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Background of Home Depot in USA and China

Discuss about the Customer Experience Model for Social Environment, Retail Brand and Positive?

The background of this case study is based on the Home Depot, China – an US based home decorating company that was facing the problem in China. The issue of the company was related to the international business as well as change in the environment of the business that was not an uncommon matter in the industry. In this context, the company has faced the different culture due to different demographics in China (Pinterest, 2016). The company had a strong background in the USA before going to China. It had its presence in many countries as well as in the home country. In the meantime, the company had grown since 1978 as the home décor and the home developer for the American citizens. The company’s operation was been scheduled as presenting it towards the contracting business for the retail business. The service of the company was termed as the highly valuable for the customers. The home decorating division is known as Expo design center. The company is specialized in decorating the home as well as furnishing with suitable illuminating designs (Bhasin, 2016). Therefore, the company’s trading division has contributed much to the business of furnishing the personal home and the online business of serving the customers in many domains. The company can provide the customers outdoor as well as indoor furniture. The furniture made of wood as well as organic fiber. The company has the business of film production materials as well as power tools for the retail segment.

The company had faced the problems regarding the international expansion like China as the culture of the Chinese people was different. The main problem was to encompass the local people in the business who can understand the local issues and related sentiments of the customers (Burkitt, 2016). The assembling line of the furniture and other decorative products was necessary for the company as the Chinese people liked to pay for serving their needs and demands. Home Depot had tried to shake up its strategy by opening niche product and service based stores in China for getting more revenue from the Chinese people in this segments (Feng, 2014).   

The major problem faced by the company is to sustain its business in China where the culture of the people is different. It started its venture in the country by acquiring the local home improvement retailer The Home Way. It was the acquisition of the twelve stores spread over the six cities in the country. The recent move of shutting down majority of the stores in the country has made the company’s presence in the limelight of the Chinese media. The company’s policy of assembling the furniture by the customers was not appreciated by the Chinese people as they liked to pay to the people who worked for them. In this context, it was also found that the demand of the Chinese consumers regarding the products was different as well as the specialty of the goods for selling to the Chinese people (Breazeale & Lueg, 2011). In this regard, the projection of the business did not look good for the company in China as their strategy of running the business did not work out since opening. The same problem has been happened for other retailers as they could not find the feasible option for the cultural differences in China. Ikea had the support to its customers by providing labors for assembling the furniture. The condition of sustaining the business of retail products in the country has been demoralized with the low labor rate in the country. Thereby, the assembled or non-assembled furniture could not be feasible for the company as the culture of the country was different (R. Dhanya & Dr. S. Ramachandran, 2011).

Challenges Faced by Home Depot in China

The cost of the labor was too low in China. In this regard, the information from the case study showed that the labor charge in the country was too low, especially in the suburban and small city area. Further, the big cities like Beijing and Shenzhen had the access of high pool of labors in numbers who work at low cost. Therefore, the strategy of Ikea to provide the service from the labors was successful in China as the Chinese people like to hire them to work with their service of labors for assembling the furniture ("Retail Brand Building Through Promotional Communication: A Study That Focuses on Category Killers Promotional Flyers", 2011).

Another problem was seen for the foreign companies in China to react quickly according to the needs of the market and the market. The climate of Chinese retail industry was much complex compare to other countries. In this context, we have seen that the Chinese retail companies do not hold their inventory for many days (Narteh & Kuada, 2014). The foreign do not follow the instinct of the local retailers. They had the tendency of making huge inventory for the products they want to sell in the market.

Competition in the retail market of China is too tight for the foreign companies due to price differentiation from the local retailers. The Chinese sales persons are hired for the local players to sell their products who know the local culture and add value in their selling technique. However, the foreign people were hired by the foreign companies for retail sales jobs in the Chinese markets. This was a major flaw in selecting the market representatives in retail segment by the foreign retailers in China (Liu, 2009). The trend of the sales of retail market in this country by the Chinese companies was seen to be sluggish due to lack of knowledge of the local markets and the local culture of the customers. In this regard, the product mix marketing of the Chinese retailers are based on the brand based. The consumers could see and observed all the products of the same brand at one place. However, the foreign retailers, especially the American retailers displayed the products of the different brands category wise at the same place (Nadiri, 2011). The presentation of the events of the selling retail products in China differs by their traditional culture of retailing by the foreign companies.

Different taste of the consumers in the country is also a factor for the foreign practitioner in retail segment. The taste of Chinese people did not match with that of the American people as they do not think to pay attention towards the local cuisines much. However, the Chinese people were very exact about their culture and taste regarding their fashion, decoration, food habits and buying habits (Liu & Pearson, 2010). This was developed due to their different culture and ethnicity in society with traditional familiarity towards the social interaction among each other.

The recent closure of the stores of Home Depot would make the loss of assets as well as the value of the company. The closure would cost the company in reducing its book value of the shares by 10 cents per share for the parent US arm while there would be much complication in balance sheet due to impairment of goodwill and severance charges for closing the foreign units. In this way, the value of the brand would be deployed due to losing the business of the associates of the company (Sun & Ma, 2009). The number would be almost 850 who would be paid the severance package due to their loss of closing the seven stores throughout the country. The issues would be addressed in the share price of the company as the earnings per share will be affected too. The old employees in the closed stores would be retained in the specialty stores of Shenzhen and sourcing office of Shanghai.

Analysis of the Challenges

There are many alternatives are possible for the foreign retailers in China. The current context had delivered the information of the changes in the country due to social and cultural difference in the country (Yu & Zhang, 2011). Thereby, some of the strategies to run the retail operation of Home Depot can be used to control the current situation and develop the same in the country. The main alternative strategies are as follows:

The selection of the salesman in the Chinese stores must be changed for the company as they need to recruit the local people to understand the values and sentiment of the local consumers. The pay and rewards must be in competitive way for the sales department so that maximum output can be achieved from them (Yu & Ramanathan, 2012). In this way, the company can achieve the higher sales in their furniture and decorative paints in Chinese market.

The cost regarding opening the owned stores may not be feasible for Home Depot as the cost associated with own stores are always high. The management may think about changing the model of business in China by opening the Franchise mode of business in selected cities where the competition is higher from the local retailers. In this way, they can reduce the price of the products and may take place in the competitive market in their products ranges.

The company must hire the local labors to fix their furniture and other goods for the customers. This strategy will maintain the taste of the Chinese customers of paying the workers for their activities as well. Further, in this case, Home Depot can acquire the taste of the customers by providing them their requirements.

Market research is very important for the customers as they need to rethink before making any move and investment in the foreign market. Home Depot must conduct thorough market research for the different province of the country as the culture and taste of the different provinces are different in China. It may reduce the sunk cost of the company for future expansion in the country.

The decision criteria for the alternatives would be based on the alternative strategies selected for the company. In this regard, the management of the company has to select the key decision criteria for making all the changes as followed:

Competition with the rivals and especially with the local retailers is the main decision variables in this case to be considered by home Depot. Thereby, the answer of the question of being competitive in the local market with the alternatives must be evaluated.

The reaction of alternative in view of financial risk of the company – Home Depot must evaluate the financial risk of the alternative strategies. We had the clear evidence of making loss in Chinese segment for Home Depot. Therefore, the management must make decision on basis of the financial feasibility and investment risk associated with the strategies.

How far the management may control the operation in franchisee mode? – That is the major question in decision criteria. The franchise operation may reduce the control of providing the service and the quality of the products of Home Depot.

Competition in China's Retail Market

The decision criteria from the above section can be seen and the alternatives can be assessed individually for evaluating the appropriateness of the alternative strategies.

The issue of understanding the local culture and taste of Chinese people is the main concern here. Therefore, recruiting the local sales person in the stores may provide the company an edge of projecting the taste of the local community to increase its sales. The analysis of this alternatives in basis of the decision variable 1, we can see that competition in the market can be won by Home Depot in this due course. The competition in the market is not only present because of competitors’ low priced model of business, but also the competition is present due to stay with the culture and the taste of the consumers in Chinese market.

The financial risk associated with the alternative is initially risky proposition for Home Depot as the local people has to be recruited as well as they have to be trained for understanding the system of the company. However, the cost of rewards and the salary will be varied on basis of the performance from the selected sales person in the stores. However, the risk increases gradually due to better performance from the sales person in the stores and increase of sales. The commission based payments increases the risk of paying more rewards; hence the low profit may be increased.

The management control in the franchise based model can be increased by recruiting the local people. However, the experience of Home Depot in the country for acquiring the local people may enhance the risk associated with the crocodile. Local people can be employed; but not in the top position of the firm. Employing the local at managerial level people may reduce the risk associated with bankruptcy.

The new stores in China cannot influence the taste of the local people by anyway. The alternative of flexible and convenience of the store location may provide the customers an edge of finding Home Depot store. However, it is not the feasible option for the company to become competitive in the market as there are numerous retail stores of the same products in the local area.

Opening the new stores in different locations may have financial risk as the management has to find out the feasibility of making the investment decision. In the meantime, the investment for the new stores in the new location may not be feasible as the company has suffered huge loss in the country since inception.

The new stores will provide the company entire control to the management to operate the store. Management may not have the entire operational control over the franchise opened stores in the area. The products and the service from Home Depot can be supplied and sold to the local customers through the new stores in a new place.      

The local labors may add the feature in the company’s profile for serving the customers. The service of providing the customers of ‘do-it-by-me’ can be provided with special charges as well as a nominal rate of profit also can be made from this new arm of service. This proposition can help the company to reach the local customers’ taste and the needs.

Different Tastes of Chinese Consumers

The financial risk associated with hiring the local labors for providing the customers service for the goods as well as assembling the item lines. The risk associated with hiring the labor will make the funds at risk for Home Depot due to initial payment to the labors. Further, the risk of paying wages to the fixed labors while there will not be any orders.

Hiring the new labors in the company for serving the customers better may not provide the entire control over the operation to the management. The process of hiring – if direct then the management may have the entire control over the activities of the labors. The service to the customers can be provided as per the requirement of the business. The outsourcing of the labor may reduce the financial risk associated with the direct labor charge. However, the management may not have any control over the service provided with the hired labors to the customers for assembling the furniture.

The market research of setting up the business may be found important in this business. The competitiveness and surviving in the market for Home Depot is possible through conducting market research in the local area. It may provide the company long-term competitive advantage whereas the demand of the products from the local customers can be understood by the management.

The financial risk associated with the project is null as the cost associated with the project of researching the market is not recoverable from the direct point of view. It is a sunk cost, which cannot be redeemed from the operation of Home Depot. Therefore, the risk associated with the investment cannot be measured by any means.

The management may not have any control over the market research. The research must be conducted in such a way so that the true and the neutral information is reflected in the results from the research regarding the feasible option of conducting the business. The control over the market survey by the management is not desirable as they may influence the result of the market survey.

The selection of the alternative solution to the recent issues faced by Home Depot may as followed:

The analysis of the alternative market solution and the internal change in the company showed that the usage of the local labors in the business of serving the Chinese customers is the best solution to Home Depot. The company may find it feasible due to its simplistic nature, low cost and abundance of the resources. The labor service in the business may provide the sustainability and remove the present problems in the operation and the business may provide the profitability.

The Home Depot is recommended to run the Chinese market using the local labor serving policy where the customers will be served through company’s own labor for fitting and providing the after sales service. However, the local sales personnel are also required for improving the revenue for the business.

Hiring the local labors in contract:

The cost of hiring 1 labor = RMB1000 / month

Closure of Home Depot Stores in China

Required labor for each store = 12

Open stores in numbers = 7 in present

Therefore, monthly expenses for retaining labors = RMB 1000 * 12 * 7 = RMB 84000

Annual expenses for paying the labor will be RMB 1008000

The expenses related to train the local labors about the products and service including their responsibilities will need extensive training and induction program

The expenses towards training the labors are considered to be RMB 200 per week.

Total expenses towards training will be RMB 200 * 2 * 84 = RMB 33600

Hiring of sales person

Salary = RMB 1200 / month

Numbers required = 6 per store

Total expenses for salary per month = RMB 6* 1200 * 7 = RMB 50400

Commission paid per month per sales person = RMB 2000 (average per person)

Therefore, commission expenses = RMB 84000

Total salary per month = RMB (84000+50400) * 12 = RMB 1612800

Growth

The sales for year 1:  RMB 15000000

Expenses due to salary and wages = RMB 1612800

COGS 40% of total revenue = RMB 6000000

Operating profit = RMB 7387200

Therefore, the actions taken to revive the business in positive way is feasible from the estimated operating profit of the business in China.

References

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Bhasin, K. (2016). Why IKEA Took China By Storm, While Home Depot Failed Miserably. Business Insider. Retrieved 23 February 2016, from https://www.businessinsider.com/ikea-home-depot-china-failed-2012-9?IR=T

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