Best Buy Business Strategy Essay Example

3 billion in the previous year. Total equity stood at $7. 2 billion for the fiscal year February 2011 compared to $6. 9 billion in February 2010. History of Best Buy Co. Inc Best Buy was originally founded by Richard Schulze and another partner in 1966. Schulze was also the chairman of the company. The first company that was established under its formation was Sound of Music Inc, as a single home and car audio specialty store. The company was opened in St. Paul, Minnesota in an attempt to capture the shares of the twin cities, home and car stereo retail market.

The first year of sale reached a total of $173 million. Four years later Schulze bought out his partner and began to expand the chain. By the early 1980s, Schulze broadened the product line to appliances and VCRs to target older and more affluent customers. Schulze has continued to expand its product line to suit the needs of his consumers. After almost 20 years of operation, Sound of Music changed its name to Best Buy and launched its first superstore in 1983. Best Buy grew rapidly between 1984 and 1987; it expanded from eight stores to 24 and its sales jumped from $29 million to $240 million.

Best Buy average future shop outlet occupies approximately 21,000 square feet of retail space. Each of the company’s business units run an electronic shopping web site on the internet. Overall, Best Buy’s revenue mix has consumer electronics generating 37 percent of its total revenue, home office products, 35 percent and entertainment software, 22 percent of appliances. By 1985, Best Buy went public where it raised $8 million through

an initial public offering (IPO) and two years later gained a listing on New York Stock Exchange (NYSE).

To set Best Buy apart from its competitors, Schulze introduced the warehouse-like store format in 1989 and took sales staff off commission. The concept was crucial to Best Buy ascent to become the second largest consumer electronic retailer in the U. S. by 1993. Best Buy continued to expand aggressively in the subsequent years and found itself in a large amount of debt in 1995. In 1997, earnings plummeted and the company realized it had over extended itself with its expansion. The company initiated a massive makeover scaled back operation and controlled inventory more tightly.

Since then, Best Buy has flourished once again under superior management. The company implemented innovative concepts in its stores, expanded domestically and internationally and quickly became the world’s leading consumer electronics retailer. Based on Best Buy’s Annual report, as of February 2009, Best Buy was considered the largest consumer electronics retailer in the U. S, with domestic market share of 22 percent. Best Buy Analysis Defining an industry can be described as drawing a line between the stablished competitor and the substitute products offered by competitors outside the industry (Porter 1998). “Porter’s five forces provide a framework for an industry and business strategy development to drive the five forces that determine the competitive intensity and attractiveness of a market. The Porter’s Five Forces model helps identify where improvement can be made regarding competitive forces, threat of potential entrants, bargaining power of buyers, and bargaining power of suppliers and threats of substitute products. Rivalry Best Buy is operating in an open market.

There are many more

firms offering similar products and as such rivalry among the consumer electronics retail industry are considered to be high. According to Yahoo Finance, there are approximately 7 major companies that are traded publically and sell predominately electronic products. There are numerous privately held retailers that serve specific niche markets. With a market capitalization of over $16 billion, Best Buy is the dominant player in the industry. Discount retailers such as Wal-Mart, Target and Costo occupy a significant part of the consumer electronics market.

Competition is high in this industry primarily because there is little to no switching cost if a buyer chooses to shop elsewhere. Furthermore, the products are not differentiated since buyers can purchase similar products at almost all of the different electronic stores. As a result, companies compete on prices and non-tangibles such as customer services and goodwill. Threat of New Entrant The threat of potential new entrants into the consumer electronics retail industry is relatively low. As a consequence, the potential threat of new entrants has been up (Larson, 2008).

The low market capitalization implies that it would not be difficult to enter the industry based solely on capital required. However, a potential entrant would have to overcome the superior brand reputation that Best Buy has established. Best Buy has built a reputation for selling mid-to high-end product and excellent customer services. Therefore, it would be difficult for a new entrant to challenge customer services. Further more, it would be difficult to under cut incumbent firms who have already established relationships with suppliers to purchase merchandise at the lower prices. Although threat to entry is onsidered to be low, the potential pool of entrant

is actually very large as it consists of numerous online electronic retailers. Bargaining Power of Buyers The bargaining power of buyers for electronic products is extremely low because the buyers primarily consist of a weak and fragmented group of individuals.

There are several reasons for this: (a) the cost of buying electronic products is not a huge percentage of a buyer’s budget, unlike purchasing a house or a car. Also there is an intense competition between buyers for any one additional brand such as Sony, Panasonic, Samsung etc. b) Because electronic products are often considered a luxury than a necessity, buyers do not generally have a say in what products get produce and at what price. As a result, buyers in the consumer electronics retail market do not have any substantial bargaining power over the companies in the market and do not have any substantial influence on the products or prices. Bargaining Power of Suppliers The suppliers for companies in this market have relatively high bargaining power mainly due to the fact there are only a number of suppliers that the market demands from.

Among the pool of suppliers include major manufactures such as Sony, Samsung, Panasonic and Toshiba. These suppliers often provide the latest of the art technology and companies like best Best Buy must purchase from them in order to satisfy their customers. Threat of Substitute The company faced a real threat of substitution from many other companies that produce the same product that is satisfying the same needs (Larson, 2008). The substitute products that may take a portion of the market share away from the consumer electronic retail industry do not pose a huge

or direct threat. Therefore, threat of substitute is considered to be moderate.

Today’s society and culture places a lot of emphasis on technology and is highly dependent on electronics. As a result, there are few substitutes for electronics that will directly take the place such as books, magazines and other non-electronic hobbies to occupy time. Elements of Best Buy Strategy Business Strategy A company’s strategy is management’s game plan for how to grow the business, how to attract and please customers, how to compete successfully, how to conduct operations and how to achieve targeted objectives (Hill Mc-Graw, Crafting & Executing Business Strategy, 18 Ed).

A company’s business strategy defines the major actions that builds and strengthens its competitive position in the market place. Based on the analysis of Best Buy Co, Inc, one can conclude that Best Buy has adopted a low- cost leadership strategy and an expansion strategy. The principles of the low cost strategy requires companies to aim at controlling costs which includes construction of efficient- scale facilities, tight control of costs and overhead, minimizing operating expenses, reduction in input costs, tight control of labor costs and lower distribution costs.

The lower- cost leader gains competitive advantage by getting its cost of production or distribution lower than those of other firms in its market. (Reference for business . com) Expansion Strategy Best Buy’s corporate expansion strategy has reported dominance in the electronics market. For many years now, Best Buy’s most direct competition comes from Circuit City, the second largest consumer electronic retailer behind Best Buy. Circuit City’s business has been struggling since 2006 and filed for bankruptcy protection in November 2008.

Circuit City was forced into liquidation

by March 2009. Best Buy stands to gain extensively from Circuit City’s demise, According to a research report presented from the Ian Kwok, Strategic Report on Best Buy Co. Inc; Best Buy would be able to capture as much as 40% of Circuit City’s market share. Best buy, therefore has grown to become one of the largest retailer in electronics, home office products, entertainment software and related service in the U. S and in the overseas countries where it has expanded, (Best-Buy. com).

Today the company boasts approximately 4,200 stores worldwide. Over the past decade, Best Buy has almost doubled the number of stores domestically every five years. Majority of international stores growth comes from acquisition of the Carphone Warehouse and Five Star Appliances. Business Model Best Buy’s current business strategy has two primary goals: these are offering customers the widest range of products at the lowest prices and expanding into new international markets. The company’s recent acquisitions and new business ventures have been in these two directions.

The management is positive that these two strategies will allow Best Buy to be in a favorable position to grow domestically and internationally. (1). Customer- Centricity Operating Model Best Buy’s success thus far is a testament to its commitment to “treat customer as unique individuals and meeting their needs with end-to-end solutions. ” Since 1989, Best Buy prides itself as one of the earliest retailers to adopt the strategy of non-commissioned employees and give customers more control during purchasing experience. In 2004, Best Buy began implementing an innovative strategy it calls customer-centricity in its stores.

Through these strategies, Best Buy has differentiated itself as a store that provides high-end electronics

and entertainment system and excellent customer services. (Ian Kwok, Strategic Report for Best Buy. Co, Inc) The customer –centricity operating model views Best Buy as a portfolio of customers rather than their products. It forces the company to understand its customer base at a deeper level and better target its needs. In 2004, Best Buy track its customers’ behavior and identified five initial customer segments that represented significant new growth opportunities. (Ian Kwok, Strategic Report for Best Buy.

Co, Inc) The segments were each given a name: (a) Jill, the busy suburban mom who wants her children’s lives with technology and entertainment, (b) Buss, focused on active young male customer who wants the latest technology, (c) Ray, the family man who wants technology that improves his life- the practical adapter to technology and entertainment, (d) Barry, the affluent, professional who wants the best technology and entertainment experience and who demands excellent service, (e) BB4B (Best Buy for Business), the small business consumer who wants to use Best Buy’s products solutions and services to enhance the profitability of his or her business. (Ian Kwok, Strategic Report for Best Buy. Co, Inc) Best Buy tested out these segments at 32 U. S stores by training and empowering employees to better meet these customer segment’s needs. It allowed employees large discretion in making the store more appealing to their particular customer segment. The results have been resounding over the years. Functional Strategies Marketing The main marketing strategy and position of Best Buy is for customers to consider it as their number one in electronic and related services.

As part of its marketing strategy, the company has positioned itself to enjoy

its leadership in the market because of its highest market share. One of Best Buy’s competitive advantage strategies has been to emphasize on services, something it has done in the past than any national electronic retailer. This same concept is extended to its overseas companies. Best Buy has been considered as a leading mass merchandiser of consumer electronics and music products, uses value added pricing strategy for quality brands and products. Best Buy seeks to expand business in existing markets in order to attain greater market share. Recently, they extended their business to China and Europe.

They focus on best selling lines of consumer trends ,all presented in large, spacious stores with attractive merchandise displays and on increasing important web-sites. Their strategy is to move towards the more up scale discount specialty merchandisers rather than the current low-end mass merchandisers. Some of the major elements of future growth plans and strategy of Best Buy revolves around four business priorities in the fiscal year 2010. These elements can assist the company to navigate through the current economic conditions and places it in a possible position to take advantage of the economic recovery in the long run. In the midst of those strategies, customers have always been the company’s first priority in understanding customer’s problems, their challenges and coming up with possible solutions.

Some of the basic elements and strategies include the following: * Grow Market Share: This provides opportunities for customer’s acquisition and creating relation which each customer. * Connected Digital Services (solution): This strategy focuses on Best Buy’s mobile where customers can really feel they are connected to the devices with comfort and luxury. * International Growth:

Focus is placed on entering into different joint venture programs in Europe, Asian market especially China and other international market. * Efficiency and Effective Enterprise: This strategy places emphasis on redeploying resources in such a way that it maximizes the company’s returns.

Beside these key elements, building relations with customers with each brand, avoiding complexity and being a cost effective operation can also be considered another crucial element of Best Buy’s strategy. In addition to this, the success of Best Buy depends on the ability to offer huge selection of branded products to its customers. Therefore, creating satisfactory and stable supplier relation is also the other important element of the strategies. Best Buy’s growth strategy includes expanding its business by opening stores both in existing markets and in new markets (international markets). The risk associated with entering a new international market like China includes difficulties with customers where there is a lack of customer’s familiarity with Best Buy brands.

In addition, the lack of information regarding local customer preference and seasonal differences in the market is likely to possess great risk to Best Buy’s successful implementation of its growth strategy. Therefore, these concerns should be taken into consideration as a strategic element to minimize any negative consequences. Another important element of Best Buy’s strategy is diversification of the company’s revenue and earnings by entering new market segments which addresses unique needs of its customers. It captures emerging market opportunities and defends against external threats to the company’s business, with a range of its best products and with additional value added services which stands out in a competitive market and provides a competitive edge to the company.

In addition

to this, strengthening competitiveness via strategic alliances and collaborative partnership especially in the international market is another vital element of the company’s strategy. Approaches towards wining a competitive advantage Best Buy seem to be pursuing. Some of Best Buy’s Growth strategy includes expansion towards new business ventures, strategic alliances and acquisition. Best Buy, therefore, needs to acquire sufficient information about the potential growth opportunities as a key element for the success of this strategy over its competitors. A cultural difference in some markets into which Best buy is expanding its business is key and must be taken into consideration to capitalize on its market share outside of the U. S. (Ian Kwok, Strategic Report for Best Buy.

Co, Inc) One of the major strategies that Best Buy seems to apply to customers centric in which they call core philosophies, are inviting employees to contribute to their ideas and experiences in services of customers, treating customers uniquely, honoring their differences and meeting customer needs. (Ian Kwok, Strategic Report for Best Buy. Co, Inc) Customer satisfaction is the biggest among the competitive advantage that Best Buy is aiming to achieve. To achieve this advantage; the company tends to explore the most important needs of customers and try to match whatever possible solution in order that they can maximize market share and customer satisfaction .

Best Buy’s is working towards capturing new growth opportunities and target online opportunities. This is being accomplished by looking into the unrelenting pace of changes that technology provides both for opportunities and challenges for their customers, and position the business to help them navigate through these changes. This strategy can be accomplished by studying their

customers’ needs in comparable to what their competitors are offering and work around such needs to meets customers objectives and needs. Best Buy current growth includes continuing the recent expansion in mobile service, competing particularly with the growing selection of tablet computers and increasing market share in appliances and games.

In addition, Best Buy is targeting their customers and working towards increasing their market share by providing one of their services which is called the “Geek Squad”. This can be accomplished by offering customers an innovative purchase option such as the recently launched “Buy Back program in the U. S. Best Buy also provides opportunities for customers to access people and content such as streaming movies and music, internet and television. This type of service is most prevalent today in mobile phones but also in connecting computer devices to mobile broadband and television to broadband services. (Ian Kwok, Strategic Report for Best Buy.

Co, Inc) Best Buy has established multi-channel strategy which provides customers competitive advantage to connect with their company in a variety of ways. For example, customers can interact with them directly through their store, online, mobile application or call center channel or through a combination of channels, such as purchasing on line for in-store pick up. Best Buy also plans to continue leveraging these opportunities and capabilities to offer customers option that are flexible and convenient to them. Another approach towards winning a competitive advantage, Best buy is pursuing is its improvement in growth and international markets.

Their international strategy is focused on four key geographical areas which are Canada, China, Europe and Mexico where they believe they can leverage, size, scale and economies to

succeed. For example in China, Best Buy expects to invest in profitable growth as they look to grow their position in this fast growing market through their Five Star business. In their established business in Canada and Europe, Best Buy plan to continue their evolution in connecting to World solution. In the relative new markets such as U. K and Mexico, Best Buy growth is likely to be more measured as they increase their understanding and appreciation to customer needs in these markets. . (Ian Kwok, Strategic Report for Best Buy.

Co, Inc) Finally, Best Buy drive structural opportunities to improve return is based on the perception of providing value to customers and to fund growth opportunities that they are targeting, which they intend to operate efficiently and effectively. The company has a discipline approach to managing cost and capital allocation. They expect each of their businesses to meet sufficient return on invested capital over a period of time. Their growth strategy requires that they continue to increase their presence in the market so that they can fully realize their benefits in the multi- channel strategy. . (Ian Kwok, Strategic Report for Best Buy. Co, Inc) Their plan to continue to increase their expansion of the U. S Best Buy Mobile stand- alone is expected to increase their presence in the market.

Best Buy also seek to increase store productivity through actions such as expansion, “Connected Store” mobile roll- out, increasing their presence in pre-owned and pre-order games and expanding their Pacific Sales-within-a – store appliance model. (Ian Kwok, Strategic Report for Best Buy. Co, Inc) Short term solutions Increase Services category’s contribution to revenue mix Best

buy is a retailer of luxury goods, which means that when consumer spending is falling, the company will undoubtedly experience a slow down is sales. Therefore since, Best Buy’s Annual report for 2010 shows that the company drives almost 40% of its revenue from customer electronic category,

Best Buy needs to try to reduce this reliance and increase the other category’s contribution. According to a report on Best Buy Co Inc by OASIS Consulting, Ian Kwok, urges management of Best Buy to review services category as it is currently underutilized. This should be a perfect opportunity to advertise Geek Squad services and Strengthen Best Buy’s commitment to excellent technology support services. Oasis consulting services believes that Geek Squad will help Best Buy through the Slump is sales with more consumers looking to fix or improve the existing products, rather than to buy new ones. Long- Term Solutions Commitment to provide Mid- to High- End Products.

It is imperative that Best Buy differentiate itself from the product space in which Wal-Mart Target and Costco over the past several years have placed themselves, named low-end consumer electronics. Attempting to compete with these large discount retailers in their playing field is to engage in the price war that Best Buy will bound to loose. Best Buy is simply too small in comparison to some competitors and does not have other- non electronic- related product lines. Therefore, the company should strengthen its existing reputation and corporate image by committing to provide to-mid to high end products. Oasis consultant, Ian Kwok, advices that management examines its product lists and replaces low end products with mid to high end ones.

Best Buy may also

want to cater to the interest of those who are technology savy- which is a demographic group that discount retailers like Wal-Mart could never be able to capture. SWOT Analysis Demonstrated Financial Strength Best Buy has consistently recorded strong growth as has been reported from its financial reports. The increase in net earnings has been driven by revenue growth and a decrease in selling, general and administrative expense rate, offset by a decrease in gross profit rate and a higher effective income tax rate. With the huge increase in operating profits over the years, the company strengthened its financial position in the markets. Reputable Brand Name

Best Buy is recognized as one of the best companies in the world because of its sound management. In 1993, the company became the second largest consumer electronics retailer and in 2000, Fortune magazine named it on the top 10 performing stocks. Best Buy was named company of the Year by Forbs magazine in 2004, Specialty Retailer of the Decade by the Discount Store News in 2001, ranked one among the Top 10 American’s Most Generous Corporations by Forbs magazine and made Fortune Magazine’s oneof most admired companies in 2006. Expansive Store Coverage Over the years, Best Buy has built a name for itself through offering a wide selection of products and excellent services.

This has allowed Best Buy to open many stores both domestically and internationally during the past several years. At the end of the fiscal year 2009, the company operated 1,100 domestic stores and 3,000 on the international front. Going forward, the company plans to open more stores in new countries such as Turky and Mexico. Weaknesses Depending

on the United States market Although Best Buy has international operations in China, Europe and Canada, the company derives its revenue from the U. S market. About 83% of the company’s total revenue comes from the U. S. Furthermore, the company relies heavily on the sales of consumer electronic products.

Therefore, the higher market concentration in the U. S can result in a big disadvantage for the company in the long run as consumer electronic products decrease over the most recent periods in the revenue mix. This therefore, could significantly affect the revenue of the company and also the expansion of the company’s opportunity if it continues to focus only in the U. S market. Best Buy needs to further diversify its revenue generating sources. Depending on selected number of vendors for its merchandise. Best Buy mainly depends on a handful of vendors for the supply of its products. Best Buy’s 20 largest supplies account for just over 60% of the merchandise it purchases.

If any of the key vendors fail to supply products or if there is any destruction and loss from any vendor, the company may not be able to meet the demand of the customers which can result in a decrease in revenue. Opportunities New Ventures The recent joint venture between Best Buy and the Carphone Warehouse is an exciting opportunity for the company to expand into new geographic locations in Europe. The consumer electronic market has been one of the fastest growing industries in the European market over the past five years. Therefore, management will have to be careful in this expansion and try not to over extend its resources. Bankruptcies Best Buy’s

largest competitor, Circuit City filed for bankruptcy at the end of 2008 and has closed 155 stores.

This has proven to be a tremendous opportunity for Best buy to gain share as competitors scramble to fill the void left by Circuit city. Many other consumer electronic stores have also filed for bankruptcy. Tweeter, a high end rival, shut down in December 2008, and Sharper Image’s stores which sold more exotic electronics have liquidated. Comp USA closed most of its stores in 2007. Therefore, as the weaker players in this market are weeded out, Best Buy must be actively seeking in gaining those market shares. Threats Deteriorating Economic Conditions Best Buy sells its products and services that consumer tend to view as luxury goods rather than a necessity. Therefore, the company is more sensitive to change the general economic conditions that impact consumer spending.

Future economic conditions and other factors including consumer confidence, employment levels, interest rates, tax rates, consumer debts level, fuel and energy costs and availability of consumer credit could reduce consumer spending or change consumer purchasing habits. A further deterioration of the U. S economy or the global economy could adversely affect consumer spending habits thus Best Buy’s earnings. High Competitive market The retail business is a high competitive market. Best Buy therefore faces competition regarding its consumers, employees, locations, products, and other important aspect of the business, with many other local, regional, and international retailers.

These internet competitors may have a smaller market presence and financial resources, but their prices can be substantially lower because of lower overheads. The competition could force Best Buy to reduce its products prices and increase costs for doing its

business. As a result of this competition, the company may experience lower revenue and higher operating cost. Best Buy will have to do its best to differentiate itself from these internet competitors. Strategic Recommendations Notwithstanding Best Buy challenges, the company must remain as a formidable force in the industry.

The company’s strengths are based on the quality of the service it offers and its reputable brand. The following is recommended as part of the strategies to address the current challenges of the company. The fact that Best Buy will be faced with increased long term competition from its discount competitors such as Wal- Mart, Amazon and other internet retailers, the stake out in consumer electronics retail industry has left several players standing and as such competition is expected to intensify, and companies seek to gain market share. Furthermore, as internet retailing becomes easier to access, Best Buy stand to lose most of its business. Therefore, to embrace these challenges, Best Buy needs to reassess its business model and make appropriate changes to fit the economic, social and other trends. * Appoint management to define strategic direction for the company in the changing business environment.

Adoption of a more focused strategy driven by innovation, product diversity, strategic expansion and operational efficiency. * Pursue a combined strategy of cost leadership and diversity. * Continue to strengthen the global expansion, brand image and achieve economic of scale to combat new entrants. * Explore more lucrative markets throughout other regions. Summary/ Conclusions Best Buy has grown from its humble beginning to emerge as a global phenomenon in the specialty of electronic products. The competitive forces in this industry are strong which

means that there is potential for growth. Best Buy therefore, uses a market saturation growth strategy. The company pursues mainly cost leadership strategy.

In addition to this strategy, it focuses on an expansion strategy to achieve competitive advantage. The company has to further develop strategies to strengthen its global expansion effort. This is necessary as the local market can become saturated as other companies such as Wal-Mart divest in similar revenue based products which can be more competitive than Best Buy in the long run. Focus can be placed in increased economic of scale especially on larger companies in the industry. Best Buy therefore has to refocus its energy to combat the challenges faced in the industry. The company needs to continue working on its strengths, embrace any opportunity, work on its weaknesses and try to eliminate its threats where possible.

In so doing Best Buy should be able to withstand any major challenges that could hinder winning competitive advantages where deemed necessary. It also needs to continue working a strategic focus to strengthen both its physical and human resources in the wake of major competitions. Citation http://www. investopedia. com/terms/competitve advantage http. //www. yahoo. Finance. com Thompson, A,A, Strickland, A. T. EJ. E. Crafting and Executing Strategy: The Quest for Competitive Advantage 18e edition United States Securities and Exchange Commission Form 10-K, Best Buy Annual Report, 2011 Ian Kwok, Best Buy Co Inc Strategic Report, 2009 Michael Porter, 1998, Best Buy . Co. Inc www. Best. Buy. Com. Inc