Strategic Analysis of Best Buy

BEST BUY CO. INC. STRATEGIC ANALYSIS

Strategic Analysis of Best Buy

Current situation

A- Current performance

B- Strategic posture

Corporate Governance

A- Board of directors

B- Top management

External Environment: Opportunities and threats

A- Natural physical environment

B- Societal Environment

C- Task Environment

D- Summary of external environment

Internal Environment: Strengths and Weakness

A- Corporate Structure

B- Corporate Culture

C- Corporate resources

D- Summary of internal environment

Analysis of Strategic Factors (SWOT)

A- Situational Analysis

Strategic Alternatives and Recommended Strategy

A- Strategic Alternatives

Recommended Strategy

Implementation

Evaluations and control

Part II

Functional and Business strategies of Best Buy

Operations and Logistics

Operations

Current operational objectives, strategies and objectives

Consistency in corporation's mission, objectives, strategies, and policies 13

Operational capabilities 14

Transportation 15

Services and Subcontracting Manufacturer 15

Logistics and shipment operations 15

Types of shipments and integration of customers and shipments

Risks 16

Machines and Human Mix 16

Cost Leadership 16

Information Technology (IT) 17

IT objective, strategies, polices, and programs

Decision making Support 18

Marketing 18

Human Resources 18

Research and Development 19

Emerging Trends and Future Growth 19

References 20

Introduction

Best Buy Co. Inc. is the U.S. based multi-channel consumer Electronics Company based at Richfield, Minnesota, U.S. Founded in 1966, the company operations have now expanded world-wide. The paper will conduct a strategic analysis of Best Buy. To aid the process of strategic analysis, current policies and strategies of the company will also be reviewed. The paper will be divided in two parts, the first part comprises of eight subsections i.e. section I and section II will comprise of current situation and corporate governance respectively, external and internal environment of Best Buy in sections III and IV respectively. After analyzing strategic factors of the company in section V, strategic alternatives will be discussed in section VI. Sections VII and VIII will include implementation strategy and control mechanisms respectively. Part two of the paper will highlight the current and future outlook of the company in key organizational functions such as marketing, finance, operations & logistics, information technology (IT), HRM, and R&D.

I- Current situation

With annual revenue of approximately $50 billion in the year ending December 2012, operations of Best Buy are spanned across geographical regions of United States, Canada, China, Europe and Mexico. The company manages subsidiaries and labels such as Magnolia Audio Video, CinemaNow, Pacific Sales, Geek Squad, Cowboom, Future Shop labels and Best Buy (Best Buy, 2012). Repeatedly praised as best online retailer and most generous company for philanthropic contributions, the company employs 167000 employees.

A- Current performance

Best Buy Co. Inc. operates as an international retailer of consumer electronics, entertainment products, computing and mobile phone products, appliances and related services. Retail stores, online stores, and call centers are operated by the company. Best Buy earned $50.70 billion of revenue as of March, 2012 and $38.11 billion was reported as cost of goods sold, thus cost of selling goods was approximately 75% of the revenues. The company operated with a net income of $1.08 billion and earned a gross profit of $12.57 billion. As of March, 2012, Best Buy reported total current assets of $10.27 billion and total current liabilities of $8.86 billion. The company is currently experimenting with small store network in Europe with frequent opening and closing events reported by the company. After losing significant market share to online stores such as Amazon, the company had decided to close 50 'big boxes' stores within the U.S. In 2012. Best Buy aimed to reduce the store square footage by 20% by December, 2013 (Best Buy, 2012). It was also announced to open 100 mobile-stores in 2013. Due to its presence in both 'brick and mortar' retail stores as well as 'e-tailing', Best has to compete with Wal-Mart and Target in conventional retail sector and Amazon and e-Bay in online retailing. The annual SEC filings of Best Buy in 2012 indicate that the company sales decreased for sixth consecutive quarter at newly opened stores of the company within last 14 months of their opening in 2012 and 2.4% decrease in existing stores sale was also reported (Best Buy, 2012).

B- Strategic posture

Having engaged in enormous layoffs and big store closings in 2012, the company is geared towards shifting its business model towards small and mobile-store platforms. The company has changed the Best Buy Europe's structure and smaller stores are now opened. The company is also reducing expenses on third party services. In context of restructuring charges, the company had to bear $186 million (net of taxes) in 2012. In the same year, Hubert Joly was appointed as CEO to lead the restructuring policies of Best Buy. Having closed all big format stores of Best Buy in U.K, China, and Turkey, the company is headed towards opening 100 mobile stores in 2013.

II- Corporate Governance

A- Board of directors

Designation

Credentials

Hatim A. Tyabji

Chairman of Board of Directors

Served as director since 1998 and Chairman audit committee since 2002

Has also served as CEO and Board chairman of Verifone (NYSE)

Lisa M. Caputo

Member board of directors

Served on board of directors since 2009

Executive Vice President, Marketing and Communications of The Travelers Companies, Inc.

Also founded Citi's Women & Co. business

Kathy J. Higgins Victor

Member board of directors

Served as director at Best Buy since 1999

Alos served as senior vice president at Delta Airlines

Designation

Credentials

Ronald James

Member board of directors

Director since May, 2004

Also remained CEO of Human resources group of Ceridian Corporation

Hubert Joly

Chief Executive Officer CEO

Associated with Best Buy since last 15 years

Also headed Vivendi's video game

Sanjay Khosla

Member board of directors

Board member at Best Buy since October, 2008

Also served as managing director of its consumer and food service business at Fonterra Co-operative Group Ltd.

Matthew H. Paull

Member board of directors

From: McDonald's Corp.

Director at Best buy since September, 2003

Also served as corporate senior executive vice president and chief financial officer for McDonald's Corp.

Gerard Vittecoq

Member board of directors

Director since Sep, 2008

Served as group president and executive office member of Caterpillar, Inc. since 2004

B- Top management

The top management of the company comprises of Hubert Joly as president and Chief executive officer (CEO). Media, technology, and services sectors are main domains of Joly's expertise. Sharon McCollam serves as Executive Vice President-Chief Administrative Officer (CAO) and Chief Financial Officer (CFO). Scott Durchslag is the senior vice president of Digital and Marketing and president of BestBuy.com and e-Commerce. Shari Ballard serves as President, International - Enterprise EVP at Best Buy. Jude Buckley is the Senior Vice President and General Manager of Best Buy Co. Inc. Human resources department of Best Buy is headed by Carol Surface and Shawn Score serves as the Senior Vice President, U.S. Retail at Best Buy. All the executive management is experienced and brings vast expertise in their respective domains.

III- External Environment: Opportunities and threats

A- Natural physical environment

The natural and physical environment in which the company operates has become somewhat difficult to operate in during the last decade. The presence of significant number natural hazards such as hurricanes and snow storms in the U.S. And Europe has led the insurance and risk management costs of large retail stores to increase manifold. On one hand, the governments have improved the availability of natural resources but on the other hand, supply chain management of these resources, such as fuel for logistics and raw materials for manufacturing consumer electronics have got expensive.

B- Societal Environment

The societal environment in which Best Buy operates has got stringent for the company in context of increased expectations of customers and socially active groups for the company to contribute in philanthropic purposes. On the other hand, pressure groups such as environmental watchdogs and EPA has adopted strict guidelines to enforce environmental laws. Carbon footprint of large retailers is required to be reduced. Better service quality and decreased environmental impact of retailers are the main factors that are currently shaping the trends of consumer retail sector.

C- Task Environment

The task environment of Best Buy has significantly improved during the last few years due to increased speed and reliability of services from the supplier groups and other agencies that interact with the company while in the conduct of business on day-to-day basis. Introduction of information and communication technology tools has increased the synchronization of internal operations of the company and coordination with external stakeholders of the company. There are multiple channels now available for the company to carry out external communication, business analysis, and strategic partnerships. Considerable research being carried out in management sciences and use of ICT in management fields has improved the task environment of Best Buy.

D- Summary of external environment

The external environment of Best Buy, specifically the societal and task environments have posed threats as well as opportunities for the business operations of the company. Threats are posed by increased regulatory requirements regarding environmental impact of business operations, human resource management, and financial reporting.This has increase the threat of legal complications in case the company fails to meet legal or social expectations. On the contrary, the task environment improvement has made it possible for the firm to use information technology to gain a competitive advantage over its rivals as well as better manage its internal resources.

IV- Internal Environment: Strengths and Weakness

A- Corporate Structure

The corporate structure of Best Buy is hierarchical as well as cross-functional. Having viewed the composition of executive management and board of directors, it becomes evident the company lacks talent that can anticipate the future trends in retail sector, specifically the impact of online retailing upon the traditional bricks and mortar retailing. Most of the members of board of directors have rich experience in traditional service sectors such as food service, machinery service, and financial services. These sectors have different customer service policies and depend on physical customer base. Another strategic impediment that executive management of the company created was placing the company in direct competition with both traditional as well as online retail stores, thus stretching company's resources across two different modes of commerce.

B- Corporate Culture

Best Buy Co. Inc. maintains a 'people oriented' culture and highly regards its employees as key resources of the company. While the company strives to provide superior customer services as compared to rival retail companies such as Wal-Mart and Target, it heavily invests in the philanthropic activities in communities where the company operates. Being employee oriented and community centric, the company enjoys good reputation in the U.S. And abroad, unlike Wal-Mart that is considered hostile towards small departmental stores. The company also places high importance to ethical financial reporting and disciplined conduct of operations. Learning aspect within the culture of Best Buy has not been much ingrained that has resulted in learning the process of change in retail sector, just as Circuit City, a traditional retailer that field bankruptcy in 2009.

C- Corporate resources

Total assets of the company were reported to be $16 billion in 2012 and $10 billion worth of assets were current assets. Total current liabilities of the company were around $8 billion and this shows that the company remained disciplined in S&GAD expenses.

D- Summary of internal environment

The internal environment of the company indicates that there is a strong need for aligning the company's human resource capabilities and strategic direction. While the company has set out the strategic policy of shifting towards smaller stores and decreasing the use of physical space to build stores, the company's management team is still dominated by personnel that are rather moderately aggressive and opportunistic in leveraging upon the wave of online retailing. Despite stiff competition that Amazon is giving to Best Buy, the company is still reliant on physical stores to increase its revenue. Amazon on the other hand relies only on its warehouses for conduct of operations in physical world. The sales are generated by using their virtual platform. Best Buy still has the largest customer share in consumer electronics market. The selling of electronics that are highly physical in nature such as consoles and gaming devices, the company had to face a 13.3% comparable store sales depreciation. If Best Buy does not use its currently handsome balance sheet and asset/liability position to venture aggressively into virtual commerce, the strengths of the company will not be used for tapping the opportunities presented in the external environment such as improvement in task environment.

V- Analysis of Strategic Factors (SWOT)

A- Situational Analysis

Mission: Best Buy Inc. has the mission of "to obtain and maintain the market share and profits associated with consumer electronics and appliances." The stated objectives of the company imply that Best Buy aims to gain the market share in the consumer electronics industry. The company plans to do so by increasing the connectivity of digital solutions and growth in international market.

Currently, the retail market is dominated by four or five major competitors of Best Buy. These are Wal-Mart and Target in 'bricks and mortar' retailing business model and Amazon, Apple, and Radioshack in online retail sector. Circuit City left the retail market in 2009 after filing chapter 11 bankruptcies. Due to an increased reduction in comparable store sales of Best Buy, Fitch lowered the credit rating of Best Buy from BBB+ with a negative outlook to BBB -- . This was also due to the shrinking of consumer electronic market share of Best Buy. The direct competition with internet-based businesses, discount chains, wholesale clubs, and home-improvement superstores has led the company to alter its policy of store expansion. Overall decrease in spending of consumers coupled by deep challenges due to recessionary economic outlook in the U.S. And Europe has placed company's growth prospects left dim. The slump in housing sector has also posed a negative impact on consumer electronics sector.

VI- Strategic Alternatives and Recommended Strategy

A- Strategic Alternatives

Consolidation of operations in existing market segments and geographical regions: The first alternative available for Best Buy is to consolidate their operations in existing market segments where the company operates. The company can continue targeting same demographic of people aged 16-35 years belonging to middle and high income groups. Same prices will be offered across different regions. While consolidating, cost of sales will be tried to decrease.

Expansion of online retail operations: This alternative involves considerable capital and human resource investments in developing and expanding online retail platform. The current platform of Best Buy is less scalable and provides little interaction for customer. The online platform of Best Buy can also be integrated with Android-based smartphone applications.

Expanding operations in BRICS: Expansion of Best Buys smaller retail stores, on the format of kiosks, can be initiated in Brazil, Russia, India, China, and South Africa (BRICS). Leading financial and economic analyst firms such as Goldman Sachs has put BRIC countries to top economic development till 2050. Thus, the consistent decrease in sales that Best Buy is facing in Europe and the U.S. can be offset by expanding online and small store operations in BRICS countries.

B- Recommended Strategy

Expanding operations in BRICS is the best advised alternative to be adopted by Best Buy Company. Since European and the U.S. market of consumer electronics is already approaching maturity level and online retail operations are dominated by Amazon and E-Bay, Best Buy can timely enter the BRICS and gain considerable market share in CE. Significant advantage of this strategy can be the gaining of a huge untapped potential of business in international market whereas downside of this alternative will be the legal, social, and economic difficulties in setting up business in a culture significantly different from that of the U.S.

VII- Implementation

In order to implement the recommended alternative, the company will have to restructure its corporate structure. Best Buy Global shall be constituted recruiting the business heads from respective regions of Brazil, China, India, South Africa, and Russia. An integrated Human Resource Information System (HRIS) shall be developed and balanced scorecard shall be introduced in the newly developed entity. The company can acquire smaller e-tailing companies in host countries and venture will major financial institutions to secure the required capital. Individual plans and programs shall be managed by introducing pro-forma budgeting. This will help the new regional divisions of Best Buy Global to anticipate the potential revenue changes.

VIII- Evaluations and control

Best Buy Inc. has considerably outsourced its information technology and management consultancy functions to Accenture LLC. Accenture is a global management and IT consultancy company that provide customized services for managing information technology needs of its clients. Therefore, the current information system of the company is capable of managing the expansion of business operations in BRICS. Although, control measures with respect to current business portfolio are in place, Best Buy Global will need to set up a supervisory board as part of control mechanism having internal (employees and board of directors) stakeholders as well as external stakeholders (partner firms from host countries).

Part II

Functional and Business strategies of Best Buy

I- Operations and Logistics

Operations

Current operational objectives, strategies and objectives:

The company has clearly set its client service objectives, strategies, and polices for retailing services as well as after sales services. Best Buy Co Inc. strives to provide its customers with an unbiased advice for their technology requirements. The company also claims that they are advancing towards customer satisfaction through implementation of latest techniques and customer service practices to assist in their purchase process (Best Buy, n.d.). The organization extensively focused on providing after sales services. The strategic objective of customer retention is achieved through the loyalty programs policy of the company.

Consistency in corporation's mission, objectives, strategies, and policies

The operational objectives are clearly stated and the company strictly adheres to the policy defined for customer services. The strategy of customer satisfaction is also a continuation of overall goals and objectives. The operational objectives for international and local segments are defined separately. The organization has clearly segmented its operations in order to provide best possible solution for merchandize and services. The evidence of company's growth can be derived through integrating customer feedback in their policies and aligning it with the overall corporate mission and objectives. The strategies adopted to achieve these objectives are also developed in line with the strategic objective.

Operational capabilities

The corporation maintains a status of multinational operation through online retailing in numerous countries. The domestic segment of the operations is spread across all territories of U.S. The company also operates in international markets including Canada, Europe, China, and Mexico. The outsourcing of products is appropriate as the organization has adopted a process approach of collaborative planning, forecasting, and replenishment (CPFR) (Cotrill, 2006).

The organization is mainly dealing in consumer electronics including computers, mobile, entertainment, appliances, and related services. The retailing giant operates under a variety of brand names and web addresses i.e. Best Buy Co Inc., Best Buy Mobile, Carphone Warehouse, Geek Squad, and Magnolia Audio Video etc. According to Hitt, Ireland, and Hoskisson (2008) the purchasing function of products is handled appropriately through an automated process. The corporation has sustainable growth potential as evident from there $50,272m revenues in 2011. The contribution of domestic revenue is $37,186m and international segment generated $13,086m in 2011.

The suppliers and distributors of the business operate in an inconsistent business environment. It results into exposing the organization to multiple risks and exposures. These exposures are related to inconstant economic, labor, government, and manufacturing legal and operational environment (Best Buy, 2011). The sustainable business environment and viability regarding product suppliers and warranty claims can be achieved through efficient contract management. The corporation also requires establishing a long-term contractual relationship with suppliers regarding continuity of supplies.

Transportation

Services and Subcontracting Manufacturer

The business is a subcontracted manufacture and services oriented corporation dealing in domestic and international markets. The company operates mega retail stores, call centers, and online retail stores in the above mentioned geographic locations. The organization is focused to provide services to existing as well as new clients in varied markets. The company has a main objective to avail new opportunities in Best Buy Mobile segment of domestic and international markets.

Logistics and shipment operations

The suppliers and logistics management is handled through global sourcing office based in China. The office is used to design, develop, contract, and manufacture Best Buy's own products from manufacturers located in Asia. The corporation operates a three prong strategy for its shipping and logistics operation. The main distribution warehouse is managed in China and following three scenarios are observed depending on the nature and urgency of the shipment.

Types of shipments and integration of customers and shipments:

The manufactured products are received, stored, and distributed across the world through central distribution unit in Shanghai, China. The second case is observed as the products are shipped directly from manufacturers to the stores. Finally a third form of shipment is conducted in case of urgency those products are shipped to customer directly from manufacturers on behalf of the corporation. The large appliances are also sent directly to the customers from major manufactures as well as distributors.

Risks

There are a number of risk factors involved in international trade similar to other business dealing in global environments. Natural disasters, economic, political, social, and socio-economic conditions can affect business activities of the corporation. The lack of contractual control and continuation of supplies is also a significant threat to the business. The above mentioned factors as well as financial instability, merchandise quality issues, product safety concerns, trade restrictions, work stoppages, tariffs, foreign currency exchange rates, transportation capacity and costs, inflation, civil unrest are also considered as factors beyond the organizational control (Best Buy, 2011).

Machines and Human Mix

The company deploys an appropriate mix of human and machines to automate and facilitate transportation, logistics, and shipment operations. The company uses an effective system to communicate with its offices across the globe. The effective controls placed in each segment of operations and logistics facilitate in achieving strategic objectives of the company. The corporations strategic leaders acknowledge the requirement for automated and machines and human enabled systems for operations. Best Buy co Inc. has also hired, trained, and deployed best possible customer support staff for repairs as well as customer queries.