Best Buy Co., Inc.

(2009)
External Environment: Opportunities and Threats (EFAS)

• Natural Physical Environment: Sustainability Issues

• Environment-friendly

• Societal Environment
The consumer electronics industry had significant potential for expansion into the global
marketplace. The future for this industry was optimistic. A consumer electronics analyst
for the European Market Research Institute predicted that the largest growth will be seen
in China (22%), the Middle East (20%), Russia (20%), and South America (17%).

• Economic:
- The Great Recession 2007-2009 (T) Sales dropped 2% in 2009, the first
decline in 20 years for the electronics giant. (T)
- newly developing countries markets were experiencing the fastest
economic growth while having the lowest ownership rate for gadgets. (O)
- Economies of scale (O) - With over 1000 locations, Best Buy used
its scale to obtain cost advantages from suppliers due to high
quantity orders.

Cost advantage was achieved when ordering large quantities from

its suppliers due to having over 1000 locations.

• Technological:
- Online Retailing & Technological advancements (O) - In 2000, the
company launched its online retail store: BestBuy.com. This
allowed customers a choice between visiting a physical store and
purchasing products online, thus expanding Best Buy’s reach
among consumers. Smartphones were another electronics industry
segment predicted to have a high growth impact on the entire
industry. Best Buy Mobile: These stand-alone stores offered a wide
selection of mobile phones, accessories, and related e-services in
small-format stores.

Its online retail store allowed them to have global reach. Its. Best Buy
Mobile offered a wide range of mobile phones including in their small-
format stores including accessories and related e-services. Both helped
them enter different segments and reach different markets.

- Television sales, specifically LCD units, which accounted for 77% of total
television sales, were the main driver for Best Buy. (O)
 - Market expansion - The gaming segment - sales were expected to have
tremendous room for growth. (O) Smartphones segment - predicted to
have a high growth impact on the entire industry. (O)

• Political-legal

• Sociocultural:
- Showrooming, value-added services (O)

• Task Environment

• Threat of New Entrants:

- As globalization spread and use of the Internet grew, barriers to entering
the consumer electronics industry were diminished. However, the Internet
significantly reduced the capital requirements needed to enter the industry.
Companies like Amazon.com and Dell utilized the Internet to their
advantage and gained valuable market share. (T)
- Large firms had the ability to increase advertising budgets to deter new
entrants into the market. (O)
- Brick and Mortar Competitors
- On-line Competitors

• Bargaining Power of Buyers:

- The shift toward Internet purchasing also negated another once strong
barrier to entry: customer loyalty. (T)

• Threat of Substitute Products or Services:

- Cheaper Prices (T)
- Although Internet sales were growing, the industry was still dominated by
brick-and-mortar stores. (O)

• Bargaining Power of Suppliers:

- Best Buy used its scale to obtain cost advantages from suppliers due to
high quantity orders. (O)

• Rivalry Among Competing Firms:

- Circuit City, Walmart, Target, Apple, and Amazon (T)
- Strongest competition, such as Circuit City and Wal-Mart. (T)
- Wal-Mart increased its focus on grabbing market share in the consumer
electronics industry. It was refreshing 3500 of its electronics departments
and was beginning to offer a wider and higher range of electronic
products. These efforts should help Wal-Mart appeal to the customer
segment looking for high quality at the lowest possible price. (T)
- The advantage GameStop had over Best Buy was the number of locations:
6207 GameStop locations compared to 1023 Best Buy locations, but Best
Buy had deep pockets. (T) (O)
 - Consumers had a preference for RadioShack for audio and video
components, yet preferred Best Buy for their big box purchases. (O)
- Wholesale shopping units were becoming more popular, and companies
such as Costco and BJ’s had increased their piece of the consumer
electronics pie over the past few years. (T)
- Ultimate Electronics planned to expand its operations by at least 20 stores
in the near future. (T)
- Amazon soon ventured into various consumer electronics product
categories including computers, televisions, software, video games, and
much more. (T) Netflix began offering streaming downloads through its
website, which eliminated the need to wait for a DVD to arrive which had
dramatically impacted brick-and-mortar. (T)

- Best Buy partnered with CinemaNow to enter the digital movie

distribution market and counter Netflix and other video rental providers.
(O)

• Relative Power of Unions, Governments, Special Interest Groups, etc.

Summary of External Factors

Internal Environmental: Strengths and Weaknesses (IFAS)

• Corporate Structure: Pg. 27-8, 27-9

- Objective to sustain growth and earnings by constantly reviewing its business
model. (S) Over the years, the retailer created a portfolio of products and services
that complemented one another and added to the success of the business. These
products included seven distinct brands domestically, as well as other brands and
stores internationally. (S)
- The sales staff’s mission was to answer customer questions so that the customers
could decide which product(s) fit their needs. This differed greatly from their
former mission of simply generating sales. (S)
- top management structure and filtered down from the retail field officer through
district managers, and through store managers to the employees on the floor.

Corporate Culture: Pgs. 27-8

- Strive to have highly trained employees with extensive product knowledge. (S)
- Strive to have extensive product offerings. (S)
- Ensures to satisfy customer needs and desires as effectively and completely as
possible. (S)
- The company encourages its employees to go out of their way to help customers
understand what these products could do and how customers could get the most
out of the products they purchased. (S)
 - Employees recognized that each customer was unique and thus determined the
best method to help that customer achieve maximum enjoyment from the
product(s) purchased. (S)
- Expand Best Buy’s reach among consumers through BestBuy.com (S)
- Best Buy prided itself on customer centricity that catered to specific customer
needs and behaviors. (S)
- Every employee had to have the company’s vision embedded in their service and
attitude. (S)
-

• Corporate Resources

• Marketing: Pg. 27-8

- Using mass marketing techniques to promote products. (S)
- Large firms had the ability to increase advertising budgets to deter new
entrants into the market. (S)
- Best Buy’s (mass marketing) marketing goals were four-fold: (1) to
market various products based on the customer-centricity operating model,
(2) to address the needs of customer lifestyle groups, (3) to be at the
forefront of technological advances, and (4) to meet customer needs with
end-to-end solutions. (S)
- Best Buy focused more on customer lifestyle groups such as affluent
suburban families, trendsetting urban dwellers, and the closely knit
families of Middle America. (S)

• Finance: Pg. 27-5

- 2009 fiscal year revenue growth was fueled largely by acquisitions. (S)
- At the same time, net income and operating margins had been declining.
Although this could be a function of increased costs, it was more likely
due to pricing pressure. Given the current adverse economic conditions,
prices of many consumer electronic products had been forced down by
economic and competitive pressures. These lower prices caused margins
to decline, negatively affecting net income and operating margins. (W)
- Best Buy’s long-term debt increased substantially from fiscal 2008 to 2009
primarily due to the acquisition of Napster and Best Buy Europe. (W)
Available cash increased from fiscal 2005 to 2008 and then was
substantially lower in 2009 for the same reason. (W)
- A closer inspection revealed a 1% increase in inventory from fiscal 2008
to 2009 and a 12.5% increase in revenue accompanied by a 240% increase
in accounts receivable. This created a potential risk for losses due to bad
debts. (W)
- The acquisitions of Pacific Sales, Speakeasy, and Napster, along with the
development of Best Buy Mobile, created more product offerings, which
led to more profits. (S)

• Research and Development (R&D)

 • Operations and Logistics: Pgs. 27-9
- Global expansion and acquisitions of smaller product-service-based firms,
partnering and Brick and Mortar Stores. (S)
- Service-oriented firm that relied on a differentiation strategy. (S)
- Changed the compensation structure for sales associates from
commission-based to noncommissioned-based, which resulted in
consumers having more control over the purchasing process and in cost
savings for the company (the number of sales associates was reduced). (S)
- Best Buy took customer service a step further by moving from peddling
gadgets to a customer-centric operating model. (S)
- Gearing to focus on providing products and services in line with
customers’ desire for constant connectivity. (S)
- Best Buy began operating its existing stores under a “superstore” concept
by expanding product offerings. (S)
- Sales associates have developed into educators that assist customers in
learning about the products offered in the stores. (S)
- In 2000, Best Buy began a series of acquisitions to expand its offerings
and enter international markets. (S)

- Best Buy’s operating goals included increasing revenues by growing its

customer base, gaining more market share internationally, successfully
implementing marketing and sales strategies in Europe, and having
multiple brands for different customer lifestyles through M&A (Merger
and Acquisition). (S)
-

• Human Resources Management (HRM): Pg. 27-9

- Best Buy’s employees had more training than competitors. This
knowledge service was a value-added competitive advantage. (S)
- sales employees no longer operated on a commission-based pay structure,
consumers could obtain knowledge from salespeople without being
subjected to high-pressure sales techniques. This was generally seen to
enhance customer shopping satisfaction.
- Best Buy’s human resources department were to provide consumers with
the right knowledge of products and services, to portray the company’s
vision and strategy on an everyday basis, and to educate employees on the
ins and outs of new products and services. Best Buy employees were
required to be ethical and knowledgeable.
- Despite Best Buy’s efforts to train an ethical and knowledgeable employee
force, there were some allegations and controversy over Best Buy
employees, which gave the company a black eye in the public mind. (W)

• Information Technology (IT)

Summary of International Factors

VRIO Analysis

• Valuable
• Rareness
• Imitability
• Organization

Value-Chain Analysis

• Inbound Logistics
• Operations
• Outbound Logistics
• Marketing and Sales
• Service

Core Competencies, Pg. 27-11

- Customer-Centricity Model
- Successful Acquisitions
- Retaining Talent

Challenges Ahead, Pg. 27-12

- Economic Downturn
- Pricing and Debt Management
- Products and Service
- Leadership
- Walmart

Analysis of Strategic Factors (SFAS Table)

• Situational Analysis
• Review of Mission and Objectives
 S W O T
STRENGTHS WEAKNESSES OPPORTUNITIES THREATS

EFAS
Weighted
External Factors Weight Rate Scored Comments
Opportunities
1. Economies of Scale
1. Bulk ordering large quantities –
2. Online Retailing &
cost saver
Industry-Related 2. Global reach of online retail store.
Technology 3. Gaming and smartphones
Advancement segments were projected to have high
3. Market Expansion – growth impact throughout the
Gaming & 14% 3 0.42 industry
Smartphones 14% 4 0.56 4. Partnership with CinemaNow to
4. Business 13% 4 0.52 enter the digital movie distribution
Partnerships 13% 3 0.39 market
Threats
1. Great Recession (2007-2009)
2. Consumers shifting to internet
purchasing – barrier to entry
3. Netflix and Amazon entering
streaming downloads and other
1. Economic downturns 11% 4 0.44 consumer electronic business
2. Customer Loyalty 11% 3 0.33 markets, respectively
3. Industry Competition 12% 5 0.60 4. Sales dropped 2% in 2009 – first
4. Industry Trends 12% 1 0.12 decline in 20 years
Total Score 100% 3.38

Table 11: IFAS

Weighted
Internal Factors Weight Rate Scored Comments
Strengths
1. Mass Marketing 13% 3 0.39 1. 4-Fold marketing Strategy.
 2. Partnering with Brick-and-mortar
stores Globally.
3. Consistently reviewing
2. Global Expansion opportunities for growth and
3. Frequent review of development.
business model 12% 2 0.24 4. Employees trained to provide
4. Strong employee 13% 4 0.52 customers with a strong product
training 11% 4 0.44 understanding.
Weaknesses
1. Poor public image
1. Employee
2. Forced lower prices caused
Allegations and
decreased margins, net income and
controversy
2. Adverse Economic operating margins.
Conditions 13% 1 0.13 3. Acquisition of Napster and Best
3. Acquisitions and 12% 4 0.48 Buy Europe – low available cash
Available Cash 13% 3 0.39 4. Increase in inventory – potential
4. Long Term Debt 13% 5 0.65 risk for losses due to bad debts.
Total Score 100% 3.24

Table 12: SWOT – Strategic Factors

Weighted
Strategic Factors Weight Rate Scored Comments
Strengths
1. Consistently reviewing
opportunities for growth and
1. Frequent review of development.
business model 2. Employees trained to provide
2. Strong employee 13% 4 0.52 customers with a strong product
training 11% 4 0.44 understanding.
Weaknesses
1. Forced lower prices caused
decreased margins, net income and
1. Adverse Economic operating margins.
Conditions 12% 4 0.48 2. Increase in inventory – potential
2. Long Term Debt 13% 5 0.65 risk for losses due to bad debts.
Opportunities
1. Economies of Scale
2. Online Retailing &
Industry-Related 1. Bulk ordering large quantities –
Technology 14% 3 0.42 cost saver
Advancement 14% 4 0.56 2. Global reach of online retail store.
Threats
 1. Great Recession (2007-2009)
1. Economic 2. Netflix and Amazon entering
Downturns streaming downloads and other
2. Industry 11% 4 0.44 consumer electronic business
Competition 12% 5 0.60 markets, respectively
Total Score 100% 4.11

- Despite Best Buy’s efforts to train an ethical and knowledgeable employee

force, there were some allegations and controversy over Best Buy
employees, which gave the company a black eye in the public mind. (W)
- At the same time, net income and operating margins had been declining.
Although this could be a function of increased costs, it was more likely
due to pricing pressure. Given the current adverse economic conditions,
prices of many consumer electronic products had been forced down by
economic and competitive pressures. These lower prices caused margins
to decline, negatively affecting net income and operating margins. (W)
- Best Buy’s long-term debt increased substantially from fiscal 2008 to 2009
primarily due to the acquisition of Napster and Best Buy Europe. (W)
Available cash increased from fiscal 2005 to 2008 and then was
substantially lower in 2009 for the same reason. (W)
- A closer inspection revealed a 1% increase in inventory from fiscal 2008
to 2009 and a 12.5% increase in revenue accompanied by a 240% increase
in accounts receivable. This created a potential risk for losses due to bad
debts. (W)
- Best Buy’s (mass marketing) marketing goals were four-fold: (1) to
market various products based on the customer-centricity operating model,
(2) to address the needs of customer lifestyle groups, (3) to be at the
forefront of technological advances, and (4) to meet customer needs with
end-to-end solutions. (S)
- Global expansion and acquisitions of smaller product-service-based firms,
partnering and Brick and Mortar Stores. (S)
- Objective to sustain growth and earnings by constantly reviewing its
business model. (S) Over the years, the retailer created a portfolio of
products and services that complemented one another and added to the
success of the business. These products included seven distinct brands
domestically, as well as other brands and stores internationally. (S)
- The company encourages its employees to go out of their way to help
customers understand what these products could do and how customers
could get the most out of the products they purchased. (S)
- The Great Recession 2007-2009 (T)
- Sales dropped 2% in 2009, the first decline in 20 years for the electronics
giant. (T)
- The shift toward Internet purchasing also negated another once strong
barrier to entry: customer loyalty. (T)
- Amazon soon ventured into various consumer electronics product
categories including computers, televisions, software, video games, and
 much more. (T) Netflix began offering streaming downloads through its
website, which eliminated the need to wait for a DVD to arrive which had
dramatically impacted brick-and-mortar. (T)
- Economies of scale (O)
- Online Retailing & Technological advancements (O)
- Market expansion - The gaming segment - sales were expected to have
tremendous room for growth. (O) Smartphones segment - predicted to
have a high growth impact on the entire industry. (O)

- Best Buy partnered with CinemaNow to enter the digital movie

distribution market and counter Netflix and other video rental providers.
(O)