Best Buy\'s E-Commerce Strategies

¶ … 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.

Defining the Best Buy e-Commerce Strategy

In defining the Best Buy e-commerce strategy the transition needs to be noted that throughout the 2005 timeframe an emphasis on customer centricity was heavily invested in and managed from the top down. Brian Dunn, President and Chief Operating Officer (COO) stated during the most recent Best Buy Shareholders Meeting (2006) that the company would in 2006 re-vitalize all operations, supply chain, fulfillment including distributed order management, and in-store staffing and training to create a unified, customer-centric operating model. The COO continued on saying that by creating e-commerce strategies that unified the many inputs from customers and gave Best Buy greater insights into their wants, needs and behaviors of the highest value customers. This strategic shift to put the customer at the center of Best Buy strategies is squarely aimed at the competitive, buyer, and substitute areas of Dr. Michael Porter's five forces model. In addition, the Best Buy went on to say that additional priorities were the profitable cross-selling and up-selling of consumers relying on the Magnolia Home Theater concept to showcase higher end flat panel and plasma TVs in addition to higher-end stereo components. Clearly the need for an integrated approach to guided selling and configuration including strategies for up-selling and cross-selling are critical also for this goal.

The COO went on to say that the additional top priorities are making Best Buy for Business a larger percentage of total revenue, growing international business, and creating end-to-end selling strategies that would unify the entire e-commerce strategy.

Based on the remarks made by the COO and other executive's observations regarding the current state of Best Buy's electronic initiatives, the following main classifications of their strategies emerge. They are as follows:

Guided Selling Strategies - This is by far where the majority of emphasis is today in Best Buy as it provides a foundation for selling quickly and easily customized products (sometimes called Assemble-to-Order) in addition to support for logic workflows that support cross-selling and up-selling. The integration of electronic shopping carts, pricing systems, order status, inventory positions including products in transit throughout their supply chains is critical for the success of any e-commerce strategy according to Columbus (2001). To date, Best Buy has sporadically been able to accomplish these levels of integration yet has yet to make this an enterprise-wide e-commerce strategy.

Enterprise Content Management - There are more than three dozen specific content databases throughout Best Buy, the integration of all of them is critical for the online selling experience of customers to be consistent with the information received in the store, especially when pricing and availability have been quoted for a high-end product, which could be a flat panel TV or plasma TV and DVD player home entertainment system. Best Buy, in creating an sustaining an enterprise content management strategy, is attempting to create a single version of the truth that can quickly be applied to many different selling and service scenarios on behalf of customers. AMR Research (2003) state that enterprise content management systems form the basis of the best performing catalogs, self-service websites, guided selling, up-selling, and cross-selling strategies in companies. The consolidation and integration of the many different content management systems in Best Buy is an area of weakness today that the company must address to further attract, sell, and serve its customers, both from a B2C and B2B perspective.

Best Buy continues to refine and look to improve its supply chain through the use of fulfillment and order management applications that in effect makes the company's several warehouses and distribution centers a single synchronized system. Managing the supply chain to ensure complete visibility from supplier to store shelves, and from the assembly centers the companies uses to create light customization to the exacting needs of customers ordering specialized products, Best Buy is realizing that the performance of these systems are critical to the core of their business model. The guided selling, content management, and website systems are all front-end processes to these core supply chain, fulfillment, and order management systems that ensure both off-the-shelf or standardized products and make-to-order products are specifically made to customer's requirements. This synchronization of fulfillment, supply chain, order management and pricing systems forms is where the majority of companies with successful e-commerce strategies are getting positive ROI, (Columbus 2002) and I the foundation for Best Buy's selling strategies. Porter (1999) has labeled the value chain as the supply chain's integration points to fulfillment, order management, and linking to customer-facing strategies including order capture, order management, guided selling, up-selling and cross-selling.

Best Buy's order capture, order management and online shopping carts all are based on their investment in Guided Selling. Table 1 shows the coverage of Guided Selling functionality in Best Buy's strategies relative to the needs of customers to have customized, higher-end entertainment systems and PCs delivered.

Figure 1: Best Buy's Guided Selling Strategies

Best Buy's e-commerce strategies on their website deal primarily with attracting, selling to, and servicing B2C customers. The cross-sell and up-sell strategies used online are also focused on integrating offers from merchandising partners and services providers, as is the case with the current promotions for high speed Internet with AOL, Roadrunner, and others.

In terms of the company's efforts to continually train their Sales Associates and trim down the employee turnover rate that is currently 61% according to Best Buy Shareholders Meeting (2006) presentation Shari Ballard, Executive Vice President - Human Resources and Legal. Best Buy uses as Intranet portal to keep Sales Associates trained on new product introductions and the development of new selling techniques. It is the company's hope that this level of support for Sales Associates will drastically reduce the employee turnover rate. Scenario selling tools are also offered on the employee Intranet site along with self-testing to give employees a chance to quantify their expertise with Best Buy products, practices, and services.

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.