BEST BUY CO. INC., HEADQUARTERED IN RICHFIELD, MINNESOTA, was a specialty retailer ofconsumer electr

BEST BUY CO. INC., HEADQUARTERED IN RICHFIELD, MINNESOTA, was a specialty retailer ofconsumer electronics. It operated over 1,100 stores in the United States, accounting for 19%of the market. With approximately 155,000 employees, it also operated over 2,800 storesin Canada, Mexico, China, and Turkey. The company’s subsidiaries included Geek Squad,Magnolia Audio Video, and Pacific Sales. In Canada, Best Buy operated under both theBest Buy and Future Shop labels.Best Buy’s mission was to make technology deliver on its promises to customers. Toaccomplishthis, Best Buy helped customers realize the benefits of technology and technologicalchanges so they could enrich their lives in a variety of ways through connectivity: “To makelifefun and easy,â€1 as Best Buy put it. This was what drove the company to continually increasethetools to support customers in the hope of providing end-to-end technology solutions.As a public company, Best Buy’s top objectives were sustained growth and earnings. Thiswasaccomplished in part by constantly reviewing its business model to ensure that it wassatisfying customerneeds and desires as effectively and completely as possible. The company strived to havenotonly extensive product offerings but also highly trained employees with extensive productknowledge.The company encouraged its employees to go out of their way to help customersunderstandwhat these products could do and how customers could get the most out of the productsthey purchased.Employees recognized that each customer was unique and thus determined the bestmethodto help that customer achieve maximum enjoyment from the product(s) purchased.From a strategic standpoint, Best Buy moved from being a discount retailer (a low pricestrategy) to a service-oriented firm that relied on a differentiation strategy. In 1989, BestBuy changed the compensation structure for sales associates from commission-based tononcommissionedbased, which resulted in consumers having more control over the purchasingprocess and in cost savings for the company (the number of sales associates was reduced).In 2005,Best Buy took customer service a step further by moving from peddling gadgets to acustomercentricoperating model. It was now gearing up for another change to focus on store design andproviding products and services in line with customers’ desire for constant connectivityCompany History2From Sound of Music to Best BuyBest Buy was originally known as Sound of Music. Incorporated in 1966, the companystarted as a retailer of audio components and expanded to retailing video products in theearly1980s with the introduction of the videocassette recorder to its product line. In 1983, thecompanychanged its name to Best Buy Co. Inc. (Best Buy). Shortly thereafter, Best Buy beganoperating its existing stores under a “superstore†concept by expanding product offeringsandusing mass marketing techniques to promote those products.Best Buy dramatically altered the function of its sales staff in 1989. Previously, the salesstaff worked on a commission basis and was more proactive in assisting customers comingintothe stores as a result. Since 1989, however, the commission structure has been terminatedandsales associates have developed into educators that assist customers in learning about theproductsoffered in the stores. The customer, to a large extent, took charge of the purchasingprocess. The sales staff’s mission was to answer customer questions so that the customerscould decide which product(s) fit their needs. This differed greatly from their former missionof simply generating sales.In 2000, the company launched its online retail store: BestBuy.com. This allowed customersa choice between visiting a physical store and purchasing products online, thus expandingBest Buy’s reach among consumers.Expansion Through AcquisitionsIn 2000, Best Buy began a series of acquisitions to expand its offerings and enterinternationalmarkets:2000: Best Buy acquired Magnolia Hi-Fi Inc., a high-end retailer of audio and video productsand services, which became Magnolia Audio Video in 2004. This acquisition allowedBest Buy access to a set of upscale customers.2001: Best Buy entered the international market with the acquisition of Future Shop Ltd, aleading consumer electronics retailer in Canada. This helped Best Buy increase revenues,gain market share, and leverage operational expertise. The same year, Best Buy alsoopened its first Canadian store. In the same year, the company purchased Musicland, amall-centered music retailer throughout the United States (divested in 2003).2002: Best Buy acquired Geek Squad, a computer repair service provider, to help develop atechnological support system for customers. The retailer began by incorporating in-storeGeek Squad centers in its 28 Minnesota stores and expanding nationally and theninternationallyin subsequent years.2005: Best Buy opened the first Magnolia Home Theater “store-within-a-store†(locatedwithin the Best Buy complex).2006: Best Buy acquired Pacific Sales Kitchen and Bath Centers Inc. to develop a newcustomerbase: builders and remodelers. The same year, Best Buy also acquired a 75% stakein Jiangsu Five Star Appliance Co., Ltd, a China-based appliance and consumer electronicsretailer. This enabled the company to access the Chinese retail market and led to theopening of the first Best Buy China store on January 26, 2007.2007: Best Buy acquired Speakeasy Inc., a provider of broadband, voice, data, andinformationtechnology services, to further its offering of technological solutions for customers.2008: Through a strategic alliance with the Carphone Warehouse Group, a UK-basedproviderof mobile phones, accessories, and related services, Best Buy Mobile was developed.After acquiring a 50% share in Best Buy Europe (with 2,414 stores) from the CarphoneWarehouse, Best Buy intended to open small-store formats across Europe in 2011. 3 BestBuy also acquired Napster, a digital download provider, through a merger to counter thefalling sales of compact discs. The first Best Buy Mexico store was opened.2009: Best Buy acquired the remaining 25% of Jiangsu Five Star. Best Buy Mobile movedintoCanadaIndustry EnvironmentIndustry OverviewDespite the negative impact the financial crisis had on economies worldwide, in 2008 theconsumerelectronics industry managed to grow to a record high of US$694 billion in sales—anearly 14% increase over 2007. In years immediately prior, the growth rate was similar: 14%in 2007 and 17% in 2006. This momentum, however, did not last. Sales dropped 2% in 2009,the first decline in 20 years for the electronics giant.Afew product segments, including televisions, gaming, mobile phones, and Blu-ray players,drove sales for the company. Television sales, specifically LCD units, which accounted for77% of total television sales, were the main driver for Best Buy, as this segment aloneaccountedfor 15% of total industry revenues. The gaming segment continued to be a bright spotfor the industry as well, as sales were expected to have tremendous room for growth.Smartphoneswere another electronics industry segment predicted to have a high growth impact onthe entire industry.The consumer electronics industry had significant potential for expansion into the globalmarketplace. There were many untapped markets, especially newly developing countries.These markets were experiencing the fastest economic growth while having the lowestownershiprate for gadgets.4 Despite the recent economic downturn, the future for this industry wasoptimistic. A consumer electronics analyst for the European Market Research Institutepredictedthat the largest growth will be seen in China (22%), the Middle East (20%), Russia(20%), and South America (17%).5Barriers to EntryAs globalization spread and use of the Internet grew, barriers to entering the consumerelectronicsindustry were diminished. When the industry was dominated by brick-and-mortarcompanies,obtaining the large capital resources needed for entry into the market was a barrier forthose looking to gain any significant market share. Expanding a business meant purchasingor leasing large stores that incurred high initial and overhead costs. However, the Internetsignificantlyreduced the capital requirements needed to enter the industry. Companies like Amazon.com and Dell utilized the Internet to their advantage and gained valuable market share.The shift toward Internet purchasing also negated another once strong barrier to entry:customerloyalty. The trend was that consumers would research products online to determine whichone they intended to purchase and then shop around on the Internet for the lowest possibleprice.Even though overall barriers were diminished, there were still a few left, which a companylike Best Buy used to its advantage. The first, and most significant, was economies ofscale.Withover 1,000 locations, Best Buy used its scale to obtain cost advantages from suppliers dueto highquantity of orders. Another advantage was in advertising. Large firms had the ability toincreaseadvertising budgets to deter new entrants into the market. Smaller companies generally didnothave the marketing budgets for massive television campaigns, which were still one of themosteffective marketing strategies available to retailers. Although Internet sales were growing,theindustry was still dominated by brick-and-mortar stores. Most consumers looking forelectronics—especially major electronics—felt a need to actually see their prospective purchases inperson.Having the ability to spend heavily on advertising helped increase foot traffic to thesestores.Internal EnvironmentFinanceWhile Best Buy’s increase in revenue was encouraging (see Exhibit 1), recent growth hadbeen fueled largely by acquisition, especially Best Buy’s fiscal year 2009 revenue growth. Atthe same time, net income and operating margins had been declining (see Exhibits 2 and3).Although this could be a function of increased costs, it was more likely due to pricingpressure.Given the current adverse economic conditions, prices of many consumer electronicproducts had been forced down by economic and competitive pressures. These lower pricescaused margins to decline, negatively affecting net income and operating margins. BestBuy’s long-term debt increased substantially from fiscal 2008 to 2009 (see Exhibit 4),which was primarily due to the acquisition of Napster and Best Buy Europe. The trend inavailablecash has been a mirror image of long-term debt. Available cash increased from fiscal 2005to 2008 and then was substantially lower in 2009 for the same reason.While the change in available cash and long-term debt were not desirable, the bright sidewas that this situation was due to the acquisition of assets, which led to a significantincreasein revenue for the company. Ultimately, the decreased availability of cash would seem to betemporary due to the circumstances. The more troubling concern was the decline in netincomeand operating margins, which Best Buy needed to find a way to turn around. If the problemswith net income and operating margins were fixed, the trends in cash and long-term debtwouldalso begin to turn around.At first blush, the increase in accounts receivable and inventory was not necessarilyalarmingsince revenues were increasing during this same time period (see Exhibit 5). However,closer inspection revealed a 1% increase in inventory from fiscal 2008 to 2009 and a 12.5%increasein revenue accompanied by a 240% increase in accounts receivable. This created a potentialrisk for losses due to bad debts. (For complete financial statements, see Exhibits 6 and 7.)MarketingBest Buy’s marketing goals were four-fold: (1) to market various products based on thecustomercentricity operating model, (2) to address the needs of customer lifestyle groups, (3) to be attheforefront of technological advances, and (4) to meet customer needs with end-to-endsolutions.Best Buy prided itself on customer centricity that catered to specific customer needs andbehaviors. Over the years, the retailer created a portfolio of products and services thatcomplementedone another and added to the success of the business. These products included sevendistinct brands domestically, as well as other brands and stores internationally:Best Buy: This brand offered a wide variety of consumer electronics, home office products,entertainment software, appliances, and related services.Best Buy Mobile: These stand-alone stores offered a wide selection of mobile phones,accessories,and related e-services in small-format stores.Geek Squad: This brand provided residential and commercial product repair, support, andinstallationservices both in-store and on-site.Magnolia Audio Video: This brand offered high-end audio and video products and relatedservices.Napster: This brand was an online provider of digital music.Pacific Sales: This brand offered high-end home improvement products primarily includingappliances, consumer electronics, and related services.Speakeasy: This brand provided broadband, voice, data, and information technologyservicesto small businesses.Starting in 2005, Best Buy initiated a strategic transition to a customer-centric operatingmodel,which was completed in 2007. Prior to 2005, the company focused on customer groups suchas affluentprofessional males, young entertainment enthusiasts, upscale suburban mothers, andtechnologicallyadvanced families.6 After the transition, Best Buy focused more on customer lifestylegroups such as affluent suburban families, trendsetting urban dwellers, and the closely knitfamiliesof Middle America.7 To target these various segments, Best Buy acquired firms with alignedstrategies, which were used as a competitive advantage against its strongest competition,such asCircuit City and Wal-Mart. The acquisitions of Pacific Sales, Speakeasy, and Napster, alongwiththe development of Best Buy Mobile, created more product offerings, which led to moreprofits.Marketing these different types of products and services was a difficult task. That was whyBest Buy’s employees had more training than competitors. This knowledge service was avalueaddedcompetitive advantage. Since the sales employees no longer operated on a commissionbasedpay structure, consumers could obtain knowledge from salespeople without being subjectedtohigh-pressure sales techniques. This was generally seen to enhance customer shoppingsatisfaction.OperationsBest Buy’s operating goals included increasing revenues by growing its customer base,gainingmore market share internationally, successfully implementing marketing and salesstrategiesin Europe, and having multiple brands for different customer lifestyles through M&A(Merger and Acquisition).Domestic Best Buy store operations were organized into eight territories, with each territorydivided into districts. A retail field officer oversaw store performance through districtmanagers, who met with store employees on a regular basis to discuss operations strategiessuch as loyalty programs, sales promotion, and new product introductions. 8 Along withdomesticoperations, Best Buy had an international operation segment, originally established inconnection with the acquisition of Canada-based Future Shop.9In fiscal 2009, Best Buy opened up 285 new stores in addition to the European acquisitionof 2,414 Best Buy Europe stores, relocated 34 stores, and closed 67 stores.Human ResourcesThe objectives of Best Buy’s human resources department were to provide consumers withthe right knowledge of products and services, to portray the company’s vision and strategyon an everyday basis, and to educate employees on the ins and outs of new products andservices.Best Buy employees were required to be ethical and knowledgeable. This principlestarted within the top management structure and filtered down from the retail field officerthrough district managers, and through store managers to the employees on the floor. Everyemployee must have the company’s vision embedded in their service and attitude.Despite Best Buy’s efforts to train an ethical and knowledgeable employee force, there weresome allegations and controversy over Best Buy employees, which gave the company a badblackeye in the public mind. One lawsuit claimed that Best Buy employees had misrepresentedthemanufacturer’s warranty in order to sell its own product service and replacement plan. Thelawsuitaccused Best Buy of “entering into a corporate-wide scheme to institute high-pressure salestechniques involving the extended warranties†and “using artificial barriers to discourageconsumerswho purchased the ‘complete extended warranties’ from making legitimate claims.†10In a more recent case (March 2009), the U.S. District Court granted Class Action certificationto allow plaintiffs to sue Best Buy for violating its “Price Match†policy. According tothe ruling, the plaintiffs alleged that Best Buy employees would aggressively denyconsumersthe ability to apply the company’s “price match guarantee.†11 The suit also alleged that BestBuy had an undisclosed “Anti-Price Matching Policy,†where the company told its employeesnot to allow price matches and gave financial bonuses to employees who complied.CompetitionBrick-and-Mortar CompetitorsWal-Mart Stores Inc., the world’s largest retailer, with revenues over US$405 billion,operatedworldwide and offered a diverse product mix with a focus on being a low-cost provider.In recent years, Wal-Mart increased its focus on grabbing market share in the consumerelectronicsindustry. In the wake of Circuit City’s liquidation,12Wal-Mart was stepping up effortsby striking deals with Nintendo and Apple that would allow each company to have their ownin-store displays. Wal-Mart also considered using Smartphones and laptop computers todrivegrowth.13 It was refreshing 3,500 of its electronics departments and was beginning to offer awider and higher range of electronic products. These efforts should help Wal-Mart appeal tothe customer segment looking for high quality at the lowest possible price. 14GameStop Corp. was the leading video game retailer with sales of almost US$9 billion asof January 2009, in a forecasted US$22 billion industry. GameStop operated over 6,000storesthroughout the United States, Canada, Australia, and Europe, as a retailer of both new andusedvideo game products including hardware, software, and gaming accessories. 15The advantage GameStop had over Best Buy was the number of locations: 6,207GameStop locations compared to 1,023 Best Buy locations. However, Best Buy seemed tohave what it took to overcome this advantage—deep pockets. With significantly higher netincome,Best Buy could afford to take a hit to its margins and undercut GameStop prices. 16RadioShack Corp. was a retailer of consumer electronic goods and services including flatpanel televisions, telephones, computers, and consumer electronic accessories. Althoughthecompany grossed revenues of over US$4 billion from 4,453 locations, RadioShackconsistentlylost market share to Best Buy. Consumers had a preference for RadioShack for audioand video components, yet preferred Best Buy for their big box purchases. 17Second tier competitors were rapidly increasing. Wholesale shopping units were becomingmore popular, and companies such as Costco and BJ’s had increased their piece of theconsumerelectronics pie over the past few years. After Circuit City’s bankruptcy, mid-levelelectronics retailers like HH Gregg and Ultimate Electronics were scrambling to grab CircuitCity’s lost market share. Ultimate Electronics, owned by Mark Wattles, who was a majorinvestorin Circuit City, had a leg up on his competitors. Wattles was on Circuit City’s board ofexecutives and had firsthand access to profitable Circuit City stores. Ultimate Electronicsplanned to expand its operations by at least 20 stores in the near future.Online CompetitorsAmazon.com Inc., since 1994, had grown into the United States’ largest online retailer withrevenues of over US$19 billion in 2008 by providing just about any product imaginablethrough its popular website. Created as an online bookstore, Amazon soon ventured out intovarious consumer electronic product categories including computers, televisions, software,video games, and much more.18Amazon.com gained an advantage over its supercenter competitors as Amazon was able tomaintain a lower cost structure compared to brick-and-mortar companies such as Best Buy.Amazonwas able to push those savings through to its product pricing and selection/diversification.With an increasing trend in the consumer electronic industry to shop online, Amazon.comwaspositioned perfectly to maintain strong market growth and potentially steal some marketshareaway from Best Buy.Netflix Inc. was an online video rental service, offering selections of DVDs and Blu-raydiscs. Since its establishment in 1997, Netflix had grown into a US$1.4 billion company. Withover 100,000 titles in its collection, the company shipped for free to approximately 10millionsubscribers. Netflix began offering streaming downloads through its website, whicheliminatedthe need to wait for a DVD to arrive.Netflix was quickly changing the DVD market, which had dramatically impacted brickandmortar stores such as Blockbuster and Hollywood Video and retailers who offered DVDsfor sale. In a responsive move, Best Buy partnered with CinemaNow to enter the digitalmoviedistribution market and counter Netflix and other video rental providers.Core CompetenciesCustomer Centricity ModelMost players in the consumer electronics industry focused on delivering products at thelowestcost (Wal-Mart—brick-and-mortar, Amazon—web-based). Best Buy, however, took a differentapproach by providing customers with highly trained sales associates who wereavailable to educate customers regarding product features. This allowed customers to makeinformed buying decisions on big-ticket items. In addition, with the Geek Squad, Best Buywas able to offer and provide installation services, product repair, and ongoing support. Inshort, Best Buy provided an end-to-end solution for its customers.Best Buy used its customer centricity model, which was built around a significant databaseof customer information, to construct a diversified portfolio of product offerings. This allowedthe company to offer different products in different stores in a manner that matchedcustomer needs. This in turn helped keep costs lower by shipping the correct inventory tothecorrect locations. Since Best Buy’s costs were increased by the high level of training neededfor sales associates and service professionals, it had been important that the companyremainvigilant in keeping costs down wherever it can without sacrificing customer experience.The tremendous breadth of products and services Best Buy was able to provide allowedcustomers to purchase all components for a particular need within the Best Buy family. Forexample,if a customer wanted to set up a first-rate audio-visual room at home, he or she couldgo to the Magnolia Home Theater store-within-a-store at any Best Buy location and use theknowledge of the Magnolia or Best Buy associate in the television and audio areas todeterminewhich television and surround sound theater system best fit their needs. The customercould then employ a Geek Squad employee to install and set up the television and hometheatersystem. None of Best Buy’s competitors offered this extensive level of service.Successful AcquisitionsThrough its series of acquisitions, Best Buy had gained valuable experience in the process ofintegrating companies under the Best Buy family. The ability to effectively determine whereto expand was important to the company’s ability to differentiate itself in the marketplace.Additionally, Best Buy was also successfully integrating employees from acquiredcompanies.Best Buy had a significant global presence, which was important because of the maturingdomestic market. This global presence provided the company with insights intoworldwide trends in the consumer electronics industry and afforded access to newlydevelopingmarkets. Best Buy used this insight to test products in different markets in its constant effortto meet and anticipate customer needs.Retaining TalentAnalyzing Circuit City’s demise, many experts concluded one of the major reasons for thecompany’s downfall was that Circuit City let go of their most senior and well-trained salesstaff in order to cut costs. Best Buy, on the other hand, had a reputation for retaining talent