Best Buy Co. Inc. Strategic Analysis: SWOT & Operations

Best Buy Co. Inc. is a U.S.-based multi-channel consumer electronics company headquartered in Richfield, Minnesota. Founded in 1966, the company's operations have since expanded worldwide. This paper conducts a comprehensive strategic analysis of Best Buy, reviewing current policies and strategies as part of that process. The paper is divided into two parts. Part One comprises eight subsections: Section I covers the current situation; Section II addresses corporate governance; Sections III and IV examine the external and internal environments respectively; Section V analyzes strategic factors; Section VI discusses strategic alternatives; and Sections VII and VIII address implementation and control mechanisms. Part Two highlights the current and future outlook of the company across key organizational functions including marketing, finance, operations and logistics, information technology (IT), human resource management, and research and development.

Best Buy Co. Inc. operates as an international retailer of consumer electronics, entertainment products, computing and mobile phone products, appliances, and related services through retail stores, online stores, and call centers. With annual revenue of approximately $50 billion for the year ending December 2012, operations span the United States, Canada, China, Europe, and Mexico. The company manages subsidiaries and labels including Magnolia Audio Video, CinemaNow, Pacific Sales, Geek Squad, Cowboom, Future Shop, and Best Buy (Best Buy, 2012). Repeatedly recognized as a top online retailer and a generous corporate philanthropist, the company employed approximately 167,000 people.

Best Buy earned $50.70 billion in revenue as of March 2012, with cost of goods sold reported at $38.11 billion — approximately 75% of revenues. The company posted a net income of $1.08 billion and a gross profit of $12.57 billion. Total current assets stood at $10.27 billion against total current liabilities of $8.86 billion. The company was experimenting with a small-store network in Europe, with frequent store openings and closings. After losing significant market share to online retailers such as Amazon, the company announced the closure of 50 "big box" stores within the U.S. in 2012, aiming to reduce store square footage by 20% by December 2013 (Best Buy, 2012). It also announced plans to open 100 mobile stores in 2013. Because of its presence in both brick-and-mortar and e-tailing channels, Best Buy faced competition from Walmart and Target in conventional retail and from Amazon and eBay in online retailing. Annual SEC filings for 2012 indicated that comparable store sales declined for the sixth consecutive quarter at newly opened stores within their first 14 months of operation, with an overall 2.4% decline in existing store sales also reported (Best Buy, 2012).

Having engaged in large-scale layoffs and big-store closings in 2012, the company shifted its business model toward small and mobile-store platforms. Best Buy Europe's structure was restructured to favor smaller stores, and the company reduced spending on third-party services. Restructuring charges totaled $186 million (net of taxes) in 2012. In the same year, Hubert Joly was appointed CEO to lead the restructuring effort. Having closed all large-format Best Buy stores in the U.K., China, and Turkey, the company moved toward opening 100 mobile stores in 2013.

The board of directors at Best Buy is composed of experienced professionals drawn from diverse industries. Hatim A. Tyabji has served as Chairman of the Board since 1998 and as Chairman of the Audit Committee since 2002; he previously served as CEO and board chairman of Verifone (NYSE). Lisa M. Caputo has served on the board since 2009 and is Executive Vice President of Marketing and Communications at The Travelers Companies, Inc., as well as founder of Citi's Women & Co. business. Kathy J. Higgins Victor has served as a director since 1999 and previously held a senior vice president role at Delta Airlines.

Ronald James has been a director since May 2004 and previously served as CEO of the Human Resources Group at Ceridian Corporation. Hubert Joly, Chief Executive Officer, has been associated with Best Buy for over 15 years and previously headed Vivendi's video game division. Sanjay Khosla has been a board member since October 2008 and served as managing director of consumer and food service business at Fonterra Co-operative Group Ltd. Matthew H. Paull has been a director since September 2003 and served as Corporate Senior Executive Vice President and Chief Financial Officer at McDonald's Corp. Gerard Vittecoq has been a director since September 2008 and served as Group President and executive office member at Caterpillar, Inc. since 2004.

The top management team is led by Hubert Joly as President and Chief Executive Officer, whose expertise spans the media, technology, and services sectors. Sharon McCollam serves as Executive Vice President, Chief Administrative Officer (CAO), and Chief Financial Officer (CFO). Scott Durchslag is Senior Vice President of Digital and Marketing and President of BestBuy.com and e-Commerce. Shari Ballard serves as President of International and Enterprise Executive Vice President. Jude Buckley is Senior Vice President and General Manager. Human Resources is headed by Carol Surface, while Shawn Score serves as Senior Vice President of U.S. Retail. All members of the executive management team bring considerable expertise in their respective domains.

The natural and physical environment in which Best Buy operates has grown more challenging over the past decade. The increased frequency of natural hazards — such as hurricanes and snowstorms across the U.S. and Europe — has driven up insurance and risk management costs for large retail operators. While governments have improved the availability of natural resources, the supply chain management of inputs such as fuel for logistics and raw materials for consumer electronics manufacturing has become more costly.

The societal environment has grown more demanding, driven by heightened customer expectations and pressure from socially active groups regarding philanthropic contributions. Environmental watchdog organizations and the U.S. Environmental Protection Agency (EPA) have adopted stricter guidelines enforcing environmental law, requiring large retailers to reduce their carbon footprints. Improved service quality and reduced environmental impact are among the primary forces currently shaping trends in the consumer retail sector.

The task environment for Best Buy has improved considerably in recent years due to greater speed and reliability in services from supplier groups and other entities that interact with the company on a daily basis. The introduction of information and communication technology (ICT) tools has increased the synchronization of internal operations and coordination with external stakeholders. Multiple channels are now available for external communication, business analysis, and strategic partnerships. Continued research in management sciences and ICT applications has further improved the task environment in which Best Buy operates.

The external environment — particularly the societal and task environments — presents both threats and opportunities for Best Buy. Threats arise from increased regulatory requirements regarding environmental impact, human resource management, and financial reporting, raising the risk of legal complications should the company fail to meet legal or social expectations. Conversely, improvements in the task environment have made it possible for the firm to leverage information technology to gain competitive advantage over rivals and more effectively manage internal resources.

The corporate structure of Best Buy is both hierarchical and cross-functional. Examining the composition of the executive management team and board of directors reveals that the company lacks sufficient talent capable of anticipating future trends in the retail sector — specifically the impact of online retailing on traditional bricks-and-mortar commerce. Most board members have deep experience in traditional service sectors such as food service, machinery, and financial services, industries that depend on physical customer bases and operate under different customer service models. A further strategic impediment was management's decision to place the company in direct competition with both traditional and online retailers simultaneously, thereby stretching company resources across two distinct modes of commerce.

Best Buy Co. Inc. maintains a people-oriented culture and regards its employees as key organizational assets. The company strives to deliver superior customer service compared with rivals such as Walmart and Target, and invests heavily in philanthropic activities within the communities where it operates. This employee-oriented and community-centric approach has earned the company a positive reputation in the U.S. and abroad. The company also places high importance on ethical financial reporting and disciplined operational conduct. However, a learning orientation has not been deeply embedded in the culture, which has hampered the company's ability to adapt to the changing retail landscape — a failure reminiscent of Circuit City, a traditional retailer that filed for bankruptcy in 2009.

Total assets were reported at $16 billion in 2012, of which approximately $10 billion were current assets. Total current liabilities stood at approximately $8 billion, indicating that the company maintained discipline in selling, general, administrative, and depreciation (SG&AD) expenses.

The internal environment indicates a strong need to align the company's human resource capabilities with its stated strategic direction. While the company has committed to shifting toward smaller stores and reducing its physical retail footprint, the management team remains dominated by personnel who are only moderately aggressive in leveraging the online retailing wave. Despite the intense competitive pressure from Amazon — which relies entirely on warehouses and a virtual sales platform — Best Buy has remained heavily dependent on physical stores for revenue generation. Best Buy still holds the largest customer share in the consumer electronics market; however, in the category of highly physical products such as gaming consoles and devices, the company experienced a 13.3% comparable store sales decline. Unless Best Buy uses its currently strong balance sheet and asset-to-liability position to pursue virtual commerce aggressively, it risks failing to convert its existing strengths into opportunities presented in the external environment.

Best Buy Inc.'s mission is "to obtain and maintain the market share and profits associated with consumer electronics and appliances." The company plans to achieve this by expanding the connectivity of digital solutions and growing its presence in international markets.

The retail market in which Best Buy competes is dominated by four or five major competitors: Walmart and Target in the bricks-and-mortar segment, and Amazon, Apple, and RadioShack in the online retail sector. Circuit City exited the market in 2009 after filing for Chapter 11 bankruptcy. Due to consecutive declines in comparable store sales, Fitch downgraded Best Buy's credit rating from BBB+ with a negative outlook to BBB—, reflecting the company's shrinking share of the consumer electronics market. Direct competition from internet-based businesses, discount chains, wholesale clubs, and home-improvement superstores prompted the company to reverse its store-expansion policy. An overall decline in consumer spending, compounded by recessionary economic conditions in the U.S. and Europe, further dimmed growth prospects. The slump in the housing sector also exerted a negative impact on consumer electronics demand.

Consolidation of operations in existing market segments: The first alternative is to consolidate operations within existing market segments and geographic regions. The company could continue targeting the same demographic — individuals aged 16–35 from middle- and high-income groups — offering consistent pricing across regions while seeking to reduce the cost of sales.

Expansion of online retail operations: This alternative requires significant capital and human resource investment in developing and scaling an online retail platform. The current Best Buy platform is limited in scalability and customer interactivity. Enhancements could include integration with Android-based smartphone applications.

Expanding operations in BRICS: Expansion of smaller-format Best Buy retail stores, such as kiosks, into Brazil, Russia, India, China, and South Africa (BRICS) represents the third alternative. Leading financial analysts such as Goldman Sachs have identified BRIC countries as among the top economic growth markets through 2050. Declining sales in Europe and the U.S. could therefore be offset by expanding online and small-store operations in these markets.

Expanding operations into BRICS is the most advisable strategic alternative for Best Buy. Since the European and U.S. consumer electronics markets are approaching maturity and online retail in those markets is dominated by Amazon and eBay, a timely entry into BRICS could yield considerable market share in consumer electronics. The key advantage of this strategy is access to a large, largely untapped international market. The principal downside is the legal, social, and economic complexity of establishing operations in cultures significantly different from that of the United States.

Implementing the recommended alternative will require a restructuring of the corporate structure. A new entity — Best Buy Global — should be constituted with business heads recruited from the respective regions of Brazil, China, India, South Africa, and Russia. An integrated Human Resource Information System (HRIS) should be developed, and a balanced scorecard framework introduced within the new entity. The company can acquire smaller e-tailing companies in host countries and partner with major financial institutions to secure the required capital. Pro-forma budgeting should be adopted to manage individual plans and programs, enabling regional divisions of Best Buy Global to anticipate potential revenue changes.

Best Buy Inc. has substantially outsourced its information technology and management consultancy functions to Accenture LLC, a global management and IT consultancy that provides customized services for managing clients' information technology needs. The current information system is therefore capable of supporting the expansion of business operations into BRICS. While control measures for the current business portfolio are in place, Best Buy Global will need to establish a supervisory board as part of its control mechanism, incorporating both internal stakeholders (employees and board of directors) and external stakeholders (partner firms from host countries).

The company has clearly defined client service objectives, strategies, and policies for both retailing and after-sales services. Best Buy Co. Inc. strives to provide customers with unbiased advice on their technology needs and claims to advance customer satisfaction through the implementation of the latest customer service practices to assist in the purchase process (Best Buy, n.d.). The organization places extensive emphasis on after-sales services, and the strategic objective of customer retention is pursued through a loyalty program policy.

Operational objectives are clearly stated and the company adheres closely to its defined customer service policy. The customer satisfaction strategy aligns with the overall corporate goals and objectives. Operational objectives for international and domestic segments are defined separately, with clearly segmented operations designed to deliver the best possible solutions for merchandise and services. The integration of customer feedback into policy, and its alignment with the overall corporate mission, provides evidence of the company's commitment to growth. Strategies developed to achieve these objectives are also consistent with the overarching strategic direction.