Assignment:
Case study: Best Buy
Information about the case
You are asked to answer three questions about Best Buy:
Analysis: Focus on External and/or Internal Environments
1. Describe the positioning of Best Buy relative to its main competitors.
2. Apply the VRIO framework to determine whether Best Buy has a competitive advantage. If so, is its competitive advantage sustainable? Why or why not?
Formulation: Focus on Business, Corporate, and/or Global Strategy
3. What is Best Buy's business-level strategy? What are its main value and/or cost drivers?
4. How should Best Buy adjust its business-level strategy in light of recent changes in its external environment?
Information about Best Buy and its industry
Here is some additional information and sources to get you started, but you are also required to do your own research from various sources. Remember to reference your data sources.
CEO Hubert Joly must devise a turnaround strategy that will enable Best Buy to survive in an increasingly competitive consumer electronics market. By year-end 2012, Best Buy's stock price had dropped roughly 60 percent over a two-year period and same store sales and overall profitability were showing a consistent, negative trend. On the plus side, revenues were increasing (at a marginal rate), while Best Buy continued to dominate its competitors in terms of sales volume and U.S. market share. In addition, Best Buy's online business was growing by 15 to 20 percent each quarter. Still, critics were doubtful that Joly could save the company, which seemed intent on following Circuit City down the fast-track to bankruptcy.
Best Buy was founded by Dick Schulze as an audio specialty store ("The Sound of Music") in Minnesota in 1966. It grew rapidly over the next few years, holding an IPO in 1969 and reaching $1 million in annual revenues by 1971. The company continued to expand by adding locations and product lines, changing its name to Best Buy in 1983. Shortly thereafter, Best Buy adopted its now-familiar superstore format with an increasingly diversified product range. It went public on the NYSE in 1987. Best Buy's next retail innovation, named Concept II, combined a grab-and-go format with low prices and a wide assortment in 35,000-square-foot retail warehouses. The success of this approach propelled Best Buy to $1 billion in sales revenues and landed it on the Fortune 500 by 1995. In 2000, Best Buy entered a new phase of inorganic growth through acquisitions, purchasing multiple companies both domestically (for example, Magnolia, Geek Squad, Napster) and abroad.
Best Buy's history dovetails with the development of the consumer-electronics retail industry, which also expanded rapidly in the second half of the 20th century. Demand for home electronics increased with the post-World War II suburban migration, with strong growth continuing through the mid-1990s. As the electronics retail industry matured, smaller competitors went out of business while superstores like Best Buy and Circuit City increased their control of the market. The next major shift occurred when Amazon pioneered online retailing in 1998, leading to yet another period of expansion and market consolidation. Revenues tend to be both cyclical (tied to macroeconomic factors) and seasonal (dependent on holiday sales) in nature. Product life cycles have grown increasingly shorter, as manufacturers cannibalize their own products to maintain customer interest and loyalty.
Prior to the 2008 recession, Circuit City was one of the top three consumer electronics retailers (along with Best Buy and Radio Shack). It likewise had meager origins, starting as a local appliance store named Wards Company in Virginia in 1949 and progressively diversifying through acquisitions. By 1974, performance problems caused the company to refocus around its core area of consumer electronics. To showcase its new strategy, Wards debuted a new "big box" format that proved so popular that sales increased ten-fold by 1983. It listed as Circuit City on the NYSE in 1984, while continuing to dominate the U.S. market. Circuit City's problems began in the 1990s, when it again expanded beyond its core to include used car sales (CarMax) and credit card services. The early 1990s also brought an intense price war with Best Buy that left Circuit City vulnerable. When the weakening housing market led to a decline in consumer spending starting in late 2006, Circuit City was affected disproportionately, as nearly 44 percent of its revenues came from TV sales. The company tried to cut costs but was ultimately liquidated in 2009.
The power vacuum left by Circuit City led to increased competition in the consumer-electronics industry. Best Buy initially gained a 5.5 percent increase in market share, but started to lose ground as companies like Walmart, Target, Amazon, and Apple entered the fray. The case provides a synopsis of the strategies of each of these major competitors.
After having just two CEOs in its first 43 years of operations (Richard Schulze and his successor, Brad Anderson), Best Buy went through three top leaders in a six-month period in 2012. Brian Dunn resigned in April after just three years at the helm amidst a personal scandal. At the same time, founder Schulze "stepped down" from his role as Chairman of the Board and tried to reassert his control via a bid to take the company private. Joly assumed the lead position from interim CEO George Mikan in August, and immediately sought to stem the flow of Best Buy's financial losses.
Joly's "Renew Blue" strategy involves attracting transformational leaders, reinvigorating the customer experience, energizing Best buy's rank-and-file employees, and investing in private-label brands. Whether such initiatives will be sufficient to confer a strategic competitive advantage in the current environment is one of the key questions of this case.
The company's emphasis on customer-centricity entails segmenting customers based on demographic, attitudinal, and value tiers, and configuring stores to serve the needs of the predominant customer segments in that region. As opposed to selling products, employees help customers figure out what they need and provide technology solutions. This approach requires significant investments in the company's human resources, to motivate and equip them to build relationships with customers. In addition, Best Buy owns several private labels, the most well-known of which is the Geek Squad. Joly recognizes, however, that Best Buy's exclusive brands are not the main reason customers come to the showroom. Rather, they come because they want to see Best Buy's broad selection of the most respected name brands in person, as well as to get expert advice. The problem is that Best Buy has no way to ensure that customers who come to the store actually purchase the product in-house.