Description
The Assignment must be submitted on Blackboard (WORD format only) via allocated folder.
Assignments submitted through email will not be accepted.
Students are advised to make their work clear and well presented, marks may be reduced for poor presentation. This includes filling your information on the cover page.
Students must mention question number clearly in their answer.
Late submission will NOT be accepted.
Avoid plagiarism, the work should be in your own words, copying from students or other resources without proper referencing will result in ZERO marks. No exceptions.
All answered must be typed using Times New Roman (size 12, double-spaced) font. No pictures containing text will be accepted and will be considered plagiarism).
Submissions without this cover page will NOT be accepted.
Assignment No. 2: Case Study
Learning Outcomes:
▪ Describe the different issues related to environmental scanning, strategy formulation, and strategy implementation in diversified organizations- CLO2
▪ Explain the contribution of functional, business, and corporate strategies in the competitive advantage of the organization-CLO3.
▪ Distinguish between different types and levels of strategy and strategy implementation-CLO4
▪ Communicate issues, results, and recommendations coherently, and effectively regarding appropriate strategies for different situations-CLO6
Read carefully case study No. 24 from your textbook (Best Buy Co. Inc: Sustainable Customer Centricity Model?) and answer the following questions:
1. Identify opportunities and threats as well as strengths and weaknesses of the company (draw a SWOT matrix). 2pts
2. What is the competitive strategy used by Best Buy? Justify your answer. 2pts
3. What are the main functional strategies used by this company? Are they successful? Justify 2pts
4. What are the different difficulties faced by the company to maintain and reinforce its competitive advantage? 2pts
5. Suggest some recommendations or solutions to Best Buy to improve its competitive advantage. 2pts
Notes:
✓ Copy/paste the phrases from the text is not acceptable. You must use your own words.
✓ Using the terminology developed in the course of strategic Management is highly valued.
ANSWERS
Unformatted Attachment Preview
Industry Five—Retailing
Case
27
Best Buy Co. Inc. (2009):
Sustainable Customer-Centricity
Model?
Alan N. Hoffman
Bentley University
Best Buy Co. InC., headquartered In rIChfIeld, MInnesota, was a specialty retailer of
consumer electronics. It operated over 1100 stores in the United States, accounting
for 19% of the market. With approximately 155,000 employees, it also ran more
than 2800 stores in Canada, Mexico, China, and Turkey. The company’s subsidiaries
included Geek Squad, Magnolia Audio Video, and Pacific Sales. In Canada, Best
Buy operated under both the Best Buy and Future Shop labels.
Best Buy’s mission was to make technology deliver on its promises to customers. To accomplish this, Best Buy helped customers realize the benefits of technology and technological changes so they could enrich their lives in a variety of ways
through connectivity: “To make life fun and easy,”1 as Best Buy put it. This was what
drove 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 were sustained growth and earnings. This was accomplished in part by constantly reviewing its business model to ensure
it was satisfying customer needs and desires as effectively and completely as possible.
This case was prepared by Professor Alan N. Hoffman, Bentley University and Erasmus University. Copyright ©
2015 by Alan N. Hoffman. The copyright holder is solely responsible for case content. Reprint permission is
solely granted to the publisher, Prentice Hall, for Strategic Management and Business Policy, 15th Edition (and
the international and electronic versions of this book) by the copyright holder, Alan N. Hoffman. Any other
publication of the case (translation, any form of electronics or other media) or sale (any form of partnership)
to another publisher will be in violation of copyright law, unless Alan N. Hoffman has granted an additional
written permission. Reprinted by permission. The author would like to thank MBA students Kevin Clark,
Leonard D’Andrea, Amanda Genesky, Geoff Merritt, Chris Mudarri, and Dan Fowler for their research.
No part of this publication may be copied, stored, transmitted, reproduced, or distributed in any form or
medium whatsoever without the permission of the copyright owner, Alan N. Hoffman.
27-1
27-2
C ase 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
The company strived to have not only extensive product offerings but also highly trained
employees with extensive product knowledge. The company encouraged its employees
to go out of their way to help customers understand what these products could do and
how customers could get the most out of the products they purchased. Employees recognized that each customer was unique and thus determined the best method to help
that customer achieve maximum 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 relied on a differentiation strategy. In 1989, Best Buy changed the compensation structure for sales associates from
commission-based to noncommissioned-based, which resulted in consumers 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
was 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 retailing video products
in the early 1980s with the introduction of the videocassette recorder to its product
line. In 1983, the company changed its name to Best Buy Co. Inc. (Best Buy). Shortly
thereafter, Best Buy began operating its existing stores under a “superstore” concept
by expanding product offerings and using mass marketing techniques to promote those
products.
Best Buy dramatically altered the function of its sales staff in 1989. Previously, the
sales staff worked on a commission basis and was more proactive in assisting customers
coming into the stores as a result. Since 1989, however, the commission structure has
been terminated and sales associates have developed into educators that assist customers in learning about the products offered in the stores. The customer, to a large extent,
took charge of the purchasing process. The sales staff’s mission was to answer customer
questions so that the customers could decide which product(s) fit their needs. This differed greatly from their former mission of simply generating 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
In 2000, Best Buy began a series of acquisitions to expand its offerings and enter international 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 market 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, Best Buy also opened its first Canadian store. In the same year, the company
Case 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
27-3
purchased Musicland, a mall-centered music retailer throughout the United States
(divested in 2003).
2002: Best Buy acquired Geek Squad, a computer 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, then expanding
nationally, and eventually 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, Best Buy also acquired a
75% 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 provider of broadband, voice, data, and
information technology services, to further its offering of technological solutions
for customers.
2008: Through a strategic alliance with the Carphone Warehouse Group, a UK-based
provider of mobile phones, accessories, and related services, Best Buy Mobile was
developed. After acquiring a 50% share in Best Buy Europe (with 2414 stores) from
the Carphone Warehouse, Best Buy intended to open small-store formats across
Europe in 2011.3 Best Buy also acquired Napster, a digital download 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% of Jiangsu Five Star. Best Buy Mobile
moved into Canada.
Industry Environment
Industry Overview
Despite the negative impact the financial crisis 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% increase over 2007. In years immediately prior, the growth rate
was similar: 14% in 2007 and 17% in 2006. This momentum, however, did not last. Sales
dropped 2% 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, drove sales for the company. Television sales, specifically LCD units, which
accounted for 77% of total television sales, were the main driver for Best Buy, as this
segment alone accounted for 15% of total industry revenues. The gaming segment continued to be a bright spot for the industry as well, as sales were expected to have tremendous room for growth. Smartphones were another electronics industry segment
predicted to have a high growth impact on the entire industry.
The consumer electronics industry had significant potential for expansion into the
global marketplace. There were many untapped markets, especially newly developing
countries. These markets were experiencing the fastest economic growth while having
the lowest ownership rate for gadgets.4 Despite the recent economic downturn, the
future for this industry was optimistic. A consumer electronics analyst for the European
Market Research Institute predicted that the largest growth will be seen in China (22%),
the Middle East (20%), Russia (20%), and South America (17%).5
27-4
C ase 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Barriers to entry
As globalization spread and use of the Internet grew, barriers to entering the consumer
electronics industry were diminished. When the industry was dominated by brick-andmortar companies, obtaining 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 significantly reduced the capital requirements needed to
enter the industry. Companies like Amazon.com and Dell utilized the Internet to their
advantage and gained valuable market share.
The shift toward Internet purchasing also negated another once strong barrier to
entry: customer loyalty. The trend was that consumers would research products online to
determine which one they intended to purchase and then shop around on the Internet
for the lowest possible price.
Even though overall barriers were diminished, there were still a few left, which
a company like Best Buy used to its advantage. The first, and most significant, was
economies of scale. With over 1000 locations, Best Buy used its scale to obtain cost
advantages from suppliers due to high quantity orders. Another advantage was in
advertising. Large firms had the ability to increase advertising budgets to deter new
entrants into the market. Smaller companies generally did not have the marketing
budgets for massive television campaigns, which were still one of the most effective
marketing strategies available to retailers. Although Internet sales were growing, the
industry was still dominated by brick-and-mortar stores. Most consumers looking for
electronics—especially major electronics—felt a need to actually see their prospective
purchases in person. Having the ability to spend heavily on advertising helped increase
foot traffic to these stores.
Internal Environment
Finance
While Best Buy’s increase in revenue was encouraging (see Exhibit 1), recent growth
had been fueled largely by acquisition, especially Best Buy’s fiscal year 2009 revenue
growth. At the same time, net income and operating margins had been declining (see
Exhibits 2 and 3). Although this could be a function of increased costs, it was more likely
due to pricing pressure. Given the current adverse economic conditions, prices of many
consumer electronic products had been forced down by economic and competitive pressures. These lower prices caused margins to decline, negatively affecting net income and
operating margins.
$20,000
$15,000
In Millions
ExHIbIt 1
Quarterly sales, Best
Buy Co., Inc.
2005
2006
2007
$10,000
2008
2009
$5,000
$0
2010
1st Qtr
SOURCE: Best Buy Co., Inc.
2nd Qtr
3rd Qtr
4th Qtr
Case 27
$1,000
$800
In Millions
Exhibit 2
Quarterly Net
Income, Best Buy
Co., Inc.
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
27-5
2005
2006
$600
2007
$400
2008
2009
$200
$0
2010
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
SOURCE: Best Buy Co., Inc.
Exhibit 3
Operating Margin,
Best Buy Co., Inc.
10.00%
2005
8.00%
2006
6.00%
2007
4.00%
2008
2009
2.00%
2010
0.00%
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
SOURCE: Best Buy Co., Inc.
$2,000
$1,500
In Millions
Exhibit 4
Long-Term Debt and
Cash, Best Buy Co.,
Inc.
Long term Debit
Cash
$1,000
$500
$0
2005
2006
2007
2008
2009
SOURCE: Best Buy Co., Inc.
Best Buy’s long-term debt increased substantially from fiscal 2008 to 2009 (see
Exhibit 4), which was 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 fiscal 2005 to 2008 and then was substantially lower in 2009 for the same
reason.
While the change in available cash and long-term debt were not desirable, the
bright side was that this situation was due to the acquisition of assets, which 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 was the decline in net income and operating margins, which Best
Buy needed to find a way to turn around. If the problems with net income and operating margins were fixed, the trends in cash and long-term debt would also begin
to turn around.
At first blush, the increase in accounts receivable and inventory was not necessarily
alarming since revenues were increasing during this same time period (see Exhibit 5).
However, closer inspection revealed a 1% increase in inventory from fiscal 2008 to 2009
and a 12.5% increase in revenue accompanied by a 240% increase in accounts receivable. This created a potential risk for losses due to bad debts. (For complete financial
statements, see Exhibits 6 and 7).
27-6
C ase 27
ExHIbIt 5
accounts Receivable
and Inventory, Best
Buy Co., Inc.
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
$5,000
$4,000
Inventory
Accounts receivable
$3,000
$2,000
$1,000
$0
2005
2006
2007
2008
2009
SOURCE: Best Buy Co., Inc.
ExHIbIt 6
Consolidated Balance sheets, Best Buy Co., Inc. ($ in millions, except per share and share amounts)
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Receivables
Merchandise inventories
Other current assets
Total current assets
Property and equipment:
Land and buildings
Leasehold improvements
Fixtures and equipment
Property under capital lease
Less accumulated depreciation
Net property and equipment
Goodwill
Tradenames
Customer relationships
Equity and other investments
Other assets
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Unredeemed gift card liabilities
Accrued compensation and related expenses
Accrued liabilities
Accrued income taxes
Short-term debt
Current portion of long-term debt
Total current liabilities
February 28, 2009
March 1, 2008
$498
11
1,868
4,753
1,062
$1,438
64
549
4,708
583
8,192
7,342
755
2,013
4,060
112
6,940
2,766
732
1,752
3,057
67
5,608
2,302
4,174
2,203
173
322
395
367
$15,826
3,306
1,088
97
5
605
315
$12,758
$4,997
479
459
1,382
281
783
54
8,435
$4,297
531
373
975
404
156
33
6,769
Case 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
27-7
ExHIbIt 6
(Continued)
Long-term liabilities
Long-term debt
Minority interests
Shareholders’ equity:
Preferred stock, $1.00 par value: Authorized—400,000 shares;
Issued and outstanding—none
Common stock, $0.10 par value: Authorized—1.0 billion shares;
Issued and outstanding—413,684,000 and 410,578,000 shares,
respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders’ equity
Total liabilities and shareholders’ equity
February 28, 2009
March 1, 2008
1,109
1,126
513
838
627
40
—
—
41
205
4,714
(317)
4,643
$15,826
41
8
3,933
502
4,484
$12,758
SOURCE: Best Buy Co., Inc. 2009 Form 10-K, p. 56.
ExHIbIt 7
Consolidated statements of earnings, Best Buy Co., Inc. ($ in millions, except per share amounts)
Fiscal Years Ended
February 28, 2009
March 1, 2008
March 3, 2007
Revenue
Cost of goods sold
$45,015
34,017
$40,023
30,477
$35,934
27,165
Gross profit
Selling, general and administrative expenses
Restructuring charges
Goodwill and tradename impairment
Operating income
10,998
8,984
78
66
1,870
9,546
7,385
—
—
2,161
8,769
6,770
—
—
1,999
Other income (expense)
Investment income and other
Investment impairment
Interest expense
35
(111)
(94)
129
—
(62)
162
—
(31)
1,700
674
(30)
7
$1,003
2,228
815
(3)
(3)
$1,407
2,130
752
(1)
—
$1,377
$2.43
$2.39
$3.20
$3.12
$2.86
$2.79
412.5
422.9
439.9
452.9
482.1
496.2
Earnings before income tax expense, minority
interests and equity in income (loss) of affiliates
Income tax expense
Minority interests in earnings
Equity in income (loss) of affiliates
Net earnings
Earnings per share
Basic
Diluted
Weighted-average common shares outstanding
(in millions)
Basic
Diluted
SOURCE: Best Buy Co., Inc. 2009 Form 10-K, p. 57.
27-8
C ase 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Marketing
Best Buy’s marketing goals were four-fold: (1) to market various products based on
the customer-centricity operating model, (2) to address the needs of customer lifestyle
groups, (3) to be at the forefront of technological advances, and (4) to meet customer
needs with end-to-end solutions.
Best Buy prided itself on customer centricity that catered to specific customer needs
and behaviors. Over the years, the retailer created a portfolio of products and services
that complemented one another and added to the success of the business. These products included seven distinct brands domestically, as well as other brands and stores
internationally:
Best Buy: This brand offered a wide variety of consumer electronics, home office products, entertainment software, appliances, and related services.
Best Buy Mobile: These stand-alone stores offered a wide selection of mobile phones,
accessories, and related e-services in small-format stores.
Geek Squad: This brand provided residential and commercial product repair, support,
and installation services both in-store and onsite.
Magnolia Audio Video: This brand offered high-end audio and video products and
related services.
Napster: This brand was an online provider of digital music.
Pacific Sales: This brand offered high-end home improvement products, primarily
including appliances, consumer electronics, and related services.
Speakeasy: This brand provided 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 affluent professional males, young entertainment enthusiasts,
upscale suburban mothers, and technologically advanced families.6 After the transition,
Best Buy focused more on customer lifestyle groups such as affluent suburban families,
trendsetting urban dwellers, and the closely knit families of Middle America.7 To target
these various segments, Best Buy acquired firms with aligned strategies, which were used
as a competitive advantage against its strongest competition, such as Circuit City and
Wal-Mart. The acquisitions of Pacific Sales, Speakeasy, and Napster, along with the development of Best Buy Mobile, created more product offerings, which led to more profits.
Marketing these different types of products and services was a difficult task. That
was why Best Buy’s employees had more training than competitors. This knowledge
service was a value-added competitive advantage. Since the sales employees no longer
operated on a commission-based pay structure, consumers could obtain knowledge from
salespeople without being subjected to high-pressure sales techniques. This was generally seen to enhance customer shopping satisfaction.
Operations
Best Buy’s operating goals included increasing revenues by growing its customer base,
gaining more market share internationally, successfully implementing marketing and
sales strategies in Europe, and having multiple brands for different customer lifestyles
through M&A (Merger and Acquisition).
Case 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
27-9
Domestic Best Buy store operations were organized into eight territories, with
each territory divided into districts. A retail field officer oversaw store performance
through district managers, who met 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 had an international operation segment, originally established in connection with the acquisition
of Canada-based Future Shop.9
In fiscal 2009, Best Buy opened up 285 new stores in addition to the European
acquisition of 2414 Best Buy Europe stores. It relocated 34 stores and closed 67
stores.
Human Resources
The objectives of Best Buy’s human resources department were to provide consumers
with the right knowledge of products and services, to portray 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 were required to be ethical and knowledgeable. This principle started within the top management structure and filtered down from
the retail field officer through district managers, and through store managers to the
employees on the floor. Every employee had to have the company’s vision embedded
in their service and attitude.
Despite Best Buy’s efforts to train an ethical and knowledgeable employee force,
there were some allegations and controversy over Best Buy employees, which gave the
company a black eye in the public mind. One lawsuit claimed that Best Buy employees
had misrepresented the manufacturer’s warranty in order to sell its own product service
and replacement plan. The lawsuit 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 discourage 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 alleged that Best Buy employees would aggressively deny consumers the ability to apply the company’s “price match guarantee.”11 The
suit also alleged that Best Buy had an undisclosed “Anti-Price Matching Policy,” where
the company told its employees not to allow price matches and gave financial bonuses
to employees who complied.
Competition
Brick-and-Mortar Competitors
Wal-Mart Stores Inc., the world’s largest retailer, with revenues over US$405 billion,
operated worldwide and offered a diverse product mix with a focus on being a low-cost
provider. In recent years, Wal-Mart increased its focus on grabbing market share in the
consumer electronics industry. In the wake of Circuit City’s liquidation,12 Wal-Mart was
stepping up efforts by striking deals with Nintendo and Apple that would allow each
company to have their own in-store displays. Wal-Mart also considered using Smartphones and laptop computers to drive growth.13 It was refreshing 3500 of its electronics
departments and was beginning to offer a wider and higher range of electronic products.
27-10
C ase 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
These efforts should help Wal-Mart appeal to the customer segment looking for high
quality at the lowest possible price.14
GameStop Corp. was the leading video game retailer with sales of almost US$9
billion as of January 2009, in a forecasted US$22 billion industry. GameStop operated
over 6000 stores throughout the United States, Canada, Australia, and Europe, as a
retailer of both new and used video game products including hardware, software, and
gaming accessories.15
The advantage GameStop had over Best Buy was the number of locations: 6207
GameStop locations compared to 1023 Best Buy locations. However, Best Buy seemed
to have what it took to overcome this advantage—deep pockets. With significantly
higher net income, Best Buy could afford to take a hit to its margins and undercut
GameStop prices.16
RadioShack Corp. was a retailer of consumer electronics goods and services,
including flat panel televisions, telephones, computers, and consumer electronics
accessories. Although the company grossed revenues of over US$4 billion from 4453
locations, RadioShack consistently lost market share to Best Buy. Consumers had a
preference for RadioShack for audio and video components, yet preferred Best Buy
for their big box purchases.17
Second tier competitors were rapidly increasing. Wholesale shopping units were
becoming more popular, and companies such as Costco and BJ’s had increased their
piece of the consumer electronics pie over the past few years. After Circuit City’s bankruptcy, mid-level electronics retailers like HH Gregg and Ultimate Electronics were
scrambling to grab Circuit City’s lost market share. Ultimate Electronics, owned by
Mark Wattles, who was a major investor in Circuit City, had a leg up on his competitors.
Wattles was on Circuit City’s board of executives and had firsthand access to profitable
Circuit City stores. Ultimate Electronics planned to expand its operations by at least 20
stores in the near future.
Online Competitors
Amazon.com Inc., since 1994, had 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 website. Created as an online bookstore, Amazon soon ventured
into various consumer electronics product categories including computers, televisions,
software, video games, and much more.18
Amazon.com gained an advantage over its supercenter competitors because it was
able to maintain a lower cost structure compared to brick-and-mortar companies like
Best Buy. Amazon was able to push those savings through to its product pricing and
selection/diversification. With an increasing trend in the consumer electronics industry
to shop online, Amazon.com was positioned perfectly to maintain strong market growth
and potentially steal some market share away from Best Buy.
Netflix Inc. was an online video rental service, offering selections of DVDs and
Blu-ray discs. Since its establishment in 1997, Netflix had grown into a US$1.4 billion
company. With over 100,000 titles in its collection, the company shipped for free to
approximately 10 million subscribers. Netflix began offering streaming downloads
through its website, which eliminated the need to wait for a DVD to arrive.
Netflix was quickly changing the DVD market, which had dramatically impacted
brick-and-mortar stores such as Blockbuster and Hollywood Video and retailers who
offered DVDs for sale. In a responsive move, Best Buy partnered with CinemaNow
to enter the digital movie distribution market and counter Netflix and other video
rental providers.19
Case 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
27-11
Core Competencies
Customer-Centricity Model
Most players in the consumer electronics industry focused on delivering products at
the lowest cost (Wal-Mart—brick-and-mortar; Amazon—web-based). Best Buy, however, took a different approach by providing customers with highly trained sales associates who were available to educate customers regarding product features. This allowed
customers to make informed buying decisions on big-ticket items. In addition, with
the Geek Squad, Best Buy was able to offer and provide installation services, product
repair, and ongoing support. In short, Best Buy provided an end-to-end solution for its
customers.
Best Buy used its customer-centricity model, which was built around a significant
database of customer information, to construct a diversified portfolio of product offerings. This let the company offer different products in different stores in a manner that
matched customer needs. This in turn helped keep costs lower by shipping the correct
inventory to the correct locations. Since Best Buy’s costs were increased by the high
level of training needed for sales associates and service professionals, it had been important that the company remain vigilant in keeping costs down wherever it could without
sacrificing customer experience.
The tremendous breadth of products and services Best Buy was able to provide
allowed customers to purchase all components for a particular need within the Best
Buy family. For example, if a customer wanted to set up a first-rate audio-visual room
at home, he or she could go to the Magnolia Home Theater store-within-a-store at any
Best Buy location and use the knowledge of the Magnolia or Best Buy associate in the
television and audio areas to determine which television and surround sound theater
system best fit their needs. The customer could then employ a Geek Squad employee to
install and set up the television and home theater system. None of Best Buy’s competitors offered this extensive level of service.
successful acquisitions
Through its series of acquisitions, Best Buy had gained valuable experience in the process of integrating companies under the Best Buy family. The ability to effectively determine where to expand was important to the company’s ability to differentiate itself
in the marketplace. Additionally, Best Buy was also successfully integrating employees from acquired companies. Best Buy had a significant global presence, which was
important because of the maturing domestic market. This global presence provided the
company with insights into worldwide trends in the consumer electronics industry and
afforded access to newly developing markets. Best Buy used 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 concluded one of the major reasons
for the company’s downfall was that Circuit City let go of their most senior and welltrained sales staff in order to cut costs. Best Buy, on the other hand, had a reputation
for retaining talent and was widely recognized for its superior service. Highly trained
sales professionals had become a unique resource in the consumer electronics industry,
where technology was changing at an unprecedented rate, and was a significant source
of competitive advantage.
27-12
C ase 27
Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Challenges Ahead
economic Downturn
Electronics retailers like Best Buy sold products that could be described as “discretionary items, rather than necessities.”20 During economic recessions, however, consumers had less disposable income to spend. While there was optimism about a possible
economic turnaround in 2010 or 2011, if the economy continued to stumble, this could
present a real threat to sellers of discretionary products.
In order to increase sales revenues, many retailers, including Best Buy, offered customers low-interest financing through their private-label credit cards. These promotions
were tremendously successful for Best Buy. From 2007 to 2009, these private-label credit
card purchases accounted for 16%–18% of Best Buy’s domestic revenue. Due to the
credit crisis, however, the Federal Reserve issued new regulations that could restrict
companies from offering deferred interest financing to customers. If Best Buy and other
retailers were unable to extend these credit lines, it could have a tremendous negative
impact on future revenues.21
Pricing and Debt Management
The current depressed economic conditions, technological advances, and increased
competition put a tremendous amount of pricing pressure on many consumer electronics products. This was a concern for all companies in this industry. The fact that
Best Buy did not compete strictly on price structure alone made this an even bigger
concern. Given the higher costs that Best Buy incurred training employees, any pricing pressure that decreased margins put stress on Best Buy’s financial strength. In
addition, the recent acquisition of Napster and the 50% stake in Best Buy Europe
significantly increased Best Buy’s debt and reduced available cash. Even in prosperous times, debt management was a key factor
