Best Buy Case Study

Best Buy, Inc. Problem Summary “Strategy is concerned with matching a firm’s resources and capabilities to the opportunities that arise in the external environment,” (Grant p. 114). Best Buy became a market leader in 1996 by paying close attention to its industry and matching its resources and capabilities to its market. In the early 2000s, Best Buy was starting to lose its competitive advantage in the market. They were focusing on the external factors, when they needed to look inside their own firm, to identify their capabilities with their established resources. While they have the resources, they lacked a strategy on how to use these resources to turn them into capabilities. They have been able to establish their competitive advantage over the years but Best Buy needs to sustain their competitive advantage. To establish their competitive advantage Best Buy needs to be relevant and address scarcity. Best Buy has an array of products and services and to be relevant, they need to use their resources to provide customer value of the products and services that they offer. With other companies offering similar products, but with those firms using their capabilities based on establishment location of no tax, faster shipping of products, or lower service fees, Best Buy was taking a hit. Also, because other companies had the same capabilities and/or offerings, this made their resources less scarce, which creates an additional problem to keeping their established competitive advantage. Best Buy invested heavily in brick and mortar infrastructure to sell their products or services, when they need to focus and invest more on e-commerce or how to combine the two appropriately for profit. Best Buy bought into many other firms, and brought different segments into their stores, to create a store within their store. They were using many resources to try to bring more value and options to the products that they offer. This affects the transferability of Best Buy, which means different parts of its firm can be bought and sold, which “erodes” its competitive advantage which also affects the sustainability of its competitive advantage (Grant p.129). Best Buy is financially capable of expanding its product line and investing in human capital which could help it’s service line. With many options for products, the quality of service is what sets a firm apart from other firms. Many of their offerings can be replicated in the industry, but they need to focus on how their resources are more relevant or create more value for their customers. They also need to focus on e-commerce over their brick and mortar stores. They began losing market share because their competitors were capitalizing on the e-commerce market. Along with establishing a competitive advantage and sustaining that competitive advantage, Best Buy needs to appropriate the returns for their competitive advantage. If they do all three, they are making full use of their resources and their capabilities. Analysis-Establishing Competitive Advantage Best Buy establishes a competitive advantage by providing relevance in their products by expanding their services and product availability to create value to the customer. As technology grows, computers, appliances and services need to be expanded and enhanced to meet the needs of the consumers. Best Buy has been able to weather the storm when it comes to the competition in the market. They have been able to compete within the market and appeal to consumer trends by creating an inventory of electronics for a one stop shopping experience. Not only will they deliver and install appliances they have also found a way to service certain electronics such as computers through their Geek Squad service center in order to have revolving customers. Keeping up with current technological trends and creating a shopping experience that lures customers to their stores in search of the newest electronic devices and appliances is what makes Best Buy competitive within the market. Brick and mortar retail firms are not as relevant as ecommerce firms such as Amazon which is the largest online retailer. What sets Best Buy apart is that it is one of the few appliance chains that still exist as others have closed business due to insufficient revenue. Best Buy has created value and stayed profitable by changing strategy and coming up with a new business plan. They compete with Amazon’s low prices by allowing consumers to purchase at equivalent rates via price matching. Best Buy sells an arrangement of electronics and appliances that many customers want to inspect prior to making a large purchase. Best Buy not only allows you to view products by having a large showroom it also provides a valuable customer service experience, installation services and extended maintenance programs. By providing extra services it is differentiating themselves from their competitors and creating value to their consumers. Best Buy sells products that are necessary to the consumer, however, this alone does not set themselves apart in the market. They maintain competitive advantage by following technological trends providing high quality products. Best Buy also invests in new developments and services and have established a credible retail store brand. Best Buy doesn’t just provide electronics and appliances that make them able to compete, they have a competitive advantage by maintaining a clear internal business model to ensure growth of their firm. The CEO Hubert Joly set out to recreate Best Buy’s business plan by creating the “Five-Point Business Plan” that would renew the stores presence and provide long term growth. The strategy was to enhance customer service, create and maintain middle management, innovate and drive value up with suppliers, increase the firm's invested capital and recycling electronics to give deserving youth a technological advantage by providing them with computers (Ellsworth, John R. Et Al., 2018). The new strategy and business plan of Best Buy would and currently is establishing a competitive advantage for the firm. Sustaining Competitive Advantage Sustaining a competitive advantage in the retail industry is very difficult because competitors are fighting for market share by discounting their products to attract customers. In the case of Best Buy, they were having trouble losing market share with Amazon taking a lot of their sales because of the shift in the retail industry going from brick and mortar purchases to ecommerce. Once having established a huge market share in the mid-2000s, but later in the early 2010s were losing sales every year and market share to Amazon. Around this time was when Amazon was growing fast and was taking a lot of the sales from these stores. To combat Amazon, the new CEO Jolly did a Five-point Plan to get Best Buy to compete with Amazon and other retailers. After 5 years of rebuilding and restructuring, Best Buy was back to where they had growing earnings, market share, and revenue. To sustain a competitive advantage over other retailers, Best Buy had to have durable resources. One of Best Buy’s durable resources is the ability to have many of the brick and mortar stores around the country which made it easily accessible for most consumers. They also have had the Geek Squad which helps out with customers when they have technical problems with their electronic devices. Transferability also goes along with Best Buy having all those stores. Best Buy supply negotiations with other manufacturers are hard to transfer as they are the top electronic retailers in the country because of the bankruptcies of RadioShack, and Circuit City. In retail, replicability is always a threat because many of the other retail companies can simply copy each other. To prevent this, Best Buy took advantage of the “showrooming” practice by investing in its stores and continuously changing the buying experience for customers. The company has invested a lot of money redesigning it’s stores by removing or reducing the products that are no longer relevant in the current market such as CDs and DVDs and are now putting new products like smartphones, smartwatches, and electronic health products. They have also teamed up with companies such as Samsung, Microsoft, Apple, and Amazon to have their booths to display their products. One of Best Buy’s key strengths is its online website and brick and mortar system. Jolly noticed that some customers were looking online to look at the potential products they might buy. To combat every growing E-commerce, he integrated the online website with local stores. 70% of Americans lived 15 minutes away from a Best Buy so the firm started to have its stores act like “mini” warehouses to store products so online customers can purchase the product online and pick it up at the store (Ellsworth, John R. Et Al., 2018). If the store did not have the product available, stores can have the product the same or the next day. Another key strength was the complete customer service that Best Buy had. They invested heavily in their stores to offer many different products and if customers have any questions, employees can guide them to recommend the products they are looking for and have Geek Squad install those products such as a TV, home theater, etc. If customers were to have any issues with their products, they can buy a service contract with Geek Squad. Another key strength of Best Buy is the ability to control costs. Joly focused on lowering the main cost for Best Buy which was the cost of goods sold that made up 80% of expenses (Ellsworth, John R. Et Al., 2018). The rest was reducing costs for advertising, occupancy costs, and general administrative expenses. Throughout the years Jolly and the team were able to reach the target of saving more than 750 million over the 5 years. Best Buy's weakness is they have to keep reinvesting into their stores to prevent customers from buying most of their electronics online. Analysis- Appropriating Competitive Advantage The analysis of profit-earning potential of a resource or capability requires a dissection into different stages of developing the firm’s competitive advantage. These stages include the establishing, sustaining, and appropriating of a competitive advantage. In this section there will be a dissection of how Best Buy appropriates their competitive advantage. While dissecting how the firm appropriates competitive advantage, an analysis of how the firm disperses the returns generated by superior resources and capabilities along with the property rights, relative bargaining power, and embeddedness. When talking about the creation and appropriation of a company such as Best Buy and its value, it is wise to not venture into the conversation of the industry. The way in which the market is imperfect, it allows for a firm to gain competitive advantages and therefore appropriating rents from the market. A point that is often overlooked is how a firm might continue to be appropriate within the firm through upper level management, to the stockholders, and even to regular managers and employees. Within Best Buys company, bargaining power seems to be equally split. This was especially evident when Best Buy hired their new CEO to run the company. Hubert Joly, the new CEO, had a plan to reinvent Best Buy and mold the company to fit the ever changing industry. Part of this plan was to create a “safe space” for new ideas. One of these ideas was for Joly to match prices in order to halt some of the showrooming problems that Best Buy was experiencing. His plan was to continue with the price matching plan until they matched Amazon prices where a lot of business was being taken away. His goal was to slow down some of the damage that Amazon had been doing to Best Buy through the showrooming technique. This would move leverage back to the firm as far as leverage goes. His next move was to ask employees about their concerns and how to appeal to these concerns. He also realized that he must implement new strategies and train employees better on how to navigate the customers through emerging technology products and ultimately sell these products. This action gave some bargaining power back to the employees by providing them with the knowledge necessary to carry out sales. For Best Buy, this was crucial because the in-store employees offer a potential for competitive advantage. The difference between Amazon and Best Buy is the value that Best Buy can offer in their stores with their tech experts. Amazon does not have the same ability to put experts in front of a customer helping them through the process of learning about new products and eventually purchasing these products. Joly realized this and invested a lot of time in the employees and getting the processes moving in the right direction. Joly also recognized that customers not only wanted help installing products in their home after they make a purchase, but also were seeking help before making any purchase. He then implemented a new program for Best Buy’s Geek Squad that offered customers free inhome advisors to provide help in improving the customer experience. Not only would Geek Squad be helping install freshly purchased products, or providing maintenance assistance, they would now have the opportunity to advise the customers on products that they would not necessarily be thinking of purchasing prior. Thus, allowing for a new sales opportunity for the employee. Of course this comes with new training and recruiting to put the correct processes in place in order for the program to be successful. Best Buy has done an exceptional job so far with their five week training for the in home service program. This makes it difficult to come to a conclusion on how the bargaining power is shared at Best Buy. It is true that without Joly’s and his team’s help, ideas, and new processes, Best Buy would have fallen further behind Amazon and other online retail operators. With that being said, part of Joly’s new plan leans on the employees to offer a different value to the customer than Amazon, making them a larger part of Best Buy’s competitive advantage. The difference is that Best Buy, especially after the introduction of Joly, was not so embedded in the way things were done before. This is what allowed them to capitalize on their competitive advantage and appropriate more of the returns to the employees. Best Buy moved away from their corporate systems and reputation by selling private jets as well as Super Bowl and NASCAR advertising. This provided a more powerful position for the employees amongst the firm. Through my analysis, it is likely to believe bargaining power is the most determinant factor within Best Buy. Since Joly stepped in as CEO, the power is now with the employees who provide value for the firm’s competitive advantage. The value that Best Buy offers compared to Amazon is that they are able to not only provide an expert for the customer in-store to help make sales, but also provide for in-home advisement, installation, and maintenance all from the place in which the customer purchases their products. The implementation of price-matching from the firm might have saved Best Buy in the moment, but it soon becomes a problem due to the amount of cost it brings to the company. Best Buy knows that their advantage lies within their ability to provide a service that Amazon does not. Joly and his team have done their due diligence to ensure that this advantage is exploited to its full potential. Strategic Alternatives The first alternative that would benefit Best Buy is market penetration. Best Buy could benefit from increasing the number of retail stores. This would help sales a lot because it would make Best Buy a more convenient outlet for customers. They could also benefit from increasing the number of products they have in stores and online. E-commerce is a big way for Best Buy to improve market penetration. They could make their online products available at their local stores and make their products available internationally to increase sales and help customer loyalty. According to Reinvesting Best Buy, in 2011, “Best Buy was number-one in the total U.S. consumer electronics and appliances market with 16% share compared to Walmart’s 15% and Amazon’s 4%, but its internet share was only 7% compared to its bricks-and-mortar share of 18%” (Ellsworth, John R. Et Al., 2018). The second alternative Best Buy would benefit from is through Product Development. Best Buy can improve product development in a number of ways. According to Reinventing Best Buy, two of those examples are, building a leading position in the smart home market, by continuing expanding its curated assortment, demonstrating new technology solutions, entering the solutions and services part of the market. The other example is launching a Total Tech Support, which is a new geek squad offering that provides ongoing support for a customer’s tech, no matter where or when they bought it (Ellsworth, John R. Et Al., 2018) Both of these examples would benefit Best Buy and help them increase their product development. The third alternative that would benefit Best Buy is Differentiation. According to the Digiday website, Best Buy had two multi year strategic plans, Renew Blue and Best Buy 2020, these emphasized using its stores as a ride for differentiated customer service as well as fulfillment centers, and building a close relationship with brands. Best Buy is currently taking a differentiation approach and it may be beneficial for them to choose to stick with this plan because they are doing well with a revenue of $14.8 billion (Best Buy's blueprint for surviving as a big-box retailer in the Amazon age, 2019). Recommendations The best alternative for Best Buy is market penetration. This is the best method because Best Buy offers products that are owned by other companies which have their own brick and mortar business. Therefore, product differentiation would not help as much as market penetration. If Best Buy can make their stores more prevalent and accessible, more customers would use their services. Best Buy has high demand products from phones and household appliances, but needs alternative ways to create sales by expanding their online retail and growing internationally. If they were able to create even more stores, consumers will be more likely to go to the closest Best Buy versus the Apple store that may be a further distance away. Creating a more accessible and diverse online retail store would allow them to compete with top ecommerce market contenders and expand revenue. The most important strategy is for Best Buy to make it easier for consumers to access their stores and products.