Strategic Management

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 techno-

logical 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

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C A S E 22 Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model? Alan N. Hoffman Bentley University

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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 interna- tional 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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626 C A S E 2 2 Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?

knowledge. The company encouraged its employees to go out of their way to help customers un- derstand 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 non- commissioned-based, which resulted in consumers having more control over the purchasing pro- cess 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 customer- centric 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.

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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 operat- ing 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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C A S E 2 2 Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model? 627

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 informa- tion 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 indus- try as well, as sales were expected to have tremendous room for growth. Smartphones were an- other 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 own- ership 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 purchas- ing 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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628 C A S E 2 2 Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model?

The shift toward Internet purchasing also negated another once strong barrier to entry: cus- tomer 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 in- dustry 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.

$0

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$15,000

$20,000

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2005

2006

2007

2008

2009

2010

ExHIbIt 1 Quarterly Sales, Best

Buy Co., Inc.

SOURCE: Best Buy Co., Inc.

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 pres- sure. 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.

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ExHIbIt 2 Quarterly Net Income, Best Buy Co., Inc.

SOURCE: Best Buy Co., Inc.

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C A S E 2 2 Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model? 629

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 alarm- ing 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% in- crease in revenue accompanied by a 240% increase in accounts receivable. This created a poten- tial risk for losses due to bad debts. (For complete financial statements, see Exhibits 6 and 7.)

0.00%

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ExHIbIt 3 Operating Margin,

Best Buy Co., Inc.

SOURCE: Best Buy Co., Inc.

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ExHIbIt 4 Long-Term Debt

and Cash, Best Buy Co., Inc.

SOURCE: Best Buy Co., Inc.

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Inventory

Accounts receivable

ExHIbIt 5 Accounts Receivable and Inventory, Best

Buy Co., Inc.

SOURCE: Best Buy Co., Inc.

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630 C A S E 2 2 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 March 1, 2008 Assets Current assets:

Cash and cash equivalents $498 $1,438 Short-term investments 11 64 Receivables 1,868 549 Merchandise inventories 4,753 4,708 Other current assets 1,062 583

Total current assets 8,192 7,342 Property and equipment:

Land and buildings 755 732 Leasehold improvements 2,013 1,752 Fixtures and equipment 4,060 3,057 Property under capital lease 112 67

6,940 5,608 Less accumulated depreciation 2,766 2,302

Net property and equipment 4,174 3,306 Goodwill 2,203 1,088 Tradenames 173 97 Customer relationships 322 5 Equity and other investments 395 605 Other assets 367 315

Total assets $15,826 $12,758

Liabilities and shareholders’ equity Current liabilities:

Accounts payable $4,997 $4,297 Unredeemed gift card liabilities 479 531 Accrued compensation and related expenses 459 373 Accrued liabilities 1,382 975 Accrued income taxes 281 404 Short-term debt 783 156 Current portion of long-term debt 54 33

Total current liabilities 8,435 6,769 Long-term liabilities 1,109 838 Long-term debt 1,126 627 Minority interests 513 40 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 41 41

Additional paid-in capital 205 8 Retained earnings 4,714 3,933 Accumulated other comprehensive (loss) income (317) 502

Total shareholders’ equity 4,643 4,484

Total liabilities and shareholders’ equity $15,826 $12,758

SOURCE: Best Buy Co., Inc. 2009 Form 10-K, p. 56.

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C A S E 2 2 Best Buy Co. Inc. (2009): Sustainable Customer-Centricity Model? 631

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 end- to-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 comple- mented 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, acces- sories, 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.

Fiscal Years Ended February 28,

2009 March 1,

2008 March 3,

2007

Revenue $45,015 $40,023 $35,934 Cost of goods sold 34,017 30,477 27,165

Gross profit 10,998 9,546 8,769 Selling, general and administrative expenses 8,984 7,385 6,770 Restructuring charges 78 — — Goodwill and tradename impairment 66 — —

Operating income Other income (expense) Investment income and other 35 129 162 Investment impairment (111) — — Interest expense (94) (62) (31)

Earnings before income tax expense, minority interests and equity in income (loss) of affiliates

Income tax expense 674 815 752

Minority interests in earnings (30) (3) (1)

Equity in income (loss) of affiliates 7 (3) —

Net earnings $1,003 $1,407 $1,377

Earnings per share Basic $2.43 $3.20 $2.86 Diluted $2.39 $3.12 $2.79 Weighted-average common shares outstanding (in millions)

Basic 412.5 439.9 482.1 Diluted 422.9 452.9 496.2

1,870 2,161 1,999

1,700 2,228 2,130

ExHIbIt 7 Consolidated

Statements of Earnings, Best

Buy Co., Inc. ($ in millions, except per

share amounts)

SOURCE: Best Buy Co., Inc. 2009 Form 10-K, p. 57.

Marketing

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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 moth- ers, 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 prod- uct 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, gain- ing more market share internationally, successfully implementing marketing and sales strate- gies 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 ter- ritory 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 do- mestic 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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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 misrepre- sented 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 barri- ers 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 electron- ics 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 consis- tently 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 becom- ing 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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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 vari- ous 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 posi- tioned 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 brick- and-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

Online Competitors

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 differ- ent 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 data- base 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 televi- sion and home theater system. None of Best Buy’s competitors offered this extensive level of service.

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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 compa- nies. 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.

Successful Acquisitions

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 tremen- dously 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 de- ferred 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 competi- tion 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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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 tarnish- ing 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 market- place. 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 with- out 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

Products and Service

Leadership The two former CEOs of Best Buy, Richard Shultze and Brad Anderson, were extremely suc- cessful 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 chal- lenges, 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 experi- enced 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.

N o t e s 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 Colum-

bus Dispatch, May 18, 2009, http://www.dispatch.com/live/

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. Ibid. 8. Ibid. 9. Ibid. 10. 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.

11. “Best Buy Bombshell!” HD Guru, March 21, 2009, http:// hdguru.com/best-buy-bombshell/.

12. Circuit City Stores Inc. was an American retailer in brand-name consumer electronics, personal computers, entertainment soft- ware, 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.

13. 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/.

14. N. Maestrie, “Wal-Mart Steps Up Consumer Electronics Push,” Reuters, May 19, 2009, http://www.reuters.com/article/ technologyNews/idUSTRE54I4TR20090519.

15. Capital IQ, “GameStop Corp. Corporate Tearsheet,” Capital IQ, 2009.

16. E. Sherman, “GameStop Faces Pain from Best Buy, Down- loading,” BNET Technology, June 24, 2009, http://industry .bne t .com /tec h nol ogy/ 1000232 9 /g a mestop-faces-pain- from-best-buy-downloading/.

17. T. Van Riper, “RadioShack Gets Slammed,” Forbes.com, February 17, 2006, http://www.forbes.com/2006/02/17/radioshack- edmondson-retail_cx_tr_0217radioshack.html.

18. Capital IQ, “Amazon.com Corporate Tearsheet,” Capital IQ, 2009.

19. 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-movie- downloads-with-cinemanow-deal/.

20. Best Buy Co., Inc., Form 10-K, 2009. 21. Ibid. 22. Ibid.

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