1. Best Buy Inc.
A thesis submitted to the Anglo-American University for the
degree of Bachelor of Business Administration
Spring 2013
NATIA MANJGALADZE
INSTRUCTOR: MARK WIEDORN
SCHOOL OF BUSINESS ADMINISTRATION
2. 2
DECLARATION
No portion of the work referred to in this thesis has been submitted in support of an application
for another degree or qualification of this or any other university or other institute of learning.
I hereby also declare that this thesis is my independent work. All sources and literature are cited
and included.
3. 3
ACKNOWLEDGEMENT
I would like to express my gratitude to my family and friends for their support and
encouragement during my studies. I would also like to thank my professors at AAU for giving
me the knowledge and confidence to write this thesis. Furthermore, I would like to thank my
advisor, Mark Wiedorn, for his support during the process of completing this thesis. Finally, I
thank my opponent for providing me with useful feedback about my work.
7. 7
1. Executive Summary
This strategic planning document provides an evaluation and analysis of the current
situation of multi-national consumer electronics big-box retailer company - Best Buy. The
company was established in 1966, and is headquartered in Richfield, Minnesota.
The research was focused on the strategic question, according to rapid shift in retail
environment what strategy should Best Buy implement in order to gain competitive advantage
and stay viable? Internal and external analysis was done to address this question and to identify
the strategic alternatives and recommendations in order for Best Buy to succeed in a highly
competitive environment.
Best Buy’s crisis mainly started in 2011 that was caused by macro and micro
environment in the industry. Show-rooming became the great issue for a Brick & Mortar
company, which was grounded by growth of e-commerce. Another challenge company faces is
its high prices and lack of value-added services that directly affects customers’ shopping
behavior. The most significant issue arisen for the company is its culture. Due to not following
the company’s values and failing in right employee approach, it leads to customers’
dissatisfaction. High competition destroys Best Buy’s concept and throws it out from the position
of “industry leader”. For all these reasons, the company lost its competitive advantage and
experienced losses in the past 2 years.
According to Andrews S Grove – “Only the Paranoids Survive”, the company is a classic
example of strategic inflection point. Best Buy cannot deal with “reign in chaos” and is not able
to pass “valley of death”. The company fails to manage its resources and form a clear picture
what their concept is. As author says, “Businesses fail either because they leave their customers
or because their customers leave them!”1
Best Buy’s case addresses both insights.
In order for the company to stay viable three strategic recommendations were discussed
in the strategic planning document. Expansion in emerging markets by using direct sales
channel, improve cost structure by managing supply chain management efficiently and improve
customer experience by various steps. As customer experience is the major issue for the
company, increase customer experience is the recommended strategy for Best Buy.
1
Grove Andrews; Only paranoid Survive; New York,USA; April 1999;
8. 8
2. Introduction
Best Buy Co., Inc. (NASDAQ:BBY) is a multinational electronics retailer founded by
Richard M. Schulze and headquartered in Richfield, MN. Company provides consumer
electronics, computing and mobile products, entertainment products, appliances and related
services. It operates through two main business segments: domestic and international. Company
operates under various brand names, has more than 4,100 stores in compound formats (big box
stores, Best Buy Mobile stores, Future Shop stores, etc) and 165,000 employees worldwide2
.
Best Buy Inc. was chosen for this strategic planning document because the company is
one of the main players on the market. It is interesting to understand and make analysis why the
company's profit declined last years - despite the growth of revenue, company showed the loss.
Also, lots of complaints from customers’ side was the reason of choosing it. It is interesting to
make the company’s internal and external analysis to identify the major problems Best Buy is
facing in its performance and to suggest new strategies to the company for improvements.
2.1 Brief history3
The Best Buy Company was established in the United States by Richard Schulze and his
business partner in 1966. In the beginning the company was registered as Sound of Music, and
opened its first store in St. Paul, Minnesota. The Company was oriented on audio components up
until the 1980s, when the CEO decided to expand the business by opening new stores, offering
new product lines, and increasing warehousing. These changes caused a rapid growth in sales ($
9.3 million) and 42% growth of local market share. Three years later, in 1983 the company’s
board of directors approved a new corporate name, Best Buy Company. After two years, on
April 18, 1985, Best Buy offered its first shares and went public.
In order to differentiate the company and gain a competitive advantage over its
competitors, Mr. Schulze changed the format of the store and made it more like a ware-house in
1989. In the 1990s, the company continued to expand. They opened 38 new stores and
throughout the year Best Buy increased revenues by 19.4% and showed the best financial
performance in twenty-seven years of the company’s history. Due to high competition in the late
1990s, competitors such as Circuit City played a big role in the falling of Best Buy’s market
share by nearly 40% during five months in 1994. In the same year, after the failure (decrease in
2
"Best Buy Co Inc (BBY.N) Company Profile | Reuters.com." 2008. 19 Mar. 2013
<http://www.reuters.com/finance/stocks/companyProfile?symbol=BBY.N>
3
"History of Best Buy Co., Inc. – FundingUniverse." 2012. 19 Mar. 2013
<http://www.fundinguniverse.com/company-histories/best-buy-co-inc-history/>
9. 9
market share), the company introduced its larger Concept III stores, that were 58,000 square feet,
which provided customers with a large range of selection. Despite these issues, the company
made a step forward to expand the business and increase market share.
As the internet became one of the main attributes for businesses at the end of the 20th
century, it was crucial for Best Buy to be the part of internet. In 1998, the company entered into
e-commerce and launched the website for online purchases, bestbuy.com. The company started
to sell other products besides audio products, such as digital televisions, that helped Best Buy to
return on the market and increase sales by 21%. On December 16, 1999, the company signed a
partnership with Microsoft Corporation. Microsoft invested $200 million for a 2% stake in Best
Buy and also gave the company preferred placements on several Microsoft websites, which
became the main driver for the company to become the most visited e-commerce web site.
The early 2000s were a period of acquisitions for Best Buy. From the year 2000, the
company started to make acquisitions. First, Best Buy acquired Magnolia Hi-Fi, Inc. for $88
million. Magnolia was a privately held company that generated $100 million revenues from
audio, video and home theater products. The next acquisition was completed in 2001, when Best
Buy bought Musicland Stores Corporation for $696.3 million in total ($425.1 million in cash and
$271.2 million in debt). Musicland operated in 49 states with 1,300 stores and their revenue
consisted of $1.89 billion at that period. Another acquisition was made in the same year, when
Best Buy bought a Canada-based electronic-chain, Future Shop. In following the years, the
founder and CEO of Best Buy, Mr. Schulze handed over duties and responsibilities to Vice-
Chairman Brad Anderson. This eventually led to Brad Anderson becoming the CEO; the
company added another acquisition – Geek Squad. These acquisitions gave Best Buy the ability
to operate in various segments and offered a wide range of products and services. As an example,
by acquiring the Geek Squad, the company gained the ability to provide customers with services
which created a better customer experience. Acquisitions in general are a tool to improve
performance, have greater brand value, diversify products, and acquire skilled labor that helps a
company to succeed in a competitive environment.
During 2003, the sales of Musicland started to decline rapidly, because of changes in the
market and customer preferences. Online downloads and cheaper CD/DVDs were the reason for
Musicland’s failure. After this issue Best Buy made a decision to write off the value of
Musicland’s acquisition by $410 million. Late in 2003, the company opened their first global
10. 10
office in China and by the end of the year the total number of stores was up to 600. 2004 was the
year of success, Forbes magazine named Best Buy the “Company of the year” and meanwhile
the company was listed in the top ten of America’s most generous corporations.
Best Buy signed a partnership with Carphone Warehouse Company4
, a British Based
independent mobile phone retailer in 2008, to make a joint venture and create a new company.
Best Buy acquired 50% of Carphone Warehouse for £1.1 billion. This acquisition helped Best
Buy to establish brand awareness in Europe and generate more revenue. Also, working with
Carphone Warehouse helped Best Buy to open new Best Buy stores where the company focused
specifically on mobile sales. In 2009, the company became the largest electronics retailer in the
eastern United States, as its Big Box competitor, Circuit City, shut down.
In addition, two years ago, in 2011, the company acquired mindSHIFT Technologies Inc5
,
which is a leader for MSP (Managed Service Provider) for $167 million. This acquisition will
help Best Buy to improve its performance in Geek Squad services and accelerate company’s
growth in the IT services category.
Best Buy’s downfall started in 2011, when they announced the closing of 11 stores in
Europe and in China as well. The company showed a loss of $1.2 billion6
. Lastly, in 2012,
Hubert Joly was named the new CEO of Best Buy.
2.2 Vision Statement
"People. Technology. and the pursuit of happiness." (Appendix)i
If the company wants to concentrate on the employee-customer relationship, Best Buy
must take great steps in order to do so. At this point in time the company has failed to establish
lasting relationships with its customers; this has become one of the main reasons why customers
are switching to the company’s competitors. The Company’s vision is not something that drives
customers to shop in Best Buy. It should improve its consumer approach in order for the
company to stay strong in the market. With regards to the “happy” work environment, the new
CEO, Hubert Joly’s approach to the company’s operations could possibly put Best Buy on the
right track towards creating a “great place to work.”
4
"Best Buy and The Carphone Warehouse create new company." 2009. 9 May. 2013
<http://pressoffice.carphonewarehouse.com/news/item/best_buy_a_world_leading_consumer_electronics_retailer_and_the_carphone_war/>
5
"Best Buy to Acquire mindSHIFT Technologies." 9 May. 2013
<http://www.mindshift.com/Company/News-and-Events/Press-
Room/2011/Best%20Buy%20to%20Acquire%20mindSHIFT%20Technologies.aspx>
6
"BBY-2012-10K." 2012. 19 Mar. 2013
<http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>
11. 11
Proposed Vision Statement:
“To be the world’s most customer-oriented company that provides people with the
opportunity to acquire any electronic device that they want.”
This statement gives a sense of a customer-based approach which is the most significant
in the business world. As the Consumer Electronics industry faces rapid change in customer
preferences, it is crucial for Best Buy to address this issue in order to be a winner in this
competitive environment.
2.3 Mission Statement
“Our formula is simple: we’re a growth company focused on better solving the unmet
needs of our customers—and we rely on our employees to solve those puzzles. Thanks for
stopping.”
This mission statement is perfect. The Company differentiates itself from competitors –
“better solving the unmet needs of our customers”. It is clear from the statement that Best Buy
concentrates on the customer and employee relationship to increase their performance. Based on
the mission statement, one would think that everything seems to be on track. However, there are
some mismatches in what the company says and what they actually do. Andrew S. Grove, in his
book “Only the Paranoids Survive”7
, writes about this divergence between actions and
statements, strategic dissonance that is the phase of “Lets Chaos Reign”. According to Grove’s
theory, Best Buy is at the point of strategic inflection. The Company has failed to establish
positive long lasting relationships with its customers, it has had a hard time satisfying shoppers
and it has failed to deliver a strong customer experience. Best Buy should increase its efforts to
honor its mission statement; this would definitely` be a major step in the right direction.
7
Grove Andrews; Only paranoid Survive; New York,USA; April 1999;
12. 12
3. Company’s culture
3.1 Company’s corporate governance 8
3.2 Changes in Management
The year 2012 was a time for transformation within the company. Best Buy’s board of
directors decided to make changes in top management positions and replaced the former CEO
Brian Dunn with a Frenchman, Hubert Joly. After spending twenty-eight years with the
company, Brian Dunn resigned as the chief executive officer after a year of downfalls for the
company. At that period the company announced the loss of $1.7 Billion and a 91% decrease in
profits in comparison to the previous year. Also, stock prices declined at the time and Best Buy
lost its market share to competitors. Due to these issues the former CEO was listed on the top of
the “Worst CEOs of 2012” announced by Bloomberg Business Week9
. In addition, Best Buy
published the audit committee’s report on May 12, 2012. In the report the company stated that
Mr. Dunn violated company policy by having a close relationship with a young female
employee. All of these issues, including many financial problems announced two weeks prior;
were the main reasons why the CEO resigned.
After this announcement, on August 20, 2012, Best Buy announced the board’s decision
to hire Hubert Joly as the new CEO of the company. As the company was in a transition to a new
CEO, Best Buy’s founder Dick Schulze resigned as chairman because he was caught in the
crossfire of the feuding parties. He was aware of the relationship between the former CEO and
the young female employee and failed to take action against it. After his resignation, Mr. Schulze
8
"Corporate Officers - Investor Relations - Best Buy Co., Inc." 2011. 19 Mar. 2013
<http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-govmanage>
9
"The Worst CEOs of 2012 - Businessweek." 2012. 19 Mar. 2013
<http://www.businessweek.com/articles/2012-12-13/the-worst-ceos-of-2012>
13. 13
wanted to make the company private, this was declined. However, on March 25, 2013 the
Company’s founder came back and was named Chairman Emeritus and started to work with
Hubert Joly to get the company back on track10
.
Transformation in the company’s top management is related to some threats. When a new
CEO comes, he has his own views and strategy that renovates the whole company. It is difficult
to integrate new ideas into an existing corporate culture; especially when those ideas are
drastically different from the existing ones. One example is the entirely different attitudes
towards show rooming. The former CEO, Brian Dunn saw show-rooming as a threat, while
Hubert Joly feels that show rooming isn’t a problem. He was quoted as saying, “We love show
rooming, we want to turn the tables and embrace show rooming.”11
He considers show rooming
as something that draws people into stores.
3.3 Corporate Values
The Company has four corporate values12
:
1. Have fun while being the best.
2. Learn from challenge and change.
3. Show respect, humility and integrity.
4. Unleash the power of our people.
While these guiding principles may look good on paper, they are far from what has taken
place in reality. It is clear that the company is no longer in the top spot in the market, especially
after online retailers entered the market. This situation serves as evidence that Best Buy has
failed to follow one of its core principles, “learn from challenge and change”. Best Buy has not
been able to adapt to environmental and customer demand shifts. This also serves as more
evidence that the company has failed to meet yet another one of its core principles, have fun
while being the best. Respect, humility and integrity are great strengths in corporate culture. This
principle would be a great value for the company if they followed it. The last value, “unleashing
the power of our people” is really imposing but it is actually not clear what they are trying to say.
It creates the impression that Best Buy is a modern innovative company not only in terms of its
products but more importantly in terms of how it treats its employees. As we will see later, not
10
"Is Best Buy Back On Track? - Forbes." 2013. 22 Apr. 2013
<http://www.forbes.com/sites/lauraheller/2013/03/25/is-best-buy-back-on-track/>
11
"Best Buy CEO: We 'Love' Being Used As The Internet's Showroom ..." 2012. 19 Mar. 2013
<http://blogs.wsj.com/corporate-intelligence/2012/11/14/best-buy-ceo-we-love-being-used-as-the-internets-showroom/>
12
"Ethics At Best Buy - EthicsPoint." 2010. 19 Mar. 2013
<https://secure.ethicspoint.com/domain/media/en/gui/26171/moreinfo.pdf>
14. 14
only is this not the case, but Best Buy’s approach towards people (both customer and employee
alike) is barely acceptable for today’s standards. The Company must improve in their
performance in order to honor their principles.
3.4 Work environment
In the past decade, Best Buy actively made changes in its work environment and has
implemented new approaches again and again. Best Buy’s work environment has transformed
significantly after the changes in management. The New CEO, Hubert Joly decided to change the
approach towards employees and transitioned the work environment from “Results-Only Work
Environment” to “all hands on deck”. This dramatic change has directly affected the company’s
culture, but could also cause problems within the company. When employees become
accustomed to one work environment it is often difficult to adopt to a new one. Changes from a
flexible timetable to a more strictly regulated schedule for example may make it difficult for
some employees to stay motivated and deliver the same or better results than they did in the past.
3.4.1 Results-Only Work Environment
ROWE – Results-Only Work Environment is recently innovated management approach
that enables employees to have flexible timetable, freedom to do the work that meets a
company’s goals and customers’ needs. Thompson and Ressler, Best Buy’s former employees
(HR), were the ones who created this flexible work program that energizes workforce and turns it
into a more productive unit. When introducing the new work environment, Thompson said,
employees “actually get to act like an adult and live their lives in a way where they can do what
they need to do every day in the best way possible.” This human resources management strategy
focuses on not the number of hours worked but on the results itself. It doesn’t matter if
employees spend 8 hours at the office or do not show up, even for meetings, as long as the
company’s management gets satisfactory results out of them.
Results-Only Work Environment strategy has its advantages. Firstly, Best Buys
employees seemed quite happy with the new environment and gave great feedback on it. As a
result of a newfound flexibility and autonomy, employees’ became highly motivated and that
increased ROWE team performance significantly, by 35%. Workforce satisfaction led the
company to have a very low voluntary turnover rate which saves costs related to employee
dismissal and recruitment. At a glance, the company should be delighted with this approach as it
is a costless program which increases employee performance.
15. 15
Even though the company experienced growth of productivity, ROWE has its drawbacks
that make us question whether this strategy was worth it. Because this strategy takes out the
supervising part over employees, it can easily destroy company’s culture and experience failure
in leadership this doesn’t sound right somehow. If a person doesn’t have self-discipline, it is hard
to stay focused outside the office. As the “Pareto Principle”13
states, 20% of invested input
generates 80% of outcomes. It means that 80% of firm’s profit is driven by 20% of corporate
staff. According to that, when analyzing employees’ productivity it is inaccurate to rely on
percentage growth of team performance. It can be a reason why Best Buy fired so many
employees (77% increases in involuntary turnover)14
for not performing on high level. I believe
that working as a team and in a sharing environment is a part of building a company’s culture
and this culture is a major influence on the company’s performance. Effective communication
and interaction between managers and employees is extremely important as well. For that to be
possible, it is important to have a support network, strong relationships and the ability to work
together as a team.
3.4.2 “All hands on deck”
Hubert Joly, the new CEO of the company cancelled the ROWE strategy and introduced
the “all hands on deck” approach. “Bottom line, it’s ‘all hands on deck’ at Best Buy meaning to
have employees in the office as much as possible to pool resources and connect on ways to
improve our business.”15
Top management wants to have a high level of communication with the
workforce for innovation and believes that not only results matter in high performance but the
process as well. They want to implement accountability, which the company’s new management
sees as the key to success.
The “All hands on deck” approach is a new spirit for the company. This new work
environment should help the company to move forward and show better results in the future. As
these changes were made in a relatively short period (twice in seven years), the company should
have a good change management team in order to succeed and implement these strategies. This
strategy is better than the previous one, as it develops a sense of responsibility. However, the
CEO’s report states that “You need to feel dispensable as opposed to indispensable”. In my
13
"What is Pareto principle? - BusinessDictionary.com." 2007. 22 Apr. 2013 <http://www.businessdictionary.com/definition/Pareto-
principle.html>
14
"Implementing a Results-Only Work Environment | Jerm." 2010. 9 May. 2013
<http://www.jerm.com/2010/01/implementing-a-results-only-work-environment/>
15
"Best Buy Ending Work From Home - Business Insider." 22 Apr. 2013
<http://www.businessinsider.com/best-buy-ending-work-from-home-2013-3>
16. 16
opinion, this is an inappropriate way to address employees. It basically tells the employees they
are not unique and they can be replaced at any moment. This approach frustrated and
demotivates staff members. It seems like Best Buy doesn’t care about their employees and is
actually moving away from one of its core principles, unleashing the power of people. The
company should be focused on their resources and labor, treat employees as their main assets in
order to satisfy customers. This is one of the main reasons why the company fails in
performance. The company should follow this statement: “Treat your employees the way you
want your customers treated – maybe even better!” Shep Hyken16
, that is the golden rule for a
company’s success. If Best Buy does not give priority to their employees, they cannot match
customer satisfaction; which is the key factor for generating profit.
Best Buy is currently at the strategic inflection point. The company should identify the
ways how to pass through the “valley of death”. “An event that changes the way we think and
act.”17
– Andy Grove (founder of Intel). According to this, Best Buy should change its mindset
and its approach to different issues in order to experience the business heights. Most importantly,
the company’s top management should break down the walls between different levels of
employees and make everyone to be part of the process. This activity will change the mindset of
its employees and will make them feel that they are needed to overcome these obstacles.
Source: http://blogs-images.forbes.com/christinecomaford/files/2012/10/fig2-1_inflectionPT_color1.jpg
The graph shows inflection point in a relationship with time. The company’s steps determine whether
company will go down or move up.
16
Shep Hyken. "Treat Employees Like They Are the Customer - Shep Hyken | Shep ..." 2011. 9 May. 2013
<http://www.hyken.com/customer-service-3/1123/>
17
Grove Andrews; Only paranoid Survive; New York,USA; April 1999;
17. 17
4. Segments
Best Buy Co. operates in two main segments:
Domestic segment – consists of the operations in all states in U.S.
International segment – consists of the operations in Canada, Europe, China and
Mexico.
4.1 Withdrawal from Turkey
The company operated in Turkey for fourteen months. It entered the market in October of
2009 and opened two stores. Surprisingly, in a relatively short period of time the company
decided to withdraw from the Turkish market and close both stores there18
. Turkey is considered
as the best emerging market in the Middle East for Best Buy, but the company decided to
concentrate on cost savings which were a part of the global strategy at that time.19
Best Buy
faced strong competition on the market from local and foreign players20
. However, competition
should not be the reason for withdrawal, as a businesses’ main challenge is to become the leader
in the market by offering different value added services and gaining competitive advantages
amongst rivals. If we look at the date when Best Buy started to operate in Turkey, it can be
doubted that the company chose the wrong time for expansion, because of strong macro-
economical shifts in that period. It is hard to say what was the reason of failure but it is obvious
that the company would have lost huge amounts of money from these investments.
4.2 Withdrawal from Europe
The recent news related to Best Buy’s withdrawal from the European market became the
discussion topic of the business world. On April 29, the company officially confirmed that they
are going to exit from the European market by selling its 50% stake in its joint venture with
Carphone Warehouse Group for £500 million ($775 million) that is two times less than the
company paid for it in 2008. Due to international segment loss occurred in fiscal year 2013, and
the European market failure in general, CEO of the company commented: "after reviewing the
business and spending time with our partners, we concluded that the timing and economics were
18
"Best Buy Says Bows Out of Turkey” Anadolu Agency." 2012. 22 Apr. 2013
<http://www.aa.com.tr/en/news/35330--best-buy-says-bows-out-of-turkey>
19
"Where now for Best Buy internationally? – Rob ... - Blog - Emap." 2011. 9 May. 2013
<http://blog.emap.com/Rob_Gregory/2011/02/23/where-now-for-best-buy-internationally/>
20
"Top ranking retailers in Turkey - Retail-Index." 2011. 22 Apr. 2013
<http://www.retail-index.com/HomeSearch/TopretailersinEuropebycountry/ToprankingretailersinTurkey.aspx>
18. 18
right to enter into this agreement."21
Withdrawal from the European market can turn out to be a
great move for the company as it will concentrate more on its core market in the U.S.
5. Industry analysis
Best Buy operates in the consumer electronics industry. This industry is rapidly growing
and changing. It is important that companies follow these changes to stay competitive in the
market. Industry revenues reached $209B, a 5% growth from the previous year22
.The CE
(Consumer Electronics) industry grows year by year which leads to ongoing shifts in customer
preferences. “The 2012 Accenture Consumer Electronics Products and Services Usage Report”23
states, that smart phones and tablets are ‘power players’ of revenue growth in CE industry
(appendix)ii
. It also discusses the customers’ expenditure compared to their income sorted by
country.(appendix)iii
This graph explains which geographical area is more demanding and gives
the companies’ the ability to see their emerging markets.
As U.S. is Best Buy’s main segment, CE sales in the country is volatile. Consumer
electronics sales showed $4 billion decrease compared to year 201124
.
21
"AFP: Best Buy withdraws from Europe - Google." 2013. 9 May. 2013
<http://www.google.com/hostednews/afp/article/ALeqM5jX0slSwOhzvnzrnyJYWMRnoehxzw?docId=CNG.6c1cdea465165c3cf433a997ff0cb8
5d.21>
22
"CE Industry Revenues to Reach Record-High ... - Yahoo! Finance." 2013. 22 Apr. 2013
<http://finance.yahoo.com/news/ce-industry-revenues-reach-record-165800686.html>
23
"The 2012 Accenture Consumer Electronics Products and Services ..." 2012. 9 May. 2013
<http://www.accenture.com/SiteCollectionDocuments/PDF/Accenture_EHT_Research_2012_Consumer_Technology_Report.pdf>
24
"Consumer Electronics Industry Posts $4 Billion Loss in 2012." 2013. 22 Apr. 2013
<http://www.gottabemobile.com/2013/02/20/consumer-electronics-industry-posts-4-billion-loss-in-2012/>
19. 19
Source: The NPD Group/Consumer and Retail Tracking Services and Mobile Phone Track
This graph shows U.S. quarterly consumer technology sales from Q3 2011 to Q4 2012. We can clearly see
that industry is volatile. 2nd
quarter of 2012, was the peak period for sales declining. It fell nearly by 5% compared
to previous quarter. However, in the next period it showed noticeably less % of sales decrease and finally the last
quarter gives the hope for growth of sales in the industry.
Unstable industry issues are influencing every company’s performance which operates in
this market. All these quick shifts in customer preferences point out how dynamic and volatile
the industry is. Best Buy fails to adapt to these changes on time, which is the key driver of their
poor performance.
5.1 Current Market Situation
5.1.1 Price Wars
The industry consists of both, store-based retailers and online retailers that create a price
war within the market. Online retailers’ prices are much lower than traditional ones for a number
of reasons. First, online retailer businesses have smaller overhead costs because they don’t have
to pay rent, not having high electric bills and also no substantial labor costs (no sales people).
Secondly, customers pay lower taxes (shipping costs are smaller than local sales tax at a retail
store) and sometimes shipping is even free. Store-based retailers have lots of expenses but more
ability to persuade customers to buy the product through sales people. In today’s world,
technology is easily accessible and due to competition prices are getting lower. It is obvious, that
customers are willing to pay less for the same product on-line (with the help of show-rooming)
20. 20
than walk into the retail stores and pay more. These reasons prevent store-based retailers from
competing effectively for customers and performing better25
.
5.1.2 Show-rooming
Due to the price war between two types of retailers, show-rooming became a major
concern for traditional store-based retailers. The Consumer Electronics industry uses show-
rooming more than any other industry in the world (appendix)iv
. Show-rooming26
is defined as
checking out the product in the store and buying it online for a lower price. This issue is gaining
more power every year. Customer decision is divided into 3 stages. At stage 0, companies are
introducing their prices which are monitored by customers. At stage 1, customers can evaluate
the product they are about to buy in two different ways – visit retail stores or go online. Visiting
an actual store gives the person an opportunity to experience the product and better identify their
needs, but it can be costly (transport cost). On the other hand, visiting a website doesn’t incur
any costs but it is hard to identify the product properly. The last stage is to decide by which
channel it is more convenient to purchase the product. It can be made either by direct (online) or
indirect (traditional store) channel27
.These stages show that customers have the ability to choose
the method of purchase in order to maximize their surplus (saving). Online retailers launch new
services to keep customers and attract them. As an example, Amazon introduced a price-check
app for comparison shopping. Customers are able to scan bar codes in stores and compare prices
with Amazon. This new application increases competition and gives a great competitive
advantage to the company.28
Best Buy is one of the B&M (Brick & Mortar) retailers that are victims of show-rooming.
Best Buy faces tough competition from its main online retailer Amazon. Customers are
examining products in big-box stores and then purchasing the same products from online. It
means that online retailers are taking customers away from traditional retail businesses; this
decrease in customers naturally leads to poor performances.
25
"Cost Analysis: Starting A Retail Store Vs. An Online Ecommerce ..." 2012. 19 Mar. 2013
<http://www.smartt.com/cost-analysis-starting-retail-store-vs-online-ecommerce-business>
26
"Showrooming Definition | Investopedia." 2012. 19 Mar. 2013
<http://www.investopedia.com/terms/s/showrooming.asp>
27
Mehra, A. "Competition With “Showrooming” Between Store and Online Retailers." 2012
. <http://www.teis-
workshop.org/docs/2012/Amit_Mehra_Competition%20With%20Showrooming%20Between%20Store%20and%20Online_TEIS_2012_draft.pdf
>
28
Erik Kain. "Amazon Price Check May Be Evil But It's the Future - Forbes." 2011. 22 Apr. 2013
<http://www.forbes.com/sites/erikkain/2011/12/14/amazon-price-check-may-be-evil-but-its-the-future/>
21. 21
6. Products & Brands of Best Buy Co., Inc.
6.1 Brands
Best Buy – operates in both, domestic and International segments. It offers consumer
electronics, computing and mobile products, entertainment products, appliances and
related services.
Best Buy Mobile – retailer of mobile phones and related services. Company operates in
the US and Canada.
Future Shop – the main retailer of consumer electronics in Canada, offers analogous
products as Best Buy Co. Best Buy operates a dual brand strategy in Canada, that means,
two divisions are competing individually29
.
Magnolia Audio Video – US-based retailer which offers audio and video products, home
integration systems (control systems, remote systems, energy management) and
accessories30
.
Geek Squad – “We take care of your technology needs – so you don’t have to.”31
Geek
Squad is a home technology support business, offers services such as consultation,
protection, installation and setup, tune-up and backup, repair, trade–in and recycling for
each product Best Buy offers. It operates in the US, Canada, Europe and Mexico.
The Carphone Warehouse – One of the main retailers in Europe that offers similar
products as Best Buy Mobile.
Jiangsu Five Star – offers the same product lines and services as Best Buy in China.
Pacific Sales – offers kitchen, Bath and home improvement products with its services. It
operates in the domestic segment32
.
The Phone House – Europe’s largest telecommunications retailer provides the same
products as the Carphone Warehouse.
29
"RetailWire Discussion: Best Buy Goes Dual Branding Route." 2011. 19 Mar. 2013
<http://www.retailwire.com/discussion/9283/best-buy-goes-dual-branding-route>
30
"Magnolia - Home." 2003. 19 Mar. 2013
<http://www.magnoliaav.com/>
31
"Geek Squad." 2009. 19 Mar. 2013
<http://www.bestbuy.com/site/Electronics/Geek-Squad/pcmcat138100050018.c?id=pcmcat138100050018>
32
"Pacific Sales - Kitchen, Bath & Electronics." 2007. 19 Mar. 2013
<http://www.pacificsales.com/kitchen_bath_electronics/>
22. 22
6.1.1 Dual Branding Strategy
Best Buy has quite a high number of acquisitions that are operating independently. The
names of those brands are original and have nothing to do with the Best Buy name. For example,
Future shop is operating in Canada, offering similar products as Best Buy and it competes with
Best Buy Canada.
Dual-branding strategy is when two companies are competing by the same firm under
different and unrelated brands.33
This strategy has advantages such as leaving smaller space to
competitors, give customers the ability to experience various brands, have internal competitive
environment within the company, increase market share (Future shop competes with Best Buy
Canada for better performance) that overall gives great results. On the other side, dual branding
is dangerous in relation to “cannibalism.”34
This marketing term describes the competition
between two or more of a company’s brands that “eat” each other’s sales. Mainly, those brands
are competing for the same customers; which can decrease their revenues. Moreover, a company
which has implemented the dual-branding strategy experiences higher costs than usual, such as
marketing, training and operation expenses. For example, when the company invests in
marketing of Best Buy Canada, they should also think about another subsidiary, Future shop that
needs to be advertised as well. Lastly, customers are not aware of the case that Future Shop and
Best Buy Canada operate under the same company, which can blur or even destroy the brand
recognition. Although it is tough to manage dual-branding, Best Buy is a company that
productively implemented this strategy. Top management decided to take a risk and this step
combined with the right timing led them to success. The company launched the dual-branding
strategy in the fiscal year 2003 which gave Best Buy an opportunity to perform better and
increase their sales.35
As a result of the achievements in Canada, the company is planning to
implement a dual branding strategy in China as well36
. Jiangsu Five Star and Best Buy China
will operate separately and become each other’s competitors. Even though dual-branding works
in Canada effectively, it is doubtful whether this strategy will succeed in a totally different
33
"What is multi-brand strategy? - BusinessDictionary.com." 2007. 22 Apr. 2013
<http://www.businessdictionary.com/definition/multi-brand-strategy.html>
34
"What is cannibalism? definition and meaning - BusinessDictionary ..." 2007. 19 Mar. 2013
<http://www.businessdictionary.com/definition/cannibalism.html>
35
"Cases in Marketing Management." 22 Apr. 2013
<http://books.google.com/books?id=fI74N3u4USwC&pg=PA127&lpg=PA127&dq=best+buy+canada+sales+growth+after+dual+branding&sour
ce=bl&ots=aPxFbGXwcf&sig=WgN4jLWqhwQ6bck7pdxns2_0Eyc>
36
"Best Buy unveils dual-brand strategy for its return to China ..." 2011. 22 Apr. 2013
<http://www.wantchinatimes.com/news-subclass-cnt.aspx?id=20111025000063&cid=1102>
23. 23
market. Five Star in the Chinese market is a greatly established and well-known brand that is
rated as the third largest consumer electronics retailer in the country. On the other hand, today’s
micro and macro environment in China, gives Best Buy an optimistic view that they can double
the company’s success through the Chinese market. In my opinion, it is a huge risk to apply the
strategy in China, but proper management can drive a company to increase profit through dual-
branding.
6.2 Products and Services Mix
Best Buy offers a wide selection of products that are divided in four main parts and its
related services as well37
.
1. Consumer Electronics – it primarily concentrates on two main products, video and audio
products. This section includes televisions, home theaters and accessories, cameras and cam
recorders, Audio products are audio and MP3 players, home theater audio systems and
components, car, marine, GPS, movies & music, health & fitness & sports.
2. Computing and Mobile Phones – this section offers office supplies, computer & tablets,
networking equipment, and mobile Phones.
3. Entertainment – this part consists of videos, toys, video games and home products.
4. Appliances – includes major and small appliances.
5. Services – extended warranties, product repair, computer-related services, delivery and
installation, recycling of old products and customer service.
Best Buy’s wide range of products in these five categories provides their customers with
the opportunity to select products according to their taste and preferences. Best Buy’s services
such as Geek Squad, are a way to engage with customers in a supportive and helpful manner.
7. Sales & Marketing
7.1 Sales Channels
Best Buy Co. differentiates itself and gains a competitive advantage by having multiple
channels of selling. Multi-channel selling is one way to match customer needs and wants, make
a convenient environment for them and increase the sales in return. The company uses two
primary channels38
:
1. In stores (indirect selling)
37
"BBY-2012-10K." 2012. 19 Mar. 2013
<http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>
38
"BBY-2012-10K." 2012. 19 Mar. 2013
<http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>
24. 24
“We draw customers in and let them play.”39
The big-box stores not only
offer products but provide Geek Squad support services and Magnolia
Home Theater services.
Best Buy Mobile Stores – offers Smartphones, tablets and ipads, E-
readers, accessories, related services and plans.
Kiosks – “’The Store’ that lives in the busiest locations around the
country.”40
Best Buy Express is a small shop that is most often located in
high traffic areas such as airports, casinos, malls, etc.
2. Online web site (direct selling) - offers products with services and online discounts as well.
Products are shipped or can be picked up in the store.
3. Call Centers (direct selling) – customer can make orders by phone. Best Buy call centers
provide customers with products and services as well.
According to Accenture, 51% of customers who made purchases in 2012 used only
consumer electronic retail stores, compared to only 20% of online shopping (appendix)v
. This
implies the fact that clientele still prefers offline purchases, rather than online. Best Buy tries to
incorporate online and offline marketing in order to reach both types of shoppers. Accenture
statistics show the importance of multi-channel sales and Best Buy has been successful in
managing this.
7.2 Marketing Strategy
Best Buy recognizes the need for as well as benefits of social networks in relation to
business and has more than seven different official pages on both Facebook and Twitter. It
encourages customers to be engaged in the company’s everyday activities. It also offers twenty-
seven different web sites for various products41
. It is true that Best Buy is a giant in the retail
industry and has diverse types of businesses, but having twenty-seven websites can be quite
confusing for customers. Many times it also can affect a company’s brand recognition. Many
brands like Dynex, Insignia and Init are hard to connect with Best Buy, because of the absence of
the common logo or any other type of connection. It is a marketing pitfall, because it should
concentrate on enhancing brand recognition with as many tools as possible and instead, these
39
"In Store Placements - Best Buy On | Media Kit." 2011. 19 Mar. 2013
<http://www.bestbuymediakit.com/store/placements>
40
"Best Buy Express Placements - Best Buy On | Media Kit." 2011. 19 Mar. 2013
<http://www.bestbuymediakit.com/store/bby-express-placements>
41
"More Best Buy Sites." 2011. 22 Apr. 2013
< http://www.bestbuy.com/site/Global-Promotions/Best-Buy%20Websites/pcmcat256300050025.c?id=pcmcat256300050025>
25. 25
websites continue confusing customers by having an undefined origin. On the other hand, all
these businesses are different and it will be hard to incorporate all of them into one web site, but
at least a relative connection should be made between them. Another interesting fact is that
Future Shop, which operates in Canada and sells Best Buy’s products, tries not to be associated
with the company by offering different type of marketing and customer experience approaches.
In 2012 the company hired Starbuck’s former CIO in order to improve various
applications for mobile purchasing.42
This field is very important for the company, because it is
competing with Amazon, Wal-Mart and Costco whom all have successful marketing strategies.
In order to outperform competitors and increase value to customers, Best Buy established
partnership with Samsung on April 4, 2013. The companies agreed to create store-within-store
concept, where specially-trained Samsung employees will be working in Best Buy’s stores in
order to help customers and provide them with specific information about Samsung products.
Best Buy will benefit from this partnership as it will strengthen its brand image and will generate
more profit.
Even though the company switched from printed advertising to digital ones, Best Buy
still does old school marketing via TV commercials, banners and weekly flyers that are still
considered to be effective tools. It is essential for multi-channel companies to do both, digital
and printed advertising in order to reach all target audiences.
Best buy also concentrates on B2B business and offers companies a special website
called the Best Buy Media Kit43
that explains all the advantages of posting an advertisement in
Best Buy stores. It also provides different possibilities of positioning posters and billboards
according to the willingness of companies. It tries to establish mutually beneficial relationships
with not only suppliers, but also with potential customers.
The retail industry is considered to be one of the most competitive markets. In order to
survive and succeed, companies need to strengthen their marketing strategies. It is very hard to
differentiate products especially when you do not produce them. For Best Buy, marketing should
pack and design all undifferentiated products in such way that make customers believe they are
purchasing more than a TV or mobile phone, marketing should create value for the clientele.
42
"Best Buy Hires Starbucks' CIO to Boost Online Sales - Forbes." 2012. 22 Apr. 2013
<http://www.forbes.com/sites/greatspeculations/2012/03/16/best-buy-hires-starbucks-cio-to-boost-online-sales/>
43
"Overview - Best Buy On | Media Kit." 2011. 22 Apr. 2013 <http://www.bestbuymediakit.com/overview>
26. 26
Best Buy’s brand awareness is quite high, as the company does a lot of advertising and
has high visibility in the countries in which they operate. If we take into consideration the fact
that Best Buys’ revenue is annually increasing, we can assume that its marketing strategy is
working well. On the other hand, there are always aspects that can be improved. Due to the
digitalization of many processes, including purchases, Best Buy has to adapt to different these
new processes. Nowadays, customers are more powerful than they have ever been. In order to
gain customer loyalty, the company has to offer not only high quality products, but also enable
consumers to have easy accessibility, understandable websites and updates about products.
7.1.2 Pricing Strategy
In order to be competitive in today’s world price is extremely important. Differentiating a
company by lower prices is the key for success. Best Buy’s problems started with pricing issues,
as their prices were higher than its competitors, such as Amazon, eBay and Wal-Mart. This issue
led to “show-rooming”. Show-rooming is the reason why the company’s financial performance
is relatively low and showed loss in the FY 2012 compared to previous years. The new CEO,
announced a price matching policy that became permanent (not only for holiday seasons) after
March of 2013. The company reported a low price guarantee program with the slogan, “Find a
lower price and we will match it.”44
The company is ready to match the price of local retailers
and nineteen other major online retailers in all product categories including Amazon, Apple,
Target, Wal-Mart, Sears, HP, Dell and many more. If a customer finds a lower price on a
product, Best Buy will match the price with competitors and moreover, if the company lowers
the price within fifteen days (shortened return policy by 50%) after the customers purchase, the
company will still match the price.45
The price-matching strategy could potentially be the first step for the company to return
to its previous place at the top of the market. It could also serve as a chance to get back its
customers, who switched to competitors because of lower prices. However, this strategy is
connected with big amount of costs, decreasing its gross margin that is going to be affected on
Net Income. Best Buy’s Christmas Holiday season was the great example of losing money by
price matching strategy. On Christmas holiday season 2012, Best Buy offered discount on
iPhone, 50% off and decreased the price down to $149.99 while Wal-Mart dropped the price to
44
"Low Price Guarantee." 2012. 19 Mar. 2013
<http://www.bestbuy.com/site/Global/Low-Price-Guarantee/pcmcat290300050002.c?id=pcmcat290300050002>
45
"Best Buy ends 'showrooming' with Low Price Guarantee | BBY ..." 2013. 19 Mar. 2013
<http://pr.bby.com/best-buy-ends-showrooming-with-low-price-guarantee/>
27. 27
$127. Wal-Mart’s new discount caused trouble for Best Buy. As a result of the company’s price
matching policy Wal-Mart’s new price forced Best Buy to decrease prices at the same level that
led to $65,000 loss only for the iPhone46
. These losses may serve as a positive however, if the
company is able to gain customers and switch to a new strategy.
8. Customers
The customer, in any business, is the main driver of a company’s sales. Best Buy’s
industry name, Consumer Electronics, speaks for itself. Companies in this industry are heavily
concentrated on customer needs and trying to find ways to offer them a wide range of selections
and trying to implement policies that will lead to customer satisfaction.
Best Buy is one of the companies who struggles with meeting customer needs and cannot
catch up to fast changing customer preferences. High prices on products and the in-store
experience are the main reasons why the company has lost a lot of its customers.
8.1 Types of Customer
Discount Customers – are the frequent visitors (online, in stores) but they only purchase a
product when a discounts is offered from the company. The holiday season in retail stores is a
period of significant discounts. So that, Best Buy has a lot of discount customers that help the
company to generate sales. It is important for the company to satisfy these customers by offering
bigger discounts than other competitors. Also, Best Buy offers various product discounts
periodically that attracts discount customers to shop and visit Best Buy stores or online more
often.
Wandering Customers – are customers who don’t have any intention to buy something. These
type of customers are all about trying out the product, check its advantages and disadvantages
and then decide what to buy (depending on product’s features). Best Buy has a great opportunity
to attract wandering customers by having well-trained employees in the store in order to inform
customers properly and persuade them to buy the product they are interested in.
Impulse Customers – customers in this category are making purchases unexpectedly. As best
buy offers consumers vast selections, the company is mostly catching a lot of impulse customers’
attention.
46
"iPhone 5 discount wars lead to $65,000 in losses for Best Buy | Ars ..." 2013. 19 Mar. 2013
<http://arstechnica.com/apple/2013/01/iphone-5-discount-wars-lead-to-65000-in-losses-for-best-buy/>
28. 28
Need Based Customers – these customers have specific needs and know exactly what they want.
They are hard to please because of their demands. However, Best Buy has twenty-five major
suppliers which provides a wide range of selections for customers. The advantage of having
extensive choices helps the company to draw customers into the store.
8.2 In-store experience
The CEO of Best Buy, Hubert Joly commented about show-rooming: “once customers
are in our stores, they’re ours to lose.”47
The CEO discusses show-rooming not as a bad thing but
as a driver for customers to enter the stores. This gives them the chance to interact with buyers
and get them to purchase products in the store. In 2004, Best Buy took a customer-centric
approach48
meaning that the company should look at the company through the lenses of the
customers’. Best Buy’s management at that time knew they couldn’t compete with prices and
that was the reason for establishing this model. The company succeeded in establishing the
program and showed great performances throughout the years.
However, Best Buy went far from the customer-centric model and challenges itself in
delivering a great experience for buyers which is a major factor why customers switched to its
competitors. Best Buy’s customers complained based on their experience in the stores and that
directly affected the company’s image. Also, whenever buyers are displeased with the service,
instead of listening to customers and satisfying them, the company did nothing or even treated
them improperly. Meanwhile the company frequently violates customer protection laws. As an
example, a customer who filed a lawsuit against Best Buy for breaking the law received a letter
from the company announcing that he was banned from entering and shopping at any of Best
Buy’s stores. Another major issue is poorly trained employees. Best Buy’s staff was unable to
match customer’s demands which were provoked by lack of training.49
These issues show that the
company has literally no idea what customers really want and why it is so important to be
concerned about them.
47
"Best Buy CEO: Let's embrace "showrooming" - CBS News." 2012. 19 Mar. 2013
<http://www.cbsnews.com/8301-505125_162-57549273/best-buy-ceo-lets-embrace-showrooming/>
48
"Best Buy Rolls Out Customer-Centricity Program - CRM Buyer." 2004. 22 Apr. 2013
<http://www.crmbuyer.com/story/33698.html>
49
"BBY - Untrained Employees Do Not Know How To Process Pho... - Best ..." 2012. 22 Apr. 2013
<http://forums.bestbuy.com/t5/Manufacturer-Warranties-and/Untrained-Employees-Do-Not-Know-How-To-Process-Phone-Insurance/td-
p/630596>
29. 29
Source:http://experiencematters.wordpress.com/2013/02/27/2013-temkin-experience-ratings-2/
This graph shows us at what rate retail companies deliver customer experience. We can clearly see that
Best Buy has a quite low ranking. Its percentage is ‘okay’ that is obviously not enough to compete with other
retailers in this environment. Analyzing each three factors that determine customer experience – emotional,
functional and accessible, Best Buy has huge problems on functional and emotional side. These two factors are
really important that drives people to spread positive thoughts in society and come back.
Meanwhile, analyzing the customer intelligence report (see appendix)vi
, in every section,
including customer service, reliability, general satisfaction, price, returns, exchanges and
business, the negative opinions had greater proportion than the positive ones.
Those reports should be the driver for the company to think of remodeling its customer
service policies and make much more effort to deliver better services. The company fails to
address this issue. In annual report from the year 2012, Best Buy talked about customers saying:
“we don’t have a significant concentration of sales with any individual customers and therefore,
the loss of any individual customer would not have a material impact on our business.”50
This
type of approach is dreadful for business. Best Buy should take all the factors and aspects into
50
"BBY-2012-10K." 2012. 19 Mar. 2013
<http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>
30. 30
consideration and start to care for each individual as they struggle to become competitive in the
market again. Keeping and attracting new customers should be the main goal for Best Buy to
improve their performance.
9. Market competition
Competition is one of the most influential pressures to any company in any industry.
Consumer electronics is an extremely competitive industry. Companies must be able to keep up
with the shifting of the customer’s preferences and attitudes in order to gain a competitive
advantage through innovation.
Best Buy experienced competitive rivalry from online-retailers that affected the
company’s profit and market shares. According to statistics, the U.S. online sales in 2012
reached $226 billion compared to $202 billion sales in 2011. The average amount customer spent
during the year of 2012 is $1,207 that has potential to grow up to 45% by 201651
. Undoubtedly,
the size of competitors in the industry is significant that can become a basis of dramatic results
for companies, such as going out of business. “We compete for customers, employees, locations,
products and other important aspects of our business.”52
The company identifies three main groups of competitors in its annual report:
1. Company’s vendors (selling products directly to customers without distribution) – Companies,
which produce products and sell directly to customers without distribution in retail stores,
increases competition within the industry. Apple, Dell, Sony, HP, Samsung, and all other
companies producing electronics and selling to customers by direct or indirect sales channel, are
the competitors of Best Buy.
2. Internet-based businesses – As I discussed above, growth rate of online sales from the past
decade is steadily increasing. Competition occurs in online sales and players such as Amazon,
eBay, Netflix and others which are doing well online are big threats for Best Buy.
3. Traditional store-based retailers – companies which are store-based are implementing new
strategies in order to avoid show-rooming, match prices, keep up the changes and stay
competitive on the market. RadioShack, Target, Wal-Mart, Staples, Sears, Costco and many
others are direct competitors for Best Buy.
The main competitors out of these groups are Amazon, Apple Inc, and Wal-Mart.
51
"E-retail spending to increase 62% by 2016 - Internet Retailer." 2012. 19 Mar. 2013
<http://www.internetretailer.com/2012/02/27/e-retail-spending-increase-45-2016>
52
"BBY-2012-10K." 2012. 19 Mar. 2013
<http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>
31. 31
Amazon53
(NASDAQ:AMZN) an online retailer, provides online retail shopping
services. The company operates mainly in two segments – North America and
International. The company focuses on selection, price and convenience. Selection –
Amazon tries to provide customer by wide range of selection. Price offers customers the
lowest price possible, plus no shipping costs. The biggest threat for Best Buy from
Amazon is low prices that are the main reason for show-rooming. As Amazon an online
retailer, it has much lower costs than others that gives it an advantage in today’s world
and builds a highly competitive environment within the industry (see appendix 3)vii
. The
graph shows that Best Buy has the second highest percentage of high prices after Apple
Inc. with 23% lower prices than other competitors which is quite low.
Apple Inc.54
(NASDAQ:AAPL) designs manufactures and markets its products. The
company operates worldwide through its retail stores, online stores, and direct sales
force, as well as through third-party cellular network carriers, wholesalers, retailers, and
value-added resellers. Apple also sells digital content and applications through iTunes.
This became a great problem for Best Buy’s products mix. As Best Buy sells CDs and
DVDs, customers are not willing to buy them any longer, as they have switched to online
versions and can download music and movies from iTunes. Another great advantage
Apple has over Best Buy is customer in store experience. The Company’s main goal is to
satisfy their clientele and create such an experience that will drive customers to come
back and become loyal. Also, as discussed above, a company’s direct selling makes
company more competitive and Best Buy has difficulties to compete with Apple Inc.
Wal-Mart55
(NYSE:WMT) operates worldwide. It has three main revenue segments –
Wal-Mart U.S., Wal-Mart International and Sam’s Club. Company has multi-channel
selling. It operates through its retail stores and online. Although the company is not
focused on consumer electronics sales and is a bigger chain than Best Buy, Wal-Mart is a
traditional store-based company that operates in the same way as Best Buy. Those two
companies are competing with each other for low prices and vast selection. They are in
53
"Amazon Media Room: Company Facts." 2005. 19 Mar. 2013
<http://phx.corporate-ir.net/phoenix.zhtml?c=176060&p=irol-factSheet>
54
"AAPL Profile | Apple Inc. Stock - Yahoo! Finance." 2010. 19 Mar. 2013
<http://finance.yahoo.com/q/pr?s=AAPL+Profile>
55
"WMT Profile | Wal-Mart Stores, Inc. Common St Stock - Yahoo! Finance." 2003. 19 Mar. 2013
<http://finance.yahoo.com/q/pr?s=WMT>
32. 32
competition for the same customers and both try to compete by delivering better
customer service.
This graph compares Best Buy’s and its 3 main competitors’ financial results within the industry. When
comparing these results we can clearly say that Best Buy’s performance is the poorest matching up to all of its
competitors. There are significant differences in market capitalization, net income/loss. If we compare to direct
competitor, Wal-Mart, difference in net income is 419.54B that indicates Best Buy’s failure in performance. PEG
(Price/Earnings to Growth ratio) is negative in Best Buy’s case that means the more stock can be undervalued.
Andy Grove writes, "The first mover and only the first mover, the company that acts
while the others dither, has a true opportunity to gain time over its competitors--and time
advantage, in this business, is the surest way to gain market share”56
. From the analysis, it is
obvious that Best Buy is definitely not “the first mover” and fails to adapt to industrial changes.
As the market competition analysis showed, Best Buy is facing harsh competition from several
companies. Rivals are outperforming Best Buy almost in every financial index. It is very hard for
the technology retail company to differentiate its products, but the concentration should be made
on pricing strategy and customer experience. Switching costs are very low for consumers and
56
Grove Andrews; Only paranoid Survive; New York,USA; April 1999;
33. 33
Best Buy should come up with strategies that will enable it to maintain customers, create value
for them and offer reasonable prices. These factors will allow it to differentiate from rivals and
gain a competitive advantage. It is vital for Best Buy to implement pull rather than push
strategies to attract and maintain customers.
10. Competitive Advantage
Best Buy has lost its competitive advantages throughout the time. Online retail
competitors made the industry shrink. Before the changes in the shopping experience Best Buy
differentiated itself by having big-box stores. Nowadays, customers switch from offline to online
shopping that threatens company’s big-box store model. Meanwhile, the company’s strong
customer service started to decline because due to lack of well-trained employees. Even though
the company is closing stores throughout the U.S. and Europe, Best Buy still has the ability to
differentiate itself from competitors by having great accessibility. Its stores are located in many
states and multi-channel sales make it is easier for customers to shop everywhere. Furthermore
Geek Squad can also be a competitive advantage, because it creates the value to consumers,
when there is a special service that offers installation and tuning up services. It is a good way of
personalizing products and engaging clientele with supportive way. Besides accessibility and
Geek Squad, Best Buy does not have any advantage over its competitors. The company has
serious difficulties to regain its previously strong competitive advantage and perform on a high
level. This problem should be the measurement for the company on how they operate and what
changes they should make in order to reach their goals. Best Buy should offer customers a better
experience, with new features or value-added services.
11. PESL Analysis
As technological and environmental factors are not significant in analyzing Best Buy’s
current case in a relationship with its external factors, only political, economic, social and legal
factors will be discussed.
Political factors
Best Buy Inc. is regulated by the US law and also it should meet all legal requirements of
those countries that the company operates in. The company mentions in its code of business
ethics report, “If a local law conflicts with our Code, we follow the law; if a local business
34. 34
practice conflicts with our Code, we follow our Code.”57
Laws addressed to Best Buy are mostly
tax policies, privacy policies and employee protection laws.
Tax policies are the major issue in the retail world and companies from this industry are
highly depended on it. Changes in tax policy are significant for every retail business. For
example, On March 22, 2013 the US Senate voted on and passed the Marketplace Fairness Act.58
It basically supports e-fairness, meaning that every state is allowed to oblige online retailers to
collect taxes. Best Buy is delighted with the new tax policy, the CEO of the company
commented that, “It is critical that today’s sales tax laws reflect this new world, because when
businesses compete fairly consumers and communities benefit.” In order to compete equally in
the market, businesses should have the same conditions. Although the policy will negatively
affect consumer’s expenditure, I think that new tax policies build a more fairly competitive
environment. It also gives B&M store retailers a sense of fairness amongst online retailers.
Meanwhile, “Best Buy engages in the political process by developing and advocating
public policy positions that directly impact our employees, customers, shareholders and
communities.”59
It encourages employees to take part in the political activities personally and
professionally. The company forum – PAC – The Best Buy Employee Political Forum gives
employees the ability to participate in the election process, contribute their personal funds to help
candidates that empathizes the issues related to Best Buy and its industry.60
This activity is
basically interpreted as a ‘legal bribe’ that helps Best Buy to establish good relationships with
candidates, the Senate in order to use them for its own interest.
Economic Factors
The economy plays a major role in the CE industry and vice versa61
. Consumer
expenditure shows the financial situation in general and besides the retail sector is the largest
employer of the national labor force62
. How much consumers can afford to spend determines the
profitability of firms and the viability of the economy. On the other hand, as far as Best Buy is as
57
"BEST BUY Code of Business Ethics - EthicsPoint." 2010. 22 Apr. 2013
<https://secure.ethicspoint.com/domain/media/en/gui/26171/code.pdf>
58
"nexusetailers Marketplace Fairness Act Amazon eBay Best Buy ..." 2013. 22 Apr. 2013 <http://www3.cfo.com/article/2013/4/tax_nexus-
etailers-marketplace-fairness-act-amazon-ebay-best-buy-target-dick-durbin>
59
"2012 Political Activity Report - BBY – Best Buy News." 2013. 22 Apr. 2013
<http://pr.bby.com/wp-content/uploads/2012/10/2012-Political-Activity-Report-PDF.pdf>
60
"Best Buy PAC - Best Buy's BlueGrassRoots." 2011. 22 Apr. 2013
<http://www.bluegrassrootsnetwork.com/welcome/best-buy-pac>
61
"A look at economic factors that affect retail sales - by ... - Helium." 2009. 22 Apr. 2013
<http://www.helium.com/items/1597780-a-look-at-economic-factors-that-affect-retail-sales>
62
"America's Ten Largest Employers - 24/7 Wall St." 2011. 22 Apr. 2013
<http://247wallst.com/2011/04/24/americas-ten-largest-employers/>
35. 35
a US domiciled company, US economic conditions greatly affects the company’s operations.
“The historic slowdown in the economy and its effect on our business over the past ninety days
have been the most challenging consumer environment our company has ever faced,” said Brad
Anderson, former CEO of Best Buy. Economic downturns and especially GFC (Global Financial
Crisis) in 2008 caused customer related challenges. The Great Recession led to dramatic increase
of the unemployment rate. Unemployment reached its peak in October of 2009 at 15.38 million,
compared to just 7.15 million in 2007. Unemployment was the main driver of decline in
discretionary income that is directly affected to retail industry sales. As consumer expenditure
narrowed at that time, the company had to make some changes in order to survive. Best Buy
announced voluntary separation packages for employees to reduce corporate expenses63
. !! This
strategy allowed the company to maintain their position in the market. By the end of the fiscal
year of 2008, there was a steady increase in revenues and even net income grew slightly by
2.18%. Although the company did its best to adopt changes for the financial crisis, the GFC was
too strong. Best Buy’s performance started to shrink and the growth rate of operating income
was negative in 2009, -13.57% compared to previous the year. At this point in time the US
economy is on track to recovery, but there is still a relatively high unemployment rate – 7.7%.
Best Buy is very much dependent on the economy. Consumer expenditure is vital for all
CE companies. Electronics are not something that is necessary to survive. There are luxury
goods people buy to satisfy their wants and without the economy doing well, it is hard for
companies to generate sales and gain profit.
Social Factor
As Best Buy operates internationally, social factors directly affects the company. While
Best Buy doesn’t have to use marketing tools in order to diversify products, when it comes down
to indirect sales channel, it needs to find the right marketing approaches for different audiences.
If the US big box stores use a specific style to convince customers to buy the product, it will
probably not work in China. Therefore, Best Buy should adjust to cultural differences and use a
more customer based approach as they are in the market. For instance, the company should
advertise differently to each market to gain proper customers’ interest and loyalty. Meanwhile,
each product has its own age group customers so the company should make proper marketing
campaigns to address the products to the right customers. For example, the iphone buyers’ age
63
"Best Buy Continues To Prepare For Difficult Economic Environment." 2013. 22 Apr. 2013
<http://www.ecoustics.com/products/buy-continues-prepare-difficult-economic/>
36. 36
group is lower than TV buyers’. Best Buy should understand their target audience and make
marketing campaigns that will address the right customers.
Legal Factors
Best Buy tries to fulfill its legal obligations. Even though the company announces code of
ethics every year and shows that they are all about legacy, a huge number of filed lawsuits prove
them wrong. Those lawsuits are filed by various stakeholders such as employees, customers and
by companies64
as well. One of Best Buy’s core values is to show respect, humility and integrity.
Discrimination is directly addressed as a violation of its values.
There are many cases when employees or general managers accuse Best Buy of
breaching employee protection policy and discrimination. For example, a lawsuit filed in 2005
alleged that Best Buy discriminates against African-American, Latino and female employees by
denying desirable jobs and promotions. According to the court decision, the company paid
$200,000 to the plaintiffs and $10 million in legal fees. After that, the company focused more on
employee protection and in 2011 the company announced a settlement of an employment
discrimination class action65
, but they still failed to maintain it.
Directly after approval the class action settlement, the general manager sued the company
for religious discrimination and also requested to end the discriminatory BOLO (“Be On the
Look Out”) program. The plaintiff won the case and Best Buy was obliged to pay $1 million to
the manager for the damages they caused66
. Besides that, more importantly, customers are the
ones who file lawsuits against the company most often. Disappointed customers make websites
such as www.bestbuybadbuyboycott.blogspot.com and www.best-buy.pissedconsumer.com.
Also for anyone who is interested in customer experiences related to Best Buy, it is easily
accessible on blogs, forums and websites. All these blogs unsatisfied customers create and write
on, negatively affects future or existing customer’s decision making process. Customer
complaints and lawsuits show that the company doesn’t really care about individuals and tries to
draw a big picture where everything looks good. As a result, the company loses its customers,
destroys WOM marketing, and pays a lot of money for lawsuits and damages. Going back to the
64
"TechForward Wins $27M In Lawsuit Against Best Buy ... - TechCrunch." 2012. 22 Apr. 2013
<http://techcrunch.com/2012/12/05/techforward-wins-27m-in-lawsuit-against-best-buy-over-stolen-trade-secrets/>
65
"Best Buy Employment Discrimination Class Action Lawsuit and ..." 2011. 22 Apr. 2013
<http://bbclassaction.com/>
66
"Best Buy Lawsuit: Manager Allegedly Fired After ... - Huffington Post." 2011. 22 Apr. 2013
<http://www.huffingtonpost.com/2011/06/30/bestbuy-lawsuit-manager-a_n_887760.html>
37. 37
company’s core values, it is hard to say that company follows its core values and concentrates on
its employees and customers.
12. Porter’s Five Forces
12.1 Threats of new entrants
The threat of new entrants in the CE industry is moderately high. This means that there is
room for new players. In order to enter the electronics industry, a company needs high capital
and long-term investment. Another boundary that industry has is well-known brands. For
instance, Best Buy’s brand image is very strong and to establish a new brand that will threaten
Best Buy’s position in the market will be extremely tough.
12.2 Power of buyers
CE industry is all about customers’ satisfaction that drives company’s sales. Bigger
volume of customers is better for operations. Players in this industry should be focused on each
buyer in order to keep each one of them and generate revenues from them. Customers can choose
from plenty of CE retailers in relation to prices, products, services and a selling channel that best
meets their needs and wants. Taking advantage of multiple alternatives available in the market,
buyers have power over retail companies. For example, if a customer is frustrated by one
Rivalry
HIGH
Threat of
Entrants
MODERATELY
HIGH
Power of
Buyers
HIGH
Threat of
Substitutes
LOW
Power of
Suppliers
HIGH
38. 38
company, it is quite easy for him or her and cost nearly nothing to switch to one of the
competitors and find better products and or services. If a Best Buy or Wal-Mart customer is
price-sensitive, they can easily change selling channels and purchase goods online which are
cheaper than store-based retailers. Customers have a wide range of selections where to shop and
have very little or nearly no costs for switching suppliers. This is the reason why the power of
the buyers is considered to be high.
12.3 Power of Suppliers
Retail companies which do not produce anything on their own are completely dependent
on their suppliers. It is vital for every company to understand the importance of suppliers as far
as they play a huge role in company’s sales. As Best Buy reports, “our success is dependent upon
satisfactory and stable supplier relationships.” (source)The company has twenty-five large
suppliers, which gives the company the opportunity to have a wide range of products in order to
meet customer’s demands. Five of the main suppliers out of twenty-five, like Apple, Samsung,
Sony, Hewlett-Packard and Toshiba represent 40% of the total merchandise purchased. (annual)
Based on this info, the company should be aware that there is only a small number of brands
(five main suppliers) that the market demands and Best Buy should try to keep strong
relationships with them. Even though suppliers are also determined to distribute and sell their
products by various sales channels, it is more significant for Best Buy to be able sell well-known
products because there is no way for them to substitute these products with other lesser brands. If
Apple was to remove its products from Best Buy it would be fine because it has other retailers as
well as its own channels to sell the products through; however this would be a disaster for Best
Buy, because Apple represents a considerable amount of Best Buy’s revenue. The significance of
suppliers in generating revenues and in company’s performance, power of suppliers is regarded
as high.
12.4 Rivalry
Internal competition is a main porter’s force among Porter’s five forces in CE industry.
There are lots of players in the market and they try to differentiate themselves by offering value
added services. It is difficult to stay competitive in this environment, where there is a high price
pressure, room for show-rooming and actual sales decline in retail industry. Even though
companies seek to gain competitive advantages and to be unique, it is still hard to differentiate
due to the fact that companies mainly offer the same products. Meanwhile, there are almost no
switching costs for customers that make rivalry even harder.
39. 39
Best Buy’s competitors are really strong and have high brand awareness as well. Apple,
Wal-Mart and Amazon are the key rivals for the company. Apple is a supplier and a competitor
as well. It has various sales channels such as distribution to retail stores, online selling and its
own stores. The fact that the company is a manufacturer and a retailer together, customers who
are determined to buy Apple products are more likely to go and purchase products in Apple
stores rather than shop at Best Buy. Best Buy finds various threats from each of those
competitors whom are a challenge to the company’s efforts to perform well and deliver a
positive customer experience. Best Buy has however been able to restructure and introduce new
strategies to keep up and maintain to some degree its place in the market.
The competitive environment plays an important role in industry that gives customers
the ability to shop efficiently and save money; because of this reason rivalry within the industry
is quite high.
12.5 Threat of substitutes
Nowadays, technology is a major part of everyday life. Although, leisure activities, books
and movie theatres can be considered as technology substitutes, society still heavily relies on
technological innovations and it is nearly impossible to substitute those products. Therefore the
threat of substitutes is quite low.
Analyzing all five forces lead to the conclusion that this industry is not really favorable to
start a business in. Even though there is a low threat of substitute products, all other factors
which are the most significant are moderate to high or high. Rivalry inside the CE industry is
quite strong and even existing companies struggle with differentiating its products and offer
value proposition to customers. Based on these factors companies should consider entering other
industries besides consumer electronics.
41. 41
13. Activity System
The activity system map above shows five key activities that the company is engaged in.
This map gives a clear image of what Best Buy is doing at this point in time and shows what
should be improved in its performance. When the activity system and TOWS matrix (see below)
are tied up together, it leads to the company’s strategic alternatives.
13.1 Creating Customer Experience
The main area the company is concentrated in is ‘creating customer experience’. The
company fulfills its goal by various sub-activities. Price matching strategy is the one that affects
the shopping behavior of the customer’s and it is an effective tool not just to overcome show-
rooming but to embrace it with lower prices. As the power of buyers is high in the CE industry,
prices are one of the key factors why customers are switching. Even though the company has
hard times in establishing this strategy, (see price matching strategy), it is crucial to have
competitive prices for customer satisfaction which Best Buy is trying to reach through the cost
reduction process (cut COGS).
Employee training is another main activity for the company to bring customers into the
store. Good service is the key to customer satisfaction and that has a strong relationship with
sales. This activity is related to sales channel, no matter if it’s direct or indirect. This link needs
experienced and trained professionals to persuade customers that Best Buy is the best place to
buy. Best Buy has difficulties with employee training and plans to reinvest in this field (dashed
line indicates the weak relationship).
Offering loyalty programs to customers is one step in the right direction to become a
more customer-centric company again. The company has a Reward Zone Premium Silver card
that gives customers a lot of benefits. Another sub-activity that strongly affects the shopping
experience is Geek Squad, which attracts customers by supporting and taking care of their
technology.
It is vital for retail companies to have these value-added services in order to build the
customer centric environment inside the company. Lastly, the store itself is something that has a
major impact on the customers’. If store is not very well organized and confusing, shoppers will
most likely go to one of their competitors’ stores and purchase goods there. Best Buy started to
improve their store which increases effectiveness of indirect selling.
42. 42
Customer experience is directly linked to international market management. In order to
have a strong international presence and generate sales internationally, the company should make
it its goal to implement a great customer experience in each market.
13.2 International Market Management
As Best Buy has a global presence, it is important to manage the international market
properly and show efficient performance in every market. As discussed above (Segments), the
company conducts its business in the US, Canada, China, Europe and Mexico. The initiatives the
company has include Chinese market expansion that is quite demandable right now. As statistics
show, China is a great potential market for Best Buy to increase their sales. Best Buy implements
dual-branding strategy in China too, as they open both, Best Buy Mobile and Future shops.
Canada and China are the areas where the company finds the need for dual-branding, to generate
more profit.
In order to be competitive in any market, low cost is essential. So that, the international
market management is closely connected to ongoing cost reduction.
13.3 Ongoing Cost Reduction67
Best Buy announced a cost reduction plan to perform better and reinvest in a number of
fields. Firstly, the company decided to cut costs from corporate and support structure. Decreasing
IT service will negatively affect the company’s performance. Differentiating the business is
significant and IT services are one of the main tools for that. George Sherman, Vice President of
Best Buy services commented on this acquisition: “As important, the “mindSHIFT” team will
bring value-added experience, talent and resources to the remote support capability we have been
building within our multi-channel tech service unit Geek Squad.”68
These services assist the
company to gain a competitive advantage and cost reduction in IT area will weaken its services
delivered to customers.
Secondly, cutting corporate jobs is the company’s goal which reduces extra expenses
related to labor. It is not clear from which departments Best Buy is going to lessen positions, but
this is the way to reduce the costs that will be invested in different fields. Another area, Best Buy
finds essential to save money, is shutting the big box stores. According to changes in macro
environment and customer preferences, a big number of stores, especially with large square
67
"BBY-2012-10K." 2012. 19 Mar. 2013
<http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>
68
"Best Buy branches out with cloud, IT services with ... - VentureBeat." 2011. 22 Apr. 2013
<http://venturebeat.com/2011/11/07/best-buy-mindshift-acquisition/>
