Best Buy Case Analysis 1iw5x

Title: - MGT6950 Strategic Management of Business Policy (BEST BUY CO.) Author: - Hifzaan Mastan Madonna University ID: - 210410 Specialization: - Cost Management Course: - Masters in Business istration - Madonna University, Michigan State, U.S.A Instructor : Prof Dr. Kaup Mohammed

Submitting to: - Prof. Dr. Stuart Arends

STRATEGIC MANAGEMENT 210410

ACKNOWLEDGEMENT

I would like to express my special thanks of gratitude to our professor Dr. Stuart Arends and Dr. Kaup Mohammed who gave me the opportunity to do this Case Study in Strategic Management, which also helped me in doing a lot of Research and I came to know about so many new things. I am really thankful to him.

I would also like to thank my parents and friends who helped me a lot in finishing this project within the limited time.

I am making this project not only for marks but to also increase my knowledge.


CONTENT 1. Introduction………………………………………………pg.1 2. History……………………………………………………pg.1 3. Mission, Vision and Values………………………………pg.2 4. SWOT Analysis…………………………………………..pg.4 5. Corporate objectives and Strategies………………………pg.7 6. Competitive Analysis……………………………………..pg.12 7. External matrix……………………………………………pg.17 8.

Internal matrix……………………………………………pg.18

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Space matrix, BCG matrix & M matrix………………pg.19-21

10. Financial Analysis………………………………………..pg.23 11. Income statements………………………………………...pg.26 12. Recommendations…………………………………………pg.27 13. Conclusion………………………………………………...pg.31 14. Bibliography………………………………………………pg.32


INTRODUCTION

Best Buy Co., Inc. (NASDAQ: BBY) together with its subsidiaries is one of the world’s leading companies that operates as a retailer of consumer electronics, home office products, entertainment software, appliances and related services in the United States, Canada, China, Europe and Mexico. It controls retail stores and websites under 11 brand names: Best Buy, Five Star Appliances, Future Shop, Geek Squad, Magnolia Audio Video, The Carphone Warehouse, Best Buy Mobile, Audiovisions, Napster, Pacific Sales and Speakeasy. Best Buy currently has about 165,000 employees worldwide. The company preliminarily recorded revenues of $45 billion during the fiscal year ended February 28, 2009, a 12.5% increase over 2008. The operating profit during the FY09 was $1.76 billion, an 18.6% decrease over 2008. The net income during the same period was $1 billion, a 28.7% decrease from 2008. (Reuters, 2009)

HISTORY Best Buy was originally founded as Sound of Music, Inc. by Richard Schulze and another partner in 1969. It operated as a single home and car audio specialty store in St. Paul, Minnesota. In 1971, he bought out his partner and began to expand the chain. By early 1980s, Schulze broadened the product line to include appliances and VCRs to target older and more affluent customers. Schulze would continue to expand the product line to suit the needs of his customers. After almost 20 years of operations, Sound of Music officially changes its name to Best Buy and 1


launches its first superstore in 1983. Best Buy grew quickly somewhere around 1984 and 1987; it extended from eight stores to 24 and its sales bounced from $29 million to $240 million. (Best Buy, 2014) In 1985, the organization effectively brought $8 million up in an IPO on NASDAQ. To separate Best Buy from its rivals, Schulze presented the distribution center like store arrangement in 1989 and took sales staff off commission. The quantity of workers per store was lessened by around a third, bringing about significant cost savings. This idea was critical to Best Buy's climb to end up as the second biggest consumer electronics retailer in the U.S. by 1993. Best Buy kept on growing fiercely in the next years and ended up in a lot of debt in 1995. In 1997, income dove and the organization acknowledged it had overextended itself with its development. (Best Buy, 2014) The organization started a huge makeover, downsized operations and controlled stock all the more firmly. From that point forward, Best Buy has flourished once again under superior management. The organization actualized creative ideas in its stores, extended locally and globally, and rapidly turned into the world's driving consumer electronics retailer. As of February 28, 2009, Best Buy is the biggest consumer electronics retailer in the U.S. with a domestic market share of 22%. MISSION, VISION AND VALUES OF THE COMPANY To make technology deliver on its promises. "Our formula is simple: we’re a growth company focused on better solving the unmet needs of our customers—and we rely on our employees to solve those puzzles. Thanks for stopping." Best Buy mission is to bring technology and consumers together in a retail environment that focuses on educating consumers on the features and benefits of technology and entertainment products.

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Best Buy's vision is to make life fun and easy for consumers. Company’s Values: Have fun while being the best. Learn from challenge and change. Show respect, humility and integrity. Unleash the power of our people. Revised Mission Best Buy’s mission is to bring technology and consumers together in a retail environment. We strive to meet and exceed out customers expectations and preserve our public image as the leading low-cost specialty retailer. We are dedicated to providing the best quality electronics and home office equipment in the North American retail industry. As leading technology provider we strive to incorporate the best, most reliable technology into our everyday operation to ensure efficiency and maximize revenues. Best Buy as a whole feels that success is not only dependent on our growth and profitability, but also the well being of our employees and the satisfaction of our customers. Revised Vision At Best Buy, our vision is to become the leading electronics specialty retailer that focuses on customers and their needs.

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SWOT ANALYSIS STRENGTHS Best Buy has constantly recorded solid development. The organization's revenue grew at a CAGR of 9.90% amid FY05-08, from $27 billion to $40 billion. Operating profit grew massively at a CAGR of 10.64% amid FY05-08 from $1.4 billion to $2.1 billion. Likewise net income expanded by a CAGR of 9.35% amid the same period, from $980 million to $1.4 billion. The increment in net earnings was driven by revenue growth and a decrease in selling, general and istrative expense rate, offset by a decrease in gross profit rate and a higher effective income tax rate. With the colossal increment in its operating and net profits throughout the years, the organization fortified its monetary position in the business sector. Trustworthy Brand Name Best Buy is perceived as one of the best organizations on the planet on of its sound istration. In 1993, the organization turned into the second biggest consumer electronics retailer and in 2000, Fortune magazine named it one of the top 10 performing stocks. Best Buy was named organization of the Year by Forbes magazine in 2004, Specialty Retailer of the Decade by Discount Store News in 2001, positioned one among the Top 10 America's Most Generous Corporations by Forbes magazine and made Fortune Magazine's List of Most ired Companies in 2006. Extensive Store Coverage Over the years, Best Buy has assembled a name for itself through offering a wide determination of items and excellent services. This has allowed Best Buy to open many stores both domestically and internationally in the past several years. At the end of FY09, the company was operating approximately 1,100 domestic retail stores. On the

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international front, the company operated approximately 3,000 stores. Going forward, the company plans to open more stores in new countries such as Turkey and Mexico. WEAKNESSES Dependence on United States market Although Best Buy has international operations in China, Europe and Canada, the company mainly derives its revenues from the U.S. market. About 83% of the company’s total revenue comes from the U.S. Furthermore, the company relies heavily on the sales of consumer electronic products. Therefore, this high market concentration in the U.S. can result as a big disadvantage for the company in the long-run as consumer electronic products decrease from 42% in 2007 to 41% in 2008 in the revenue mix. It could significantly affect the revenues of the company and also its expansion opportunities if it continues to focus only in the U.S. market. Best Buy needs to further diversify its revenue generating sources. Dependence on select number of vendors for its merchandise Best Buy mainly depends on a handful of vendors for the supply of their products. Best Buy’s 20 largest suppliers for just over 60% of the merchandise it purchases. If any of key vendors fails to supply products or if there is any disruption and loss from any vendors the company may not be able to meet the demands of the customers which can result in the decline of revenues. OPPORTUNITIES New ventures

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The recent t venture between Best Buy and The Carphone Warehouse is an exciting opportunity for the company to expand into new geographic locations in Europe. The consumer electronics market has been one of the fastest-growing industries in the European market over the past five years.22 The management will have to be careful in this expansion and try not to overextend its resources. Bankruptcies Best Buy’s largest competitor, Circuit City, filed for bankruptcy at the end of 2008 and is closing 155 stores. This will prove to be tremendous opportunity for Best Buy to gain market share as competitors scramble to fill the void left by Circuit City. Many other consumer electronic stores have also filed for bankruptcy. Tweeter, a high-end rival, shut down in December 2008, and Sharper Image’s stores, which sold more exotic electronics, have liquidated. CompUSA closed most of its stores in 2007. As the weaker players in this market are weeded out, Best Buy must be actively seeking to gain those market shares. Threats Deteriorating Economic Conditions Best Buy sells products and services that consumers tend to view as luxury goods rather than necessities. Therefore, the company is more sensitive to changes in general economic conditions that impact consumer spending. Future economic conditions and other factors including consumer confidence, employment levels, interest rates, tax rates, consumer debt levels, fuel and energy costs and the availability of consumer credit could reduce consumer spending or change consumer purchasing habits. A further deterioration of the U.S. economy or the global economy could adversely affect consumer spending habits and thus Best Buy’s earnings. Highly Competitive Market

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The retail business is highly competitive. Best Buy faces competition regarding its customers, employees, locations, products and other important aspects of business with many other local, regional, national and international retailers. Furthermore, there are numerous internet retailers that sell similar products that Best Buy does. These internet competitors may have a smaller market presence and financial resources, but their prices are substantially lower because of lower overhead. This competition could force Best Buy to reduce its products’ prices or increase costs of doing its business. As a result of this competition, the company may experience lower revenue and higher operating costs. Best Buy will have to do its best to differentiate itself from these internet competitors. Flat TVs saturation Despite what is now believed to be nearly a 50% penetration rate in digital TVs, it seems that the market will soon hit its saturation point.23 This could potentially be a problem for Best Buy since it derives most of its revenues from TV sales. To add to the problem, discretionary spending is clearly slowing and higher ticket OLED TVs appear to be at least a couple of years away before being widely available in large screen sizes. In the meantime the recent introduction of 240 Hz LCD TVs (second derivative of the 120 Hz LCD TVs), will create excitement for the consumer. CORPORATE OBJECTIVES Best Buy’s current business strategy has two primary goals: offering customers the widest range of products at the lowest prices and expanding into new international markets. The company’s recent acquisitions and new business ventures have been in these two directions. The management is positive that these two strategies will allow Best Buy to be in a favorable position to grow domestically and internationally. Customer Centricity Operating Model -

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Best Buy’s success thus far is a testament to its commitment to “treat customer as unique individuals [and] meeting their needs with end-to-end solutions. Since 1989, Best Buy prides itself as one of the earliest retailers to adopt the strategy of non-commissioned employees to give customers more control during the purchasing experience. In 2004, Best Buy began implementing an innovative strategy it calls customer-centricity in its stores. Through these strategies, Best Buy has differentiated itself as a store that provides mid- to high-end electronics and entertainment systems and excellent customer service. The customer-centricity operating model views Best Buy as a portfolio of customers rather than products. It forces the company to understand its customer base at a deeper level and better target its needs. In 2004, Best Buy tracked its customers’ behaviors and identified five initial customer segments that represented significant new growth opportunities. The segments were each given a name : 1. Jill, the busy suburban mom who wants to enrich her children’s lives with technology and entertainment. 2. Buzz, the focused, active, younger male customer who wants the latest technology and entertainment. 3. Ray, the family man who wants technology that improves his life – the practical adopter of technology and entertainment. 4. Barry, the affluent professional who wants the best technology and entertainment experience and who demands excellent service. 5. BB4B (Best Buy for Business), the small business customer who can use Best Buy’s product solutions and services to enhance the profitability of his or her business. Best Buy tested out these segments at 32 U.S. stores by training and empowering employees to better meet these 8


customer segments’ needs. It allowed employees large discretion in making the store more appealing to their particular customer segment. The results were astounding. The lab stores sales were an average of 7% higher than other U.S. Best Buy stores. Close rates (the percentage of shoppers who make a purchase) also rose by approximately 6%.8 SG&A for the stores were expectedly higher, but the model helped lower employee turnover from 81% in 2005 to 69% in 2006. The company decided to adopt this strategy with all of their stores and the transition was fully completed in 2007. To this day, Best Buy continually revises the customer segments in order to capture new growth opportunities. Cross Industry Expansion Since 2000, Best Buy has acquired entire or majority stakes in nine companies that complement its existing products, services and culture. These acquisitions, over $3 billion in combined value, expanded the company’s operations into Canada, China and Europe. Additionally, they added a wide range of products such as kitchen and bath appliances, broadband technology, and repair services to Best Buy’s existing portfolio. Beginning in 2008, Best Buy has been focused on strengthening its market position by expanding into the cellular phone sales to compete with its rivals. Best Buy entered into a t venture with U.K.’s largest cellular phone retailer, The Carphone Warehouse to open new Best Buy Mobile stores in the U.S. Furthermore, its acquisition of Napster launched Best Buy into an entirely different market of digital media distribution. To help drive Best Buy Mobile’s expansion, the management intends to enhance service plans with Napster’s distribution platform and mobile capabilities. Best Buy hopes to increase the company’s share of the 160 million handset market in the U.S. to 10% in under five years from about 4% currently. Aggressive Store Growth The expansion of retail stores for Best Buy plays a significant role in its revenue growth and success. For FY09, Best Buy operated just 9


shy of 4,000 retail stores worldwide. Over the past decade, Best Buy has almost doubled the number of stores domestically every five years. Majority of international store growth comes from the acquisitions of The Carphone Warehouse and Five Star Appliances. Additionally, the company opened a Best Buy store in Shanghai and a pilot store in Mexico. Figure 1 shows the addition of new stores domestically and internationally over the last five fiscal years. Table below shows the breakdown of stores.

Best Buy Global stores breakdown as of (February 28, 2009)

Distribution The distribution system is crucial to Best Buy’s operations in order to meet its customer needs. Generally, U.S. Best Buy stores’ merchandise, except for major appliances and largescreen televisions, is shipped directly from manufacturers to the distribution centers located in

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California, Georgia, Indiana, Minnesota, New York, Ohio, Oklahoma and Virginia. Major appliances and large-screen televisions are shipped to satellite warehouses in each major market. The distribution system in the international segment operates similarly. The Canada stores’ merchandise is shipped directly from the suppliers to the distribution centers in British Columbia and Ontario. Five Star Appliances stores’ merchandise are received and warehoused at more than 50 distribution centers and warehouses. The China Best Buy store’s merchandise is shipped directly from the suppliers to the distribution center in Shanghai. In order to meet release dates for selected products and to improve inventory management, certain merchandise is shipped directly to the stores from manufacturers and distributors. Suppliers In fiscal year ended March 2008, the 20 largest suppliers ed for just over 60% of the merchandise purchased, with five suppliers — Sony, Hewlett-Packard, Samsung, Apple, and Toshiba — representing just over one-third of total merchandise purchased.14 Best Buy generally does not have long-term written contracts with the major suppliers. The company, however, has not experienced significant difficulty in maintaining satisfactory levels of supply. Best Buy operates global sourcing offices in China in order to purchase products directly from manufacturers in Asia. These offices have improved the product sourcing efficiency and provided the company with the capability to offer private-label products that complement the existing product line. In the future, the company expects purchases from the global sourcing offices to increase as a percentage of total purchases.

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COMPETITIVE ANALYSIS Force

Strategic Significance

Internal Rivalry Internal rivalry is the most significant force of Porter’s Five Forces and is very high in the consumer electronics retail industry. According to Yahoo Finance, there are approximately 7 major companies that are traded publically and sell predominately electronic products. There are also numerous privately-held retailers that serve specific niche markets. With a market capitalization of over $16 billion, Best Buy is the dominant player in this industry. Competition, however, comes from companies outside of this industry. Discount retailers such as Wal-Mart, Target and Costco occupy a significant part of the consumer electronics market. Wal-Mart, for example, booked $378 billion in sales in FY08 and its $92.2 million in gross profit more than double Best Buy’s $40 billion in revenue during the same period.20 Wal-Mart does not breakdown its sales into different product categories, so it is not possible to directly compare the two businesses. However, even if consumer electronics was merely 1% of Wal-Mart’s $378 billion operation, it would still be very significant to Best Buy. Competition is high primarily because there is little to no switching costs if a buyer chooses to shop elsewhere. Furthermore, 12


the products are not differentiated: buyers can get similar products at almost all of the different electronic stores. As a result, companies compete on prices and non-tangibles, such as customer service and goodwill. An important observation of the market is its net profit margin (NPM). The NPM shows how much profit a company makes after taxes for every dollar it generates in revenue. According to Yahoo Finance, the NPM of the consumer electronics retail market is low(3.80%). This implies that competition is quite fierce, and profitability and survival is depended on inventory turnover. Circuit City had to liquidate its assets because it was not able drive sales as effectively as other competitors over the past several years. Combine the level of competition with the current economic conditions, many companies in the industry must find it more difficult to continue operations as they did in the past several years.

Threat of New Entrants The threat of potential new entrants into the consumer electronics retail industry is relatively low. The market capital of the industry, according to Yahoo Finance, is currently at $23.2 billion. This figure is substantially lower than other industries such as Apparel Stores ($37.2 billion), Home Improvement Stores ($53.0 billion) or Discount Variety Stores ($240.4 billion). The low market capitalization implies that it would not be difficult to enter the industry based solely on the capital required. However, a potential entrant would have to overcome the superior brand reputation that Best Buy has established. Best Buy has built a reputation for selling mid- to highend product and excellent customer service. It would be difficult for an entrant to challenge the 13


company. Furthermore, it would be difficult to undercut incumbent firms who have already established relationships with suppliers to purchase merchandize at the lowest prices. Although the threat of entry is low, the potential pool of entrant is actually quite large as it consists of numerous online electronics retailers. These online retailers are the most likely candidate to enter the consumer electronics retail market because they already have large existing inventories and extensive experience dealing with customers – two key factors that give them a potential edge. The fact that they are currently only online retailers suggests that acquiring real estate is a significant entry barrier. However, once an online retailer is able to establish a strong reputation with customers, it is likely to enter the industry to captures additional sales through non-web customers. As mentioned, the NPM of the industry is low (3.80%). This means that a key component to be successful in this industry is to drive sales and have high inventory turnover. High inventory turnover implies that large inventories are required in warehouses. Together, these two factors make a very significant barrier to entry for potential entrants. (Kwok, 2009) Threat of Substitute Products The substitute products that may take a portion of the market share away from the consumer electronics retail industry do no pose a huge or direct threat. Today’s society and culture places a lot of emphasis on technology and is highly dependent on electronics. As a result, there are few substitutes for electronics that will directly take their place, such as books, magazines and other non-electronic hobbies to occupy people’s time. Some of the main retailers of books are Barnes and Noble, Borders and the online retailer Amazon.com. Bargaining Power of Buyers The bargaining power of buyers for electronic products is extremely low because the buyers primarily consist of a weak and fragmented group of individuals. There are several reasons for this: 14


1. The purchase volume is very low. Most people do not go to Best Buy and purchase 10 HD TVs or 10 DVD players, for example. The typical individual will purchase one item of a specific product. So the buyers often do have any influence on prices. 2. The cost of buying electronic products is not a huge percent of a buyer’s budget, unlike purchasing a house or car. Also, there is no intense competition between buyers for any one brand (i.e. Sony, Panasonic, Samsung, and etc.). 3. Because electronic products are often a luxury than a necessity, buyers do not generally have a say in what products get produced and at what price. 4. Most importantly, buyers do not have the ability to integrate backwards because it is not feasible for individuals to build their own electronic products or establish their own retail shops. As a result, the buyers in the consumer electronics retail market do not have any substantial bargaining power over the companies in the market and do not have any substantial influence on the products or prices. Bargaining Power of Suppliers The suppliers for companies in the market have relatively high bargaining power mainly due to the fact that there are only a number of suppliers that the market demands from. Among the pool of suppliers include major manufacturers such as Sony, Samsung, LG, Panasonic and Toshiba. These suppliers provide the latest state-of-the-art technology and companies like Best Buy must purchase from them in order to keep its inventory fresh and satisfy its customers. There is no way around purchasing these products; for example, backward integration is difficult and requires a lot of capital and technological expertise. This suggests that suppliers have a

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substantial influence on the products that they manufacture and their pricing. Furthermore, the high bargaining power of the suppliers is also due to the sheer number of stores that they are in. Therefore, consumer electronics retailers must purchase them to stay competitive in the industry. On the other hand, there are several factors that lower the bargaining power of the suppliers. While most of all the suppliers have their own online stores to drive sales, they rely almost entirely upon retailers to bring in revenue. Suppliers want their products on the shelves for people to see and test them. They also rely on the sales teams within retail stores to help drive sales. Therefore, a company can partially mitigate the bargaining power of a supplier if it is especially effective in bringing sales. Best Buy, as the industry leader, therefore has more bargaining power than other retailers. Additionally, while there might not be intense competition between buyers for any one brand, there is intense competition among the suppliers. For example, the most recent Blu-ray and HD-DVD rivalry between Sony and Toshiba caused less bargaining power for these suppliers.(Best Buy 2014)

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EXTERNAL AND INTERNAL MATRIX

Source (perleybrook.umfk.maine.edu)

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Source (perleybrook.umfk.maine.edu)

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Space Matrix

Source (perleybrook.umfk.maine.edu) As we can see through this space matrix that Best Buy employs an aggressive strategy. With its strong financials and competitive age there is scope for further growth for Best Buy. It has great market share with the number of new entrants being very little. 19


Source (perleybrook.umfk.maine.edu) The strategy that Best Buy employs is rather Aggressive and it did not opt for Conservative, Competetive or Defensive strategy.

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Competetive Profile Matrix

Source (perleybrook.umfk.maine.edu) CompUSA and Circuit City, were forced to close their doors in recent years as a result of the strength of the Five Forces. Both were large competitors in the industry. In 2008 Circuit City’s annual revenues were $11.7 billion, and in 2006, CompUSA’s revenues topped $4 billion. According to a 2010 report by Gap Intelligence, approximately 55% of Circuit City shoppers were planning to transition to Best Buy7. This statistic correlates to the 1.7% same store sales growth for Best Buy in 2010, the only year in which same store sales growth was positive from2008 through 2012. However, Amazon’s revenues from consumer electronics grew by 74% from2009 to 2010. Best Buy’s financial statements provide insights on the industry. Best Buy is by far the largest firm in the big box electronic retail industry in of sales and market cap. As of March 2013, Best Buy’s market cap of $6.8 billion was greater than the combined value of 21


the next four largest public competitors at $4.8 billion according to March 2013 Yahoo! Finance data. From 2005 to 2007, Best Buy’s annual revenue growth was between 11.8% and 16.5%.Same store sales in 2006 and 2007 were 4.9 and 4.1% respectively. (Gupta, 2013)

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FINANCIAL ANALYSIS

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Source: (http://financials.morningstar.com/ratios/r.html?t=BBY&region=usa&culture=en-US) A few years ago, most people expected Best Buy to go down the same lane as its competitor Circuit City, which after years of losses, went bankrupt. Even RadioShack went down a similar path earlier this year as online giants like Amazon took away sales from brick-and-mortar stores. But, Best Buy has been a completely different story, thanks to the company’s turnaround strategy, Renew Blue. Best Buy’s return on equity, which is a widely used indicator of a company’s profitability, stood at a negative 8% at the end of 2011. While other similar companies went bankrupt, Best Buy took its online rivals head-on and turned around its operations. By matching competitors on price and focusing on providing a superior customer experience, they were able to prevent a

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significant fall in sales. While price competition would have hit margins significantly, the company averted this by cutting down costs significantly. They streamlined their operations, established an online presence, shut down low-performing stores and used all other stores as distribution centers for online sales. By the end of 2014, the company managed to generate an ROE of a positive 8%. (Forbes, 2014)

Encouraged by the success of its turnaround strategy, Best Buy plans to continue its cost cutting efforts in FY 2016 to battle industry and economic pressures. The company has set itself a target of approximately $400 million in cost reductions and gross profit optimization, over the next three years. It will utilize these incremental savings for investments in delivery and cost control and other growth initiatives, which are expected to amount to approximately $100 million to $120 million.

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INCOME STATEMENT

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As we can see from the above income statement there has been a steady decline in the Revenue but to offset the decline in revenues there has also been a decline in cost of good sold leading to a fairly good gross profit. Yet as we analyze further we see that the operating expenses are fairly high which is really sapping the profits. The net income is still at a normal rate which is a good sign for Best Buy. The EBITDA has also increased from the previous year adding to the strong financials displayed by Best Buy. RECOMMENDATIONS Offer on site, in-store and online training. Companies such as General Assembly (GA) have created successful networks of digital training centers. Best Buy can bring in GA or other providers and use part of their big box stores as training centers. This will bring in high-profit streams of revenue while engaging the customer in a much deeper way than selling them a commoditized flat screen. Best Buy could also arrange for on site training at corporate campuses. Companies are struggling to keep up with the latest technologies and would welcome a brand-name, national training provider to teach their employees on site. Best Buy can partner with Microsoft, Cisco, Salesforce.com and others to deliver online and on site training modules. It can also work with Udacity, Coursera and other online course providers to offer a common space for video conferencing and study sessions for their classes. Slash the number of SKU’s by 50% in every store.(Forbes)

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Instead of every location in a dense region trying to be all things to all customers, have each store in a few tech sectors specialize. The Best Buy in Union Square in NYC, for example, boasts an extensive music technology section complete with a 20-foot high wall of digital guitars — a feature not replicated many other NYC Best Buy shops. Best Buy should also expand beyond commodity products and begin focusing on innovative categories, for example, personal health monitoring and quantification. Everything from weight scales that are connected to Wi-Fi networks to pulse monitoring watches will be increasingly popular as consumers use technology to manage their health and lifestyle. Designated Best Buys could become health tech centers with partners including GE , Nike and others. This approach will drastically decrease the amount of working capital dedicated to holding inventory. By slicing inventory down to the key products that consumers wish to buy, Best Buy frees up capital to deliver a top-flight training and service platform. A focus on revenue growth when all that revenue only brings more losses is misguided. Best Buy should clearly seek to replace commoditized revenue with higher-margin revenue that engages key customer bases. (Vela, 2013) Expansion of Service Offerings Best Buy should offer Installation, Warrantees, Delivery, Maintenance, Technical /Service etc. Many of their other competitors in the appliance and electronics industries, such as Sears and Lowes are already doing these types of things for their customers. If Best Buy wants to retain their market share in the electronics industry and/or grow their low market share in the appliance industry, they could take advantage of this. This is an example of related diversification. Approximated Costs: $50,000,000

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Turn 20% of every store into a tech incubator for startups. Incubators have blossomed in the past few years in urban centers including San Francisco, New York, LA and Washington, DC. Since Best Buy has a big footprint in suburban locations, it can host incubators that will attract startups that cannot be or do not wish to be in urban settings. Incubators will bring several benefits to Best Buy:– Best Buy can showcase the cutting-edge tech from the startups. While a customer may not be able to purchase the technology it will attract back the tech-oriented base that Best Buy has lost. This is similar to how car enthusiasts attend auto shows even though one cannot purchase a car at those events. Startups create community. Just offering lots of stuff in a big box is a losing formula in the world of electronics unless you create a compelling reason for people to show up and purchase there. Best Buy can create its own community network by hosting hackathons and other tech gatherings centered on their in-house incubator which will attract hundreds of potential customers for each event. Start a media content service on their website More and more people are using the web nowadays to and listen/watch media (music, videos, movies, etc). Best Buy is a leading retailer in the music and movie industry. It could start (or team up with a service such as Rhapsody) to offer a subscription-based service where s can albums from the latest artists or the latest DVD movies. Companies and services such as Rhapsody, NetFlix, and iTunes have found this to be a great way to make money. Given the rapid growth of the web, and the use of it, this could give BestBuy a chance to make money from customers they might never have seen in their stores. Approximated costs: About $5,000,000 29


Through this strategy, Best Buy can transform itself from a white elephant chain to a nimble leader catalyzing adoption of new technologies. Instead of waiting for tech companies to come up with hardware that it then tries to sell at zero margins, Best Buy can shift to help SMBs as well as consumers use these new technologies and host the brainpower of future innovation. Best Buy will not only dramatically increase in value, but it will create a sticky, loyal community of customers who will now have a reason to visit the locations and purchase services and good from Best Buy and recommend Best Buy to their networks. (Vela, 2013)

FINANCING STRATEGY

As one can see, debt financing seems like a great route to take here, with the highest EPS out of any other method. Also, one strategy that can have a big effect on cash is the buyback or repurchase of Common stock. When this stock is eliminated, the value per share can rise. STRATEGY EVALUATION Yearly performance evaluations for each store/department should be carried out. Things should be measured simply using sales, revenue, and profits for each store. If each store is performing as 30


well as the other existing stores, leave it as-is. If some stores are lacking, use a growth metric (store must see an increase in revenues and/or profits by a certain percentage each year). Watch the popularity of the ing service – do the revenues outweigh the costs? Watch appliance/major electronics sales from year to year – are sales rising because Best Buy is offering installation, , and service? If not on a steady increase over a 5 – year period, they can decide what to do from there. Is customer satisfaction on the rise? Give out a customer survey with questions relating to the new services offered. CONCLUSION As internet retailing becomes more accessible to even those who are not technologically savvy, Best Buy will become all but obsolete. Furthermore, internet retailing will almost always be less expensive for customers because of lower overhead costs. In order to survive this paradigm shift, Best Buy must reshape the look and feel of its ments and stores. More importantly it needs to sell a “shopping experience” that cannot be imitated online. Therefore, the management should try to abandon the warehouse superstore format to a showroom or exhibit format. One possibility is for the products to be laid out in different types of showrooms for customers to interact with. The concept is similar to an Apple store, but at a much larger scale and incorporating a wider range of products. The existing customer-centricity model would still exist, but the emphasis would be shifted to selling a lifestyle rather than a profile. Another possibility is to add coffee shops, game rooms, music rooms and etc. that all utilize products that are sold by Best Buy. The advantage of doing this is to increase the customers’ duration in the store and thus increase the chances of closing a sale. I believe rethinking the retail experience to make it more personable and physically interactive is a viable way to compete with internet retailing.

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Bibliography Best Buy. (2014). Retrieved from Best Buy: Bestbuy.com Forbes. (2014). Retrieved from Forbes. Gupta, T. (2013). Best Buy. Kwok, I. (2009). Strategic report for Best Buy. Reuters. (2009). Retrieved from Reuters: www.reuters.com Vela, M. (2013, January 3). Retrieved from Fortune. (perleybrook.umfk.maine.edu) (2009) Morningstar. (2015) Retrieved from: (http://financials.morningstar.com/ratios/r.html?t=BBY&region=usa&culture=en-US)

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