• Home
• About
• Online Shop

Why did Best Buy fail in China (2)?

(Continued from last post)

Michael Porter, in classic book Competitive strategy: techniques for analyzing industries and competitors, presents five forces that determines the intensity of industry competition, and three generic strategies. Michael Porter argues that a firms’ strength falls into either cost advantage or uniqueness. By applying these strengths in either a broad or narrow scope, three generic strategies emerge: cost leadership, differentiation and focus. These three strategies are applied at the business unit level. They are not firm or industry dependent, hence the name generic strategies.

	Pricing / Cost	Uniqueness
Industry wide(broadly-based)	Cost leadership	Differentiation
Market segment(narrowly-focused)	Focus (Cost leadership)	Focus (Differentiation)

 

Here, I think there are essentially two strategies – cost leadership and differentiation. If a firm’s strength is its uniqueness, pursue differentiation; if a firm’s strength is cost advantage, pursue cost leadership. The focus strategy concentrates on a narrow market segment, within that particular segment attempts to achieve either cost advantage or differentiation.

Pricing	Unique Ness	Names	Doing Well?	Entry Barrier	Bargain Buyer	Bargain Supplier	Threat of Substitute	Rivalry firms	Industry Comp.	Urgency in need
M	√	Wal-mart	OK	H	M	L	M	M	M	H
M	√	McDonald	Well	H	L	L	L	L	L	H
M	√	KFC	Well	H	L	L	L	L	L	H
M	√	Microsoft	Well	H	L	N/A	L	L	L	H
M	√	Coca Cola	OK	H	M	N/A	M	M	M	L
M	√	GM	OK	H	M	M	M	H	M	L
×	√	Luxuries	Well	H	L	L	L	L	L	L
M	√	Hollywood	Well	H	L	N/A	L	L	L	L
M	√	Citibank	OK	H	H	N/A	H	H	H	M
M	×	Google	Poor	H	H	N/A	H	H	H	H
×	×	FedEx/UPS	Poor	H	H	N/A	H	H	H	M
×	×	Acctg firms	Poor	L	H	N/A	H	H	H	L
×	×	Law firms	Poor	L	H	N/A	H	H	H	L
×	×	Best Buy	Poor	M	H	H	H	H	H	L

H-high       M-medium       L-low       √-Yes, positive       ×-No, negative       N/A-not applicable

Five competitive forces that determines the intensity of industry-wide competition: Barrier to entry, Bargaining power of buyers, Bargaining power of suppliers, Threat of substitute, Rivalry among existing firms. 

Here I am introducing a new factor “urgency in need.” If one has to use, consume immediately (e.g. within the next five to ten minutes), or use frequently, the urgency in need is high. If one has the option to delay consumption, shop around to find better alternatives, or not to consume at all, urgency in need is low. If the urgency in need is high, take  food, banking, healthcare services provided by restaurants, banks, hospitals for example, the number of outlets across different locations should increase to catch more customers, boost sales.

McDonald & KFC represent American style fast food. Its uniqueness is high. There is virtually no substitute, no alternatives in China. Industry competition is low. Urgency in need is high because one must eat immediately after walking into the door, can not go out to shop around in starvation.

Microsoft is a dominant player in PC operating system. There is no qualified substitute for Microsoft with respect to compatibility, convenience, efficiency. Almost every PS sold uses MS OS. Industry competition is low. Its uniqueness is high. Urgency in need is high, as PC is an indispensable tool must be used daily nowadays.

Coke, GM, Walmart are all doing fine.

The uniqueness of luxury items (e.g. LV, Rolex, BMW, etc) is high. There are no substitutes. Industry competition is low. Although only the privilege few can afford these items, this is the nature of being luxury, isn’t it? The prices must be high; quality must be high; design must be exquisite; materials must be expensive. Number of outlets should be kept low, as urgency in need is low.

Hollywood movies uniqueness is high with no substitute. Industry competition is low. Hot movies like Avatar, 2012 witnessed impressive box office revenue.

With regard to Citibank and other financial firms, industry wide competition as well as regulation is high, yet Citibank and other renowned financial firms are doing fine due to their high uniqueness in terms of brand name, innovative products, quality of services. Urgency in need is medium. More profit could be achieved if more branches were opened. Customers prefer banking at the nearest local branch, but the regulation prohibits from opening more branches.

Google has been facing fierce competition in China. Although popular around the world and good at searching content in English, it is not considered more helpful, more relevant in search results in Chinese content compared with Chinese search engines. Industry competition is high. Its uniqueness is low. Google’s services can be substituted by Chinese competitors.

Logistic firms like FedEx are not doing well in China as local competitors offer lower price without sacrificing delivery speed. The delivery service is generic. Services offered by logistic firms are very much alike. The uniqueness is low. Industry competition is high.

The services provided by accounting and law firms are not applicable in China due to different legal system and taxation code. Barrier to entry is low. Anyone with an accounting certificate or legal license can open an office. Industry wide competition is high. Except a flickering presence by Ernst & Young, big name accounting and law firms are not operating in China.

Finally, Best Buy’s electronic products at retail outlets are not different from their competitors. Consumers do not want to pay higher price for the same merchandise available at their next door competitors simply because the shop is cleaner, better-decorated. Its uniqueness is low. Barrier to enter electronics retail business is medium. Industry-wide competition is fierce. Best Buy fared poorly, had to close its outlets one after another.

Special thanks to http://www.quickmba.com/strategy/generic.shtml, which provides relevant content to this post.

(To be continued. See the next post)

Did you enjoy this post? Why not leave a comment below and continue the conversation, or subscribe to my feed and get articles like this delivered automatically to your feed reader.

Copyright The deals I want | Theme by DailyBlogTips