Case Study of Best Buy

In 1966 Richard Schultze and James Wheeler saw an opportunity in opening a specialized electronics store in St. Paul, Minnesota. Soon after opening, The Sound of Music became an immediate success in the industry. By the year 1969 the company grew so fast, Schultze decided to publically trade The Sound of Music. Over the next few years, The Sound of Music was able to raise their annual revenues to over $1 million. In 1981, a tornado hit the Roseville, Minnesota store. In order to salvage what they could from the storm wreckage they held a huge storewide sale which was advertised as “The Best Buy”. The sale was such a huge success that Schultze decided to hold it annually. Sound of Music became widely known for this annual “best buy” sale, therefore in 1983, the board of directors decided to officially change the name to Best Buy Co., Inc. [1] 

Best Buy went on to become the leading consumer electronics retail store in the Nation. By 2008 they had opened their 1000th store (Lawrence being #837). Due to their success, Best Buy was able to expand their business by building additional stores throughout the nation as well as expanding internationally in countries such as UK, Canada, Mexico and China. Best Buy was able to achieve such growth because of the rapidly growing consumer electronics market. Best Buy was joined in the Industry by competitors such as GameStop, Radio Shack, hhgregg and Conns Inc. (Yahoo financial). [2] Other competition includes Wal-Mart, Nebraska Furniture Mart and other big super stores. By being the Industry Pioneer, Best Buy has been able to maintain positive annual revenues as well as a large market share.

Business Information

Best Buy is one of the International leaders in the sale of electronics. They offer a wide variety of products that are needed as well as wanted in the entertainment industry. Best Buy carries movies, games, music, computer hardware as well as software, and television entertainment equipment. They also provide many home appliances which are sought after by people throughout their market. Best Buy is successful because it provides customers with entertainment as well as equipment and the newest technology as it becomes available in the market.

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Geographical Reach

Best Buy offers its services and products to people not just throughout our country, but in many different countries as well. Their first international venture came in 2001 with the acquisition of Future Shop. Future Shop was the leading consumer electronics retailer in Canada. Since 2001, Best Buy has expanded by establishing stores in Canada as well as the UK, China, Mexico, and they are looking to establish a position in Turkey in the future.

Market Performance

The market for consumer electronics is a very saturated market. Most of the electronic needs in the industry are spoken for by current businesses, therefore it is very difficult for any new competition to enter into the market and successfully compete. Best Buy has been able to capture a substantial amount of the market for electronics. Between the five main competitors for electronics, Best Buy has a $17.5 billion market capitalization, which is number one out of all 5 electronic specialists. It is hard to quantitatively compare Best Buy to businesses such as Wal-Mart, Target and Nebraska Furniture Mart because these firms sell a variety of other products to different industries. After interviewing Supervisor, Jeremy Brown he discussed the service you will receive when you shop at Best Buy. “Best Buy is the place you know you will receive the best service and help from employees in searching for the item you came in to buy”. [3] Given the data found, Best Buy has been able to perform as the market leader in the electronics Industry.

Best Buy has the greatest Brand awareness in the Industry. They have very loyal customers because of their Geek Squad business which was opened in 2004. The Geek Squad operates to assist customers in learning how to use the products that they previously purchased from Best Buy, as well as servicing any customer’s equipment which is in need of repair or replacement. Jeremy Brown said, “It benefits Best Buy having a complimenting business like Geek Squad because it allows us to offer the whole solution to the customer. We can repair, protect, as well as install any product the customer would need us to.” [4] By offering a variety of products and services in the electronic industry, Best Buy can tailor to any needs of the existing market.

Financial Performance

In the end of the February 2010 fiscal year, Best Buy reported revenues of $49,694 million. This was a 10.3% increase from the previous year. Net profit in 2010 was $1,317 million which was a 31.31% increase from 2009. Best Buy, which is publically traded on the New York stock exchange is currently up 42.59. Best Buy’s revenue per share is $121.49. According to Yahoo finance the company has a strong balance sheet, with $840 billion in cash and cash equivalents as of the most recent quarter in August 2010, meaning that Best Buy has created a successful trend of positive cash flows. [5] 

Internal Analysis

Since Best Buy’s inception in 1966, the company’s top executives have used numerous strategies to keep their earnings increasing at a steady pace. Changing the way that people shop in their stores was a key internal strategy for Best Buy. In 1984, they introduced the superstore format for the first time. This allowed for sales to rise and for them to secure a 42% market share. In 1989, Best Buy introduced its Concept II stores. The new stores had a large warehouse attached to the store so that more inventory could be kept on site and thus help with inventory management. The new stores also had self-help information guides and answer centers for customers seeking personal attention. This move had both positive and negative reactions. The customers liked it so sales rose, but some suppliers thought that the lack of sales representatives would lead to lesser sales.

In 1994, the Concept III stores were introduced and they had even more self-help service. Then Hitachi and Kenwood pulled their products from Best Buy stores because they believed that salespeople were key to selling their product. Despite the minor setbacks, revamping the stores to tend to the customers’ wants was working as sales continued to rise. Concept IV stores launched in 1998 and they implemented digital displays as well as new departments such as home theatre and digital imaging. This new store design was a tremendous success as Best Buy recorded record sales of $224 million in 1998, a 137% increase from the previous year. Then in June, Best Buy changed the way its products were sold again by selling consumer electronics on its website. From expanding to a superstore to selling its products online, Best Buy has tweaked and changed its distribution medium to allow for its profits to keep going up.

Probably the largest factor in Best Buy’s success is its expansion into new markets and offering of new products. The consumer electronic industry is constantly changing as technology improves and new markets are created. Best Buy stores are always stocked with the most up to date products. In 1982, they started selling VCRs and appliances. Then in 2000, Best Buy partnered with Whirlpool to start offering KitchenAid brand appliances. In 2008, they even bought a majority holding in Napster. They were also the first third party retailer to sell Apple’s iPhone. Now, they’ve opened Apple stores inside the Best Buy megastores. In 2006, they tried the digital music market as they launched the Best Buy Digital Music Store and in 2010, they launch their web-based movie service. Best Buy is constantly looking for new markets that they could feasibly dive into and start selling new products. [6] 

Another way Best Buy tailors their stores for the customer is by purchasing another company. Magnolia Hi-Fi, one of Best Buy’s competitors, was bought by Best Buy in 2000 for $87 million. This allowed for Best Buy to later put Magnolia Home Theatre stores inside of hundreds of Best Buy superstores. As technology increased in the consumer electronics market, there was a growing need for technical support and assistance with different, more complicated electronics. So in 2003, Best Buy acquired Geek Squad in order to better accommodate to the customer’s needs. Geek Squad gives Best Buy full technical support right there in the store for all of the electronics that they sell. In 2006, Best Buy acquired Pacific Sales Kitchen and Bath, a retailer of high-end home improvement products. So, Best Buy is also looking to move to new markets via an acquisition. [7] 

Best Buy also uses a rewards program to help boost sales. Their rewards program gives the customer a $5 Best Buy gift card for every $100 that he spends at Best Buy. This gives an incentive for customers to spend more money and to buy their electronics at Best Buy since they’re getting 5% of their money spent back. Plus, giving out a free gift card will help boost sales. If someone has a $5 gift card, they are more likely to go and buy something. But there aren’t many things that cost $5 or less, so usually, the customer will end up spending more than $5, all because he had the gift card in the first place. The rewards program has been very successful for Best Buy and has lead to increased sales. [8] 

Best Buy is a successful consumer electronics retailer that has been around for over 40 years. Whether it’s changing the layout of the store, selling new products in new markets, expanding through acquisition, or implementing a rewards program, Best Buy uses many strategies and tactics to not just survive in the consumer electronics market, but to thrive, and Best Buy has been thriving for over 40 years.

Comparison To Competiton

Best Buy has a sizeable piece of the consumer electronics industry, but they still face heavy competition from many other retailers and online stores, just a couple of them being Wal-Mart and Amazon. Best Buy is not the price leader when it comes to consumer electronics, but they do seem to be the leader when it comes to providing extensive knowledge about products, and selling services with them. Their competitive advantage [9] is being able to display products in an appealing setting while providing customers with insight to their product needs. This has proven a successful strategy and has attracted a lot of traffic in their stores. One metric Best Buy seems to lead the retail industry in is in-store sales per square foot. Best Buy’s current sales per sq. ft is around $830, compared to Wal-Marts $680, and HHGregs $380. This an important metric because it helps track how much of their store front space is being utilized, as leasing for space usually constitutes a large share of a company’s costs. Forbe’s Magazine1 says that 74% of Best Buy’s stock price is directly proportional to its sales per sq. ft metric. This is much of the reason Best Buy has been so successful and why they’ve been able to keep growing so rapidly.

Best Buy has also remained successful for its ability to get products out of the store. Latest figures show Best Buy having inventory turns [10] of 6.1, the same as Target, much better than Sears’ 2.9 or Radio Shacks 3.2. Close to Best Buy was HH Greg with 5.8. Amazon and Wal-Mart both have higher turns but Amazon is all online with no store front, and Wal-Mart is a much larger company with a better supply chain and a far broader array of products while also focusing on a cost-leadership strategy.

Though Best Buy’s differentiated strategy has been successful, it can possibly encourage consumers to come into Best Buy to become educated about products, and then turn around go buy them at Wal-Mart or off of the internet. To better differentiate themselves, Best Buy has focused on services to add to their products, of which would not be available unless otherwise purchased from Best Buy. These services include extended services plans, installations, and repairs. These services usually have high profit margins and can constitute a significant amount of revenue, while giving customer professional installations and peace of mind. Wal-Mart is also on Best Buy’s trail, now adding expanded electronics department in many of its stores and has added personnel to provide customer assistance, similarly to Best Buy stores. Given Wal-Mart’s supply chain and price leading capabilities, they remain a constant threat to Best Buy. Amazon remains a threat as their prices are usually always lower, and consumers can shop from home and never have to go to the store. Although Best Buy provides this service, they cannot match the price, and with no other way to differentiate themselves through the limited online experience, price remains the deciding factor.

For these reasons Best Buy continues to try to set its self apart and take advantage of its strengths. It’s recently used it large distribution network to get into the used game market. It will buy used games, send them to a center to be refurbished, and sells them at relatively low prices. This is helping the huge retailer compete directly with small retailers such as Game Stop. With their size, Best Buy has an opportunity to steal market share in this industry.

External Analysis

The general environment involves several external factors that would have unpredictable and dramatic effects on firm’s strategy, such as demography, socio culture, politics, technology, economy and globalization. However, it is difficult to monitor all aspects of the general environment, so most managers only focus on their own industry structure. As the leading consumer electronics retailer in the United States, Best Buy primarily faces the economic segment and the global segment. First of all, the economy affects all industry. During the financial crisis period from 2008 to 2009, the stock price of Best Buy, Inc hit to $16.42 in the third quarter of 2009 fiscal year, dropping approximately 65.43% in four months and touched the lowest price in past 5 years; the net income of 2009 decreased to 1.003 million, comparing with previous annual net income of $1.407 million, thus distracting the investors. [11] The worst situation may be that total operating cash flow reduced by 148 million from 2008 to 2009, which significantly limited the company’s internal operating activities. However, with the recovery of the domestic and global economy, the company’s net income climbed to $1.137 million by February 2010, which is 13.36% higher than previous annual performance. Also the stock price reached about $42.83 per share recently. Secondly, for global segment, Best Buy divided its operating portion into two parts, domestic and international. The company tends to expand its market to attract multinational customers, to use lower costs of resource, and to access more opportunities to grow up. Besides the domestic market, Best Buy established 2453 stores in Europe, Canada, China, Mexico and Turkey at the end of fiscal 2010.

Although the general environment inevitably affects the firm’s strategy, the company is usually more directly influenced by forces in the competitive environment. Through the Porter’s five-force model of industry competition, the company would have a deep realization of developing trend and ability of restructuring and improvement. The Threat of New Entrants

There are few new major entrants in Consumer Electronics & Appliances Retail because this industry is already mature in United States and the entry barriers are relatively high. Obviously, Best Buy has the advantage of economies of scale with 1069 stores across the all states. Its major competitors, Wal-Mart, target, Amazon, apple Inc also share the rest of market through the physical stores and web-based sales channel. Moreover, the capital requirement for entering the consumer electronics industry is normally huge, including the investment in negotiation with distribution channels, inventory systems, purchasing of infrastructure, employee training and so forth. Another barrier exists in the product differentiation. Since the consumer electronic retail industry is not highly innovative, customers’ loyalty and brand identification are difficult to change.

The Bargaining Power of Buyers

The Power of buyers in consumer electronic retail industry is relatively high because that the switching costs are almost close to zero. In most circumstances, customers are price sensitive. According to the firm’s annual report, Best buy’s business is most profitable in the fourth quarter because of the discounts of products in holiday season.

The Bargaining Power of Suppliers

Partially, Best Buy’s business depends on offering a broad selection of name-brand products, so establishing a long and stable relationship with suppliers is important for the firm. Since the suppliers of Best Buy are not dominated by a few companies. In fact, “In fiscal 2010, our 20 largest suppliers accounted for just under 60% of the merchandise we purchased, with five suppliers – Apple, Hewlett-Packard, Samsung, Sony and Toshiba -representing 35% of total merchandise purchased.” [12] In other words, the concentration relative to buyer industry is low, thus leads to the low suppliers power.

The Threat of Substitute Products and Services

Best Buy offers almost the same electronic products as Wal-Mart, Target and Amazon. How can it differentiate from those competitors? The answer is Geek Squad. It is a subsidiary of the Best Buy and primary offers services in-store, on-site and also provides 24-hour telephone and emergency support, including repairing computers, adding car’s navigation, transferring data, fixing personal digital products and so on. As their first pledge states: “We are dedicated to giving you the best service possible and we’ll prove it. If you’re not completely satisfied, we’ll do our best to correct the problem, Fast and Free.” [13] This strategy is difficult to imitate and brings the firm high profits.

The Intensity of Rivalry among Competitors in an Industry

In order to compete with so many competitors in this industry, Best Buy needs to consider the settlement of price, to face the advertising battles, to continuously improve the customer services and warranties. In addition to low industry growth rate, low product differentiation, and low switching costs, the intensity of competitive rivalry is pretty high. After the analysis of the company’s general and competitive environment, Best Buy has reached success through expanding, providing prior and high-quality service, well established relationships with customers and suppliers, and differentiation.

Recommendations for the Future

As the leading company in the Electronics Industry, Best Buy already has a competitive advantage over its competitors. In order to gain even more market share for their company there are steps Best Buy could take in becoming more specialized. If they kept their focus on the specific aspects of the electronics industry that the everyday consumer does not necessarily know, consumers would feel even more comfortable purchasing specific electronic products. This way they would be differentiating themselves from their main competitors and be considered as a superior business all together.

An advantage that Best Buy has is the production of their own products, such as Rocketfish, Dynex, Init. This allows for Best Buy to gain higher margins on products that are sold. Therefore we feel that it is important for Best Buy to market their products strongly. By increased advertising and promotion on such products, consumers will begin purchasing Best Buys own products rather than other competing name brands such as Sony and LG.

It is also important for Best Buy to continually enhance their employee relationship within the Company. A job at Best Buy is highly sought after, however it is important for them to keep their employees interests in the company high. By maintaining good employee relations they are also ensuring that their employees speak of them highly outside of work which ensures their customer relations in good order as well. It would be beneficial if Best Buy would keep enhancing their Reward and Benefit Systems for their employees. By doing so, moral and interest in the company will increase and the Company will see improvements in their performance. One example of such reward systems that Best Buy already has in place are what they call “Blue Crew Bucks”. This system is used to pay a bonus to stores who perform the highest and their employees. While Sarah Ballard, Vice President of Human Capital for Best Buy developed this system and thought it was a great idea employees thought differently. “Three months after it began, she realized that employees didn’t agree. Store managers told her that some workers thought Best Buy wouldn’t pay up; others just didn’t understand the program”. After realizing that employees were upset she was able to talk to managers of each store and clarify how the program worked. By continually receiving feedback from employees and the management team, Best Buy is able to make sure that everyone is satisfied with their work environment and with how things operate. [14] 

As new products are constantly entering the market along with rapidly developing technology it is important for Best Buy to keep up with the market and make sure they always provide the newest products for customers immediately. With the latest products such as the I-Pad and X-box Kinect consumers will only consider shopping for these at the stores they know will be the first to carry them. It is important for customers to know when they want to purchase that new item they can do so at Best Buy. Jeremy Brown stated, “It is so important to have the newest items for customers when they come out. Upon the new items release we must make sure that we have enough of the product to cover the demand and place them at an appropriate location in the store to maximize the items appeal”. [15] Making sure these new products are placed so that they can be easily identified by consumers when they enter the store is very important for the company. This will attract consumers into the store in the first place, in hopes that upon purchasing the new item, they will also decide to purchase other items.

After analyzing Best Buy’s competitive approach in their corporate strategies, it is apparent that they have established themselves as the leader in the consumer Electronics Industry. The resources that Best Buy has at their expense allow for them to have a remain competitive in the electronics industry as a leading electronics retailer. The process by which Best Buy utilizes their resources is a valuable asset, for the company strives to continually strengthen their competitive approach. They can continue to strengthen this by focusing on great employee relationships, keeping up with the newest technology and products in their stores and focusing on specific products where they have a competitive advantage above competition.