Management Case Study

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Question

This paper is a case study analysis.

After conducting an analysis of the industry, competitors, and the value chain, evaluate the strategy followed by the company discussed in the case you have selected

Answer

Case study analysis Best Buy

Contents

Introduction. 1

Analysis of the industry. 2

Threat of new entrants. 2

Bargaining power of suppliers. 2

Bargaining power of buyers. 3

Threat of substitute products. 3

Rivalry among competing firms. 4

Analysis of competitors. 5

Analysis of value chain. 8

An evaluation of Best Buy’s strategy. 9

Conclusion. 10

Works Cited. 11

Introduction

Best Buy is the largest retail electronics store in the US. It operates in the large-format consumer electronics segment. The company, which was established in 1966, operates through two segments: domestic and international. The domestic segment account’s for a bulk of the company’s revenue (Hitt, Ireland and Robert 62). Best Buy places its operations into six categories; namely, consumer electronics, appliances, entertainment, home office, services, and other non-core items such as food and beverages (Hitt, Ireland and Robert 62).

Since its inception, Best Buy continued to expand its operations and overall success (Hitt, Ireland and Robert 57). Throughout the twentieth century, the company was a major force in the US retail industry. However, the greatest success for the company came after 2000 (Hitt, Ireland and Robert 58). It expanded its market reach through international acquisitions and ventures. Although not all of these ventures were successful, Best Buy managed to establish a strong international presence. Nevertheless, today, the company faces a serious threat from online retailers such as Walmart and Amazon. These competitors are able to provide lower prices for their electronic products because they do not have to maintain brick-and-mortar structures. Moreover, they do not have to pay sales tax. The aim of this paper is to conduct an analysis of the industry in which Best Buy operates, its competitors, and its value chain. On the basis of this analysis, the paper undertakes an evaluation of the strategy that the company has followed.

Analysis of the industry

Threat of new entrants

The threat of new entrants is very high in the retail industry. Best Buy is under a threat of entry of new online retailers that do not need to build and maintain large brick-and-mortar premises. At the same time, these emerging retailers do not have to pay sales tax, meaning that they are able to sell their products at more competitive prices. It is relatively easy for a new online retailer to emerge largely because of the new capabilities that come with recent technological advancements.

An entry of new entrants is likely to put Best Buy’s business model at risk. The company is likely to face the challenge of a major reduction in profit margins. Worse still, markets coups have proven to be a major threat. A good example is Amazon’s recent strategy that enables its customers to obtain bar codes from products stocked in other retail stores and to use them to search and purchase products in its online store at lower prices (Hitt, Ireland and Robert 60).

Bargaining power of suppliers

Companies operating in this industry stock a wide variety of products. This compels them to maintain business relationships with hundreds and in some cases even thousands of suppliers. However, for the sake of reliability and continuity, many retailers (including Best Buy) are compelled to obtain more than fifty percent of their products from less than twenty major suppliers (Hitt, Ireland and Robert 60). In the case of Best Buy, some of these suppliers include Samsung, Sony, HP, Apple, and Toshiba. These are major suppliers and it is highly unlikely that a disruption in the supply of their products will occur. However, these established suppliers are increasingly letting online distributors and warehouse clubs sell their products, thereby denying brick-and-mortar retailers the exclusive access they have been enjoying for decades. This phenomenon increases opportunities for the suppliers to increase their bargaining power.

Bargaining power of buyers

The bargaining power of buyers in the retail industry is very low. In most cases, the prices of electronic products are set by large suppliers, such that it becomes impossible for retailers to bow to the demands of buyers without jeopardizing their profit margins. The best that the buyers can do to get a better deal is to choose between a brick-and-mortar store and an online store. Online stores often provide lower retail prices compared to other business formats. However, even in the online environment, the buyer’s bargaining power is greatly curtailed.

Threat of substitute products

In the retail industry, new products are being released into the market all the time. Retailers have to stay abreast of changes in technology in order to ensure that they have stocked the products that customers want. In today’s globalized world, tech-savvy customers are always on the lookout for the latest, most sophisticated products. Retailers are compelled to increase their offerings and to extend the scope of their businesses by providing consultation services. The objective is to ensure that sellers give customers what they want instead of just imposing new products on them.

The consumer electronics industry is especially highly vulnerable to the entry of substitute products. In many cases, these products are not only technologically advanced, they are also offered at lower prices. This new trend continues to affect not just the products being provided but also many related services. For example, the proliferation of the smartphone and tablet computer market has led to the consolidation of numerous functions including computing, phone-calling, games, camera functions, and GPS navigation.

As technology continues to change, the retail and consumer electronics market is being supplied with an endless line of new substitute products. Therefore, retailers are in a constant risk of getting stuck with unsold stock that may have suddenly become obsolete or unpopular. An important option for such retailers is to channel these newly obsolete products to secondary markets where new technological advancements are yet to be embraced.

Rivalry among competing firms

Rivalry among competing firms in the consumer electronics industry at the retail level is high. Best Buy is unhappy with Amazon’s recent “market coup” in which Amazon customers gain access to bar codes of products stocked by Best Buy for reference purposes only. Such customers are aware that Best Buy offers most of its electronic items at a higher price than Amazon. Therefore, once they gain access to the details of a product at Best Buy, they cross over to the Amazon website to search for the same product and to purchase it at a lower price.

Best Buy’s main rivals in the traditional retail model, Circuit City and CompUSA, have already collapsed. However, the exit of these rivals has been replaced by the emergence of rivalry with online retailers. In the US, the rivalry has taken a political dimension (Hitt, Ireland and Robert 60). This is because of the existence of US laws that subject products sold through brick-and-mortar stores to sales tax (Hitt, Ireland and Robert 61). Retailers with a physical presence in the US have repeatedly complained that both their physical and online sales are being subjected to sales tax. They are opposed to the practice of excluding online retailers from sales tax even after they establish physical “distribution centers”. The brick-and-mortar retailers argue that the distribution centers are not different in any way from the old-model retail centers, and should therefore be subjected to sales tax as well.

Analysis of competitors

The retail industry is always undergoing major changes today. Best Buy’s competitors keep changing in terms of strategies, competitive advantages, target segments, and mode of operation. This phenomenon has created a state of flux in the industry. Weak competitors are continually being eliminated from the industry. The emergence of the internet era has only hastened this process. Best Buy’s model will also become obsolete if it does not embrace online business solutions. Two main companies that used to pose serious competition to Best Buy, CompUSA and Circuit City, were eliminated from the industry primarily because of failure to adopt online business systems.

In the absence of traditional competitors, Best Buy is being pitted against new competitors who have adopted unfamiliar business models (Hitt, Ireland and Robert 62). Most of these competitors use online, mass market, and warehouse club approaches. It is extremely difficult for a brick-and-mortar electronics store like Best Buy to compete in these unfamiliar platforms.

One of the new competitors is Amazon.com, an online book-selling company that was established in 1990. The company has since diversified its operations into music, video, toy, and electronics segments. Amazon has continued to grow at an alarming rate since its inception. In many instances, the growth has resulted from the company’s own business model. The growth may also be attributed to the acquisition of online businesses such as Netflix and Zappos.com.

Recently, Amazon launched a new smartphone app that enables consumers with smartphones to capture the bar code of a product in a store and receive price information instantly from Amazon. This new application has catapulted Amazon to a dominant position in the consumer electronics market, thereby making it one of Best Buy’s fiercest competitors. Amazon makes competition even stiffer by offering customers lower prices than Best Buy. This competition has compelled Best Buy to launch a new online platform by the name BestBuy.com.

Walmart is also a major competitor in the industry. It is the world’s largest retail store and has been in existence for more than 60 years. Initially, Walmart focused its retail operations on the US market. However, after this market became saturated, the company started putting most of its energies on the international division. Today, the international division is growing more rapidly than the domestic division. Although Walmart’s core business is not in the electronics market, it is the second largest seller of electronics after Best Buy.

Radio Shack is also a major competitor in the retail consumer electronics industry. Like Amazon, Radio Shack has benefited a lot from acquisitions. They have enabled it to diversify into many areas, including furniture, consumer credit, and furniture. However, its core business remains consumer electronics. Radio Shack does not pose any serious competition to Best Buy. Nevertheless, the company is in the process of rebranding itself. Today, its financial performance creates the impression that it is in the recovery process.

Costco is also one of the main competitors of Best Buy. Like Amazon and Walmart, Costco has grown by leaps and bounds by extending its operations across the US border into Canada, Europe, Asia, and Mexico. The retailer has over the years obtained an upscale image although it is still able to provide “quick-sale” electronic items at low prices. This enables the retailer to sustain a high level of profitability despite the fact that it obtains a smaller margin on each product.

In terms of objectives, Best Buy’s strategy seems to resemble that of Costco, Radio Shack, and Amazon. All these companies are keen to maintain a strong online presence as well as to diversify their product offerings to gain bigger profit margins. However, Costco and Radio Shack seem to lag behind in the adoption of online capabilities. Therefore, their priorities may diverge from those of Amazon and instead move closer to those of Walmart. However, Best Buy, Radio Shack, and Costco are reluctant to face the high business risk that comes with an overhaul of the old retail model.

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The current strategic flux has intensified competition among all companies in the retail industry. Currently, all the main competitors except Amazon have their sights on both brick-and-mortar and online sales. They are also keen to diversify into new products. Costco, Best Buy, and Radio Shack are concerned that their business models may collapse if they fail to choose a new business model that solves the current problem of dwindling profit margins.

Best Buy endeavors to position itself as the best retailer in terms of customer service and product line. Its competitors are likely to start pursuing this goal as well. Like Best Buy, the competitors are also likely to start looking for a new industry in which to invest as a way of dealing with the increased commoditization of products. They are also likely to start exploiting each others’ weaknesses more aggressively. Amazon has already set the pace by attempting to exploit the capabilities of brick-and-mortar competitors.

According to Hitt, Ireland and Robert, it should be assumed that the retail market will become more volatile in the future than it is today (61). Companies like Amazon have been working to offset the status quo since their inception. Therefore, competitors should assume that the prevailing market phenomenon may be overturned yet again. This will lead to the creation of new frontiers in the quest for competitive advantage and market dominance. The response is likely to be one in which companies that are unable to set the pace in the adoption of new technologies, platforms, and trends act as fast-followers. Best Buy is likely to operate like a fast-follower while Amazon will possibly achieve industry leadership in the retail consumer electronics segment. Competitors who fail to either act as leaders or fast-followers will most likely fail to survive in today’s competitive retail industry.

Analysis of value chain

Value chain analysis is the process through which the primary and support activities that add value to a company’s final product are identified and analyzed with the aim of reducing costs and increasing differentiation. In the case of Best Buy, the main support functions include finance, human resources, and management information systems. On the other hand, the main value chain activities include supply-chain management, operations, distribution, sales and marketing, and follow-up services. Best Buy can choose to adopt either the cost advantage strategy or the differentiation advantage strategy. In the cost advantage strategy, the aim is to reduce costs while in the differentiation advantage strategy, the aim is to come up with superior products and services. The best option for the company is the differentiation advantage strategy.

The choice of the differentiation advantage strategy is based on the realization that for many of the products that the company stocks, superior substitutes are available. Examples include electronic and media games. These products should be eliminated from the company’s inventory. They should be replaced with consumer electronics as well as supporting peripherals and components that have a leading edge in the market. This will enable Best Buy to make the best use of its strategic assets in a differentiation process that sets all the company’s offerings apart from their core competitors. This necessitates efforts to leverage all internal systems, internet capabilities, as well as physical locations. The resulting integration process will enable the company to create value as well as to regain its leadership position in the industry in terms of customer service.

An evaluation of Best Buy’s strategy

Best Buy’s strategy is best understood through an analysis of the company’s retail formats in both domestic and international divisions. The way the aforementioned six categories of products are presented in each of these segments provides crucial indicators regarding the company’s overall strategy. The company seems to favor a strategy that ensures that a bulk of its sales is achieved through home office products and consumer electronics in both divisions.

The company also intends to rebrand international retail outlets that have not succeeded in wading off local competition to achieve higher profit margins. A case in point is the company’s decision to rebrand its Best Buy stores in China several years after the acquisition of the Jiangsu Five Star Appliance Company. Immediately after the takeover, Five Star Appliances was rebranded with the Best Buy brand, only for this move to turn out to be unprofitable. Consequently, the company was compelled to rebrand the Chinese stores by reinstating the Five Star Appliances brand. The bottom line is for the company to look for ways of reducing costs to remain competitive in the brick-and-mortar model.

Conclusion

In conclusion, Best Buy needs to adopt the differentiation advantage strategy in its efforts to create value and establish a unique competitive advantage in both the brick-and-mortar and online platforms. Moreover, it must seek to take up the coveted position of market leadership instead of settling for that of a mere fast-follower. Moreover, in today’s retail consumer electronics industry, the greatest cost-cutting opportunities exist in the online retail segment. This explains why companies like Amazon have managed to establish a high level of differentiation while at the same time maintaining low costs. This cost advantage enables them to enhance their purchasing power as well as to achieve high rates of turnover, making them the most preferred outlets for suppliers.

 

Works Cited

Hitt, Michael., Ireland, R. Duane, and Robert E. Hoskisson. Strategic Management Cases: Competitiveness and Globalization (10th ed). New York: Cengage Learning. 2013. Print.

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