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Why did Best Buy fail in China (3)?

Continued from last post

Michael Porter argued that to be profitable in the long-run, a company must adopt only one of the 3 generic strategies – cost leadership, differentiation and focus. (Here, I think there are essentially two strategies – cost leadership, differentiation. The focus strategy concentrates on a narrow market niche, within that particular niche to achieve cost leadership or differentiation).

Porter’s argument to pursue either of the two strategies might not hold true nowadays.

How is cost leadership achieved? By lower cost of good sold and operating expenses, lower prices to retain existing customers and draw new customers. Cost leadership hurts profitability in the event of pricing war.

How is differentiation achieved? By brand recognition, reputation, customer loyalty, technical know-how, irreplaceability. Differentiation or uniqueness helps boost profitability and avoid pricing war.

Only differentiation warrants a company to stay in monopoly or oligopoly competition where economic profit can be exploited. In contrast, cost leadership strategy alone without differentiation can not secure long-term economic profit, but may lead a firm to face monopolistic or perfect competition whereas all products and services are very much similar, more and more competitors enter into the market; profit margin is shrinking. Read Economics For Dummies (by Sean Masaki Flynn) for explanation on four types of competition. 

When price increase were not possible, cost cutting would make a company survive, but there would be profit squeeze in the long-run, quality standard may be compromised as well.

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

Look at the chart above. Industry competition could be low, medium, high as the result of combined five competitive forces. All successful firms must have uniqueness or differentiation in place (see √ in uniqueness column). Differentiation sets a firm apart from the mass crowd. Differentiation enables a firm to charge medium to higher prices to ensure profitability (see M & × in pricing column)

Best Buy & other firms including FedEx, Google, failed to differentiate (see ×), nor did they successfully pursue cost leadership strategy in China (see ×). They charged higher prices than competitors.

In order to run a world class big business, not a mom & pop shop, it is not to pursue either cost leadership or differentiation. Indeed, differentiation is a prerequisite for success. The uniqueness represents a firm’s core competence, corporate culture and the value of its products.

Achieving differentiation is the primary objective; cost leadership is of secondary concern.

(The end)

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