GB528 Unit 3 Case Analysis Example

Strengths That Arrived Intact and Still Failed: A Unit 3 Case Analysis of Home Depot in China

[Student Name]

Purdue University Global

GB528: Global Strategy

Unit 3 Case Analysis

[Instructor Name]

[Date]

The case facts are drawn from public reporting and company announcements; the advantage ledger and its ratings are the writer's analysis.

The Case Facts

Home Depot entered China in 2006 by buying Home Way, a home improvement chain of about a dozen stores based in Tianjin. It kept the format of large warehouse stores selling building materials, tools and home products. Sales were weak for years. In 2012, Home Depot closed its seven remaining big-box stores in China and reported a charge of about $160 million. It kept two smaller specialty stores in Tianjin, one selling paint and flooring and one selling home decor, a small presence that showed which parts of the business could still work. The analysis uses only these facts and widely reported explanations of the results.

Timeline

2006: acquisition of Home Way and its stores.

2007 to 2011: store closures and weak sales; the format is kept largely unchanged.

2012: closure of the remaining big-box stores; two specialty stores remain.

Exhibit 1: The Advantage Ledger

Rugman and Verbeke (2004) distinguish firm-specific advantages that can be used anywhere, called non-location-bound, from those that work only where they were built, called location-bound. The ledger sorts five of Home Depot's US strengths.

1. Store operations and inventory systems. Non-location-bound. The systems for running large stores, tracking inventory and managing suppliers transferred to China with modest adaptation.

2. Purchasing scale. Largely location-bound. Home Depot's buying power rested on its US volume with US and Asian suppliers serving the US market. In China, it bought from local suppliers at much smaller volumes.

3. The do-it-yourself service model. Location-bound. Store associates who advise homeowners on projects, and clinics teaching customers to tile or paint, depend on customers who do their own work.

4. The big-box format. Location-bound in its value, though not in its execution. Large stores on the edge of cities suit car-owning suburban customers who shop for projects. Its value depended on how customers shopped.

5. The brand. Location-bound. Home Depot's name was well known in North America and little known among Chinese consumers.

Only one of five strengths traveled without loss, and it was the one customers never see.

Why the Strengths Failed

Many accounts of Home Depot's exit point to how Chinese homeowners renovated. Newly bought apartments were often sold as bare shells, and owners typically hired contractors or renovation companies to do the work. Customers who hire others to do the work want to choose finishes and products, not buy tools and learn techniques. That made the do-it-yourself model, the clinics and much of the tool and materials range less relevant. Labor costs were low enough that hiring workers was the normal choice.

Large stores on the edges of cities were also a poor fit for customers in dense urban areas, many without cars. And local competitors and building-materials markets offered wide choice at low prices, with merchants who would negotiate.

Ghemawat (2001) argues that firms underestimate differences between countries in economic structure and consumer behavior. Home Depot's main advantages were tuned to a particular kind of customer: a homeowner with a car, a suburban house and a habit of doing projects alone. That customer was rare in China.

What the Acquisition Did and Did Not Bring

Buying Home Way gave Home Depot stores, leases, staff and supplier relationships at once. It did not bring a format suited to Chinese customers, because Home Way itself was a warehouse-style chain. An acquisition is often justified as a way to buy local knowledge, but the knowledge a firm acquires depends on what the target knows. Home Way knew how to run big-box stores in Tianjin; it did not offer evidence that the format could grow. Home Depot treated the acquisition as a platform for its own model rather than as a source of learning about how Chinese homeowners renovate.

A Counterargument

One could argue that Home Depot simply entered too early, before Chinese homeowners adopted do-it-yourself habits as incomes rose. Some foreign home improvement retailers did persist longer in China, and the market for home products kept growing. But the evidence from the specialty stores points the other way: the categories that survived were those that fit how renovation already worked, not those that waited for habits to change. Waiting for customers to become like American customers is a weak basis for a strategy, because nothing guaranteed that they would.

Why the Paint and Flooring Store Survived

The specialty store sold products that customers choose themselves even when contractors install them: paint colors, flooring and finishes. In those categories, the decision rests with the homeowner, who wants to see samples and compare quality, and the store's systems, product range and display skills, the non-location-bound advantages, could be used. The smaller format also suited urban shoppers better than a warehouse store.

The surviving stores fit a pattern Rugman (2005) describes: multinationals tend to succeed abroad in the parts of their business where their advantages are not tied to the home market, and to struggle where they are.

What Home Depot Could Have Done

The ledger suggests an alternative entry. Home Depot could have entered China with a format built around the decisions Chinese homeowners make, choosing finishes and materials, rather than around the work they hire others to do. Smaller urban stores focused on paint, flooring, fixtures and design services, with partnerships with renovation contractors, would have used its systems and product knowledge without depending on the do-it-yourself model. An acquisition of a local chain could have been used to learn customer behavior before committing to a format.

Lessons for Managers

Separate advantages by where they work. Before entering a market, a firm should ask which of its strengths depend on its home customers and which do not.

Study who does the work. In home improvement, whether customers do the work or hire it decides what the store must offer.

Let surviving parts point the way. When part of a business succeeds abroad and the rest does not, the surviving part shows which advantages travel, and it is often the best place to rebuild from.

Conclusion

Home Depot arrived in China with its strengths intact. The trouble was that most of them were strengths only in a market of homeowners who do their own projects. The store that survived sold the one thing Chinese customers still chose for themselves, and it relied on the advantages that traveled.

References

Ghemawat, P. (2001). Distance still matters: The hard reality of global expansion. Harvard Business Review, 79(8), 137-147.

Rugman, A. M. (2005). The regional multinationals: MNEs and "global" strategic management. Cambridge University Press.

Rugman, A. M., & Verbeke, A. (2004). A perspective on regional and global strategies of multinational enterprises. Journal of International Business Studies, 35(1), 3-18. https://doi.org/10.1057/palgrave.jibs.8400073