Case_Discussion_7
- 1. Case #4: Finding the Best Buy BUSA 4980 (Strategic Management) Dr. Steven Dionne 1 Strategy Formulation Summer 2014
- 2. Company basics … 2 • Best Buy Co., Inc. is a multi-national retailer of consumer electronics, computing and mobile phone products, entertainment products, appliances and related services – Founded by Richard Schulze in 1966 (Sound of Music) – Grew rapidly in US from 1989 – Domestic (84.5%) and International (15.5%) • Variety in its retail format: – Big Box stores, Geek Squad, Best Buy Mobile, Bestbuy.com, The Carphone Warehouse (Europe), and Five Star Appliances (China) • Roughly 1,500 locations, $42B in annual revenue, 140,000 employees, and among top 10 largest retail websites
- 3. Problems have emerged: Best Buy has not kept pace with its industry in returning value to its shareholders 3 • Presence of competitors with different business models / strategies • 2400 US layoffs in July 2012 alone! • 950 Canadian layoffs in January 2014 • Schulze made a proposal to acquire Best Buy for $26 per share in August 2012 (failed) • Discontinued BestBuy Europe, large-box format in China, and Napster in 2013 • Is big box retailing dead? • Stores provide hands-on experience with a product • Best price? • Exclusive gadgets? • Knowledge center?
- 4. What issues have emerged from the General Environment? 4 Segment Elements Demographic • The rise in dual income families and women’s purchasing power also affect product and marketing decisions Economic • Impact of a slow recovery: With less disposable income, consumers reduce the types of purchases that make up Best Buy’s product line Political / legal • The controversial sales tax legislation for online retailers Socio-cultural • The popularity of the online marketplace: Online shopping has brought new rivals, with lower cost structures • The availability of product information online means that technology and product questions can be addressed without the expertise of in-store staff • Universal connectivity: Offers opportunities as the complexity of functionality and the need for interaction between devices increases Technological • The emergence of new ways of conducting business and accessing customers • The consolidation of functions into single electronics devices Global • Opportunities to achieve greater economies of scale, to integrate backward into the supply chain with lower risk, and to move inventory into secondary markets Physical environment • N/A
- 5. Again, the slow pace of recovery and talk of fiscal cuts present challenges to this industry 5 • Real income for US households has remained stagnant, given weak overall economic and employment growth • As a result, discretionary spending for US households will likely remain weak • Global discretionary spending was down in Q4 2013 • Q1 2014 GDP: -2.9%
- 6. What about the Industry Conditions? 6 Moderate Moderate Pressure Pressure • Globalization and broad access to the Internet reduce capital requirements and customer loyalty • New entrants differ significantly in structure, focus, and sources of competitive advantage • Economies of scale and capacity to launch advertising campaigns provides some protection High Pressure High Pressure • Consumers research products online, determine purchasing intentions, and then seek the lowest price • Low switching costs • Not consolidated, but pricing pressures have increased due to emerging purchasing tools and processes Moderate Pressure Moderate Pressure • Consumer electronics are not priority items, and many alternatives exist that satisfy consumers’ entertainment needs • Yet, older forms of communication are not good substitutes for advanced devices Moderate Moderate Pressure Pressure • Scale gives the company good leverage with suppliers → 1400 domestic + 473 foreign stores ($42 billion in sales) • Shifts in supplier distribution policies have reduced the exclusivity Best Buy once enjoyed • Some supplier concentration and forward integration (e.g. Apple)
- 7. Consumer Electronics Segment Segment Segment Primary Strengths • Efficiencies • Innovative apps • Price / tax advantages • Range of products / services • Scale / scope economies • Bargaining power with suppliers • Lower end • High inventory turnover • Service oriented • Customer value • Higher quality • Market niche • Specialty electronics • Rebranding with cell phones TTM Revenue $74.5 billion $476.3 billion $107.9 billion $3.43 billion 3-yr Sales Growth 29.6 4.1% 10.5% -7.0% TTM Net Income $274 million $16.0 billion $1.96 billion ($400.2 million) 3-yr Profit Margin 0.4% 3.5% 1.8% -4.0% Increased Competitive Intensity in an Evolved and Less Familiar Form → Price Centric Rivalry • Switching costs for consumers are low and retailer differentiation is minimal • Given economic conditions, rivals seeking growth further intensify competitive pressures 7 Financial data as of April 2014
- 8. How would you characterize BBY’s strategy? … Connected World approach 8 1. Where will we be active? • Global: +1400 locations in the USA; 473 in Canada, China, Mexico • Consumer electronics, Home office, and related services • Retail Arena Staging Vehicles Economic Logic Differentiators 2. How will we get there? • Internal: New stores / concepts • M&A: Magnolia Hi-fi, Musicland, Napster, Geek Squad, Future Shop (CA), Five Star Appliance (75%, China) 3. How will we win? • Extensive product knowledge • Service levels • End-to-end solutions • Price 4. What will be our timing? • Quick responses to competitive challenges 5. How will we obtain our returns? • Premium prices by providing superior services and product knowledge across extensive electronic categories • BL Strategy: Broad Differentiation → Integrated 1. Accelerate online growth 2. Escalate multi-channel experience 3. Optimize US real estate 4. Achieve supply chain efficiencies
- 9. How has Best Buy performed financially? 9
- 10. Recent results show improvements in profitability but continued weakness in revenue growth 10
- 11. Are there any bright spots across BBY’s various segments and/or product categories? • Europe and China had been sources of sales growth …? • Home office products accounted for 55% of international sales, compared to 37% in the USA (2011) – Computing/Mobile phones and appliances account for 60% of foreign sales 11 What concept is utilized outside the United States?
- 12. Does Best Buy have an optimal product mix and store configuration? • Computing and mobile phones account for 48% of total sales • Entertainment has been contracting, accounting for just 8% of sales revenue in fiscal 2014 • Oddly enough, appliances are growing, even though accounting for just 6% of sales – Appliances are 17% of international sales and a growth category (+8.4%) 12
- 13. What are BBY’s Strengths and Weaknesses? • Extensive product knowledge provides value-added services in an environment where technology is changing rapidly • Provide customers with end-to-end solutions through installation services, product repair, and ongoing support 13 Strengths • Strong industry presence: 1,495 retail locations in North America and more than 473 stores in China / Canada • Unique, value-added business segments (e.g. Geek Squad, Best Buy Mobile) • Standardized processes: Scale economies and low operating expenses • Immediate product fulfillment • Provides an extensive product offering and is highly adept at anticipating and satisfying customer needs Weaknesses • Market perceptions of Best Buy’s service levels do not put the company ahead of its competitors • Financial vulnerabilities stemming from downward economic and competitive pressures on prices • 16% increase in accounts receivable for 2011 → Bad debt losses • Business model → Competitive disadvantage for competing on price
- 14. What are the Critical Challenges for Best Buy? • Increased competitive intensity: Rivals with alternative approaches exerting margin pressure – Cost of brick-and-mortar stores? – Combat sales losses and manage financial stress? • Products are increasingly becoming commoditized – Difficulty differentiating and finding new ways to add value • How will BBY execute its strategy? – Strategy centers on the customer: How does it revamp products and store design to serve customers’ new needs? – How does BBY enhance perceptions of superior customer service? • How to manage international ventures to realize potential in foreign markets? 14
- 15. “Our ability to transform Best Buy is highly dependent on our ability to transform our in-store experience” • Enhancing customer experience: – Ship-from-store (1400 locations) – Opened 1400 Samsung and 600 Windows stores-within-a-store concept – Pacific Kitchen and Home and Magnolia Design Centers – Google announces intentions for 2014 15 Ties success to specific brands – Samsung and Microsoft
- 16. How would you address Best Buy’s issues? • Home Office: Reposition on consultative services and products specifically for business / home office applications → Compete against Staples / Office Depot 16 Element Options Arena • Continue retail to offer consumer consultation during purchase → Fashion a Best Buy Complex: store-within-a-store concept • Cautiously seek growing, foreign markets (e.g. India and Brazil) Vehicles • Improve cost management and internal training, using supplier partnerships / alliances Differentiators • Concentrate on new technologies for which prices have not eroded and new information is required to make the purchasing decision • Seek ways to transfer its value-added knowledge model to its website and closely integrate with store resources • Build value through relevant customer services: 1. Reduce confusion around new, advanced devices, features, and technologies 2. Support technology and device integration as well as customer desire for connectivity, access, and immediacy