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 Summary
BB 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 sustainable
As 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 differences
BB 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 BBs 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 Entrants

ELEMENTS Disadvantages of economies of scale High Capital requirements Difficult to generate brand recognition Product Knowledge needed Access to Distribution Channels is difficult 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 Difficult for substitutes to achieve the cost advantages Difficult to give Sales Assistance Low Switching Costs for customers

POWER COUNTER STRATEGIES The threat of Work towards better Entrants is low for customer focused sales the industry and support and services along power lies with the with driving cost incumbents. advantages from economies of scale

Suppliers

Established Suppliers Diversification of seem to be gaining products power in the Supplier Loyalty industry. However, programs emergence of new Promotions on products suppliers like the with loyal suppliers phone companies should help in balancing the power tilt.

Substitutes

Buyers

Rivalry

The power of substitutes is low due to the knowledge, cost advantages that exist for the existing players. High Bargaining Leverage with Buyers seem to have the power in the buyers industry due to the Diversified group of buyers Buyer Switching costs lower low switching costs and availability of compared to retailer options Price Sensitivity is high High Brand Consciousness Buyers volumes are not very high for most groups Power lies with rivals Steadily Growing Industry Highly Dynamic with new due to the highly completely new technologies format of selling, High cost of obsolescence Highly Diverse competition e.g. emerging technologies and Amazon, Wal-Mart changing market.

Compete on availability and sales support and service

Loyalty Programs Variety of products available After Sales services like installations, periodic checks, on call help etc Sales Assistance for given customer needs Grow Online presence Drive home the time to customer home advantage Grow international presence

Low Switching Costs No Exclusivity on products High cost of obsolescence Differentiation with service and sales assistance
Exhibit 1: Industry Analysis

Diversify products

into

other

Strengths

Weaknesses

Financial Financial Market Leader High Costs of Operation Loyalty Programs Falling Margins on mobile stores Physical Pricing disadvantages compared to competition International Presence Global Alliances High costs of obsolescence Physical Mobile Stores Miniscule Online presence Customer Focus Products 4 times the size of its next big competitor in terms of store size increasing costs Variety One Stop Shop (Big Box Stores, Geek Squad services) Human Knowledgeable Sales Staff

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