enabled the company to gain profits during the first three years of its operation in the Chinese market, because Five Star Appliances was a local industry which had already taken its base in the market and so it was easy for Best Buy Company to operate under its name (Chen & Kwan, 2010, p.14).

Later, the company failed to position itself strategically when it started opening retail stores in China since it failed to find a better location for its stores to attract potential clients. The company failed to establish a brand name in the Chinese market and this contributed to its failure in China.

First, the company entered into the market selling its products at higher prices in comparison with other local retail stores. This tarnished the image of the company since customers could not get into their shops to make purchases (Chua & Mor, 2012, p.12).

The company branded itself as ‘Baisimai’ which in Chinese language means ‘to buy after thinking hundred times’. The use of this name made Best Buy Company cut down its sales even after reducing its prices since many people considered the company as one that sells fake products and that is why it had to lower its prices.

The company failed to develop trust among the customers in the Chinese market hence the closing of its nine stores (Naisbitt, 2011, p.44).

Recommendations

Best Buy Company has a good opportunity to expand its market to foreign countries like China and Canada. Getting back to China, the company needs to change its western strategy and implement a business model that focuses on lower prices rather than higher value.

The company should also consider adapting into the culture of the Chinese people before implementing its business.

A move to open more stores under Five Star Suppliers will help the company by closing the cultural gap since Five Star Suppliers is a local retail shop which understands the culture of China and it is rooted in the Chinese market (Kotler, 2009, p.24).

Best Buy Company needs to improve on its distribution channels by moving from the traditional distribution channel to the electronic commerce market.

The company has to implement online delivery services just like its counterpart Amazon which delivers at no costs in order to regain back its market share which its competitors grabbed (Haines, 2010, p.45).

The company can also implement the strategy it used to enter into the Canadian market since its stores in Canada expand in every fiscal year by a net profit of twenty percent.

The company should venture with a local company in the host country which has already acquired success in the market as well as offered practical warrants to its clients. The company should also focus on opening stores that deal with specific electronics as a way of marketing its products (Cheng, 2009, p.43).

Conclusion

The analysis of the research conducted indicates that a business model determines the success or failure of a company in the market. It is also evident that the business entry strategies that are applicable in the Western countries do not yield fruits when implemented in Asian countries.

In the Asian countries, the quality of the product does not matter a lot as opposed to the price of the product.

When investing in Asian countries it is advisable to consider the issue of pricing for the business to penetrate into the Asian market as well as adopt their cultural behaviours in the market in order to gain a competitive edge in the market.

References

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Ingram, P, 2009, ‘Guanxi vs. networking: distinctive configurations of affect- and cognition-based trust in the networks of Chinese vs. American managers,’ Journal of International Business Studies, vol.40, no.3, pp.490-508.

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Scarpelli, I, 2011, ‘Consumer electronics ownership, spending in Brazil ranks highest among 8 countries; tops China, Germany and the U.S.’ Accenture, vol.4, no,23, pp.45-64.

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