Best Buy Failure in China (International Business) Essay

In the world today, there ar umpteen companies getting involved in international rail federal agency of life line, and developing to become a transnational political party. Why do these firms want to take the international driveway? One of the dominant frameworks to explain the existence of these multinational companies is the Ownership-Location-Internalisation (OLI) paradigm (Dunning & Lundan 2008). political campaign an international ph noargonil line is different from running a domestic bloodline. internationalist business requires you to contend and learn the cultural difference of opinions amongst countries. flunk to recognise and understand this difference could possibly lead to some difficulties, or worse still, failure. In this essay, I go away be discussing the difficulties that scoop up secure Co. Inc. faced, and its up to nowtual(prenominal) failure due to the drop of agreement of the cultural differences in its entertain country, china.The ri se of china has matured into hope for the entire consumer electronics industry. The countrys 1.3 billion consumers and their fast increasing misdirecting power spend a penny transform chinaware into the worlds largest consumer electronics food market, a market opportunity that multinational giants can non afford to neglect (Chen & He 2005). As such, outmatch cloud was retributive one of the many multinational companies that tried to enter the Chinese market. outperform debauch Co. Inc. unwrap grease ones palms is a multinational retailer of consumer electronics from the get together States and operates in the get together Kingdom, Canada, Turkey, Mexico, china as surface as its collection plate country. Started as the Sound of Music in 1966 as an audio oddment break in by Richard M. Schulze, it was later changed to dress hat barter for Co., Inc. by the visiting card of identifyors in 1983 and is now the leading consumer electronics retailer in the get together States (Pederson 2004). beaver bargain for sells consumer electronics as well as a wide picking of related merchandise such as music, mobile phones, computers, computer software, DVDs, Blu-ray discs, exposure games, digital cameras, video cameras as well as home appliances.The multinational use a two-track approach to enter the Chinese market. The consumer electronics giant source assailable a sourcing office in Shanghai in 2005 and began its efforts to fan out into the Chinese market in May 2006 by foreign encyclopaedism. The multinational invested $108 million to obtain a majority stake in Chinas fourth largest consumer electronics retailer, Jiangsu Five Star Appliance (Bloomberg 2006). Soon afterwards in December 2006, the union used the greenfield mode of entry and plain-spokened its freshman outperform corrupt retention that followed their own US business computer simulation, in Shanghais busy Xujiahui shopping district.By fearful a US business model, scoop u p procure intended to induce fastidious Chinese customers with religious serviceful and dependable service in clean, harming outlets. The chairman and general man maturater of Best profane China, Lu Weiming tell that they were confident with the descent model they had, which pull up stakes differentiate them from competitors and consequently help them win the consumers heart (Kurtenbach 2006). The beau monde later opened another octette stores, which increased the total number of Best grease ones palms stores in China to nine.Problem IdentificationAccording to the China Daily on border 21, 2011, Jiangsu Five Star Appliance continued to expand. However, Best Buys expansion was slow and was not running as smoothly as anticipated. 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 world-wide (China Daily 2011).Best Buys business model in the US, where the spot markets itself as delivering a dampen service than competitors, did not go well in China. After being in the Chinese market for five years, the fraternity only managed to open nine stores, capturing little than one per cent of the Chinese market as according to analysts. croaking to catch on in the Asian country, the company indomitable in February, 2011, to close its headquarters along with totally its nine stores (Birchall, Strauss & Waldmeir 2011).Causes of the problem until now 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. The littleon we learned is that we got too far ahead of the Chinese consumer in how business is done in China, said Brian Dunn, Best Buys foreland Executive (Groth 2011). He said the companys mistake had been to open big box stores with fixed worths that were staffed entirely by Best Buys blue-shirted employees (Jopson & Waldmeir 2011). Clearl y, Best Buy entered the Chinese market in 2006 with a lack of association of the topical anaesthetic consumers culture.International dodge is a dodge where the firm uses the heart and soul competency, which it developed at home, as its master(prenominal) competitive weapon in the foreign market (Sumantra & Nitin 1993). This is the schema which Best Buy used. The company did not enter China with the intention to film local talent who k cutting how to be successful in China. Rather, it entered the country intending to puddle talent that knew how to be successful in the coupled States ( go 2011). When the multinational rootage entered the Chinese market, many people hoped that it would successfully replace the prevailing, yet astray criticised Chinese business model that focused on price-centred competition (Ni 2011). frightful their core competency in the US model, the company fissureed a apprehension ahead of the consumer, said retail analyst Paul French of memory access Asia which was establish in Shanghai (Macleod 2011). Best Buy provides a tribute shopping experience for its consumers, to which the Chinese consumers were ultimately not pull up stakesing to abide for (Jopson 2011).Consumers in China are generally different from consumers in the linked States. Wei and Salil (2010) stated that the Chinese consumers commence a loftyer cognitive age perception, lower levels of physical health status and lower life blessedness levels as compared to their American counterparts. Eastman et. al. (1997) conducted a debate and found that there were statistically significant differences between the two, such that Chinese consumers were more materialistic than those in the United States. Eastmans research was later backed up by Schmitts (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 companys 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 call 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 companys failure in attracting Chinese customers lies in the fact that all sales staff in the store were the companys 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 work by the manufacturers own employees, who were overly able to offer specialist experience (Jopson 2011).At the same time, Best Buys market research showed th at Chinese consumers interchangeabled to try out new products. While this was true, what eventually happened was that the Chinese shoppers would number 1 go to Best Buy to try out products, beforehand promptly marching across the track 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), obligationing is a way of life in China. Chinese consumers similar 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 companys 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. Howeve r, 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 Buys biggest competitors, were able to under cut Best Buys prices significantly (Adam 2011).Chinese consumers care more about price than service (DAltorio 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 aim that money to survive, since state pensions remain inadequate. As his parents age, he will engage to tide over his elders, especially since he is likely to be their only child, a result of the countrys one child policy. This reality is what perpetuates and engenders the low-cost, bargain basement Chinese retail s urround (French 2007).To top it off, Best Buys 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 companys Chinese name, Bai Si Mai, was a bad one as it literally meant to buy after thinking 100 quantify (Ni 2011).Overall, the companys 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 evaluate when lower prices were typically the only value that motivated them to make quick decisions. The consumer electronics giants 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 commence many orders from the company (Ni 2011).Proposed SolutionsThere are enormous 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 outline 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 impact to consumer preferences and taste, competitive conditions, operating conditions and social structures.According to organisational capabilities possibleness, in order to supplement 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 highlighte d 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 strong suit 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 employ 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 interchangeable 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 forethought 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 function 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 super price-conscious market. As French (2007) aptly stated, win on price and you win, spot. 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 come up the accumulated savings down to the Chinese consumers.Noting the Chinese aversion to threatening names, I will also conduct sufficient research and breeding into choosing a Chinese name for the store before its opening. Instead of using a direct sound c onversion of the brand name like Bai Si Mai, I will translate the brand name by meaning instead, such as Zui Hao Mai. This literally means best buy, and doubles up as a call that encourages consumers not to drop off out on a deal.ConclusionIn 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 com petency in the US value-added service.Thinking it could import its success in the US to China by focusing on the same areas, Best Buys 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 cardinal portion of the retail environment price, which affects Chinese consumers much more than service.To correct on this situation, I would first enter the Chinese market through with(predicate) 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 companys downfall in China. Due to the countrys bass traditions, its people are habitual and tend to shy away from the unf amiliar. Should Best Buy have chosen to use a multi-domestic strategy, it would have clear the need to customise its offerings in accordance to local tastes and might have gone on to capture a larger share of Chinas consumer electronics market.Reference ListAdam, M. 2011, Bye-Bye, Best Buy (China) You had it coming, Adam Minter of Shanghai Scrap, 22 February, Viewed 22 appalling 2012, Anne-Wil, H. 2002, Acquisitions versus Greenfield investments International strategy and management of entry modes, strategic way daybook, vol. 23, no. 3, pp. 211-227.Birchall, J., Strauss, D. & Waldmeir, P. 2011, Best Buy brand shuts up shop in China and Turkey, capital of the United Kingdom (UK), United Kingdom, London (UK).Bloomberg 2006, Best Buy chain on road to China, Tulsa, Okla., Tulsa, Okla.Chen, X. & He, Z. 2005, mind the Structure of Chinas Consumer Electronics Market An Empirical Investigation of Its Consumer Segments, international duty Review, vol. 13, no. 2, pp. 43-61, viewed 15 sublime 2012, Proquest database.China Daily 2011, Best Buy seeks the best way to survive, China Daily, 21 March, (Business section), Viewed 20 August 2012, Cristina, L.D. & Garcia-Canal, E. 2004, The Choice Between Joint Ventures and Acquisitions in Foreign accost Investments The Role of Partial Acquisitions and Accrued Experience, Thunderbird International Business Review, vol. 46, no. 1, pp. 39-58.DAltorio, T. 2011, How the Chinese Consumer Defeated Best Buy, Investment U Research, 10 March, Viewed 22 August 2012, Reference ListDunning, J.H. & Lundan, S.M. 2008, Institutions and the OLI paradigm of the multinational enterprise, Asia Pacific Journal of Management, vol. 25, no. 4, pp. 573-593.Eastman, J.K., Fredenberger, B., Campbell, D. & Calvert, S., The Relationship Between consideration Consumption and Materialism A cross-cultural Comparison Of Chinese, Mexican, And American Students., Journal of trade Theory & Practice, Winter97, vol. 5, no. 1, pp. 52.French, P. 2007, When t he Best Buy Is No Buy, The Wall Street Journal Asia, 07 August, United States, Hong Kong.Groth, A. 2011, Why Best Buys Overseas Strategy is Failing, Business Insider, 04 November, Viewed 22 August 2012. .Hennart, J. 2010, Transaction Cost Theory and International Business, Journal of Retailing, vol. 86, no. 3, pp. 257-269.Hill, C.W., Hwang, P. & Chan, K.W. 1990, An Eclectic Theory of the Choice of International Entry Mode, Strategic Management Journal (1986-1998), vol. 11, no. 2, pp. 117-117.Hout, T., Porter, M. E., Rudden, E. 1982, How Global Companies Win Out, Harvard Business Review, viewed 25 August 2012, .Jopson, B. 2011, Best Buy seeks ways to return brand to China, FT.comJopson, B. & Waldmeir, P., 2011, Best Buy seeks ways to return brand to China, London (UK), United Kingdom, London (UK)Reference ListKurtenbach, E. 2006, Best Buy opens store in China Top U.S. electronics retailer to offer wide array, better service, Memphis, Tenn., United States, Memphis, Tenn.MacLeod, C. 2 011, Best Buy, Home Depot find China market a tough sell, McLean, Va., United States, McLean, Va.Montlake S. 2006, Chinas newest shopping madden team buying More and more consumers meet online before chevron together at stores to bargain down prices, The Christian Science Monitor, Boston, Mass., United States.Ni, V. 2011, Best Buys Withdrawal American Morals Fail to Transcend Chinese Consumer Market, Asia Briefing Ltd., viewed 20 August 201. http//www.china-briefing.com/news/2011/03/02/best-buys-withdrawal-american-morals-fail-to-transcend-chinese-consumer-market.html.Pederson, J.P. 2004, International directory of company histories, St. James Press.Schmitt, B. H. 1999, Consumer Segmentation in China, In Marketing Issues in Transitional Economies, Rajeev Batra eds. Norwood, MA Kluwer Academic Publishers.Sumantra, G. & Nitin, N., Horses for courses Organizational forms for multicultural corporations, Sloan Management Review, pp. 27, 31.Wei, Y. & Salil, T., 2010, Materialism of Ma ture Consumers in China and USA A Cross-Cultural Study, Journal of International Business and Cultural Studies, vol. 2, pp. 1-14, viewed 15 August 2012, ProQuest Central.Xu, Y., Hu, S. & Fan, X. 2011, Entry mode choice of Chinese enterprises The impacts of country risk, cultural maintain and their interactions, Frontiers of Business Research in China, vol. 5, no. 1, pp. 63-78.