#101 Think a hundred times before you “Best Buy” in China
Yes, this is somewhat old news, but it’s also an ongoing story. In early 2011, several media outlets reported that US electronics retail giant Best Buy was failing in China. In a year when Chinese overall retail sales grew by a monthly average of 18 percent, Best Buy shut down all of its nine mega stores. It would be easy to blame the Chinese consumer for their price sensitivity, their tendency to haggle over discounts, their unwillingness to pay for quality service, and the rapidly rising competition from online retail, but that would be – well, too cheap. Foreign companies entering a new market carry what the international management scholars call the “liability of foreignness” – their task is not to educate consumers and reshape and entire culture, their task is to adapt to local conditions. Or, if their internal environment and business model doesn’t allow them to do so, to simply stay away. Also, local Chinese competitors such as Gome (Electrical Appliances Holding Ltd.) themselves started to introduce fixed prices and to take sales personnel off commission a while ago, thus getting closer to the Western retail model. In Best Buy’s case, the failure might have been a combination of many different things from costs that were too high to mistakes in product portfolio decisions to the building of monumental flagship stores. Maybe Best Buy even overextended itself on a global scale. Almost parallel announcements to withdraw from the UK and from Turkey point to a mismanaged overall global expansion strategy. Anywho, back in 2011, it seemed that another arm of Best Buy’s operations in China, the acquired local, Nanjing-based Five Star chain and its mobile business units would be the solution to the company’s trouble. In fact, Five Star was where Best Buy’s involvement in the Chinese market started altogether in 2006. Two years later, Five Star’s market share had been steadily declining and calls for Best Buy to completely pull out of China grew louder. In late 2013, however, the company’s new CEO, Hubert Joly, renewed Best Buy’s confidence in the Chinese market, citing steady progress the company had been making. In 2014, it remains to be seen if Best Buy’s future will be able to attract more Chinese consumers or if they’ll continue to do what one of the translations of Best Buy’s name in Chinese, 百思买 (Bai Si Mai), could mean: “Think a hundred times before you buy”!
April 13, 2014 @ 7:50 am
Rally It is interesting to see how often western retail companies experience failure in China. How come? Media Markt or Best Buy are strong worldwide companies wizt much of experience in international business. I am positive they have had wisely change management and systematic approach to International market entry but again, they face failure. Long time ago Geert Hofstede determined how cultural differences influence behavior in business. Furthermore, it is widely known how cultural differences can be a source for miscommunication, wrong perceptions and stereotypes. Not to lose the essence, by Hofstede model, eastern civilization are one which are more collectivistic with commitment to long term orientation. Maybe there is catch. Western companies haven’t been used to wait for success. If they don’t have promising results in few years, they are giving up. Maybe, they just need to be more patient and integrate local touch in their brand so locals can identify with the products as a time pass by. In introducing new brand or products, it is essential to determine key factors which influence on individual adaption or usage in order to determine perfect Marketing Mix. People determine their behavior intention on three beliefs. Normative (what they are expected to believe), subjective beliefs (what they think about that) and also by behavior beliefs. Behavior beliefs refer to perceived usefulness, ease of use, compatibility, visibility, and Image. These beliefs make attitude which also influence behavior intention. While, behavior beliefs are pretty strong in western societies, in China, I would say, normative beliefs plays major role for behavior intention. To summarize, adopting to all mentioned along with examination of PEST factors; the macro-environment e.g. Political (and legal) forces, Economic forces, Sociocultural forces, and Technological forces are critical for integration in host market which at the end can result with success!
April 17, 2014 @ 9:08 pm
The American middle class was the world economy’s growth engine throughout the 20th century. Now, the center of growth has shifted to the Asian–Pacific region. As such it is not very surprising that American retail giants such as Best Buy try to stabilize total sales through a broader country portfolio, diversify risk and participate from the growth in these booming markets.
Interbrand, the world’s largest brand consultancy, nominates the Best Retail Brands by country every year. Even though Best Buy was losing ground during the last years, the company is still in the top positions of the ranking for the United States for several years in a row now. According to Interbrand’s definition, brand strength is the ability of the brand to create loyalty and includes customer-centric factors like clarity of target audiences, customer drivers as well as the commitment to recognizing changes in their customer’s needs and wants. [1]
Clearly this understanding was missing when Best Buy entered the Chinese market in the following aspects:
Product: Best Buy was positioning itself as a high-quality service and good shopping experience offering company. However Chinese customers’ major purchasing determinant is price, not service. The competitive advantage Best Buy enjoyed in the U.S. was not a source in China. As such, company didn’t understand the customers’ preferences.
Price: As stated already above, price is the main distinguishing factor in the Chinese market. Best Buy was perceived as being too expensive compared to local competitors e.g. Gome and Suning. Premium prices were only accepted by Chinese customers for products they couldn’t get elsewhere, like Apple products. Hence there was no need for customers to shop at Best Buy.
Brand recognition: Whilst Best Buy is a well-known brand in the U.S. domestic market, it enjoyed very little brand recognition in China, compared to its competitors. Hence it had to invest significantly in marketing to build this brand recognition. As part of this strategy, the company decided to convert its name to its phonetic equivalent, which meant “think a hundred times before you buy”- another reason for Best Buy’s failure in China. Examples like Coca-Cola, meaning “Tasty and Happy” or Carrefour “Happy and Prosperous Family” show how names can attribute positive aspects which are in turn contributing to a successful market entry.
Place: Best Buy was relying on large flagship stores, like in the U.S., rather than smaller, conveniently located retail outlets even though Chinese customers rather prefer to shop closer to their homes due to ongoing traffic congestions.
In this connection I found an interesting example of how Coca Cola managed its market entry in India by identifying the local specialties particularly with regards to sales. As such, the company noticed the importance of small family stores in India, requiring the company to adapt their business practices compared to how they do business in developed markets. In the beginning, basic concerns, like cooling the drinks and socio-economic factors (E.g. small stores are often run by women, who face more difficulties in getting a credit) shaped the way of doing business and were more critically. As such, they learned to see the market as it is, not as they wished it to be, which perfectly summarizes their success formula. [2]
[1] http://www.interbrand.com/de/BestRetailBrands/2013/Best-Retail-Brands-Brand-View.aspx
[2]http://www.mckinsey.com/Insights/Asia-Pacific/Thinking_outside_the_bottle?cid=reimagining_india-eml-alt-mip-mck-oth-1312
April 19, 2014 @ 1:46 am
Is there a direct relation between foreign market entry failures and companies with a proven successful domestic business model? Wal-Mart, Best Buy, Home Depot, Mattel, Coke and Media Markt, just to name a few, are (im)perfect examples on this subject. Of course, we must not forget media’s power of attention when retail giants such as Best Buy massively scale back or even pull the plug on its foreign country operation. Nevertheless, all those companies have at least one thing in common: Domestic success. As already mentioned in the initial blog, it looks like, successful corporations try to teach customers and reshape cultures, while overlooking the necessity to adapt their (domestic) business model to foreign countries and their external factors (political, economical, technological, etc.). What are the sociocultural distinctions between China and the U.S. that Best Buy might have failed to consider? According to Geert Hofstede’s cultural dimension model* there are major differences in individualism, pragmatism and indulgence between the American and Chinese culture, so that high prices and big flagship stores might have pushed shoppers away. Also, foreign advertising and brand image make a difference. Stated by Paul Chao (1989), many companies in developing countries sell their products through well-known U.S. retailers as a result of their lack of clearly identifiable brand image and consumer resistance. Similar situation happened to Best Buy in China. Five Star, the local chain that had 136 stores at the time of the acquisition in 2006, still shows steady improvement while Best Buy struggled from the beginning. Was it the right timing for Best Buy’s attempt to conquer the Chinese Market? Market entries should be timed to balance the risks of premature against raising problems due to missed opportunities (Lilien & Yoon, 1990). One of the major reasons why Best Buy had to close its stores in the U.K. was, because the market entry occurred during a time where margins in the electronics industry hit rock bottom. Needless to say that in order to increase the chances for a successful foreign market entry, companies like Best Buy will have to overhaul their business models and adapt their strategy to the evolving Chinese consumer preferences.
*http://geert-hofstede.com/china.html
March 4, 2017 @ 9:04 am
It is really impressive how many companies fail when they try to enter a foreign market. But where in the planning phase did this mistake happen? In my opinion the biggest stumbling blocks are located during the phase of target market selection and the choice of the entry mode. But these steps are selected and evolved during the first two phases, cooperation readiness and product readiness. Best Buy made the right preparation to make the company readiness to go global, because the other subsidiaries and mergers, for example in Canada, worked well. I guess the products, services and product advertisement from Best Buy are usually fit to the selected Chinese market, and the product readiness was already prepared. In my opinion these two topics was not the major issue why Best Buy fails. Well, some other examples are telling me that this issue can happen – like Wal-Mart in Germany -, but from my experience the product or service is a simple topic, if the company spends enough time to figure out the right products, the right name of the product, and how to advertise it, maybe the cooperation has to do some adaption.
Before I’m going to discuss the target market selection and the choice of the entry mode I would like to highlight an article, which argues which Six Culture Clusters in according to Hofstede’s 5-D Model. This article focuses on the international marketing and culture. Best Buy is a well-established company in North America. Based on the analysis of this article Best Buy is dealing in the – so called – Contest Cluster. China is settled in the Family Cluster. The biggest difference between these two countries is the “power distance indicator”. Moreover I would like two topics which are very important in China, older people are seen as a source of knowledge and a hierarchy is very important. Nevertheless indirect messages are welcome, because people in China are afraid to lose face. Risk awareness is very low in China and very high in US. Based on this information it’s clear how a marketing strategy for Chinese market can fulfil the expectation of Best Buy. The knowledge of different culture and behavior can help to design the right marketing strategy for a country.
The target market selection is a crucial point in the strategy process. It looks like that Best Buy decision base focused only on the market potential in China. I guess the major driver was the expected market size and the growing life style. The market attractiveness was very high for Best Buy and the expected risk for the market entry was very low. Moreover, Best Buy tried to copy the successful business operation strategy from USA to China, without any adoptions. I think that Best Buy didn’t spend too much afford on the strength of the company. From my point of view the same topic happened during Best Buy established the other shops in UK and Turkey. But the cultural behavior in UK and Turkey are similar to USA.
Finally I would like to argue my thoughts about the choice mode of the entry. Best Buy selected the subsidiary version in China and keeps the brand as it looks like in US. For Canada Best Buy acquired the company Future Shop Ltd. I guess a merger solution can provide more success in case of a well-known brand, like Future Shop Ltd. in Canada. The cooperation with Carphone Warehouse also failed in UK and meanwhile Best Buy withdrawn from the European market too. So Best Buy is neither not successful in cooperation nor in building subsidiaries.
To copy a solution which works well is not the guarantee for success in another country. Nevertheless it’s important to do a couple of studies and analysis to get a rough picture how the selected strategy fit to the new market and the behavior culture of the local people.
https://geert-hofstede.com/tl_files/Marketing_and_Culture_itim_International.pdf
https://www.researchgate.net/publication/222686829_Hofstede's_dimensions_of_culture_in_international_marketing_studies
http://www.handelsblatt.com/unternehmen/handel-konsumgueter/us-einzelhaendler-best-buy-gibt-europa-auf/8145658.html
September 30, 2018 @ 7:36 pm
Why did Best Buy fail in China?
There are few a factors that can be considered relative to Best Buy’s failure in China. Numerous corporations have been confronted with significant challenges in their attempts to do business in China. It was not surprising that Best Buy saw its opportunity to enter the Chinese market turn into challenges they could not overcome. Big American retailers such as Best Buy have miscalculated what is required to succeed in the Chinese market. Prior to entry into the China market, Best Buy’s due diligence failed to gain a comprehensive understanding of the inner workings of the Chinese government and the impact it could have on operations in China. Best-Buy would have been better prepared had it gained a greater understanding of the evolving Chinese consumer market to determine which product preferences would be in demand in its Chinese retail stores. Chinese market is attractive due to its size, but continues to be a difficult market to enter. Culture and language constitute major factors that define the Chinese market, making it a greater challenge relative to foreign entry.
Pricing was also a factor in Best Buy’s failed entry in China. Chinese manufactures were very adept at counterfeiting products and selling them at a lower price that the authentic items. Consequently, local electronic retailers could offer better pricing than Best Buy. Unfortunately, the Chinese are very capable of counterfeiting products without penalty and it is unfortunately a factor of doing business in China.
Lastly, Arrogance may have played a part in Best Buy’s failure as well. Corporations cannot enter a county to change the mindset of the locals. If the product is not suitable for the market, it has to be adapted to the needs of the market or it will not sell. It is typically the desire to enter a new market without adapting products, but adaptation may be the only option to sustain the product in a market. American retailers apparently eye the vast Chinese market as a significant opportunity only to face the reality that entry into the Chinese market can be a costly mistake.