Best buy-analysis


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Analysis of Best-Buy's Strategy as of March 2013.

Best buy-analysis

  1. 1.             Strategic Analysis Taposh Dutta-Roy (Word count : 4255)
  2. 2. Best Buy Strategic Analysis Submitted by: Taposh D.    Introduction Best Buy Co., Inc. (NYSE: BBY)is the global leader in consumerelectronics and appliances retail. It hasmore than 1,400 large and small-formatlocations, more than 160,000 employees,$50B in annual revenue and is the 11thlargest retail website in the UnitedStates. Best Buy maintains it has the largest share of the electronic and appliances segment at16%1. Best Buy is a big box store in the electronics retailing industry. Other firms competingwith Best Buy in this industry include Fry’s Electronics and HH Gregg. The industry previouslyincluded CompUSA and Curcuit City. These companies went out of business in 2008 and 2009respectively. Figure 1 (next page) maps the industry. The big box electronic retail industry isdifferentiated from other industries that sell electronics based on the physical size of the store(s),plotted on the x-axis, and variety of electronic inventory, plotted on the y-axis. Firms with smallor zero store square footage but sell a moderate-to-high variety of electronic inventory are withinthe electronics e-commerce retail industry. And, firms with very large store square footage andsell a moderate variety of electronic inventory are big box general merchandise retailers.   2
  3. 3. Best Buy Strategic Analysis Submitted by: Taposh D.    Figure 1   Despite holding the leading share in the big box electronic retail industry, Best Buy iscurrently a company in decline. The company is facing increasingly strong forces in its industrythat have had a negative impact on its business since 2008. This paper explores industry forces affecting Best Buy, that have resulted in its businessdecline. The following industry dynamics seem to be strengthening buyer power, supplier powerand substitution forces in Best Buy’s industry: • Showrooming - shopping brick and mortar retail locations to determine purchase preference, then buying online for a lower price   3
  4. 4. Best Buy Strategic Analysis Submitted by: Taposh D.     • More perfect consumer information - e.g. online and mobile price comparison tools • Price matching programs - driving down margins • Shifts in consumer electronic spend - away from computers to mobile products • Substitution - CDs and DVDs replaced by digital music and streaming servicesBackground Best Buy started in 1966 as an audio component systems retailer named Sound of Music.In 1983, the company changed its name to Best Buy. As part of the change the company beganusing mass market merchandising techniques and operating consumer electronic stores in the bigbox superstore format. The company has followed a differentiation strategy to create value fortheir customers. Best Buy operates retail stores throughout the United States, China, Canada, Europe, andMexico. The company sells products in a variety of categories including: consumer electronics,appliances, video games, music, movies, and musical instruments. Elements of theirdifferentiation strategy include: broad selection of products, home delivery, repair andwarranty services, in-home technical services, and financing. The company has also madeacquisitions and joint ventures to further differentiate and diversify its products and services.   4
  5. 5. Best Buy Strategic Analysis Submitted by: Taposh D.    Store Development and Format Strategy Best Buy’s store development program includes testing stores in new markets; addingstores within existing markets; and relocating, remodeling and expanding existing stores in orderto offer new products and services to customers. The company rolls out new stores following adeliberate process that starts with a detailed market analysis of a target metro area. Onceestablished in a metro area, the company expands into suburban areas and small-markets. Table 1 shows the total number of US Best Buy stores, number of stores opened andclosed, for last five years2. Table 1     2012 2011 2010 2009 2008 U.S. Best Buy stores 1103 1099 1069 1023 923 Stores opened 7 31 46 100 101 Stores closed 3 1 0 0 0Product MixBest Buy carries a large inventory of products ranging from consumer electronics, computers andmobile phones, entertainment products (DVDs, Video Games, CDs), and appliances. Table 2shows share of revenue for each product category.   5
  6. 6. Best Buy Strategic Analysis Submitted by: Taposh D.    Table 2Physical electronic and entertainment goods make up the bulk of Best Buy’s revenues.Best Buy’s Troubles To understand how much of Best Buy’s performance troubles are due to the industry itinhabits we have used Porter’s Five Forces model. Each of the five forces is analyzed below.Threat of New Entrants Opening a big box electronic store is capital intensive. According to Best Buys FY2012financial statements, the firm spent $766 million in capital expenditures on 300 new stores,remodeling projects to existing stores, and upgrading its information technology infrastrucure.The average big box store is over 20,000 square feet and employs over 75 people. Firms in thisindustry spend millions of dollars on property, plant and equipment to penetrate national andglobal markets to capture market share. HH Gregg and Best Buy also spent $2.2 million and $2.4million, respectively in SG&A per store, and $7.8 million and $8.8 million, respectively, in cost   6
  7. 7. Best Buy Strategic Analysis Submitted by: Taposh D.    of goods sold per store in FY2012. The amount of initial investment to open a big box electronicretailer is well over $15 million - significant enough to deter new entrants. Additionally, incumbents have advantages because of multiple establishments, brandvalue and relationship with channels. This creates a considerable barrier for new entry. Multipleestablishments in a local region makes it easy for customers to purchase a product. If one chainlocation happens to be out of stock of a particular item, the retailer can easily redirect fromanother chain location’s inventory. Leaders in this industry have an international presence andhave reached economies of scale. The threat of new entrants in the big box electronics retailingindustry is low.Bargaining Power of Suppliers The industrys revenue relies heavily on the major suppliers. For example, the largest 20suppliers account for 60% of merchandise purchased from Best Buy, the dominant firm in theindustry. The industrys suppliers, Dell, Apple, Samsung, Vizio, LG, Sony, and Yamaha amongothers, provide electronics and appliances to the firms stores and warehouses. Suppliers in this industry are subject to influence by large volume buyers. For instance,Best Buy leverages its position as a share leader for electronics with its suppliers. Best Buy’sproduct teams can influence product development and design3. Best Buy and other leaders in theindustry also carry exclusive items in special arrangements with suppliers. Bargaining power ofsuppliers is moderate for this industry.   7
  8. 8. Best Buy Strategic Analysis Submitted by: Taposh D.    Bargaining Power of Buyers The industry’s customers are individuals and small businesses who use electronics forentertainment, leisure, or business. In the past, customers had been extremely fragmented whichlimited their ability to organize and influence the price of goods and services that firms offer. Inrecent years, the industrys customers power has been increasing. The majority of items sold by big box electronics retailers are undifferentiated and areavailable in other retail stores or online. As a result, buyers are inclined to go for price shoppingand play one vendor against another. Online tools provide customers with near perfectinformation about price availability from competing retail outlets. When shopping forelectronics, 81% of consumers go to a company’s website for information versus 61% ofconsumers going to the brick and mortar store4. The availability of online information andpricing perpetuates the behavior known in the industry as showrooming. To fend offshowrooming the industry has been implementing price-matching policies for online or retailstores4. The bargaining power of buyers in the industry is high.Availability of Substitutes   Substitutes to big box electronic retailers include electronic e-commerce retailers (e.g.Amazon, eBay,, big box general merchandise retailers (e.g. Wal-Mart, Target,and Costco) and digital content distributors. (e.g. Netflix, iTunes, X-box Live). E-commerceelectronic retailers are considered substitutes because the companies in this industry are able toprovide similar products while offering the convenience of shopping at home or at work.   8
  9. 9. Best Buy Strategic Analysis Submitted by: Taposh D.     Electronic commerce firms provide an alternative experience to the big box electronicretailers’ showroom experience. A key differentiating benefit of e-commerce retail is the ease ofpresentation of relavant information for consumer decisionmaking, such as like-productrecommendations and customer reviews. It is possible for e-commerce retailers to conductbusiness under a very different cost structure than Best Buy. Without physical store locations andstaff to support each sale, these firms are often able to offer goods at lower price points than thebig box electronic retailers. Big box general merchandise retailers can serve as a substitute to big box electronicsretailers because these firms offer customers with economies of scope. General merchandiseretailers allow customers to purchase a variety of household goods, including electronics, in onestore. A key differentiator between big box electronic retailers and big box general merchandiseretailers is that the diversity of inventory. Another substitute threat to the big box electronics retail industry is the emergence ofdigital content. More customers are consuming content via online services. These services, suchas Netflix, iTunes and X-box Live, are replacing the DVDs, CDs and video games that havemade up the 4th largest segment of Best Buy’s revenues (Table 2, page 6). According to a 2011 e-Commerce and Consumer Electronics report from the NPGGroup, televisions and home theater systems are some of the least likely products that consumerswould purchase via online electronic retailers. However, the report indicates that computers,tablets, and movies are products that consumers would more likely purchase online4.   9
  10. 10. Best Buy Strategic Analysis Submitted by: Taposh D.     Additionally, Accenture’s 2012 Consumer Electronics report indicates, that TV and DVDownership decreased by 7% year over year6. Economics teaches us that we can determine whether a product is a substitute based on itsprice elasticity of demand against another product; as the price of a substitute Product Bdecreases, the demand of Product A good will also decrease. As e-commerce electronic and bigbox general merchandise retail industries are able to supply electronics to the market at lowerprices, they have captured a larger share of the overall electronic industry pie. Figure 2 illustrateshow Best Buy, the leading big box electronics retailer, faired against the leading firms in the e-commerce electronic and big box general merchandise industries in Q4 2011.Figure 2  The threat of substitutes in the big box electronics retailing industry is high.   10
  11. 11. Best Buy Strategic Analysis Submitted by: Taposh D.    Intensity of Rivalry Rival forces have spawned significant action in recent quarters that have reduced profitmargins in the industry. The pure electronics store segment has become more concentrated inrecent years as Circuit City and CompUSA went out of business. However, for overallelectronics and appliance sales (including online sales) there are several large players. Theselarger competitors, selling identical products, have forced aggressive competitive activity. Pricematching programs are now commonplace in the industry and new programs and services, suchas trade-in programs, have been introduced. Establishing a big box store is both capital and resource intensive. A large amount ofinvestment is required to rent a large space in a prime location and maintain inventories. The exitbarriers for big box stores causes strong rivalry in industry, increasing price competition andtraining customers to pay more attention to price than services provided by the stores. Rivals in the industry are competing on many fronts. Players in the industry offer bothconvenient physical locations as well as an online presence. Nearly all industry players haveloyalty programs and engage customers with promotions. Intensity of rivalry is high in the big box electronics retailing industry.Recommendation Our analysis of the industry using the Five Forces Framework indicates that the industrysperformance should decline. Evidence of decline can be found in the consolidation of theindustry and Best Buys recent performance. Two of the dominant players in the industry,   11
  12. 12. Best Buy Strategic Analysis Submitted by: Taposh D.    CompUSA and Circuit City, were forced to close their doors in recent years as a result of thestrength of the Five Forces. Both were large competitors in the industry. In 2008 Circuit City’sannual revenues were $11.7 billion, and in 2006, CompUSA’s revenues topped $4 billion.According to a 2010 report by Gap Intelligence, approximately 55% of Circuit City shopperswere planning to transition to Best Buy7. This statistic correlates to the 1.7% same store salesgrowth for Best Buy in 2010, the only year in which same store sales growth was positive from2008 through 2012. However, Amazon’s revenues from consumer electronics grew by 74% from2009 to 2010. Best Buy’s financial statements provide insights on the industry. Best Buy is by far thelargest firm in the big box electronic retail industry in terms of sales and market cap. As ofMarch 2013, Best Buy’s market cap of $6.8 billion was greater than the combined value of thenext four largest public competitors at $4.8 billion according to March 2013 Yahoo! Financedata. From 2005 to 2007, Best Buy’s annual revenue growth was between 11.8% and 16.5%.Same store sales in 2006 and 2007 were 4.9 and 4.1% respectively. From 2008 to 2012, BestBuy’s revenue growth declined from 11% to 1.9%. During the same period, same store salesplummeted to as low as -3%. Top line growth was driven primarily from new stores until 2011and 2012 when revenue growth declined to 1% and 1.9%, respectively. From 2008 to 2012,Amazon, a key substitute for the big box electronic retail industry, experienced revenue growthbetween 27.1% and 40.6%. During this period, Amazon’s revenues from electronics (excludesmedia) saw year over year increases between 34.4% and 74.2%.   12
  13. 13. Best Buy Strategic Analysis Submitted by: Taposh D.     e-Commerce, digital goods, consumer information are increasing the power of buyers andincreasing the threat of substitutes. Big box general merchandisers are also executing on low coststrategies that are outperforming the differentiating strategies of the big box electronics retailers. To compete with emerging threats in its industry Best Buy must change course. Theymust leverage their assets in a more focused way to fend off competition. Best Buy must changetheir strategy from differentiation to one of focused differentiation.Focused Differentiation Strategy Best Buy must reduce the variety of products that it carries by eliminating items forwhich there are superior substitutes. This includes all media and electronic games. Instead thecompany must focus solely on leading edge consumer electronics and supporting componentsand peripherals. By focusing solely on leading edge technology Best Buy will be able to betterutilize their strategic assets and differentiate their offering from their competitors and substitutes.With this new strategy Best Buy will no longer carry items that have saturated the market and arecommonly understood. Instead they will only carry a supplier’s most current product from eachof their product categories. This will help the company take advantage of public interest in aproduct or product category. It will also position the company to be a leading source of expertiseon a product. Best Buy’s new strategy will require that they leverage their internal systems, physicallocations, internet properties, and expertise in personal electronics integration to create value andprovide industry leading customer service. These strategic resources are a key component to   13
  14. 14. Best Buy Strategic Analysis Submitted by: Taposh D.    their future success. Synergy between them will be valuable to the company, rare amongst itscompetitors, and difficult to imitate or substitute.Internal Systems Best Buy’s internal systems for training must be augmented to guarantee that their storeand online support employees have strong and timely knowledge of leading technologies,devices, and configurations. This is a critical piece in executing the recommended strategy andmust be implemented using the company’s internal IT and technology resources. Because of itsposition in the industry Best Buy has broad access to a multitude of products and suppliers. Thisperspective must be used as inputs into their internal training system. This is something thatBest Buy must keep in-house because timely knowledge of products and services is a criticalcomponent to their value proposition.R&D Best Buy must establish an R&D competence. The industry in which Best Buy competesis being transformed by substitutes that are firmly rooted in technology innovation. Best Buywill only achieve industry leading customer service if they are able to utilize technology to betterunderstand their customers in the context of the their unique value proposition. The R&Dorganization must focus on developing methods to better understand and reach Best Buycustomers across a growing landscape of interaction points. The R&D organization must minecustomer data and patterns to create new ways to understand and service their target segments.They must focus on ways to unify and improve customer experience across both virtual and   14
  15. 15. Best Buy Strategic Analysis Submitted by: Taposh D.    physical platforms (e.g. phone and physical store). One area where R&D can drive innovation isin real-time price matching for physical stores.Physical Locations Best Buy’s physical locations are an important differentiator. Unlike their internet basedcompetitors and substitutes Best Buy has hundreds of physical locations, many in primelocations, across the United States, Canada, Mexico, and Europe. These locations providecustomers with an opportunity to interact with a product before purchasing it. The key here is tokeep the customer by enticing him or her to buy while they are in the store. Best Buy’s customerbehavior group has identified its customers as “Angels” and “Devils”8. Angel customers arethose who boost profits and Devils are those who use Best Buy’s showroom and staff to gainproduct information and buy it elsewhere. To combat the Devils, the company is price matchingcompetitors, but they can do more. Best Buy must become a leader in real-time price competition in both their online andphysical locations. The company can price match on large or expensive items that bring peoplein the door and sell the accompanying services and accessories at a higher margin.The company’s stores are also important because of their proximity to the customer. Productscan be purchased and returned more conveniently in the same day. This is something that cannotbe easily matched by an online competitor. Best Buy’s store development strategy should be focused on increasing their retail pointsof presence, while decreasing their overall store square footage (average: 37,000 square feet), forincreased flexibility in a multi-channel environment.   15
  16. 16. Best Buy Strategic Analysis Submitted by: Taposh D.     Best Buy has come up with new concept of “Connected Store”, which they plan to rollout sometime this year2. A Connected Store will be a remodeled store that focuses onconnections, services and an enhanced multi-channel experience through a total transformationof both the physical store and the operating model. We agree with this direction. Further, we recommend converting the physical store in to ashowroom for their products. This means an open, hands-on environment where shoppers cantouch and use an actual device before making a purchase decision. We believe that a solutionoffering, a showroom structured store and a multi-channel connectivity will enable them toenhance the connection between shoppers and product experiences.Fulfillment Best Buy’s physical stores provide important opportunity for the company todifferentiate. Today, stores serve as a fulfillment center for online and phone orders. We believethe stores should be used as fulfillment centers for same-day delivery to customers in theimmediate geographic area. The company must again leverage their internal R&D and ITdepartments to improve or develop the systems necessary to coordinate product distribution andfulfillment. Such a system will build on the company’s strategic resources to create a processwhich is valuable, rare among competitors, difficult to imitate or substitute. Best Buy’s virtual properties must provide an experience which is seamlessly consistentwith the physical stores. The company must capture shoppers who visit a physical store to try adevice but complete their purchase online with a different retailer. With improved, home grown,technology Best Buy must guide user experience from their online channels to their physical   16
  17. 17. Best Buy Strategic Analysis Submitted by: Taposh D.    locations while learning more about the customer’s wants and needs along the way. To achieve aseamless integration the company’s internal logistics system must be integrated to serve stores,physical customers, and online customers.Employees In January 2012, Best Buy was ranked 6th among most hated companies9 by its customerswhen it could not deliver thousands of orders placed for Christmas in 2011. Instances ofmismanagement like these cost Best Buy with bad reputation, negative customer sentiments andfurther alienated it from ever depleting customer base. The company’s line staff must be knowledgeable not only on technology and deviceconfiguration but also on the various products and services that are available to enable oraugment a product. The company must focus on store employees who should exude passion fortechnology and the brands that the company sells. Best Buy’s store employees are the front lineto the customers who visit their retail locations. The customer likely has information on theproduct that they want to purchase. The store employees can add value by demonstrating indepth knowledge about the product and how it integrates with other products or services that areavailable in the store. With hands-on demo units, store employees can delight customers by demonstrating howa device integrates and works with supporting products and services. Functioning demo unitsacross product categories will help the company realize the industry leading customer servicethat is strategic to their success.   17
  18. 18. Best Buy Strategic Analysis Submitted by: Taposh D.     Turnover rates in retail sales are predictably high compared to other sectors. According toan analysis of BLS data by the National Retail Federation, nearly a quarter (24.6 percent) ofretail workers voluntarily left a job in 2010, substantially above the national average of 16.4percent10. At the end of fiscal 2012, Best Buy employed approximately 167,000 full-time, part-timeand seasonal employees worldwide. Best Buy’s turnover rate is 37%11. Best Buy needs to reducethe employee turnover rate. We recommend Best Buy to turn their employees into brandmessengers. Our strategy of narrow focused differentiation, will lead to selling cutting edgeproducts. This will attract early adopters of technology, who have a passion for sharing theirknowledge as potential employees. These new employees will have a strong affinity to the BestBuy brand.Organization StructureTo execute this strategy and ensure the required focus on synergy the company must restructuretheir three sales channels to fall under a single multi-channel senior vice-president. Alsoreporting to this role will be the Regional Fulfillment vice-president. This role will work closelywith the store managers to streamline online and phone order fulfillment and store deliveries.The company must create corporate level R&D and Training departments. R&D will beresponsible for creating tools and solutions that can be deployed across sales channels. Thetraining department will primarily serve the customer facing employees with relevant and timelytraining on products and services being offered by the store.   18
  19. 19. Best Buy Strategic Analysis Submitted by: Taposh D.    Sustained Competitive Advantage The big box electronics retail industry that Best Buy is a part of is under under attack.The industry is battling nimble substitutes and internal enemies. Best Buy is the largest and most   19
  20. 20. Best Buy Strategic Analysis Submitted by: Taposh D.    well known of the group. Substitutes like and EBay are making significant gainsoperating as eCommerce only stores. Walmart and Target are winning with a broaddifferentiation strategy. Best Buy must change its strategy from differentiation to focuseddifferentiation to compete. Best Buy company has several strategic resources that can be leveraged in the fight for itssurvival. Because of its size it maintains favorable access to suppliers and their upcomingproducts. The company has stores in prime locations across the country and internationally. Thecompany has well trained employees across its locations. Finally Best Buy has, because of itshistory and configuration, internal systems and processes that help to move products to storesand into customers’ hands. To win as a focused differentiator Best Buy must reduce both the size of their stores andthe type of products offerred. They must drop products for which there are superior substituteslike audio and video media, and videogames. The stores and online channels should only carry aselection of leading edge electronics and appliances, and supporting products and periferals.Products which have not yet saturated the market will benefit more from the value that Best Buyoffers, Face-to-face customer service by knowledgeable employees in convenient locations. Thecompany will continue to compete in the online channel and should increase the integrationbetween their physical and online stores. The company must invest in research and developmentto find ways to increase the synergy between their resources and customers. The physical storesmust be leveraged to provide online shoppers with fast and efficient same-day delivery.   20
  21. 21. Best Buy Strategic Analysis Submitted by: Taposh D.     If the company can cultivate synergy between their strategic resources they will establisha sustainable competitive advantage.   21
  22. 22. Best Buy Strategic Analysis Submitted by: Taposh D.     Appendix Exhibit 1: Best Buy Five Elements of Strategy   22
  23. 23. Best Buy Strategic Analysis Submitted by: Taposh D.     Exhibit 2: Best Buy – Porter’s Five Forces   23
  24. 24. Best Buy Strategic Analysis Submitted by: Taposh D.     Exhibit 3: Value Chain Analysis Exhibit 4: Best Buy Stores going out of Business     24
  25. 25. Best Buy Strategic Analysis Submitted by: Taposh D.    Works Cited1 Chang, A. (November 2012). Best Buy’s new CEO outlines turnaround plan. Retrieved Feb. 14,2013, from MarketWatch: Best Buy FY Annual Reports on Form 10-K, as retrieved from: Edwards, C. (December 2009). Why Tech Bows to Best Buy. Retrieved Mar. 7, 2013, from The NPD Group, (September 2011). e-Commerce and Consumer Electronics: Online Shoppingand Purchasing. Wolf, A. (January 2013). Target Extends Online Price-Match; Best Buy May Follow. Accenture (2012). Consumer Electronics Report. Fishman, J (March 2010). The Demand Creation Vacuum – Who is Going to Step Up.Retrieved March 7, 2013, from McWillimas, G. (Nov. 2004) Analyzing Customers, Best Buy Decides Not All Are WelcomeRetrieved March 15, 2013 from,,SB109986994931767086,00.html  9 Hudson, B. (January 2012). Best Buy Among ‘Most Hated’ For Customer Satisfaction. Asretrieved from: Labor Turnover in the Reatil Industry. Retrieved March 7, 2013 from   25
  26. 26. Best Buy Strategic Analysis Submitted by: Taposh D.    11 Listen Carefully to Best Buy CEOs Take on Employee Turnover Rate. March 8, 2013 from:   26