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CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
I. CASE ABSTRACT
Best Buy is the largest consumer electronics retailer in the United
States, accounting for 19% of the market. Globally, it operates around 4,000
stores in the United States, Canada, Mexico, China, and Turkey. Its
subsidiaries include Geek Squad, Magnolia Audio Video, Pacific Sales, and
Future Shop.
new products) have also put stress on its financial strength and the quality
of its customer service. The key challenge for Best Buy is to determine the
correct path to improve its differentiation strategy. The main question is:
How can Best Buy continue to have innovative products, top-notch employees,
and superior customer service while facing increased competition, operational
costs, and financial stress?
Decision Date: 2010 FY Sales: $45 million
FY Net Income: $1 million
II. CASE SUBJECTS AND ISSUES
Industry Analysis International Growth
Strategy Formulation Competitive Advantage
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
III. STEPS COVERED IN STRATEGIC DECISION–MAKING PROCESS
IV. CASE OBJECTIVES
1. To discuss Best Buy’s Business Level Strategy versus Amazon and
Wal–Mart.
2. To discuss Best Buy’s change from a low–price strategy to a
differentiation strategy.
3. To discuss Best Buy’s move from commissioned based sales to a
noncommission sales force.
V. SUGGESTED CLASSROOM APPROACHES TO THE CASE
1. This is an excellent case for instructor–led discussion.
2. This is an excellent case for an exam or written case analysis.
VI. DISCUSSION QUESTIONS
1. Do customers care about sales force knowledge or do they care more
about low prices?
2. How will Wal–Mart’s decision to ramp up its in–store electronics
sales affect Best Buy?
3. How will Best Buy compete against Internet giant Amazon?
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
VII. CASE AUTHOR’S TEACHING NOTE—Not Available
VIII. STUDENT STRATEGIC AUDIT
I. Current Situation
A. Current Performance:
1. Best Buy is the largest consumer electronics retailer in the United
States, accounting for 19 percent of the total market share and
1,100 domestic stores.
2. Current employee strength—155,000.
3. Global presence with around 4,000 stores spread across the United
States, Canada, Mexico, China, and Turkey.
B. Current Performance:
1. Mission:
a. In the consumer electronics retailing business.
2. Objectives:
a. Sustaining growth and earnings.
b. Increasing revenues.
c. High customer satisfaction through employee knowledge and
service.
d. Provide consumers the right knowledge regarding products and
services.
3. Strategies:
a. Differentiation strategy—moved from being a discount retailer to
service oriented firm (customer centricity model) with end–to–end
product support enabled through employee knowledge.
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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b. Group strategy—it expanded in various areas through acquiring
firms like Geek Squad, which is in line with their service–
oriented strategy.
c. Strategic alliances—it established strategic alliances with
related firms (Carphone Warehouse Group) in international markets
to quicken development and reach large customer base.
d. Continuous change in strategy to remain competitive: they plan to
II. Corporate Governance:
NA
III. External Environment: Opportunities and Threats (SWOT)
A. Societal Environment
1. Economic:
a. Economic downturn (T).
b. Global expansion (O).
2. Technology
a. Smartphones (O).
b. LCD TV’s (O).
3. Political—Legal
a. Lawsuit about misrepresented warranties (T).
b. Lawsuit “Price match” policy (T).
4. Sociocultural
a. Changes in buying behavior—rise of online shopping (T).
b. Demand for brick–and–mortar stores to see the product (O).
B. Task Environment
1. Threat of new entrants: Moderate–High
a. Internet made it easy to enter the market.
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Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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2. Bargaining power of buyers: High
a. Mature market.
3. Threat of substitute products: Low
a. Wide range of products.
4. Bargaining power of suppliers: Low
a. Economies of scale.
5. Rivalry among competing firms: High
a. Strong competition with brick–and–mortar competitors as well as
online retailers.
IV. Internal Environment: Strengths and Weaknesses (SWOT)
A. Corporate Structure
1. Presently, the retail hierarchy is structured by territories.
Domestic stores are divided into eight territories and each
2. Corporate and strategic decisions are generated from top management
(S).
B. Corporate Culture
1. Best Buy’s culture is well defined and committed to ethics and
knowledge (S).
2. The culture is consistent with knowledge based HR objectives
(ethics, knowledge), portraying company vision and strategy (S).
3. Regarding important issues, the culture is aligned to ethical
behavior and a knowledgeable employee force.
a. Also, the culture has adaptability to changing conditions, due
to ever changing technological market.
C. Corporate Resources
1. Marketing
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
a. Objectives include:
i. Marketing various products based on customer centricity
operating model.
b. Strategies include:
i. Continuing to be a service–oriented firm.
ii. Addressing needs of customers.
c. Policies include:
i. “Price Matching Policy.”
f. The marketing objectives align with the corporate mission,
strategy, and internal environment (S).
g. Best buy has 19 percent market share in consumer electronics
within the United States.
h. Price:
i. Does not compete strictly on price structure.
i. Place:
i. 1,100 domestic brick–and–mortar retail stores, 2800
international brick–and–mortar retail stores
l. Trends emerged from the marketing mix has shown that it was a
good business model in the past. The current marketing mix may
affect future performance either positively or negatively
determining how consumers prefer to purchase consumer electronics
in the future as well as the health of the consumer electronic
market (S).
m. Marketing provides Best Buy competitive advantage by acquiring
2. Finances
a. The current financial objectives of Best Buy are sustained growth
and earnings.
b. Global expansion is underlining the objectives by growing revenue
and earnings through entering new markets.
c. Trend:
i. Sales and long–term debt rising net income and operating
profits decreasing.
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
d. Current trend suggests lower margins because of downward pricing
pressure due to increased low–cost competitors and higher cost
structure.
i. New debt would be needed which in turn comprises higher risk in
liquidity
j. Key facts and ratios:
i. Long–term debt increasing from $528 million to $1,126 million
(80 percent increase).
ii. Huge decline in cash from $1,438 million (2008) to $498
million (2009) (65 percent decrease).
iii. Revenues increased between 2005 and 2010 (>10 percent) largely
because of acquisitions. Five–year average growth in Sales 13
percent.
3. Research and Development—NA
4. Operations & Logistics
1. Current manufacturing or service objectives and strategies:
a. Differentiation through high–quality service and
knowledgeable staff.
2. Domestic versus International Operations:
a. Have over 1,000 stores nationally.
3. Performance Compared to Competition:
a. If referring to competition as other stores selling
similar merchandise, Best Buy has higher prices which
place them at a significant disadvantage when customers
4. Competitive advantage through operations:
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Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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5. Human Resources
1. HR objectives include:
a. To provide consumers knowledge of products and services.
b. Portray company’s vision and strategy on an everyday
basis.
2. The HR objectives and strengths indicate a trend of maintaining
consumer–centric model and knowledge and serviced based
employees. This has helped them differentiate from competitors.
For example, in the past, Best Buy moved from a sales driven
approach to the service oriented customer centricity model,
which has allowed them to excel in their strategy.
6. Information Systems (IS)
1. IS is reducing operation costs and decreasing distribution
channel costs.
2. IS has developed a database of consumer information to construct
a portfolio of product offerings. This system allows Best Buy to
becoming more accessible to consumers.
V. Analysis of Strategic Factors (SWOT)
1. See Table 3.
2. Current mission and objectives are aligned with the strategic
factors and problems. Best Buy successfully places an emphasis on
the customer by implementation of the customer centricity model.
Best Buy also achieves sustained growth and earnings through global
expansion.
VI. Strategic Alternatives and Recommended Strategy
A. Strategic alternatives
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
1. Strategic alliance with cable Internet and television providers.
Pros:
• Increased revenues and providing customers with “end–to–end
2. Global expansion in developing nations.
Pros:
3. Increase presence of Napster online music.
Pros:
• May capture additional market segments and increase
revenues.
Cons:
• Difficulty in entering market due to already established
competition (iTunes, Amazon, etc.).
4. Increase home furniture offerings and delivery.
Pros:
5. Investing funds directly to suppliers and manufacturers by creating
manufacturing plants, etc.
Pros:
• Lower costs for products increased sale margins. Could
offer lower prices with higher profit margins.
Cons:
B. Recommended Strategy
1. Global expansion in developing nations:
a. Short–term would not help the current financial situation.
b. Long–term, a significant increase in revenues and margins is
possible, three–to–five year range.
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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c. Providing similar products and services globally while
customizing offerings to individual geographic market segments.
d. Entering new geographic markets would align with the already
established strategy of global expansion.
VII. Implementation
1. Global integration would require addition of trained employees in a
large number. Also, the international presence would need to align with
Best Buy’s current mission and values becoming “one face, one company”.
2. New financial debt and investment would be required to establish these
VIII. Evaluation and Control
1. The current information system needs to be expanded by establishing new
means of communication via national and regional headquarters.
2. A decentralized model would be necessary because strategies would need
IX. EFAS, IFAS, and SFAS EXHIBITS
Table 1: Internal Factor Analysis Summary (IFAS)
Key Internal Factors
Weight
Rating
Weighted Score
Strengths
Extensive Product/ Service
Offerings
0.1
4
0.4
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
Global
Presence
0.15
3
0.45
Weaknesses
Cannot Match Low Competitor
Pricing
0.2
2
0.4
Table 2: External Factor Analysis Summary (EFAS)
External
Strategic Factors
Weight
Rating
Weighted
Score
Comments
Opportunities
Global Expansion
0.1
5
0.5
Through the acquisition
of Best Buy Europe,
Best Buy provides
opportunity for
expansion into the
global market.
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Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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Smartphone and LCD
TVs & Gaming
Industry
0.1
2
0.2
A new era of mobile
phones and TV
technology opens up new
markets and rise in
demand of a previously
matured industry.
Rise of E-commerce
0.15
4
0.6
Enables Best Buy to
acquire new customer
through the Internet
without personnel &
other costs.
Threats
Economic Downturn
0.2
5
1
Increased
Low price strategy of
downward price pressure
driving to the shop.
Consumer electric
products are considered
discretionary and,
therefore, are less
desired as customers
Table 3: Strategic Factor Analysis Summary (SFAS)
Key Internal
Factors
Weight
Rating
Weighted
Score
Comments
Customer Centric
Operating Model
0.17
4
0.68
Caters to specific
customer needs and
behaviors, providing
end–to–end services.
Smartphone and
LCD TVs & Gaming
A new era of mobile
phones and TV technology
opens up new markets and
rise in demand of a
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
New Markets in
Developing
Countries
0.15
5
0.75
The use of technology
like cell phones is not
as mature as in other
developed countries with
a significant potential
for growth.
have less disposable
income.
pressure and hence lower
operating margins.
X. FINANCIAL ANALYSIS
A. FINANCIAL RATIOS
YEARS
1. Liquidity Ratios
2009
2008
2007
Current Ratio
0.97
1.08
N/A
Quick (Acid Test) Ratio
0.41
0.39
N/A
Inventory to Net Working
Capital
8.22
N/A
Cash Ratio
0.06
0.21
N/A
2. Profitability Ratios
Net Profit Margin
2.23%
3.52%
3.83%
Gross Profit Margin
Return on Investment (ROI)
6.34%
N/A
Return on Equity (ROE)
N/A
Earnings Per Share—Diluted
$ 2.39
$3.12
$2.79
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Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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3. Activity Ratios
Inventory Turnover
9.47
8.50
N/A
Days of Inventory
51.00
56.38
N/A
Net Working Capital Turnover
–185.25
69.85
N/A
Asset Turnover
2.84
3.14
N/A
Fixed Asset Turnover
10.78
12.11
N/A
Average Collection Period
15.15
5.01
N/A
Accounts Receivable Turnover
24.10
72.90
N/A
Accounts Payable Period
N/A
N/A
N/A
Days of Cash
4.04
13.11
N/A
4. Leverage Ratios
Debt to Asset Ratio
70.66%
64.85%
N/A
Debt to Equity Ratio
240.86%
184.52%
N/A
Structure
0.48
0.33
N/A
Times Interest Earned
19.09
36.94
69.71
Coverage of Fixed Charges
N/A
N/A
N/A
Current Liabilities to Equity
181.67%
150.96%
N/A
5. Other Ratios
Price/Earnings Ratio
N/A
N/A
N/A
Dividend Payout Ratio
N/A
N/A
N/A
Stock
N/A
N/A
N/A
Available
Dividend Yield on Common
B. COMMON SIZED STATEMENTS
CONSOLIDATED STATEMENT
INCOME STATEMENT
Year Ending December 31
2009
2008
2007
INCOME STATEMENT
Revenue
100.00%
100.00%
100.00%
Cost of Goods Sold
75.57%
76.15%
75.60%
Gross Profit
24.43%
23.85%
24.40%
Selling, General, and
19.96%
18.45%
18.84%
Restructuring Charges
0.17%
0.00%
0.00%
Goodwill and Tradename
0.15%
0.00%
0.00%
Operating Income
4.15%
5.40%
5.56%
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
Other income (expense)
Investment Income and oOther
0.08%
0.32%
0.45%
Investment Impairment
–0.25%
0.00%
0.00%
Interest Expense
–0.21%
–0.15%
–0.09%
(loss) of Affiliates
3.78%
5.57%
5.93%
Income Tax Expense
1.50%
2.04%
2.09%
Minority Interest in Earnings
–0.07%
–0.01%
0.00%
Equity nterests in Earnings
0.02%
–0.01%
0.00%
Net Earnings
2.23%
3.52%
3.83%
Earnings Before Income Tax,
BALANCE SHEET
Year Ending December 31
2009
2008
Current Assets
Cash and Cash Equivalents
3.15%
11.27%
Short Term Investments
0.07%
0.50%
Receivables
11.80%
4.30%
Merchandise Inventories
30.03%
36.90%
Other Current Assets
6.71%
4.57%
Total Current Assets
51.76%
57.55%
Property and Equipment
Land and Buildings
4.77%
5.74%
Leasehold Improvements
12.72%
13.73%
Fixtures and Equipment
25.65%
23.96%
Property under Capital Lease
0.71%
0.53%
Total Gross Property and Equipment
43.85%
43.96%
Less Accumulated Depreciation
17.48%
18.04%
Net Property and Equipment
26.37%
25.91%
Goodwill
13.92%
8.53%
Tradenames
1.09%
0.76%
Customer Relationships
2.03%
0.04%
Equity and Other Investments
2.50%
4.74%
Other Assets
2.32%
2.47%
Total Assets
100.00%
100.00%
Liabilities and Shareholders’ Equity
Current Liabilities
Accounts Payable
31.57%
33.68%
Unredeemed Gift Card Liabilities
3.03%
4.16%
2.90%
2.92%
CASE 27
Best Buy Co., Inc.: Sustainable Customer Centricity Model?
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Accrued Liabilities
8.73%
7.64%
Accrued Income Taxes
1.78%
3.17%
Short-Term Debt
4.95%
1.22%
Current Portion of Long-Term Debt
0.34%
0.26%
Total Current Liabilities
Long-Term Liabilities
7.01%
6.57%
Long-Term Debt
7.11%
4.91%
Minority Interests
3.24%
0.31%
Shareholders’ Equity
Preferred Stock
0.00%
0.00%
Common Stock
0.26%
0.32%
Additional Paid in Capital
1.30%
0.06%
Retained Earnings
Accumulated other Loss Income
3.93%
Total Shareholders’ Equity