Best Buy Market Strategies
This study provides a comprehensive analysis of Best Buy through highlighting the key areas in the evaluation. This is inclusive of the business strategy, the evolution and history, and the company’s competitive edge. The strengths and weaknesses are also evaluated in the study coupled with building a comprehensive understanding of the opportunities that present themselves in the market for this company from the perspective of the Chief Executive Officer (CEO) which partially forms part of the basis for drawing the conclusive recommendations. Through this analysis, the importance can be realized in helping the management in other companies, the research organization on organizations, analysts as well as the corporate advisors in making the essential decision that is of importance to their operations.
Best Buy specializes in the consumer electronics and appliances with the main engagement being retail of the home office products, consumer electronics, and software for entertainment together with other services that are related. The operation of the company is based in Canada and US (Stapleton, 2008). The headquarters of Best Buy is based in Richfield with the company having under its management more than 100, 000 employees.
The performance of this company has always been high despite the fact that this field is characterized by massive competition from major giants. For instance, during the year that ended in the February 2005, the revenue that the company recorded totaled to $ 27.41, which signaled an 11 percent increase from the previous year (Don, 2011). This is a trend that the company has not lost ever since then with this growth being strongly attributed to the increase in the digital products demands. During this upturn year (2005) the company recorded an operating profit amounting to more than $ 1.35 million denoting more that 10 percent increase from the previous year. The net profits were also recorded to increase by 39% from the previous year to a new level of $ 984 million (Don, 2011).
History, Evolution, and Vision
According to Brown (2003), Best Buy was established back in the year 1969 when the Sound of Music was founded by Richard and a partner. The Sound of Music was founded as a stereo store in Minnesota. By the year 1971, Richard had already bought out his partner and therefore started expanding the chain. The line of product was broadened by Richard in early 1980 after starting targeting the customers that were older and more affluent after the introduction of the VCRs and appliances. Between the year 1984 and 1987, there was a rapid growth to the Best Buy coupled with the expansion of its stores that had already increased to eight to a new record of 24. In addition, there was a rapid increase in the sales during this period to a level of $ 240 from $ 30. The following year marked the opening of 16 more stores resulting to a sales jump by 84 percent (Brown, 2003).
The vision of Best Buy is moving towards ensuring that there are easiness and fun in life. The strategy of the business is aimed at bringing the consumers together with the technology in an environment that is aimed at ensuring that the consumers are educated on the technology features and benefits while ensuring that the overall profitability is maximized. Best Buy holds strong belief that its consumers are offered an advantage that is meaningful in the stores which result in the advancement of the company objectives which seeks to enhance a business model, market share gain, and profitability improvement. The trail of handling the CEO leadership role can be traced back to the founder Schulze and currently, Brand Anderson is the CEO and Director of the company. This role had been formerly assigned to Schulze; who is the founder of Best Buy (Biemesderfer, 1997). The founder has however remained in the operations of the company even after handling over the leadership roles to ensure that the company grows to a successful level.
The strategy of setting itself apart from the competitors resulted in Best Buy cutting the payroll in the year 1989 through taking off the commission of the sales staff together with reduction of the employees number by more than a third in each of its stores; a concept that was unexpected and which the company appreciated as a major hit. Best Buy has a history full of events which cannot be fully exhausted in this article. However, it can be noted that during the year 2004, Best Buy made an announcement of its plan of opening new stores totaling to 73 in the US and in the 2005 fiscal year, more stores were opened in Canada through a similar announcement.
The strongest anticipation by the company was that of having 11 Best Buy stores opened in Canada in the fiscal year that followed; in a predominant format of more than 29, 000 square feet. This move was followed by targeting new markets which were inclusive of Alberta, Saskatchewan, Calgary, Langley, and Regina. Best Buy has since then made announcement aimed at enhancing its improvement of services to the consumers coupled with attracting new customer groups. The company moves have also been inclusive of outsourcing some of its operations as a way of enhancing more performance. For instance, the year 2004 marked a move by the company entering into a strategic relationship of seven years with Accenture for their services in outsourcing and consulting (Bernstein, 1997). Other historic moves by this company have been inclusive of the launching of Next Generation Stores for Best Buy in California.
The External Environment
To Best Buy, the external environment is inclusive of the sectors that may not have a direct effect on the day to day company business activities although these sectors play a big role in influencing Best Buy. Basically, the external environment is inclusive of economic and social cultural conditions, the financial resources together with the technology. From these sectors, the operations of Best Buy are affected in various ways. Due to the rapid changes in the demographics, the operations of Best Buy does not go unaffected based on the fact that there has been and there are still rapid changes in the generation as time goes by. This results in these generations changing their tastes in some of the goods that are highly priced in the name of the highly known brand name.
Best Buy is not spared based on the fact that those goods that are highly priced in the name of the company “big” name suffer a reduction in the demand. The consumers are rapidly changing and as new entrants start associating with these products, they are doing so based on various personal reasons one of them being the highly competitive price and although the company name also has an influential role, it tends to be ignored if the goods are highly priced above those of the competitors. Hisey (2002) note that this poses a challenge to Best Buy; a challenge which has required the company to develop loyalty among the new generation which has a tendency of increasing its consumption as the old generation reduces their consumption.
The internet expansion as a place that business can be done is highlighted to be one of the changes in the sector of technology that is highlighted as the most overwhelming. Due to the World Wide Web and other information technology advances, the whole face of doing business for Best Buy has been a rapid change. Best Buy is making moves to the new format through which it is able to store and transmit the music through the internet. To those other companies specializing in the music industry, it has been a time to reap from the technological changes which have left Best Buy benefiting in various ways.
However, Best Buy operations are based on the clear understanding that its activities have in the past been influenced by the environment and are still exposed to these influences. These environmental l factors all boils down to major ways that are essential through which the organization is influenced. One of the major calls is towards understanding the need for information on the environment and also need for the environmental resources. As a result of the environmental change, the complexity conditions create a need for this Best Buy gathering the information and making responses on the basis of that information. Just like any other modern operating organization, Best Buy has strong concerns about the scarcity of the financial resources and materials coupled with the need to move towards ensuring that the required resources are available.
The Five Forces Model
Best Buy operates in an industry which is being characterized by new entrants every other moment. However, this is also an industry that is characterized by high barriers to entry making the entry threat to be categorized in this industry as a high risk. In fact, Best Buy operates in an industry with very high economies of scales with its production having most of the cost efficient production levels as being characterized as minimum efficient scale. At this point, the unit production cost is basically at a level that can be termed as minimal. Best Buy minimum efficient scale is usually on a minimum high level; meaning that a minimum high entry barrier is usually presented by the company for the competitors.
To this company, this factor has been highlighted as very important based on the fact that a great role is usually played by the consumer loyalty. This means that the competitors will have to come up with various ideas for identification of the brand, customer service together with the advertising (Miguel, 2009). This presents to the competitors a high barrier which cannot be easily be accomplished in this industry which is ever changing. The Barrier presented by Best Buy to the competitors is usually high due to the realization of the need for the company investing substantial amounts of its resources financially to enhance competition. The necessity of the capital is based on the need for credit, inventories, and absorption of the production losses at the startup.
According to Miguel (2009), the biggest rival to Best Buy has always been Circuit City. However, this competition no longer exists based on the fact that after the declaration of bankruptcy by Circuit City, followed by closing the doors on the market to the consumers, Best Buy has the advantage of maintaining its leading position in this field. To ensure that the Best Buy is able to maintain a top position, aggressive plans are being implemented by the management to ensure that it is able to maintain a strong competition with the newly emerging rivals. The competition from Wal-Mart is based on the ability of the company to the stock modest selection of products that are quite attractive to the consumers. In addition, Wal-Mart has been able to offer prices on electronics that are competitively low, which has created an attraction for the consumers that have in the past felt victimized by the economy which has been on a downslope.
For Best Buy, the focus is centered on the in-store experience coupled with promotion of stores that are more interactive and which enable consumer interaction with the technology not only by just a manner of perusing the products that rest on the shelves. Compared to Wal- Mart displays which are designed like a warehouse, the Best Buy showrooms are designed in such a way that they are exciting and captivating. The next move by Best Buy has aimed extension of competition to Wal-Mart on the basis of price to enhance gaining a further edge.
Best Buy is also aware that the employees that are found in the retail stores are of importance to the experience of the customers. There has to be a look that is positive to these employees when it comes to the experience of Best Buy various products knowledge. Although the competitor War- Mart is trying to copy the strategy of Best Buy by creating a more expressiveness in its electronics showrooms, what Best Buy relies on is its employees who are known to be unique and plugged- in therefore increasing the likelihood of the competitive advantage persisting against the rivals (Miguel, 2009). The employees to Best Buy are very valuable resources and through their experience, it is able to employ the best strategies against its rivals which have enabled the company to maintain a competitive advantage.
A series of distribution centers is what the Best Buy relies on Enterprise Resource Planning being used to enhance continuous management of these centers. The functioning of these systems resembles that of the distributed hub management through which the customers’ demands are synchronized from the stores of the company. Being able to synchronize many partners in their supply chains with the store’s demand presents another major competitive advantage for Best Buy, coupled with ensuring that there are products optimal mix to the customers frequenting their stores.
The Financial Analysis
Over the past five years, the revenue from the sales has been able to increase to a new level of more than 50 billion in the 2009 financial year (Don, 2011). The top line growth of the company has been impressive although similar results have not been shown by the net income and operating income. The profitability of Best Buy in the five consecutive years up to the year 2011 has been increasing on a continuous tread. The debt to equity ratio of Best Buy which has been marked at 40.82 has been relatively high in comparison to the most of its competitors. The high debt to equity ratio has been due to the aggressiveness that has been employed by Best Buy in its expansion at the domestic and international level.
Don (2011) note that the current ratio of Best Buy has been 0.96 for most of the recent quarter. This has been an indication of adequate liquidity position of the company although there could have been chances of making it better.
The Strengths and Weaknesses
The Best Buy maintains a leading position as the retailer of the consumer electronics in Canada and in the United States. This has been enhanced through the annual sales which have hit highly competitive levels coupled with the electronics market consumer market share. As a result of having a large size as an advantage, Best Buy has been able to leverage its bargaining power with the vendors of the consumer electronics. The financial resources of the company are in a way that it has the ability to have spent on advertisement, promotion, new products, restructuring together with quick adaptation to the market to the changes (Brown, 2003).
The strong comparable sale by the stores is another strength that Best Buy has. This has enhanced the company to make significant gains on the basis of the same store sales against the former biggest competitor in the consumer electronics hard-lined retail segment in Circuit City. There has also been an increase by the company when it comes to the market share which was highly notable in the year 2006 relative to the competitor; Circuit City. This has been a clear indication of the effectiveness that has enabled Best Buy to compete with its largest rival in the segment of the hard-lined electronics of the retail consumer.
The strength of structural advantage in the market of the digital TV is also notable. Through this advantage, the company has been able to effectively compete with its peers in its discounted retailers and hardline retailing. When compared to the competitors, the company’s assortment is expensive coupled with the youngest base store in locations of high quality. There is also the benefit that storm from the customer base network which has been perceived to be extensive because of the technological complexity in the HD products and digital television. Based upon the effort of the company to have digital TV promoted through the promotions in store displays and staff that are highly trained, Best Buy has been recognized to be the best retailer of HDTV.
The low gross margin is one of the Best Buy weaknesses. Some of the recent previous years have seen the company experiencing average gross margins than are lower than the expected. This has gone to an extent of recording gross margins of 22 percent in comparison to the industrial average of the technology retail amounting to 27 percent. The lower gross margins relative to those of the competitors is a reflection of poor operations of the company.
Another weakness is that of the company depending so much on the sales at the domestic level. The company strongly relies on the retailing market of the domestic consumers of the electronics to enhance the generation of revenue. This has been proved by the past revenue in which the higher percentage is traced back to the United States. There has been a significant effect on the company revenue as a result of US showing downward momentum signs in the electronics as a result of the increasing interest rates.
Canada has been characterized with high expense in the operations. Also since the opening of the Canadian store, there has been a record of the sales, what has been offsetting these sales in Canada is operating expenses which have been noted to be very high. This has also at times resulted in losses as a result of the operations of this company. As a result of the continuity in the thread of increasing the expenses of operations, there would be a significant effect on the profitability of the company in this region resulting in an effect to the plans for expansion. Strategies to pursue the strengths.
In the effort to pursue the company’s strengths, Best Buy has adopted the operating model that is customer centric. This has been in the effort to ensure that the company is able to accelerate its store’s conversion to the operating model that is based on the customer centricity. This followed the observation of the converted 67 segment stores in the year 2004. With these converted stores, there has been an outperformance to the Best Buy stores in the US on the basis of the comparable sales. From each of the converted stores, the design is in such a way that there is an appeal to the major segments of the customer which are the families perceived to be technological adopters and small businesses which have less than 20 employees. With this consumer-centric model, Best Buy is able to offer to its customers an experience in the in-store that is richer together with shopping assistance that is better, through which it is able to translate to a revenue growth that is better.
Business Level Strategy
In the effort to assume an operation at a low cost, Best Buy adopts the strategy that is aimed at reducing the service in order to ensure that it is able to offer prices that are low. However, the suppliers continue to incur costs as a result of this strategy and within a short period of time, some of the major suppliers have resulted to expressing their inability to continue being suppliers to the Best Buy. These have included Kenwood which is a maker of the appliances. In addition, this is the strategy that has resulted to Whirlpool pulling from the store the Whirlpool brand which is a top-line brand although it has continued with the supply of the Roper brand which is not very highly priced. Some of the companies have also resulted in selling to retailers that are relatively smaller in reaction to the effects of this strategy based on the fact that better services are offered and based on the fact that their sizes cannot be used to pressure these companies into offering wholesale prices that are lower (Hill & Jones, 2004).
The adoption of this strategy has marked one of the declining stages for Best Buy which has been followed by an effort aimed at reversing this trend. This has been an intended strategy aimed at ensuring that the company’s operations would be enhanced in return. Most of the strategies that are adopted in the company have not just emerged. They result from careful evaluation by the company and eventual decision based on the best way for the company (Hill & Jones, 2004). Reversing the trend that had already been set by the intended strategy has in the past been done through an announcement of the company’s decision to revamp its format of merchandising for audio products that are of high quality.
The need for his move is mainly based on the fact that it was not possible for the company to land some of the products that were wanted by it. However, these problems do not stop Best Buy from broadening its territory coupled with bolstering its shares in the market. This has been marked by an increase in the number of stores under operation by Best Buy in new areas such as Cincinnati and Miami. This is the new strategy that has made Best Buy recover from the past competition of the strongest rival Circuit City which in the year 1995 had almost eliminated its major operations from the market. Best Buy currently controls a substantial size of the market.
Some of the best strategies adopted by Best Buy have resulted in the company achieving the goal which has always been aimed at becoming the leader in the industry. However, the price for the success of these strategies has been paid through the profits which have in some cases recorded a decline resulting to the profit margins that are minuscule at very low percentages.
Corporate Level Strategy
Best Buy has succeeded in conquering most of its rivals in the electronics industry enabling it to gain an upper hand when ti comes to the rivals such as the Circuit city and Wal-Mart. Therefore, the next move for the company has been an acquisition. Through the acquisition of the industrial major giants, Best Buy is able to enhance its ability to dominate a large market and having a stronger control when it comes to the pricing and consumer control. The Musicland Stores Corporation is one of the major companies that Best Buy has acquired resulting in its ability to succeed.
According to Levy, the acquisition of the Musicland has been aimed at the creation of an existence in the shopping malls. In this retail environment, there is domination by the young children and women through which Best Buy is able to have its customer core demographics expanded. After having conquered the major markets in the market, Best Buy is able to cover the access to the other markets that are smaller; which to gain, it has to own the On Cue Chain serving the people in the community.
In the effort to ensure better operation followed with profitability, Best Buy has restructured in the past. In the year 1996, the introduction of the new products resulted in the company restructuring its operations. This was marked by adding 40 newly hired vice presidents, most of who came from the outside with much of the old guards in the company being replaced. While the process of restructuring was in the process, there was a considerable slowness in the expansion of the chains with the fiscal year ending in 1999 only recording an addition of 12 newly opened stores. With the introduction of the new changes, there was a success in ensuring that the company was able to turn around. There was an onset to a quicker pace to the inventory with the net profits having a record of $ 8.38 in the revenues.
The Company Structure, Control, and Culture
Based on the corporate culture, the specific set of norms and values that groups in company shares are defined. Basically, the culture can be able to incorporate the ideas and beliefs that define the kind of goals that the company needs to pursue together with the behavior that will result in the achievement of the goals. Based on these values, there is the development of the norms in which the expectations and guidelines are incorporated into which the behavior that is appropriate can be enhanced based on specific situation together with the control of the behavior that is right.
By looking at the top management role when it comes to the creation of the enterprise culture, it is obvious that the business routine that has been characterized with Best Buy since its onset of the operations cannot be altered. Actually, the culture of Best Buy can be described on the basis of being individualistic at the onset; an implication that a lot of empowerment on the individual together with creativity is what the company has emphasized on (Dickel et al., 1994), resulting to the self-expression and creativity being perceived as a way through which the competitive advantage can be enhanced. Through the leadership that is strategic, Best Buy is able to create an organizational culture. This leadership is provided by the top management together with the founders of the organization.
This brings a clear understanding that the Best Buy current CEO is actually the optimal person through which the company’s culture can be developed in consideration to the 21st-century challenges. In relation to the company’s culture strategic implications, it can be clearly understood that the norms and values of the company are communicated in a way that is definitely clear at the internal level together with the external level through the use of documentation together with the management behavior and therefore, everyone in the organization should have a clear understanding.
Basically, the main elements of implementing the strategy are important factors through which the superior efficiency is achieved together with the customer responsiveness, innovation, and quality and there is a need for these elements being designed in a way that there is consistency with the business level, functional level, global level as well as the corporate level of the company. In fact, the organizational structure of Best Buy is a functional structure through which decentralization, control, and specialization of authority is promoted together with the authority through which the various functional sets should be allowed to enhance setting actions that are appropriate to enhance implementation of the strategy.
When it comes to the control systems, the implementation of a strategy that is efficient is enhanced through the use of behavior and personal systems of control. In addition, the norms and values that Best Buy corporate culture incorporates in its operations support the organizational structure of the company together with the strategy; which is enhanced through the promotion of initiative, innovation, creativity and motivation throughout the operations of Best Buy which it has perceived to be the central elements of its strategy. Generally, through the organizational structure, culture, and control there is an enhancement of shaping the behavior of the people and through this process, the company is able to determine how the strategies and model of an organization business can be implemented (Dickel et al., 1994). Therefore, through the constant interaction of the control, structure, and culture in Best Buy, together with the employee’s motivation and coordination, there is an ability to have its policies implemented at various strategy levels.
The Global Endeavor and Strategies
The operations of Best Buy are based on two geographical segments; that of the domestic segment and internal. In the domestic segment, there is the inclusion of the Best Buy in the United States together with the Video Operations in Magnolia Audio. Through the Best Buy emphasis in the United States, various consumer electronics are offered by Best Buy together with the home office equipment, the software for the entertainment, appliances and other services that are related. In the Magnolia Stores specializing in the video and audio electronics, Best Buy offers high-quality video and audio products. In the Best Buy Canada and Future shop, the products and services that are offered have a striking similarity with those that are offered by the Best Buy stores in the United States.
In the 48 states in the United States, Best Buy continue increasing its operations to more than 600 stores and in the Columbia district where there has been an arrangement of roughly 45, 300 square feet retail together with the Oregon, Washington, and California which do have 23 Magnolia Video Audio Stores averaging to around 10, 000 square feet. Best Buy’s international segmentation is inclusive of the Future Shop stores amounting to 108 throughout the province of Canada with the Alberta, Ontario, and Manitoba having 20 Canadian Best Buy stores. Together, the totals of the international stores approximated to about 3 million retail square feet.
CONCLUSION AND RECOMMENDATIONS
The CEO of Best Buy has been able to identify the major challenges that will be faced by Best Buy as it progresses forward. First, it is hard for the levels that have been experienced by Best Buy to be rebound by the US economy. With the continuous fall in the prices of houses together with a reduction in the wealth of the people, there will be a reduction in the discretionary spending by the consumers. This is very problematic for Best Buy based on the fact that the products that it offers are perceived to be luxury goods and are not necessary. To ensure that Best Buy does not lose its business, there will be a need to have its business model reassessed.
Basically, there are various issues that Best Buy will have to address to enable it to be successful. Best Buy first needs to identify ways to which it can be able to support the expected sales fall due to the short-term contracting of the consumer spending. Best Buy will, in addition, need to identify ways to which it can be able to maintain strong competition with the large competitors such as Wal-Mart together with targeting the retailers offering internet discount.
Basically, Best Buy deals with retailing of the goods that are categorized as luxurious. As a result of fall in the spending by the consumers, there will undoubtedly be a slowdown experienced by the company. Based on the fact that the highest percentage of the company’s revenue is derived from the category of electronics, there is a need for Best Buy reducing its reliance on this category with an increase in the contribution from the other categories. The service category should particularly be reviewed based on the fact that currently it is not fully utilized.