FOR AMANDA SMITH ONLY

In the battle to become the largest consumer electron- ics retailer in the US, some might say that Best Buy is up by a few rounds. Beginning as a single location car and home stereo store in 1966, Best Buy has grown into a massive firm with 1,400 stores in North America and over 2,600 stores in Europe and China.1 As recently as 2007, Best Buy was seen as the team to beat, boast- ing a strong lead in market share over its competitors, large and consistent profits, healthy stock returns, and a global expansion strategy. In accomplishing this feat, Best Buy brought down its biggest competitors—Circuit City and CompUSA.2 With CompUSA out of the way (at least temporarily) in 2007, the economic recession and the ensuing reduc- tion in consumer discretionary spending added the last bit of leverage needed to topple Circuit City in 2009.3 This allowed Best Buy to emerge as the clear champion of the large format consumer electronics retail segment; a position many consider prophetic of future success. However, whether the downfall of its competitors is the result of Best Buy’s superiority or simply the inevi- table demise of a retail model that is becoming obsolete remains to be seen. Unfortunately for Best Buy, recent results suggest that the latter might be the case. As shown in Exhibit 1, Best Buy’s recent stock returns have been consistently below those of the S&P retailing group as well as those of the S&P 500.4 In addition, revenue growth slowed to a miniscule 1.6 percent over the course of fiscal year 2011.i While the recession can be blamed at least in part for this reversal of fortunes, more of the blame likely lies with the presence of new competitors in the industry including the better diversified Walmart and Costco, additional “go straight to the source” Apple stores, and the monster of online retail—Amazon i Best Buy’s fiscal year 2011 closed on February 26, 2011. .com. In fact, Amazon’s stock price increase is a near mirror image of Best Buy’s stock price decline.5 Likewise, these new competitors have been gaining market share in the consumer electronics segment while Best Buy has been losing it.6 The threat of these new entrants is particularly ominous in that they are quite different from Best Buy in terms of their structure, focus, and features that customers find attractive. For example, it is not uncommon for a customer to browse Best Buy for a particular product, use Amazon’s app on their smartphone to scan the barcode, and then purchase the product from Amazon at a better price while still in Best Buy—a scenario that has led to a new—and painful— nickname for Best Buy—“Amazon’s showroom.”7 History In 1966, Richard Schulze, disgruntled that his suggestions for improvement weren’t being taken seriously, quit his family’s electronics distribution business and, together with a partner, started his Minnesota-based home and car stereo store called “Sound of Music.” The firm grew through acquisitions and the opening of new stores and hit the million-dollar revenue mark by 1970. During the 70s, Schulze’s company experienced significant financial success, allowing him to expand the chain and buy out his partner. Even early in his managerial career, Schulze showed an uncanny ability to adjust to market trends and seek out profitable opportunities. For example, his position on a school board gave him insight into the fact that the customer pool of 15- to 18-year-old males (his target demographic) was shrinking. Consequently, he adjusted his business approach by diversifying into appliances and video equipment with the goal of targeting the expanding demographic of older and wealthier customers emerging in the 80s. As another example, when a tornado destroyed one of his stores but left the inventory largely unharmed, Schulze held a “no frills parking lot sale with reduced prices. The approach was so successful that in 1983, Schulze reorganized the business into a superstore format under the “Best Buy” brand name and in 1985, took the new company public.8

As Best Buy continued to evolve, the sales approach used in the superstores changed from that of a specialty electronics retailer with highly knowledgeable commissioned sales staff, to a mass merchandiser with a larger variety of products, discounted prices, and a more dispersed and non-commissioned sales force.9 Although customers seemed to appreciate the increased variety and did not seem to mind the reduction in sales assistance, some suppliers were skeptical of the superstore concept and, for a time, pulled some of their products from Best Buy’s shelves.10 Since the introduction of the superstore, Best Buy has refined the concept to allow for moderate levels of customer service, balanced with displays and product groupings designed to allow customers to shop for many items without extensive assistance.11

This moderated approach was successful and prompted the brand to expand rapidly throughout the US between 1989 and 1995—opening 47 new stores in 1995 alone. However, Best Buy’s rapid expansion brought with it high debt levels and low profit margins that eventually forced the firm to slow its expansion and reconsider some of its low-cost strategy. This setback notwithstanding, Best Buy began to expand again in 1999, opening new superstores in additional regions of the US and launching a separate subsidiary—BestBuy.com—to claim its stake to the online market.12

If Best Buy experienced rapid growth in the last 34 years of the twentieth century, it was paltry compared to the meteoric rise it experienced during the decade beginning in 2000. Growth came through

Globe: © Jan Rysavy/iStockphoto.com

organic means (opening new store locations), new ventures within the firm (Best Buy Mobile stores), and both domestic and overseas acquisitions.13 Domestic acquisitions included Magnolia Hi-fi (a chain of 13 high-end stereo electronics stores) in 2000, the Musicland Group (comprised of over 1,300 Sam Goody, Suncoast Video, and Media Play stores) in 2001, Pacific Sales Kitchen and Bath Centers (a chain of home appliance and remodeling stores) in 2006, and Napster (an online music download website) in 2008.14 Also domestically, the firm acquired Geek Squad (an omnibus computer/electronics installation, repair, and support service) in 2003 to offer after- purchase support services to customers, and Speakeasy (a provider of broadband voice, data, and IT services to small businesses) in 2008.15

International acquisitions were even more extensive starting with Future Shop (the largest electronics retailer in Canada) in 2002.16 Next up, Best Buy acquired 75 percent of Five Star Appliance (a major Chinese appliance and electronics retailer) in 2007, and scooped up the remaining 25 percent in 2009.17 In 2009, Best Buy formed Best Buy Europe and entered a 50/50 joint venture in Europe with Carphone Warehouse, a company that included over 2,400 stores and, not coincidentally, had acted as a consultant when Best Buy opened its US mobile stores two years earlier. These acquisitions were all followed by the opening of Best Buy superstores in their respective markets of Canada, China, and Europe. Best Buy also opened superstores in Mexico in 2009 and Turkey in 2010.18

Not all of Best Buy’s expansions were successful, however. Due to poor performance, the firm closed almost 100 Musicland Group stores in early 2003, and sold all remaining Musicland assets later that year.19 Best Buy’s Speakeasy acquisition ultimately did not provide the strategic advantages Best Buy had expected, and was sold in 2011. Due to the lethal combination of non- existent brand equity and cultural mismatch, the Best Buy branded stores in Turkey and China also performed poorly, resulting in the decision to close (or in the case of China, convert to Five Star branded stores) those locations in 2011 and 2012 respectively.20

Managerial changes at Best Buy have been infrequent over the course of the firm’s history and because most of the changes that have occurred have been internal leadership promotions, managerial succession has had little impact on Best Buy’s overall strategy. Dick Schulze led the company from its founding in 1966 until he resigned from the CEO position in 2002 and continues to be a driving force as Chairman of the Board. Upon Schulze’s retirement from CEO, Brad Anderson, who had been serving as the firm’s vice chairman, took over the position and worked as the company’s CEO until 2009 when he retired. Brian Dunn, who started his career with Best Buy working as a sales associate over 25 years ago, accepted the CEO position in 20

he retired. Brian Dunn, who started his career with Best Buy working as a sales associate over 25 years ago, accepted the CEO position in 2009.21 Industry Suppliers Due to the variety of products Best Buy offers, the firm maintains relationships with hundreds of suppliers. Even so, in 2010 Best Buy purchased almost 65 percent of its products from just 20 suppliers with 5 of those suppliers (Apple, HP, Samsung, Sony, and Toshiba) providing almost 40 percent of its merchandise.22 Although there are no signs of supply disruption from any of these major companies, supplier firms themselves are evolving. In the past, major electronics producers like Sony would sell only to specialty electronics retailers like Best Buy or Circuit City. Today, the major electronics suppliers are increasingly allowing their products to be sold by warehouse clubs and online distributors. As suppliers extend the scope of their distribution, Best Buy loses the exclusivity it once enjoyed.23 Compounding this problem is the fact that major supplier firms like Apple are integrating forward and distributing their products through websites and bricks-and-mortar stores.24 As Best Buy has increased its emphasis on cell phone sales through the Best Buy Mobile store-within-a-store format, the major cell phone carriers are becoming more important as suppliers than in the past.25 However, because the cell phone business is becoming increasingly concentrated and commoditized, the cut for middle- man distributors is dwindling. In the end, vendors such as Best Buy may find it too difficult to achieve profit margins sufficient to continue this foray.26 Customers Like many firms that focus on retail sales, Best Buy’s customers represent a broad array with no single customer profile accounting for a significant portion of overall sales.27 Nevertheless, in its effort to meet each customer in an efficient manner, Best Buy has worked to understand its customers better. As an example, the firm has recently worked to increase its offerings to business customers—training designated staff to provide consultation services to business purchasers as well as showcasing products specifically designed for business applications.28 Of course, technological trends have important implications for firms in the consumer electronics industry. The increased use of the Internet provides businesses with multiple challenges and opportunities, both in terms of the range of products offered as well as new ways to conduct business and access customers. The trend toward a decrease of retail prices in the consumer electronics industry combined with an increase in market saturation could become problematic for firms.29 Additionally, the smartphone and tablet trend toward the consolidation of functions (i.e. computing, messaging, phone calls, GPS navigation, games, camera, etc.) will influence not only the demand for these products, but the products they replace as well. The increasing rate at which technology is changing offers firms in this industry an endless supply of new products, but carries with it the threat of being caught with unsold stock that is newly obsolete or simply suddenly unpopular. To offset this particular risk, firms with the ability to bring products to an international market could benefit from economies of scale. In addition, offering products considered by advanced markets as obsolete to secondary and tertiary markets would extend the shelf life of a product and give sellers the opportunity to move products from inventory that could not otherwise be sold. International access to inexpensive labor and production facilities also affords firms in the industry the opportunity to consider backward integration in terms of developing their own “house brand” products with lower financial risk than would be the case without international options. Specifically in regard to the US, the aging population suggests the need to offer products and use marketing approaches that appeal to older customers. Likewise, the increased ethnic diversity of the population, the staying power of the dual career family, and the subsequent increase in the purchasing power of women mark opportunities to provide and market electronic products to consumer groups beyond the typical white-middle-aged-male segment. Also, stagnating population growth in the US and expanding international populations and economies fuel opportunities in international expansion-opportunities that come however with the threat of increased competition from international firms.30 The economic downturn and tightening of credit late in the most recent decade resulted in decreased growth for several consumer electronics firms and likely contributed to the demise of Best Buy competitors such as Circuit City and CompUSA. In general, firms selling lower-end electronic products are thought to benefit from this trend while those selling cutting-edge technologies are expected to suffer. Clearly, the speed and extent of economic recovery will influence future growth opportunities. Recent indicators suggest that personal income is on the rise in the US, a change that will likely increase the demand for luxury, high-end, and discretionary products once again.31 However, recession induced trends such as increased financial prudence could at least temporarily delay this effect. Responses to the recession that influence inflation and trade balances internationally—and by extension, exchange rates—will affect the viability of international expansion. With increased competition in the consumer electronics industry coming from online retailers, the political/legal segment is becoming increasingly important to firms like Best Buy. This is because when a company operates even a single bricks-and-mortar retail outlet in a US state, all sales made within that state, both in-store and online, are subject to sales tax.32 Alternatively, if a firm does not have a “physical presence” in a state, they do not have to charge its online customers sales tax. The issue up for debate is whether distribution centers fall within the definition of “physical presence” with online retailers threatening to pull distribution centers— and the jobs they provide—from any state that says it is so. With retail locations in the majority of US states, Best Buy would like to see state legislators level the playing field by clearing up the definition to explicitly include these distribution centers.33 Competitors The industry in which Best Buy operates is in an unprecedented state of flux. The recession finished the job of eliminating weak competitors in the specialty consumer electronics store segment that started years earlier with the advent of the Internet and mass-market merchandisers. With the elimination of Best Buy’s traditional head-to-head competitors (i.e., those like Circuit City and CompUSA that sold the same products and used the same format), Best Buy is left to compete primarily against unfamiliar rivals on unknown terrain. The strategies and tactics used by competitors coming from the online retail, warehouse club, and mass market approaches differ from those traditionally used by bricks-and-mortar electronics stores. Major competitors in the “new” consumer electronics industry and their effects on industry competition are discussed below. Amazon.com. Jeff Bezos developed the idea for Amazon.com in 1990 when he was struck by the goodness-of-fit of book selling via online marketing because of the need for precise and automated inven- tory controls in each. Over the next four years, he developed the idea for his new company and launched the online bookstore in 1995. Sales grew rapidly and the company went public in 1997. Realizing the potential based on its unprecedented success, in 1998, Bezos contracted with AOL and Netscape to increase Amazon’s visibility to Internet users, and later that year, Amazon added music, video, electronics, and toy segments to its product offerings.34 Since its inception, Amazon has continued to grow— sometimes through its own ventures including the development of Endless.com, Amazon’s online shoe store, its own e-reader device, the Kindle, and the addition of media downloading services including music, TV shows, and movies—but oftentimes through acquisitions of online retail firms. Each representing a product market niche, the firms Amazon has acquired offer a range of products and services including audio books (audible.com), to pet care (pets.com), and groceries (homegrocer.com). Acquisition of a European version of Netflix suggests that Amazon may be considering entry into the mail-delivered DVD rental business in the US. While most acquisitions serve to extend Amazon’s reach into markets it can effectively and efficiently supply, some come with additional benefits as well. For example, Amazon’s acquisition of Zappos.com not only increased its presence in the online shoe market but also made it possible for Amazon to integrate some of Zappo’s customer service skills into its main operation.35

Not one to be behind the curve, Amazon quickly capitalized on the smartphone trend as a way to sell new products and attract new business. Early in 2011, Amazon went into direct competition with Google’s App Marketplace with the launch of its Appstore for Android. Amazon’s site allows customers to “test drive” an app before purchasing, carries ad supported free apps, and has a “premium-app-a-day” giveaway to increase market share and encourage customers to regularly check back with the site.36 In a major coup and as mentioned previously, Amazon’s new shopping app allows smartphone users to say the name of a product or take a picture of its cover art or bar code (presumably in a store) and receive instant information on the price of the product at Amazon—as well as the opportunity to make the purchase.37

There are two factors central to Amazon’s suc- cessful bid as a consumer electronics retailer. First, its operating expenses are lower than those typical of a bricks-and-mortar operation with less than aver- age lease obligations, payroll, insurance, utilities, and the like.38 Because of these cost savings, Amazon has been able to engage in price wars to increase market share and profits. Second and as previously discussed, because Amazon does not have physical retail locations, it is able to sell its products without sales tax in most locations, giving it an automatic price advantage of several percent over bricks-and-mortar competitors in most states.39 As might be expected, Amazon’s operating results—even in the midst of a recession—have been impressive. The firm has averaged 32 percent annual revenue growth between fiscal years 2008 and 2010 and, with growth of almost 40 percent during the last year, this growth is accelerating. During this same three-year period, the firm’s net profit margin remained stable at 3.37 percent.40 These results support investors’ optimism for Amazon’s future and account for the 33 percent increase in its stock price.41

Walmart. Sam Walton opened a five-and-dime store as a franchisee in 1945. After the franchise owners dismissed his idea of opening discount stores in small towns, he and his brother Bud opened their first Walmart store in 1962. The firm grew quickly and is now the largest retailer in the world. Although most of its sales come from Walmart and Sam’s Club stores in the US, Walmart’s international divi- sion is growing rapidly and has established its presence in Canada, Mexico, Europe, and Asia.42

Walmart stores epitomize the “big box” model of retail. The firm operates stores that range from large to gigantic with product offerings designed to meet most of the needs of the average consumer. While the mega retailer officially falls within the “Discount and Variety Retail” industry, depending on location, its major product offerings may include groceries, pharmacy goods, gasoline, clothing, furnishings, music and video entertainment, software, office products, sporting goods, toys, consumer electronics, and appliances. Additionally, the firm has a significant online presence, has dabbled in online music downloads, and is considering a video downloading venture.43

Walmart uses its unmatched economies of scale and scope, considerable bargaining power with suppliers, as well as well-developed logistical competencies to offer a broad range of merchandise at prices that competing firms have a hard time matching.44 While Walmart does not classify itself as an electronics retailer, it is second in electronics sales only to Best Buy—and gaining. It is important to note however that most of Walmart’s electronics sales come from lower-end audio/video products where margins tend to be lower.45

Similar to most businesses considered in economic terms to carry inferior products, Walmart fared well during the recession. While revenue growth was

modest and stable from fiscal year 2008 to 2011 at 3.65 percent per year, the firm’s net profit margin steadily increased from 3.3 percent in 2009 to 3.89 percent in 2011.46

Costco. The firm known today as Costco Wholesale resulted from the merger of Price Club and Costco Wholesale in 1993. Price Club was founded by Sol Price in 1975, and the original Costco was founded by Jeffrey Brotman, a former executive VP of Price Club, in 1983. The merger of the two firms and its subsequent growth in the US, Canada, Mexico, Europe, and Asia makes Costco Wholesale the largest wholesale club in the world. Though Costco locations offer limited variety within each product type, the scope of its product offerings is wide and includes fresh foods and groceries, household items, clothing, jewelry, pharmacy, office supplies, tools, auto- motive supplies, consumer electronics, furniture, insur- ance, payroll and travel services, and even car sales.47

Costco offers products that are of a slightly higher quality compared to other mass-market merchandisers, often contracting with upscale brands for large quantities of a certain product. These products may then be sold under the original brand name (or a version of it) or, alternatively, rebranded and sold under Costco’s Kirkland Signature store brand that, as store brands go, has come to have an upscale image. Costco is able to offer low prices by almost exclusively stocking items that sell quickly, allowing it to take a smaller margin on each item while continuing to provide exceptional value to its customers and maintaining a high level of profitability. As is the case with Walmart, consumer electronics is only a portion of Costco’s business. Best Buy attempts to maintain an edge over discounters like Costco by offering superior service, a bigger selection, and cutting- edge technologies. However, with the recent economic downturn, consumers have been more reticent to jump into buying the newest technologies, making Costco’s “garden variety” offerings and low prices quite appealing. The firm has also made some progress on the service front. While its departmental service remains limited, the addition of its “Concierge” program— offering after-sale technical assistance via telephone and a free second year warranty—is beginning to encroach on benefits typically dominated by specialty retailers.49 In addition, Costco has begun to develop relationships with premium suppliers like Sony, allowing it to sell higher-end products that were once distributed only by specialty electronics retailers.50

Despite its discounted pricing, Costco’s reputation for higher product quality backfired during the economic recession as many customers returned to their “bare bones” purchasing habits. This likely explains Costco’s 6.57 percent three-year revenue growth average

compared to its five-year average of 8.05 percent. Nevertheless, Costco’s traditionally low net profit margin has been stable with a 1.65 percent average between 2007 and 2010.51

Radio Shack. In 1963, Charles Tandy purchased a financially distressed electronics parts distributer named Radio Shack to add to his investment portfolio. Within ten years, the Radio Shack portion of his portfo- lio accounted for 50 percent of sales and 80 percent of earnings. Between 1973 and 2010, the firm undertook multiple acquisitions and divestitures in industries as diverse as furniture, trucking, and consumer credit, but the small format Radio Shack branded store remained at the center of business.52

Radio Shack’s primary industry is consumer electronics. Despite offering a small variety of traditional consumer electronics including televisions, DVD players, stereo equipment, MP3 players, navigation systems, electronic toys, etc., the company is most well known for its selection of batteries, electronic parts, and components—a market niche that has not been intruded upon by its larger competitors. However, Radio Shack has lost market share of traditional consumer electronics to Best Buy in recent years and its specialty electronics and components business has not been profitable enough to carry the chain. In response to this difficulty, Radio Shack (or “The Shack” as it is trying to rebrand itself) shifted its emphasis to the sales of cell phones and wireless contracts for three major carriers—a shift that resulted in a significant financial turnaround for the firm.53 However, major cell phone companies have reduced the profitability of the cell phone brokering business and this will cut into Radio Shack’s profits and growth beginning immediately.54

At this point, Radio Shack’s operating results still tell a story of recovery. Revenue growth in 2010 was 4.6 percent compared to an average of 1.7 percent for the three years prior and −2.52 percent for the five years prior. Net profit margins also increased markedly after Radio Shack’s emphatic switch to mobile phone and contract sales, averaging 4.88 percent for the four years since refocusing, compared to a net profit margin of 1.54 percent for the year before the change.55 However, net profit margins have stagnated at recent levels (4.61 percent for YTD 2011) and have nowhere to go but down as the cell phone business becomes increasingly less profitable.

The Big Picture

Reporting Segments

Best Buy’s operations are divided into two main segments. The domestic segment accounts for the bulk

of Best Buy’s revenues ($37.1 billion of $50.3 billion in 2011), and is made up of Best Buy branded big box stores, a number of Best Buy Mobile, Geek Squad, Pacific Sales, and Magnolia Audio Video stores, as well as the Napster brand. The international segment is made up of relatively fewer Best Buy stores and an eclectic mix of appliance, electronic, and cell phone store brands Best Buy has acquired in its forays into international markets. This division accounts for $13.1 billion of 2011 revenue.

Both the domestic and international divisions generate revenue through sales in six main categories: consumer electronics (televisions, home theater systems, and DVD players), home office (computers and cell phones), entertainment (DVDs, Blu-ray discs, and video game software), appliances (refrigerators, washing machines, and vacuums), services (installation, repair, and support), and other (non-core items such as food and beverage). As shown in Exhibit 2, consumer electronics and home office products account for the bulk of sales in both divisions while entertainment makes up a significant portion of sales (14 percent) in the domestic division, and the appliances and services segments make up a significant portion of sales (9 percent each) in the international division.

Retail Formats

Best Buy Big Box Stores. These large format stores account for the bulk of the firm’s domestic operations and are beginning to become more prevalent abroad. The stores are designed to be one-stop shops that meet all of the consumer electronics and home appliance needs of its customers. These stores offer a wide variety of brands and models in each of the product segments listed above including premium brands (such as Sony, Apple, and Samsung in the consumer electronics seg- ment) as well as lower-cost brands (such as LG), and more recently, low-cost store brands (such as Insignia). In addition, many Best Buy stores now offer the Best Buy Mobile store-within-a-store feature and access to Geek Squad services, with plans to outfit the remaining stores with these services as well.57

Best Buy’s big box stores have been profitable in the US, Canada (where Best Buy also operates Future Shop large format stores—giving the illusion of competition), and Mexico. In its original plans with European joint venture partner Carphone Warehouse, Best Buy announced it would open its first stores in 2009 and “a hundred or so” big box stores in the UK (later re-estimated at 80) and 200 across Europe within four to five years.58 After opening its first location a year late in 2010, Best Buy Europe CEO Scott Wheway speculated it would have another nine stores open within the year.59 As of the mid-year mark in 2011, Best Buy Europe had managed to open ten locations in the UK and was going

back to the drawing board with Carphone Warehouse to review their plans.60 Best Buy has had difficulty in other international locations as well. The Best Buy branded big box stores in China have not proven to be as profitable as those run under the acquired Five Star brand, and Best Buy is currently working to reformat its Best Buy stores into Five Star locations. Additionally, the Best Buy store in Turkey has been unprofitable and will be closed this year.61 Closer to home, with no large format competitors left in existence, the size of some of Best Buy’s big box stores may be superfluous as, having a showroom four times the size the nearest competitor may be less profitable than being only two or three times their size.

Geek Squad. Best Buy acquired Geek Squad in 2003 and integrated the firm and its concept within its big box stores. This branch of Best Buy offers after-sale services including installation, repair, and technical support.62 Examples of specific services offered include home the- ater and surround sound setup, flat screen television mounting, wireless network setup, virus and spyware removal, and the installation of aftermarket electronic equipment such as GPS and remote starters in cars.63

Though the services Best Buy sells through the Geek Squad make up a relatively small portion of revenue, the percentage is consistently increasing and the profit margin earned on Geek Squad services is higher than the firm average.64

Best Buy Mobile. These stores focus on selling cellular phones and small computing devices and their associated service plans and accessories. Best Buy Mobile stores can be found within all domestic and Canadian big box loca- tions and, in increasing numbers, as stand-alone “small box” stores.65 It offers cell phones from all major brands including Apple, Motorola, LG, and Samsung running on all major platforms (i.e., iOS, Android, Blackberry, and Windows), and sells service contracts with all major providers such as Verizon, AT&T, T-Mobile, and Sprint as well as contract-free phones through Boost Mobile, Virgin Mobile, and MetroPCS.66 As with Geek Squad, Best Buy Mobile operations have provided a financial cushion for the firm in what could have been a very dif- ficult time. For example, although Best Buy comparable store sales experienced a five percent slump in December 2010, the decrease would have been 15 percent if not for the addition of Best Buy Mobile sales.

Bestbuy.com. In recent years, Bestbuy.com, the firm’s online channel, has become more integrated with the in- store experience. Most of the same products offered in the big box stores are available through the online channel, as well as many additional products.68 Driving customers to the site, Bestbuy.com attempts to outdo other online retailers by providing superior assistance to customers making purchases. For example, the site provides 24/7 human customer assistance, user forums, professional and customer reviews, and optional in-store pickup. The website’s value to Best Buy extends beyond the revenue produced by sales. In fact, it has been estimated that regardless of whether they eventually purchase products from the website or a bricks-and-mortar store, 60 percent of Best Buy customers begin their research and shopping on the Best Buy website.69

The Carphone Warehouse. Unlike the domestic division’s big box format stores, most of the stores mak- ing up the Best Buy Europe portion of the international division are either Carphone Warehouse or Phone House branded “small box” stores. Not coincidentally, these stores are similar to Best Buy Mobile stores, offer- ing cell phones, service contracts, and small computing devices with a large percentage of their revenue derived from the sales of device insurance. (A team of consul- tants from Carphone Warehouse helped develop the Best Buy Mobile plan.) Many of the stores also offer Geek Squad services that focus mainly on the repair of consumer-owned devices.70 Best Buy Europe is a 50 per- cent owner in the over 1400 Carphone Warehouse and Phone House stores in Europe.

Five Star Appliances. Prior to its acquisition by Best Buy in 2007, the Jiangsu Five Star Appliance Company was one of the largest retailers of consumer electronics and appliances in China.71 Best Buy’s reasoning for the acquisition was two-fold. First, it offered a quick way to move into and gain a foothold in the lucrative and grow- ing consumer electronics market in China and second, it was seen as an opportunity to get an inside perspec- tive of selling electronics in China from a successful firm. With the exception of entertainment media, the large format Five Star stores offer a similar mix of products to Best Buy stores in the US. Overall, Best Buy’s Five Star branded stores have done well, even during the recession, and Best Buy plans to open 10 to 15 additional stores in the coming year.72 The importance of the Five Star stores is seen when their success is juxtaposed against the lack- luster performance of the soon-to-be-closed/re-branded Best Buy stores in China. With similar product offerings and overhead expenses, this disparity of outcomes can only be explained by the fact that Five Star was devel- oped by individuals who understood the culture, while

Best Buy stores and operating procedures were largely imported from abroad.

Past and Current Strategies

Before Best Buy’s bricks-and-mortar competitors shut down it was clear that, considering how easy it was to drive to a competitor’s location, no firm targeting the broad consumer electronics market would be successful if it charged too high a premium over its competitors. Because of this, Best Buy was forced to find ways to reduce its costs to remain competitive. While Best Buy’s size and purchasing power was and is an important factor in keeping costs down, former CEO Brad Anderson admitted that the firm did not develop its own approaches to reducing costs. Instead, Best Buy observed companies like Walmart and Target and then acted as a “fast follower” to implement new ideas and efficiencies in ways suited to Best Buy’s operations.73 Through copying the successful approaches to logistical issues of stores like Walmart and Target74 and building relationships with its network of suppliers,75 Best Buy is able to quickly and accurately distribute its products to stores and customers worldwide. Although cost efficiencies have been important to Best Buy, to avoid falling into a “commodity hell” where all competition in the industry is based on price, the firm has had to develop other reasons for Best Buy to be a shopper’s first stop. According to Ranjay Gulati of Harvard Business School, Best Buy has done this by doing a better job than its competitors at looking at the electronics industry through the eyes of a customer. In other words, instead of telling customers what they should want next, Best Buy works to understand both the technology as well as its customers’ needs, wants, and tendencies so it may then provide technological solutions that not only match, but actually work for the consumer.76 In addition, rather than simply present- ing a display model and a stack of boxes containing the product, Best Buy is highly adept at anticipating all of the needs a consumer may have in association with a particular purchase. These needs may include help with product comparison and selection, home delivery and setup, training, accessories, service, etc. To meet these needs, Best Buy has developed well thought out and communicated processes, structures, displays, and services.77

As an extension of this proficiency and even before the recent narrowing of the field in the big box segment of the consumer electronics industry, Best Buy had a reputation for providing superior sales assistance for a big box retailer. Today, with its main competitors a warehouse chain offering essentially no sales assistance, a website that discourages person-to-person customer service contact, and an oversized grocery store with

Copyright 2011 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). extremely limited specialized support staff, it would seem that Best Buy has the potential to not only retain, but extend, this lead. Disappointingly, however, a recent consumer survey revealed that customers perceived Best Buy’s service as only average, placing Best Buy flat even with Amazon and only slightly ahead of Costco and Walmart. While the customer service expectations of a consumer entering a Best Buy are likely higher than when entering a Costco or Walmart, Best Buy cannot lower the bar to those levels simply because CompUSA and Circuit City are no longer around.78

Best Buy refers to its overarching plan for its future as the “Connected World” strategy. Best Buy defines this approach as follows: “Broadly defined, our Connected World strategy is based on the goal to demystify and humanize technology to help customers get the most out of the rapidly expanding role that technology plays in their lives.”79 Major objectives associated with this goal include growing the Bestbuy.com web presence to capitalize on online opportunities, expanding the Best Buy Mobile segment in the US, utilizing its size and scale to improve returns in international markets, and increasing its presence at a reduced cost by increasingly relying on stores with a smaller footprint.80 As a positive indication of the potential of its international expansion, compared to many firms that experience a high failure rate in their foreign acquisitions, the vast majority of Best Buy’s acquisitions of foreign electronics companies have been profitable.81 This suggests that the firm knows how to bring the benefits of Best Buy’s scale and experience to its acquired firms without requiring conformity in areas that could dilute the location specific strategies that made the acquired firm desirable in the first place.

While Best Buy has standardized many of its processes across its big box stores to create economies of scale and reduce operating costs, as illustrated by its management of acquisitions, Best Buy remains flexible in many novel ways including its understanding of the benefits attached to supporting entrepreneurial innovations initiated at the store level. For example, noticing the large Brazilian population near a Manhattan store, store managers hired Portuguese-speaking staff to better serve that population segment and brokered a deal with a Brazilian cruise company to bring tourists to Best Buy as a stop on their trip.82 With a company culture that values the ability to recognize opportunity and spearhead this type of initiative, Best Buy is more likely to develop company policies that allow it to compete successfully with small local competitors both domestically and abroad.

As for innovation beyond the big box model most often associated with Best Buy, the rapid financial success of the new Best Buy Mobile stores in the US and Canada, as well as the ongoing profitable growth of the Carphone Warehouse stores in Europe suggest that Best

Buy has the capabilities necessary to compete in this market. Furthermore, the speed with which Best Buy Mobile stores in North America went from non-existent to successful suggests that Best Buy may be particularly adept at adapting knowledge gained in one locale to another.

Financial Results

The above strategies have resulted in the financial outcomes examined in this section. Despite a 1.16 percent increase in gross revenue, Best Buy’s fiscal year 2011 net income dropped 3 percent (see Exhibits 3A and 3B for and overview of BBY financial performance). A key component of Best Buy’s decreasing net income was an increase in selling, general, and administrative (SG&A) expenses. From 2010 to 2011, SG&A increased $452 million, or 4.4 percent, and followed its 2009 to 2010 increase of over 10 percent. Clearly, Best Buy did not adjust its fixed costs when revenue growth went into decline.83 Although its increased expenses were well masked by gains in other segments, the economic downturn and changes in the competitive nature of the industry have affected Best Buy. While its average revenue growth over the last five years was 10.26 percent, it slowed to 7.9 percent in the last three years, and became downright sluggish in fiscal year 2011 at 1.16 percent.

Best Buy’s domestic sales contribute 74 percent of total gross revenues—$37.2 billion compared to $13.1 billion from the international segment (see again, Exhibit 2). In the international segment, Best Buy’s primary regions are Europe with 10.9 percent of total revenue ($5.5 billion), Canada with 10.8 percent ($5.4 billion), and China with 3.9 percent ($1.9 billion) (Exhibit 4). Beyond these three, the total of all other foreign sales contribute the remaining .03 percent ($155 million) of total revenue. Historical financial reports demonstrate that revenue growth as a percentage of sales is greatest in the international segment of the firm; from 2007 to 2010, international gross revenue increased an average of 15 percent per year as opposed to less than 6 percent in the domestic segment.84

Looking at the product categories that Best Buy sells, consumer electronics comprise 37 percent of US sales (down from 39 percent in the previous fiscal year) and 21 percent of international sales (up from 20 percent) (Exhibit 2). Home office equipment was the largest component in foreign sales at 55 percent, which was a 2 percent increase from prior year sales. In the US, home office equipment accounted for 37 percent of sales, up 3 percent from the previous year. In total, the remaining categories of entertainment, appliances, services, and other made up 26 percent of US sales (down 1 percent as a group) and 24 percent of international sales (down 3 percent)

When compared to its competitors, Best Buy’s gross profit margin of 25.14 percent is only slightly less than Walmart’s 25.26 percent and better than Amazon’s 22.37 percent. It is in the net profit margin that Best Buy’s challenges surface. At 2.54 percent, Best Buy is markedly lower that Walmart and Amazon at 3.88 percent and 2.85 percent respectively. Providing further comparison, the market standards in the gross and net profit margin categories are 30.36 percent and 3.87 percent respectively.86

Strategic Leaders

The strategic leaders responsible for the financial results discussed are described in this section. Best Buy’s

ownership is made up of 65 percent institutional and mutual fund owners, 19 percent insiders and large-block shareholders, with the remaining shares held by various investors. The largest institutional stockholder of Best Buy (FMR LLC) and the largest mutual fund stockholder (American Funds) collectively own more than 10 percent of Best Buy thus providing a solid governance mechanism. The largest individual stockholder is Richard Schulze, founder and current Chairman of the Board.87

External members and insiders represent 71 percent and 29 percent of Best Buy’s comparatively heterogeneous Board of Directors, respectively. The key insiders on the Board of Directors include Richard Schulze (Founder and Chairman of the Board), Brian

Dunn (CEO), and Elliot Kaplan (Director of Finance & Investment Policy Committee). Additional key insiders on the Board include Jianguo Wang (Chairman of subsidiary Jiangsu Five Star Appliance), Kathy Higgins (Independent Director of Best Buy since November 1999), Ronald James (Independent Director of Best Buy since May 2004), and Rogelio Rebolledo (Director of Best Buy since August 2006). Key outsiders on the Board include Hatim Tyabji (Bytemobile), Gerard Vittecoq (Caterpillar), Lisa Caputo (Citigroup), Matthew Paull (KapStone Paper and Packaging), Sanjay Khosla (Kraft Foods), and George Mikan III (UnitedHealth Group).88

Best Buy’s key strategic decision makers include Richard Schulze (Founder and Chairman of the Board), Brian Dunn (CEO), James Meuhlbauer (CFO), and Andrew Harrison (Best Buy Europe CEO).89

Richard Schulze received technical training in electronics from the US Air Force and founded the company in 1966. He took Best Buy public in 1985 and held the position of CEO for the following 19 years. Aside from Best Buy, Schulze is a member of several Boards including St. Thomas Business School, National Entrepreneurs of the Year Institute, and Pentair, Inc. Schulze’s marketing and entrepreneurial spirit was instrumental in Best Buy growing into the largest US electronics retailer. Currently Chairman of the Board, Schulze’s main responsibilities include long-term strategic planning and the development of leaders within the company. Schulze’s total compensation for the year 2010 was $165,000.90

Brian Dunn has been with Best Buy for 26 years, working his way up from Store Manger to become CEO in 2009. In addition to his position at Best Buy, Dun also serves on the Board of Directors for Dick’s Sporting Goods and is a member of the Board of the Consumer Electronics Association. Dunn’s total compensation for the year 2010 was $10.2 million.91

James Meuhlbauer was hired as CFO in 2008 after serving as interim CFO in 2007. He came to Best Buy after 10 years with Pillsbury where he was a Vice President and Controller. Meuhlbauer has extensive experience in audit/compliance having worked as a consultant and full time employee of several law firms. Meuhlbauer’s total compensation for the year 2010 was $2.95 million.92

Andrew Harrison was named CEO of Best Buy Europe in February 2011 amidst a suddenly unstable time within the Carphone Warehouse/Best Buy joint venture during which it lost several key leaders including Best Buy Europe’s head of online services, its branded operations chief, marketing director,93 CEO, and Carphone’s senior insight manager.94 Originally hired in 1995 by Carphone Warehouse as its Strategy Manager, Harrison became Carphone’s Commercial Director in 1998 and CEO in 2001. Harrison had been previously appointed COO of Best Buy Europe in July 2010 in addition to his CEO position with Carphone Warehouse and The Phone House.

Challenges

Best Buy’s strategic leaders begin the second decade of the 21st century facing several key strategic challenges. From its beginnings as a single retail outlet, it has grown to become the largest big box chain in the consumer electronics industry. Through its 45-year life, the company has successfully navigated changes in technology, customer needs, and the industry environment in general to remain profitable but to continue to do so will require its leadership to make important strategic decisions. An increased intensity of competition in an evolved and less familiar form is exerting pressure on Best Buy’s bottom line. The retail industry in general has embraced the online delivery of products—a development that places weighty competitive pressure on retailers that continue to bear the costs associated with maintaining bricks-and-mortar stores. As the products that Best Buy traditionally sells become increasingly commoditized and profit margins are reduced, the firm will need to find new ways to achieve profitability in the industry—or will need to find a new industry in which to compete. Will Best Buy try to continue to set itself apart through its product line and customer service? Will it try to find a way to reduce costs substantially enough to “slug it out” with online competitors? Can its strategic leaders formulate a strategy to do both? At face value, Best Buy’s “Connected World Strategy” appears to be a reasonable approach to answering these questions. A closer and more critical analysis of the firm’s own description of how it will execute this strategy, however, raises concern. When parsed for meaning, this strategy seems to center on customer facing goals. However, whether these goals can be achieved via the operational objectives and physical alterations (i.e., non customer facing goals) discussed earlier remains to be seen.

Combining these questions leads to one main query that the firm’s leadership will need to answer: Given the realities of the new industry environment, how can Best Buy best develop, combine, and exploit its capabilities and competencies to form a sustainable competitive advantage? Best Buy’s continued growth, profitability, relevance, and, in fact, survival will likely depend on the ability of its leaders to find concrete and effective answers to this question