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After hurdling Best Buy's two main problems which are the declining comps and margins, CEO Hubert Joly is faced with the problem of coming up and putting into action a strategic plan. The plan must conform so that it would enable BBY to create a sustainable competitive advantage. Additionally, it must gain the support and coordination of all of the company's main stakeholders who are its customers, employees, vendors, investors, and even the community. This "Best Buy Co., Inc." case study also presented an overview of Circuit City, Walmart, Target, Apple, and Amazon.com, all of which are BBY's main competitors.
Marne L. Arthaud-Day; Frank T. Rothaermel
Harvard Business Review (MH0038-PDF-ENG)
January 14, 2016
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Best Buy Co., Inc. Case Answers
Summary and Problem Statement – Best Buy Co., Inc.
“Sound of Music” was founded by James Wheeler and Richard Schulze in 1966, which was later renamed to Best Buy in 1983. The firm started as an audio specialty store and grew to become one of the largest consumer-electronics companies in the US. Growth for the firm was mainly through global expansion and acquisitions of smaller product -service-based firms. Best Buy reached 1 billion$ sales in 1992 and was one of the top 10 performing stocks from 1990 to 2000(Forbes). Also, Best Buy made international debut in Canada and continued international expansion in China, UK, Turkey, etc. by partnering or acquisition and/or by opening stores under Best Buy brand name.
However, due to the birth of online retailing, technology advancements, and poor leadership within the company, Best Buy (BB) experienced a significant downfall. Thus, it closed down most of its international stores or consolidated stores under its brand name. A new CEO Hubert Joly was hired in 2012 to combat the downfall, suggested a “Renew Blue” strategy to turnaround the situation. The strategy had two phases: the first one was to stabilize the downward trend of the firm and Joly was successful in doing the same in a span of 3 years. However, the second phase i.e. the path forward required a new strategy.
Given that Hubert Joly was able to reverse the trends for the poor performing Best Buy in 3 years, what strategy should the electronic retailer pursue in order to compete with its high performing “Online” & “Clicks & Bricks” rivals, and ensure sustainable growth?
The PEST Analysis, Technological: Improvements in technology are becoming increasingly rapid and technology is becoming cheaper and cheaper. The continuous evolution of technology and decreasing prices led manufacturers to cannibalize their products.
Physical Environment: Sustainability has become a major tool for companies to market their products/services in the consumer electronics industry. By being more environment-friendly, firms are increasing customer awareness and are differentiating themselves.
Socio-cultural & Economic Factors: Showrooming is increasing, which adds to the threat of physical stores in the consumer retail industry. Customers buy more electronics in the fourth quarter than in three-quarters combined. Also, most customers expect value-added services (repair, installation, assistance for usage) for the products that they buy.US civilian Unemployment rate has greatly reduced in 2015, after the economic recession in 2009.
Industry analysis [Consumer Electronics]
The consumer-electronic retail industry in the US have firms that use either “bricks-and-mortar” stores or “clicks & bricks” platform or “Online” platform to sell their products & services. The industry is highly seasonal and cyclical. US took a hit on the CAGR during the recession i.e. in 2009, but started recovering and grew by 1.5 % from 2010 to 2014. The projections for the future look average, which is not that enticing for a new entrant.
Porter’s Six Forces for Best Buy Co., Inc.
Threat of New Entrants: [Low] A physical store can be opened by a new firm if it has capital, warehouse, and an effective supply chain. However, it is difficult to enter the online electronic retailer market as customers would be hesitant to share their information, and competition is intense. Also, based on industry projections, there are top fortune companies in the market, which makes it even more unfavorable.
Bargaining Power of Suppliers:[Medium] Electronic product manufacturers are suppliers for the products e.g., Sony, Samsung, LG, etc. There are a few major suppliers that retailers have to depend on. However, retailer giants and leaders can opt for private labels too, which reduces supply power.
Bargaining Power of Buyers: [High] Buyers for electronic products are individuals and small businesses, and they are very price-sensitive and have no switching costs.
Industry Rivalry: [High] There was a high price war between existing competitors and competitors who used different channels to sell their products like online and in-store.
Threat of Substitutes & Complimentary products: There are no substitutes for electronic retail. However, within the industry, an electronic product can be bought through various channels e.g.: in a physical store or online. So “online” selling of a product is a substitute for a physical store. There are a number of complementary products/services that come along with electronic goods. Installation support, extended warranty, on-site assistance can be some of the complementary services which can help firms in generating additional revenues.
Overall Industry Attractiveness: Overall, considering the expected growth within the industry, the opportunities available in developing countries the rise of online sales, and existing competition, the overall industry attractiveness is Low to Medium.
Past and Current Competitors:
Circuit City: Founded in 1949, and had “big-box” stores to sell electronic products. A high percentage of revenues for the firm came from TV sales. When the housing market weakened and TV sales declined, Circuit City did not adapt to changing landscape and thus, couldn’t sustain itself in the market as it had high competition from Walmart and Best Buy. Also, key staff was fired by the firm’s CEO at the time of crisis, which even worsened the situation and eventually led to bankruptcy for Circuit City. Its competitors capitalized on the open market share.
Walmart: Walmart is the world’s largest retailer and has both in-store and online presence. It used Cost Leadership strategy [Exhibit 1] to sell its products, and post circuit city’s collapse it expanded rapidly into the consumer electronics segment. STR: Superior capabilities in Logistics. A great relationship with suppliers. The Strong online presence and global presence WEA: Poor sales led to a Reduction in floor space that was dedicated to electronics.
Amazon: Started as an online book retailer, and gradually entered the consumer electronics market. It is the largest online retailer, with no physical stores and had a Cost Leadership strategy [Exhibit 1] to ensure its lead over its competitors. STR: Third largest consumer electronics retailer. 2nd most valuable retail brand in 2015. The strong global presence and logistic network. No sales tax in states where the firm is not physically present. WEA: Struggling with private owned tablet and smartphone sales.
Apple: Has its own retail stores for selling Apple products and has the highest individual market share in the global electronics retail sector. The business-level strategy for Apple was focussed differentiation [Exhibit 1]. STR: Significant investment in designing retail stores and staffing the outlets. Experienced in electronic retail WEA: Earnings per share & market value decreased significantly in 2015. The potential loss of market shares to its competitors.
Target: Second largest Discount retailer in the US with 1790+ physical stores and by partnering with Amazon’s Enterprise solutions it enhances its grip in the online market. The firm had a focused differentiation strategy [Exhibit 1] as it catered to middle and high-class clients, with its extended service offerings. STR: Provided customized service for its focus group. Focus on products that required limited footprint, in turn saving space WEA: Struggled with sales and thus, it tried switching to cost leadership, which drove away one of its segments. History of data breaches leading to undermined customer trust.
Key Success Factors
Price is an essential differentiating factor as electronic customers are highly price-sensitive. Online presence is a necessity and an easy way to minimize operating costs. Value-added services and innovation of new technology can help prosper in this industry. [Exhibit 2] shortlists a few competencies to be successful in the industry.
Resources & Capabilities: Hubert Joly, CEO of Best Buy, has been able to…
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