A shift in consumer preferences towards multi-tasking electronic devices, fast turnover of electronic devices, increase in online sales, and a tremendous decrease in prices for electronics have led Best Buy to the experience of its first net loss in the past decade. But this is not the first time in Best Buy’s history that the company is going through a “near death experience.” The company has reinvented itself multiple times before and it is clear that the time has come for Best Buy to do it once again. Net Loss of $1.2 billion in 2012 serves as an indicator that the company needs to completely revamp its business strategy and, most importantly, to bring in a strong new leader who will conduct and control reorganization (Case Exhibit 3). In order to stay competitive and to carry on the legacy of the Best Buy brand name several issues have to be addressed. Among them are technological and website improvements (emphasis on online sales), expansion of the global outreach, employee training and retention strategy, inventory management, and development of a strong business culture. Best Buy is on the fast track to extinction, and if the company does not want to end up like Blockbuster or Circuit City several years ago, immediate action to address these issues is required.
Best Buy can no longer achieve a competitive advantage using a cost leadership business strategy because companies like Amazon, Wall-Mart, and Target have successfully superseded Best Buy in this strategy, and if Best Buy continues to lower its prices as a response to competition, the company will continue to carry big losses. It got to the point where Best Buy stores serve as “showrooms” for its direct competition and the company is losing not only on sales but on operational expenses as well. The growth of the company for the 2012 fiscal year was about 0.9% in comparison to about 50% growth of its rival, Amazon; and even though Best Buy sales have increased, it has happened solely due to lower product pricing that is not beneficial for the company in the long run. In order to reinvent itself and to stay competitive Best Buy has to focus on online sales and cutting edge technology that would meet all of the wants and needs of the modern consumer.
Business Strategy – Competitive Advantage
Choosing a right business strategy is crucial to the company’s success. It is clear that with emergence of Amazon and expansion of Wal-Mart and Target electronic departments, Best Buy can no longer pursue the cost leadership strategy; therefore, cost leadership strategy should be abandoned immediately. I would recommend that a mix of differentiation and operational efficiency strategies be pursued in the establishment of the competitive advantage. Differentiation will be easily established because Best Buy already offers a variety of different products. I would also recommend elimination of departments that are becoming obsolete, such as Best Buy’s in-store music and video departments. Video and music industries are undergoing big changes, and with establishment of online music stores and easy access to instant video selections, Best Buy’s music and video departments have become outdated. All of the underperforming brick-and-mortar stores have to be eliminated as well and more attention have to be concentrated on improving online sales.
Case Exhibit 8a provides a good comparison of sales and gross profit margins of Best Buy vs. its most aggressive rival – Amazon. It is clear that Amazon’s online sales are growing much faster and would surpass Best Buy’s total sales within the next couple years. This exhibit provides solid evidence of Best Buy’s urgent need to become much more competitive in online sales. An investment has to be made into improvement of the Best Buy online store. Competitive Framework
Consumer electronics industry has a very low threat of new entrants. Entering the industry requires a lot of capital. Competition is very high and potential new entrants would require using economies of scale in order to be cost competitive, therefore the barriers to entry are very high. Best Buy should not fear any new entrants at this point of time. Competition from substitutes is very high as well due to a large variety of similar products on the market. Nowadays consumers shifted their preferences to the multi-tasking electronic devices and they have a lot more freedom to choose from a variety of products because they are not limited by high costs or operating systems anymore. This also means that bargaining power of consumers is very high; consumers have unlimited access to information about products, and by simply clicking couple of buttons on their smart phones, they can find and compare products and prices.
Technology has extended so far, that an average consumer does not have to leave his or her home in order to make a purchase; therefore, Best Buy has to strive to create a stronger relationship with online consumers. Consumer electronics industry is also very sensitive to prices due to the bargaining power of the buyers. Supplier Power in this industry is medium-high and suppliers are influenced by the large quantity purchases. Best Buy is a consumer electronics giant and it should use vertical integration in order to have control over the end product and different components. Rivalry between established competitors is very intensive. Amazon’s rapid growth, lower prices, ease of purchasing experience, and established reputation allow the firm to aggressively cannibalize Best Buy’s sales. At this point of time, I have two recommendations for Best Buy in order to stay competitive. The company could make a big investment into R&D, and potentially find its unique place in the online sales business or the company could partner with Amazon, and together they would most certainly be able to stay ahead of any other competitors. This potential partnership would allow Best Buy and Amazon to share some of their resources and facilities and, therefore, lower their operating and general and administrative cost.
Supply Chain Management and Restructure
Supply chain and warehouse management have to be reinvented in order to avoid inventory stagnation that precedes big losses for the company. Big sales of the almost obsolete products are only helping the company to get rid of the unwanted inventory; they are not profitable and should be avoided with strategic inventory planning. Replenishment frequency has to be synchronized with consumption, and all of the products available in Best Buy online stores have to be ready for shipment within 24 hours. This means that Best Buy needs to purchase the most advanced inventory tracking software, as well as to hire a very experienced supply chain management and procurement management in order to keep track of the software performance, and to make certain strategic and intuitive adjustments when needed.
International Outreach and CAGE Analyis
Best Buy’s first attempt to grow globally was not very successful and in the most recent years multiple international stores were closed due to underperformance. I recommend that another attempt be made but this time reaching out into still developing economies. Africa could potentially open a new market for Best Buy. Some of the African countries with stable environments and promising economic climates (such as Ghana or South Africa) are striving to achieve technological progress similar to the United States, and Best Buy could potentially aid them in their pursuit. English is a medium language spoken by the majority of the African countries. Weak legal and political institutions can (and I hate to say this) be beneficial for Best Buy, and ease the entry into the African market. African consumer’s income could potentially become a slight problem but in the long run lower product costs could be offset by low general and administrative costs of doing business in Africa. Also, the product mix could be adjusted to African consumer needs and capabilities. Best Buy could potentially sell the products that stopped selling in the US, in Africa. There are definitely certain risks that have to be considered when expanding business to Africa, among them is security and corruption; but the benefits of reaching out to new international markets outweigh challenges and risks, and some of the African countries have the fastest growing economies in the world with a lot of potential.
In the past decade, Best Buy has experienced many changes in leadership that undermined its already weak culture. A new leadership with a strong vision and clear mission for the future of the company has to be established. The organizational structure has to be revamped in accordance to new organizational goals. It is crucial that Human Resources department focuses on the employees that already resemble a desirable culture, and communicate with these employees regarding the improvements of the company culture that have to be made. Also, Best Buy does not seem to have a good retention strategy, which is part of the problem why some key employees are leaving the company. The focus of the culture has to be upstream, from the bottom level employees to higher management, and key features of culture should be teamwork, transparency, and communication. And lastly, stronger relationship has to be built between Best Buy and some of its most successful acquisition, such as Geek Squad, because as of right now, Best Buy’s acquisitions resemble separate entities within the Best Buy stores. Financial Implications
Regardless of the net loss in the 2012 fiscal year, Best Buy managed to achieve a positive net cash flow of $96 million. Some of this cash have to be used to pay-off current debts and interest on long-term debt but approximately $50 million should be invested into reinvention of the company. Also, Best Buy would be able to trim a lot of its costs by further eliminating underperforming stores and departments (based on my estimation approximately $200 million, see exhibit 1); savings due to these eliminations should be used solely for the reinvention of the company.
Cost savings due to further elimination of underperforming stores and departments: Best Buy already trimmed approximately $800 million in costs with previous store eliminations. About ¼ of the underperforming stores and departments could be further eliminated, bringing in additional $200 million in cost savings. Stores reviewed for elimination include “Total Electronics-Only Stores” that have experienced an average of 13% decline, and “Total Consumer Direct” stores with an average decline of 14.6% (Case Exhibit 2).
Beat Buy Company is the largest retail company, originated in United States. It was established in 1966 with the name “Sound of Music” and because of some natural disasters it renamed to “Best Buy Company” in 1983.
“The company opened its first store in 1966, and called it “Sound of Music”. After a tornado hit one of its stores in Roseville, MN, it held a “tornado sale”, and later reopened in 1983 under a new corporate name, Best Buy.” (Matthew Kemp)
The company is dealing in electronic items i.e. Entertainment software, Office products and other electronic products. It’s capturing a big market share in the financial world. From 1983 the company is operating in United States as well as in Canada. In last few years they expanded their business and made it globalize through launching it in the market of China. With the passage of time as the Market grew, the profits of the company have also been accelerated.
“Best Buy has seen large increases in revenues over the past few years because of the demand for flat-panel TVs. Revenue increased 12.45% overall in fiscal 2006 and 16.49% overall in fiscal 2007. It is unlikely that these margins will continue due to slowed demand and decreased prices for the TVs.” (Matthew Kemp)
The research shows that the company have more potential to increase its revenue in the future and it will keep hold the largest market share as well.
There are few factors which can effect the company i.e economic forces, social forces, cultural and environmental forces, Political, legal and governmental forces, technological forces, and competitive forces. These forces are important to evaluate the company.
There always been ups and downs in the economy. Either there is inflation or deflation. If the GNP is higher in the economy the income also increases and people can spend their incomes on different items. From last few years US is enjoying healthy economy. That factor is helping the retail industry as well. In future Best buy company profit may increase by as the trend shows.
“Increasing GDP would be good for companies like Best Buy; however the smaller increases in GDP can have a negative effect on not only Best Buy’s sales, but Best Buy’s stock price if investors predict that GDP will fall in the future.” (Matthew Kemp).
Best Buy Company is also socially committed and believes in literate people about technology. They are socially responsible. The company spent $13 million in teach Awards for the school to aware them from the new technologies about the classrooms. They also gave scholarships to the students all over the world.
“Best Buy stores have awarded over $13 million in scholarships to nearly 11,000 students nationwide”.
In this modern world, where every day new technologies are coming up and frequently they are becoming outdated. Under this scenario, the Best buy company has to keep itself up to date and must have to keep watch on the new technologies. In this way the company can survive under intense competition.
Wisconsin State Attorney General’s office took a serious civil action against Best Buy Company In 2005. They stated that the company is violating the consumer protection law by misleading the people about service plans, supplemental magazine subscriptions etc.
Where the company is enjoying healthy profits, there the company is also facing intense competition. The biggest competitors of Best Buy Company are Dell, Wal-Mart, Circuit City and all those retailers which are supplying those products on reasonable prices. The company should also bring some changes in their business to stay in the top line. Like, they should also offer their products online as other companies are doing.
“To help overcome online competitors, Best Buy allows consumers to purchase their items online. Consumers then have an option of having the product shipped to their home or picking it up at a local Best Buy store.” (Matthew Kemp)
The internal forces include Marketing and Management of the company.
The company is spending a greater amount on the marketing expanses of the company. They spend millions of dollars on their website to provide people with all the information about their business and description about each and every product they are dealing with. Mostly they do business-to-business marketing for their business. They also mailed thousands of copies to their target market, with the catalog attached to it. With the changing trend, the company is also planning to open inbound as well as outbound call center.
“In October the company plans to mail a second catalog for larger businesses. The catalog will sell computers, cables, and accessories as well as a smattering of consumer electronics. To help in its efforts in bagging big businesses, Best Buy is setting up a call center for inbound and outbound calls.”
SWOT analysis will help to examine the condition of the company from internal as well as external.
The Best Buy is the specialized retailer store in the US and Canada dealing with electronic items. The company is enjoying the leadership in the market because of its highest share. It is one of the leading companies in States with total market share of 18%. Because of its large operation, the company is able to capture the market and supply the products on spirited prices.
“Best Buy leads the consumer electronics retail market in the US and Canada, with total revenues reaching $27,380 million in fiscal 2006. It has about 18% market share of the consumer electronics retail market the US. Leveraging its large scale of operations, the company has been able to increase its bargaining power with consumer electronics vendors and offer more competitive prices.”
The company is capable of performing strong operations during last few years. It revenues increase by 15.2%. This figure is much more then the average rate in the same fiscal year. The company has shown that the company is efficient enough to capture the large share of the market.
“Its operating margin of 5.3% in fiscal 2006 compares well with the industry average of 4.7% for the same period. Strong operating performance implies that not only was the company able to increase its market share but also its operational efficiency.” (DataMonitor 2006)
The revenue which is continuously generating by the Best buy’s are only from one sector i.e. from flat panel TV’s. It is the biggest weakness for the company. The company should not rely on one product. If the product is hotcake today, it can be outdated tomorrow. Then it will harm the company as well as its revenues.
The emerging trend of electronic items in the market is an opportunity for the Best Buy Company to accelerate their profits by offering them.
“Such as new computer technology like Windows Vista which can drive computer or software sales, or the release of Apple’s iPhone. The immense popularity of the Nintendo Wii may also drive up sales of consumer electronics as well as entertainment software” (DataMonitor 2006)
Best Buy Company has an opportunity to expand their business globally. As electronic items have a big consumer market, so there is also a chance of gaining more profits inside the other countries. Recently Best buy company opened there outlet in China. And it attracted a large number of buyers.
“Best Buy already opened a store in China in December, which reportedly exceeded sales expectations by 40%, and on January 1st attracted more than 20,000 customers.” (Matthew Kemp)
Electronic items are mostly luxurious items. The consumer mostly buys these items when his/her income is high. And high income is depended on good economy. If the income of a person falls then he will definitely go for the basic items not for these secondary items. So at this point the company can lose the profits.
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