best buy strategic management analysis

Best Buy Corporation - S. Bensen, A. El Haddi, K. Fitzsimmons, A. Hussein, H. Marotske -- UST EMBA [1]

Best Buy Corporation: Strategic Management Analysis S. Bensen, A. El Haddi, K. Fitzsimmons, A. Hussein, H. Marotske

Strategic Management

University of St Thomas, College of Business

Executive MBA program, Cohort 62

Abstract

Best Buys news coverage of the last few years has been consistently negative. The companys performance and

reputation suffered greatly. Its Earnings per Share fell by more than 200% in 2012 alone. These negative events were

the result of governance problems, a changing market landscape (cloud computing, music streaming, online

purchasing, online gaming, etc.) and a significant leadership turnover in a period of crisis. The companys value

stream is in a state of flux and could be said to be a master of none at this time. This paper presents strategies to deal

with these problems by creating a strategic road map that will first stabilize Best Buy and eventually put it on a

growth path. As a result of our analysis, we recommend that the company employs new strategies that include

growing its online business by capitalizing on Geek- Squads expertise and exploring an internal fix-it strategy with

the development of a compelling mission and vision. Finally, we recommend that BB explore the formation of an

alliance with its rivals and leverage opportunities presented by new markets.

1. INTRODUCTION

The purpose of this paper is to examine Best Buys (BB) strategies using SWOT, TOWS

and value stream analysis. It proposes business strategies that can mitigate BBs current

organizational problems and improve its competitiveness.

Founded in 1966, BB is a retail consumer electronics business that owns 1150 big box and over

100 express stores around the globe. Its holdings include CinemaNow, Geek Squad, Magnolia

Audio Video, MindShift and Pacific Sales. Best Buy sports a large array of brands as shown in

figure 1. Best Buys competitors include Amazon, Walmart, Radio Shack and the world of online

retailers.

As of this writing, sales are flat around 50 Billion dollars and its growth is declining from

an average CAGR of 7%. Its earnings per share have declined by more than 200% in the last year.

Additional performance data is shown in the appendix). In 2012, Best Buy pulled out of the UKi,

removed the founder and chairman of the boardii, closed many stores, reshuffled management and

is trying to deal with its own governance issuesiii

. In addition, BB is facing a significant market

paradigm shift towards online e-commerceiv

, mobility, cloud computing, internet taxationv, music

and video streaming. In section 2 we discuss the value streams, followed by a SWOT, a TOWS

and we finally propose several strategies to address Best Buys stagnation issues.


Figure 1: Best Buy brands.

2. BEST BUY VALUE STREAMS

Organizations can pursue one of the following value streams: Operational Excellence

(OE), Customer Intimacy (CI) or Product Leadership (PL). They must master at least one value

stream in order to succeed in the market place.

2.1 Value streams defined

Organizations that pursue OE lead in overhead cost minimization and convenience maximization

by designing and deploying processes and systems that drive efficiency whether in production or

in delivery of goods or services.

Companies whose objective is CI pursue fine customer segmentation. CI seeks to address the

needs of individual customers by delivering the right product at the right place, the right time and

at the right price. PL value discipline focuses on designing and delivering a continuous stream of

innovative products or services. Businesses pursuing PL must be creative (open minded, embrace

external ideas, encourage new ideas), bring products to market quickly (flexible rapid engineering,

agile methods, concurrent product development, rapid marketing and early distribution) and they

must continuously raise the bar by creating new solutions, new products or by adding new

features. Table 1 illustrates our classification criteria used to discern Best Buys value streams.

2.2 Best Buy value proposition in a state of flux

As of this writing, Best Buy is making decisions that will impact its future existence. For

example, management issued a press release (Oct 2012), to announce the streamlining of the

organization by refocusing on connectivity, online retailing and customer service. The company

fired the vice president of operations and his senior staff. The CFO has resigned and is stepping

down in Februaryvi

and the CTO and founder of Geek Squad have left as well. BBs new direction

and its value stream is in a state of flux. Hence, we will focus on existing details and try to predict

the future direction.

2.3 Best Buy Value Streams and the competitive advantage

Best Buy is attempting to focus on cost leadership as a competitive advantage. The problem is

that customers often use it to browse in the store, try products, and get questions answered. Then

they make purchases online for a lower charge, from Amazon or other competitors web sites.

This Showroomingvii behavior is increasing Best Buys costs, which does not translate into

lower prices for the customer (except for the ones with access to free financing such as small and

medium businesses). Best Buy is using focused differentiation by leveraging Geek Squad

expertise and knowledge, which is hard for Amazon to imitate due to the personal attention it

requires. Geek Squad has an army of technicians who visit customers homes to install and

service purchased goods. The technicians also provide lessons to customers without sales pressure

(Something BB was accused of doing in the past). Best Buy extends zero financing for 1-2 years

to select consumers (The most frequent and large item purchasers). This lowers customers prices

and reduces BBs cost of customer acquisition through retention and repeat purchases. Therefore,


we believe Best Buy is using a hybrid of focused differentiation and focused cost leadership

(Figure 1). However this competitive advantage may not last as Wal-Mart edges into this business

segment and as regulations address the business of credit financing.

Furthermore, Table 1 shows a cluster view of how Best Buy ranks compared to its competitors in

terms of OE, CI and PL.

We believe that Best Buy is attempting to be a master of two value disciplines with some

successes and misalignments (See table 1 for details). A quick scan of the print and social media

shows a bureaucratic organization that is not keeping pace with change. The company claims to

avoid top down management. Yet, the sales associates who are in direct contact with the customer

are not empowered to deal with customer issues; Management has to approve non ordinary issues

with transactions even if they impact the customer directly. A visit to a new store shows that

customers may feel lost even after the new initiative of remodeling some stores. It takes more than

3-5 minutes before an initial contact with the customer (It is interesting that the older stores had a

greeter and the initial contact happened within 15 seconds of entering the store). The company is

in a consumer electronics sea change and a paradigm shift accelerated by changes to cloud

computing, music and movie streaming, online purchasing, internet tax and credit card legislation.

Hence, the corporation is in a slow re-invention and reactive modes. For these reasons, we believe

that the company is focusing on Operational Excellence first and on Customer Intimacy second

(Figure 2). Best Buys attempt to be a product leader as well was a failure (Initiatives about

Mobile application development and other off the shelf commercial software and Skunk works

attempts were aborted after birth around 2010). In October, the company reshuffled its operations

management by laying off the veteran operations management and a new focus on mobility,

customer service and online retail emerged as a new goal.

Figure 2: Best Buy Value Streams

3. SWOT ANALYSIS (Strengths, Weaknesses, Opportunities and Threats):

A detailed SWOT analysis is shown in table 2. The following is a SWOT summary.

COST Uniqueness Competitive advantage

Co

mp

eti

tive

sco

pe

Figure 1: Hybrid focused cost and differentiation as a competitive advantage

PL

OE CI

CI

Figure 2. Best Buy as a master of Operational excellence and nearly a master of customer intimacy. The company also had some initiatives in product innovation that failed.


3.1 Strengths

Company size and extensive (domestic and global) distribution network

Core competency in technology services through Geek Squad

Well-known brand

Strong past performance

Robust internet presence and online infrastructure

3.2 Weaknesses

Major governance Issues

Recent senior leadership turnover in the midst of a crisis (governance, market shift)

Weakening financial situation

Too many brands

Poor inventory management

3.3 Opportunities

Emerging global markets (rising middle class and oil wealth, rebalance of global power,

etc.)

Quick obsolescence of mobile technology (Requires frequent upgrades, repurchases)

Online purchasing is becoming more prevalent

Increasing need for IT outsourcing

Economic recovery: Small-midsize businesses and households may resume purchasing

3.4 Threats

Shareholder lawsuits against value destruction, governance

Limited number of suppliers; growing power of wholesalers who are also becoming

competitors: (i.e. Apple stores in malls).

Online competitors set up brick and mortar distribution warehouses due to internet taxes

Exchange rate fluctuation

Low frequency of Television upgrades

Cheap retailers such as Walmart moving in

Financial legislation and compliance: credit cards, financial instruments

Unemployment and recession impact on discretionary income

4. TOWS MATRIX AND STRATGIES

Based on our SWOT analysis, we developed a TOWS matrix (see table 3), and as a result, we

propose the following strategies. It is imperative that BB clarifies its value stream by revamping

its structure, developing a culture and governance to increase the companys intrinsic value.

4.1 Growth Strategy

This strategy must be accompanied by a new pricing structure that deters showrooming.

Best Buy has strong brand recognition which should be utilized for expanding online market


share. In addition, by taking advantage of connectivity and the companys infrastructure as well as

its free computational cycles, BB could implement a platform of software as a service (SaaS)

using concentric growth. Furthermore, In 2011 Best Buy acquired MindShift Technologiesviii

, a

managed services and iCloud services company for business owners and customers. Combined

with the Geek Squad technology expertise, Best Buy can leverage these factors to differentiate

offerings from other traditional brick and mortar consumer electronics stores. In an effort to be

perceived as cutting edge, the organization should target high visibility early adopters on social

media platforms. Best Buy must continue being on the front lines for social and mobile

consumers. We also recommend that the company develop an aggressive international growth plan

in markets with rising discretionary incomes and laws mandating shifts to high definition

frequencies.

4.2 Internal Fix-It Strategy

BB must review spending in connectivity, services, online, retail and home and pay special

attention to the power of suppliers such as Apple, Dell, HP, etc. The corporation must re-vitalize

its enterprise wide training about new technology and perform an internal audit of how they are

using their Big Data and Analytics initiatives to make thoughtful strategic decisions. It is

imperative that BB take advantage of its own consumer insights and market intelligence to

anticipate changing trends.

BB does not have a published mission or vision statement on its website. The organization

should create a new, compelling mission and vision that gets employees excited, re-energized and

engaged. In addition to closing non-performing stores, the use of in-store square footage and the

companys pricing strategies must be reviewed. To be competitive, a clarification of value streams

is needed (i.e. for OE treat stores as additional channel of distribution; for CI ensure items are

available to deliver when purchased by the consumer, empower associates, custom choices

through online near infinite selection etc.).

4.3 External Fix-It strategy

BB needs to rethink its strategy for new markets and cultivate plans to integrate cultural

and economic factors by developing specific entry strategies for emerging markets that have a

growing discretionary income and a desire for electronic status symbols. This should be done by

leveraging a concentric diversification strategyix

and understanding how other cultures use retail

and mobile technology differently than North Americans (i.e. mobile payments, money transfer,

pay as you go, etc.) BB may face state owned or supported monopolies in mobile technologies.

Thus, it must explore cooperation with state capitalism drivers as a market penetration tactic.

In an effort to capture early adopters and be perceived as a progressive company, they should

seek exposure to a captive social media community of people in public relations, journalism,

advertising, music and film who can champion BBs brand and create opportunities to expand the

enterprises affiliate marketing channel reach. This will differentiate BB from Wal-Mart, Apple,

Amazon and others. BB must also ideate innovative strategic alliances and partnerships with other

companies and organizations that align with the brand.


4.4 Eliminate/Survive strategy

We believe that some of the following strategies may be required:

The company should consider a merger with rival Amazon

Explore new ideas and unique integration with suppliers

Close the least profitable stores and invest the resources in further vertical integration

Evaluate use of in-store square footage and consider leasing space in the corporate office

Assess internal spending, financing and hedging to protect against currency risk

Review pricing strategy since a big portion of profits is derived from margins on

accessories, home theatre and extended warranty protection

Review debt financing, cost of capital and capital structure

5. DIRECTIONAL STRATEGY

Best Buy has traditionally been on the cutting edge of the consumer electronics market. Not

long ago its largest competitor, Circuit City, folded. Best Buy will have to first leverage the new

consumer habits of mobile shopping and cloud computing. The effective execution of these

strategies could and should help propel Best Buy to remain among the leaders in consumer

electronics. However, the future of the company remains uncertain. We recommend a directional

strategy that is a blend of stabilization, retrenchment and growth with an emphasis on Growth.

6. EXAMPLE OF A NEW GROWTH STRATEGY

Based on our analysis above, we propose the following concentric diversificationviii

growth

strategy:

Leverage Best Buys existing resources to pursue opportunities in cloud computing, virtual

sales and affiliate marketing. Best Buy has a strong internet presence, an extensive cyber

infrastructure and brand image. The company will use its existing infrastructure and idle

network and computer time to service a big need of small to medium businesses (SMB):

selling their goods and services online world wide and delivering managed services around

produced solutions

The target market includes software companies, game developers, small music and movie

producers

BB will be a virtual processor, a technology provider and a fulfillment partner that leverages

its own infrastructure to offer e-commerce, automatic payments and online distribution for

the SMB companies who are not in a position to sell directly to the same customer segment

targeted already by BB. This will enable BB to increase the utilization efficiency of its

existing infrastructure and expand its sales of the high margin service worldwide

We propose a revenue sharing model, in addition to charging a subscription for using BBs

big data analytics and hosting the online store for third party vendors.


Project Name and Objectives Project Name: Internet Affiliate Marketing and Services

Project Objectives: Provide virtual stores and marketing for small to

medium technology companies that target the same segments targeted by

BB for complementary products.

Project managers:

The lead project manager

must be hired from outside

to bring in new ideas. The

manager must be a product

development manager. The

manager must have

experience in cloud and

mobile computing and

online retail.

Marketing: Interactive

marketing manager

CTO: iCloud CTO

Customer Service: Geek

Squad Service

The trio will design a solution that will

provide services for small to medium

technology companies to deliver

solutions to the market place. The

managers will work across boundaries

and lead strategy making.

Best Buy Services

Provide internet services, online ecommerce. Geek Squad and Managed

IT services will provide premium professional services around a select

number of technologies sold directly through the online stores and

delivered by affiliates.

Structure of operation

The unit will operate as a startup within BB. This may cause resentment

from other divisions.

Culture

The unit is chosen to combine the unified geek culture within BB, provide freedom to innovate and agility to deliver products faster.

Focus on self-managed teams with leads.

Competitors Amazon, Digital river, Google


APPENDIX, TABLES AND GRAPHS

Best Buy Stock Value

Best Buy Quarterly Revenues (Billions of dollars)

Best Buy earnings per share declined by more than 200%


Table 1: Best Buy Value Stream Characteristics

Operational Excellence Customer Intimacy Product Leadership

Reliance on information systems in logistics to reduce costs

Reliance on Big Data, complex event analytics to maximize sales

Outsourcing of support and other IT activities (i.e. IBM, SITEL) to reduce

costs and focus on core competencies

Bureaucratic and hierarchical organizations (Titles matter a lot inside

the company).

Established procedures of doing business with less leeway for deviation.

Automated logistics and product aggregation

One size fits all products (sell what we have)

Turnover in experienced senior management.

Extensive use of social media inside BB to attempt to gather cost reduction ideas

Extensive use of predictive behavior models.

Use of personal shopping assistance

Store access, presentation, assistance (Mixed results, upgrade with newly

remodeled stores: i.e. Eden Prairie).

Use of Geek Squad to help service, guide, assist rather than just sell

Well trained teams on the floor (But high turnover with College kids).

Takes too long before initial contact with associate.

Heavy use of Big Data Analytics and complex event analytics and attempt to focus on the 7% of the customers

that generate 43% of sales.

Reward programs, zero financing for select customers.

Attempt to focus on personal computing, media and mobile needs in

one stop shop.

Integration of product selection, sales and service value chains.

Extensive use of social media inside BB to gather ideas about servicing the

customer(Blue shirt nation, loop

market place, predictive models)

Extensive use of predictive behavior models.

Attempts to develop own Mobile network.

Attempt to develop own Commercial off the shelf

software (Failure attempts)


Table 3: Best Buy SWOT

(S)trengths

1. Largest consumer electronics retailer/ Reputable Brand Name 2. Diversified portfolio of product offerings 3. International business acquisitions 4. Reputation for excellent customer satisfaction 5. Customer centricity, through an end-to-end model 6. Level of service is unparalleled by competitors

Highly trained staff Reputation for retaining highly skilled and talented staff in

the consumer electronics industry.

7. Provides in-store value added services; customer service, repairs, interactive product displays.

8. Strong growth strategy 9. Financial strength

Revenues of $16.26 B |Profits of $651 M in 2011 10. Capitalizes on economies of scale i.e.; cost advantages 11. Strong advertising budget | increases store foot traffic 12. Physical stores | convenient locations

Just under 4,000 world wide 13. Online presence 14. High levels of community service and local involvement.

(O)pportunities

1. Growing global demand for consumer electronics: China 22% Middle East 20% Russia 20% South America 17%

2. A more knowledgeable, savvy, consumer base willing to use the internet for product purchases

3. Dissolution of number one competitor; Circuit City 4. New business ventures i.e.; Best Buy and Car phone Warehouse 5. Further expansion of chain through mobile stores 6. No other pure consumer electronic retailer near Best Buys market share 7. Rapid obsolescence of technology and increased needs to upgrade 8. Gadgets as a status symbol 9. Economic recovery 10. Weak dollar against other currencies (helps exports) 11. Growing mobile applications

(W)eaknesses

1. Marketing goals too broad 2. Weakening financial position

28.7% decrease in net income (08 09) Increase in long-term debt due to multiple acquisitions Decrease in available cash due to rising inventories and

accounts received.

Increased costs associated with the Customer-Centric operating model training of employees

3. Top leadership turnover at crucial time (need for increase in connectivity strategy)

4. Dependence on few suppliers 5 suppliers represent one third of all purchases; Sony, HP,

Samsung, Apple, Toshiba

5. Physical stores 6. Impact of class action lawsuits 7. Many (11) brand names 8. Deterioration of strong ethical culture touted by company 9. No strategy for cloud computing, Software as a Service(SaaS), Platform as a Service(PaaS)

10. Governance issues 11. Poor inventory management systems 12. Poor inventory communications to customers

(T)hreats

1. Rise of many competitors - loss of market share and loss of revenue

Unspecialized discount retailers i.e.; Wal-Mart, Target and Costco + Others such as Sears

Online retailers (i.e. Dell, Amazon, eBay) Entertainment software stores i.e.; GameStop. Office supply stores i.e.;

Staples, OfficeMax, and Office Depot.

Home improvement retailers i.e.; Home Depot and Lowes. Small retailers with little overhead (including internet vendors).

2. Legislation restoring internet taxes, thus forcing online retailers to establish brick and mortar stores (case of Amazon now).

3. Legislation regarding credit cards and other financial instruments 4. Shifting IT market to cloud computing, SaaS and PaaS architecture

(What to do with geek squad who is geared to desktops rather than

cloud? misalignment, desktop sales & service)

5. Distressed economy + Fall in consumer spending especially discretionary spending

6. Moderate to high bargaining power of suppliers 7. Rising labor wages + Skills required for cloud services 8. Regulations negatively impacting private-label credit cards i.e.;

decreasing revenue streams on domestic sales

9. Domestic market for consumer electronic products maturing i.e.; flat panel television market

Most of Best Buys revenues come from TV sales 10. Chinese imitation goods with very low margins 11. Very high risk of a shareholder legal action + Former founder value

destruction through offer/offer withdrawal

12. Trade wars with China, protectionism 13. Overseas American businesses as a soft targets to international

terrorism

14. Cyber-crime, cyber war attack on internet infrastructure and other business discontinuity events(Natural or man-made disasters)

15.


Table 3: Best Buy TOWS Matrix

Internal

Assessment

External

Scanning

(O)pportunities

1. Growing global demand for consumer electronics

2. China 22%, Middle East 20%, Russia 20%, South America 17%

3. A more knowledgeable, savvy, consumer base willing to use the internet for product

purchases

4. Dissolution of number one competitor; Circuit City

5. New business ventures i.e.; Best Buy and Car phone Warehouse

6. Further expansion of chain through mobile stores

7. No other pure consumer electronic retailer near Best Buys market share

(T)hreats

1. Rise of many competitors - loss of market share and loss of revenue

2. Distressed economy, low spending 3. Moderate to high bargaining power of

suppliers

4. Rising labor wages 5. Regulations negatively impacting

private-label credit cards i.e.; decreasing

revenue streams on domestic sales

6. Domestic market for consumer electronic products maturing i.e.; flat

panel television market

7. Long life of TV sets 8. Direct competition with suppliers such

as apple stores.

9. Rising wage rates 10. Shareholder lawsuits

(S)strengths

1. Largest consumer electronics retailer/ Reputable Brand Name:

Diversified portfolio of product

offerings, International business

acquisitions

2. Reputation for excellent customer satisfaction;

3. Financial strength 4. Online presence 5. High levels of community

service and local involvement.

6. Geek Squad: Service, Training, Support

7. Strong leverage of Social Media

S-O Strategies: GROWTH

1. Develop aggressive international growth strategies [New markets/New geographical

markets ]: S1-S4/O1

2. Software as a Service: Cloud computing: S1-S4/O1

3. Leverage Remnants of Geek Squad to educate customers + Managed services

4. Explore a growth strategy with vertical integration components.

5. Develop Strategy for expanding online market share[S7:O1-O7]

6. Build visibility of inventory to customers [S2-S4:O1-O7]

S-T Stratgies [External Fix-t]

1. Develop entry strategies for emerging markets with growing electronic consumer

population and high economic growth

rate.[S1-S7/T1-T9]

2. Explore integration with suppliers[S4:T8] 3. Develop aggressive international growth

strategies

4. Cooperate/Partner with others such as Amazon [W11:O1-7]

(W)eaknessess

1. Marketing goals too broad 2. Weakened financial position 3. Top leadership turnover at

crucial time (need for increase in

connectivity strategy)

4. Dependence on few suppliers 5. Physical stores 6. Impact of class action lawsuits 7. Many (11) brand names 8. Weak skills in Cloud computing 9. Deterioration of strong ethical

culture touted by company

10. Incongruent pricing structure 11. Logistics/Product availability 12. TV sales are a high% of total

revenue

W-O Strategies: Internal Fix-it

1. Close non-performing stores:[W5/O1-O6] 2. Companywide training on ethics starting with

senior management[W9:O1-O7

3. Revisit pricing strategy to be competitive. 4. Improve availability of items for online

purchasing[W11:O1-O7]

5. Cooperate/Partner with others such as Amazon [W11:O1-7]

W-T Strategies [ Eliminate / Survive]

1. Explore integration with suppliers[W11:T1] 2. Close the least profitable

stores[W5,W2:T1,T7,T9]

3. Review Accessory pricing strategy(W2:T1,T7,T8]

4. Merger/Acquisition [Amazon: W2:T1]


References and End Notes

i Bustillo, Miguel. Gordon.Kathy. 11-08-11 Best Buy Leaves U.K., Reboots Phone Venture.

Wall Street Journal. ii Clifford, Stephanie. 05-14-12. Chairman of Best Buy Resigns After an Internal Audit. New

York Times. iii

Lee, Thomas. 10-09-12. Schulze Gets Access to Key Execs. StarTribune. iv

Duryee, Tricia. 10-10-12. Best Buys New E-Commerce Head Aims to Unify Bricks and Clicks. All Things Digital. v Ericson, Jim. 11-05-12. The Cloud (Tax) Platform. Accounting Today

vi Jopson, Barney. 10-10-12. Best Buys Finance Chief to Step Down. Financial Times.

vii Bhasin, Kim. 06-25-12. BEST BUY EXEC: Heres the Truth About the Showrooming

Phenomenon. Business Insider. vii

Wheelan and Hunger. 2012. Strategic Management and Business Policy, 13th Edition. P.215.

Prentice Hall.

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