Best Buy: Company Overview
Best Buy – Case Analysis #1 MGT 575 – 01 Christopher J. O’Connor July 17, 2013
Major Issues/Concerns/Problems Best Buy has a myriad of issues it is facing as it struggles for viability and, in the eyes of some, literal survival. The primary challenges for the company include financial concerns, overly aggressive expansion into the European market, and a questionable strategic decision to focus more on large “big box” retail stores in the face of an industry shifting dramatically toward an online presence. Beyond these hurdles, Best Buy has also chosen a somewhat radical shift toward a customer-centric operating model combined with an intentional change in demographic/target market and has had a questionable direction in corporate social responsibility with respect to …show more content…
ethical issues. Analysis of Issue(s) Many of the aforementioned are inter-related. Best Buy’s revenue is moving in a positive direction, however, net income decreased consistently each quarter in 2009 and 2010. This trend became even worse during the past six quarters which include three with negative net income. Laying this issue at the feet of extreme pressure due to lower prices alone is not the only factor. The 2008 ill-fated acquisition of more than 2,400 stores comprising of Best Buy Europe saddled the company with long-term debt. The company recently announced that it was selling its stake in the joint venture for $775 million, so it could “bolster its balance sheet” according to CEO, Herbert Joly. The five-year foray into big box retail locations in Europe ultimately cost investors $3 billion. Growth by acquisition, at least in this case, was a marked failure of a grand strategy (p. 12, Pearce/Robinson). All of this was done in the face of an industry that has moved dramatically toward an online presence as opposed to having a higher numbers of stores. Walmart continues to be the world’s largest retailer and it competes aggressively in the electronics industry forging relationships with Apple and Nintendo.Additionally, Amazon.com is a formidable online presence as it allows consumers ease in searching for products that customers peruse Best Buy for only to find for the lowest cost on-line. Amazingly, 90% (or $45 billion) of Best Buy’s $50 billion in annual revenue still comes from in-store purchases. Amazon.com has an online presence only, meaning they pay less staff, and lack the overheard costs of running more than 6,200 Best Buy stores. As such, the company appears to have lacked a true understanding of the external environment specifically with respect to how consumers now buy electronics and has struggled with long-term objectives as it relates to issues such as competing on service versus price in an economically challenged environment, that being statements of Best Buy’s company vision (p. 12, Pearce/Robinson). Issues surrounding Best Buy’s business model are not the only challenges. The company’s mission (p.23, Pearce/Robinson) and long-term strategies appear to be shifting to the point of being rudderless. The long-standing customer centric model was undergirded by a supposed relentless pursuit of providing users with a full gamut of technology solutions and trouble shooting. This enabled the company to compete not on price, but on service. Some of this was additionally accomplished by ensuring that sales people were paid flat salaries as opposed to being compensated based on commission. Yet, Best Buy has recently decided to move away from this historical practice and is now incentivizing staff based on increases in sales and higher customer satisfaction scores. This relates to one of the three issues identified as integral to the development and refining of a company’s vision (p. 33, Pearce/Robinson). Best Buy has also struggled with ethical behavior (p. 55, Pearce/Robinson) ranging from consumers suing the company over fraudulent warranties, being investigated for erroneous sales prices being posted internally at stores, running a fowl of the FCC for not informing buyers of analog televisions that they would not receive digital transition after a specific date, and environmental concerns relating to the purchase of raw materials from Canadian logging companies which contributed to deforestation. And, as Best Buy shifted from targeting upscale professional males to close knit affluent families in Middle America, an area of the country known generally for having high moral values, the company has gone through three CEOs in a year. This turnover included the resignation of Brian Dunn, who had an inappropriate relationship with a 29-year old female co-worker which was not reported to the audit committee by the company chairman and founder, Richard Schulze. Mr. Schulze also resigned. Beyond its persona as a clunky big box retailer, these ethical missteps have added to what is today a questionable company image (p. 29, Pearce/Robinson). Alternatives/Recommendations and Potential Issues To remediate a company that is fast becoming obsolete, Best Buy should consider following recommendations: 1. Take drastic steps to eliminate a large percentage of retail stores. The consumer has already moved to shopping primarily online, yet Best Buy’s declining revenue continues to primarily come from in store purchases. The burdensome cost of its real estate footprint, along with the staffing overhead, is unsustainable in a market moving in another direction. 2. Enhance service in the stores that remain. Interestingly, Best Buy’s customer service scores have decreased, due to staff who are not well trained, and employee turnover has increased. The store needs to take a page out of Apple’s book and have staff who truly knows the ins and outs of the products on the shelves. 3. Stop competing on service and start competing on price. Consumers appreciate good service today, but will almost always default to the lowest price. While altruistic and utopian to focus exclusively on superior service as a way to compete, Best Buy must accept that this model no longer works in the industry in which they compete. 4. Increase its online presence. Best Buy’s current website only allows for some of its in store products to be purchased online. The site is also clunky and feels outdated. An overhaul of the site, getting away from the big box, blue and yellow branding would be a welcome change for consumers. 5. Tout its distinction by the EPA as one of the top 50 purchasers of green power in the U.S. as a means of enhancing public image and placing emphasis on CSR. The underlying potential issue in recommendations 1 – 3 surrounds cost or expense to implement. Closing stores (many of which have leases) will be costly and likely involve layoffs, which come with unemployment claims and bad press. This will hurt Best Buy’s public image. Training of existing staff and staff retention are also cost issues, as is a transition in how Best Buy competes. A shift to competing on price will involve downward pressure on net income as heavy inventories with high costs are reduced. Recommendation #4 needs to involve a new way of thinking as well as a brand shift for the company. It will be a departure from tying the look and feel of the stores to the website.
Bibliography Cringely, Robert X., "Best Buy Is Doomed." Beta News, 5 May 2013.
Web. 12 July 2013. <http://betanews.com/2013/05/06/best-buy-is-doomed/>. Cheng, Andria, “Best Buys Grand Mission is Right Here in the U.S.” MarketWatch, 30 April 2013. Web. 11 July 2013. <http://blogs.marketwatch.com/behindthestorefront/2013/04/30/best-buys-grand-mission-is-right-here-in-the-u-s/> Zimmerman, Ann, “Can This Former Clerk Save Best Buy?” Wall Street Journal Online, 26 April 2013. Web. 12 July 2013 <http://online.wsj.com/article/SB10001424127887324743704578444733449436900.html> Winter, Carolyn, “How to Save Best Buy from Extinction.” Bloomberg Businessweek, 6 August 2012. Web. July 10 2013 <http://www.businessweek.com/articles/2012-08-06/how-to-save-best-buy-from-extinction> <https://en.wikipedia.org/wiki/Best_Buy> Pearce, John A., and Richard B. Robinson. Strategic management: Planning for domestic & global competition. New York: McGraw-Hill/Irwin,
2013.
Major Issues/Concerns/Problems Best Buy has a myriad of issues it is facing as it struggles for viability and, in the eyes of some, literal survival. The primary challenges for the company include financial concerns, overly aggressive expansion into the European market, and a questionable strategic decision to focus more on large “big box” retail stores in the face of an industry shifting dramatically toward an online presence. Beyond these hurdles, Best Buy has also chosen a somewhat radical shift toward a customer-centric operating model combined with an intentional change in demographic/target market and has had a questionable direction in corporate social responsibility with respect to …show more content…
ethical issues. Analysis of Issue(s) Many of the aforementioned are inter-related. Best Buy’s revenue is moving in a positive direction, however, net income decreased consistently each quarter in 2009 and 2010. This trend became even worse during the past six quarters which include three with negative net income. Laying this issue at the feet of extreme pressure due to lower prices alone is not the only factor. The 2008 ill-fated acquisition of more than 2,400 stores comprising of Best Buy Europe saddled the company with long-term debt. The company recently announced that it was selling its stake in the joint venture for $775 million, so it could “bolster its balance sheet” according to CEO, Herbert Joly. The five-year foray into big box retail locations in Europe ultimately cost investors $3 billion. Growth by acquisition, at least in this case, was a marked failure of a grand strategy (p. 12, Pearce/Robinson). All of this was done in the face of an industry that has moved dramatically toward an online presence as opposed to having a higher numbers of stores. Walmart continues to be the world’s largest retailer and it competes aggressively in the electronics industry forging relationships with Apple and Nintendo.Additionally, Amazon.com is a formidable online presence as it allows consumers ease in searching for products that customers peruse Best Buy for only to find for the lowest cost on-line. Amazingly, 90% (or $45 billion) of Best Buy’s $50 billion in annual revenue still comes from in-store purchases. Amazon.com has an online presence only, meaning they pay less staff, and lack the overheard costs of running more than 6,200 Best Buy stores. As such, the company appears to have lacked a true understanding of the external environment specifically with respect to how consumers now buy electronics and has struggled with long-term objectives as it relates to issues such as competing on service versus price in an economically challenged environment, that being statements of Best Buy’s company vision (p. 12, Pearce/Robinson). Issues surrounding Best Buy’s business model are not the only challenges. The company’s mission (p.23, Pearce/Robinson) and long-term strategies appear to be shifting to the point of being rudderless. The long-standing customer centric model was undergirded by a supposed relentless pursuit of providing users with a full gamut of technology solutions and trouble shooting. This enabled the company to compete not on price, but on service. Some of this was additionally accomplished by ensuring that sales people were paid flat salaries as opposed to being compensated based on commission. Yet, Best Buy has recently decided to move away from this historical practice and is now incentivizing staff based on increases in sales and higher customer satisfaction scores. This relates to one of the three issues identified as integral to the development and refining of a company’s vision (p. 33, Pearce/Robinson). Best Buy has also struggled with ethical behavior (p. 55, Pearce/Robinson) ranging from consumers suing the company over fraudulent warranties, being investigated for erroneous sales prices being posted internally at stores, running a fowl of the FCC for not informing buyers of analog televisions that they would not receive digital transition after a specific date, and environmental concerns relating to the purchase of raw materials from Canadian logging companies which contributed to deforestation. And, as Best Buy shifted from targeting upscale professional males to close knit affluent families in Middle America, an area of the country known generally for having high moral values, the company has gone through three CEOs in a year. This turnover included the resignation of Brian Dunn, who had an inappropriate relationship with a 29-year old female co-worker which was not reported to the audit committee by the company chairman and founder, Richard Schulze. Mr. Schulze also resigned. Beyond its persona as a clunky big box retailer, these ethical missteps have added to what is today a questionable company image (p. 29, Pearce/Robinson). Alternatives/Recommendations and Potential Issues To remediate a company that is fast becoming obsolete, Best Buy should consider following recommendations: 1. Take drastic steps to eliminate a large percentage of retail stores. The consumer has already moved to shopping primarily online, yet Best Buy’s declining revenue continues to primarily come from in store purchases. The burdensome cost of its real estate footprint, along with the staffing overhead, is unsustainable in a market moving in another direction. 2. Enhance service in the stores that remain. Interestingly, Best Buy’s customer service scores have decreased, due to staff who are not well trained, and employee turnover has increased. The store needs to take a page out of Apple’s book and have staff who truly knows the ins and outs of the products on the shelves. 3. Stop competing on service and start competing on price. Consumers appreciate good service today, but will almost always default to the lowest price. While altruistic and utopian to focus exclusively on superior service as a way to compete, Best Buy must accept that this model no longer works in the industry in which they compete. 4. Increase its online presence. Best Buy’s current website only allows for some of its in store products to be purchased online. The site is also clunky and feels outdated. An overhaul of the site, getting away from the big box, blue and yellow branding would be a welcome change for consumers. 5. Tout its distinction by the EPA as one of the top 50 purchasers of green power in the U.S. as a means of enhancing public image and placing emphasis on CSR. The underlying potential issue in recommendations 1 – 3 surrounds cost or expense to implement. Closing stores (many of which have leases) will be costly and likely involve layoffs, which come with unemployment claims and bad press. This will hurt Best Buy’s public image. Training of existing staff and staff retention are also cost issues, as is a transition in how Best Buy competes. A shift to competing on price will involve downward pressure on net income as heavy inventories with high costs are reduced. Recommendation #4 needs to involve a new way of thinking as well as a brand shift for the company. It will be a departure from tying the look and feel of the stores to the website.
Bibliography Cringely, Robert X., "Best Buy Is Doomed." Beta News, 5 May 2013.
Web. 12 July 2013. <http://betanews.com/2013/05/06/best-buy-is-doomed/>. Cheng, Andria, “Best Buys Grand Mission is Right Here in the U.S.” MarketWatch, 30 April 2013. Web. 11 July 2013. <http://blogs.marketwatch.com/behindthestorefront/2013/04/30/best-buys-grand-mission-is-right-here-in-the-u-s/> Zimmerman, Ann, “Can This Former Clerk Save Best Buy?” Wall Street Journal Online, 26 April 2013. Web. 12 July 2013 <http://online.wsj.com/article/SB10001424127887324743704578444733449436900.html> Winter, Carolyn, “How to Save Best Buy from Extinction.” Bloomberg Businessweek, 6 August 2012. Web. July 10 2013 <http://www.businessweek.com/articles/2012-08-06/how-to-save-best-buy-from-extinction> <https://en.wikipedia.org/wiki/Best_Buy> Pearce, John A., and Richard B. Robinson. Strategic management: Planning for domestic & global competition. New York: McGraw-Hill/Irwin,
2013.