A shift in consumer preferences towards multi-tasking electronic devices, fast turnover of electronic devices, increase in online sales, and a tremendous decrease in prices for electronics have led Best Buy to the experience of its first net loss in the past decade. But this is not the first time in Best Buy’s history that the company is going through a “near death experience.” The company has reinvented itself multiple times before and it is clear that the time has come for Best Buy to do it once again. Net Loss of $1.2 billion in 2012 serves as an indicator that the company needs to completely revamp its business strategy and, most importantly, to bring in a strong new leader who will conduct and control reorganization (Case Exhibit 3). In order to stay competitive and to carry on the legacy of the Best Buy brand name several issues have to be addressed. Among them are technological and website improvements (emphasis on online sales), expansion of the global outreach, employee training and retention strategy, inventory management, and development of a strong business culture. Best Buy is on the fast track to extinction, and if the company does not want to end up like Blockbuster or Circuit City several years ago, immediate action to address these issues is required.
Best Buy can no longer achieve a competitive advantage using a cost leadership business strategy because companies like Amazon, Wall-Mart, and Target have successfully superseded Best Buy in this strategy, and if Best Buy continues to lower its prices as a response to competition, the company will continue to carry big losses. It got to the point where Best Buy stores serve as “showrooms” for its direct competition and the company is losing not only on sales but on operational expenses as well. The growth of the company for the 2012 fiscal year was about 0.9% in comparison to about 50% growth of its rival, Amazon; and even though Best Buy sales have increased, it has happened solely due to lower product pricing that is not beneficial for the company in the long run. In order to reinvent itself and to stay competitive Best Buy has to focus on online sales and cutting edge technology that would meet all of the wants and needs of the modern consumer.
Business Strategy – Competitive Advantage
Choosing a right business strategy is crucial to the company’s success. It is clear that with emergence of Amazon and expansion of Wal-Mart and Target electronic departments, Best Buy can no longer pursue the cost leadership strategy; therefore, cost leadership strategy should be abandoned immediately. I would recommend that a mix of differentiation and operational efficiency strategies be pursued in the establishment of the competitive advantage. Differentiation will be easily established because Best Buy already offers a variety of different products. I would also recommend elimination of departments that are becoming obsolete, such as Best Buy’s in-store music and video departments. Video and music industries are undergoing big changes, and with establishment of online music stores and easy access to instant video selections, Best Buy’s music and video departments have become outdated. All of the underperforming brick-and-mortar stores have to be eliminated as well and more attention have to be concentrated on improving online sales.
Case Exhibit 8a provides a good comparison of sales and gross profit margins of Best Buy vs. its most aggressive rival – Amazon. It is clear that Amazon’s online sales are growing much faster and would surpass Best Buy’s total sales within the next couple years. This exhibit provides solid evidence of Best Buy’s urgent need to become much more competitive in online sales. An investment has to be made into improvement of the Best Buy online store. Competitive Framework
Consumer electronics industry has a very low threat of new entrants. Entering the industry requires a lot of capital. Competition is very high and potential new entrants would require using economies of scale in order to be cost competitive, therefore the barriers to entry are very high. Best Buy should not fear any new entrants at this point of time. Competition from substitutes is very high as well due to a large variety of similar products on the market. Nowadays consumers shifted their preferences to the multi-tasking electronic devices and they have a lot more freedom to choose from a variety of products because they are not limited by high costs or operating systems anymore. This also means that bargaining power of consumers is very high; consumers have unlimited access to information about products, and by simply clicking couple of buttons on their smart phones, they can find and compare products and prices.
Technology has extended so far, that an average consumer does not have to leave his or her home in order to make a purchase; therefore, Best Buy has to strive to create a stronger relationship with online consumers. Consumer electronics industry is also very sensitive to prices due to the bargaining power of the buyers. Supplier Power in this industry is medium-high and suppliers are influenced by the large quantity purchases. Best Buy is a consumer electronics giant and it should use vertical integration in order to have control over the end product and different components. Rivalry between established competitors is very intensive. Amazon’s rapid growth, lower prices, ease of purchasing experience, and established reputation allow the firm to aggressively cannibalize Best Buy’s sales. At this point of time, I have two recommendations for Best Buy in order to stay competitive. The company could make a big investment into R&D, and potentially find its unique place in the online sales business or the company could partner with Amazon, and together they would most certainly be able to stay ahead of any other competitors. This potential partnership would allow Best Buy and Amazon to share some of their resources and facilities and, therefore, lower their operating and general and administrative cost.
Supply Chain Management and Restructure
Supply chain and warehouse management have to be reinvented in order to avoid inventory stagnation that precedes big losses for the company. Big sales of the almost obsolete products are only helping the company to get rid of the unwanted inventory; they are not profitable and should be avoided with strategic inventory planning. Replenishment frequency has to be synchronized with consumption, and all of the products available in Best Buy online stores have to be ready for shipment within 24 hours. This means that Best Buy needs to purchase the most advanced inventory tracking software, as well as to hire a very experienced supply chain management and procurement management in order to keep track of the software performance, and to make certain strategic and intuitive adjustments when needed.
International Outreach and CAGE Analyis
Best Buy’s first attempt to grow globally was not very successful and in the most recent years multiple international stores were closed due to underperformance. I recommend that another attempt be made but this time reaching out into still developing economies. Africa could potentially open a new market for Best Buy. Some of the African countries with stable environments and promising economic climates (such as Ghana or South Africa) are striving to achieve technological progress similar to the United States, and Best Buy could potentially aid them in their pursuit. English is a medium language spoken by the majority of the African countries. Weak legal and political institutions can (and I hate to say this) be beneficial for Best Buy, and ease the entry into the African market. African consumer’s income could potentially become a slight problem but in the long run lower product costs could be offset by low general and administrative costs of doing business in Africa. Also, the product mix could be adjusted to African consumer needs and capabilities. Best Buy could potentially sell the products that stopped selling in the US, in Africa. There are definitely certain risks that have to be considered when expanding business to Africa, among them is security and corruption; but the benefits of reaching out to new international markets outweigh challenges and risks, and some of the African countries have the fastest growing economies in the world with a lot of potential.
In the past decade, Best Buy has experienced many changes in leadership that undermined its already weak culture. A new leadership with a strong vision and clear mission for the future of the company has to be established. The organizational structure has to be revamped in accordance to new organizational goals. It is crucial that Human Resources department focuses on the employees that already resemble a desirable culture, and communicate with these employees regarding the improvements of the company culture that have to be made. Also, Best Buy does not seem to have a good retention strategy, which is part of the problem why some key employees are leaving the company. The focus of the culture has to be upstream, from the bottom level employees to higher management, and key features of culture should be teamwork, transparency, and communication. And lastly, stronger relationship has to be built between Best Buy and some of its most successful acquisition, such as Geek Squad, because as of right now, Best Buy’s acquisitions resemble separate entities within the Best Buy stores. Financial Implications
Regardless of the net loss in the 2012 fiscal year, Best Buy managed to achieve a positive net cash flow of $96 million. Some of this cash have to be used to pay-off current debts and interest on long-term debt but approximately $50 million should be invested into reinvention of the company. Also, Best Buy would be able to trim a lot of its costs by further eliminating underperforming stores and departments (based on my estimation approximately $200 million, see exhibit 1); savings due to these eliminations should be used solely for the reinvention of the company.
Cost savings due to further elimination of underperforming stores and departments: Best Buy already trimmed approximately $800 million in costs with previous store eliminations. About ¼ of the underperforming stores and departments could be further eliminated, bringing in additional $200 million in cost savings. Stores reviewed for elimination include “Total Electronics-Only Stores” that have experienced an average of 13% decline, and “Total Consumer Direct” stores with an average decline of 14.6% (Case Exhibit 2).