Strategic Management

Best Buy Case Study

Strategy to Succeed

Prakash, Madhulika

3/20/2013

This document aims to study the consumer electronics market in detail with respect to Best Buy (BB) and their current strategy. Based on the a detailed analysis, this document also outlines certain recommendations for the BB Management to ensure ongoing growth and continued success in the industry

Executive SummaryBB is currently the largest consumer electronic retailer in the United States with a growing market

presence internationally. With competitors like CompUSA and Circuit City out of the way, BB seems to

be in a great position in the market. However, the growth in revenues has shrunk in the last financial

year from a healthy 10% to a meager 1.6%. The growth has come largely from the international market

(6%) which also has not grown like the year before (24%). The revenue in the domestic market for BB

has shrunk by around 0.3%.

From and Industry Analysis, what are the major keys to success for the industry in which the BB competes at the end of the case? Is this an attractive or unattractive industry? What changes would you expect to see by 2018?The consumer electronics industry in which BB competes is a highly dynamic industry with changing

landscapes and emerging technologies causing high flux in the market. BB has been growing both within

the United States and internationally both through organic growth as well as strategic alliances.

Competition in the Industry comes from diverse group of retailers ranging from online stores like

Amazon to wholesale players like Costco and Wal-Mart. The power in the industry lies with the suppliers

as well as the rivals. The suppliers are important largely due to the brand recognition of the consumers

and their dominance in the market. The rivals have gained importance due to the changed market

landscape and the price advantage they enjoy over traditional brick and mortar retailers like BB.

The keys to success in this industry are

Diversification: Selling other related group of products like Mobile Phones

Addition of services along with sales like installation, after sales support, online or telephone

help for consumers

Sales assistance after defined categorization of customers and assessment of needs

Loyalty programs to enhance value for both BB and Customers

International expansion into emerging markets through strategic alliances

Defining a strategy to reduce costs of obsolescence through international movement of obsolete

products into new markets

Enhance online presence and offer price advantages to customers

Additional services like trial period for customers

Market Expansion through opening of new stores into new markets

Improved Supply Chain efficiencies and operations for reduced costs and better margins

This market is experiencing a steady growth in demand across the world and is also seeing new growth

engines like the Internet which makes it very attractive. This market will remain attractive as long we see

new technologies and innovative products being regularly launched. However, the players need to adapt

fast to the changing trends and expand with the above defined strategies to succeed in it.

The Market will continue the current trend of innovative product launches and new technologies. It

might also see a bundling of services e.g. selling of cable TV services along with a TV purchase. Products

offering consolidated services will dominate the market. Margins will reduce further and industry

players will need to work on operational efficiencies and cost reduction for better profits.

From an analysis of internal strengths/ weaknesses, does BB have a competitive advantage at the end of the case and is it sustainableAs is evident from the SWOT Analysis shown in Exhibit 2, BB does have a distinct competitive advantage

over its competition in its sales effectiveness which can be further broken down into the sales assistance

its staff provides to customers and the after sales service. Competitors like Amazon and Wal-Mart

cannot emulate this distinct advantage due to their online presence (Amazon) and lack of focus on

consumer electronics (Wal-Mart & Costco). This market has new innovative products being launched

very frequently and customers need help understanding the advantages of given features to decide their

order of preference and make a decision. This would make the advantage very valuable to customers

and would help BB drive home a distinct advantage over its competition and would help them

differentiate better if they have some more after sales services like free installation of equipment or

training on optimizing the utility of new products like Smart TVs.

Compare and evaluate the industry keys to success identified in (1) above with the current strategies of BB. Discuss the similarities and differencesBB has focus on a few of the keys to success identified already with its current customer centric,

diversification and International expansion focused strategy.

It is already making the right moves in the emerging markets with alliances like Carphone Warehouse

and Five Star Appliances. However, it also needs to focus on certain services it can start on its own using

the local knowhow it would have developed in these alliances. It can also start venturing into newer

markets or regions within these countries which do not have a significant presence of their partners.

BB does have a knowledgeable sales staff educating customers and helping them decide between

products based on their priorities. These services are giving it a sustainable competitive advantage in the

current market. However, going forward these coupled with after sales service like training sessions for

customers on using innovative products, free installation/ delivery along with after-hours online help

might help them drive the advantage better. Recognition programs for sales staff for their good work

might also help BB drive this further.

They also have a loyalty program but it can be better streamlined to drive volumes while also giving the

customer some discounts for loyalty over a period of time.

However, some of the steps that BB needs to focus on is the reduced margins in the mobile market

along with their overall lo NPM. BB needs to focus better on their supply chain efficiency and cost of

operations to increase their margins.

The online market for BB can grow further with coupling of the price advantage with services offered by

stores. BB is yet to create a defined strategy to grow its online presence.

At the end of the case, it is stated, “As the products that BB traditionally sells become increasingly commoditized and profit margins reduced, the firm will need to find new ways to achieve profitability in the industry- or will need to find a new industry in which to participate”. Evaluate this statement using your matching analysis. What set of recommendations would you make to BB’s management?The matching analysis (Exhibit 3) clearly drives the fact that achieving profitability in this industry is

going to be difficult given the current trend towards reduced prices and high cost of obsolescence of

existing products. These coupled with a service focused strategy as recommended would reduce

margins even more and a clear and distinctive strategy would be needed to help BB achieve the

profitability it needs to stay and grow in the market. New ways to achieve the given profitability targets

can come from some or all of the following:

Alliances with service providers for installation, shipping, after sale support or outsourcing of the

same services

Working on the supply chain efficiency for BB

Reduce costs of operation by reducing staff or store sizes

Better utilization of store space

Training for customers to utilize products better

Reduce costs of obsolescence by moving obsolete products into emerging markets

International market expansion for growth and volumes through alliances

Optimize supplies for emerging markets using local facilities

FORCE ELEMENTS POWER COUNTER STRATEGIESEntrants Disadvantages of economies of

scale High Capital requirements Difficult to generate brand

recognition Product Knowledge needed Access to Distribution Channels

is difficult

The threat of Entrants is low for the industry and power lies with the incumbents.

Work towards better customer focused sales support and services along with driving cost advantages from economies of scale

Suppliers Highly Concentrated between companies like HP, Toshiba, Apple, Samsung and Sony

Brand Conscious industry so switching costs are high

High Volumes drive better power for retailers

Forward Integration is possible for powerful suppliers e.g. Apple while Backward Integration is difficult

Distribution through varied channels like online, warehouse

Changing order of significance with new products like mobile phones, TV Boxes, Tablets

Established Suppliers seem to be gaining power in the industry. However, emergence of new suppliers like the phone companies should help in balancing the power tilt.

Diversification of products

Supplier Loyalty programs

Promotions on products with loyal suppliers

Substitutes Difficult for substitutes to achieve the cost advantages

Difficult to give Sales Assistance Low Switching Costs for

customers

The power of substitutes is low due to the knowledge, cost advantages that exist for the existing players.

Compete on availability and sales support and service

Buyers High Bargaining Leverage with buyers

Diversified group of buyers Buyer Switching costs lower

compared to retailer Price Sensitivity is high High Brand Consciousness Buyers volumes are not very

high for most groups

Buyers seem to have the power in the industry due to the low switching costs and availability of options

Loyalty Programs Variety of products

available After Sales services like

installations, periodic checks, on call help etc

Sales Assistance for given customer needs

Rivalry Steadily Growing Industry Highly Dynamic with new

technologies High cost of obsolescence Highly Diverse competition e.g.

Amazon, Wal-Mart Low Switching Costs

Power lies with rivals due to the highly completely new format of selling, emerging technologies and changing market.

Grow Online presence Drive home the time to

customer home advantage

Grow international presence

Diversify into other

No Exclusivity on products High cost of obsolescence Differentiation with service and

sales assistance

products

Exhibit 1: Industry Analysis

StrengthsFinancial

Market Leader Loyalty Programs

Physical International Presence Global Alliances Mobile Stores Customer Focus

Products

WeaknessesFinancial

High Costs of Operation Falling Margins on mobile stores Pricing disadvantages compared to

competition High costs of obsolescence

Physical Miniscule Online presence 4 times the size of its next big competitor

Variety One Stop Shop (Big Box Stores, Geek

Squad services)Human

Knowledgeable Sales Staff

in terms of store size increasing costs

Opportunities Growing income for high end individuals Imposition of Taxes on goods sold by

Amazon International Expansion (China, Mexico,

Europe) Potential to back integrate( create a

private brand) Opportunity to win share left by Comp

USA and Circuit City Growth in Online Sales

Threats Increased Competition Changing Market Landscape Loss of Exclusivity of high end brand

suppliers Economic Downturn Forward integration by suppliers like Apple

Exhibit 2: SWOT Analysis

Leverage Higher income for its customer segment Tax imposition on good sold by online competitors like Amazon International expansion with products and services with strategic alliances Capture the mindshare of customers loyal to circuit city and Comp USA Prepare strategies for selling online by making interactive and advantageous for customers

Constraints BB is a market leader in its segment It carries variety of products in the big box stores Positions itself as a one stop shop carrying diversified brands and services within its stores

High customer focus makes the expectations higher Diversification into other products like mobile phones Maintains a highly knowledgeable sales staff for sales assistance

Vulnerabilities Its high costs of operations compared to competition High costs also due to store size (4 times bigger than its nearest Brick and Mortar competitor) Low Margins on mobile store sales Thin Net profit margins (NPM) creating a constraint in growth plans Very high costs component comes from obsolescence since products are phased out quickly

Problems Forward Integration by innovative companies like Apple No exclusivity on high end brands like Samsung, Apple, Sony, HP Dynamic Market Intense rivalry between players Economic factors like downturn, fiscal crises etc

Exhibit 3: Matching Analysis