Chile - Potential Market for Best Buy - Case Study Example

Chile: Potential Market for Best Buy Chile: Potential Market for Best Buy The importance of strategic planning cannot be overlooked especially whena retailer such as Best Buy decides to capture foreign markets. It becomes necessary for the strategic planning group to prepare a short-term plan that would meet the goals of the organization; thus, "top managers usually plan one to three years in advance simply thinking about the environment and making plans for coping with it" ( Robert, 1985). Setting up a business in a foreign country has many challenges; amongst them are language and culture differences that influence the business process. For this reason, this paper presents an environmental scan and SWOT analysis of Best Buy to determine its viability as a business in Chile. 1. Environmental Scan The Environmental Scan is an important process in strategic planning. Pertinent data about the host country must be thoroughly studied so the information can serve as feed forward to planning. 1.1 Country Information According to the Central Intelligence Agency, Chile has an estimated population of 16,601,707, which ranks it 60th when compared to the other countries in the world (2009). Located along the Southwestern coast of South America, Chile has a total area of 756,102 sq km and shares common borders with Argentina, Bolivia and Peru (Central Intelligence Agency, 2009). 1.2 Economic Data The economic situation in Chile is promising, in part because Chile's government has developed policies which encourage the use of the country as an "investment platform" for multinational organizations wishing to operate in South America (Global Edge Chile, 2010). Chile also has a Foreign Investment Law which provides foreign investors with the same benefits as Chilean businesses. Registration is straightforward and foreign investors are able to repatriate their profits and capital through the official foreign exchange market (Global Edge Chile, 2010). Chile's Macroeconomy Chile is characterized by a market economy therefore has a high level of foreign trade with export accounting for 40% of the GDP most which are commodities (http://www.theodora.com). It has a reputation for a strong financial institution and sound policy making it the strongest bond rating in South America (http://www.theodora.com). It has recorded a total GDP of $240.3 billion in 2007, $248 billion in 2008 and $244.3 billion in 2009 (http://www.theodora.com). The decline is mostly attributed to the recession. These figures show a positive growth rate in 2008 but a negative one in 2009. To be specific, it is estimates that GDP grew by 3.2% in 2008, although less than the 4.7% growth in 2007 and a negative rate of -1.5% in 2009 (http://www.theodora.com). Other relevant figures are: unemployment rate increased from 7.75% in 2008 to 10% in 2009, inflation rate declined from 8.7% in 2008 to 1. 7% in 2009 and exchange rate of Chilean peso per dollar also weakened from 509.02 in 2008 to 569.37 in 2009 (http://www.theodora.com). Although the 2009 figures show signs of recession, the economy is expected to be on the course of exiting recession on a gradual basis (Antonio de la Jara). Chile's Stand on Trade and Foreign Direct Investment "Chile deepened its longstanding commitment to trade liberalization with the signing of a free trade agreement with the US, which took effect on 1 January 2004. Chile claims to have more bilateral or regional trade agreements than any other country" (http://www.theodora.com). Currently, Chile has signed 57 agreements (not all of them full free trade agreements), which includes that with the European Union, Mercosur, China, India, South Korea, and Mexico (http://www.theodora.com). "Over the past five years, foreign direct investment inflows have quadrupled to some $17 billion in 2008, but FDI dropped to about $7 billion in 2009 in the face of diminished investment throughout the world" (http://www.theodora.com). Chile is indeed a wonderful place to venture into investment as the government is showing openness and rigor in attracting foreign investors. For three decades, it is Foreign Direct Investment that placed a key role in Chile's economic growth and development. "Incoming FDI has maintained an upward trend, helping to increase Chile's competitiveness through not only resources and new markets but also technological development and specialized know-how" (Foreign Investment Committee).To be specific, it is reported that the country has attracted FDI worth US$14,457 million, which makes it rank third after Brazil and Mexico (Foreign Investment Committee). 1.3 Political Background & Structure The country is a republic comprised of fifteen administrative divisions. In 1810, Chile officially declared its independence from Spain (Central Intelligence Agency, 2009). After a period of elected governments, Chile endured a three-year Marxist government under Salvador Allende. Allende was overthrown in 1973 by a military coup led by Augusto Pinochet, who led the country for sixteen years until a freely elected president was installed in 1989 (Global Edge Chile, 2010). In the fourth free election since the Pinochet era, Chile elected its first female president in 2006: left-wing Michelle Bachelet. Chile recently experienced a change in government, when right-wing President Sebastian Piera took office in March 2010. He now serves as both Chief of State and Head of Government (Central Intelligence Agency, 2009). Chilean presidents can serve more than one term, but those terms cannot be consecutive. 2. Mission, Vision & Values Before completing a SWOT analysis, it is important to understand the vision, mission and values of Best Buy. Best Buy states its vision as follows: " People. Technology. And the pursuit of happiness" (Best Buy). Technically, the company does not have a mission statement, but states: "Our formula is simple: we're a growth company focused on better solving the unmet needs of our customers-and we rely on our employees to solve those puzzles. Thanks for stopping" (Best Buy corporate website). Best Buy also has four corporate values that act as guiding principals for the company: Have fun while being the best. Learn from challenge and change. Show respect, humility and integrity. Unleash the power of our people. Source: Best Buy The company also has a slogan, which reveals its passion for customers. The slogan is simply: "Pleased to meet you" (www.company-statements-slogans) and the company's motto is: "Buyer be happy" (BestBuy Corporate Website). Examining these statements prior to conducting a SWOT analysis will help reveal whether Best Buy is walking its talk. 3. SWOT Analysis The SWOT (Strengths, Weaknesses, Opportunities and Threats) Analysis is an examination of the business' internal and external environment and is useful for strategic planning (Internet Center for Management and Business Administration, Inc.). While strengths and weaknesses are internal, opportunities and threats are external factors (Internet Center for Management and Business Administration, Inc.). 3.1 Strengths What we consider as firm's strengths are "its resources and capabilities that can be used as a basis for developing a competitive advantage" (Internet Center for Management and Business Administration, Inc.). In the case of Best Buy, key strengths include: powerful scaling capability, the people, culture and passion, strong market share, high level of community service and local involvement and customer service (Judge & OPPapers.com). Best Buy Co., Inc. entered the business in 1996 when computers and internet were quickly gaining popularity. It has "grown steadily and enhanced its business through inspired innovation" and "continually transforming into a dynamic, customer-driven, talent-powered company that focuses on enhancing our customers' enjoyment of technology" (Best Buy). The company already has branches in U.S., Canada, Europe, China and Mexico (Best Buy). From one branch it was able to scale up its operation to cater to cross-country branches. With 155,000 employees, Best Buy is a hub of satisfied and energetic individuals with the strength of youth and innovation (Best Buy). Due to its strength in scaling up production and service, another successful branch in a South American country such as in Chile is strong possibility. Best Buy also has increasing market share. Forbes.com reported an increase of sales by 1.7% in the first quarter of 2007, while competitor Circuit City experienced a plummet of 5.6% (Farrell). The recent report also reveals that from March to December 2009, "Best Buy's combined online and offline share of the notebook computer and digital camera markets gained 5.5%, flat-panel televisions increased 5.2%, and desktop computers gained 4.7%" (Vertical Web Media.). The increasing market share enables Best Buy to expand its reach, even to foreign countries. Best Buy already enjoys a high degree of popularity, which the company can capitalize on once it opens in Chile. In addition, Best Buy always remembers to share its success with the community. It has strengthened its community partnership with the Best Buy Children's Foundation and other charitable programs (Best Buy). Lastly, Best Buy has a reputation for excellent customer service which makes the shopping experience more pleasant and more convenient, which in turn creates loyal customers. 3.2 Weaknesses Opposite to the internal strength are weaknesses. In the case of Best Buy, these weaknesses include too much bureaucracy, undifferentiated products or services and complicated shipping schedules (OPPapers.com). The absence of strengths on each of these aspects results in a business weakness, which can cause dismay to customers. Too much bureaucracy inside Best Buy results to lesser efficiency. If the hierarchy is so tall, transactions may take longer time to be accomplished. This problem is much worse given an operation in a foreign country such as Chile. The delay in delivery and logistics can harm the entire business. There is also the problem of undifferentiated products and services, which is primarily not beneficial to customers. Lastly, since there are already a lot of customers from around the world, Best Buy has not still found the best way of managing their logistics especially in shipping. This can cause delay and inconvenience on the part of the customers. 3.3 Opportunities Looking at the external environment may "reveal certain new opportunities for profit and growth" (Internet Center for Management and Business Administration, Inc.). The opportunities present for Best Buy are increased preference for the brand, more categories to enhance the brand, more expansion opportunities and the increasing use of computers and the internet in other countries (Judge & OPPapers.com). The gaining of greater market share for Best Buy was a result of one new opportunity: there is an increasing consumer preference for Best Buy over other brands. This opportunity will allow greater growth and expansion in terms of sales and number of outlets. That's why it is not difficult to venture into a foreign branch since there are already a lot of customers in foreign countries. There are also more categories and product lines to enhance the existing brands. The new discoveries such as the Ipad enhance the existing products and brands. Given that its products can easily be reached and ordered online, the company also benefits from the increasing popularity of internet and online shopping in more key cities. This allows Best Buy to reach greater number of markets at almost zero cost. 3.4 Threats Lastly, we look at the current threats to the company. Best Buy still faces stiff competition from Wal-Mart and Circuit City. Circuit City has adopted several organizational and management facelifts for the past few years which Best Buy has not espoused (AU Interactive). One such change is offering customer reviews of all products, which provides much- needed help to customers, especially those lacking technological knowledge (AU Interactive). There are also an increasing number of suppliers around which can take market share, especially the localized ones (Judge). 3.5 SWOT Summary From the given SWOT analysis, it can be said that Best Buy is a company which is internally strong due to the exemplary customer-service orientation of its employees. Moreover, Best Buy returns to the community generously which would be a welcome fact to most Chileans. Although it has external weaknesses such as undifferentiated products and shipping schedules, still this can be later on resolved by instituting clear policies. It is recommended that divisions such as inventory, warehousing, and sales engage in planning sessions to clear out the issues. Like any free trade market, Best Buy is threatened by local competitors but a strong brand name can beat the competition plus good service to keep people coming back. In the first place, Best Buy has pronounced that it has empowered its employees to solve their customer's problems. Overall, Best Buy is in a very good position in the industry. It has great potential for growth and expansion in Chile, and eventually in Brazil and Argentina as well. 4. Goals 4.1 Establishment in Chile The main goal for the next three years is to become successfully integrated in the country of Chile. This is another Best Buy venture that will capture the South American market. Best Buy intends to offer the same services as its main branch in the US but will be delivered in a manner that suits the South American culture. Similar to its Mexico branch, Best Buy in Chile will provide the latest and state-of-the-art technology through a wide variety products. It wishes to provide more updated products and more brands to its Chilean market. Best Buy will continue to bring to its customers all the best in terms of technology. One of its goals is to capture the highest market share in the country, through its strategic plans. With a commitment to its employees, Best Buy will employ Chilean for its "retail locations, multiple call centers and Web sites, in-home solutions, product delivery and activities in our communities" (Best Buy Coporate Website) Similar to its main US branch, Best Buy's goals are composed of the following: Best Buy, with the demise of Circuit City, wants to make itself a more effective competitor versus the big mass market and Internet retailers it has identified as current and future rivals, making stores more cost effective in terms of labor and more differentiated by adding services. The company is determined to reduce store management devoted to behind-the-scenes business operations and put personnel with supervisory experience on the sales floor in support of or as - in what would essentially be a demotion - hourly personnel engaged in customer service. It wants to eliminate wage tiers on the sales floor to simplify how it accounts for labor costs over the store base, which should make running stores easier, particularly those stores losing management positions. Source: (Duff) 4.2 Expansion Once Best Buy has been effectively established in the country of Chile, the company plans to expand into the countries of Brazil and Argentina. Its Chile branch will only be a starting point of its South American expansion. Brazil and Argentina are two countries that show economic vigor, especially Brazil. The expansion will be immediately done in Brazil, once the Chilean operation is stabilized. 5. Tactics 5.1 Products & Services The Chilean products will most likely be similar to the ones offered in the main branch, only there will be a lag in the introduction of products as some will be first tested in the US market. Best Buy Chile will offer products such as 3DTV, computing technology, entertainment devices, home appliances, cameras, mobile phones, music, movies, games and other technologies. It will also be introducing electric cars, motorcycles, scooters and bicycles. The variety of products that it offers indeed differentiates Best Buy from other retail companies. Best Buy Chile can offer the services available in its UK branch: 0% commission: Best Buy's Blue Shirts and Geek Squad Agents don't work for commission in order to offer a truly impartial service Walk out working: Buy any laptop, camera or mobile phone and Best Buy can offer to set it up so it's ready to use.Whether it's transferring your old contacts onto your new mobile phone, installing software and parental controls on your new laptopor synching the two devices, we can personalize your products and get you up and running before you walk out of the store Geek Squad: the 24-hour technology support service which is part of Best Buy Europe and a Best Buy Co., Inc owned company 1-2-1 Help: Book an in-store consultation online or in the store with a Blue Shirt or Geek Squad Agent for advice on a wide range of technology, so you can get the most out of it Trade-in and save: When you trade in old televisions, laptops and mobile phones, you could receive discounts towards your next in-store purchase Test drive: A wide variety of the latest and greatest technology is switched on, connected and ready to try before you buy Price guarantee: Price match on any product, plus an extra 10 percent of the difference. In addition, if you find the same product for less elsewhere up to 30 days after you bought the product, Best Buy will refund the difference Source: (Best Buy Coporate Website) 5.2 Number of Stores Best Buy can start its Chile operation in its capital Santiago del Chile, which has an estimated population of more than 5.5 million, accounting to more than 30% of the country's population (http://www.studentsoftheworld.info). This is the largest and most modern city. The other cities are Concepcion, Vina del Mar and Valparaiso, but they have smaller number of poulation averaging only 300,000 (http://www.studentsoftheworld.info). It is strategic to begin with the largest and most advance city such as the Capital, Santiago de Chile, where the bulk of commercial and industrial transactions occur. However, a few branches in the capital alone can be constructed if the demand proves to be very high, given high population density. The establishment of other branches within the city will however be accomplished depending on the success of the pioneer branch. 5.3 Staffing Of the total population of Chile, 67.8% are between 15 and 64 years of age (Central Intelligence Agency, 2009). Additional details for Chile's labor force are provided in Tables 3-5 in the Appendix. To summarize, Chile has a large, highly literate labor force, with the majority of the population at prime working age and skilled in the services industry. As plans progress, Best Buy will want to invest in Spanish language training for all employees involved in the Chilean expansion project, as the majority of Chileans do not speak English. 5.4 Resources & Budget Best Buy is open to the public and is currently trading in the New York Stock Exchange. The company has recently posted a 7% increase in store sales, which was translated to a 14% increase of EPS. The March 25, 2010 report says that it has "net earnings of $779 million, or $1.82 per diluted share, for its fiscal fourth quarter ended on Feb. 27, 2010, compared with $570 million, or $1.35 per diluted share, for the prior-year period" (McNamara). With its rosy performance, financing for Best Buy wouldn't be such difficult. A release of more of its common stocks for its Chile expansion will be a good buy to most investors. References Antonio de la Jara, Maria Jose Latorre and Aaron Nelsen. http://uk.reuters.com. 5 January 2010. 5 May 2010 . AU Interactive. Retrieved April 22, 2010 from http://blog.auinteractive.com/how-circuit-city-could-steal-market-share-from-best-buy Best Buy. About Us. Retrieved April 22, 2010 from http://www.bby.com/about/ Best Buy. Company Information. Retrieved April 22, 2010 from http://www.bestbuy.com/site/olspage.jspid=cat12114&type=page Best Buy Coporate Website. http://www.bby.com. 5 May 2010 . BestBuy Corporate Website. http://forums.bestbuy.com. 5 May 2010 . Central Intelligence Agency. (2009) The 2009 World Factbook. Retrieved April 26, 2010 from https://www.cia.gov/library/publications/download/ Duff, Mike. http://industry.bnet.com. 17 April 2009. 5 May 2010 . Farrell, Andrew. (20 June 2007). Retrieved April 22, 2010 from http://www.forbes.com/2007/06/20/best-buy-update-markets-equity-cx_af_0620markets33.html Foreign Investment Committee. http://www.cinver.cl. 4 May 2010. . GlobalEDGE. (2010). Your Source for Global Business Knowledge. Retrieved April 26, 2010 from http://globaledge.msu.edu/ http://www.studentsoftheworld.info. 10 October 2006. 5 May 2010 . http://www.theodora.com. http://www.theodora.com. 8 February 2010. 5 May 2010 Index Mundi. Chile. Retrieved April 22, 2010 from http://indexmundi.com/chile/ Internet Center for Management and Business Administration, Inc. SWOT Analysis. Retrieved April 22, 2010 from http://www.quickmba.com/strategy/swot/ Judge, Barry. Retrieved April 22, 2010 from http://barryjudge.com/best-buy-brand-swot-analysis-using-open-principles-test McNamara, Jennifer. http://www.bby.com. 25 March 2010. 5 May 2010 . OPPapers.com. Best Buy SWOT Analysis. Retrieved April 22, 2010 from http://www.oppapers.com/essays/Best-Buy-Swot-Analysis/134008 Robert, Michel M. (1985). Strategic Thinking: Charting the Future of your Organization. 2nd ed. Woburn, Mass: Decision Process International. Vertical Web Media. (13 April 2010). Retrieved April 23, 2010 from http://www.internetretailer.com/dailyNews.aspid=34395 www.company-statements-slogans. 5 May 2010 . Appendix Table 1. Economic Data for Chile Date 2009 2008 2007 2006 2005 Inflation 1.7% 8.7% 4.4% 2.6% 3.1% GDP Growth -1.7% 3.2% 4.7% 4.3% 5.6% GDP Per Capita $14,700 $15,100 $14,700 $13.067 $12,240 Purchasing Power Parity $243.7 billion $248 billion $240.3 billion $ 214.94 billion $198.6 billion Unemployment 10% 7.8% 7.0% 7.8% 8.1% Note - Data is drawn from Index Mundi and the CIA World Factbook (Central Intelligence Agency, 2009 et. seq) which reports data 1 year ante from the published data. **Data are in 2009 US dollars.** Table 2. SWOT Analysis INTERNAL EXTERNAL Table 3. Chile: Gender Breakdown Table 4. Chile: Labor Force Details Life Expectancy 77.34 years Median Age 31.4 years Literacy Rate 95.7% Resides in Urban Areas 88% Language Spoken Spanish Table 5. Chile: Total Labor Force - Industry Breakdown Read More