International Business: Home Depot's China Market Entry Failure Report

This report provides an in-depth analysis of Home Depot's international business strategies, specifically examining its failed entry into the Chinese market. The report identifies key reasons for the failure, including a lack of understanding of Chinese cultural preferences, inadequate market research, and the adoption of a "do-it-yourself" business model that did not align with local consumer habits. It contrasts Home Depot's approach with that of IKEA, highlighting the importance of cultural adaptation and customer experience in international business. The report further discusses various entry modes for international business, differentiating between direct and indirect exporting, and how organizations from developing and developed countries choose their entry strategies. It emphasizes the impact of resource availability and brand value on entry mode decisions. The report recommends customization, consideration of cultural and social aspects, and economic viability assessments for successful international market entry, along with an effective customer experience strategy.

Running head: INTERNATIONAL BUSINESS
International business
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Question: 1
Home Depot is one of the leading and prominent players From America in
providing retailing home decor items and tools. Currently they are having their presence
in various countries around the world. In 2006, they have the entered the China with
having 12 stores. This is due to the reason that China is most populous country in the
world along with having a huge and growing middle class section. Moreover, with the
rapid growth in the Chinese economy, the purchasing power of the customers is also
increasing. Thus, Home depot saw a huge potential in making entry in the Chinese
market. However, by 2012, they closed off all their stores in china due to lack in
customer interest. It came as a huge surprise due to the reason that Home depot being
one of the leading players in this sector and China being one of the leading developing
countries in world cannot got complied with one another (Forbes.com, 2017). On the
other hand, it is been seen that IKEA, the Swedish firm and the prime competitor for
Home depot is growing their market share in China and they are planning to double up
their stores there. Thus, the market is equally potential as it was estimated, but the
approach initiated by Home depot was not appealing to the Chinese customers.
One of the key considerations for the international business is the cultural aspect.
Organizations entering in the global market and more specifically to a foreign country
should adopt and accept the cultural differences between their home and host
countries. The approach taken by the organization in their home or parent country may
not prove successful in the host country due to the social and cultural change. This is
the area where Home depot got wrong in their marketing policy in china. According to
Vaara, Sarala, Stahl and Björkman, it is important for the organization to consider the
cultural aspect of the country they are operating. In addition, organizations have to
adopt the culture of the host country and have to offer customized service or product
which will attract the local customers (Vaara et al. 2012). This will help in gaining the
foothold in the foreign country. However, on the other hand, Home depot tried to imply
their American culture in marketing their products in China. They offered their global
products to the Chinese customers without being customize them according to their
requirement. Thus, the customer did not found any utility from their products.

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It is the failure of the market research for Home depot of determining the need
and requirement of the Chinese customers. Americans are more preferably stays in
singly family apartments or homes, while on the other hand, majority of the Chinese
people stays in condominiums (Theweek.com 2017). Thus, they do not have the
backyards or garage for their tools and supplies to decorate their own homes. While, on
the other hand Home depot offered them tools to decorate their own homes. Thus,
Home depot failed to identify the gap between the American and Chinese customers.
Another reason being identified for the failure of Home depot in the Chinese market is
the preference pattern of the Chinese customers. As being told by Dunnings,
determining the preference pattern of the host country customers is important to survive
in the international business. The preference pattern of the customers in the home
country may not get matched with that in the host country. Thus, it is the responsibilities
of the organization to identify the requirement of the host country customers. In the case
of Home depot, they failed to determine the preference pattern of the Chinese
customers.
American customers tend to do their household activities by their own due to the
high labor cost involved there. However, on the other hand, Chinese customers prefer
to hire a person to do their job on the behalf of them. It is due to the reason that the
labor cost in china is much lower and it is more preferable for the Chinese people to pay
for their job rather than doing it by their own. Thus, this is the area that Home depot
failed to indentify. Home depot initiated their core business model of “does it yourself”
for the Chinese market also. However, Chinese people are comfortable in do it yourself
model. Thus, the tolls and supplies sold by them in the Chinese market were not found
enough takers.
Another issue being identified for the failure of Home depot in the Australian
market is the absence of guiding the customers in experiencing the new service or
product. According Peppers and Rogers, customer experience is important for the
contemporary business organization. This is due to the fact that any new product or
service in the market will not get accepted by the customers unless they are given the
hand on experience (Peppers and Rogers 2016). Home depot failed to provide the

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experience and awareness about their new concept to their customers. Thus,
customers do not gained any idea about their product concept. This is the place, where
IKEA got their hold right. IKEA designed their stores in such a way that the Chinese
customers will get the live experience regarding various types of home decoration which
will further motivate them to opt for their products. However, Home depot does not
provided any such experience to their customers rather than just offered them their
products in the stores. Thus, the connection to be created between the organization and
the customers did not succeed.
Apart from the failure in identifying the cultural gap in the Chinese market,
various other reasons such as economic slowdown is also responsible for the failure of
Home depot in the Chinese market. Though the Chinese economy is growing and they
are one of the most prominent developing economies in the world, however, global
economic crisis in the recent past had adversely affected their economy also (Lewis
2013). This crippled the domestic demand of the customers which eventually negatively
impacted the demand in the housing sector also. Home depot also failed to identify this
economical aspect before entering in the Chinese market. According to Cavusgil,
Knight, Riesenberger, Rammal and Rose, in the international business, economic factor
is one of the key factors to be considered by the business organizations (Cavusgil et al.
2014). The economy and the growth rate of the host country are important for the
organizations to determine their viability of entering the particular market. With the
reduction in the demand of the housing sector in china due to global economic crisis,
the demand for the home decor also reduced. Moreover, it is also been seen that
majority of the existing buyers in the housing sectors are not actually buying the home
for their living rather than they are just using it as mode of investment. Thus, decorating
the house in this case is not applicable which further affected the business potential of
Home depot.
Thus, it can be recommended that customization or personalization option for the
customers will be beneficial for the organizations entering in a new market. Before
entering in the global market, it should be considered that the taste and preference
pattern for the customers is not similar in very region. Thus, organizations have to

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customize their products according to the requirement of the customers for a particular
region (Gandhi, Magar and Roberts 2014). This will enable the organizations in meeting
the customer requirement and expectations more effectively. Moreover, the cultural and
social aspects of the particular region should also be considered in targeting the host
country customers. It is also been recommended that economic viability in entering in a
particular market should be determined effectively to identify the future potential of the
business. Accordingly, the strategies should be designed and implemented. This will
help the business organizations in having sustainable development. Effective customer
experience should be considered to attract the foreign customers. In the international
business, it can be assumed that the global organization is going to offer something
new among the host of domestic players. Thus, it should be considered that customers
will not have any experience with the particular products. Organizations will have to
provide effective customer experience in order to guide them about the utility of the
products which will further motivate them in having the access of the product.
Question: 2
In entering in the international business, there are various entry modes being
available for the organizations. Organizations tend to select their entry mode according
to their internal and external situation. However, the selection of the entry mode by the
organizations depends on their home country (Beamish 2013). This is due to the reason
that the organizations from the developed economy will select a more direct form of
entry mode, whereas, the organizations from developing economies will select more
indirect form of entry mode. This is due to the fact that, organizations from the
developed countries are having more brand value and exposure which the
organizations from a developing country will lack. Moreover, the potential market in the
developing countries will be more than that in the developed countries. The majority of
the markets in the developed countries are already saturated.
According to Cuervo‐Cazurra, organizations from developing economies will face
more challenges in entering in the international market. This is due to the reason that
the market value of them will be less than that of the developed countries organizations
(Cuervo‐Cazurra 2012). According to him, there are various factors that influence the

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entry mode decision of the organizations from both the economies. One of the key
factors being identified is the difference in the access of resources by them.
Organizations from the developed economies have the access to more number of
resources such as infrastructure, enhanced economies, skilled employees and effective
financial structure (Chong and Poole 2013). On the other hand the organizations from
developing economies do not have the effective access for all of these resources. Thus,
with having the limited resources with the organizations from the developing countries,
there are few effective entry modes available for them to enter in the global market.
One of the key entry modes being available for the organizations from the
developing countries is direct exporting. It will help the organizations to have the less
risk associated with their international business along with having less responsibilities.
With the help of direct export, organizations can export their products to the host
country market in a limited number (Sadgrove 2016). It will enable them to determine
the outcome of their international business strategy in the initial stage. This is due to the
reason that with having limited resources, they cannot able to invest in the host country
to have their own manufacturing unit. Moreover it will involve more risk for them. Thus,
through direct exporting, organizations will appoint sales representative in the host
country to sell their products (Grunig and Morschett 2012). However, one key drawback
in this form will be the presence of the import tariff which will eventually increase the
price of their products.
Another entry mode available for the organizations from the developing countries
is the form of indirect export. Indirect export refers to presence of the middle man or
intermediaries in the transaction of the products. It will be more practical solution for
them comparing to the direct export due to the reason that intermediaries will have the
expertise in the international business (McCann 2013). Thus, it will help the exporting
organizations in effectively managing their exportation of the products. The products will
be exported more efficiently due to the intermediaries (Ripolles and Blesa 2012). In
addition, the organizations do not have to take the responsibilities of exporting their
products. Intermediaries includes various exporting trading companies and export
merchants.

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Comparing to the entry modes available to the organizations from the developing
countries, more diversified options are available for the organizations from the
developed countries. One of the prime entry modes available for them is having their
own manufacturing unit in the host country by the way of foreign direct investment. This
will help them in effectively managing their operations in the host country (Brouthers
2013). The market requirement of the host country will be more effectively managed
and the brand penetration among the customers will also be more. This is due to the
reason that presence in the host market will increase the exposure among the
customers. Organizations from the developed countries can take the risk of investing for
their manufacturing unit in the host country due to their access to the latest technologies
and more resources.
Joint venture is another option for entry available to the organizations from
developed economies. Joint venture refers to the agreement between the organizations
entering in the country with the domestic organizations. The organization entering in the
market of the host country comes to an agreement with the domestic organization in
manufacturing the products (Killing 2012). It helps the global organizations in having the
access to the host country market more quickly and effectively. This is due to the
reason that the domestic organization will have the more information about the local
market taste and preference pattern. This information will help the global organization in
marketing their products accordingly.
Another option of entry mode available to these organizations is the licensing.
With this approach, they do not have to invest directly in the host country rather than
they will provide the license to a domestic organization which will look the
manufacturing and marketing of the products. The global organization will only provide
the license for their patents, trademarks, technology and the manufacturing process.
Afterwards it will be the responsibility of the domestic firm to drive the sales in the host
market (Folsom et al. 2012). The domestic firm will receive commission and agreed
value in return for their operation in the hoist country. Apart from this, options available
for the organizations from the developing countries will also applicable for these
organizations. Moreover, the effectiveness of the export form will be more for the

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developed countries. This is due to the reason that the brand value of the developed
country organization will help them to have more market penetration by exporting the
products to the host country. Even, increase in the price of the product due to the tariff
will also be adjusted with the enhanced brand value of these organizations.
However, there are various factors to be considered by the organizations from
both the developed and developing countries before determining the entry mode
strategy (Shaver 2013). For the organizations from the developing countries, the main
determining factor is the available resource with them to invest in the global market.
They will have limited access to the resources which will influence them to opt for export
form to enter in the foreign country (Laufs and Schwens 2014). On the other hand, the
main concern for the organizations from the developed countries is the mode through
which they will have the most effective market penetration in the host country. Resource
availability is not a concern from them. Thus, they will opt for more extensive way of
entering the foreign market such as FDI and joint venture.
Another influencing factor for the organizations in selecting the entry mode is the
sector of their operation. If the organization is operating in the retail sector of consumer
goods, then they will more likely to for direct or indirect investment in the host country
rather than exporting. This is due to the reason that in the case of consumer goods, the
transportation cost of the goods will get increased due to the presence of the import
tariffs (Amiti and Khandelwal 2013). Thus, the transportation cost of the products will be
more than the actual cost of the products. Organizations from the developing countries
may opt for the joint venture with another domestic firm to reduce the cost of investment
in the host country along with the perceived risk (Seuring and Goldbach 2013). On the
other hand, organizations from the developed countries will opt for the foreign direct
investment in the host country. It will help them to keep their offerings at the lowest price
possible and enhancement of the brand exposure in the host market.
Another key determining factor of the organizations in selecting their entry mode
is the access to the technology. Organizations from the developed countries will have
more access to the developed countries due to the reason that the developed countries
are having more updated technologies (Dunning 2013). Thus, it will help them to

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penetrate in the other countries. They will gain more in direct investing in the host
country due to the reason that the technology they possess will help them to set up their
manufacturing unit more effectively and can compete with the existing players in the
market more efficiently. However, in the case of the organizations from the developing
countries, they do not have the access to the latest technologies like that of the
developed country economies (Guerrero and Pena-Legazkue 2013). Thus, they will not
go for setting up their own unit in the host country. This is due to the reason that the
associated risk for their operation will get increased and lack of updated technologies
will made it difficult for them to compete with the existing players. Thus, for them, direct
or indirect exporting is the most effective way to enter in to a new market.
Thus, from the above discussion about the entry mode available to the
organizations from both the developed and developing countries, it can be concluded
that organizations from the developed countries is having more access to the various
resources which will help them to enter in the global market more effectively. It is also
been seen that the brand value and the access to the latest technologies by the
organizations from the developed countries is enabling them in penetrate the host
country market more effectively. Thus, they are more confident in making investment in
the host country. However, on the other hand, the organizations from the developing
countries are having less access to the business resources. Thus, it is difficult for them
to set up their manufacturing unit in the host country by their own. This will increase
their business risk to a large extent. Thus, the most effective form of entry in the foreign
countries is direct and indirect exporting.

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