Best Buy's e-commerce strategy using Porter's Five Forces Model

¶ … Best Buy's e-Commerce Strategies

Best Buy continues to lead all retailers in their use of the Internet for attracting, selling, and serving their customers. The intent of this paper is to critically evaluate the e-business strategy of Best Buy and provide recommendations for its improvement in the future. To begin, an industry assessment is presented using Dr. Michael Porter's Five Forces Model, an analytical construct Dr. Porter has mentioned in several of this articles and books. Dr. Porter (1990) also uses the five forces model as the construct for the competitive advantage of nations, which shows that global productivity is the greatest potential differentiator long-term. The productivity of Best Buy in turn is directly related to the quality of the decisions regarding e-commerce strategy definition and development. This paper examines the Best Buy e-commerce strategies as they relate to selling business to consumer (B2C0, business to business (B2B), and Business to Employee (B2E) and each of these strategies' impact of the Five Forces Analysis in the paper. The third step of this analysis is a critical evaluation of the Best Buy e-commerce strategy, followed by recommendations for improving the e-business of Best Buy today and into the future.

Porters' Five Forces Model of Competition applied to Best Buy

The five forces that comprise Dr. Porter's model are industry competitors, pressure for substitute products, bargaining power of suppliers, bargaining power of buyers, and the influence of potential entrants. Figure 1 shows the Porter Five Forces Model graphically. Each of these areas is now discussed in bullet form in the following series of sections.

Assessing Best Buy's Industry Competitors

Highly fragmented series of smaller electronics competitors, both in terms of individualized stores and smaller chains, who concentrate on a subset of the electronics Best Buy carries.

National competitors in the PC distribution arena are Dell, Gateway and several other lesser known PC manufacturers who are using the direct model for selling force price competition in local markets for Best Buy. Both the B2C and B2B expertise Best Buy is continually refining as a result of their efforts to streamline e-commerce selling strategies, including adding in guided selling and distributed order management as part of their corporate-wide e-commerce strategies, is giving the company a competitive edge relative to PC direct marketers.

Low-price online competitors have proliferated in the flat panel TV marketplace mainly as a result of increased manufacturing efficiencies and greater distribution from Asian manufacturing plants. Best Buy's e-commerce strategy to compete with these many online competitors is to combine editorial and expert-level advice on their website with guided selling and low-end sales configuration or quoting tools. The consumer is more educated about the flat screen TVs after leaving the Best Buy site and may even have printed a quote vs. visiting competitor's sites and just gotten a price quote. There is a difference in these quotes over and above price, and Best Buy is pursuing the role of trusted advisor to B2C customers in this regard.

Global online retailing competition is dominated by Amazon.com, and like Best Buy, Amazon.com uses guided selling, cross-sell, and up-sell e-commerce applications as part of their online selling strategies for attracting both B2C and B2B customers. Amazon.com is also one of the most significant competitors Best Buy has from an operations standpoint as well. Amazon.com has a distributed order management system that rivals Wal-Mart in complexity but not scope or size, and has a supply chain series of practices that is making their electronics business profitable.

Brick-and-mortar retailers are also a significant competitive threat, with Wal-Mart being the largest both financially and from a selection standpoint. Wal-Mart's supply chain is much more developed than Best Buy's, giving Wal-Mart pricing as a competitive advantage. Best Buy's approach to using e-commerce strategies to up-sell and cross-sell both consumer and business customers has been successful in protecting pricing and margins, yet Wal-Mart's extensive network of suppliers and the resulting price points is a long-term competitive threat to Best Buy.

The use of business to employee (B2E) strategies to enrich and educate Best Buy associates on the sales floor is one of the best competitive responses the company has created to this point vs. Wal-Mart. The training, focus on customer satisfaction, and the tying of bonuses and raises to sales level and customer satisfaction, all managed through B2E portals and applications, is making a significant difference in Best Buy's ability to stay competitive relative to Wal-Mart, which has no such program for B2E enrichment.

Pressure from Substitute Products

Chinese manufacturing centers are generating lower-quality flat panel televisions in literally hundreds of factories throughout that nation, hoping to flood the U.S. And Canada with low-price flat-panel TVs in the hopes of capturing a growing market quickly. The majority of these manufacturers have the basics of the technology defined on how to create flat panel TVs, yet do not have the necessary training for Underwriter's Laboratories (UL), TUV, or CSA certifications on their products. Anyone can literally go to the Internet and find these manufacturers online or through manufacturing sourcing sites including Global Sources, and see the variety and depth of flat-panel TV offerings available. For Best Buy, the rapid growth of these substitute products underscores the need to become a trusted advisor specifically in the areas of variations in flat panel TV technologies, and how to integrate them into a home entertainment system.

Substitute low-end PC products are also proliferating including the development of Linux-based laptops and desktops that sell for less than $1,000, and have comparable applications and features. This is a trend that long-term also threatens the higher margins Best Buy generates from in-store sales of PCs from HP, IBM, Toshiba, and others.

Online music downloading is a serious threat from the standpoint of Best Buy's extensive music marketing and selling division. The growth of iTunes and with it, iPod sales, have made the sales of CDs slow throughout 2006. One industry observer says that for every CD purchased in a store, an equivalent of ten CDs are either traded or downloaded online. The implications for Best Buy then are to strengthen through B2E strategies their iPod and MP3 business, assuming revenue from music CDs will eventually begin to be impacted by the iTunes and future Microsoft announcements around downloadable music.

Big box retailers (Costco, Sam's Club, Wal-Mart, and others) are increasingly finding consumers are willing to buy washers, dryers, and refrigerators over the Internet and just pick them up locally. This is a substitute distribution channel, and to counter this Best Buy has created a product location service on their website which tells consumers where a specific durable goods product can be picked up in the customers' general area, using zip code as the delineator of where the customer's location is. This substitute distribution channel threat has been successfully countered by Best Buy in the near-term, yet long-term the trending on durable goods needs to be addressed with more local partnerships with key installers who can for example put in a gas-powered washer and dryer any day of the week a customer requires it.

Bargaining Power of Buyers

Affluent consumers who are looking to build their own home entertainment systems, get their own wireless PC networks at home up and running complete with a new laptop, and also get the latest digital camcorder exemplify the high-end buyer that Best Buy is targeting with their integrated approach to delivering a high quality in-store experience for customers. These customers, as a group, are the most affluent purchasers of electronics in the U.S. And Canada, and purchase from retailers who can conclusively show how specific products align with their needs. In selling to these buyers, the role of training from a B2E perspective is critical. These affluent buyers look to trust retailers first, then purchase, and in the training from B2E-based program, initiatives and strategies is where Best Buy associates can become trusted advisors to these consumers.

There is $80B in spending by Small Business according to Best Buy Shareholders Meeting (2006) for technology-related products this year, making this one of the largest potential buyer segments Best Buy is addressing with strategies. These buyers require a multi-channel approach to buying so that they can coordinate purchases between the Internet, calling in, and coming in for orders. The ability to track all this activity by customer is critical for being able to grow this channel.

Music buyers' bargaining power is the most price-sensitive and focused on immediate availability, and is going to the toughest segment for Best Buy to continually grow in the future given the popularity of iTunes. For these music buyers, the MP3 players, cell phones that can accept MP3-formatted songs, and the rise of convergence products will transform this customer base. Arguably this is the most significant segment long-term as this segment matures, they will look for flat screen TVs and advanced electronics, all the core part of the Best Buy product strategy.

Bargaining Power of Suppliers

The bargaining power of quality producers of flat screen TVs and allocations of their most popular models of HD, HDTV, HD-DVD and LCD convergence consoles gives top tier suppliers of these products significant leverage in the market. Consumers' high level of interest in all these products and their build-to-order configurations also point to significant bargaining power of suppliers.

Suppliers of MP3 players, cell phones and convergence products also have a significant bargaining power relative to Best Buy and other retailers, and this is especially true of Apple with their series of iPods. MP3 as the market standard for music formats has correspondingly lead to significant bargaining power for Apple globally.

The bargaining power of PC manufacturers as they trim down and consolidate their distribution channels is another significant factor in the supplier mix for Best Buy, as they must keep HP, IBM, Toshiba, and other suppliers satisfied with the sell-through rates of their products through Best Buy stores.

Networking products companies including Cisco (Linksys) and NetGear have significant bargaining power as suppliers of home and business networking products. Their ability to define pricing, discounts, and promotions is based on their significant bargaining power as suppliers. As a group, networking products vendors have significant leverage on all retailers given the high level of interest many families and companies alike have in creating their own wireless networks.

Microsoft's Xbox Sony's PlayStation 2, and Nintendo's Dual Screen game consoles all represent, collectively, the bargaining power of suppliers in the time-critical holiday selling season. Best Buy relies on new product introductions from these three companies in the console gaming area to increase revenues in their 4th calendar quarter sales. The bargaining power of each of these manufacturers in the console gaming market is also very significant and when any of these vendors introduces a new model, allocations typically occur, further accentuating their bargaining power.

Potential Entrants

Wal-Mart's entrance in flat-panel and LCD TVs is the greatest potential threat, as is their move into consumer electronics and higher end MP3 and cell phones. At present Wal-Mart pressures its supply chain to deliver flat panel TVs at costs that allow for $250 price points on models that would normally go for $400 - $500 in Best Buy, creating a significant competitive advantage for the global retailer in high end electronics.

Dell and Gateway continue to attempt to sell higher-end flat panel TVs and LCD TVs, in addition to DVD TV convergence products, and they have both already proven to be entrants into the home entertainment system markets. Their continued growth and testing of the market for digital cameras for example will continue to force Best Buy to not broaden their lines of cameras carried, but me more knowledgeable about them through better trained Sales Associates working on the store floor.

Critically Evaluating Best Buy's e-Commerce Strategy

Best Buy's many advances in e-commerce, sales operations, fulfillment and supply chain operations are impressive, yet there is room for additional improvements. Best Buy still struggles with a more precise understanding of its customers, and needs to further look to streamline and modify processes that give them a clearer vision of their customers. This entire area of business processes and accompanying software is called Customer Relationship Management, and according to renowned author Jill Dyche (2004), CRM is defined as "the infrastructure that enables the delineation of an increase in customer value, and the correct means by which to motivate valuable customers to remain loyal - indeed, to buy again."

For Best Buy, this is a critical first step, the ability to better penetrate the chose market segments they are targeting with their e-commerce strategies. These segments include Affluent Professionals, Busy Suburban Moms, Small Businesses, Tech-Savvy Families, and Young Entertainment Enthusiasts. These segments were defined at the Morgan Stanley Global Consumer & Retail Conference (2005) where a series of executives spoke on the current state of the company. The company stated during this presentation that they have 40% conversion rates with Affluent Professionals and Small Businesses yet lags with Busy Suburban Moms and Young Entertainment Enthusiasts with a 20% conversion rate. The tech-savvy Families segment is hovering at 25% conversion rate. Clearly what's needed is more insight into each of these segments, and the use of CRM-based strategies and software applications to capture more of the specifics of what is appealing to and drawing in the highest performing segments and replicate those strategies throughout all regions of the country. For the struggling segments there is the need for creating more experimentation and discovery-related marketing campaigns to see what resonates with these customers.

In terms of critically evaluating the Best Buy e-commerce strategy it's clear that despite the best-in-class use of guided selling and pricing integration, the synchronization of their supply chain, fulfillment, and order management systems, and continued penetration of the B2B segments based on the successes of the B2C marketing efforts, Best Buy still lacks a pervasive and all encompassing 360 degree view of their customers. This translates into an incomplete e-commerce strategy in the B2C, B2B, and even in the B2E arena as the company needs more information on their customers to better motivate and train their employees. This lack of visibility into how each of these identified segments want to buy is a major shortcoming.

Recommending Improvements to Best Buys' e-Commerce Strategy

The following are a series of recommendations for making the Best Buy e-Commerce strategy even more effective than it already is. Here are the key recommendations based on the analysis in this paper:

Best Buy needs first to re-define e-commerce processes so that analytics can be used for measuring their profitability and performance. In the case of the build-to-order strategies, the following list of metrics need Dashboards tracking the performance and profitability of their higher end product strategies including the Magnolia Home Theater stores and higher-end custom PC sales.

Measuring Product Customization Performance

Areas of Measurement

Baseline: What to Measure

Example of Benefits

Sales

Order cycle time

Order cycle times reduction of 65% or more recorded with mftrs contacted

Cost of Sales

Days Sales Outstanding reduction from 60 to 29 days on average

Cross-sell and up-sell revenue

Increase of 33% on aggregate

Average sales price per order

Increase from 9% to 26%

Quote and Order

Average costs to complete an order

95% reduction in cost per order

Special Pricing Requests

Over 100% ROI on automating Special Pricing Requests

Bad or incomplete orders

Incomplete order reductions of 20%

Customer Service

Number of customer complaints

98% reduction in cost of simple requests

Revenue lost to churn

60% when cross-selling is used with quote-to-order

Number of calls on order status

Median level of 500 per week to 70

Warranty and Returns

Reduction in warranty cost on customized products

10% reduction at a minimum

Labor cost reductions

Decrease order re-work from 15% to 2%

Best Buy needs to realize that guided selling will only get them so far, they need to consider moving into quote-to-order workflows and align them with product configuration strategies. Best Buy needs to move more into providing customized quotes for high-end home theater systems, and this will require them to move into product configuration software applications. Figure 2 shows the manual approaches Best Buy uses today to complete a quote and the payoff of going to a more automated approach. Clearly their e-commerce strategies need to move to support the automating of this workflow. Automating this workflow will create higher margins from customized product sales and higher levels of customer satisfaction, according to research completed by Columbus (2003).

Figure 2: Comparing Manual vs. Automated Best Buy Quoting Processes

Pricing integration is manual and at times delivering incorrect results to pricing requests in the current e-commerce architecture, and to be more competitive, Best Buy needs to get rid of the multiple pricing databases it has and operate a single version of the pricing truth.

For selling more B2B accounts, Best Buy needs to create a more thorough approach to having services and products on the same invoice, something the company cannot do in all departments. This is critical when a new network is sold to a small business and networking expertise is needed in addition to the actual products themselves.

Greater integration to supply chain systems from the website so customers can see a broader set of options for large-ticket items they want to buy and even are willing to pick up on their own. The better integration of supply chain systems' key measures of a products' availability, Available to Promise (ATP) and Capable to Promise (CTP) are two critical elements the systems need to deliver.

In conjunction with pricing, each store needs to be equipped with an internally used e-commerce application that allows for special pricing requests to be quickly completed for larger B2B customers. These special pricing requests are used for getting a percentage of the purchase price off a higher-end piece of equipment.

Finally Best Buy must look to better understand how their core customer segments want to buy, in addition to answering the fundamental question of what they are going to purchase. This appreciation of segments must pervade the company, and the analytics mentioned in these recommendations is to serve as the foundation for greater insights and 360 degree views of their target segments.