As the nation’s leading consumer electronics retailer, Best Buy is trying to be the best. But that’s not been easy in light of the challenges it’s facing in the external environment. Like many other retailers, the economic climate has forced Best Buy to carefully consider its strategic options.
Best Buy was founded under the name Sound of Music in 1966 as a home- and car-stereo store by Dic Schulze (he still remains as board chair), who got tired of working for his father, who would never listen to his ideas on how to improve the family’s electronics distribution business. However, while chairing a school board in the early 1980s, Schulze realized that his target customer group—15- to 18-year-old males—was declining sharply. He decided to broaden his product line and target older and more affluent customers by offering appliances and VCRs. In 1981, a tornado wiped out his entire store (but not the inventory). Schulze decided to spend his entire marketing budget on advertising a huge parking lot sale. The successful sale taught him the importance of strong advertising, wide selection, and low prices—lessons that would serve him well as he built his business. In 1983, Schulze changed the name to Best Buy and began to open larger superstores. The change in store format and the fast-rising popularity of VCRs led to rapid growth. The number of stores grew from 8 to 24 and revenues skyrocketed from $29 million to $240 million.
In 1989, Schulze introduced the warehouse-like store format. By setting up stores so customers could browse where they wanted, the company was able to reduce the number of employees, a real cost saver. Larger store formats were introduced in 1994 and the company kept opening new stores. By 1997, the company realized that it had overextended itself with its expansion efforts, the super-sized stores, and costly consumer financing promotions. In response, the company went through a massive makeover, scaling back expansion plans and doing away with its “no money down, no monthly payments, no interest” program.
In 1999, Best Buy went through another evolutionary change as digital electronics began to flood the market. Store formats now highlighted digital products and featured stations for computer software and DVD demonstrations. They also decided to branch out into audio and video stores by acquiring the Magnolia Hi-Fi chain of stores and The Musicland Group (Sam Goody Stores, Suncoast, On Cue, and Media Play music stores). This strategy turned out to be a mistake and Best Buy sold off the entire Musicland subsidiary in June 2003.
In 2004, the company began focusing on bundling high-end electronics with service and installation, without giving up the low prices. Best Buy’s former CEO, Brad Anderson, admitted this strategy was risky, stating, “Nobody has been able to do this before. If we can only figure out the puzzle.” Why did they start messing with a successful formula? Because Anderson felt there was “trouble” ahead. The company’s store base was maturing. Imports were flooding the market and shorter product life cycles were exerting severe price pressures on some of the company’s most profitable products—digital TVs, cameras, and home entertainment systems. And then there were Wal-Mart and Costco. These mass merchants and even direct seller Dell had ramped up their consumer electronics offerings. At the time, Anderson reasoned that, “If we do nothing, Wal-Mart will surpass us by the simple fact they’re adding more stores than we are each year.” There was no way Best Buy could win by “trying to chase the customer out of Wal-Mart.” However, even though Best Buy felt that it couldn’t compete on merchandise, it could compete with add-on services. Best Buy’s acquisition of Geek Squad, a Minneapolis start-up, was an important key to that strategy. In addition, Best Buy began to sell private-label goods. It opened an office in Shanghai in September 2003 that allowed it to source products directly.
Then the company turned to a massive effort to identify and serve its most profitable shoppers (a process called “customer centricity”), an idea based on the belief that not all customers are profitable ones. Some are lucrative, whereas others cost more to sell to than their business is worth. After researching massive amounts of sales and demographics data, Best Buy identified some lucrative consumer segments and gave them the following names: Barry, the affluent tech enthusiast; Jill, a busy suburban mom; Buzz, a young gadget freak; Ray, a price-conscious family guy; Carrie, a young single woman; and others. Each store was oriented toward the segments that most reflected its customer base. Continuing its commitment to this centricity strategy, Best Buy is “getting in touch with its feminine side.” As a company vice president said, “We were a boy’s toy store designed for boys by boys.” No more. Best Buy has feminized its stores by doing things such as turning down the volume of store music, lowering the bright lights, training salespeople to talk to customers about their lifestyles, and eliminating the flashing lights—all in an attempt to create a softer, more personal atmosphere.
In early 2011, Best Buy joined other retail chains in going smaller. It announced it was slowing growth of new “big-box” stores and instead focusing on Best Buy Mobile locations where smartphones were the primary attraction. In an attempt to better utilize the space in its larger stores, Best Buy also began moving into health and exercise equipment in addition to electronics and musical instruments.
There are risks associated with Best Buy’s strategic moves. Uncertain economic conditions, a shaky global economy, and low consumer confidence mean that Best Buy must continue to find ways to weather the challenges. Doing nothing isn’t a feasible option. It is substantially reducing new store openings and may be forced to lay off employees. In response to critics who have questioned the speed with which Best Buy was adapting its business model to growing online competition, former CEO Brian Dunn said that it was a “fair criticism.” However, he also said that the belief that “specialty-store chains were doomed by the rise of Internet merchants such as Amazon.com” was off-base. Dunn “cited a recent study which found that roughly 80 percent of electronics were still bought in stores, and added that Best Buy saw store visits climb in the last quarter of 2011.”
Being the Best. Answer questions (a-f) in a 3-5 page, APA style paper (excluding title and reference pages), and supported with the concepts outlined in your text and from your previous classes.
What are examples of environmental scanning do you see in this case? What role do you think environmental scanning has played in the company’s evolution? What role will it need to play in the company’s future?
Using the five competitive factors approach and the information in the case, do a brief industry-competitive analysis.
What types of information do you think Dunn might want from each of the five general environmental sectors? (You don’t need to look up this information. Just indicate what trends they would probably want to keep track of).
What opportunities and threats do you think are facing this industry?
Best Buy has 2,600 stores in Europe and China (and has stores in Canada) and is looking to global markets for growth. As the company goes more international, what types of external information will it need?
Update the information on Best Buy: number of store, revenues, profits, and employees. Are these numbers increasing or declining.