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CASE
22
Best Buy Co. Inc. (2009):
Sustainable Customer-Centricity
Model?
Alan N. Hoffman
Bentley University
Best Buy Co. Inc., headquartered in Richfield, Minnesota, was a specialty retailer
of consumer electronics. It operated over 1100 stores in the United States, accounting
for 19% of the market. With approximately 155,000 employees, it also ran more than
2800 stores in Canada, Mexico, China, and Turkey. The company’s subsidiaries
included Geek Squad, Magnolia Audio Video, and Pacific Sales. In Canada, Best Buy
operated under both the Best Buy and Future Shop labels.
Best Buy’s mission was to make technology deliver on its promises to customers. To
accomplish this, Best Buy helped customers realize the benefits of technology and technological changes so they could enrich their lives in a variety of ways through connectivity: “To
make life fun and easy,”1 as Best Buy put it. This was what drove the company to continually
increase the tools to support customers in the hope of providing end-to-end technology solutions.
As a public company, Best Buy’s top objectives were sustained growth and earnings. This
was accomplished in part by constantly reviewing its business model to ensure it was satisfying
customer needs and desires as effectively and completely as possible. The company strived to have
not only extensive product offerings but also highly trained employees with extensive product
This case was prepared by Professor Alan N. Hoffman, Bentley University and Erasmus University. Copyright ©
2015 by Alan N. Hoffman. The copyright holder is solely responsible for case content. Reprint permission is solely
granted to the publisher, Prentice Hall, for Strategic Management and Business Policy, 14th Edition (and the international and electronic versions of this book) by the copyright holder, Alan N. Hoffman. Any other publication of the
case (translation, any form of electronics or other media) or sale (any form of partnership) to another publisher will
be in violation of copyright law, unless Alan N. Hoffman has granted an additional written permission. Reprinted
by permission. The author would like to thank MBA students Kevin Clark, Leonard D’Andrea, Amanda Genesky,
Geoff Merritt, Chris Mudarri, and Dan Fowler for their research. No part of this publication may be copied, stored,
transmitted, reproduced, or distributed in any form or medium whatsoever without the permission of the copyright
owner, Alan N. Hoffman.
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C ase 22    Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
knowledge. The company encouraged 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. 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.
From a strategic standpoint, Best Buy moved from being a discount retailer (a low-price
strategy) to a service-oriented firm that relied on a differentiation strategy. In 1989, Best Buy
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). In 2005,
Best Buy took customer service a step further by moving from peddling gadgets to a customercentric operating model. It was now gearing up for another change to focus on store design and
providing products and services in line with customers’ desire for constant connectivity.
Company History2
From Sound of Music to Best Buy
Best Buy was originally known as Sound of Music. Incorporated in 1966, the company started
as a retailer of audio components and expanded to retailing video products in the early 1980s
with the introduction of the videocassette recorder to its product line. In 1983, the company
changed its name to Best Buy Co. Inc. (Best Buy). Shortly thereafter, Best Buy began operating its existing stores under a “superstore” concept by expanding product offerings and using
mass marketing techniques to promote those products.
Best Buy dramatically altered the function of its sales staff in 1989. Previously, the sales
staff worked on a commission basis and was more proactive in assisting customers coming
into the stores as a result. Since 1989, however, the commission structure has been terminated
and sales associates have developed into educators that assist customers in learning about the
products offered in the stores. The customer, to a large extent, took charge of the purchasing
process. 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.
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.
Expansion Through Acquisitions
In 2000, Best Buy began a series of acquisitions to expand its offerings and enter international
markets:
2000: Best Buy acquired Magnolia Hi-Fi Inc., a high-end retailer of audio and video products
and services, which became Magnolia Audio Video in 2004. This acquisition allowed
Best Buy access to a set of upscale customers.
2001: Best Buy entered the international market with the acquisition of Future Shop Ltd, a
leading consumer electronics retailer in Canada. This helped Best Buy increase revenues,
gain market share, and leverage operational expertise. The same year, Best Buy also
opened its first Canadian store. In the same year, the company purchased Musicland, a
mall-centered music retailer throughout the United States (divested in 2003).
2002: Best Buy acquired Geek Squad, a computer repair service provider, to help develop a
technological support system for customers. The retailer began by incorporating in-store
Geek Squad centers in its 28 Minnesota stores, then expanding nationally, and eventually
internationally in subsequent years.
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2005: Best Buy opened the first Magnolia Home Theater “store-within-a-store” (located
within the Best Buy complex).
2006: Best Buy acquired Pacific Sales Kitchen and Bath Centers Inc. to develop a new
customer base: builders and remodelers. The same year, Best Buy also acquired a 75%
stake in Jiangsu Five Star Appliance Co., Ltd, a China-based appliance and consumer
electronics retailer. This enabled the company to access the Chinese retail market and led
to the opening of the first Best Buy China store on January 26, 2007.
2007: Best Buy acquired Speakeasy Inc., a provider of broadband, voice, data, and information technology services, to further its offering of technological solutions for customers.
2008: Through a strategic alliance with the Carphone Warehouse Group, a UK-based provider
of mobile phones, accessories, and related services, Best Buy Mobile was developed.
After acquiring a 50% share in Best Buy Europe (with 2414 stores) from the Carphone
Warehouse, Best Buy intended to open small-store formats across Europe in 2011.3 Best
Buy also acquired Napster, a digital download provider, through a merger to counter the
falling sales of compact discs. The first Best Buy Mexico store was opened.
2009: Best Buy acquired the remaining 25% of Jiangsu Five Star. Best Buy Mobile moved
into Canada.
Industry Environment
Industry Overview
Despite the negative impact the financial crisis had on economies worldwide, in 2008 the
consumer electronics industry managed to grow to a record high of US$694 billion in sales—a
nearly 14% increase over 2007. In years immediately prior, the growth rate was similar: 14%
in 2007 and 17% in 2006. This momentum, however, did not last. Sales dropped 2% in 2009,
the first decline in 20 years for the electronics giant.
A few product segments, including televisions, gaming, mobile phones, and Blu-ray players,
drove sales for the company. Television sales, specifically LCD units, which accounted for 77%
of total television sales, were the main driver for Best Buy, as this segment alone accounted for
15% of total industry revenues. The gaming segment continued to be a bright spot for the industry as well, as sales were expected to have tremendous room for growth. Smartphones were another electronics industry segment predicted to have a high growth impact on the entire industry.
The consumer electronics industry had significant potential for expansion into the global
marketplace. There were many untapped markets, especially newly developing countries.
These markets were experiencing the fastest economic growth while having the lowest ownership rate for gadgets.4 Despite the recent economic downturn, 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%).5
Barriers to Entry
As globalization spread and use of the Internet grew, barriers to entering the consumer
electronics industry were diminished. When the industry was dominated by brick-and-mortar
companies, obtaining the large capital resources needed for entry into the market was a barrier
for those looking to gain any significant market share. Expanding a business meant purchasing or leasing large stores that incurred high initial and overhead costs. 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.
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C ase 22    Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
The shift toward Internet purchasing also negated another once strong barrier to entry: customer loyalty. The trend was that consumers would research products online to determine which
one they intended to purchase and then shop around on the Internet for the lowest possible price.
Even though overall barriers were diminished, there were still a few left, which a company
like Best Buy used to its advantage. The first, and most significant, was economies of scale. With
over 1000 locations, Best Buy used its scale to obtain cost advantages from suppliers due to high
quantity orders. Another advantage was in advertising. Large firms had the ability to increase
advertising budgets to deter new entrants into the market. Smaller companies generally did not
have the marketing budgets for massive television campaigns, which were still one of the most
effective marketing strategies available to retailers. Although Internet sales were growing, the industry was still dominated by brick-and-mortar stores. Most consumers looking for electronics—
especially major electronics—felt a need to actually see their prospective purchases in person.
Having the ability to spend heavily on advertising helped increase foot traffic to these stores.
Internal Environment
Finance
While Best Buy’s increase in revenue was encouraging (see Exhibit 1), recent growth had
been fueled largely by acquisition, especially Best Buy’s fiscal year 2009 revenue growth. At
the same time, net income and operating margins had been declining (see Exhibits 2 and 3).
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.
Best Buy’s long-term debt increased substantially from fiscal 2008 to 2009 (see Exhibit 4),
which was primarily due to the acquisition of Napster and Best Buy Europe. The trend in
available cash has been a mirror image of long-term debt. Available cash increased from fiscal
2005 to 2008 and then was substantially lower in 2009 for the same reason.
$20,000
$15,000
In Millions
Exhibit 1
Quarterly Sales, Best
Buy Co., Inc.
2005
2006
2007
$10,000
2008
2009
$5,000
$0
2010
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
SOURCE: Best Buy Co., Inc.
$1,000
$800
In Millions
Exhibit 2
Quarterly Net
Income, Best
Buy Co., Inc.
2005
2006
$600
2007
$400
2008
2009
$200
$0
2010
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
SOURCE: Best Buy Co., Inc.
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C ase 2 2   Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Exhibit 3
10.00%
Operating Margin,
Best Buy Co., Inc.
8.00%
629
2005
2006
6.00%
2007
4.00%
2008
2009
2.00%
2010
0.00%
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
SOURCE: Best Buy Co., Inc.
$2,000
$1,500
In Millions
Exhibit 4
Long-Term Debt
and Cash, Best
Buy Co., Inc.
Long term Debit
Cash
$1,000
$500
$0
2005
2006
2007
2008
2009
SOURCE: Best Buy Co., Inc.
While the change in available cash and long-term debt were not desirable, the bright side
was that this situation was due to the acquisition of assets, which led to a significant increase
in revenue for the company. Ultimately, the decreased availability of cash would seem to
be temporary due to the circumstances. The more troubling concern was the decline in net
income and operating margins, which Best Buy needed to find a way to turn around. If the
problems with net income and operating margins were fixed, the trends in cash and long-term
debt would also begin to turn around.
At first blush, the increase in accounts receivable and inventory was not necessarily alarming since revenues were increasing during this same time period (see Exhibit 5). However,
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. (For complete financial statements, see Exhibits 6 and 7.)
Exhibit 5
Accounts Receivable
and Inventory, Best
Buy Co., Inc.
$5,000
$4,000
Inventory
Accounts receivable
$3,000
$2,000
$1,000
$0
2005
2006
2007
2008
2009
SOURCE: Best Buy Co., Inc.
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C ase 22    Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Exhibit 6 Consolidated Balance Sheets, Best Buy Co., Inc. ($ in millions, except per share and share amounts)
February 28, 2009
Assets
Current assets:
Cash and cash equivalents
Short-term investments
Receivables
Merchandise inventories
Other current assets
March 1, 2008
$498
11
1,868
4,753
1,062
$1,438
64
549
4,708
583
8,192
7,342
755
2,013
4,060
112
732
1,752
3,057
67
Less accumulated depreciation
6,940
2,766
5,608
2,302
Net property and equipment
Goodwill
Tradenames
Customer relationships
Equity and other investments
Other assets
4,174
2,203
173
322
395
367
3,306
1,088
97
5
605
315
$15,826
$12,758
$4,997
479
459
1,382
281
783
54
$4,297
531
373
975
404
156
33
8,435
1,109
1,126
513
6,769
838
627
40
—
—
41
205
4,714
(317)
41
8
3,933
502
4,643
4,484
$15,826
$12,758
Total current assets
Property and equipment:
Land and buildings
Leasehold improvements
Fixtures and equipment
Property under capital lease
Total assets
Liabilities and shareholders’ equity
Current liabilities:
Accounts payable
Unredeemed gift card liabilities
Accrued compensation and related expenses
Accrued liabilities
Accrued income taxes
Short-term debt
Current portion of long-term debt
Total current liabilities
Long-term liabilities
Long-term debt
Minority interests
Shareholders’ equity:
Preferred stock, $1.00 par value: Authorized — 400,000 shares; Issued
and outstanding — none
Common stock, $0.10 par value: Authorized — 1.0 billion shares; Issued and
outstanding — 413,684,000 and 410,578,000 shares, respectively
Additional paid-in capital
Retained earnings
Accumulated other comprehensive (loss) income
Total shareholders’ equity
Total liabilities and shareholders’ equity
SOURCE: Best Buy Co., Inc. 2009 Form 10-K, p. 56.
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C ase 2 2   Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Exhibit 7
Consolidated
Statements of
Earnings, Best
Buy Co., Inc. ($ in
millions, except per
share amounts)
Fiscal Years Ended
Revenue
Cost of goods sold
Gross profit
Selling, general and administrative expenses
Restructuring charges
Goodwill and tradename impairment
Operating income
Other income (expense)
Investment income and other
Investment impairment
Interest expense
Earnings before income tax expense, minority
interests and equity in income (loss) of affiliates
Income tax expense
Minority interests in earnings
February 28,
2009
March 1,
2008
March 3,
2007
$45,015
34,017
$40,023
30,477
$35,934
27,165
10,998
8,984
78
66
9,546
7,385
—
—
8,769
6,770
—
—
1,870
2,161
1,999
35
(111)
(94)
129
—
(62)
162
—
(31)
1,700
674
2,228
815
2,130
752
(30)
(3)
(1)
Equity in income (loss) of affiliates
Net earnings
Earnings per share
Basic
Diluted
Weighted-average common shares outstanding
(in millions)
Basic
Diluted
631
7
(3)
—
$1,003
$1,407
$1,377
$2.43
$2.39
$3.20
$3.12
$2.86
$2.79
412.5
422.9
439.9
452.9
482.1
496.2
SOURCE: Best Buy Co., Inc. 2009 Form 10-K, p. 57.
Marketing
Best Buy’s 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 endto-end solutions.
Best Buy prided itself on customer centricity that catered to specific customer needs and
behaviors. 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:
Best Buy: This brand offered a wide variety of consumer electronics, home office products,
entertainment software, appliances, and related services.
Best Buy Mobile: These stand-alone stores offered a wide selection of mobile phones, accessories, and related e-services in small-format stores.
Geek Squad: This brand provided residential and commercial product repair, support, and
installation services both in-store and onsite.
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C ase 22    Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Magnolia Audio Video: This brand offered high-end audio and video products and related
services.
Napster: This brand was an online provider of digital music.
Pacific Sales: This brand offered high-end home improvement products, primarily including
appliances, consumer electronics, and related services.
Speakeasy: This brand provided broadband, voice, data, and information technology services
to small businesses.
Starting in 2005, Best Buy initiated a strategic transition to a customer-centric operating
model, which was completed in 2007. Prior to 2005, the company focused on customer groups
such as affluent professional males, young entertainment enthusiasts, upscale suburban mothers, and technologically advanced families.6 After the transition, Best Buy focused more on
customer lifestyle groups such as affluent suburban families, trendsetting urban dwellers, and
the closely knit families of Middle America.7 To target these various segments, Best Buy
acquired firms with aligned strategies, which were used as a competitive advantage against its
strongest competition, such as Circuit City and Wal-Mart. 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.
Marketing these different types of products and services was a difficult task. That was
why Best Buy’s employees had more training than competitors. This knowledge service was
a value-added competitive advantage. Since the 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.
Operations
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).
Domestic Best Buy store operations were organized into eight territories, with each territory divided into districts. A retail field officer oversaw store performance through district
managers, who met with store employees on a regular basis to discuss operations strategies
such as loyalty programs, sales promotion, and new product introductions.8 Along with domestic operations, Best Buy had an international operation segment, originally established in
connection with the acquisition of Canada-based Future Shop.9
In fiscal 2009, Best Buy opened up 285 new stores in addition to the European acquisition
of 2414 Best Buy Europe stores. It relocated 34 stores and closed 67 stores.
Human Resources
The objectives of 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. This principle started
within the top management structure and filtered down from the retail field officer through
district managers, and through store managers to the employees on the floor. Every employee
had to have the company’s vision embedded in their service and attitude.
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633
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. One lawsuit claimed that Best Buy employees had misrepresented the manufacturer’s warranty in order to sell its own product service and replacement
plan. The lawsuit accused Best Buy of “entering into a corporate-wide scheme to institute
high-pressure sales techniques involving the extended warranties” and “using artificial barriers to discourage consumers who purchased the ‘complete extended warranties’ from making
legitimate claims.”10
In a more recent case (March 2009), the U.S. District Court granted Class Action
certification to allow plaintiffs to sue Best Buy for violating its “Price Match” policy.
According to the ruling, the plaintiffs alleged that Best Buy employees would aggressively
deny consumers the ability to apply the company’s “price match guarantee.”11 The suit also
alleged that Best Buy had an undisclosed “Anti-Price Matching Policy,” where the company
told its employees not to allow price matches and gave financial bonuses to employees who
complied.
Competition
Brick-and-Mortar Competitors
Wal-Mart Stores Inc., the world’s largest retailer, with revenues over US$405 billion, operated
worldwide and offered a diverse product mix with a focus on being a low-cost provider. In
recent years, Wal-Mart increased its focus on grabbing market share in the consumer electronics industry. In the wake of Circuit City’s liquidation,12 Wal-Mart was stepping up efforts by
striking deals with Nintendo and Apple that would allow each company to have their own
in-store displays. Wal-Mart also considered using Smartphones and laptop computers to drive
growth.13 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.14
GameStop Corp. was the leading video game retailer with sales of almost US$9 billion as
of January 2009, in a forecasted US$22 billion industry. GameStop operated over 6000 stores
throughout the United States, Canada, Australia, and Europe, as a retailer of both new and
used video game products including hardware, software, and gaming accessories.15
The advantage GameStop had over Best Buy was the number of locations: 6207 GameStop
locations compared to 1023 Best Buy locations. However, Best Buy seemed to have what it took
to overcome this advantage—deep pockets. With significantly higher net income, Best Buy
could afford to take a hit to its margins and undercut GameStop prices.16
RadioShack Corp. was a retailer of consumer electronics goods and services, including
flat panel televisions, telephones, computers, and consumer electronics accessories. Although
the company grossed revenues of over US$4 billion from 4453 locations, RadioShack consistently lost market share to Best Buy. Consumers had a preference for RadioShack for audio
and video components, yet preferred Best Buy for their big box purchases.17
Second tier competitors were rapidly increasing. 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. After Circuit City’s bankruptcy, mid-level
electronics retailers like HH Gregg and Ultimate Electronics were scrambling to grab Circuit
City’s lost market share. Ultimate Electronics, owned by Mark Wattles, who was a major
investor in Circuit City, had a leg up on his competitors. Wattles was on Circuit City’s board
of executives and had firsthand access to profitable Circuit City stores. Ultimate Electronics
planned to expand its operations by at least 20 stores in the near future.
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C ase 22    Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Online Competitors
Amazon.com Inc., since 1994, had grown into the United States’ largest online retailer with
revenues of over US$19 billion in 2008 by providing just about any product imaginable
through its popular website. Created as an online bookstore, Amazon soon ventured into various consumer electronics product categories including computers, televisions, software, video
games, and much more.18
Amazon.com gained an advantage over its supercenter competitors because it was able to
maintain a lower cost structure compared to brick-and-mortar companies like Best Buy. Amazon
was able to push those savings through to its product pricing and selection/diversification. With
an increasing trend in the consumer electronics industry to shop online, Amazon.com was positioned perfectly to maintain strong market growth and potentially steal some market share away
from Best Buy.
Netflix Inc. was an online video rental service, offering selections of DVDs and Blu-ray
discs. Since its establishment in 1997, Netflix had grown into a US$1.4 billion company.
With over 100,000 titles in its collection, the company shipped for free to approximately
10 million subscribers. Netflix began offering streaming downloads through its website,
which eliminated the need to wait for a DVD to arrive.
Netflix was quickly changing the DVD market, which had dramatically impacted brickand-mortar stores such as Blockbuster and Hollywood Video and retailers who offered DVDs
for sale. In a responsive move, Best Buy partnered with CinemaNow to enter the digital movie
distribution market and counter Netflix and other video rental providers.19
Core Competencies
Customer-Centricity Model
Most players in the consumer electronics industry focused on delivering products at the lowest
cost (Wal-Mart—brick-and-mortar; Amazon—web-based). Best Buy, however, took a different approach by providing customers with highly trained sales associates who were available
to educate customers regarding product features. This allowed customers to make informed
buying decisions on big-ticket items. In addition, with the Geek Squad, Best Buy was able to
offer and provide installation services, product repair, and ongoing support. In short, Best Buy
provided an end-to-end solution for its customers.
Best Buy used its customer-centricity model, which was built around a significant database of customer information, to construct a diversified portfolio of product offerings. This
let the company offer different products in different stores in a manner that matched customer
needs. This in turn helped keep costs lower by shipping the correct inventory to the correct
locations. Since Best Buy’s costs were increased by the high level of training needed for sales
associates and service professionals, it had been important that the company remain vigilant
in keeping costs down wherever it could without sacrificing customer experience.
The tremendous breadth of products and services Best Buy was able to provide allowed
customers to purchase all components for a particular need within the Best Buy family.
For example, if a customer wanted to set up a first-rate audio-visual room at home, he or
she could go to the Magnolia Home Theater store-within-a-store at any Best Buy location
and use the knowledge of the Magnolia or Best Buy associate in the television and audio
areas to determine which television and surround sound theater system best fit their needs.
The customer could then employ a Geek Squad employee to install and set up the television and home theater system. None of Best Buy’s competitors offered this extensive level
of service.
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Successful Acquisitions
Through its series of acquisitions, Best Buy had gained valuable experience in the process of
integrating companies under the Best Buy family. The ability to effectively determine where
to expand was important to the company’s ability to differentiate itself in the marketplace.
Additionally, Best Buy was also successfully integrating employees from acquired companies. Best Buy had a significant global presence, which was important because of the maturing
domestic market. This global presence provided the company with insights into worldwide
trends in the consumer electronics industry and afforded access to newly developing markets.
Best Buy used this insight to test products in different markets in its constant effort to meet
and anticipate customer needs.
Retaining Talent
Analyzing Circuit City’s demise, many experts concluded one of the major reasons for the
company’s downfall was that Circuit City let go of their most senior and well-trained sales
staff in order to cut costs. Best Buy, on the other hand, had a reputation for retaining talent and
was widely recognized for its superior service. Highly trained sales professionals had become
a unique resource in the consumer electronics industry, where technology was changing at an
unprecedented rate, and was a significant source of competitive advantage.
Challenges Ahead
Economic Downturn
Electronics retailers like Best Buy sold products that could be described as “discretionary
items, rather than necessities.”20 During economic recessions, however, consumers had less
disposable income to spend. While there was optimism about a possible economic turnaround
in 2010 or 2011, if the economy continued to stumble, this could present a real threat to sellers
of discretionary products.
In order to increase sales revenues, many retailers, including Best Buy, offered customers
low-interest financing through their private-label credit cards. These promotions were tremendously successful for Best Buy. From 2007 to 2009, these private-label credit card purchases
accounted for 16%–18% of Best Buy’s domestic revenue. Due to the credit crisis, however,
the Federal Reserve issued new regulations that could restrict companies from offering deferred interest financing to customers. If Best Buy and other retailers were unable to extend
these credit lines, it could have a tremendous negative impact on future revenues.21
Pricing and Debt Management
The current depressed economic conditions, technological advances, and increased competition put a tremendous amount of pricing pressure on many consumer electronics products.
This was a concern for all companies in this industry. The fact that Best Buy did not compete
strictly on price structure alone made this an even bigger concern. Given the higher costs that
Best Buy incurred training employees, any pricing pressure that decreased margins put stress
on Best Buy’s financial strength. In addition, the recent acquisition of Napster and the 50%
stake in Best Buy Europe significantly increased Best Buy’s debt and reduced available cash.
Even in prosperous times, debt management was a key factor in any company’s success, and
it became even more important during the economic downturn. (See Exhibits 6 and 7 for Best
Buy’s financial statements.)
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C ase 22    Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?
Products and Service
As technology improved, product life cycles, as well as prices, decreased. As a result, margins
decreased. Under Best Buy’s service model, shorter product life cycles increased training
costs. Employees were forced to learn new products with higher frequency. This was not only
costly but also increased the likelihood that employees would make mistakes, thereby tarnishing Best Buy’s service record and potentially damaging one of its most important, if not its
most important, differentiators. In addition, more resources would be directed at research of
new products to make sure Best Buy continued to offer the products consumers desire.
One social threat to the retail industry was the growing popularity of the online marketplace. Internet shoppers could browse sites searching for the best deals on specific products.
This technology allowed consumers to become more educated about their purchases, while
creating increased downward price pressure. Ambitious consumers could play the role of a
Best Buy associate themselves by doing product comparisons and information gathering without a trip to the store. This emerging trend created a direct threat to companies like Best Buy,
which had 1023 stores in its domestic market alone. One way Best Buy tried to continue the
demand for brick-and-mortar locations and counter the threat of Internet-based competition
was by providing value-added services in stores. Customer service, repairs, and interactive
product displays were just a few examples of these services.22
Leadership
The two former CEOs of Best Buy, Richard Shultze and Brad Anderson, were extremely successful at making the correct strategic moves at the appropriate times. With Brad Anderson
stepping aside in June 2009, Brian Dunn replaced him as the new CEO. Although Dunn
worked for the company for 24 years and held the key positions of COO and President during
his tenure, the position of CEO brought him to a whole new level and presented new challenges, especially during the economic downturn. He was charged with leading Best Buy into
the world of increased connectivity. This required a revamping of products and store setups to
serve customers in realizing their connectivity needs. This was a daunting task for an experienced CEO, let alone a new CEO who had never held the position.
Wal-Mart
Best Buy saw its largest rival, Circuit City, go bankrupt. However, a new archrival,
Wal-Mart, was expanding into consumer electronics and stepping up competition in a price
war Wal-Mart hoped to win. Best Buy needed to face the competition not by lowering prices,
but by coming up with something really different. Best Buy had to determine the correct path
to improve its ability to differentiate itself from competitors, which was increasingly difficult
given an adverse economic climate and the company’s financial stress. How Best Buy could
maintain innovative products, top-notch employees, and superior customer service while
facing increased competition and operational costs was an open question.
Notes
1. Best Buy Co. Inc., Form 10-K. Securities and Exchange
Commission, February 28, 2009.
2. Ibid.
3. Ibid.
4. Greg Keller, “Threat Grows by iPod and Laptop,” The Columbus Dispatch, May 18, 2009, http://www.dispatch.com/live/
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Title: Strategic Management
content/business/stories/2009/05/18/greener_gadgets.ART_
ART_05-18-09_A9_TMDSJR8.html (July 10, 2009).
5. Larry Magid, “Consumer Electronics: Future Looks Bright,”
CBSNews.com, May 2, 2008, http://www.cbsnews.com/stories/
2008/05/02/scitech/pcanswer/main4067008.shtml (July 10, 2009).
6. Best Buy Co. Inc., Form 10-K, 2009.
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7.
8.
9.
10.
11.
12.
13.
14.
Ibid.
Ibid.
Ibid.
Manhattan Institute for Policy Research, “They’re Making a
Federal Case Out of It . . . in State Court,” Civil Justice Report 3,
2001, http://www.manhattan-institute.org/html/cjr_3_part2.htm.
“Best Buy Bombshell!” HD Guru, March 21, 2009, http://
hdguru.com/best-buy-bombshell/.
Circuit City Stores Inc. was an American retailer in brand-name
consumer electronics, personal computers, entertainment software, and (until 2000) large appliances. The company opened its
first store in 1949 and liquidated its final American retail stores
in 2009 following a bankruptcy filing and subsequent failure to
find a buyer. At the time of liquidation, Circuit City was the
second-largest U.S. electronics retailer, after Best Buy.
Z. Bissonnette, “Wal-Mart Looks to Expand Electronics Business,”
Bloggingstocks.com, May 18, 2009, http://www.bloggingstocks
.com/2009/05/18/wal-mart-looks-to-expand-electronics-business/.
N. Maestrie, “Wal-Mart Steps Up Consumer Electronics
Push,” Reuters, May 19, 2009, http://www.reuters.com/article/
technologyNews/idUSTRE54I4TR20090519.
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15. Capital IQ, “GameStop Corp. Corporate Tearsheet,” Capital IQ,
2009.
16. E. Sherman, “GameStop Faces Pain from Best Buy, Down-
17.
18.
19.
20.
21.
22.
loading,” BNET Technology, June 24, 2009, http://industry
.bnet.com/technology/10002329/gamestop-faces-painfrom-best-buy-downloading/.
T. Van Riper, “RadioShack Gets Slammed,” Forbes.com,
February 17, 2006, http://www.forbes.com/2006/02/17/radioshackedmondson-retail_cx_tr_0217radioshack.html.
Capital IQ, “Amazon.com Corporate Tearsheet,” Capital IQ,
2009.
T. Kee, “Netflix Beware: Best Buy Adds Digital Downloads
with CinemaNow Deal,” paidContent.org, June 5, 2009, http://
paidcontent.org/article/419-best-buy-adds-digital-moviedownloads-with-cinemanow-deal/.
Best Buy Co., Inc., Form 10-K, 2009.
Ibid.
Ibid.
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