Group Case Analysis 1

Reinventing Best Buy

Group 6

Justin Foglesong, Harouna Ouedraogo, Nhi Van, Courtney Oates, and Prisca Gnamitche

Strategic Management 4813

University of Central Oklahoma

Dr. Lalit Manral

 GROUP CASE ANALYSIS 1: REINVENTING BEST BUY

Problem Summary

Best Buy is the largest North American consumer electronics and appliance retail store.

Under the ruling of Brad Anderson, who became the CEO in 2006, Best Buy has endured very

hard times. Countless forces and factors led to this difficulty faced by Best Buy. Indeed, the first

major problem we can point out was the fact that Best Buy was losing tremendous market share

to Amazon, which had led to a practice called “showrooming.” It consists of customers coming

to view product at Best Buy or another physical store, and then proceeding to buy them online at

a cheaper price. This caused competitive prices to take away sales from Best Buy. Yet overseas,

Best Buy was experiencing difficulties with their slumping international operations in Canada,

China, and Europe. The overwhelming competition forced Best Buy to rethink their strategy, and

newly appointed CEO Hubert Joly would have to combat the competition with a new strategy.

The “Renew Blue” strategy was the promising Five-Point Plan that would save Best Buy.

According to Joly’s observations, Best Buy had two main problems he needed to correct. The

first problem was negative comparable sales due to the shift to e-commerce, changes in product

mix, customer satisfaction, and poor price perception. The answer to this problem would be to

amplify the customer experience in an interactive manner online and in-store, with competitive

prices and better retail execution. The last problem was declining margins due to the first

problem, which includes comparable sales that spiraled downward, price competition, the

inability to get fully compensated for the value Best Buy brought, and increasing costs. Joly saw

this final solution in the form of differentiating the offering with premium brands, working with

vendors to innovate and drive value, and improving productivity.

 Analysis 1

Strategic Fit:

Best Buy is an incredible company that is well established with its strong impact on the

retail industry especially when it comes to consumer electronics and appliances. The company

has physical stores that are spread across the country, and they are also established online. The

company’s success is articulated around its values and goals. As far as the mission statement is

concerned, it is very impressive and it is stated as follow” Our formula is simple: we’re a growth

company focused on better solving the unmet needs of our customers—and we rely on our

employees to solve those puzzles. Thanks for stopping.” This clearly shows that Best Buy is

committed to adding value and satisfying its customers, and that it is their main goal. Indeed, the

company serves a huge customer base of 40 million active and 75 million total members in the

loyalty program.

Through the “Renew Blue” turnaround plan, CEO Hubert Joly wanted the firm to provide

a unique and compelling service to their customers with a wide range of brands at competitive

prices. All this improvement was achieved with a high productive model for enhancing sales and

profit. Joly’s “Renew Blue” initiative was headlined from his Five-Point Plan for Best Buy that

included: reinvigorate and rejuvenate the customer experience, attract and grow transformational

leaders and energize our employees to deliver extraordinary results, work with vendors to

innovate and drive value, increase the company’s return on invested capital by growing revenue

and efficiency, which included cutting unproductive cost such as administrative and non-product

expenses, and the goal to make the world a better place through a recycling program and to equip

teenagers with technology. Best Buy does business in a very competitive industry and this makes

decisions quite complicated for Joly. Luckily for Best Buy, Joly is a critical thinker and chief
analyst. The main competitors of Best Buy are Amazon and Walmart. They both feature low

prices and fast delivery. Despite the difficulty, Joly has made tremendous strides in improving

relations with customers, investors, and suppliers to regain trust in Best Buy. Implementing this

fresh strategy has helped Best Buy reposition itself within its industry as a serious opponent.

Best Buy’s Strategy

Next, Best Buy is North America’s consumer electronics and appliances retailing

mammoth. It is vital to understand the central strategy of Best Buy in order to reveal the ultimate

vision of the company. CEO Hubert Joly has ushered in a fresh strategy for Best Buy that he

ironically refers to as the “Renew Blue” strategy. The “Renew Blue” strategy is backed by Joly’s

Five-Point Plan. Joly’s Five-Point Plan is exemplified with a vision to “reinvigorate and

rejuvenate the customer experience, attract and grow transformational leaders and energize our

employees to deliver extraordinary results, work with vendors to innovate and drive value,

increase the company’s return on invested capital by growing revenue and efficiency, which

included cutting unproductive cost such as administrative and non-product expenses, and finally

make the world a better place through a recycling program and equipping teenagers with

technology. It will be important to address the static and dynamic components related to this

strategy of Best Buy. The static component of strategy expresses Best Buy’s methods for

competing in the present through a product market, geographical, and vertical scope. The static

component also identifies the foundation of the present competitive advantage. The dynamic

component of strategy depicts the mechanisms needed to get to the desired future destination in

different spheres such as vision and mission, performance metrics, and the potential for growth.

Firstly, we will examine the static components of Best Buy’s strategy. Back in 2006, Best

Buy entered into a joint venture with British retailer Carphone Warehouse (CPW). This business
opportunity has proved rather advantageous in light of Best Buy’s product market entrance in the

market for cell phones. Former CEO Brian Dunn saw the demand for mobile phones and

capitalized on this new product market to benefit Best Buy’s sales. This deal with CPW led to the

creation of Best Buy Mobile, which resulted in robust sales for the company. Best Buy’s

involvement in Best Buy Mobile symbolizes their greatest strength in a new product market for

the store. The history of Best Buy’s association with Canada, Europe, and China represents their

geographical scope. Best Buy’s vertical scope has been amplified from the introduction of

premium brands. The introduction of premium brands has been highlighted from the presence of

brands such as the Pacific Kitchen and Home, the Magnolia Home Theater Design Center,

Apple, the Samsung Experience, Microsoft, and the Sony Retail Experience. One gem from

Hubert Joly’s Five-Point plan was the directive to “reinvigorate and rejuvenate the customer

experience.” The reassignment of store space to expanding categories was one area for progress

in the process for reinvigorating the customer experience. The genesis of Best Buy’s competitive

advantage primarily manifests from the Geek Squad and other employees. Best Buy places

proper controls on all their service-related employees to ensure that they provide the best

experience for all customers. This customer-oriented approach further frustrates the competition

of Best Buy because the world-class service brings customers back in the store on repeat visits to

buy additional products or services. The knowledge of employees at Best Buy surpasses the

knowledge of the workers from Amazon or Wal-Mart. However, Hubert Joly remarked that Best

Buy’s competitive advantages can be narrowed down to three sources: multi-channel product and

service delivery, display of leading-edge technologies, and vendor support.

Consequently, we must also evaluate the dynamic component of Best Buy’s strategy. As

mentioned previously, Joly has crafted the vision for Best Buy with his “Renew Blue” strategy
that promotes his Five-Point Plan. The company’s new vision is recovering and restoring their

lost business and providing key growth especially in the online domain. Best Buy’s mission

statement includes: “Our formula is simple: we’re a growth company focused on better

solving the unmet needs of our customers—and we rely on our employees to solve those

puzzles. Thanks for stopping.” Best Buy’s customer centricity derives from their rewards

program. Joly also has improved the customer quality of the workforce by constantly evaluating

the ratings from the Net Promoter’s score calculations in terms of customer experience.

Feedback from customers will generate improvements at the store level that will keep Best Buy

on top of the competition. The trend of positive reviews has skyrocketed ever since Joly

implemented the control on performance goals related to customer service through the Net

Promoter. Joly also diagnosed Best Buy’s two problems that desperately needed a change to

prepare for future profitability. The initial problem involved negative comparable sales due to the

shift to e-commerce, changes in product mix, customer satisfaction, and poor price perception.

The solution would result in cultivating the customer experience in an interactive way online and

in-store, with price matching and better retail execution. The last problem was declining margins

due to the first problem, which includes declining comparable sales, price competition, the

inability to get fully compensated for the value Best Buy brings, and increasing costs. Joly

envisioned the solution to this final problem as differentiating the offering with premium brands,

workings with vendors to innovate and drive value, and to improve productivity. Joly carried out

a target plan for cutting expenditures by 725 million dollars. Joly anticipated 325 million dollars

of supply chain savings, and witnessed a potential for 400 million dollars in savings from selling,

general, and administrative expenses. Organic growth was realized from the development of Best

Buy Mobile since it caused Best Buy to promote a new product segment. Sales rapidly surged as
a result of the new store outlet. Finally, Joly’s decision to exit struggling international operations

in Europe, Canada, and China was a sound decision because it was hurting the company to keep

operations going abroad.

Analysis 2: Data Interpretation

In our next analysis, we will provide an overview of the relevant Performance Data and

illustrate the reality behind the numbers. Best Buy’s stock price has been positively correlated

ever since Hubert Joly took over the helm as CEO in the middle of 2012. When word reached out

that Dick Schulze could not buy out Best Buy, the stock price plummeted to a twelve-year low of

$11.29. It was obvious that investors had lost confidence in this dynamic organization. Joly

ended up restoring the stock price back to a comfortable $32.24 at the end of 2015. It is evident

that he has regained investor confidence through his work in maximizing shareholder wealth.

2012 was notoriously known as a year in transition for Best Buy. Best Buy appointed a

new CEO in August named Hubert Joly. Joly needs to be attributed as the savior and pioneer for

positive change for Best Buy. The 2012 year resulted in a net loss for Best Buy, and they needed

to pursue a direction out of the red. Joly dramatically improved the net profit margin, operating

margin, gross margin, and operating income figures ever since the 2012 debacle. Joly has also

managed to be an ambassador for change through his attempts at reducing the selling, general,

and administrative expenditures. The deterioration of international sales is obvious from the

double-digit percentage decreases so it is excellent that Joly has taken the necessary steps to limit

the damage that international business has done to the company. Joly also has maximized

countless benefits by prompting change that resulted in an upward trend of the Return on Capital

Employed (ROCE) calculation. ROCE demonstrates the efficiency of the company’s margins

and asset productivity. Joly took Best Buy from -2.3% in dreadful 2012 to a successive 17.3%,
19.4%, and 20.9% in years 2013-2015 respectively. Joly also has done a tremendous job in

reducing the square footage of stores while simultaneously increasing the sales per square foot.

To drill down the retailing industry, Best Buy is a company that specializes in consumer

electronics and appliances. Best Buy brings value to customers, both foreign and domestic, in

categories such as Consumer Electronics, Computing and Mobile Phones, Entertainment,

Appliances, Services, and Other categories. Almost half of Best Buy’s revenue comes from the

Computing and Mobile Phones category. A third of Best Buy’s revenue comes from consumer

electronics. Best Buy must look for ways to strengthen the current dominant categories as well as

try to perform harder in their weaker categories in relation to revenue.

The most promising feature of Best Buy’s quarterly sales is the noticeable bump in online

comparable sales. Best Buy must continue to innovate with their online retailing to capture the

multi-channel competitive advantage that they currently flaunt. It is truth that Best Buy sits as the

champion retailer for consumer electronics and major appliances in the United States. However,

Amazon sits in third place and is dangerously treading upwards by growing ten percent in the

last ten years. Wal-Mart is down five percent, and Amazon is down ten percent in comparison to

Best Buy. These percentages explain which retailer brings more value to their ultimate consumer

consistently. Best Buy completely shreds the competition when it comes to Traditional or non-

online sales. They stand at the top of the leaderboard for all consumer electronic retailers in

Traditional sales. Online sales comprise twelve percent of Best Buy’s business. Best Buy must

endeavor to raise the innovation of their online platform to close the gap on the rest of the

competition. Best Buy jolted into third place in 2014 over Wal-Mart because in 2012 Best Buy

was in fourth place behind Wal-Mart in Online Retailing for Consumer Electronics. Best Buy

must battle Apple and Amazon to seize control for the top sport in Online Retailing for
Consumer Electronics. It will be extremely difficult for them to surpass Amazon since Amazon

has 6X the amount of sales that Best Buy has in online retailing. However, Amazon’s online

sales numbers are nowhere near Best Buy’s traditional sales numbers. Additionally, Best Buy’s

ability as a multi-channel retailer contributes extra sales from the online sales aspect. Lastly, it is

crucial to recognize that Store-Based retailing is trending downward while Internet Retailing is

trending upwards in the market sizes and distribution channels for consumer electronics and

appliances. Internet Retailing has quadrupled in the last fifteen years while Store-Based Retailing

has diminished by twenty percent for consumer electronics and appliances in the last fifteen

years. This will be important for Best Buy to concentrate on as they navigate the treacherous

waters of future Store-Based Retailing and handle the innovation of future trendy Internet

Retailing.

Analysis 3: Assess the Firm’s Strategy

Determining Return on Capital Employed into sales margins and capital productivity

ratios in 2016 year is one way to diagnose the featured Company’s Performance. There are two

categories of ROCE that we need to consider, which are Margin (Return on Sales) and asset

productivity in 2016. According to Financials Table from Exhibit 2, in 2016, Best Buy’s Net

Profit Margin is 2.3%. Within the margin, the COGS/Sales is 76.74% and SGA expense/Sales is

19.27% in 2016. Best Buy has 5.99% for asset productivity while the Inventory Turnover

(Sales/Inventories) is 6.0x and the Turnover of other items is 2.9 billion dollars.

Looking at the Exhibit 2, we can tell that the cost of goods sold increased from 2006 to

2011; however, since 2011, Best Buy’s Cost of goods sold was decreasing from 38,113 to 30,334

in 2016 due to they want to reduce costs to increase the profit margin. As a result, their strategy

was effective. Best Buy’s profit margin was 3.8% in 2006 and it went down to -2.4% in 2011.
Then, they changed their strategy by reducing the cost of goods sold to increase the profit

margin, the profit margin was increasing from -2.4% in 2011 to 2.3% 2016. This is a good signal

that Best Buy was improving their company.

There was a conflict between Best Buy’s COGS/Sales and net profit margin. In 2015,

COGS/Sales was 77.57% then it went down for 76.74%. It would be a good signal if the net

profit margin increases. However, the net profit margin in 2015 was 3.1% then it went down for

2.3% in 2016. Best Buy’s net profit margin is still higher than Amazon’s, which is a big

competitor of Best Buy and only had 0.56% net profit margin in 2015. In addition, Amazon’s

inventory turnover ratio was 8.34% in 2016 and it is much higher than Best Buy’s inventory

turnover ratio, which was 7.83%. It could say that Best Buy had challenge with its profit margins

and was kind of slowly catching with the digitalized commerce.

Alternatives

It will be vital to transfix our attention on the strategic alternatives that Best Buy should

contemplate when preparing for the rival forces that may endanger Best Buy’s future prospects in

business. Before we address the need for a more attractive and appealing online retail experience,

Best Buy should feel relieved that they still are the number one consumer electronics and

appliance retailer in traditional or non-online sales. As mentioned before, Joly expresses that one

of Best Buy’s phenomenal competitive advantages is that they are a multi-channel retailer. This

is pivotal to Best Buy’s current and future success because Best Buy can trigger sales in two

dimensions: the online avenue and the physical store environment. Despite Amazon having the

upper hand in online sales, Best Buy makes more money than Amazon in combined sales from

the online atmosphere and in-store domain.

 Best Buy must continue to strengthen their strategy for improving their online experience

for all customers. The growth and progressive future expansion of e-commerce requires the full

attention of Best Buy. Best Buy must tailor a unique customer experience to their website to

exceed customer expectations and foster relationship building with their customers. If Best Buy

can strive to solidify customer relationships through their online experience, Best Buy can cross

the common boundary of typical relationships with customers happening only at the store level.

Best Buy can enhance their online experience by implementing chat rooms for service and

product support to customers. This will raise positive customer perceptions about Best Buy

online, and it will lead to better online bottom line performance.

The decision to exit struggling international operations in Canada, China, and Europe was

beneficial to help the overall profitability of Best Buy. The international operations primarily

were a devastating anchor that weighed down the profitability of the entire company. The

addition of premium brands from Pacific Home and Kitchen, Magnolia Home Theater Design

Center, Sony, Samsung, Microsoft, and Apple contributes to Best Buy’s ability to be a one-stop

shop. Best Buy enables a superior customer experience from the flaunting of these product lines

and the experts in the form of sales associates or the Geek Squad to guide consumer decisions.

Best Buy’s special customer service is at the core of their strategy for flourishing in the future.

Recommendations

Based on the case, Best Buy showed the best results and remained competitive with the

competition when they made the decision to downsize their international market by closing

stores and centralized their focus to the online market. We have come to the conclusion that Best

Buy will need to maintain this strategy and focus moving forward to continue being successful

and sustainable. One thing that gives Best Buy an advantage over competitors is the personal
interaction that is available. If a customer has any questions or problems with a product, they can

talk to someone directly at the store or receive a visit from the Geek Squad to their home or

office. A recommendation to improve on this advantage further would be to add an online feature

to this interaction such as a video chat feature or chat box that pops up when searching through

products on the Best Buy website. This would allow customers to receive expert opinions on

products, and it would stimulate advice in comparisons and for choices in the product best for the

customer. This may seem like a small component, but it is those small components that can give

companies even the slightest competitive advantage.