Best Buy Co., Inc. – Case Solution

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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 and was later renamed Best Buy Co., Inc. 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 in sales in 1992 and was one of the top 10 performing stocks from 1990 to 2000(Forbes).

Also, Best Buy made its international debut in Canada and continued international expansion in China, the UK, Turkey, etc., by partnering or acquiring and/or opening stores under the 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 and suggested a “Renew Blue” strategy to turn around 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 Co., Inc. 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?

EXTERNAL ANALYSIS

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 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. The US civilian unemployment rate greatly reduced in 2015 after the economic recession in 2009.

Industry analysis [Consumer Electronics]

The consumer-electronic retail industry in the US has firms that use either “bricks-and-mortar” stores or “clicks & bricks” platforms or “Online” platforms to sell their products & services.

The industry is highly seasonal and cyclical. The 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.

The threat of New Entrants: [Low] A physical store can be opened by a new firm if it has capital, a 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 online and in-store.

The Threat of Substitutes and 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, and on-site assistance can be some of the complementary services that can help firms generate 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, it 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 the changing landscape and, thus, couldn’t sustain itself in the market as it had high competition from Walmart and Best Buy Co., Inc.

Also, key staff was fired by the firm’s CEO at the time of the 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 an in-store and online presence. It used the Cost Leadership strategy [Exhibit 1] to sell its products.

Post-Circuit City’s collapse, it expanded rapidly into the consumer electronics segment.

Strengths: Superior capabilities in Logistics. A great relationship with suppliers. The strong online presence and global presence

Weaknesses: 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.

Strengths: Third largest consumer electronics retailer. 2nd most valuable retail brand in 2015. The strong global presence and logistic network. There is no sales tax in states where the firm is not physically present.

Weaknesses: Struggling with privately-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 focused on differentiation [Exhibit 1].

Strengths: Significant investment in designing retail stores and staffing the outlets. Experienced in electronic retail.

Weaknesses: Earnings per share & market value decreased significantly in 2015. The potential loss of market shares to its competitors.

Target

It is the second-largest discount retailer in the US, with 1790+ physical stores. By partnering with Amazon’s Enterprise solutions, it enhances its grip on 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.

Strengths: Provided customized service for its focus group. Focus on products that require a limited footprint, in turn saving space.

Weaknesses: 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.

Internal Analysis

Resources & Capabilities: Hubert Joly, CEO of Best Buy Co., Inc., has been able to…