In 1970, Manfred Maus, a shop clerk in a German hardware store proposed an entrepreneurial venture - to open a home improvement shop which could provide a one-stop shopping experience to gardeners and home improvement enthusiasts. Pioneering the DIY store concept, OBI (OBI Heimwerkermaekte AG) flourished. It took only five years to develop ten stores, as people accepted and came to love this novel idea. OBI¡¯s orange-colored beaver logo ? symbolizing the skilled constructor ? became one of the most recognized symbols in Germany. To solve the problem of capital required for opening new stores, Maus utilized franchising. ¡°You must cooperate if you want to survive and win in the fiercely competitive market,¡± Maus recalled. This innovative win-win style made OBI stores spread dramatically through western Germany. In less than 30 years, OBI opened more than 300 stores and became the biggest home improvement retailer in Germany.

In China, OBI¡¯s beaver mascot was introduced as ¡°a construction master in the animal world, a symbol of environmental conservation, a favorite of children, and a partner of human beings living in contentment¡±. The English-language expression ¡°busy as a beaver¡± explained Manfred Maus¡¯ belief that the beaver¡¯s diligence and focused nature would be the momentum for OBI¡¯s growth. Also, the beaver is the role model in nature for employing collective wisdom. Learning from the beaver, OBI emphasized the most valuable asset of the enterprise - the collective wisdom. OBI endeavored to advocate the collective decision making embedded in its ¡°beaver¡± culture and teamwork spirit. ¡°In OBI teams, we also use the beaver as a way to ¡­build ¡­mutual trust and to accomplish the goal on time.¡± Maus personally viewed this distinctive OBI culture of trust as the secret behind the success. He said: ¡°If you have a brilliant idea, you should try to make it true and find the best talent in the world to accomplish it. You should trust them, give them enough authority and power, and support them to work with you together to achieve the goal successfully. If you trust them fully, you can gain a hundred percent return. In the end, the core of an enterprise is people, people, people.¡±  

The OBI beaver culture and commitment were credited with over three decades of growth and development. By 2003, OBI employed approximately 24,000 employees and achieved an annual turnover of £¿6.2 billion. It was ranked No. 1 in Germany, No. 2 in Europe, and No. 4 in the world in the home improvement industry. In Germany, its name is a synonym for home improvement, with 92% market awareness. Its parent company is the German retailing giant of the Tenglemann Group, which has more than 7,000 subsidiaries globally and is the second biggest private enterprise in the world. Tengelmann¡¯s American subsidiary, A&P, is one of the top 500 companies in the world and operates KAISER supermarkets, A&P supermarkets, KD pharmacies, PLUS food and discount supermarkets, KIK clothing discount shops and OBI home improvement supermarkets.

After 20 years¡¯ growth in Germany, OBI took steps to move into the international arena, opening its first overseas store in Italy in 1991. By 2004, there were more than 450 stores established throughout Europe and Russia. OBI started its sourcing activities in China in the late 1970s, and gradually acquired some understanding of the China market over years. The OBI China project was formally launched in 1995, just after Dr. Li Fengjiang joined OBI upon his graduation from the University of Cologne. In 2000, OBI opened its first store in China - the Wuxi store in Jiangshu province, close to OBI China¡¯s Shanghai headquarters. Since then, OBI brand awareness increased rapidly in China and OBI China became the fastest-developing regional group in OBI¡¯s international expansion.

Profiling the Chinese Market

Along with the acceleration of urbanization and rapid increase of per capita living space, China rose as one of the biggest markets in the world for construction materials. According to a report by the Economic Research Institute of China Building Materials Industry, China would have a construction materials market of RMB 650 billion increasing by 20% for years. Prediction was that the development of China¡¯s construction industry would outpace GDP growth by 3 to 4 percentage points over the first decade of the 21st century, exceeding RMB 1 trillion by 2010.

However, the traditional Chinese way of buying and selling construction material is very different from the European and American patterns. In developed countries, about 90% of home improvement products were sold through the large retail chain channel. By contrast, in Beijing and Shanghai this percentage was only 10% and 20%, respectively. In most small and medium Chinese cities this percentage was less than 5%. The dominant sales channel for home improvement products remained retail stands in the marketplace. However, because of China¡¯s accession to the WTO and the relative advantages of supermarkets in terms of quality and price, it was predicted that within the next 3 or 5 years, the sales volumes of construction products through supermarket chains would increase rapidly in population centers such as Beijing, Shanghai and Guangzhou, reaching 50-80% market penetration.

In contrast to the accelerating China market, the market in Europe was shrinking due to soaring tax rates, high debt cost and inflation. It was the European retailing giants who first responded to the massive China market and its lucrative prospects, seeking the first-mover advantage. For example, the leading home furnishing retailer IKEA opened its first store in China, with over 8,000 square meters of retail space under one roof, in 1997. In the construction products retailing, the same situation was witnessed ? the European giants ran first. In the case of British-owned B&Q, OBI¡¯s largest competitor, the home improvement supplies company ranked third globally and first in Europe, it opened its first China store in 1999 and OBI followed suit in 2000. Their longtime competition in the European market had now been extended to the China market with huge potential. In 2003, after B&Q China announced the plan to open a total of eighty stores in China by 2008, OBI China publicized their project of ¡°a hundred stores in ten years¡±.

OBI China: Li Fengjiang and the China Strategy

Li Fengjiang was a superstar in China¡¯s construction material industry. After bringing together a team of Chinese elites to enter into the China market, he made the regional company of OBI China a very important profit generator for the OBI Group, in only a few years.                                            

Li Fengjiang, a graduate of Beijing University in China, gained his PhD in Economics from the University of Cologne in 1995. During his study in Cologne, Li became a German citizen and established his contacts with OBI Germany. His projections of the exponentially increasing consumption of construction and interior design materials in China corresponded to OBI¡¯s strategic intentions in the China market. After Li¡¯s graduation he joined OBI and gained the trust of the OBI founder, Manfred Maus and the support of the board and was assigned as the manager of the OBI China Project. In the period of 1995-1998, he worked in the German OBI headquarters and went through every basic business operation, including logistics management. He took this chance not only to gain a fuller understanding of OBI operational mechanisms and management culture, but also to investigate the China market, and to conduct preliminary preparations to extend OBI business to China.

In 1998, Dr. Li was assigned CEO of the OBI China Management Center and registered a management consulting company in Shanghai to do the ground work for opening stores in China. In 2000, OBI opened its first Chinese superstore with more than 42,000 products, including six categories of construction materials, interior design materials, hardware, gardening, household appliances and white ware products. Its mission of ¡°one stop shopping, and green environmental conservation¡± embodied in a well-functioning shopping environment presented a very sharp contrast to the traditional construction material marketplace featured by chaotic layout of retailing stalls. In the following two years, Li led his local Chinese team in opening another four stores in Shanghai and the surrounding areas. Gradually, all stores began generating profits. The OBI China achievement in this fastest developing market in the world was very encouraging. In January 2002, 36-year-old Li became a member of OBI¡¯s global supervisory committee and a member of its Asian board of directors, with management responsibility for OBI Asia¡¯s regional operations. Significantly, he was the first Chinese in the top management team of OBI Group.

At the beginning, Li¡¯s strategy of China market development was to win over Chinese consumers from traditional markets by a world-class shopping experience. Having high expectations of the China market, OBI sent more than thirty German retailing experts to help the establishment of  its first store in Wuxi . Since these experts couldn¡¯t get used to the living conditions in a small city like Wuxi, they commuted daily between Shanghai where they lived, and Wuxi where they worked, a distance covering 120 kilometers. With the investment of more than RMB 100 million, the first OBI store was a perfect copy of OBI German stores, reflecting European models of store layout, product portfolio, merchandising and display. The store also introduced European business standards: more than 42,000 products, all procured through a centralized global/national procurement procedure; a fully air-conditioned shopping space of 15,000-square-meter. European standards of customer service were also introduced, such as a huge green gardening area, material selection advisory service, computerized paint mixture solutions, tools leasing, 30-day refund policy, home delivery service and a free ¡°beaver hotline¡± service.

Despite extensive market research, and significant investment in infrastructure, the OBI Wuxi store did not succeed as expected. Although its opening was a great fanfare, most enthusiastic crowds merely enjoyed window-shopping in this novel modern store without buying anything ? they were more like tourists drawn to a new attraction, without buying anything. The price of most imported goods sold in the store was far beyond what they could afford. Moreover, these goods didn¡¯t fit the consumption needs of Chinese customers who did not have a DIY habit and expertise. The result of a whole year¡¯s hard work and planning was but a huge loss.

This painful experience forced Li to ¡°think outside the box¡±, i.e., to break the OBI prototype of ¡°international advanced leading company in construction retailing business¡±. He started to make adjustments in search for a profitable business model for OBI China. Zhao Ya, the first staff member and HR VP of OBI China, observed that ¡°The fact had proved that our model didn¡¯t fit the national conditions of China¡±. OBI China realized that Chinese customers had completely different needs for construction and interior design materials compared to European customers. Because Chinese had neither the liking nor the necessary skill base for DIY home improvement, the portfolios of goods and services provided by OBI China needed to be modified. OBI China conducted market research again and found that Chinese customers essentially had an enormous need for local brands. As a result, OBI China began to change its strategy and systems. 

OBI China adjusted the product lines and increased the percentage of local products. They called this type of procurement ¡°local procurement¡± to differentiate it from OBI¡¯s global/national purchasing model. However, during this process it was discovered that, in China, the professional competence of German experts became irrelevant. The complicated supply chain system and diverse background of suppliers made it difficult, if not impossible, for these expatriates to work independently with Chinese suppliers - quite often the suppliers were not even able or willing to provide formal invoices. Consequently, Li, as CEO of OBI China, cancelled the service terms of German expatriates. It was a part of his initiative of promoting OBI China¡¯s new strategy of ¡°international management, local operation¡± in response to China¡¯s market conditions.

When the German expatriates left China, Li recruited Chinese professional managers who had experience working for multinationals, and entrusted them with key functional responsibilities in strategy, operation, purchasing and human resource management. They were appointed vice presidents or directors. Li believed that ¡°it is far more complex, and therefore time-consuming, to understand a certain culture than to acquire a certain kind of skill or technical skill. This is especially so with a new and developing enterprise where systems are being established from scratch and many subtle details need to be taken care of. Certainly, the manager conversant with local culture will be more adept at the job than an expatriate manager.¡± Wang Wenduo, the operation director of OBI China once told a reporter that ¡°China is a country of more than 5,000 years of history. It is not easy even for a native Chinese to thoroughly grasp his mother culture, much less so for a foreigner¡­It is far more difficult for an expatriate to gain a deep understanding of the China market.¡± It was this freshly made Chinese team of top management led by Li that oversaw the development of OBI China strategy and operations.

This new strategy started with the change of product structures in OBI stores. In 2002, OBI China launched a new purchasing model sharply differing from the initial OBI centralized global/national purchasing model. It raised the proportion of local procurement to 30% in the Wuxi store. Within months, this store began to earn a profit. From then on, the Wuxi ¡°30%¡± solution was adopted in other OBI China stores. Simultaneously, the lessons learned from the Wuxi store were applied to subsequent store openings. One of key lessons resulted in a formal rule that one year prior to opening a new store, an in-depth market and consumption trend research program be conducted to define a location-specific product structure. It also demanded that regular research of the same kind be further carried out in order to make timely adjustments to products proportions and mix. The store performance suggested that this customer-oriented method better fit the habits of Chinese customers. Moreover, it allowed OBI China to exploit the price advantage of local products, and to leverage OBI¡¯s brand and scale advantage through the chain of operations. Combining these elements, OBI China was able to operate at much lower costs and became a ¡°price killer¡± in the local markets. In the period of  2002 to 2004, OBI China increased its regional and city procurement to gradually move away from the OBI centralized global / national procurement model. The strategic plan called for a procurement ratio of 20% centralized, 60% regional and 20% city. By the end of 2003, the local (regional and city) procurement percentage at the OBI Wuxi store had reached 40-45%, while it held the position of the most profitable store in OBI China.

A significant part of this localisation strategy was the region-centered plan. A key measure was to delegate purchasing operations and new store openings to OBI regional centers in China. In seeking a viable model for OBI China, Li explored a differentiation strategy that could best leverage regional market characteristics, in order to test and prepare for more rapid expansion. The three regional centers were North China in Beijing, East China in Shanghai and South China in Shenzhen, all following the principle of localized operation and the structure of a regional general manager taking all responsibilities for procurement and business development within the region. In terms of organizational structure and management, Li also made adjustments to adapt OBI China to a decentralized organizational system, a model dubbed ¡°small headquarters, big regions¡±. For example, Wu Xuefeng was originally in charge of the procurement center for East China Region. Because of its superior performance, this center assumed over 95% of OBI China¡¯s local procurement in August 2003. Consequently, the sales per square meter, sales volume and profit before tax of OBI China all experienced double-digit growth.

Li went even further to break away from the OBI business expansion tradition of franchised stores in Europe. Instead, he looked for local strategic partners who could bring in capital and infrastructure to speed up OBI¡¯s expansion in China. Li stated that ¡°we will depend on our partnership to accomplish our expansion plan¡±. According to this strategy, OBI China developed three models to cooperate with local Chinese partners: strategic partnership; new site outsourcing; and location affinities.

Strategic partnership. In August of 2002, OBI China aligned itself strategically with the prominent Haier Group to jointly open up the market. Haier and OBI invested a total of £¿ 180 million (beginning with £¿60 million, as registered capital) to form a joint venture, ¡°China Homeworld Company, Limited¡± with a 50/50 share split. This joint venture appointed Li as CEO and focused its main business on the retailing of construction and home furnishing material. The mutual goal was to build-up a fashionable home improvement brand of ¡°China Homeworld¡±. Through this cooperation, OBI China would benefit by extending its retailing stores through Haier¡¯s sales channels and networks, meanwhile Haier would benefit by entering a wider market territory through OBI¡¯s domestic and overseas sales channels. In January 2003, OBI China¡¯s stores started to sell Haier¡¯s household appliances and electronics, including air conditioners, television sets, and refrigerators. It was Li¡¯s stated strategic intent to drive this joint venture toward public listing in the Hong Kong stock exchange in 2005, which in return would secure continuing capitalization for OBI China¡¯s expansion.

New site outsourcing. The second model of cooperation was linked to the development of new supermarket sites, exemplified through the project with Dalian Wanda Group. In this model, OBI China would entrust the business of store construction to Wanda; in return, OBI China would earn the priority in leasing the shopping malls from Wanda and pay only the rental for its actual store usage. Thus the cash requirements for opening a new OBI store could be effectively reduced, while the property developer Wanda, apart from getting a stable rental income, could gain premium rental returns on the rest of the site by anchoring the malls with well-known international brands such as OBI and Wal-mart.

Location affinities. The third model of cooperation was one of complementary marketing and sales with a partner. Case in point was the cooperation between OBI China and Redstar Macalline international furnishings. OBI China could fully leverage Redstar¡¯s expertise in furniture marketing management to provide customers with a more comprehensive ¡°one stop shopping¡±. By offering construction material downstairs and furniture and appliances upstairs, the OBI store in this model truly realized its vision of ¡°one stop shopping¡± service. Like the second model, this type of cooperation also made full use of the shared property holdings of OBI and Redstar to effectively cut operating costs. With this model, OBI forecasted that it would be able to open at least 12 stores in Shanghai alone. 

From the perspectives of management and culture, Li reinforced the necessity of OBI China¡¯s localization strategy: ¡°There is a huge disparity between the Chinese culture and the German culture. Our (strategic) adjustment must fit into the needs of Chinese customers. To actualize this localized adaptation, we need to work with domestic partners to shorten the process.¡±

When Li summarized the experiences and lessons of OBI China, he emphasized people and local needs. ¡°Except for the advantages of right time and right location,  the other key for success is harmonious human relations. For an enterprise, the very foundation of healthy interpersonal relations is an effective cultural communication¡±; ¡°Through the human resources localization, OBI China operated effectively across cultures by taking into account important regional and ethnic differences, and as a result, the process of internationalization was accelerated.¡± Holding these views, Li set off to promote HR localization by training and retaining management talent right after the early termination of the service term of the OBI German experts. He established the OBI management school and served as the first school president. He also carefully designed a systematic training scheme to satisfy different learning needs of both new university graduates and experienced staff members, aiming to build a pool of professional talent in home improvement retailing to support the fast growing business of OBI China.

OBI China after Li

Two weeks after Li¡¯s sudden resignation, Marcus Maus arrived in Shanghai accompanied by his German management team and promptly started to restructure the OBI organization. He abandoned Li¡¯s decentralization model of operation and re-adopted centralized management. To achieve this goal, he focused on reclaiming the key functions - such as procurement - from regions as well as from its departments, and put firm restrictions over the delegated authorities of local branches. Maus started to restructure the core organizational framework, intending to put it back on the track with headquarters by standardizing the management model and operation procedures for all supermarkets. Decision-making was re-centralized. All requests from local stores had to be reported to regional offices, then to the China headquarters, then the Asian regional office and finally to the German OBI headquarters for approval before moving back down through the levels to the initiating store managers.

Purchasing was affected almost immediately. Maus acknowledged that ¡°with respect to purchasing, I have a totally different way of thinking compared to the ex-management team¡±. ¡°I think centralization is much more important than decentralization.¡± He explained that ¡°we need to strengthen the communication between German staff and Chinese business, because, as you should know, it is in Germany that we have had 36-years of experience in construction material retailing, not in China.¡± He also emphasized that ¡°the staffs transferred from the headquarters need to hold more power¡±. The most visible change in this aspect was the dismissal of the procurement director of OBI East China area, Wu Xuefeng. This dismissal caused ¡°vicious sabotage¡± by staff of procurement center. A month later, on 19 April, OBI China faxed a message to all suppliers that those staff had been collectively fired. The resignation of the Vice President in charge of OBI China¡¯s strategy development, on 26 May, stirred up yet more personnel turbulence within OBI China, which lasted for several months and resulted in five VPs of OBI China leaving the firm.

This management turbulence had a direct impact on OBI China¡¯s business progress. The ambitious plan of opening twelve more new stores in 2004 and up to ten new stores in 2005 was delayed repeatedly. By March 2005, only four new stores had opened, bringing the total number of OBI China stores to thirteen. In contrast, B&Q China had grown to 22 stores, tripling OBI China¡¯s rate of expansion. At the same time, some OBI stores¡¯ sales performance started to show double-digit declines in revenues, with even greater negative effect on profit margins.

The shocking waves of OBI China¡¯s turbulence went beyond the boundaries of OBI itself, causing a high degree of concern amongst domestic stakeholders of OBI China ? especially the Haier Group. Holding a 50% share in the joint venture of ¡° China Homeworld¡±, Haier Group publicly expressed their dismay over OBI¡¯s unilateral announcement of Li¡¯s resignation without informing or consulting Haier in advance. Apart from the resentment Haier felt in OBI¡¯s action, the eventual slow-down in store openings cruelly let down Haier who had originally expected to leverage OBI¡¯s strengths to enter into the supermarket chain. In the atmosphere of escalating tensions with OBI, Haier determined that OBI¡¯s business development pace was too slow and that there was no point continuing to invest in OBI China. In the beginning of April 2004, Haier announced that it had handed over an application to the Ministry of Commerce to withdraw its investments in the ¡°China Homeworld¡± joint venture.

In April 2005, one year after Li¡¯s resignation, Sergio Giordi, the Global CEO of OBI, arrived at the OBI China Center in Shanghai, in the company of his rival, the Asia Area managing director of B&Q. He announced that all OBI China businesses ? which meant their entire Asian presence - had been sold to B&Q, for the reason that OBI had decided to focus on the European market. It was followed by an announcement made by B&Q¡¯s parent company (the Kingfisher Group) in Britain that they had finished the acquisition of Germany¡¯s OBI China operations at a cost of 85 million pound (about RMB 1.3 billion).

On July 1, 2005, after gaining approval from the Ministry of Commerce and completing legal procedures, B&Q formally announced its acquisition of OBI¡¯s China businesses, including stores, inventories and more than 2,000 Chinese staff. The acquisition announcement emphasized that these ¡°2,000 OBI staff and the management team, which had been well trained over the last 5-6 years, is a very important asset attracting [B&Q] to complete this transaction.¡± At the end of September, all 13 OBI stores in China had completed the information systems transformation and changed their name to B&Q. As a result of this acquisition, B&Q China doubled their store numbers, market share and purchasing strength, and enjoyed turnover more than twice that of their nearest competitor. This strengthened B&Q¡¯s advantage of having the biggest scale in China¡¯s construction material market and consolidated its leading position in the industry. Meanwhile, after 8 years of efforts to settle in China, OBI, the earliest home improvement product supermarket chain in the world, bid farewell to China - potentially the most lucrative home improvement product market in the world.

This case was prepared by Research Fellow Dr. Shaohui(Sophie) Chen at CEIBS and Prof. Marie Wilson at the University of Auckland from published sources. The case was prepared as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation.

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