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 “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 “Best Buy” stores in China to nine.
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. “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...