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BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
BEST BUY REPORT
Prepared by: Aziz Ghani & Sola Soetan
Aziz Ghani : azizg...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Table of Contents
Executive summary 3
Current performance 4
Mission, Vis...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Implementation 2 7
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Executive summary
BestBuy is one of the largest consumer electronics ret...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Current performance
BestBuy is the largest retailer of consumer electron...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
To remain competitive in online electronic segment the company implement...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Mission, Vision
Currently BestBuy does not have an official mission stat...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
To remaining consistent with its mission and vision BestBuy is currently...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
shipment in cost of goods sold to fulfill online purchases from all exis...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
5. centers. Additionally, the company will batch multi-unit customer or...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Corporate Governance
In 2012 BestBuy went through major corporate gover...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
Also, BestBuy’s encounters a liability for warranty replacements and re...
BestBuyCo.
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ADMN 4604 BusinessStrategyandPolicy1
advantage of the discounted prices. Changing fashion is expected and pl...
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ADMN 4604 BusinessStrategyandPolicy1
Bargaining power of buyers
The bargaining power of buyers is high due t...
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Other Environmental factors
Customers
BestBuy successfully changed from...
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Revenue (ttm): 48.15B 66.85B 169.40B 473.00B 4.19B
Gross Margin (
ttm):...
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ADMN 4604 BusinessStrategyandPolicy1
External Factors Weight Rating
Weighted
Score
Comments
1 2 3 4 5
Opport...
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BestBuy liability regarding war
ranty replacements and product
defects....
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source objectives. BestBuy introduced Results-Only Work Environment (RO...
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program enables manager to review and re-evaluate their relationship wi...
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flow was $1.5 billion USD in 2013. BestBuy needs to maintain enough liq...
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The following table summarizes the major ratios of BestBuy for the FYs ...
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Human Resources
As of FY 2013, BestBuy employs 165,000 people globally....
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management, customer relations, staff training, displaying of merchandi...
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Strategic Alternatives
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Make space available for a chain of popular fast food restaurants in al...
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be partially offset plus BestBuy will be receiving a small percentage o...
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Cons
 Stores must hold larger inventory on stock to prevent stock outs...
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Pros
 Higher profit margin due to backward integration.
 Reduce depen...
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They have done a number of strategic moves to maintain their position i...
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ADMN 4604 BusinessStrategyandPolicy1
opening separate mobile stores, expanding to European and Asian countri...
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net losses. BestBuy will undergo a corporate restructuring to integrate...
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BestBuy which can make the process of easier for products BestBuy needs...
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BestBuy Co.
Pro forma Income Statements
For 2014 to 2015
2014 2015 2016...
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e n c a lc u la t e d t o b e $ 44 3. 1 0 w hic h a ft e r d e d uc t i...
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paid for investment gives a gross profit of $193.1 million.
References
...
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24. http://www.businessinsider.com/best-buy-e-commerce-presidents-3-ste...
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Best Buy Strategy Report

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BEST BUY BUSINESS STRATEGY REPORT, PESTEL, PORTERS 5, Implementation, Strategic Recommendations, SWOT, BUDGET, Internal Analysis, External Analysis

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Best Buy Strategy Report

  1. 1. BestBuyCo. 1 ADMN 4604 BusinessStrategyandPolicy1 BEST BUY REPORT Prepared by: Aziz Ghani & Sola Soetan Aziz Ghani : azizghani0@gmail.com 1416-856-6737
  2. 2. BestBuyCo. 2 ADMN 4604 BusinessStrategyandPolicy1 Table of Contents Executive summary 3 Current performance 4 Mission, Vision 6 Objectives 6 Strategies 6 Corporate Governance 9 External Environment: PESTLE 9 Political-legal factors 9 Economic factors 10 Socio-cultural factors 10 Technological factors 11 Environment factors 11 Porter’s Five Forces 11 Threat of new entrants 11 Bargaining power of buyers 12 Bargaining power of suppliers 12 Threat of substitute products 12 Rivalry among competing firms 12 Other Environmental Factors 13 Customers 13 Competitors 13 Corporate Structure 16 Corporate Culture 16 Corporate Resources 17 Marketing 17 Finance 17 Human Resources 20 Research and Development 20 Operations and Logistics 20 Information system 21 Strategic Alternatives 23 Recommended Strategy 26
  3. 3. BestBuyCo. 3 ADMN 4604 BusinessStrategyandPolicy1 Implementation 2 7
  4. 4. BestBuyCo. 4 ADMN 4604 BusinessStrategyandPolicy1 Executive summary BestBuy is one of the largest consumer electronics retailers in the world with 19% share of the gl obal retail consumer electronics market. Although extremely successful in the past starting in FY 2012 the retailer has been reporting net losses. The purpose of this report is to analyze what is ha ppening and how the company can overcome its financial difficulties and emerge on as a leader a gain. Using several analysis techniques including PESTLE and Porter’s Five Forces, we have conclud ed that the company is dealing with fierce competition both online and offline. This fierce compe tition drives prices down, thus eating into the live-blood of any retailer – the margins. Sluggish e conomy, gloomy customer expectations towards the future and resulting reduced spending on co nsumer electronics have provoked a price war and made BestBuy introduce a price-matching pol icy. The latter eats into the margins as well. These unfavorable changes lead to corporate culture changes as well, shifting from results-oriented culture to “be-there-40-hours-a-week” culture. Thi s coupled with the company’s plan to attract and retain its employees will eventually negatively i mpact employees morale and will lead to outflow of long-time employees. To offset the negative impacts of the company’s fragile financial position a number of strategic a lternatives is being offered. These include partnering with a famous fast-food chain of restaurants and place restaurants in each of the stores; acquire a third-party manufacturer to have full contro l over BestBuy’s private label production; increase offerings in kitchen and household appliances . While each of the strategic alternatives has pros and cons, the second alternative is deemed the most viable. BestBuy relies heavily on private label. These are exclusive products, sold only at BestBuy under a variety of brands belonging to the company. The retailer can acquire a third-party manufacture r of these products, tap into consumer electronics market and start selling products at a higher pr ofit margin, thus contributing directly to the bottom-line. The implementation of this strategy is d one in 4 steps. Step 1 – allocate the budget, step 2 – allocate the team, step 3 – allocate the produ c t , s t e p 4 - t r a i n e m p l o y e e s .
  5. 5. BestBuyCo. 5 ADMN 4604 BusinessStrategyandPolicy1 Current performance BestBuy is the largest retailer of consumer electronics in the world. The company has 1,503 store s in the U.S. and 2,876 stores in Canada, China, Mexico and eight European countries. BestBuy i s the tenth largest online retailer in the U.S. and Canada and more than 1.6 billion users visit the company’s websites or the stores each year. BestBuy currently employs approximately 165,000 p eople and its world consumer electronics market share is 19 percent. BestBuy unlike its competitors Amazon and Walmart does not employ a low price strategy. The company’s current strategy focuses on differentiation driven by employee training, online and in- store enhanced consumer experience, and cost control. During the year 2013 the domestic segment (consisting of operations only in the U.S.) operated u nder various brand names such as BestBuy, BestBuy Mobile, Geek Squad, Magnolia Audio Video and Pacific Sales. The company opened 105 US BestBuy Mobile stand-alone stores and closed 47 US BestBuy stores, one US BestBuy Mobile stand-alone store and one Magnolia store. BestB uy continues to offer Geek Squad support services, and BestBuy Mobile store is still active. In th e year 2014, the company expects to close additional between five to ten US BestBuy stores and open a small number of US BestBuy Mobile stand-alone stores. The International segment is operated under the brand names of BestBuy, BestBuy Mobile, Cell S hop, Connect Pro, Future Shop and Geek Squad. In Europe the corporation operates under the br and names of The Carphone Warehouse, The Phone House and Geek Squad. In China BestBuy s ells under the brand names of Five Star and BestBuy Mobile. The operations in Mexico are regist ered under the brand names of BestBuy, BestBuy Express and Geek Squad. In 2013 BestBuy Mobile concept and the store-within-a-store experience was introduced in Chin a in select Five Star outlets. BestBuy Express was also introduced in a small-format store in Mex ico. The latter focuses on high-traffic and convenience purchases with a large volume of accessor ies offerings. In Europe BestBuy repositions and resizes the existing stores aiming at revenue ma ximization. In 2013 alone the corporation closed 126 stores and opened 122 new ones.
  6. 6. BestBuyCo. 6 ADMN 4604 BusinessStrategyandPolicy1 To remain competitive in online electronic segment the company implemented Enhanced Price- Matching Policy in the U.S. in March 2013. The online promotion allows consumers to request a price match for comparable products offered by a retail store and an online operator. This initia tive was put into place after a successful pilot conducted over the holiday season of 2013. BestB uy is able to match competitors’ prices by taking full advantage of its economies of scales, global vendor partnership and sustaining efficient, low-cost operations. Internationally store sales varied from country to country in 2013. In the European continent the company reported store sales gain due to effective promotions and an increase in sales of higher- priced mobile phone handsets. In Canada store sales declined with major contributors being telev isions, computers and gaming sales lacking behind and reinforced by overall industry weakness. The sales decline was partially offset by increase in sales of mobile phones and tablets. In China, increasing competition from online vendors drove down prices across most product categories. Abolishment of U.S. government stimulus programs in December 2011 contributed to weaker sal es. Overall lower gross profit and operating income in international segment was driven by a co mbination of lower sales in Canada and China, a decrease in gross profit in Europe, adverse prod uct mix and increased promotional costs. BestBuy incurred a net loss of $443 million US dollars (USD), a significant reduction from last y ear net loss of $1.3 billion USD. In 2013 the company had $45.1 billion USD in revenue, which r epresents a decrease of 5.6 billion USD compared to the previous year. The decrease in revenue i s attributable to store sales decline of 2.9 percent and closure of 47 large-format stores in the U.S . Gross profit decreased by one percent to 23.6 percent of revenue. The reduction in gross profit was the result of increased revenue from the wholesale channel in Europe and increased global p romotion costs. The company recorded $451 million USD of restructuring expenditures related t o Renew Blue cost-reduction initiatives, European store transformation and U.S. large- format st ore closures among other operational changes.
  7. 7. BestBuyCo. 7 ADMN 4604 BusinessStrategyandPolicy1 Mission, Vision Currently BestBuy does not have an official mission statement. However the following mission/ vision statement is referenced as such on several regional websites: “Our formula is simple: we’re a growth company focused on better solving the unmet needs of o ur customers and we rely on our employees to solve those puzzles. Thanks for stopping.” Objectives In the last quarter of 2012, BestBuy announced the strategies to follow to improve the company’s performance in 2013. The company established that it would remain focused on increasing profi tability across the whole organization. The strategic plan aimed to increase revenue was called R enew Blue strategy and was focused on making BestBuy the preferred brand and destination for t echnology products and services. The Renew Blue strategy has the following objectives: “reinvigorate and rejuvenate the customer experience, attract and inspire leaders and employees, work with vendor partners to innovate an d drive value, increase return on invested capital and continue the company’s leadership role.” In FY 2014, BestBuy plans to open a limited number of small-format stores in Europe and to con tinue to review its portfolio of stores globally. Also, 2014 will be a transition year for the organiz ation with special emphasis on the following areas: 1. Accelerating online growth, 2. Enhancing the multi-channel customer experience, 3. Increasing revenue and gross profit per square foot through enhanced store space optimization and merchandising, 4. Driving down cost of goods sold through supply chain efficiencies, 5. Continuing to gradually optimize the U.S. real estate portfolio and 6. Reducing selling, general and administrative costs. S t r a t e g i e s
  8. 8. BestBuyCo. 8 ADMN 4604 BusinessStrategyandPolicy1 To remaining consistent with its mission and vision BestBuy is currently implementing the follo wing: 1. Accelerate online growth through the improvement of online traffic by:  generating online recommendations based on customers' requirements and preferences;  employ a new search platform with increased product find and relevance capabilities;  create integrated product pages with generation of consistent browsing experience across devices;  improve access to reward zone points management and redemption capabilities;  develop easy process to supplementary products and services, such as extended warranties and support;  increase product mix and product detail information. BestBuy expects to have made significant improvements against these initiatives by the beginnin g of 2014 holiday season. 2. Enhance the multi-channel customer experience. To measure customer satisfaction BestBuy introduced a new tool known as the Net Promoter Score (NPS). The NPS will measure the level of customer satisfaction in the following areas: offer of devices and services, level of knowledge of the company’s sales representatives, price competitiveness, shopping schedule, technical support during useful life of products, availability of stock as well as the customer price perception with low price guarantee, higher personalization in online offers and re-allocation of store hours. 3. Increase revenue and gross profit per square foot through enhanced store space optimization and merchandising. In 2014 BestBuy plans to reduce the square footage allocated to declining or low margin segments, such as music and movies, and replace them with inventory from higher-growth segments, such as mobile phones, appliances and accessories. The company plans to increase its product selection, store employee training and re-evaluate marketing investments. 4. Drive down cost of goods sold through supply chain efficiencies. BestBuy will include
  9. 9. BestBuyCo. 9 ADMN 4604 BusinessStrategyandPolicy1 shipment in cost of goods sold to fulfill online purchases from all existing distribution
  10. 10. BestBuyCo. 10 ADMN 4604 BusinessStrategyandPolicy1 5. centers. Additionally, the company will batch multi-unit customer orders in one shipment. 6. Continue to gradually optimize the U.S. real estate portfolio. BestBuy reduced occupancy costs through store closings and renegotiation of leases. In 2013 the company closed forty seven large-format stores and expects to close at least five more in 2014. Also, the company expects to open new stores in selected markets, including 12 new BestBuy Mobile stores, 10 Magnolia Design Center, and 18 to 25 Pacific Kitchen and Home. 7. Reduce selling, general and administration costs. As part of the initial phase of the Renew Blue strategy the company is expecting to reduce its expenditures by estimated $150 million USD annually through discontinuing non-core activities and eliminating management layers. 8. The company implemented a customer-centricity model that includes online and in store customer experience, employee training and engagement, partnership with vendors, retail execution and cost control. 9. BestBuy implemented a price matching policy that allows the company to remain competitive by offering consumers the same price as certain other retail stores and online operators. 10. BestBuy offers loyalty programs, so members can earn points with each purchase. The retailer also offers points to consumers using cobranded credit cards in the U.S. and Canada. The points earned through the loyalty program are used by consumers to get discounts on future purchases.
  11. 11. BestBuyCo. 11 ADMN 4604 BusinessStrategyandPolicy1 Corporate Governance In 2012 BestBuy went through major corporate governance restructuring at top management leve l. Mr. Hubert Joly became President and Chief Executive Officer in September 2012 and the Exe cutive Vice President, Chief Administrative Officer and Chief Financial Officer Ms. Sharon Mc Collam was appointed in December 2012. The board of directors of BestBuy Co. is comprised of directors in charge of appointing the Chairperson and the members of the Public Policy Committ ee. The Public Policy Committee is composed of independent directors that meet four or more ti mes in the year depending on the discretionary judgment of the members. At the end of March 2 013, the company had 3,185 common stock shareholders. BestBuy offers quarterly cash dividend to its shareholders. The dividend has grown by $0.10 USD to $0.17 USD per share since 2012. External Environment: PESTLE Political-Legal factors The BestBuy sales of its exclusive branded products represent an important component of the co mpany’s revenue. Most of these products are manufactured under contract by producers based in Southeast Asia. Although China and other countries-producers of consumer electronics are some what politically unstable, almost entire economy is fueled by American and European demand fo r consumer products. Unless there is a 75% decline in demand for consumer products, this factor does not pose any serious threat to the company’s business. The company is currently under litigation regarding two class action lawsuits. The first lawsuit w as filed in February 2011 and alleges that corporate officers violated earnings guidance regulatio ns in 2011 financial statements. The second laws suit filed in June 2011 and claims breach of fid uciary duty and failure to correct public misrepresentations and material misstatements and/or o missions regarding fiscal 2011 earnings projections. Also the plaintiffs declare that certain direct ors sold stock while in possession of material adverse non-public information. This factor is not a serious threat as it is person-related and the company may and will remove the individuals provo king negative publicity, invest further in positive publicity and will overcome the short-term repu tation damage.
  12. 12. BestBuyCo. 12 ADMN 4604 BusinessStrategyandPolicy1 Also, BestBuy’s encounters a liability for warranty replacements and repairs resulting from prod uct defects, while suppliers do not reimburse or cover such costs. In addition, BestBuy is account able for personal injury, death or property damage caused to customers by exclusive brand produ cts. These two factors require a serious financial analysis with access to privately-owned informa tion on brands, models, claims, lawsuits from consumers (if any), thus it is impossible to evaluat e these factors as posing threat to the company. None of the above-described factors can significantly influence BestBuy’s business except for th e third group, which cannot be fully analyzed at this point. Economic factors North American slow economic recovery created uncertainty and reduced consumer spending in 2013. Low level of consumer confidence and perception of electronics as discretionary items ma y have had a negative impact on historically expected high earnings in the fourth quarter of 2012. BestBuy’s is a seasonal business and relies heavily on revenues gained during holiday shopping season in the U.S., Europe, Canada and Mexico. This is a strong factor against BestBuy and unfo rtunately out of its reach to control it. Vigorous competition in consumer electronics industry has considerably decreased revenues and margins. There are several online businesses competing on price and driving everybody’s prices and hence revenue and profit down. This is another factor that inevitably undermines BestBuy’s finances, however it is important to note that exclusive brands are responsible for a big part of th e company’s revenue. This is sell-cheaper-strategy-proof for BestBuy. Socio-cultural factors In FY 2013 there was an increase in demand for tablets, eReaders, mobile phones and appliances . At the same time, consumers were buying less of televisions, games and notebook computers. I n the same year BestBuy took full advantage of the consistent growth of ecommerce by introduci ng their price-matching policy resulting in increased revenue and declining margins. Customer tr affic increased in the traditional bricks-and-mortar retail stores since price-conscious customers a nalyzed the product in traditional stores and then purchased them online to take
  13. 13. BestBuyCo. 13 ADMN 4604 BusinessStrategyandPolicy1 advantage of the discounted prices. Changing fashion is expected and plays in favor of BestBuy as the company may and will change product offerings towards a higher-margin ones. Increased t raffic to physical stores will serve as additional promo tool as consumers will see the turn-around . Thus both are positive for BestBuy. Technological factors Smartphone’s mobile purchasing capability is pushing boundaries between online and offline ret ail. Consumers have twenty four hours access to stores by literarily just reaching into their pock ets. BestBuy has been able to positively embrace the current online purchasing customer behavio r by allowing consumers to shop, have personalized shopping lists, match competitors prices, im plement self scanning and self checkout and reward its customers with loyalty points. Another st ep in the mobile purchasing industry is led by tablets. “Recent research indicates that by 2014, m ore than one in three American Internet users will have a tablet device, and 52 percent of tablet o wners prefer to shop online using their tablets”. Another fashion trend is again positive for BestB uy. Being a retailer and being able to switch, drop, add products to their online and store displays is to BestBuy’s advantage that they absolutely have to jump on. Environmental factors These are not relevant to retailer, unless we look into the kind of suppliers BestBuy chooses and what kind of requirements for environmental consciousness they have to meet. Porters Five Forces Threat of new entrants The threat of new entrants in the consumer electronics market is medium to low. Even though it i s relatively easy for any small Asian electronics producer or a no-name electronics vendor in the Americas or Europe to set up their website and start selling, there is a number of factors preventi ng just about anybody from entering this market. First, advertising is costly; it takes a long time t o get recognized by potential consumers. Second, logistics is close to impossible to do since one container shipment may take 6 months from China to US. Third, a huge initial investment is need ed to start the business, invest in the first production batch, advertising and delivery to customers . T h i s t h r e a t i s v i r t u a l l y n o n - e x i s t e n t f o r B e s t B u y .
  14. 14. BestBuyCo. 14 ADMN 4604 BusinessStrategyandPolicy1 Bargaining power of buyers The bargaining power of buyers is high due to a strong competition from Internet-based business es, wholesalers, discount chains and home improvement superstores. Consumers have numerous alternatives when purchasing online, therefore prices remain relatively low and profit margins thi n; as sellers compete among each other using a low-price strategy. The fact that consumer electro nics are non-essential products also increases purchasing power of consumers. BestBuy is a disa dvantage and has to do price-matching, eating into its margins, but they can attract more people t han other retailers due to repair and exchange guarantee, as well as exclusive brands, as well as wide product line-up offered. Bargaining power of suppliers The bargaining power of suppliers is low due to the organization economy of scale. BestBuy is t he largest retailer of consumer electronics in the world and the tenth largest online retailer in the North American market; therefore suppliers rely on BestBuy’s network to sell their products. Mo reover, BestBuy has the power of driving down purchasing prices, thus compensating or limiting decrease in their margins. Threat of substitute products Threat of substitute products is low since BestBuy has a broad spectrum of consumer electronics products the retailer offers. Suppliers need BestBuy to attain high volumes of sales; therefore Be stBuy will always have access to the latest technology and devices. Rivalry among competing firms Rivalry among competing firms is high. There is a strong price competition from brick-and-mort ar retailers and online operators. BestBuy’s main competitors are Amazon and Walmart. These c ompetitors’ product offers are more diversified into various types of products besides consumer e lectronics, which makes them less category-dependent. Due to the wide selection and similarity o f consumer electronics products offered by all competitors, there is low customer retention and st rong competition for maintaining their market share.
  15. 15. BestBuyCo. 15 ADMN 4604 BusinessStrategyandPolicy1 Other Environmental factors Customers BestBuy successfully changed from being a commission-based company to a fully-integrated cus tomer-centric company. BestBuy implemented customer-centricity strategy as a manner of differ entiating itself from competition. Over the years, BestBuy has acquired different companies in ot her segments to serve customers better. For example, Magnolia Hi-Fi Inc. was acquired with the purpose of targeting upscale customer segment. In FY 2012 the retailer acquired mindSHIFT Tec hnologies Inc. to be able to offer cloud services, data center services and professional services. T o change the consumer shopping experience, BestBuy bought Future Shop, started operating dual brand to attract more customers. BestBuy sells consumer electronics products online and in retai l stores under different brand names. Due to the accelerated innovation in consumer electronics, consumer demand shift from one consumer electronics product to another, there is a need to resp ond to changing consumer preferences in a timely manner. Competitors BestBuy operates in a highly-competitive industry. BestBuy’s primary competitors are consumer electronics retailers, such as Walmart and Internet-based businesses, such as Amazon. BestBuy's competitors thrive to compete on price. The company works to beat its competitors by providing excellent customer service and in-store experience; also BestBuy price match. In the U.S. BestB uy has seen bigger impact from its online competitors due to the fact that online-only businesses are exempt from collecting sales taxes in some of the states. The following table provides comparison of BestBuy to their direct competitors. Direct Competitor Comparison BBY AMZN AAPL WMT Industry Market Cap: 14.67B 150.28B 462.33B 246.47B 2.24B Employees: 165,000 88,400 72,800 2,200,000 17.00k Qtrly Rev Gro wth (yoy): -0.00 0.22 0.01 0.02 0.11
  16. 16. BestBuyCo. 16 ADMN 4604 BusinessStrategyandPolicy1 Revenue (ttm): 48.15B 66.85B 169.40B 473.00B 4.19B Gross Margin ( ttm): 0.23 0.26 0.38 0.25 0.30 EBITDA (ttm) : 1.89B 2.92B 55.87B 36.65B 129.68M Operating Mar gin (ttm): 0.02 0.01 0.29 0.06 0.01 Net Income (tt m): -349.27M -101.00M 37.75B 17.09B N/A EPS (ttm): -1.39 -0.23 40.11 5.14 -1.39 P/E (ttm): N/A N/A 12.69 14.74 31.28 PEG (5 yr exp ected): 2.15 10.53 0.85 1.59 1.30 P/S (ttm): 0.30 2.25 2.73 0.52 0.31 BBY = BestBuy Corp. AMZN = Amazon.com Inc. AAPL = Apple Inc. WMT = Walmart Stores Inc. Industry = Consumer Electronics Stores Source: http://ca.finance.yahoo.com/q/co?s=BBY
  17. 17. BestBuyCo. 17 ADMN 4604 BusinessStrategyandPolicy1 External Factors Weight Rating Weighted Score Comments 1 2 3 4 5 Opportunities Increased demand for tablets, e Readers, mobile phones and ap pliances. 0.10 3.50 0.35 The demand for these pro ducts increases revenue. Increased mobile purchasing ca pability. 0.10 3.00 0.30 Online retail is more acce ssible than ever, due to in creased capabilities of cel l phones and tablets. Short product life-cycle and ob solescence. 0.20 2.00 0.40 Technology innovation h as reduced product life- c ycles and increased produ ct obsolescence. Diversification of the business: offering further supporting serv ices along with the products sol d. 0.05 1.00 0.05 This will increase profit margin and overall comp etitiveness. Threats Slow economic recovery and re duced consumer spending. 0.10 3.00 0.30 Consumers are spending l ess due to high unemploy ment rates and economic instability in North Amer ica.
  18. 18. BestBuyCo. 18 ADMN 4604 BusinessStrategyandPolicy1 BestBuy liability regarding war ranty replacements and product defects. 0.10 1.00 0.10 Current manufacturers of branded products do not c over the cost of defective merchandise. The strong competition in the 0 .20 electronics industry decreases r evenue margins. 2.50 0.50 Internet-based business low-cost strategy decreas ed traditional retailers’ pr ofit margins. Consumer electronics products are discretionary items. 0.15 3.50 0.53 Discretionary items sales decrease in times of econ omic uncertainty. Total Scores 1.00 2.53 Internal Environment Corporate Structure BestBuy is structured in a way that information travels from top to bottom. The CEO passes info rmation to company executives in which at this point information flow to the 3 main sub-organiz ations. These 3 sub-organizations have their own management team headed by middle managem ent that connects top level management to regional managers. There are over 40 regions, each of which consists of districts. These districts each has its own district manager that report to the regi onal manager. There are over 20 stores headed by General Manager in each district. Each store’s departments are overseen by a supervisor who answers to General Manager. BestBuy has a good structure that allows communication from top to bottom through company designed communicati on channels, such as Employee News Feed and email system. The company develops a list of obj ectives, goals and duties, which employees must accomplish. BestBuy’s chain of command is cle ar and easy to understand. Corporate Culture BestBuy corporate culture reflects change from traditional business methods to a more contempo rary and flexible work schedule. Their culture is the result of employees complaints about the de manding nature of their work and is well-defined and consistent with knowledge-based human-re
  19. 19. BestBuyCo. 19 ADMN 4604 BusinessStrategyandPolicy1 source objectives. BestBuy introduced Results-Only Work Environment (ROWE), which over tim e was adopted by all departments of the company except for the legal department. ROWE allows employees to carry out their duties however they want as long they got the job done. After the i mplementation of the ROWE program, the company experienced a rise in productivity, reduction i n vo lu nt a r y t ur no ve r a nd inc r e a s e in e mp lo ye e mo r a le . The RO W E
  20. 20. BestBuyCo. 20 ADMN 4604 BusinessStrategyandPolicy1 program enables manager to review and re-evaluate their relationship with their subordinates and assess the level of stress they undergo. Managers then create a well-organized method of commu nicating to employees more efficiently and gain deeper understanding of an employee’s strengths and weaknesses. Despite being a multinational company, BestBuy successfully integrated emplo yees from acquired companies into its organizational culture. Regardless of the success of the program, the current CEO Hubert Joly announced that the ROW E culture would be totally revamped to a culture that encompassed accountability. Furthermore, he stated that for accountability to be restored there was a need to have all employees on board, s omething current corporate culture does not require. All employees will have to work 40 hours p er week with few exceptions. Joly believes this is the first step in changing the basic corporate cu lture in BestBuy. (Source: Business Insider, 2013) Corporate Resources Marketing BestBuy's current marketing objectives include meeting the technological needs of customers an d making products available to customers with end-to-end solutions. The current marketing obje ctives are in line with the company's mission, strategy and policy. BestBuy strives to become a s ervice-oriented company. The company spends a large amount of money on advertisement in pri nt, TV and other media. Industry analytical reports state that BestBuy spent $913 million USD in FY 2013, $995 million USD in FY 2012, $862 million in FY 2011. BestBuy offers customer loy alty program that allows customers to earn points on purchases. These points may later be redee med towards future purchases. Currently this program is only effective in the U.S. and Canada. B estBuy operates 1,503 domestic stores and 2,876 international stores. Finances BestBuy’s current financial objective is to increase revenue. BestBuy funds its operations by cas h and cash equivalents, short-term investments and cash flow generated from operations. BestBu y’s revenue tends to be decreasing. In FY 2012, revenue was reported to be $51 billion USD, wh ereas in FY 2013 it went down to $45 billion, in most part caused by decreasing sales. The total r evenue decline in FY 2013 was 2.1%. Sales declined 2.9% in FY 2013 vs. FY 2012. Cash
  21. 21. BestBuyCo. 21 ADMN 4604 BusinessStrategyandPolicy1 flow was $1.5 billion USD in 2013. BestBuy needs to maintain enough liquidity to meet current f inancial objectives and expand globally. Further breakdown of 2.1% revenue decline in 2013 are shown in the table below. Comparable store sales impact (2.8%) Net store changes (0.2%) Non-comparable store sales channels(1) (0.6%) Impact of foreign currency exchange rate fluctuations (0.3%) Total revenue decrease (2.1%) During FY 2013 BestBuy made dividend payments in four installments, $224 million USD. In terms of liquidity, for FY 2013 company managed the current ratio of 1.1x vs. 1.2x in 2012. T his means that the company's liquidity is declining which is not a good sign, if the retailer is to m aintain access to current credit facility as a source of external funding. BestBuy currently holds $ 1.0 billion USD of 364-day credit facility and $1.5 billion USD of five-year credit facility. Curre nt financial condition of the company is deteriorating which is mostly due to the inefficiency of maintaining global expansion.
  22. 22. BestBuyCo. 22 ADMN 4604 BusinessStrategyandPolicy1 The following table summarizes the major ratios of BestBuy for the FYs 2011 - 2013. 1. Liquidity Ratios F/Y 2013 F/Y 2012 F/Y 2011 Current Ratio 1.1x 1.2x 1.2x Quick Ratio 0.44x 0.39x 0.40x 2. Profitability Ratios F/Y 2013 F/Y2012 F/Y2011 Net Profit Margin -3.12% -2.43% 2.54% Gross Profit Margin 24.1% 24.8% 25.1% Return on Investment -21.43 -18.48 14.85 Earnings Per Share -4.63 -3.36 3.08 3. Activity Ratios F/Y 2013 F/Y2012 F/Y2011 Asset Turnover 2.49x 3.00x 2.78x Inventory Turnover 4.39x 6.56x 6.61x Accounts Receivable Period 8.94 Days 14.30Days 13.15Days Accounts Payable Period 37.40Days 33.51Days 27.42Days 4. Leverage Ratios F/Y 2013 F/Y2012 F/Y2011 Financial Leverage (Average) 3.69 4.27 2.69 Source: http://ca.finance.yahoo.com/q/sec?s=BBY
  23. 23. BestBuyCo. 23 ADMN 4604 BusinessStrategyandPolicy1 Human Resources As of FY 2013, BestBuy employs 165,000 people globally. BestBuy employees are well-trained, experts in their fields and offer the best quality services to consumers. The company works to att ract and retain its employees for the future. Employees are trained and educated about the produc ts offered in stores. BestBuy offers Stock Compensation Plans to all its employees under a plan c alled "Omnibus Plan"1. All employees are expected to comply and work towards BestBuy's objectives and mission. Emp loyees are permitted to buy the company's common stock at 15% discount from the market price. Research & Development Consumer electronics industry experiences continuous innovation and technology advances. Best Buy must be up-to-date with new products to allow it in adapting to the change in technology an d consumer preferences. BestBuy seeks to collaborate with new and existing manufacturers to sel l their products to enable it to be a one-stop-shop for consumer electronic products. The stores ar e continuously changing their design to allow customers to interact more with products and to all ow the stocking of products efficiently. Research is done in customer service as well to make sur e their experience is at the best possible level. BestBuy also continuously researches competitors pricing, to enable them in pricing competitively. Operations & Logistics BestBuy operates through its physical retail locations and its website. The retailer currently opera tes in 11 different countries. BestBuy reported having 4,379 stores around the blobe. The majorit y of BestBuy stores operate under the same standard procedure in terms of inventory 1 http://www.sec.gov/Archives/edgar/data/764478/000076447813000014/bby2013x10kt.htm#sA97A074035424C49 38E47AAECA5AC4F5
  24. 24. BestBuyCo. 24 ADMN 4604 BusinessStrategyandPolicy1 management, customer relations, staff training, displaying of merchandise, product sales and ser vices, designed and controlled through the corporate management team. Products are shipped to stores from distribution centers or directly from manufacturers to stores. The company currently operates 35 distribution centers globally which allows it to efficiently transport the products from the manufacturer to its stores. BestBuy has implemented a strategy to reduce the cost of its trans portation by forecasting store sales effectively, transporting fuller trucks, and using railway as th e most cost-effective means of transportation. Stores can also supply each other with products in case of a stock out. Information System BestBuy is highly dependent on its information system to operate its business. The system emplo yed assists in running their operations at all management levels. Furthermore the system aids in f orecasting sales, provides an efficient supply chain management, processes transactions, operates its ecommerce website and allows for efficient staff planning. All this has resulted in revenue in crease and lower costs. BestBuy is focused on growing its online sales. The website has been red esigned and currently uses Oracles ecommerce platform to operate online sales. BestBuy reporte d $477 million USD sales through its website in 3Q 2013. This is an increase of 10.5% compared to 2Q 2012.
  25. 25. BestBuyCo. 25 ADMN 4604 BusinessStrategyandPolicy1 Strategic Alternatives
  26. 26. BestBuyCo. 26 ADMN 4604 BusinessStrategyandPolicy1 Make space available for a chain of popular fast food restaurants in all stores. Building lease will Internal Fa ctors Weight Rating Weighted Score Comments 1 2 3 4 5 Strengths Largest retail er of consum er electronics in the world 0.10 5.00 0.50 BestBuy’s size and purchasing power provide s the company with a strategic advantage. Exclusive rig ht to sell cert ain products 0.20 4.00 0.80 The organization has exclusive rights to produ cts such as music, and TV sets. Broad range of electronic product offeri ngs and price s 0.20 3.00 0.60 BestBuy offers a wide selection of products a nd services. Customer- ce ntric model 0.10 3.00 0.30 BestBuy provides an enhanced in-store custo mer experience. Weaknesses High marketi ng cost 0.15 2.50 0.38 BestBuy spend considerable resources on adv ertising They are less diversified th at its competi tors 0.15 1.00 0.15 Walmart and Amazon do not rely exclusively on consumer electronic sales. High cost of operations 0.20 3.00 0.60 BestBuy carries significant expenses associate d to employee overhead and stores lease. Total Scores 1.00 3.33
  27. 27. BestBuyCo. 27 ADMN 4604 BusinessStrategyandPolicy1 be partially offset plus BestBuy will be receiving a small percentage of the fast food chain’s reve nue. The restaurant must operate during regular business hours of BestBuy. Pros  This will help to partially offset buildings lease costs.  The restaurant will attract more customers to walk into the store and will keep them in the store longer.  A low-cost strategy to implement, it will be at the cost of the fast-food to set the restaurant and the operation. Cons  All stores will have to change the layout to fit the restaurant.  The restaurants food quality and service is controlled by a third party, and any bad publicity can have a negative impact on BestBuy.  This move may lose more business to BestBuy due to store layout change, than bring new business in. Unfortunately, this may be known once the restaurant is established. Offer same-day shipping. Pros  Provide customers with a service that would allow it to differentiate itself amongst its competitors.  Corporate offices and businesses will be easy targets to take advantage of the service, this will increase BestBuy’s customer base.  Compete against Amazon in a way that’s very hard for them to implement, due to its limited number of distribution centers around the country.  Increases sales to customers who are willing to pay the price and need an expedited service.  It’s a low cost strategy to implement, and can have a positive effect in sales.  BestBuy has the necessary infrastructure to efficiently implement this strategy, due to their retail presence in different cities.
  28. 28. BestBuyCo. 28 ADMN 4604 BusinessStrategyandPolicy1 Cons  Stores must hold larger inventory on stock to prevent stock outs.  Customers don’t walk into the store to purchase other items, only the products they need are purchased.  Reduce profit margin if cost is passed onto to BestBuy.  If shipping cost is passed to the consumer, it will make the price too high for competitiveness in the market place. Therefore, BestBuy would lose potential sales and possibly market share. BestBuy increases its product offering in private labels, particularly in kitchen and household ap pliances. Pros  Higher profit margins when compared to branded products.  Reduced dependence on branded products.  Exclusivity of the product, competitors will not have the same product.  Control over price, and marketing plans. Cons  The setup of the private label has to go through intensive research, logo, brand name, and design.  BestBuy must audit the quality of the manufacturers that will be used to manufacture for their private label.  The quality of the product will impact BestBuy and not the manufacturer that produces it.  BestBuy trusting a third party to manufacture a product that will be sold under their name.  There is no support from manufacturers in marketing and selling the product.  If the product does not sell, BestBuy will be responsible for liquidating the unsold merchandise.  Warranty of the product will be BestBuy’s responsibility. Acquire a current third-party supplier that BestBuy uses to outsource its private label products.
  29. 29. BestBuyCo. 29 ADMN 4604 BusinessStrategyandPolicy1 Pros  Higher profit margin due to backward integration.  Reduce dependence on third-party suppliers, and instead take control of the manufacturing.  A stepping stone into consumer electronic manufacturing.  Have a competitive advantage over competitors who retail products manufactured by popular electronic companies.  Have more control over the quality of its private label product.  BestBuy will be manufacturing consumer electronics products that already sell in all its stores, allowing forecasting and supply of products to flow effectively from the manufacturer to the retail outlets.  Reduce the cost of logistics and distribution due to the private label brands being manufactured in one place rather than many different manufacturing plants.  Consistency in the quality of the product due to having a sole manufacturing plant for all the private label brands. Cons  Large investment in acquiring a manufacturer.  Dependence on products from one manufacturer. In case of disruption BestBuy will not be able to be supplied with products.  Trade embargo and tariff rate changes can make manufacturing of the product in that country unfeasible. Recommended Strategy BestBuy has been incurring losses since FY 2012. Competition in the market has been on the rise , Market share is being lost to Walmart and Amazon due to low prices they offer. BestBuy differ entiates among competitors in concentrating on the service it offers to its customers rather than p rice. BestBuy will need to come up with a strategy to allow it to gain back the market share back.
  30. 30. BestBuyCo. 30 ADMN 4604 BusinessStrategyandPolicy1 They have done a number of strategic moves to maintain their position in the market by
  31. 31. BestBuyCo. 31 ADMN 4604 BusinessStrategyandPolicy1 opening separate mobile stores, expanding to European and Asian countries and diversifying thei r product offerings, but investors have lost the confidence in BestBuy to be able to come with a s trategy to turn the company around. Due to current challenges faced by BestBuy from shareholde rs and both internal and external environmental factors, the strategy feasible and viable to BestB uy current situation is vertical growth through backward integration. BestBuy gets a third party t o manufacture private labels it carries and backward integration will increase the existing positiv e profit margin. BestBuy currently generates large portion of its revenue through sales of product from its private label brand. Although the retailer’s private label brand has the highest profit margin among other well-known brands that it currently sells, it has the highest risk due to the low quality and the liability of the product warranty is the responsibility of BestBuy. The company has a well-known brand in cons umer electronic retail and has one of the highest market share (over 19%) which will aid the succ ess of this strategy. BestBuy currently own brand names such as Dynex, Insignia, Init, Rocketfis h and Geek Squad which its uses to offer cost-competitive consumer electronics product to the m arket. Warranty liabilities under these brand names are on BestBuy even though the products are produced by outsourced manufacturer. Also BestBuy has a team that designs, develops and tests consumer electronics products under these brand names. The qualities of these products under its brand name are not controlled by BestBuy even though it is liable for any risk caused by the usa ge of these products. Since the formula that drive BestBuy is to focus on better solving the unmet needs of its customers, acquiring one of its third-party manufacturers to produce product meetin g the needs of consumers will differentiate from competition and give it a stepping stone into con sumer electronics manufacturing. BestBuy has the necessary infrastructure and human resources experience needed to implement this backward integration. Some of the consumer electronics pr oducts currently offered under its brand name include televisions, car electronic accessories, Blu- ray, Home Audio and tablets. The demand for these products is high and they accounted for large share of BestBuy’s revenue. Acquiring one of its manufacturers to produce these products under one of its brand name will give BestBuy competitive advantage in the market and will discontin ue dependence on third-party manufacturers of its private label products. This strategy will addre ss BestBuy’s objective for FY 2014 to reduce cost of goods sold, increase profit margin, rise in st o c k p r i c e a n d e n d c o n t i n u o u s
  32. 32. BestBuyCo. 32 ADMN 4604 BusinessStrategyandPolicy1 net losses. BestBuy will undergo a corporate restructuring to integrate the newly-acquired compa ny. Implementation To successfully implement the recommended strategy, BestBuy should carefully analyze and allo cated the available resources. Also, BestBuy should carefully choose manufacturers as our strate gy is vertical growth through backward integration. Implementation of the recommended strateg y is followed by several stages. For this particular strategy implementation period would be 3 yea rs which can be subdivided into short, medium and long horizons. The first stage is to allocate the budget and manage financial requirement for the implementation . This is very crucial stage for BestBuy. The team responsible for strategic planning should be ab le to convince the future success of recommended strategy to the stakeholders and present inform ation to related parties very effectively. Mission, vision and goals of the strategy should be clearl y stated to all employees. BestBuy currently holds cash and cash equivalents of $1.2 billion USD and $1.5 billion USD of five-year credit facility. BestBuy also holds long term investments, clas sified as available-for-sale securities. We believe that available funds should be adequate to acqu ire electronics manufacturer. The second stage is to form a team who are experts in the field and select three manufacturers in Asia and do negotiations with them. The team will negotiate in ter ms of products, cost, quality and supply chains. The third stage followed by this process is to det ermine what kind of products to offer and design of the products. At this point BestBuy is lookin g to acquire a manufacturer who can supply various consumer electronics products, such as TV s ets, Tablets and E-Reader at one stop. The cost of acquiring manufacturer is estimated to be $250 million USD. Acquiring a manufacturer who can supply all these products will benefit BestBuy in various aspects of the business. This will create consistency in the quality of the products that are being offered to customers under private labels. This is another significant advantage BestBu y will achieve from this is economies of scale and reduce dependency on third- party suppliers as BestBuy can have more control over its private label manufacturers. Implementation of this strat egy is in the best interest of the company and excels the sales from existing and potential new cu stomers. There should be very effective flow of information between BestBuy and the manufactu r e r . T h e s y s t e m s t h a t a l l o w m a n u f a c t u r e r t o i n t e g r a t e w i t h
  33. 33. BestBuyCo. 33 ADMN 4604 BusinessStrategyandPolicy1 BestBuy which can make the process of easier for products BestBuy needs in future. The fourth s tage of implementation is to train employees on what they are dealing with and also to provide e xcellent customer service. The final stage would be to remain constantly innovative, be price-eff ective and meet the needs of consumers. Evaluation and Control After the strategy has been successfully implemented, BestBuy must assess if the new strategy is taking company in the desired direction. The evaluation of the strategy implemented is made thro ugh series of actions. A detail survey has to be conducted by the company to figure out if the cust omers are satisfied or not. Sales, Revenue and Return on Investment are also to be examined. If t he figures and trends show all these three elements of financial statements have increased and cre ated satisfactory results, it should be assumed that the strategy we implemented is doing well. Co rrective measures are to be adopted to fix any issues that are creating problems for the company. (Please refer to page 19 to view pro forma statement) Contingency In case if the above recommended strategy does not perform well, BestBuy should adopt alternat ive third mentioned above which is BestBuy increases its product offering in private labels, parti cularly in kitchen and household appliances.
  34. 34. BestBuyCo. 34 ADMN 4604 BusinessStrategyandPolicy1 BestBuy Co. Pro forma Income Statements For 2014 to 2015 2014 2015 2016 Revenue Revenue Of Tv and E-Reader $2,418 $2,491 $2,541 Revenue Of Tablets $536 $568 $585 Net Revenue $2,954 $3,059 $3,126 Cost of goods Sold Direct Material 531.72 $550.57 $562.65 Direct Labor 443.1 $458.81 $468.88 Factory Overhead $797.58 $825.85 $843.98 Manufacturers Margin $443.10 $458.81 $468.88 Total Cost of goods sold $2,215.50 $2,294.03 $2,344.40 Gross Profit from new factory $738.50 $764.68 $781.47 Income Realized from new Plant Manufacturers Margin(from above) $443.10 $458.81 $468.88 Less: Cost of Investment ($250) Gross Profit $193.1 $458.81 $468.88 Revenue for FY 2013 is $4085 (million) USD. This revenue consist of consumer electronics, co mputing and mobile phones, entertainment, appliances, services and others. 33% of the total reve nue coming from consumer electronics consist of 65% revenue coming from TVs and E-readers and 25% revenue is from BestBuy's private label brands. Computing and mobile phones make up 44% of the total revenue out of which 19% is accounted for tablets and 30% from private label t ablets. The total revenue from TVs and E-reader comes to be $2,418 million USD and tablets is e stimated to be $536 million which makes the total amount to be $2,954 million USD taking into account all other factors. The cost of goods sold which comprises of Direct material, direct labor and factory overhead is forecasted for FY 2014 is $ 2,215 million. Manufacturers margin of is th
  35. 35. BestBuyCo. 35 ADMN 4604 BusinessStrategyandPolicy1 e n c a lc u la t e d t o b e $ 44 3. 1 0 w hic h a ft e r d e d uc t io n o f $ 2 50 mi l l io n
  36. 36. BestBuyCo. 36 ADMN 4604 BusinessStrategyandPolicy1 paid for investment gives a gross profit of $193.1 million. References 1. http://www.aacstudents.org/informative-essay-example-exploring-the-organizational- structure-of-best-buy.php 2. http://journalofinternationalmanagement.wordpress.com/2011/05/15/trusting-your- employees-the-case-of-best-buys-rowe-program/ 3. http://www.businessinsider.com/best-buy-ceo-workers-need-to-feel-disposable-not- indispensable-2013-3 4. http://finance.yahoo.com/blogs/daily-ticker/best-buy-losing-best-chance-survival-jeff- macke-181740101.html 5. http://www.forbes.com/sites/lauraheller/2012/03/29/best-buy-cost-cutting-to-profitability/ 6. http://seekingalpha.com/article/941701-best-buy-corporate-governance-and-financial- risk-heightens 7. http://businessfinancemag.com/risk-management/best-buy-needs-confront-its-residual- risk 8. http://business.time.com/2012/11/01/brand-names-just-dont-mean-as-much-anymore/ 9. http://www.computerworld.com/s/article/9220698/Best_Buy_rebuilding_IT_capability_it _outsourced_starts_hiring 10. http://finance.yahoo.com/news/pf_article_112269.html 11. http://www.techspot.com/news/49294-best-buys-new-retail-layout-borrows-heavily- from-the-apple-store.html 12. http://www.grinningcheektocheek.com/best-buy-new-store-format 13. http://online.wsj.com/article/BT-CO-20130821-710360.html 14. http://www.insigniaproducts.com/support/warranty.html 15. http://forums.bestbuy.com/t5/TV-Home-Theater/Insignia-offers-breakthrough-two-year- TV-warranty/td-p/32782 16. http://www.forbes.com/sites/lauraheller/2013/04/30/best-buy-quits-carphone-warehouse- bids-europe-adieu/ 17. http://voices.yahoo.com/expanding-foreign-markets-international-operations- 2131554.html 18. http://www.extremetech.com/computing/112363-bye-bye-best-buy 19. http://vdonnell.pbworks.com/f/Best%2BBuy%2BStrategic%2BChange.pdf 20. http://www.businessinsider.com/how-best-buy-is-turning-things-around-2013-7 21. http://www.cnbc.com/id/100470877 22. http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-irhome 23. http://www.investopedia.com/stock-analysis/062513/best-buy-ecommerce-its-savior-bby- wsm-msft-aapl.aspx
  37. 37. BestBuyCo. 37 ADMN 4604 BusinessStrategyandPolicy1 24. http://www.businessinsider.com/best-buy-e-commerce-presidents-3-step-plan-2012-10 25. http://ca.finance.yahoo.com/q/co?s=BBY 26. http://financials.morningstar.com/ratios/r.html?t=BBY&region=USA&culture=en-US

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