Marketing Management: Best Buy - Assignment Example

Society in the 20th century lived through an era that brought new innovations and technologies that produced electronic goods to improve the standardof living of people in their household. Appliances are machines that facilitate housework for family members. The proliferation of the radio and the creation of the television were two inventions that transformed the lives of people due to its entertainment value. Electronic consumer goods became booming industry in the latter half of the 20th century. The broadband era of the 21st century brought to the marketplace numerous electronic devices that serve for multimedia purposes. A store that entered into this industry and evolved into the largest electronic specialty retailer is Best Buy. This paper analyses the operation of Best Buy by dividing the paper in four segments. The four key subjects coved in this paper are: SWOT analysis, industry and company success factors, Best Buy driving forces and international strategic alliances. Company Profile Best Buy was founded by Ralph Schulze and his associate in 1966 in Minnesota. The company originated under the name Sound of Music Store. During the 1970’s company did very well with and by the end of the decade the company had 9 stores throughout America. In 1983 the company officially became Best Buy Corporation with the introduction of its first superstore1. The stores growth in this industry was amazing after the creation of its superstore. Before the turn of the century the company had become the top electronic retailer in the world. As the broadband era came upon us Best Buy realized that its expertise could be use create portfolio of electrical products along with technological related services. The diversification of the business opened the doors for international expansion. The current business segments that provide income streams for the company are consumer electronics, appliances, entertainment software, home office and other services. In fiscal year 2008 the company generated 40 billion dollars in revenue with a net earning of $1.4 billion2. The company has over 150,000 employees across over 1000 stores domestically and internationally. Best Buy stores utilize a centricity operating model that optimizes customer service in a business environment in which employees are not aggressively targeting its employees as sales leads since their income is non-commission based. The company has embarked in new business ventures domestically and abroad such as Future Shop, Geek Squad, Five Stat Store, Best Buy Mobile, Magnolia Audio Video Stores and Pacific Sales Stores. Best Buy SWOT Analyses A SWOT analysis is a marketing tool that is utilized to evaluate the operations of a company. The analysis cover four basic identified by each letter which are the acronyms for strength, weakness, opportunity and threats. The strengths and weakness require an internal environmental analysis, while the opportunities and threats involve an external environmental analysis3. The first part of the analysis will be the strength analysis. Best Buy is the world leading electronic specialty retailer. Being the largest retailer provides the firm strong purchasing power which gives Best Buy access to economies of scale its purchasing cycle. Economies of scale are achieved at Best Buy through bulk purchasing which lowers the cost of inventory. As part of its expansion plan the company selected the nation of China, a strategic move that provides added benefits associated with the proximity to suppliers. In China Best Buy has established its global sourcing offices to able to negotiate directly with Asian suppliers. The company has been effective at spreading its customer base. They have not incurred in governmental contracts that can tied to political partisan power shifts that can lead to loss of big contracts. The stores business model is expanding the size of the company through establishment of acquisition of new facilities. This strategy allows for the expansion of the customer base of the company. Intellectual property assets are legal strength since its branded names such as Future Star, Best Buy, Geek Squad are protected by copyright laws. The research and development initiatives have been able to create various patent pending technologies that will reap benefits in the near future for the company. Best Buy utilizes a customer centricity operating model that has served the purpose of increasing its ability to provide superb customer service. The facility layouts of Best Buy’s stores are designed to enable the company to operate with lower labor costs. The internal structure is design to be self-sufficient with the help of information technology tools that provide customers with basic information about its products. The differentiation strategy used by this firm provides them with a competitive advantage. As a retailer Best Buy suffers from seasonal patterns that concentrate the majority of its sales in one quarter. The 4th quarter of the year is the holiday season. During this quarter the company generates over one-third of its overall revenues. Due to this fact the company income stream are more sensitive to changes in the economy. The nature of the business also means that the sales strategies the company during the critical season have higher level of risk since failure in its implementation will have a greater effect in Best Buy’s annual results. A glaring weakness for Best Buy and other retailers involved in the consumer electronics industry is that they are susceptible to downward spiral prices. The reason these products are price sensitive and its value depletes fast is because these items are subject to Moore’s Law. Moore’s Law stipulates that processing speed double every two years4. Good inventory management and turnover along with superb information technology is needed to ensure the right mix of products and operational logistics is in place. In order to offset this systematic weakness the company formed long term consulting alliance with the information technology consulting giant Accenture to ensure optimum results. The company has an international growth strategy, but so far it has not been able to expand its business beyond a short list of selected countries. The business penetration so far has been limited to US, China, and Canada with Mexico and Turkey being the next locations for expansion as early as 2009. The recent deal with Carphone Warehouse Group finally enabled the company to achieve a much needed presence in the European marketplace. A business venture of the company that represents a weakness in its business portfolio is Magnolia Audio Video Stores. Movie rentals are an industry in its maturity stage. During 2008 the store closed seven of its Magnolia stores, a downsizing choice that eliminated 35% of the 20 establishments that were operating at the beginning of the year5. The company started a new business venture called Best Buy Mobile. The concept was developed with the help of a management consulting agreement with the Carphone Warehouse Group. The mobile segment of the electronics industry is one of the fastest business opportunities because the introduction of the new generation of smart phones and the fast networks such as G3 that in place in developed economies to supercharge their functionality. These devices represent the newest multimedia medium that provide along with traditional wireless phone services the ability to take photos and videos, transfer data, listen to music, GPS functionality, and connectivity to the internet. As of 207 there were over three billion mobile users worldwide with Porto Research projecting 4.9 billion users worldwide by the year 20126. This strategic alliance also represents a cornerstone to start Best Buy massive European expansion. The current slide in the United States and the worldwide economy hurt all retailers, but it provides the well managed ones an opportunity to further penetrate and increase its market share. During last four years Best Buy has been successful at spreading its market presence. Appendix A illustrates Best Buy’s market share during the last four years. The customer centricity operating model is a compatible strategy assigned with the objective of increasing market share. During these harsh times customer look for planes where they are treated well that provide value in their product and service offerings. This year the US and global economies have been weakening throughout the year. This has manifested in overall lower levels of consumer confidence which adversely affects retail sales. In Canada which one the company primary expansion for Best Buy Stores and its Future Shop subsidiaries consumer confidence went down 11.9 points to reach a 67.9 level this year7. The credit crush that magnified during the last month will hurt the company’s ability to generate credit sales and expand its credit card products to new customers. Economic wisdom states that during recessionary times the sales that are affected the most are luxury products and high-end convenience products such as appliances. Appliance sales during September 2008 decrease by 15%8. The gross profit of retailers will be adversely affected by bad economic times. As a mega-store Best Buy is seen as threat to other small businesses, a situation that places the firm in the eyes of regulators which may restrict access of Best Buy to certain US location to protect the local economies from a hostile takeover. Industry and Company Success Factors The consumer electronics industry is expected to grow 6.1% during 20089. Despite the slowdown of the economy retailers such as Best Buy expect these products to do well irrelevant of their high price tags due to their attractiveness and other favorable factors. The product in the industry that generates the most sales is television sets. There is regulation in place set for February of 2009 that mandates digitalized television transmission in effect making analog television sets obsolete. This will increase the demand for HDTV flat screens TVs since digital TV is now a necessity for reception. The greater demand will increase production lowering cost for manufacturers. This scenario will provide the retailers the flexibility to pass on the savings to the customer at the retail level allowing lower prices. The further integration of multimedia is another critical success factor. There are new technological advances that will allow television transmission through broadband internet and wireless mobile networks. The gaming industry has adapted to this trend and the new consoles coming out such as Sony’s PlayStation 3 offer Blue Ray DVD technology, a multipurpose quality that makes the item more attractive. There are several critical success factors that Best Buy must emphasize to continue its success in the future. Human resources considerations are one of these factors. Best Buy depends on a qualified workforce to ensure the highest levels of consumer service. The retail industry has the highest employee turnover rate of any industry. To keep the employees they have and recruit new employees the company must device a strategy such as increasing salary offers and adding benefits to ensure a sufficient supply of human capital. Due to the fact that the company growth strategy is based on increasing floor space the human resource factor becomes an important issue to attend. Further proliferation of the company’s ecommerce strategy is another critical success factor. Ecommerce has become the fastest growing retailing strategy. Faster broadband speed along with greater accessibility due to lower prices has increase participation. Retailer can design now design e-store with interactive capabilities and sophisticated graphic design that enhance the shopping experience. The BestBuy.com operations must be re-evaluated to enhance the store functionality and develop a better online marketing campaign to increase traffic to the e-store. In the short term the company management of the recession in the economy through adequate pricing strategies, inventory management, and cost cutting initiatives are critical success factors for good financial results in the 4th trimester of 2008. Best Buy Driving Forces Best Buy has been able to stay ahead of the competition due several competitive advantages. The driving forces and strategic choices that have catapult the firm in the 21st century include customer service, installation support services, store environment, location and convenience, product assortment availability, value pricing and financing alternatives. This list provides the operating factors that allowed Best Buy to become the world leader in the electronics industry. Location and convenience allow a retailer to obtain the greatest return from its facility investment. The optimum locations are places with high traffic of customer where the disposable income of the population is higher than the average for the country. The customer centricity operation model allowed the company to excel in its customer service functions. Customer service is the most influential force that enables a retailer to achieve a higher level of customer retention. The importance of customer retention lies in the fact that achieving higher retention increases sales without increasing marketing expenses to attract new customers. It also enables long term growth it creates a larger customer base. International Strategic Alliance Best Buy has utilized different forms of international agreements and alliances to expand its business beyond its US domestic region. In fiscal year 2008 the company’s sales distribution showed that 83% of its sales were generated domestically and 17% occurred outside the United States. The company implements an international plan consisting of several generic strategies including wholly owned subsidiaries, strategic alliances, joint ventures, and acquisitions. Best Buy was able to start its international expansion by acquiring the Canadian electronics retailer Future Shop in 2001. The initial expansion was a success because it allowed the company it served a learning experience and model to enable the company to run two operations simultaneously in one country. Soon after the acquisition the company established its own Best Buy Stores in Canada. The acquisition provided Best Buy a supply chain infrastructure that gave the firm a turn-key business that was easy to run since Best Buy already had managing in this industry. The company differentiated the Best Buy’s from the Future Shop by eliminating appliance inventory from its Canadian Best Buy establishments and by showcasing different electronic brands in each store. The importance of this expansion round was that the experience gave the company the courage to expand to the valuable Chinese marketplace. The company started its Chinese operations by establishing a sourcing office in China in 2003. The move served the strategic purpose of enhancing the companies purchasing power capabilities in the Asian marketplace which is the continent where the majority of electronics products are manufacturers. This move was followed by a majority stake acquisition of 75% of the equity in Five Star, one of China biggest appliance retailers. China has become an attractive market for consumer goods to a growing middle class that appeared in the nation after China opened up its markets further in the 21st century. The firm opened its first Best Buy in 2007 in Shangai and currently operates two store with an additional four store to be build in 200910. The company adjusted its product offering in China to eliminate greatest weakness of this marketplace which is intellectual property protection. China has one of the highest software piracy levels in the world, thus Best Buy China does not offer its entertainment software division in its stores. Best Buy recognized there was an opportunity for them to expand its retailing presence to offer mobile products. Since this was not their area of expertise the company looked for help from a European corporate partner. In 2006 the company signed a managerial consulting agreement with Carphone Warehouse Group, a UK firm. This led to the creation of Best Buy Mobile. The strategic alliance also allowed the company to introduce its Geek Squad computer repair and maintenance service in the United Kingdom. Europe represents an affluent marketplace with great growth potential for the company. Due to this fact the company in the summer of 2008 invested $2.15 billion in a joint venture with Carphone Warehouse Group to acquire a 50% of its 2400 electronic retail stores outlet across nine European states11 Conclusion Retailers in today global economy have to find ways to attract customer to their stores by having a good selection of quality products that provide value for the customers. The customer is the most important stakeholder group for retailer, thus the implementation of strategies to attend their needs is essential. At Best Buy a customer centric approach enabled the company to satisfy the needs of its customer by improving its level of service. Large retailers that seek international expansion can not limit themselves to one generic strategy to achieve its goal. Best Buy during the last seven years has achieved an impressive penetration in foreign markets by using a combined strategy that included acquisition, wholly owned subsidiaries, strategic alliances and joint ventures. The future holds many challenges for retailers who must adapt themselves to market changes. Best Buy has been able to attract a greater customer base by differentiating themselves and expanding their business division and over presence in the global marketplace. References Annual Report: Best Buy. 2008. Available from [Accessed October 15 2008] Annual Report: Best Buy. 2008. Available from [Accessed 16 October 2008]. Bestbuy.com. 2008. About Best Buy. Available from [Accessed 17 October 2008]. Boston.com. 2008. Deals Lets Best Buy Enter Europe. Boston Globe. Available from < http://www.boston.com/business/articles/2008/05/09/deal_lets_best_buy_enter_europe/>[18 Accessed October 2008]. Burns, E. (2008). Consumer Electronics Expects Increased Revenue ’08. Available from [Accessed 19 October 2008]. Ermisch, M. 2008. Consumer Confidence Sinks. Available from [Accessed 19 October 2008]. Intel.com. 2008. Moore’s Law: Made Real by Intel Innovation. Available < http://www.intel.com/technology/mooreslaw/> [Accessed 18October 2008]. Kotler, P. 2002. Marketing Management (11th ed.). New Jersey: Prentice Hall. Plunkett Research. 2008. Wireless, Cellular and RFID industry. [Accessed 18 October 2008]. Wolf, A. 2008. September Matjap Shipments Plummet. Available from [Accessed 18 October 2008]. Appendix A: Best Buy Market Share Growth 12 Appendix B: Best Buy revenue distribution domestically 13 Read More