Bachelors Thesis_Best Buy Co.

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

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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.

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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.

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Contents

1. Executive Summary .................................................................................................................... 7

2. Introduction ................................................................................................................................. 8

2.1 Brief history........................................................................................................................... 8

2.2 Vision Statement ................................................................................................................. 10

2.3 Mission Statement ............................................................................................................... 11

3. Company’s culture .................................................................................................................... 12

3.1 Company’s corporate governance ...................................................................................... 12

3.2 Changes in Management ..................................................................................................... 12

3.3 Corporate Values ................................................................................................................. 13

3.4 Work environment............................................................................................................... 14

3.4.1 Results-Only Work Environment .................................................................................. 14

3.4.2 “All hands on deck” ..................................................................................................... 15

4. Segments ............................................................................................................................... 17

4.1 Withdrawal from Turkey ..................................................................................................... 17

4.2 Withdrawal from Europe ..................................................................................................... 17

5. Industry analysis ....................................................................................................................... 18

5.1 Current Market Situation ..................................................................................................... 19

5.1.1 Price Wars .................................................................................................................... 19

5.1.2 Show-rooming ............................................................................................................... 20

6. Products & Brands of Best Buy Co., Inc. ................................................................................. 21

6.1 Brands.................................................................................................................................. 21

6.1.1 Dual Branding Strategy ................................................................................................ 22

6.2 Products and Services Mix .................................................................................................. 23

7. Sales & Marketing .................................................................................................................... 23

7.1 Sales Channels..................................................................................................................... 23

7.2 Marketing Strategy .............................................................................................................. 24

7.1.2 Pricing Strategy ............................................................................................................ 26

8. Customers ................................................................................................................................. 27

8.1 Types of Customer .............................................................................................................. 27

Discount Customers ............................................................................................................... 27

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Wandering Customers ........................................................................................................... 27

Impulse Customers ................................................................................................................ 27

Need Based Customers .......................................................................................................... 28

8.2 In-store experience .............................................................................................................. 28

9. Market competition ................................................................................................................... 30

10. Competitive Advantage .......................................................................................................... 33

11. PESL Analysis ........................................................................................................................ 33

Political factors .......................................................................................................................... 33

Economic Factors ...................................................................................................................... 34

Social Factor .............................................................................................................................. 35

Legal Factors ............................................................................................................................. 36

12. Porter’s Five Forces ................................................................................................................ 37

12.1 Threats of new entrants ..................................................................................................... 37

12.2 Power of buyers ................................................................................................................. 37

12.3 Power of Suppliers ............................................................................................................ 38

12.4 Rivalry ............................................................................................................................... 38

12.5 Threat of substitutes .......................................................................................................... 39

13. Activity System ....................................................................................................................... 41

13.1 Creating Customer Experience.......................................................................................... 41

13.2 International Market Management .................................................................................... 42

13.3 Ongoing Cost Reduction ................................................................................................... 42

13.4 Efficient Supply Chain Management ................................................................................ 43

13.5 Multi-channel Sales ........................................................................................................... 43

14. Financial Analysis ................................................................................................................... 44

14.3 Revenue & Net Income ..................................................................................................... 45

14.6 Leverage ratios .................................................................................................................. 48

14.7 Activity ratios .................................................................................................................... 48

14.8 Goodwill ............................................................................................................................ 49

15. SWOT Analysis ...................................................................................................................... 51

15.1 Strength ............................................................................................................................. 51

Brand Recognition ................................................................................................................. 51

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Multi-channel Sales ............................................................................................................... 52

Geek Squad ............................................................................................................................ 52

Wide range of products.......................................................................................................... 52

15.2 Weaknesses ....................................................................................................................... 52

Weak Brand Image ................................................................................................................ 52

Unsatisfied Customers ........................................................................................................... 52

Ineffective Supply Chain ........................................................................................................ 53

Poor Financial Performance ................................................................................................. 53

15.3 Opportunities ..................................................................................................................... 53

Global Expansion .................................................................................................................. 53

Customer Centricity ............................................................................................................... 54

Online market share growth .................................................................................................. 54

15.4 Threats ............................................................................................................................... 54

Intense competition ................................................................................................................ 54

Macro-economic Trend ......................................................................................................... 55

Customer preferences shift .................................................................................................... 55

16. Current Strategy ...................................................................................................................... 55

17. TOWS Matrix ......................................................................................................................... 56

18. Strategic Alternatives .......................................................................................................... 57

18.1 Expansion to Emerging Markets by Using Direct Sales Channel (online sales) .............. 57

18.2 Improve Cost Structure by Managing SCM Efficiently ................................................... 59

19. Recommended Strategy – Facilitating Great Customer Experience through 5 Steps ............ 60

Conclusion .................................................................................................................................... 65

Bibliography ................................................................................................................................. 66

Appendices .................................................................................................................................... 72

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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;

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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/>

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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

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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>

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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;

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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>

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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>

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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.

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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

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;

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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

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

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

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> 27Mehra, 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

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

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

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

“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

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

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

$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

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

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

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

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

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

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

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

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

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

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

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

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.

40

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

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/>

43

footage are not necessary anymore. Online operations increase throughout the time, so that the

company should keep up with it and finds the way to decrease their expenses. Even though

closing the store is related to the costs such as rent contracts payment, payrolls, these savings

(decrease in store-related expenses) will be illustrated in the long term.

Lastly, Best Buy started to decline production cost. Cutting COGS is a really great and

ambitious move from the company’s side. If Best Buy manages to do it, the company will face a

dramatic increase in profit. Relationship with suppliers is the answer to cutting costs of

production. It will positively affect the company’s performance, as it should decrease expenses

in the future and illustrate higher profits over the next years. However, after this announcement,

Best Buy still faces high cost structure and it is not clear how the company is going to reach this

goal (low cost structure).

13.4 Efficient Supply Chain Management

Consumer electronics retailers are strongly depended on its suppliers. Companies should

make sure that they have diversified products to meet customers’ needs and wants. Best Buy has

short-term contracts with suppliers69

. Not having long-term written contracts with major

suppliers is a threat, as merchandisers can stop supplying Best Buy with products. As the dashed

lines in activity system’s SCM (Supply Chain Management) part indicates the weak relationship.

The company should regulate this issue in order to avoid any complications that may be occurred

in the future. Products are shipped straight from merchandisers to distribution centers, from

where it either goes to the store or is directly shipped to the customers.

Supply chain management efficiency is directly linked to the customer’s experience as

prices are mostly determined by how effective the SCM of the company is.

13.5 Multi-channel Sales

As I mentioned previously (marketing & sales channel), the company has a diversified

online and offline sales channel. It is quite an efficient tool and gives the business the

opportunity to generate more sales. All the activities that the company carries out are linked with

sales channel. It is clear that every business is all about profits and seeks to take actions which

are related to sales channel, as it is the front office for the company.

69 "BBY-2012-10K." 2012. 19 Mar. 2013 <http://www.sec.gov/Archives/edgar/data/764478/000076447812000035/bby-201210k.htm>

44

14. Financial Analysis70

Best Buy’s consolidated statements are prepared in accordance with US GAAP. The

company’s board of directors approved to change the fiscal year-end from the nearest Saturday

of February to the nearest Saturday of January. As a result, the fiscal year 2013 shows only 11-

months of operations. As a result the financial statements of 2011 for instance includes 2 months

of 2012, Best Buy analyses it and categorizes it as FY 2012.

Best Buy’s FY 2013 annual report shows a comparison of 11-month of FY 2013 (year

2012) and FY 2012 (year 2011). Since FY 2012 included 12 montth, 11-month results of FY

2012 is not auditied. Only its balance sheet statement is not compared in this way, as components

of the balance sheet (assets, liabilities, equity) are not specifically related to monthly

performances as the income statement.

14.1 Stock Analysis

The graph represents the stock prices of a 5 year period. Analyzing the stock, we can

clearly see the fluctuation over the period. At the end of the year 2008, Best Buy’s share price

fell significantly. The major factor of that was the macro environment, an economic slowdown

70 *All numbers for FY 2013, FY 2012, FY 2011 and FY 2010 are taken from Annual Report 2012 and Annual Report 20011

45

that affected consumers’ expenditure. In Q3, 2008, the company’s earnings dropped sharply by

77%, that affected their stock price considerably. Share price declined in a relatively short time,

in 3 months, from $46.84 on August 11, 2008 to $17.63 on November 17, 2008. After this

failure, Best Buy showed growth that reflected in the stock price and reached its peak in 2010,

reaching $48.58, the highest price after April 2006 was $56.66. After that, Best Buy’s shares

showed stable decline and in December of 2012 it went to its lowest point since 2000, at $11.29

per share. This result was caused by a number of issues that were raised within the company.

Changes in management, Richard Schulze’s buyout offer, unsatisfactory earnings and most

importantly, strong competition, were the main drivers. Although the company faced bad times

in its history, Best Buy’s stock gained value and pushed shares up to 25.96 an increase of 16%,

due to a newly signed partnership with Samsung on April 4, 2013. The latest news, regarding

Best Buy’s withdrawal from the European market increased the stock price by 3% and ended the

day at $25.99, the highest price of the year.

14.2 Beta of Security

Wal-Mart Amazon Apple Best Buy

Beta 0.42 0.82 0.65 1.74

Beta of security shows the company’s volatility towards the changes in the industry and

market growth. From the table, it is clear that Best Buy has the highest beta compared to its main

competitors. It is 4 times higher than Wal-Mart, 2 times higher than Amazon and nearly 3 times

higher than Apple. This result points out that Best Buy is the most sensitive to the changes,

economic instabilities and has higher price volatility than the market itself.

14.3 Revenue & Net Income

As the company changed the fiscal year and shows only 11-months of operations, it is

hard to determine sales movement. The company’s sales used to increase throughout the period.

However, from a comparison between FY 2013 (11 month) and FY 2012 (11-month) we can see

that Best Buy’s revenue decreased slightly.

46

In billions

Even though Best Buy faces strong competition from companies such as Amazon, Apple

and Wal-Mart, Best Buy’s sales still increases yearly. Although 2011 was one of the company’s

hardest years, Best Buy still increased its revenue in FY 2012 and generated its highest revenue

($50.7 B) thus far. This stable increase in sales is mainly caused by opening new stores yearly

and the fluctuation of the foreign currency exchange rate. Even though revenue increased

throughout this time, net income compared to sales is decreasing every year and reached its

lowest point in FY 2012 with a net loss of $1.23 B. Looking at yearly profits, it is obvious that

one of Best Buy’s challenges are its huge amount of expenses. The loss of FY12 was mainly

driven by goodwill impairment and strategic changes in Best Buy Europe that made up $1.3 B

payment.

BBY FY 2012 (11-month) FY 2013 (11-month)

Revenue 46.064 45.084

EBIT 743 -186

Net Income -1.43 -441

-10.00

0.00

10.00

20.00

30.00

40.00

50.00

60.00

FY 2008

FY 2009

FY 2010

FY 2011

FY 2012

revenue

profit

47

Comparing FY13 and FY12 (11 month) there is a phase of decline, revenue decreased by

2.1%. The possible reason for downfalls is closure of 50 big-box stores in the domestic segment

and a dramatic drop in comparable store sales from (1.7) % in FY 2012 to (2.9) %. Decline in

revenue and an increase in expenses led to negative EBIT. Best Buy witnessed an operating

income loss of $186 million compared to FY 2012 (11 month) positive $743 million. COGS and

SG&A expenses increased in FY 2013. It was mainly caused by restructuring that accounted for

$450 million. Restructuring charges are mostly dependent on shutting big-box stores that raised

expenses such as employee termination benefits, facility closure costs, inventory write-downs

and property and equipment impairments.

14.4 Liquidity Ratios

BBY FY 2010 FY 2011 FY 2012 FY 2013

Current Ratio 1.18 1.21 1.16 1.11

The importance of liquidity ratios is to identify if the company has the ability to cover its

current liabilities. In Best Buy’s case the current ratio is decreasing after the year 2010 and is

slowly moving towards being on the verge of (under 1) falling apart in order to cover its short-

term liabilities. Decline in current ratio is caused by the increase in the company’s short-term

liabilities.

As the company announced the sale of stakes to Carphone Warehouse, Best Buy will

receive 420 million pounds in cash that will strengthen its balance sheet and will obviously

strengthen its liquidity.

14.5 Profitability ratios

BBY FY 2010 FY 2011 FY 2012 FY 2012

(11-month)

FY 2013

(11-month)

Net Profit Margin ratio 0.027 0.026 -0.024 -0.031 -0.010

ROE 0.189 0.175 -0.282 -0.326 -0.119

Negative profitability ratio is an indicator that Best Buy is inefficient in generating

profits. As the table shows, profitability in FY 2010 and FY 2011 was relatively stabilized, only

0.1% decline. What is noticeable, FY 2012 (year 2011) was a critical point for the company. Its

net profit margin dropped significantly from 2.6% to a negative 2.4%. This outcome was forced

48

by high cost structure and changes made in their European strategies. As a result of Net loss from

fiscal year 2012 operations, return on assets and return on equity were negative as well.

Comparing 11-month operations of FY 2012 and FY 2013, we can clearly see that profitability

ratio is improving, it increased by 2%. ROE is declining as well in regard to profit margin,

1.75% (2.82)% and (1.19)% in 2011, 2012 and 2013 respectively. As return on equity shows

how much profit is generated from shareholders’ investment, because of net loss in 2011 (FY

2012) and 2012 (FY 2013), it is a negative portion.

14.6 Leverage ratios

BBY FY 2010 FY 2011 FY 2012 FY 2013

Debt to Assets 0.62 0.59 0.73 0.78

Debt/Equity 1.63 1.45 2.67 3.52

Even though their debt to assets ratio is not specific and includes total assets and all types

of debts (short-term, long-term), it still determines whether the company is high risk in

operations. Debt to assets ratio increased rapidly in the last 2 years and reached 78% in 2012.

According to that, 78% of total assets are financed through debts. Although the company has less

debt than assets, Best Buy should still normalize its liabilities in order not to exceed its assets

which can cause major problems for the company. Looking at the company’s Debt/Equity ratio

we can easily see that “the company has been too aggressive in financing its growth with debt”.

The year 2011 (FY 2012) was a crucial year for the company’s financial health. Debt to equity

ratio increased significantly from 1.45 to 2.67 and arrived at 3.52 in FY 2013 which is

considered to be quite high.

14.7 Activity ratios

BBY FY 2010 FY 2011 FY 2012

Inventory Turnover 6.78 6.31 6.65

Receivable Turnover 24.38 21.19 22.16

49

BBY FY 2012 (11-month) FY 2013 (11-month)

Inventory Turnover 6.05 5.24

Receivable Turnover 20.13 16.67

Inventory turnover for Best Buy dropped from 6.78 in FY 2010 to 5.24 in FY 2013.

These numbers show that the company’s inventory management and efficiency is declining. Best

Buy has problems in controlling its inventory levels. The reason for this is a decrease in revenue

in this year. Another decline is identified in receivable turnover ratio. Collecting customer

payments is really important for the company’s sales. The table indicates how often the company

collects its credit sales throughout the year. We can see that from FY 2010, collection frequency

decreased steadily from around 24 to nearly 17.

14.8 Goodwill

BBY FY 2011 FY 2012 FY 2013

Goodwill 2,454 1,335 528

Goodwill impairment - 1,207 822

As ASC 305 (Accounting Standard Codification), FASB rule states, goodwill should

conduct annually a two step test. First the company should compare goodwill’s fair value to its

book value. If carrying value exceeds fair value, the second step is to recognize the impairment

loss and that should be illustrated in income statement71

.

Best Buy’s goodwill includes units such as Best Buy domestic, Best Buy Canada, Five

star China and Best Buy Europe. The table shows the trend of goodwill decline that is resulted

from the goodwill impairment. The company’s goodwill impairment in FY 2012 occurred in

international segment operations, writing-off the goodwill related to Best Buy Europe’s reporting

unit. The net loss in FY 2012 was mainly driven by the goodwill charges. It is noticeable that

goodwill value decreased in FY 2013 as well, but goodwill impairment losses decreased by

around 32%. Conversely, the last year goodwill impairment charge was related to Best Buy

Canada and Five Star China reporting units.

71 "Goodwill Impairment - Appraisal Economics." 2012. 9 May. 2013 <http://www.appraisaleconomics.com/range-of-services/goodwill-impairment/>

50

As goodwill impairment consisted of $2 billion in two years, it significantly affects

operating income that was the main reason (with restructuring charges) for the company’s weak

financial performance.

14.9 Dividends

BBY FY 2010 FY2011 FY2012 FY2013

Earnings per share 3.10 3.08 (3.36) (1.30)

Dividends per share 0.56 0.58 0.62 0.66

Even though the company’s EPS’s (Earnings Per Share) trend shows yearly decline and

negative numbers over the last 2 years, the company still pays dividends to its shareholders. Best

Buy even increases dividends per share every year by $0.02. Analyzing the company’s financial

performance, the company’s decision on dividends payment is strange. The company’s annual

reports says, “future dividend payments will depend on our earnings, capital requirements,

financial condition and other factors considered relevant by our Board”. Best Buy’s Board

should be more aware of their financial situation. Worsening liquidity, increasing debt and most

importantly decreasing profits (Net Loss) in the past 2 years, makes it obvious that Best Buy

should try to hold onto to as much money as possible. Best Buy’s total liabilities increased by

1.96 billion. Canceling the dividends payment temporarily will probably irritate the company’s

investors, but it’s better to lose money dividend payments rather than lose all investments made

into the company (if Best Buy goes to bankruptcy).

14.10 Conclusion

Best Buy’s financial performance started to weaken in the year 2011 (FY 2012). Even

though the company’s net loss decreased, the ratios that were used to determine Best Buy’s

financial standing decreased each year. This indicates on the company’s overall poor financial

performance.

51

15. SWOT Analysis

15.1 Strength

Brand Recognition

High brand awareness is one of the main strengths for the company. It greatly contributes

to the company’s success. Best Buy tries hard to promote its business and has been in the market

for over 45 years. It is well-established, highly visible and accessible which drives brand

awareness. The company’s brand recognition is especially strong in its domestic market (US).

The company works hard to promote its brand in both segments, domestic and international and

is quite successful. Marketing is a great tool for Best Buy to develop and to continue to increase

its brand recognition.

52

Multi-channel Sales

As the world continues to change, multi-channel sales are significant for companies to

outperform their competitors. Best Buy is successful in this field. As customers’ way of shopping

is diversified, different channels, both online and offline are significant to meet customers’

needs. Multi-channel sales are a strong advantage for a company to compete with its rivals.

Geek Squad

Best Buy’s strength includes its brand – Geek Squad. It is a strong differentiator of the

company that gives customers value proposition of products72

. Having a brand that offers value-

added services is important particularly in CE industry. Even though Geek Squad’s performance

is not currently satisfactory, it is still considered as strength because it offers services that the

company’s competitors such as Amazon, cannot.

Wide range of products

Product variety is something that plays an important role in the consumer electronics

retail industry. Best Buy succeeds in offering customers a wide range of products in order to

increase the number of customers and satisfy them at a high level. This strength is driven by

having a large amount of suppliers.

15.2 Weaknesses

Weak Brand Image

Brand Image is crucial for the company in order to generate sales and keep loyal

customers. However, Best Buy fails to maintain this. As I discussed in legal factors, lawsuits and

complaints are damaging the brand’s image that affects customers’ purchases and decreases the

number of buyers throughout time. (brand value decrease)

Unsatisfied Customers

Customer satisfaction should be the main goal for the company in order to stay strong in

the market. There are many reasons why Best Buy has problems in customer experience. One of

the reasons for increasing the number of unsatisfied customers is cancelation of online purchases

during holiday season. This made many shoppers frustrated and led the company to hit 6th

place

on the “10 the Most Hated Companies in America” list in 2012 by “24/7 Wall St.”73

Also, the

72"Brand Overview - Best Buy Brand Identity." 2011. 22 Apr. 2013

<http://bbybrandidentity.com/guidelines-geeksquad/brand-overview/> 73"The 10 Most Hated Companies in America - 24/7 Wall St." 2012. 22 Apr. 2013 <http://247wallst.com/2012/01/13/the-10-most-hated-companies-in-america/>

53

company faces difficulties in customer in-store experience that has been caused by various

pitfalls in the past years.

Ineffective Supply Chain

Supply chain in retail world is a main factor for retail companies’ performance. Best

Buy’s relationship with suppliers is another weakness for the company because they don’t have

long-term contracts with them. They are therefore running the risk of allowing this to shape the

company’s performance and lose the company’s strength of having products mix.

Poor Financial Performance

Best Buy’s financial performance worsens annually. Generally it is caused because of

high cost structure model of the company. Poor financial performance negatively affects

operational process. The company is experiencing hardships and it needs highly professional

team to survive.

15.3 Opportunities

Even though the company’s current strategy focuses on these areas, Best Buy doesn’t

really concentrates on key elements in it.

Global Expansion

Emerging markets are essential for any industry as it offers growth opportunities to

companies. Businesses operating in the CE industry should understand the significance of

emerging markets because they enter into the country first, build brand loyalty and customers

who are willing to pay money will spend it in their stores. It is essential for Best Buy to take

advantage of entering emerging markets. This will give the company the power to set up barriers

to entry for competitors which then increases company’s market share. Accenture report states74

,

that there are countries where consumer electronic products are in very high demand and they are

willing to pay more than in the US or Canada. (appendix)viii

According to research that indicates

the average spend vs. average annual income in various countries like China, Brazil, South

Africa and Russia there are great chances for Best Buy to perform better.

Best Buy’s strategy includes expansion in China which is a great step to increase its

international presence. However, the company should consider other markets that are quite

substantial opportunities for success.

74 "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>

54

Customer Centricity

Best Buy went away from customer centric approach that caused lots of problems in their

performance. Based on the ‘Brand Key’ rankings, company is not in the list of customer loyalty

brand opposed to its competitors such as Amazon, Apple, Wal-Mart, CostCo and Target are in

the top places. Best Buy is not focused on customers that create the threats for the company.

After the changes in management, no adjustments were made in this area. As I mentioned

above, the new CEO, Hubert Joly stated the main priority - “We are making online and e-

commerce our No. 1 priority.”75

For a company like Best Buy customer satisfaction should be

the focal point because this determines sales growth afterwards. Customer centricity is a great

opportunity for the company to perform on a high level by changing the attitude and providing

an innovative environment for them.

Online market share growth

In today’s world people use the internet for nearly everything, so selling products online

brings out great opportunities for a company to generate revenues. Best Buy’s online market

share is quite low - 7%, compared to physical store market share of 18%. The company can

increase its online market share by restructuring their website in order to make it more

understandable, by putting the right products in the online marketplace and by making a better

web design so that customers who browse the website can easily shop.

15.4 Threats

Intense competition

Best Buy intensively competes with various types of businesses. B&M retailers offer

relatively the same products and they try to win the customers by different tools. Best Buy

competes with online retailers such as Amazon this creates a high price competitive

environment. Discount retailers are a great threat as well, as companies like Wal-Mart, CostCo

and Target have traditional stores that are nearly the same model that Best Buy has. All of these

businesses have high brand awareness, this makes it even harder for the company to steal the

customers and keep loyal shoppers.

75 "Best Buy CEO Hubert Joly Considers Buying Electronics Brands ..." 2012. 22 Apr. 2013 <http://www.bloomberg.com/news/2012-11-14/best-buy-ceo-joly-considers-buying-electronics-brands-for-stores.html>

55

Macro-economic Trend

As the company operates internationally, macro-economic environment is crucial for

Best Buy. Since economy is volatile, it creates a risk for the company’s sales and overall

performance. Best Buy should find the ways to quickly adopt changes and find solutions for it.

Customer preferences shift

A rapid shift in customer taste is really dangerous for companies that operate in the CE

industry. People are the ones who set the trends, the products that are in highest demand at a

specific time creates a big challenge for the company. It is essentially a matter of being in the

right place at the right time.

16. Current Strategy

The current strategy of Best Buy is not clear. The company does not identify its main

strategy and only talks about its priorities, which are the long-term activities (see value activity

system) that the company must do in order to survive.

Best Buy does not have a clear vision statement, fails to follow their corporate values and

mission statement. These are most likely the reasons why the company can’t formulate its

strategy clearly and communicate it to their shareholders, customers and employees within the

corporation.

As the company lacks a current strategy it perhaps cannot see the significance of it.

Strategy establishes the playing field and provides guidance for decision-making. It also provides

management with the tools to lead employees in the right direction. It guides them how to

position marketing, advertising and how to structure the company in general.

Current management changes shook up the company and brought new soul into the Best

Buy franchise. The new CEO, Hubert Joly came to the company with a new priority, “to make e-

commerce number one priority of Best Buy76

.” From this announcement it can be assumed that

growth initiatives (see activity system) that include e-commerce can be Best Buy’s main

strategy.

Although, Best Buy fails to formulate a strategy, from their activities it seems that the

company’s possible strategy has elements of e-commerce growth and a focus on improving

customer experience. However, it is still vague how the company plans to achieve this.

76 "Best Buy CEO Hubert Joly Considers Buying ... - Bloomberg." 2012. 19 Mar. 2013 <http://www.bloomberg.com/news/2012-11-14/best-buy-ceo-joly-considers-buying-electronics-brands-for-stores.html>

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17. TOWS Matrix

STRENGTHS WEAKNESSES

1.High Brand Recognition 1. Weak Brand Image

2. Multi-channel Sales 2. Unsatisfied Customers

3. Geek Squad 3. Ineffective Supply Chain

4. Products mix 4. Poor Financial Performance

OPPORTUNITIES SO Strategies WO Strategies

1. Global Presence

Market development by online and

offline selling (S1, S2, O1, O3)

Geek Squad development (S3, O2)

Managing Online Website with

better services and layouts (S4, O3)

Ritz Carlton customer

experience (W2, O2)

Efficient Delivery (W1, W2,

O2, O3)

2. Customer Centricity

3. Online Sales Growth

THREATS ST Strategies WT Strategies

1. Intense Competition

Proper product marketplace (S4,

T3)

Partnership with Amazon (S1, S2,

T1, T2)

Market Penetration (W1, T1)

Manage supply chain (W1, W3,

T1, T3)

Embrace show-rooming via

various tools (W2, W4, T1, T3)

2. Macro-economic Trend

3. Shifts in customer

preferences

57

18. Strategic Alternatives

18.1 Expansion to Emerging Markets by Using Direct Sales Channel (online sales)

This activity system mapping indicates the company’s current international markets and emerging markets as well.

As the company exits the European market, Europe is not linked to the company’s international market

management.

As Best Buy competes with strong companies such as Amazon and Apple, the company

should stand out to stay viable. Having a global presence is one way to do it. Emerging markets,

as I discussed above, are a great chance for the company to increase its performance and return

to its place in the market.

Due to the fact that international retail stores expansion are related to many factors, such

as proper marketing research, employee training and costs like rent and labor. The company

should consider implementing market development in emerging markets by direct selling. Online

is the best choice for Best Buy. The company will not only increase its global presence, but

online sales as well. As discussed in SWOT analysis (opportunities), countries such as China,

58

South Africa, Brazil and Russia are great locations from which the company can generate profit.

As the company has high brand awareness, it will be easier for Best Buy to gain the first

customers with the help of right marketing campaigns.

Best Buy should open distribution centers in these locations, by which the company will

be able to meet customer needs on time. As the company doesn’t have its own delivery even in

its major market, the US, the company should do outsourcing with local delivery retailers or

apply its own “click and collect”77

system. Best Buy can open kiosks in a number of places,

(malls, airports) that will serve as automatic advertising for the company. This will increase

brand recognition more and most importantly, products such as smart phones, tablets, digital

cameras and accessories can be purchased online and collected in kiosks that will benefit

customers as they will save delivery time and costs.

Best Buy express kiosk is an offline sales channel that is the least costly in comparison to

any other indirect selling tool. Customers will have the ability to get more than visual

information on products they are willing to purchase through automated kiosks offers. This

concept works very well as it is the fastest way to purchase products especially for need based

customers who know exactly what they want.

Best Buy customers will be provided with marketing campaigns specifically focused on

“click and collect” shopping. For buyers who are determined to use this system there will be a

number of steps to fulfill. First, customers will choose the product they want to purchase.

Customers will fill in the bank account information and whenever this step is done, the last thing

is to indicate the location and time – the nearest location of kiosk person wants to pick up his

product and the time buyer wants the product to be there.

In order for Best Buy to lower their costs of expansion, company should open one or two

distribution centers in each country to have relatively fast delivery. Furthermore, to increase

operational efficiency and reach as many places as possible, the company should utilize its

locations of distribution centers in the capital cities. Location efficiency should be calculated and

opened in the center of these major cities.

As e-commerce increases every year, focusing on online operations in emerging markets

will bring sales growth. This will be instrumental in testing the market. If the company sees high

demand they will have the option to open retail stores in these locations.

77 "What is Click & collect definition : The digital marketing glossary ..." 2012. 9 May. 2013 <http://digitalmarketing-glossary.com/What-is-Click-collect-definition>

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18.2 Improve Cost Structure by Managing SCM Efficiently

The retail world is heavily dependent on suppliers; that’s why it is crucial for retail

businesses to manage the supply chain in order to stay in the game. Best Buy is not an exception.

The company should have a clear method of managing the supply chain by various steps.

Firstly, Best Buy should concentrate on information technology. As the company needs

to manage inventory, forecasting the demand helps the company to identify the “hot” products at

that time and the amount needed by looking at historical transactions. Information technology

facilitates and reduces inventory carrying costs that increase effectiveness of the company.

As the company has a high cost structure and competes with Amazon, Best Buy should

start to reduce production costs by effective SCM. Wal-Mart is very successful in managing their

supply chain and this gave the company the ability to offer lower prices to its customers. “Retail

Cross-Docking”78

is one of the tools that can decrease production costs. Cross-Docking is a

logistics procedure, by which retailers receive products from merchandisers, directly sorting

them for outbound shipments to distribution stores. This system solves many of the problems

Best Buy faces, such as cost reduction, it eliminates warehouse costs, operating costs, handling

costs; and meeting customer demands. It is fast and takes less time to get products to the

customers.

Best Buy’s annual report states that the company does not have long term contracts with

its suppliers, which automatically creates risk (see Porter analysis, power of supplier). Since the

company has five major suppliers, it is essential to have long term contracts with all of them.

This will not only help to avoid risks but also decrease COGS. Best Buy can establish strategic

partnerships by offering suppliers long-term high volume purchases in exchange for low prices.

Meanwhile, Best Buy can negotiate about having new and exclusive products manufactured by

suppliers earlier than other retailers in exchange for vendors’ in-store advertising in Best Buy.

Proper SCM will help Best Buy to gain a competitive advantage. After implementing this

strategy, the company will be able to either continue price-matching efficiently, without losses,

or even decrease prices more so that the company can outperform its competitors. Low prices

and less time to reach customers will lead to customer satisfaction which is the main weakness

for the company.

78 "Cross-Docking Distribution Center - Hofstra People - Hofstra University." 2005. 9 May. 2013 <http://people.hofstra.edu/geotrans/eng/ch5en/conc5en/crossdocking.html>

60

19. Recommended Strategy – Facilitating Great Customer Experience through 5 Steps

The activity system mapping shows the way customer’s experience can be improved by various steps that are

discussed below.

The company’s mission statement describes Best Buy as a customer based company that

relies on their employees. As analyzed previously, the company lost its track and is going in

another direction, which does not create customer experience. In order for Best Buy to still stay

in the market, it is vital for them to take a totally new approach towards customer service that

will differentiate them from competitors and deliver value-added services to buyers.

There are number of steps Best Buy should consider in order to reach customer centricity:

61

1. Changes in the company’s culture

As the world changes, employees are getting more valuable for any company. Best Buy’s

main problem is its attitude in general that causes all these failures. It is critical for the company

to change its mind-set and become more focused on their employees. Best Buy has many

priorities however, their number one priority and focus should be on customer experience. Best

Buy should create the organizational culture that will be the best motivation for employees to

perform at a higher level. Employee rewards and benefits is obviously one of the tools to

motivate labor, but without a proper working environment and strong relationships they will face

high employee turnover. Best Buy should set one clear goal, address their values and create

valuable relationships between managers and employees in order to succeed and to make their

customers happy.

2. Restructure the company’s Human Resource Management

After the company implements a better work environment and clearly outlines its

organizational culture, the next step should be to concentrate on its HR department. When

employing the person, employers should have tough standards in hiring a sales person. The

human resources department should come up with questions that will deal more with the

expression of the candidates’ behavior and get rid of Yes/No questioning. As Apple has

legendary customer service, Carmine Gallo in his book “The Apple Experience: Secrets to

Building Insanely Great Customer Loyalty”, evaluates Apple’s policy towards hiring, “Apple

hires for attitude and not aptitude.”79

It is essential for Best Buy to implement the same hiring

process and hire employees who will express their attitudes, enthusiasm and teamwork skills.

Additionally if a potential employee is successful in an interview, he or she will move on to a

second step where the person will receive training. However, it should not be a general training

to give new employee an overview of products. Best Buy should apply the Ritz Carlton’s

“written service strategy”80

where the potential employee can understand what great service will

sound and look like. Each potential employee should be trained in a manner that will give them

the best opportunity to become professionals in relation to each of the products the company

offers. These are the key components for the company to use its assets correctly in order to

provide the best possible customer experience.

79 "How To Get Hired At An Apple Store - Forbes." 2012. 9 May. 2013

<http://www.forbes.com/sites/susanadams/2012/04/03/how-to-get-hired-at-an-apple-store/> 80 "The Secret to Ritz-Carlton's Customer Service Sauce." 9 May. 2013 <http://blog.freshdesk.com/the-secret-to-ritz-carltons-customer-service-sauce/>

62

Best Buy should give its employees an environment that people will be happy to go to work in

rather than one they simply must work in. As the company is very comfortable to announce that

Best Buy’s employees are non- commissioned81

,this is exactly what determines employees’

motivation rate. In order for the company to solve this problem, the company should pay

commissions to its sales people. This will potentially increase their performance.

3. Improve in-store experience

As Best Buy’s sales are mainly generated by retail stores and physical store market share

is relatively higher than online (see SWOT analysis, online market share growth), the company

should develop a concept that will encourage customers to walk into the store and enjoy the

shopping process.

Firstly, customers should be treated in a totally different manner than they are at this time

(see Customer Experience, in-store experience). Apple has a great method called “A.P.P.L.E.”82

that has 5 steps of service. This method is all about the attitude employees have when interacting

with customers, which creates two-sided satisfaction. Best Buy should make huge improvements

in employee-customer relationships because this will directly affect the company’s performance.

Even though the company can create great employee-customer relationships, if Best Buy

doesn’t offer customers value proposition it will be hard to pull customers to their side and

motivate them to become loyal. Best Buy should come up with innovations or product

development such as provide customers with value-added services related to Geek Squad. As

Geek Squad is the company’s strength, it should be used in the right way to adapt to customers’

needs. Meanwhile, Best Buy has the chance to benefit from show-rooming by embracing it. As

the company has various brands’ stands in the big box stores, they can hire highly qualified

technicians that will help people to work with and better understand their gadgets. Additionally,

Best Buy can implement the Ikea concept. By show-rooming their products and by creating a

home type atmosphere where customers can experience the products in a way they will use them

afterwards. Customers will be able to get an actual feel for the products and even play around

with them if they would like to do so. Lastly, proper product marketplace is crucial. Best Buy

should be aware of recent “hot” products and try to put them on the shelves which are going to

81 "“No, we don't work on commission.” | Best Buy Mobile." 2012. 9 May. 2013

<http://bestbuymobile.com/2011/06/13/no-we-dont-work-on-commission/> 82 "Apple Store's Secret Sauce: 5 Steps of Service [video] - Forbes." 2012. 9 May. 2013 <http://www.forbes.com/sites/carminegallo/2012/05/16/apple-stores-secret-sauce-5-steps-of-service-video/>

63

be the most visible and accessible. As Best Buy has impulse customers, it will be a great

opportunity for the company to increase sales from this tactic.

4. Create Online Experience

As online shopping behavior has grown over the past several years, Best Buy should

restructure its website and increase its customer service. The design of their website should be

improved to match their customers’ preferences. Since Best Buy has to compete with Amazon,

the company should launch free shipping systems for some products and apply it with shipping

time. For example, shipping will be free if the customer has to wait for 10 working days.

Meanwhile, Best Buy must reduce delays and even if it occurs from time to time the company

should provide customers with extra services in order to recover from it. This will increase

customer satisfaction. Lastly, Best Buy should implement a customer feedback program.

Whenever a person clicks on a product that person should find some feedback from current

product users. This will help them to identify its advantages and disadvantages that will greatly

influence the customer’s decision on his or her purchase. The feedback program is essential for

online shopping as the customer is not able to experience the product and should at least be

provided with some opinions whether or not the product is worth buying.

5. Improve Marketing

The Golden Circle is partially completed by applying the previously discussed steps. In

order to complete the circle, the company should implement final step, which is to improve

marketing.

In order for Best Buy to be successful, they should identify their organizational beliefs.

The Golden circle is a great marketing tool that helps companies attract potential customers

through having a powerful core belief.

64

Most companies use the Golden Circle approach in the wrong direction. They create their

marketing message starting with “WHAT” and ending with “WHY”. This is a mistake as they

fail to identify what their core beliefs are and how they want to affect customers’ emotions.

"People don’t buy what you do they buy why you do it.”83

This is why Best Buy needs to start

communication from the inside out.

WHY - we want our customers to feel special

HOW – create comfortable work environment for our employees

WHAT - what - we offer unique shopping experience in compliance with value added

services

“We want our customers to feel special by designing comfortable work environment for our

employees which creates unique shopping experience in compliance with the value-added

services.”

Best buy needs to find a way to convey these beliefs to its customers but also to anyone

who stumbles upon them, because if they manage to captivate someone’s attention there is a

bigger chance that that person will give them a chance. It is important that the message Best Buy

is sending out is sincere and convincing; if the company fails to act according to their vision; it

will be obvious very quickly, and they will fail as they have done in the past.

It’s not just a question of creating a vision for the sake of marketing. The management

has to believe in what the company stands for in order to do their job effectively and move the

services in the right direction. They have to inspire the employees to do the best job possible; a

great customer experience is the best way to affect customers on an emotional level.

83 "How great leaders inspire action, the golden circle - Life-Engineering." 2011. 9 May. 2013 <http://life-engineering.com/1757/how-great-leaders-inspire-action-the-golden-circle/>

65

Conclusion

As internal and external analysis was done throughout the paper, it shows the challenges

Best Buy faces currently. The company stands at a strategic inflection point, where each and

every step will determine Best Buy’s future. Strategies offered to Best Buy are low cost strategy

that can be reached by managing its SCM, international expansion in emerging markets by

online sales that will strengthen the company’s brand recognition, increase market share and

generate more revenue. However, as customer satisfaction is the most important issue for Best

Buy to perform better in this competitive industry, the company’s number one priority should be

customer experience. In accordance with this the strategy recommended is to move towards a

customer-centric approach by making various adjustments inside the company. This strategy will

enable Best Buy to make a strong come back and regain its position in the market. “The journey

of thousand miles begins with a single step.” - Best Buy’s recovery will be a long trip but

improving customer experience will be the first step in it.

66

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Appendices

i People: From "unleashing the power" of our own employees to maintaining a clear focus on our

relationships with customers, vendors and shareholders alike, everything Best Buy does across

the world begins and ends with people. Technology: the products we sell, the services we

provide and the content we share all are tied, in some way, to the technologies that connect us

and shape our changing world. The pursuit of happiness: Best Buy has a unique ability to make

people happy. A great place to work makes employees happy. Happy employees make customers

happy. Happy employees and customers make our shareholders, vendors and community

partners happy. We're not perfect and we don't always get it right ... and that's why it's important

to acknowledge that we're in constant "pursuit" of happinessi.

ii

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