Module 2 Rawhide Brewery Mini-case Template KeyProposal Summa.docx

Module 2 Rawhide Brewery Mini-case Template: Key
Proposal Summaries
Proposal 1
1. Rawhide brews Tabby beer at a few per case (improves
Rawhides Net income on Income Statement)
2. Fee is adjusted monthly due to price of hops
3. Fee dependent on volume: as volume increase, fee
decreases, but Rawhide profit increases
4. Fee (per case of beer) is adjusted annually due to inflation
5. Guaranteed minimum case of beer processing volume
6. Created a 5-year contract where Tabby would pay 20 cents
less per case than presently
Proposal 2
1. Rawhide transfers brewery operations and 10-year debt
(improves balance sheet) to Newco
2. Rawhide brewery equipment = $5mil & debt = $3.5 mil
3. Tabby pays $950K for 95% of Newco stock; Rawhide pays
$50K for 5% Newco stock
4. Rawhide gets $1.5 mil note receivable with an annually
adjusting interest rate depending on Newco
profitability: higher profits = higher interest rate, up to 20%.
5. All beer processed at Newco is 15% cheaper than under
Proposal 1, reducing COGS for Tabby.
6. Rawhide guarantees the $3.5 mil loan.
7. Rawhide would have more control than Tabby due to
shareholder agreement.
8. Rawhide and Tabby pays the same fee per case, increasing
COGS for both.
Proposal 3
1. Rawhide transfers brewery and debt to Newco
2. Rawhide gets 60% of Newco for $1.5 mil ($5 [asset] - $3.5

[debt])
3. Tabby buys 40% of Newco for $1.0 mil
4. Tabby and Rawhide both guarantee loan.
Proposal Effect on Rawhide's Debt/Equity Ratio (Reference
debt to equity ratio = 1.33)
1. Proposal 1: D/E likely goes down (equity increases relative
to liabilities)
a. Cash and marketable securities likely increase
(Balance Sheet, B/S)
b. Retained earnings go up, assuming volume increases
(B/S), flows to net income to retained earnings
increasing equity
c. Net income goes up due to likely higher net
revenue due to processing volume, profits,
and inflation (Income Statement, I/S), flows to net income
to retained earnings increasing
equity
2. Proposal 2: D/E is likely reduced as liabilities are reduced
and equity (retained earnings) increases, probably more
than Proposal 1.
a. Net Income increases, as depreciation, amortization,
and interest expenses are reduced and COGS is reduced 15%
(I/S) flows to net income to retained earnings
b. Transferring brewery reduces non-current assets (an
asset) (B/S) no impact on d/e
c. Transferring loan reduces long-term debts (a
liability) (B/S), reduces debt
d. Rawhide holds 5% of Newco; assuming dividends,
cash and equity increase (B/S) flows to net
income to retained earnings increasing equity
e. Annual interest payment ($1.5 mil note receivable)
improves cash position (B/S), flows to net income to retained
earnings increasing equity

3. Proposal 3: D/E Ratio likely decreases
a. Net income increases, given a 15% decrease in
brewery costs (COGS), depreciation, amortization, and interest
expenses are materially reduced. (I/S), flows to net income to
retained earnings increasing equity
b. Brewery ($5 mil) and debt ($3.5 mil) are transferred
to Newco; so no long-term debt and no current assets on balance
sheet. (B/S), reduces ratio
c. Rawhide gets 60% of Newco stock for $1.5 mil
($5 [asset] -$3.5 [debt]); so, cash and marketable securities
increase as does equity (retained earnings) (B/S), flows to net
income to retained earnings increasing equity
d. Assuming stock dividends & interest on the note
receivable from Proposal 2 pays, flows to net income to retained
earnings increasing equity
Decision Model & Recommendation: Expected Value (EV)
Taylor (2013, p. 78) defines expected value as, “computed by
multiplying each decision outcome under each state of nature by
the probability of its occurrence.” If the decision involves
profits, choose the largest EV; if the decision involves costs,
choose the lowest expected value. Let’s compute some expected
values:
1. First construct a payoff table with the expected
occurrences of each state of nature.
Expected Value Payoff Table 1a
State of Nature
Decision
Good (.6)
Poor (.4)
Proposal 1
Proposal 2

Proposal 3
2. Compute expected values.
Decision
Multiplication & Addition
Proposal 1
$0.00 (.6) + $0.00 (.4) = $0.00
Proposal 2
$0.00 (.6) + $0.00 (.4) = $0.00
Proposal 3
$0.00 (.6) + $0.00 (.4) = $0.00
3. Apply decision criteria. Select the Office complex,
since EV = $0.00. A word of caution: the firm in reality may not
see an exact $0.00 profit; but if the purchase was repeated a lot,
under the same conditions, the average payoff is expected to be
$0.00.
C-1
encourages its employees to go out of their way to
help customers understand what these products can
do and how customers can get the most out of the
products they purchase. Employees must recognize
that each customer is unique and thus determine the
best method to help that customer achieve maxi-
mum enjoyment from the product(s) purchased.
From a strategic standpoint, Best Buy moved
from being a discount retailer (a low-price strategy)

to a service-oriented firm that relies on a differentia-
tion strategy. In 1989, it changed the compensation
structure for sales associates from commission based
to noncommission based, which resulted in consum-
ers having more control over the purchasing process
and in cost savings for the company (the number
of sales associates was reduced). In 2005, Best Buy
took customer service a step further by moving from
peddling gadgets, to a customer-centric operating
model. It is now gearing up for another change to
focus on store design and providing products and
services in line with customers’ desire for constant
connectivity.
Company History2
From Sound of Music to Best Buy
Best Buy was originally known as Sound of Music.
Incorporated in 1966, the company started as a
retailer of audio components and expanded to retail-
ing video products in the early 1980s with the intro-
duction of the videocassette recorder to its product
line. In 1983, the company changed its name to Best
Buy Co., Inc. (Best Buy). Shortly thereafter, it began
operating its existing stores under a “superstore” con-
cept by expanding product offerings and using mass
marketing techniques to promote those products.
In 1989 Best Buy dramatically altered the func-
tion of its sales staff. Previously, the sales staff
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
The author would like to thank Kevin Clark, Leonard
D’Andrea, Amanda Genesky, Geoff Merritt, Chris
Mudarri, and Dan Fowler for their research. Please

address all correspondence to Dr. Alan N. Hoffman,
MBA Program Director, LaCava 295, Bentley
University, 175 Forest Street, Waltham, MA 02452;
[email protected]
Best Buy Co., Inc.: Sustainable
Customer Centricity Model?
Best Buy, headquartered in Richfield, Minnesota,
is a specialty retailer of consumer electronics.
It operates over 1,100 stores in the United States,
accounting for 19 percent of the market. With
approximately 155,000 employees, it also operates
over 2,800 stores in Canada, Mexico, China, and
Turkey. The company’s subsidiaries include Geek
Squad, Magnolia Audio Video, Pacific Sales, and in
Canada, it operates under both the Best Buy and
Future Shop labels.
Best Buy’s mission is to make technology deliver
on its promises to customers. To accomplish this, it
helps customers realize the benefits of technology
and technological changes so they can enrich their
lives in a variety of ways through connectivity: “To
make life fun and easy,”1 as Best Buy puts it. This is
what drives the company to continually increase the
tools to support customers in the hope of providing
end-to-end technology solutions.
As a public company, Best Buy’s top objectives
are sustained growth and earnings. This is accom-
plished in part by constantly reviewing its business
model to ensure that it is satisfying customer needs
and desires as effectively and completely as possi-
ble. The company strives to have not only extensive
product offerings but also highly trained employees
with extensive product knowledge. The company

Dr. Alan N. Hoff man / Rotterdam School of Management,
Erasmus University and
Bentley University
76812_Best Buy.indd C-176812_Best Buy.indd C-1 8/6/11
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C-2 Best Buy Co. Inc.: Sustainable Customer Centricity Model?
worked on a commission basis and as a result was
more proactive in assisting customers coming into
the stores. Since 1989, when the commission struc-
ture was terminated, sales associates have developed
into educators assisting customers in learning about
the products offered in the stores. The customer, to
a large extent, takes charge of the purchasing pro-
cess. The sales staff’s mission became to answer cus-
tomer’s questions so that the customer could decide
which product(s) fit his or her needs. This differed
greatly from their former mission of simply generat-
ing sales.
In 2000, the company launched its online retail
store: BestBuy.com. This allowed customers a choice
between visiting a physical store and purchasing
products online, thus expanding Best Buy’s reach
among consumers.
Expansion through Acquisitions
Since 2000, Best Buy has begun a series of acquisi-
tions to expand their offerings and enter interna-
tional markets:

2000—Best Buy acquired Magnolia Hi-Fi, Inc., a
high-end retailer of audio and video products and
services, which became Magnolia Audio Video in
2004. This acquisition allowed Best Buy access to
a set of upscale customers.
2001—Best Buy entered the international mar-
ket with the acquisition of Future Shop Ltd., a
leading consumer electronics retailer in Canada.
This helped Best Buy increase revenues, gain
market share, and leverage operational expertise.
The same year, it also opened its first Canadian
store. In the same year, the company purchased
Musicland, a mall-centered music retailer
throughout the United States (divested in 2003).
2002—Best Buy acquired Geek Squad, a com-
puter repair service provider, to help develop a
technological support system for customers. The
retailer began by incorporating in-store Geek
Squad centers in its 28 Minnesota stores and
expanding nationally and then internationally in
subsequent years.
2005—Best Buy opened the first Magnolia Home
Theater “store-within-a-store” (located within
the Best Buy complex).
2006—Best Buy acquired Pacific Sales Kitchen
and Bath Centers Inc. to develop a new customer
base: builders and remodelers. The same year, it
also acquired a 75 percent stake in Jiangsu Five
Star Appliance Co. Ltd., a China-based appliance
and consumer electronics retailer. This enabled

the company to access the Chinese retail market
and led to the opening of the first Best Buy China
store on January 26, 2007.
2007—Best Buy acquired Speakeasy, Inc., a pro-
vider of broadband, voice, data, and information
technology services, to further its offering of tech-
nological solutions for customers.
2008—Through a strategic alliance with the
Carphone Warehouse Group, a UK-based pro-
vider of mobile phones, accessories, and related
services, Best Buy Mobile was developed.
After acquiring a 50 percent share in Best Buy
Europe (with 2,414 stores) from the Carphone
Warehouse, Best Buy intends to open small-store
formats across Europe in 2011.3 Best Buy also
acquired Napster, a digital downloads provider,
through a merger, to counter the falling sales of
compact discs.
The first Best Buy Mexico store was opened.
2009—Best Buy acquired the remaining 25 per-
cent of Jiangsu Five Star. Best Buy Mobile moved
into Canada.
Industry Environment
Industry Overview
Despite the negative impact the financial crisis has
had on economies worldwide, in 2008 the consumer
electronics industry managed to grow to a record
high of US$694 billion in sales—a nearly 14 per-
cent increase over 2007. In years immediately prior,
the growth rate was similar: 14 percent in 2007 and

17 percent in 2006. This momentum, however, did
not last. Sales dropped 2 percent in 2009, the first
decline in 20 years for the electronics giant.
A few product segments, including televisions,
gaming, mobile phones, and blu-ray players, drive
sales for the company. Television sales, specifically
LCD units, which account for 77 percent of total
television sales, were the main driver for Best Buy
as this segment alone accounts for 15 percent of
total industry revenues. The gaming segment con-
tinues to be a bright spot for the industry, as sales
are expected to have tremendous room for growth.
Smartphones are another electronics industry seg-
ment predicted to have a high growth impact on the
entire industry.
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Best Buy Co. Inc.: Sustainable Customer Centricity Model? C-3
The consumer electronics industry has sig-
nificant potential for expansion into the global
marketplace. There are many untapped markets,
especially newly developing countries. These mar-
kets are experiencing the fastest economic growth
while having the lowest ownership rate for gad-
gets.4 Despite the recent economic downturn, the
future for this industry is optimistic. A consumer
electronics analyst for the European Market
Research Institute predicts that the largest growth
will be seen in China (22 percent), the Middle East
(20 percent), Russia (20 percent), and South America

(17 percent).5
Barriers to Entry
As globalization spreads and use of the Internet
grows, barriers to entering the consumer electron-
ics industry are diminished. When the industry was
dominated by brick-and-mortar companies, obtain-
ing the large capital resources needed for entry
into the market was a barrier for those looking
to gain any significant market share. Expanding a
business meant purchasing or leasing large stores
that incurred high initial and overhead costs.
However, the Internet has significantly reduced the
capital requirements needed to enter the industry.
Companies like Amazon.com and Dell have utilized
the Internet to their advantage and gained valuable
market share.
The shift toward Internet purchasing has also
negated another once strong barrier to entry—
customer loyalty. The trend today is that consum-
ers will research products online to determine which
one they intend to purchase and then shop around
on the Internet for the lowest possible price.
Even though overall barriers are diminished,
there are still a few left, which a company like Best
Buy can use to their advantage. The first, and most
significant, is economies of scale. With over 1,000
locations, Best Buy can use their scale to obtain cost
advantages from suppliers due to high quantity of
orders. Another advantage is in advertising. Large
firms have the ability to increase advertising budgets
to deter new entrants into the market. Smaller com-
panies generally do not have the marketing budgets
for massive television campaigns, which are still one

of the most effective marketing strategies available
to retailers. Although Internet sales are growing,
the industry is still dominated by brick-and-mortar
stores. Most consumers looking for electronics—
especially major electronics—feel a need to actually
see their prospective purchases in person. Having
the ability to spend heavily on advertising will help
increase foot traffic to these stores.
Internal Environment
Finance
While Best Buy’s increase in revenue is encouraging
(see Exhibit 1), recent growth has been fueled largely
by acquisition, especially Best Buy’s 2009 revenue
growth. At the same time, net income and operating
margins have been declining (see Exhibits 2 and 3).
Although this could be a function of increased costs,
it is more likely due to pricing pressure. Given the
current adverse economic conditions, prices of many
consumer electronics products have been forced
down by economic and competitive pressures. These
lower prices have caused margins to decline, nega-
tively affecting net income and operating margins.
Best Buy’s long-term debt increased substan-
tially from 2008 to 2009 (see Exhibit 4), which is
primarily due to the acquisition of Napster and Best
Buy Europe. The trend in available cash has been
a mirror image of long-term debt. Available cash
increased from 2005 to 2008 and then was substan-
tially lower in 2009 for the same reason.
While the change in available cash and long-term
debt are not desirable, the bright side is that this situ-

ation is due to the acquisition of assets, which has led
to a significant increase in revenue for the company.
Ultimately, the decreased availability of cash would
seem to be temporary due to the circumstances. The
more troubling concern is the decline in net income
and operating margins, which Best Buy needs to find a
way to turn around. If the problems with net income
and operating margins are fixed, the trends in cash and
long-term debt will also begin to turn around.
At first blush, the increase in accounts receiv-
able and inventory is not necessarily alarming since
revenues are increasing during this same time period
(see Exhibit 5). However, closer inspection reveals a
1 percent increase in inventory from 2008 to 2009
and a 12.5 percent increase in revenue accompanied
by a 240 percent increase in accounts receivable. This
creates a potential risk for losses due to bad debts.
Marketing
Best Buy’s marketing objectives are fourfold: (a) to
market various products based on the customer cen-
tricity operating model, (b) to address the needs of
customer lifestyle groups, (c) to be at the forefront
of technological advances, and (d) to meet customer
needs with end-to-end solutions.
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Exhibit 1 Quarterly Sales

Fiscal Year 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr
2005 $5,479 $6,080 $6,647 $9,227
2006 $6,118 $6,702 $7,335 $10,693
2007 $6,959 $7,603 $8,473 $12,899
2008 $7,927 $8,750 $9,928 $13,418
2009 $8,990 $9,801 $11,500 $14,724
2010 $10,095
Exhibit 2 Quarterly Net Income
2005 $114 $150 $148 $572
2006 $170 $188 $138 $644
2007 $234 $230 $150 $763
2008 $192 $250 $228 $737
2009 $179 $202 $52 $570
2010 $153
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Exhibit 3 Operating Margin
Exhibit 4 Long-Term Debt and Cash
2005 3.36% 3.98% 3.51% 8.49%
2006 3.91% 3.89% 2.58% 8.97%
2007 4.84% 4.34% 2.31% 8.81%
2008 3.36% 4.58% 3.54% 8.52%
2009 3.08% 3.46% 2.38% 7.63%
2010 3.45%
Fiscal Year 2005 2006 2007 2008 2009
Long-Term Debt (LTD) $528 $178 $590 $627 $1,126
Cash $354 $748 $1,205 $1,438 $498
LTD/Equity 0.12 0.03 0.10 0.14 0.24
LTD/Total Assets 0.05 0.02 0.04 0.05 0.07
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Best Buy prides itself on customer centricity that
caters to specific customer needs and behaviors.
Over the years, the retailer has created a portfolio of
products and services that complement one another
and have added to the success of the business. These
products include seven distinct brands domestically,
as well as other brands and stores internationally:
Best Buy—offers a wide variety of consumer elec-
tronics, home office products, entertainment soft-
ware, appliances, and related services.
Best Buy Mobile—stand-alone stores offer a
wide selection of mobile phones, accessories, and
related services in small-format stores.
Geek Squad—provides residential and commer-
cial product repair, support, and installation ser-
vices both in-store and on-site.
Magnolia Audio Video—offers high-end audio
and video products and related services.
Napster—an online provider of digital music.
Pacific Sales—offers high-end home improvement
products primarily including appliances, con-
sumer electronics, and related services.
Speakeasy—provides broadband, voice, data, and
information technology services to small businesses.
Starting in 2005, Best Buy initiated a strategic
transition to a customer-centric operating model,
which was completed in 2007. Prior to 2005, the

company focused on customer groups such as afflu-
ent professional males, young entertainment enthusi-
asts, upscale suburban mothers, and technologically
advanced families.6 After the transition, it focused
more on customer lifestyle groups such as affluent
suburban families, trend-setting urban dwellers, and
the closely knit families of Middle America.7 To tar-
get these various segments, Best Buy acquired firms
with aligned strategies, which could be used as a
competitive advantage against its strongest competi-
tion, such as Circuit City and Walmart. The acquisi-
tions of Pacific Sales, Speakeasy, and Napster, along
with the development of Best Buy Mobile, created
more product offerings, which led to more profits.
To market all these different types of prod-
ucts and services is a difficult task. That is why
Best Buy’s employees have more training than that
of their competitors. This knowledge service is a
value-added competitive advantage. Since the sales
employees no longer operate on a commission-based
pay structure, consumers can obtain knowledge
from sales people without being subjected to high-
pressure sales techniques. This is generally seen to
enhance customer shopping satisfaction.
Operations
Best Buy’s operating objectives include increas-
ing revenues by growing its customer base, gain-
ing more market share internationally, successfully
Exhibit 5 Accounts Receivable and Inventory
Fiscal Year 2005 2006 2007 2008 2009
Inventory $2,851 $3,338 $4,028 $4,708 $4,753

Accounts Receivable $375 $449 $548 $549 $1,868
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implementing marketing and sales strategies in
Europe, and having multiple brands for different
customer lifestyles through mergers and acquisitions
(M&A).
Domestic Best Buy store operations are organized
into eight territories, with each territory divided into
districts. A retail field officer oversees store perfor-
mance through district managers, who meet with store
employees on a regular basis to discuss operations
strategies such as loyalty programs, sales promotion,
and new product introductions.8 Along with domestic
operations, Best Buy has an international operation
segment, originally established in connection with the
acquisition of Canada-based Future Shop.9
In 2009, Best buy opened 285 new stores in
addition to the European acquisition of 2,414 Best
Buy Europe stores, relocated 34 stores, and closed
67 stores.
Human Resources
The objectives of Best Buy’s human resources depart-
ment are to select employees that give consumers
the best knowledge of products and services, which
portrays the company’s vision and strategy on an

everyday basis, and to educate employees on the ins
and outs of new products and services.
Best Buy employees are required to be ethical
and knowledgeable. This principle starts within the
top-management structure and filters down from
the retail field officer through district managers,
and through store managers to the employees on
the floor. Every employee must have the company’s
vision embedded in his or her service and attitude.
Despite Best Buy’s efforts to train an ethical and
knowledgeable employee force, there have been some
allegations and controversy over Best Buy employ-
ees, which has given the company a bad black eye
in the public mind. One lawsuit claimed that Best
Buy employees had misrepresented the manufactur-
er’s warranty in order to sell its own product ser-
vice and replacement plan. It accused Best Buy of
“entering into a corporate-wide scheme to institute
high-pressure sales techniques involving the extended
warranties” and “using artificial barriers to discour-
age consumers who purchased the ‘complete extended
warranties’ from making legitimate claims.”10
In a more recent case (March 2009), the U.S.
District Court granted Class Action certification to
allow plaintiffs to sue Best Buy for violating its “Price
Match” policy. According to the ruling, the plaintiffs
allege that Best Buy employees would aggressively
deny consumers the ability to apply the company’s
“price match guarantee.”11 The suit also alleges that
Best Buy has an undisclosed “Anti-Price Matching
Policy,” where it tells its employees not to allow price
matches and gives financial bonuses to employees

who do this.
Competition
Brick-and-Mortar Competitors
Walmart Stores Inc., the world’s largest retailer with
revenues over US$405 billion, has operations world-
wide and offers a diverse product mix with a focus on
being a low-cost provider. In recent years, Walmart
has increased its focus on grabbing market share in
the consumer electronics industry. In the wake of
Circuit City’s liquidation,12 it is stepping up efforts
by striking deals with Nintendo and Apple that
will allow each company to have their own in-store
displays. Walmart has also considered using smart-
phones and laptop computers to drive growth.13 It
is refreshing 3,500 of its electronics departments
and will begin to offer a wider and higher range of
electronic products. These efforts will help Walmart
appeal to the customer segment looking for high
quality at the lowest possible price.14
GameStop Corp. is the leading video game retailer
with sales of almost US$9 billion as of January 2009,
in a forecasted US$22 billion industry. It operates
over 6,000 stores throughout the United States,
Canada, Australia, and Europe, as a retailer of both
new and used video game products including hard-
ware, software, and gaming accessories.15
The advantage GameStop has over Best Buy is
the number of locations: 6,207 GameStop locations
compared to 1,023 Best Buy locations. However,
Best Buy seems to have what it takes to overcome
this advantage—deep pockets. With significantly
higher net income, Best Buy can afford to take a hit

to their margins and undercut GameStop prices.16
RadioShack Corp. is a retailer of consumer
electronic goods and services including flat panel
televisions, telephones, computers, and consumer
electronic accessories. Although the company
grosses revenues of over US$4 billion from 4,453
locations, RadioShack has consistently lost market
share to Best Buy. Consumers have a preference for
RadioShack for audio and video components, yet
prefer Best Buy for their big box purchases.17
Second-tier competitors are rapidly increasing.
Wholesale shopping units are becoming more popu-
lar, and companies such as Costco and BJ’s have,
over the past few years, increased their piece of the
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consumer electronics pie. After Circuit City’s bank-
ruptcy, mid-level electronics retailers like HH Gregg
and Ultimate Electronics are scrambling to grab
Circuit City’s lost market share. Ultimate Electronics,
owned by Mark Wattles, who was a major inves-
tor in Circuit City, has a leg up on its competitors.
Wattles was on Circuit City’s board of executives
and had firsthand access to profitable Circuit City
stores. Ultimate Electronics has plans to expand its
operations by at least 20 stores in the near future.
Online Competitors

Amazon.com, Inc. has, since 1994, grown into the
United States’ largest online retailer with revenues of
over US$19 billion in 2008 by providing just about
any product imaginable through its popular Web
site. Begun as an online bookstore, Amazon soon
ventured into various consumer electronic product
categories including computers, televisions, soft-
ware, video games and much more.18
Amazon.com gains an advantage over its super-
center competitors as it is able to maintain a lower
cost structure compared to brick-and-mortar com-
panies such as Best Buy. It is able to push those sav-
ings through to their product pricing and selection/
diversification. With an increasing trend in the con-
sumer electronics industry to shop online, Amazon.
com is positioned perfectly to maintain strong
market growth and potentially steal some market
share away from Best Buy.
Netflix, Inc. is an online video rental service,
offering selections of DVDs and Blu-ray discs. Since
its establishment in 1997, it has grown into a US$1.4
billion company. With over 100,000 titles in its col-
lection, it ships for free to approximately 10 mil-
lion subscribers. It has also begun offering streaming
downloads through its Web site, which eliminates
the need to wait for a DVD to arrive.
Netflix is quickly changing the DVD market,
which has dramatically impacted brick-and-mortar
stores such as Blockbuster and Hollywood Video
and retailers who offer DVDs for sale. In a respon-
sive move, Best Buy has partnered with CinemaNow
to enter the digital movie distribution market and
counter Netflix and other video rental providers.19

Core Competencies
Customer Centricity Model
Most players in the consumer electronics industry focus
on delivering products at the lowest cost (Walmart—
brick-and-mortar, Amazon—Web-based). Best Buy,
however, has taken a different approach by provid-
ing customers with highly trained sales associates
who are available to educate customers regarding
product features. This allows customers to make
informed buying decisions on big-ticket items. In
addition, with the Geek Squad, Best Buy is able
to offer and provide installation services, product
repair, and ongoing support. In short, it can provide
an end-to-end solution for its customers.
Best Buy has used their customer centricity
model, which is built around a significant database
of customer information, to construct a diversified
portfolio of product offerings. This allows the com-
pany to offer different products in different stores in
a manner that matches customer needs. This in turn
helps keep costs lower by shipping the correct inven-
tory to the correct locations. Since Best Buy’s costs
are increased by the high level of training needed
for sales associates and service professionals, it has
been important that the company remain vigilant
in keeping costs down wherever they can without
sacrificing customer experience.
The tremendous breadth of products and ser-
vices Best Buy is able to provide allows customers
to purchase all components for a particular need
within the Best Buy family. For example, if a cus-

tomer wants to set up a first-rate audio-visual room
at home, he or she can go to the Magnolia Home
Theater store-within-a-store at any Best Buy loca-
tion and use the knowledge of the Magnolia or Best
Buy associate in the television and audio areas to
determine which television and surround sound the-
ater system best fits his or her needs. The customer
can then employ a Geek Squad employee to install
and set up the television and home theater system.
None of Best Buy’s competitors offer this extensive
level of service.
Successful Acquisitions
Through its series of acquisitions, Best Buy has
gained valuable experience in the process of inte-
grating companies under the Best Buy family. The
ability to effectively determine where to expand has
been and will be key to the company’s ability to
differentiate itself in the marketplace. Additionally,
Best Buy has also been successfully integrating
employees from acquired companies. Due to the
importance of high-level employees to company
strategy and success, retaining this knowledge
base is invaluable. Best Buy now has a significant
global presence, which is important because of the
maturing domestic market. This global presence has
11:11 AM8/6/11 11:11 AM
provided the company with insights into worldwide
trends in the consumer electronics industry and

afforded access to newly developing markets. Best
Buy uses this insight to test products in different
markets in its constant effort to meet and anticipate
customer needs.
Retaining Talent
Analyzing Circuit City’s demise, many experts have
concluded one of the major reasons for the compa-
ny’s downfall is that Circuit City let go of their most
senior and well-trained sales staff in order to cut
costs. Best Buy, on the other hand, has a reputation
for retaining their talent and is widely recognized for
its superior service. Highly trained sales profession-
als have become a unique resource in the consumer
electronics industry, where technology is changing
at an unprecedented rate, and can be a significant
source of competitive advantage.
Challenges Ahead
Economic Downturn
Electronics retailers like Best Buy sell products that
can be described as “discretionary items, rather than
necessities.”20 During economic recessions, however,
consumers have less disposable income. While there
has been recent optimism about a possible economic
turnaround, if the economy continues to stumble,
this presents a real threat to sellers of discretionary
products.
In order to increase sales revenues, many retail-
ers, including Best Buy, offer customers low-interest
financing through their private-label credit cards.
These promotions have been tremendously success-
ful for Best Buy. From 2007 to 2009, these private-
label credit card purchases accounted for 16 percent

to 18 percent of Best Buy’s domestic revenue. Due
to the current credit crisis, however, the Federal
Reserve has issued new regulations that could
restrict companies from offering deferred inter-
est financing to customers. If Best Buy and other
retailers are unable to extend these credit lines, it
could have a tremendous negative impact on future
revenues.21
Pricing and Debt Management
The current economic conditions, technological
advances, and increased competition have put a tre-
mendous amount of pricing pressure on many con-
sumer electronics products. This is a concern for all
companies in this industry. The fact that Best Buy
does not compete strictly on price structure alone
makes this an even bigger concern. Given the higher
costs that Best Buy incurs training employees, any
pricing pressure that decreases margins puts stress
on Best Buy’s financial strength. In addition, the
recent acquisition of Napster and the 50 percent
stake in Best Buy Europe have significantly increased
Best Buy’s debt and reduced available cash. Even in
prosperous times, debt management is a key factor
in any company’s success, and it becomes even more
of a concern during economic downturn.
Products and Service
As technology improves, product life cycles, as well
as prices, decrease and as a result, margins decrease.
Under Best Buy’s service model, shorter product
life cycles increase training costs. Employees are
forced to learn new products with higher frequency.
This is not only costly but also increases the likeli-
hood that employees will make mistakes, thereby

tarnishing Best Buy’s service record and potentially
damaging one of its most important, if not the
most important, differentiators. In addition, more
resources must be directed at research of new prod-
ucts to make sure Best Buy continues to offer the
products consumers desire.
One social threat to the retail industry is the
growing popularity of the online marketplace.
Internet shoppers can browse sites searching for the
best deals on specific products. This technology has
allowed consumers to become more educated about
their purchases, while creating increased downward
price pressure. Ambitious consumers can play the
role of a Best Buy associate themselves by doing
product comparisons and information gathering
without a trip to the store. This emerging trend cre-
ates a direct threat to companies like Best Buy, which
has 1,023 stores in its domestic market alone. One
way Best Buy has tried to continue the demand for
brick-and-mortar locations and counter the threat
of Internet-based competition is by providing value-
added services in stores. Customer service, repairs,
and interactive product displays are just a few exam-
ples of these services.22
Leadership
The two former chief executive officers (CEOs)
of Best Buy, Richard Shultze and Brad Anderson,
were extremely successful at making the correct
strategic moves at the appropriate times. With Brad
Anderson stepping aside in June 2009, Brian Dunn
replaced him as the new CEO. Although Dunn has
11:11 AM8/6/11 11:11 AM

C-10 Best Buy Co. Inc.: Sustainable Customer Centricity
Model?
worked for the company for 24 years and held the
key positions of COO and president during his
tenure, the position of CEO brings him to a whole
new level and presents new challenges, especially dur-
ing the current economic downturn. He is charged
with leading Best Buy into the world of increased
connectivity. This requires a revamping of products
and store setups to serve customers in realizing their
connectivity needs. This is a daunting task for an
experienced CEO, let alone a new CEO who has
never held the position.
Walmart
Best Buy saw its largest rival, Circuit City, go down
for good. A new archrival, Walmart, however, is
expanding into consumer electronics and stepping up
competition in a price war it hopes to win. Best Buy
needs to face the competition not by lowering prices,
but by coming up with something really different.
It has to determine the correct path to improve
its ability to differentiate itself from competitors,
which is increasingly difficult given an adverse eco-
nomic climate and the company’s financial stress.
How Best Buy can maintain innovative products,
top-notch employees, and superior customer service
while facing increased competition and operational
costs is an open question.
NOTES

1. Best Buy Co., Inc., 2009, February 28, Form 10-K.
Securities and Exchange
Commission.
2. Ibid.
3. Ibid.
4. G. Keller, 2009, May 18, “Threat Grows by Ipod and
Laptop,” The Columbus
Dispatch, 2009, http://www.dispatch.com/live/content/business/
stories/2009/05/18/greener_gadgets.ART_ART_05-18-
09_A9_TMDSJR8.html,
July 10
5. L. Magid, 2008, May 2, “Consumer Electronics: The Future
Looks Bright,”
CBSNews.com, 2009,
http://www.cbsnews.com/stories/2008/05/02/scitech/
pcanswer/main4067008.shtml, July 10
6. Best Buy Co., Inc., 2009, Form 10-K.
7. Ibid.
8. Ibid.
9. Ibid.
10. Manhattan Institute for Policy Research, “They’re Making a

Federal Case Out of
It…in State Court,” Civil Justice Report 3, 2001,
http://www.manhattan-institute
.org/html/cjr_3_part2.htm, September.
11. “Best Buy Bombshell,” HD Guru, 2009,
http://hdguru.com/best-buy-bombshell/
400/, March 21
12. Circuit City Stores, Inc. was an American retailer in brand-
name consumer
electronics, personal computers, entertainment software, and
(until 2000)
large appliances. The company opened its first store in 1949 and
liquidated
its final American retail stores in 2009 following a bankruptcy
filing and
subsequent failure to find a buyer. At the time of liquidation,
Circuit City was
the second-largest U.S. electronics retailer, after Best Buy.
13. Z. Bissonnette, “Wal-Mart Looks to Expand Electronics
Business,” Bloggingstocks.
com, 2009, http://www.bloggingstocks.com/2009/05/18/wal-
mart-looks-to-
expand-electronics-business/, May 18

14. N. Maestri, “Wal-Mart Steps Up Consumer Electronics
Push,” Reuters, 2009,
http://www.reuters.com/article/technologyNews/idUSTRE54I4T
R20090519,
May 19
15. Capital IQ, “GameStop Corp. Corporate Tearsheet,” Capital
IQ, 2009, https://
www.capitaliq.com/
16. E. Sherman, “GameStop Faces Pain from Best Buy,
Downloading,” BNET
Technology, 2009,
http://industry.bnet.com/technology/10002329/gamestop-
faces-pain-from-best-buy-downloading/, June 24
17. T. Van Riper, “RadioShack Gets Slammed,” Forbes.com,
2006, http://www.forbes.
com/2006/02/17/radioshack-edmondson-
retail_cx_tr_0217radioshack.html,
February 17
18. Capital IQ, “Amazon.com Corporate Tearsheet,” Capital
IQ, 2009, https://www.
capitaliq.com/
19. T. Kee, “Netflix Beware: Best Buy Adds Digital Downloads

with CinemaNow
Deal,” paidContent.org, 2009,
http://paidcontent.org/article/419-best-buy-
adds-digital-movie-downloads-with-cinemanow-deal/, June 5
20. Best Buy Co., Inc., 2009, Form 10-K.
21. Ibid.
22. Ibid.
11:11 AM8/6/11 11:11 AM
Exhibit 1 EFAS Table for Best Buy Co., Inc. 2010
External Factors
Weight
Rating
Weighted Score
Comments
Opportunities

1. Constant evolution of technology
0.20
5.0
1.00
well positioned
2. Expansion of product lines
0.10
4.1
0.41
constant
3. Acquisitions of rivals
0.05
2.5
0.13
-
4. Global expansion
0.10
3.0
0.30
continuously expanding
5. Online growth potential
0.10
3.0
0.30
will take time

Threats
1. Internet-based and brick-and-mortar competitors
0.20
5.0
1.00
well positioned, Best Buy weak globally
2. Economic downturn
0.10
3.0
0.30
questionable
3. Instant Price Discovery
0.05
4.5
0.23

well positioned
4. Lawsuit on "price match" policy and
misrepresented warranties
0.10
3.0
0.30
-
Total Scores
1.00
3.96

Module 2 Rawhide Brewery Mini-case Template KeyProposal Summa.docx

Exhibit 2 IFAS Table for Best Buy Co., Inc. 2009
Internal Factors
Weight
Rating
Weighted Score

Comments
Strength
1. Customer-Centricity
0.20
5.0
1.00
Extensive research and analysis of its customer base help Best
Buy in configuring its stores and training its workforce to cater
to the individual needs.
2. Best Buy quality culture
0.05
3.0
0.15
Best Buy's salespeople don’t receive a commission which
helped to create a low-pressure shopping experience.
3. Knowledgeable sales staff
0.05
2.5
0.13
Expert in their related fields
4. Provides services which not provide by competitors
0.15
3.0

0.45
Products installation and repairs (Geek Squad team)
5. Difference strategy
0.15
5.0
0.75
Key to success
Weaknesses
1. Financial position
0.15
3.0
0.45
High accounts receivable and inventory
2. High dependence on local (U.S) market
0.05
3.0
0.15
The global markets are growing fast, and competitors like Wal-
Mart are building their business.

3. High costs of maintaining stores and employees
0.05
2.0
0.10
Affects profitability
4. Global positioning
0.10
3.0
0.30
Best Buy must increase its global presence quickly to avoid
losing out to its competitors in the global markets
5. Inconsistent top management
0.05
2.5
0.13
Constant adjustment
Total Scores
1.00
3.60

TOWS Matrix
Internal Factors (from IFAS)
External Factors (from EFAS)
Strengths (S)
· Customer-centricity enables close connection of the firm to its
clients
· The company involves itself in the best buy quality culture
· The company’s knowledgeable staff gives it an upper hand
· Its services remain superior as compared to its rivals
· It uses an extended form of differentiation strategy
Weaknesses (W)
· The firm’s financial situation remains a challenge due to high
account receivables as compared to net profits
· The dependence on the U.S. local market remains a challenge
· The company fails to take the issue of global positioning
seriously
· The costs for maintaining workers and the various stores
remains high
· The management fails to keep consistency in the running of
the company
Opportunities (O)

· The firm’s customer-centricity model offers it an opportunity
to reach out to many customers
· Focus on the global market remains a critical issue
· Understanding rival motives and dealing with imitation
challenges gives the firm an upper hand
· Involving knowledgeable and committed top management
teams can help the business achieve its expected goals
S / O Strategies
· Continue with its strategy of sensitizing consumers using its
customer-centric model
· Involve its stakeholders in identifying what is required in
ensuring reach out to the global customers
· Acquisition of more experienced employees throughout the
firm's human resource structure
· Ensure that the strategies put in place magnify the resource
scope of the business through its skilled workforce
W / O Strategies
· The marketing groups organize their strategies to ensure that
the firm’s products gain a global appeal
· All the players in the company’s management appreciate the
costs involved in running it and ensure maximum profits
· Commitment and regular training to ensure consistency in
running the company
Threats (T)

· Increased competition from traditional rivals and imitation
worries
· Non-commitment from the top management teams that might
affect the other employees
· Lack of widespread investments in other countries since focus
remains on the U.S. market
· Retaining its skilled talent can be a problem since other firms
might poach them
S / T Strategies
· Involve everyone including loyal customers to market the
company’s products as it seeks global attention
· Raise the advantages of widespread investments in other
regions to maximize the opportunities available
· Ensure that the firm remains high as compared to its rivals by
retaining and recruiting skilled and talented employees
W / T Strategies
· Try to invest in other regions to bring the products or services
close to the customers
· Minimize costs by reducing expenses and doing away with
redundant employees
· Avoid conflict of interest since it can lead to disarray among
the stakeholders

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