Best Buy Failed Chinese Market

BestBuy Failed Chinese Market

Chinacan be considered as the one of the world’s biggest and swiftestgrowing consumer market however, Best Buy retailers have continuedto face difficulties in the market. Currently, the U.S. basedelectronics entity, Best Buy, closed all of its nine branded storesin China after five years of operation in the market. This firm isnow considering its focus on its local chain 5-star that it hadacquired some years back. There are different reasons why this firmfailed in China market these reasons are according to the Best Buyinto the China case and some study and investigations from publicopen source. These reasons are as discussed in the followingparagraphs

Background:A Successful Overseas Growth and Dual Brand Strategy Challenge

BestBuy was ready to enter Canada in 2000. During the time, the Canadianmarket of home appliances was characterized by small market patterns.Future Shop, a home appliances chain store, had the largest marketshare in the market since other local retailers were little playersin the home appliances. Indeed, Future Shop had 15% of the marketshare. However, during the time, China had five shares of thehousehold and electrical appliances store, which when combined wasless than 20% of the market share. This implies that Future Shop wasa major player in the market. In entering the Canadian market, BestBuy chose the simple and unsophisticated way. In 2002, Future Shopbecame acquired by Best Buy and the management of Best buy made theunthinkable they decided to keep the brand name of Future Shopwithout changing anything, while at the same time set up their ownstore under the name Best Buy. This was a bad decision since therewas no need of opening two stores in the Canadian market having twodifferent brand names bearing in mind that the stores were under thesame owner. However, it emerged successful in the Canadian marketsince after a few years, the two stores had 30% market share of homeappliances in the Canadian market. The chief reason explaining thesuccess is that the two stores management styles were different.Future Shop offered similar services in the Chinese appliance stores,but there was a clerk that explained in details and described thevarious features of the appliances to customers (Ferrell andHartline 637).On the other hand, Best buy maintained their selling style, which wasjust like selling in the supermarkets, where a customer would pick anitem and then checkout after paying the cashier. Although the tworetailers sold similar home appliances, they applied differentiation.Therefore, this expansion of the Best Buy in Canada did not indicateserious internal resistance due to the unique style of service. Sincethe double brand effect was quite successful in Canada, this was thelikely reason that best Buy felt confident in entering the Chinesemarket.

Dissimilarity:Chinese Market not Similar to the Canadian Market

WhenBest Buy entered in the Chinese market, it used the same tactics ithad used in attaining success in the Canadian market. When it enteredthe Chinese market, Best Buy directly purchased 75% stake of homeappliances store in Chinese Five Star appliance and set up theirflagship store. This was similar to what they had done in Canada, butthe markets were dissimilar. This was a probable reason for thefirm’s failure in the Chinese market.

MarketShare

Whenentering the Chinese market, the leading five household appliances’stores had a total market share of less than 20%. The Five StarAppliance did not have a high rank like the Future Shop in Canadasince it was in the third row in the market. In China, because of theextreme fragmentation of the market, businesses have their owncharacteristics in every region. Therefore, expansion of the Best Buyin the Chinese market could be accounted for by the problem of thefirm in acquiring the market share, given the market share of thefirm it had purchased stakes from and extreme fragmentation in themarket.

MarketPositioning

Marketpositioning was another reason, which is speculated to have led toBest Buy failing in the Chinese market. After entering the Chinesemarket, Best Buy chose Five Star Appliance as the firm that it coulduse in capturing the market however, it did not consider the marketpositioning of the firm. The Five Star Appliance is thought to haveits positions concentrated in some fast developing second tiercities. Besides, not everyone in China has an impression of the FiveStar Appliance. Although the total market share of the Five StarAppliance is only few units less than that of Gome, the gap isrelatively large for the China’s leading appliance retailer,Suning.

ConsumerBehavior

Tippingculture is common in North America. Although appliances buyers maynot necessarily pay tips, in case there is a considerate servicestore, slightly higher price is also considered considerable. This isto imply that purchasing home appliances in Canada can be accreditedwith differentiated level service by customers. On the other hand,this is a different story in China. Price emerges as one of the mostconsidered factor by the Chinese consumers, which implies that highquality services are termed as insufficient for making Chineseconsumers accept higher prices. Online stores and other firms usuallypromote their prices as the best and lowest. Basically, it was notpossible for Best Buy to offer higher prices for quality servicessince customers would not consider purchasing from the firm. Anotherbehavior of the consumer is making purchases based on brand loyalty.Compared to North American consumers, Chinese consumers are morefunction oriented when purchasing an item and sometimes have apreference for local brands (Hill andJones 108).Nevertheless, in case other brands are available and can offersimilar functions and cheap, Chinese consumers are more likely toadjust their selection compared to North American consumers.

MarketEnvironment, Economic and Cultural Differences

Porter’sfive forces model is used in this analysis

Suppliers’Bargaining Power

Traditionaldomestic entities appliance stores have a tradition of paymentarrears. In the large supermarkets, the bargaining power of suppliersis relatively weak since manufacturers have few options. During thetime of Best Buy entering the Chinese market, it was very rare formanufacturers to directly do their own online store. The Five StarAppliance has more experience in supplier management however, BestBuy might not have had the luck in managing suppliers. The Best Buyadopted their global policy of payment first after picking, which iscombined by having no slotting fees and no mandatory promotion. Thiscould strengthen the suppliers’ bargaining power for Best Buyhowever, the unspoken rule entry mode could have unexpected potentialrisk. For instance, in case competitors boycotted the move of BestBuy, suppliers could not supply the Best Buy with anything. Of moreimportance, is having high cost that would deplete the firm’sprofit. Therefore, Best Buy had problems in this competition.

Consumers’Bargaining Power

Inthe Chinese market, customers are very sensitive to prices.Businesses dealing with home appliance, which charge exceedingly highprices for their commodities or services, may end not getting a highflow of customers. This implies that price sensitiveness of Chineseconsumers is not directly associated with the service premium.Therefore, consumers are not capable of dictating the price that theywill pay for the home appliances. This implies that the consumers’bargaining power is weak.

Rivalry

Inthe Chinese market, there is a high rivalry amid appliances storespositioned in the first tier cities. Because of the strong pricewars, positioning is a major consideration in the Chinese market.Although Best Buy can offer distinct shopping experience, it is facedwith a lot of competition within the market. The Five Star Appliancesgrowth rates have been considerable, but the growth rates cannotwithstand the strong growth of Gome and Suning. This may be aprobable reason for Best Buy failing in the market.

Threatof Substitutes

Obtaininga direct substitute for home appliances is exceedingly difficult.However, it is possible to substitute the services provided by oneappliance dealer to another. This depends with how best a dealer isin selling the appliances. In its selling strategy, Best Buy providescustomers with free selection, just like the way a supermarket sellsits products. In this case, customers are not provided with anyguidance concerning the appliances, but they have to rely on theirlevel of understanding of the appliances or the knowledge that theyhave concerning the appliances. This is an obstacle to some customersthat lack any knowledge of the appliances ad need guidance. For suchcustomers, they will always seek a place where they can makepurchases of the appliances under full guidance. This will help themin screening the electronic appliances available to them and make achoice on what to purchase. As such, the Best buy firm may havefailed in China due to customers having a preference for other firmsthat can offer full guidance, when they are selecting and purchasingappliances.

Threatof New Entrants

Thethreshold of appliance stores in china is very high, consideringdifferent aspects. However, it is a good idea to make preparationsprior to entering the market. When entering the market, Best Buyfocused on buying the stakes of Five Star Appliance, which was a weakentry point. This is because the firm could have first madepreparations in order to establish the best entry point or criterion.The market share itself of the Five Star Appliance was very lowcompared to other firms dealing with appliances in the market(Hamiltonet al 58).This could have provided a clear message to Best Buy that it wouldnot be capable of expanding by entering the market. Considering BestBuy’s decision in entering the China market, it was not easy todeal with some well established appliance businesses like Suning. Itis possible for some more appliance businesses to enter the marketand challenge the operations of Best Buy. Therefore, there could be aprobability that the Best Buy firm could not do well in the Chinesemarket as a result of other firms entering the market providing greatcompetition.

Conclusion

AlthoughChina is considered as one of best ad fastest growing market in theglobe, Best Buy closed its operations in the market after it failedto realize success. Different reasons have been speculated to lead tothe firm’s failure in the market. One of the reasons was assumingthat the Chinese market was similar to the Canadian market. Prior toentering the Chinese market, the firm had realized a successfulexpansion in Canada, where it used the dual strategy of brand name.In the Canadian market, it realized success because the firm itacquired had a big percentage of the market share and they haddifferent management and selling strategies. However, on entering theChinese market, it acquired a firm that did not have a big percentageof the market share, which made the firm not acquire a highcompetitive edge. Besides, the positioning of the firm that Best Buyacquired was not competitive enough. In addition the consumerbehavior of Chinese consumers was different from that of the Canadianmarket, where consumers were very sensitive to prices rather thanquality of service received. This made it difficult for the companyto charge high price for quality services. Companies seekingexpansion can learn from the mistakes committed by Best Buy and tryto avoid them. For example, companies seeking expansion can evaluatethe markets prior to entering.

WorksCitied

BestBuy Co., I. (0012, April). Best Buy to Sell its Five Star Business inChina. BusinessWire.

Ferrell,O. C. and Hartline, Michael. MarketingStrategy.London: Cengage Learning, 2010. Print.

Hamilton,Stewart, and Jinxuan Zhang.&nbspDoingBusiness with China: Avoiding the Pitfalls.Houndmills, Basingstoke, Hampshire: Palgrave Macmillan, 2012. Print.

Hill,Charles and Jones, Gareth. StrategicManagement Cases: An Integrated Approach.London: Cengage Learning, 2012. Print.

Morschett,Dirk, Hanna Schramm-Klein, and Joachim Zentes.&nbspStrategicInternational Management: Text and Cases.Wiesbaden: Gabler, 2009.Print.

NirajDawar, Ramasastry Chandrasekhar. BestBuy Inc. – Dual Branding in China.IveyPublishing. June 26th,2009. Retrieved fromhttps://www.iveycases.com/ProductView.aspx?id=31602&ampCM=true&ampHID=384