978-1259913747 Best Buy Case Part 1

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Structure of the Case

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 amid 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. Hubert Joly assumed the lead position from interim CEO George

Mikan in August 2012 and immediately sought to stem the flow of Best Buy’s financial losses to prevent

the company from following Circuit City into bankruptcy.

Now, three years into Joly’s “Renew Blue” turnaround plan, Best Buy is once again on stable finan-

cial footing. After four years of negative domestic comparable sales, fiscal year 2015 posted a 0.5 percent

sales increase. The company’s domestic non-GAAP operating income has also reversed its four-year

downward trend and increased from 3.1 to 4.1 percent. Non-GAAP earnings per share for continuing

operations were up 26 percent over 2014, and the company posted a $1.3 billion increase in cash, cash

equivalents, and short-term investments at year end.1 As a result, Joly’s strategic task has shifted from

ensuring the company’s survival to devising a plan for its long-term future.

The case next describes the company’s history. Best Buy was founded by Dick Schulze as an audio

specialty store 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 loca-

tions 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

Best Buy Co., Inc.

TEACHING NOTE

MHE-FTR-039

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REV: SEPTEMBER 30, 2015

Teaching Note —Best Buy Co., Inc.

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 (depen-

dent 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). 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 resulting power vacuum 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. One of the major threats came from “showroom-

ing,” where customers would go to Best Buy to view and learn about the products, but then purchase

them more cheaply from Amazon online. The case provides a synopsis of the strategies of each of these

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.

Another key tenet of Joly’s plan is to build strategic partnerships with leading technology companies

Altogether, we feel that we are at an exciting turning point in our journey. We are moving from a turn-

around phase where we were focused on solving two problems—negative comps and declining mar-

gins—to a transformation phase focused on two imperatives: driving profitable growth and continuing to

improve our margins, while funding our investments in our future.2

Despite its recent investments, Best Buy is still a predominantly bricks-and-mortar store with an

online presence (just 10 percent of sales are generated online), and has a long way to go toward its goal

of becoming an integrated, multichannel retailer.

Teaching Note —Best Buy Co., Inc.

Suggested Answers

ANALYSIS: FOCUS ON EXTERNAL AND/OR INTERNAL ENVIRONMENTS

1. Describe the positioning of Best Buy relative to its main competitors.

A strategic group map provides a useful visual aid for understanding relative positioning in an

industry. A strategic group map for the online portion of the consumer-electronics retail industry might

look something like the illustration shown next. Two of the main features that distinguish competitors

Teaching Note —Best Buy Co., Inc.

with 11.3 percent share by value, compared to Walmart at 6.2 percent and Best Buy at 3.2 percent.

Regardless of which aspect of the market is diagrammed (online vs. in-store, domestic vs. global),

the relative positions of the companies along these two axes remain basically the same. Thus, what the

As an Internet retailer, Amazon has the lowest cost structure and can therefore beat physical stores

on price, while offering a much broader selection of inventory. Its market share is growing rapidly.

Walmart can price its electronics significantly lower due to the economies of scale it creates through its

overall operations. Both Walmart and Target can undercut Best Buy due to lower staffing costs, while

Online Consumer Electronics Market in the United States

Best Buy’s future market share will depend on how it defines its value proposition. The concern is

that Best Buy’s physical infrastructure limits both the inventory it can offer and its ability to control its

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?

Have the students generate a list of Best Buy’s tangible and intangible resources, such as those listed

in Exhibit TN-2.

Historically, Best Buy’s tangible resources have been at the heart of its competitive advantage: pro-

viding a vast selection in a big box format, having exclusive access to top name brands, and developing

Teaching Note —Best Buy Co., Inc.

However, much of the value associated with these resources has been eroded by the advent of online

retailing. The Internet provides customers with access to an even broader inventory, while manufactur–

Joly’s strategy has been to harness the value of Best Buy’s intangible resources, many of which are

still rare and costly to imitate. These include the company’s in-depth understanding of its customer

Next, ask students to list Best Buy’s capabilities and test whether they pass the VRIO criteria, as

demonstrated in the following table. The results should reveal that Best Buy’s core competencies no

longer lie in its physical stores or product selection, but rather in its ability to understand customer

FORMULATION: FOCUS ON BUSINESS, CORPORATE,

AND/OR GLOBAL STRATEGIES

3. What is Best Buy’s business-level strategy? What are its main value and/or cost drivers?

As implied by its name, Best Buy has traditionally competed with an integrated or best-cost busi-

ness-level strategy, providing added value at costs comparable to competitors. Its main value drivers

have been:

• Breadthofproductselection—Facilitated by its big box format (large volume) and exclusive vendor

contracts (selectivity) with name-brand manufacturers such as Sony and Apple.

Teaching Note —Best Buy Co., Inc.

• Experiencecurveeffects—By leveraging economies of scale jointly with learning-curve benefits, Best

Buy also benefits from experience-curve effects. This is evident in the company’s reputation as an

innovator of the technology retail experience.

As a best-cost provider, Best Buy also pays careful attention to the following value and cost drivers:

• Quality—This pertains to both procuring quality inventory and providing quality service. Customer-

centricity helps to ensure that customers purchase the right technology for their needs and have the

requisite knowledge to utilize the technology appropriately. This helps to minimize customer frus-

4. How should Best Buy adjust its business-level strategy in light of recent changes in its external

environment?

Best Buy’s former CEO, Brian Dunn, believed that the company’s future value lay in its mix of

online and in-store retailing. In a 2009 investor presentation, Best Buy reported that its U.S. multichan-

nel customers engaged in twice the number of transactions as single-channel customers, spending 95

percent more and generating 80 percent higher margins.4 Dunn explained, “There are still things in the

physical world that are going to be important: expert advice and the ability to see and touch the latest

tablets.”5 The trick was to make sure that customers who came to a Best Buy store to touch the mer-

chandise and talk to the salespeople actually purchased the products from the company. Dunn sought

to accomplish this by:

• Increasingcustomerloyaltythroughcustomer-centricity

Teaching Note —Best Buy Co., Inc.

Vivendi and Carlson Wagonlit Travel. Joly summarized his turnaround strategy for Best Buy in the

company’s 2013 Annual Report (p. 30) as follows:

In November 2012, we announced our priorities to strengthen our operating and financial performance.

As part of this announcement, we provide a diagnosis of our strengths and weaknesses and two main area

of focus: (1) stabilizing and improving our comparable store sales, and (2) increasing profitability across

both of our segments. In addition, we unveiled our Renew Blue strategy with the goal of making Best Buy

the preferred authority and destination for technology products and services. The pillars supporting our

Renew Blue strategy are as follows:

In this context, we believe fiscal 2014 will be a year of transistion for Best Buy. We intend to build on the

momentum from the fourth quarter of fiscal 2013 (11-month), and our focus in fiscal 2014 will include the

following six priorities:

While both CEOs’ approaches had many aspects in common, one of the key shifts in the company’s

strategic thinking under Joly was to embrace (instead of fear) showrooming. Bringing Best Buy’s cost

structure in line permitted Joly to implement a new price-matching program, which turned the com-

pany’s physical assets into a competitive advantage once again. Ads in late 2012 touted Best Buy stores

Another hallmark of Joly’s turnaround strategy has been to expand the number of “store-within-a-

store” alliances with manufacturers of leading technology products (e.g., Canon, Google, Microsoft,

Nikon, Samsung, Sony, etc.). While Apple has physical stores of its own, it would require a huge capital

investment to duplicate Best Buy’s scale and customer reach. Other vendors rely on Best Buy as their

main physical presence, with no reported plans to open their own retail establishments. Mobile carriers

Teaching Note —Best Buy Co., Inc.

IMPLEMENTATION: FOCUS ON RECOMMENDATIONS

AND HOW TO IMPLEMENT THEM

5. Consumer electronics is considered a mature industry. Where can future growth come from? How

would you go about realizing it?

In response to industry changes, Best Buy has rapidly reversed plans to build new big box stores

in favor of opening as many as 800 new smaller stores by 2016.9 Another part of Joly’s revised vision

involves positioning Best Buy as a multichannel solutions and services company with strong exclusive

brands. Growth will come from several sources:

• Channelextension—Adding BBY Mobile and other stores, expanding Best Buy’s online presence, and

continuing to support and refine its core format.

In addition, Best Buy believes that customer centricity will lead to gains in local market share by: (1)

developing relationships with the company’s most profitable customers; (2)empowering local leaders

6. Is Best Buy’s strategy transferable to international markets? Why or why not?

Highlights of Best Buy’s international expansion history include:13

• In2002,BestBuyacquiredFutureShop,thelargestelectronicsretailerinCanada.Itlauncheditsdual

branding strategy by opening the first Best Buy store in Canada in 2003. Dual branding allows Best

Best Buy Mobile store-within-a-store experiences to all branded locations.

• BestBuyenteredChinainfiscal2007byacquiringa75percentinterestinJiangsuFiveStarAppliance

Co (Five Star), one of the country’s largest consumer electronics retailers. The purchase gave Best

Teaching Note —Best Buy Co., Inc.

• Infiscal2009,BestBuyformeda50-50venturewiththeCarphoneWarehouseGroup(CPW)tocre–

ate “Best Buy Europe.” At one time, it operated approximately 2,400 small-format stores under The

Carphone Warehouse and The Phone House names.

purchases and accessory products.

In its 2013 Annual Report (10-K), Best Buy reported that it had a presence in Canada (under the

names Best Buy, Bust Buy Mobile, Cell Shop, Connect Pro, Future Shop, and Geek Squad), Europe (The

Between 2013 and 2015, however, Best Buy decided to refocus its efforts around its higher perform-

ing units in North America (including Canada and Mexico) and to exit the Asian and European mar–

The decision to sell off all international holdings except for Canada and Mexico suggests that Hubert

Joly does not see the company’s format as translatable to an international setting. Or, at the very least,

international expansion is too costly an undertaking when the company is struggling for survival in

It is possible that Best Buy could expand internationally again at some point in the future, espe-

cially if its strategic turnaround continues to prove successful. At that point, customer-centricity may

prove central to Best Buy’s international as well as domestic success. Many other large U.S. retailers

(for example, Walmart) have struggled when entering foreign markets due to a failure to adapt their

Customer-centricity may confer another advantage in that most national cultures are significantly

less individualistic than the United States (which ranks highest among all the countries analyzed by