Best Buy Report: Bestbuy Co

BestBuy Co.
BEST BUY REPORT
Prepared by: Aziz Ghani & Sola Soetan

Aziz Ghani : azizghani0@gmail.com 1416-856-6737
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ADMN 4604 Business Strategy and Policy 1
BestBuy Co.
Table of Contents
Executive summary 3
Current performance 4
Mission, Vision 6
Objectives 6
Strategies 6
Corporate Governance 9
External Environment: PESTLE 9
Political-legal factors 9
Economic factors 10
Socio-cultural factors 10
Technological factors 11
Environment factors 11
Porter’s Five Forces 11
Threat of new entrants 11
Bargaining power of buyers 12
Bargaining power of suppliers 12
Threat of substitute products 12
Rivalry among competing firms 12
Other Environmental Factors 13
Customers 13
Competitors 13
Corporate Structure 16
Corporate Culture 16
Corporate Resources 17
Marketing 17
Finance 17
Human Resources 20
Research and Development 20
Operations and Logistics 20
Information system 21
Strategic Alternatives 23
Recommended Strategy 26
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BestBuy Co.
Implementation 2 7
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BestBuy Co.
Executive summary
BestBuy is one of the largest consumer electronics retailers in the world with 19% share of the gl
obal retail consumer electronics market. Although extremely successful in the past starting in FY
2012 the retailer has been reporting net losses. The purpose of this report is to analyze what is ha
ppening and how the company can overcome its financial difficulties and emerge on as a leader a
gain.
Using several analysis techniques including PESTLE and Porter’s Five Forces, we have conclud
ed that the company is dealing with fierce competition both online and offline. This fierce compe
tition drives prices down, thus eating into the live-blood of any retailer – the margins. Sluggish e
conomy, gloomy customer expectations towards the future and resulting reduced spending on co
nsumer electronics have provoked a price war and made BestBuy introduce a price-matching pol
icy. The latter eats into the margins as well. These unfavorable changes lead to corporate culture
changes as well, shifting from results-oriented culture to “be-there-40-hours-a-week” culture. Thi
s coupled with the company’s plan to attract and retain its employees will eventually negatively i
mpact employees morale and will lead to outflow of long-time employees.
To offset the negative impacts of the company’s fragile financial position a number of strategic a
lternatives is being offered. These include partnering with a famous fast- food chain of restaurants
and place restaurants in each of the stores; acquire a third-party manufacturer to have full contro
l over BestBuy’s private label production; increase offerings in kitchen and household appliances
. While each of the strategic alternatives has pros and cons, the second alternative is deemed the
most viable.
BestBuy relies heavily on private label. These are exclusive products, sold only at BestBuy under
a variety of brands belonging to the company. The retailer can acquire a third-party manufacture
r of these products, tap into consumer electronics market and start selling products at a higher pr
ofit margin, thus contributing directly to the bottom- line. The implementation of this strategy is d
one in 4 steps. Step 1 – allocate the budget, step 2 – allocate the team, step 3 – allocate the produ
c t , s t e p 4 - t r a i n e m p l o y e e s .
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BestBuy Co.
Current performance
BestBuy is the largest retailer of consumer electronics in the world. The company has 1,503 store
s in the U.S. and 2,876 stores in Canada, China, Mexico and eight European countries. BestBuy i
s the tenth largest online retailer in the U.S. and Canada and more than 1.6 billion users visit the
company’s websites or the stores each year. BestBuy currently employs approximately 165,000 p
eople and its world consumer electronics market share is 19 percent.
BestBuy unlike its competitors Amazon and Walmart does not employ a low price strategy. The
company’s current strategy focuses on differentiation driven by employee training, online and in-
store enhanced consumer experience, and cost control.
During the year 2013 the domestic segment (consisting of operations only in the U.S.) operated u
nder various brand names such as BestBuy, BestBuy Mobile, Geek Squad, Magnolia Audio Video
and Pacific Sales. The company opened 105 US BestBuy Mobile stand-alone stores and closed
47 US BestBuy stores, one US BestBuy Mobile stand-alone store and one Magnolia store. BestB
uy continues to offer Geek Squad support services, and BestBuy Mobile store is still active. In th
e year 2014, the company expects to close additional between five to ten US Bes tBuy stores and
open a small number of US BestBuy Mobile stand-alone stores.
The International segment is operated under the brand names of BestBuy, BestBuy Mobile, Cell S
hop, Connect Pro, Future Shop and Geek Squad. In Europe the corporation operates under the br
and names of The Carphone Warehouse, The Phone House and Geek Squad. In China BestBuy s
ells under the brand names of Five Star and BestBuy Mobile. The operations in Mexico are regist
ered under the brand names of BestBuy, BestBuy Express and Geek Squad.
In 2013 BestBuy Mobile concept and the store-within-a-store experience was introduced in Chin
a in select Five Star outlets. BestBuy Express was also introduced in a small- format store in Mex
ico. The latter focuses on high-traffic and convenience purchases with a large volume of accessor
ies offerings. In Europe BestBuy repositions and resizes the existing stores aiming at revenue ma
ximization. In 2013 alone the corporation closed 126 stores and opened 122 new ones.
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BestBuy Co.
To remain competitive in online electronic segment the company implemented Enhanced Price-
Matching Policy in the U.S. in March 2013. The online promotion allows consumers to request
a price match for comparable products offered by a retail store and an online operator. This initia
tive was put into place after a successful pilot conducted over the holiday season of 2013. BestB
uy is able to match competitors’ prices by taking full advantage of its economies of scales, global
vendor partnership and sustaining efficient, low-cost operations.
Internationally store sales varied from country to country in 2013. In the European continent the
company reported store sales gain due to effective promotions and an increase in sales of higher-
priced mobile phone handsets. In Canada store sales declined with major contributors being telev
isions, computers and gaming sales lacking behind and reinforced by overall industry weakness.
The sales decline was partially offset by increase in sales of mobile phones and tablets. In China,
increasing competition from online vendors drove down prices across most product categories.
Abolishment of U.S. government stimulus programs in December 2011 contributed to weaker sal
es. Overall lower gross profit and operating income in international segment was driven by a co
mbination of lower sales in Canada and China, a decrease in gross profit in Europe, adverse prod
uct mix and increased promotional costs.
BestBuy incurred a net loss of $443 million US dollars (USD), a significant reduction from last y
ear net loss of $1.3 billion USD. In 2013 the company had $45.1 billion USD in revenue, which r
epresents a decrease of 5.6 billion USD compared to the previous year. The decrease in revenue i
s attributable to store sales decline of 2.9 percent and closure of 47 large-format stores in the U.S
. Gross profit decreased by one percent to 23.6 percent of revenue. The reduction in gross profit
was the result of increased revenue from the wholesale channel in Europe and increased global p
romotion costs. The company recorded $451 million USD of restructuring expenditures related t
o Renew Blue cost-reduction initiatives, European store transformation and U.S. large- format st
ore closures among other operational changes.
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BestBuy Co.
Mission, Vision
Currently BestBuy does not have an official mission statement. However the following mission/
vision statement is referenced as such on several regional websites:
“Our formula is simple: we’re a growth company focused on better solving the unmet needs of o
ur customers and we rely on our employees to solve those puzzles. Thanks for stopping.”
Objectives
In the last quarter of 2012, BestBuy announced the strategies to follow to improve the company’s
performance in 2013. The company established that it would remain focused on increasing profi
tability across the whole organization. The strategic plan aimed to increase revenue was called R
enew Blue strategy and was focused on making BestBuy the preferred brand and destination for t
echnology products and services.
The Renew Blue strategy has the following objectives: “reinvigorate and rejuvenate the customer
experience, attract and inspire leaders and employees, work with vendor partners to innovate an
d drive value, increase return on invested capital and continue the company’s leadership role.”
In FY 2014, BestBuy plans to open a limited number of small- format stores in Europe and to con
tinue to review its portfolio of stores globally. Also, 2014 will be a transition year for the organiz
ation with special emphasis on the following areas:
1. Accelerating online growth,
2. Enhancing the multi-channel customer experience,
3. Increasing revenue and gross profit per square foot through enhanced store space
optimization and merchandising,
4. Driving down cost of goods sold through supply chain efficiencies,
5. Continuing to gradually optimize the U.S. real estate portfolio and
6. Reducing selling, general and administrative costs.
S t r a t e g i e s
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BestBuy Co.
To remaining consistent with its mission and vision BestBuy is currently implementing the follo
wing:
1. Accelerate online growth through the improvement of online traffic by:
 generating online recommendations based on customers' requirements and
preferences;
 employ a new search platform with increased product find and relevance capabilities;
 create integrated product pages with generation of consistent b rowsing experience
across devices;
 improve access to reward zone points management and redemption capabilities;
 develop easy process to supplementary products and services, such as extended
warranties and support;
 increase product mix and product detail information.
BestBuy expects to have made significant improvements against these initiatives by the beginnin
g of 2014 holiday season.
2. Enhance the multi-channel customer experience. To measure customer satisfaction

BestBuy introduced a new tool known as the Net Promoter Score (NPS). The NPS will
measure the level of customer satisfaction in the following areas: offer of devices and
services, level of knowledge of the company’s sales representatives, price
competitiveness, shopping schedule, technical support during useful life of products,
availability of stock as well as the customer price perception with low price guarantee,
higher personalization in online offers and re-allocation of store hours.
3. Increase revenue and gross profit per square foot thro ugh enhanced store space
optimization and merchandising. In 2014 BestBuy plans to reduce the square footage
allocated to declining or low margin segments, such as music and movies, and replace
them with inventory from higher- growth segments, such as mobile phones, appliances
and accessories. The company plans to increase its product selection, store employee
training and re-evaluate marketing investments.
4. Drive down cost of goods sold through supply chain efficiencies. BestBuy will include
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shipment in cost of goods sold to fulfill online purchases from all existing distribution
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5. centers. Additionally, the company will batch multi-unit customer orders in one shipment.
6. Continue to gradually optimize the U.S. real estate portfolio. BestBuy reduced occupancy
costs through store closings and renegotiation of leases. In 2013 the company closed forty
seven large-format stores and expects to close at least five more in 2014. Also, the
company expects to open new stores in selected markets, including 12 new BestBuy
Mobile stores, 10 Magnolia Design Center, and 18 to 25 Pacific Kitchen and Home.
7. Reduce selling, general and administration costs. As part of the initia l phase of the Renew
Blue strategy the company is expecting to reduce its expenditures by estimated $150
million USD annually through discontinuing non-core activities and eliminating
management layers.
8. The company implemented a customer-centricity model that includes online and in store
customer experience, employee training and engagement, partnership with vendors, retail
execution and cost control.
9. BestBuy implemented a price matching policy that allows the company to remain
competitive by offering consumers the same price as certain other retail stores and online
operators.
10. BestBuy offers loyalty programs, so members can earn points with each purchase. The
retailer also offers points to consumers using cobranded credit cards in the U.S. and
Canada. The points earned through the loyalty program are used by consumers to get
discounts on future purchases.
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BestBuy Co.
Corporate Governance
In 2012 BestBuy went through major corporate governance restructuring at top management leve
l. Mr. Hubert Joly became President and Chief Executive Officer in September 2012 and the Exe
cutive Vice President, Chief Administrative Officer and Chief Financial Officer Ms. Sharon Mc
Collam was appointed in December 2012. The board of directors of BestBuy Co. is comprised of
directors in charge of appointing the Chairperson and the members of the Public Policy Committ
ee. The Public Policy Committee is composed of independent directors that meet four or more ti
mes in the year depending on the discretionary judgment of the members. At the end of March 2
013, the company had 3,185 common stock shareholders. BestBuy offers quarterly cash dividend
to its shareholders. The dividend has grown by $0.10 USD to $0.17 USD per share since 2012.
External Environment: PESTLE

Political-Legal factors
The BestBuy sales of its exclusive branded products represent an important component of the co
mpany’s revenue. Most of these products are manufactured under contract by producers based in
Southeast Asia. Although China and other countries-producers of consumer electronics are some
what politically unstable, almost entire economy is fueled by American and European demand fo
r consumer products. Unless there is a 75% decline in demand for consumer products, this factor
does not pose any serious threat to the company’s business.
The company is currently under litigation regarding two class action lawsuits. The first lawsuit w
as filed in February 2011 and alleges that corporate officers violated earnings guidance regulatio
ns in 2011 financial statements. The second laws suit filed in June 2011 and claims breach of fid
uciary duty and failure to correct public misrepresentations and material misstatements and/or o
missions regarding fiscal 2011 earnings projections. Also the plaintiffs declare that certain direct
ors sold stock while in possession of material adverse non-public information. This factor is not a
serious threat as it is person-related and the company may and will remove the individuals provo
king negative publicity, invest further in positive publicity and will overcome the short-term repu
tation damage.
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BestBuy Co.
Also, BestBuy’s encounters a liability for warranty replacements and repairs resulting from prod
uct defects, while suppliers do not reimburse or cover such costs. In addition, BestBuy is account
able for personal injury, death or property damage caused to customers by exclusive brand produ
cts. These two factors require a serious financial analysis with access to privately-owned informa
tion on brands, models, claims, lawsuits from consumers (if any), thus it is impossible to evaluat
e these factors as posing threat to the company.
None of the above-described factors can significantly influence BestBuy’s business except for th
e third group, which cannot be fully analyzed at this point.
Economic factors
North American slow economic recovery created uncertainty and reduced consumer spending in
2013. Low level of consumer confidence and perception of electronics as discretionary items ma
y have had a negative impact on historically expected high earnings in the fourth quarter of 2012.
BestBuy’s is a seasonal business and relies heavily on revenues gained during holiday shopping
season in the U.S., Europe, Canada and Mexico. This is a strong factor against Best Buy and unfo
rtunately out of its reach to control it.
Vigorous competition in consumer electronics industry has considerably decreased revenues and
margins. There are several online businesses competing on price and driving everybody’s prices
and hence revenue and profit down. This is another factor that inevitably undermines BestBuy’s
finances, however it is important to note that exclusive brands are responsible for a big part of th
e company’s revenue. This is sell-cheaper-strategy-proof for BestBuy.
Socio-cultural factors
In FY 2013 there was an increase in demand for tablets, eReaders, mobile phones and appliances
. At the same time, consumers were buying less of televisions, games and notebook computers. I
n the same year BestBuy took full advantage of the consistent growth of ecommerce by introduci
ng their price- matching policy resulting in increased revenue and declining margins. Customer tr
affic increased in the traditional bricks-and- mortar retail stores since price-conscious customers a
na lyzed the prod uc t in trad itio na l s tores a nd the n p urc ha sed the m o nline to take
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BestBuy Co.
advantage of the discounted prices. Changing fashion is expected and plays in favor of BestBuy
as the company may and will change product offerings towards a higher- margin ones. Increased t
raffic to physical stores will serve as additional promo tool as consumers will see the turn-around
. Thus both are positive for BestBuy.
Technological factors
Smartphone’s mobile purchasing capability is pushing boundaries between online and offline ret
ail. Consumers have twenty four hours access to stores by literarily just reaching into their pock
ets. BestBuy has been able to positively embrace the current online purchasing c ustomer behavio
r by allowing consumers to shop, have personalized shopping lists, match competitors prices, im
plement self scanning and self checkout and reward its customers with loyalty points. Another st
ep in the mobile purchasing industry is led by tab lets. “Recent research indicates that by 2014, m
ore than one in three American Internet users will have a tablet device, and 52 percent of tablet o
wners prefer to shop online using their tablets”. Another fashion trend is again positive for BestB
uy. Being a retailer and being able to switch, drop, add products to their online and store displays
is to BestBuy’s advantage that they absolutely have to jump on.
Environmental factors
These are not relevant to retailer, unless we look into the kind of suppliers BestBuy chooses and
what kind of requirements for environmental consciousness they have to meet.
Porters Five Forces

Threat of new entrants
The threat of new entrants in the consumer electronics market is medium to low. Even though it i
s relatively easy for any small Asian electronics producer or a no-name electronics vendor in the
Americas or Europe to set up their website and start selling, there is a number of factors preventi
ng just about anybody from entering this market. First, advertising is costly; it takes a long time t
o get recognized by potential consumers. Second, logistics is close to impossible to do since one
container shipment may take 6 months from China to US. Third, a huge initial investment is need
ed to start the business, invest in the first production batch, advertising and delivery to customers
. Th is t hreat is v irt ua lly no n- e xiste nt for BestBuy.
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BestBuy Co.
Bargaining power of buyers

The bargaining power of buyers is high due to a strong competition from Internet-based business
es, wholesalers, discount chains and home improvement superstores. Consumers have numerous
alternatives when purchasing online, therefore prices remain relatively low and profit margins thi
n; as sellers compete among each other using a low-price strategy. The fact that consumer electro
nics are non-essential products also increases purchasing power of consumers. BestBuy is a disa
dvantage and has to do price- matching, eating into its margins, but they can attract more people t
han other retailers due to repair and exchange guarantee, as well as exclusive brands, as well as
wide product line-up offered.
Bargaining power of suppliers

The bargaining power of suppliers is low due to the organization economy of scale. BestBuy is t
he largest retailer of consumer electronics in the world and the tenth largest online retailer in the
North American market; therefore suppliers rely on BestBuy’s network to sell their products. Mo
reover, BestBuy has the power of driving down purchasing prices, thus compensating or limiting
decrease in their margins.
Threat of substitute products

Threat of substitute products is low since BestBuy has a broad spectrum of consumer electronics
products the retailer offers. Suppliers need BestBuy to atta in high volumes of sales; therefore Be
stBuy will always have access to the latest technology and devices.
Rivalry among competing firms

Rivalry among competing firms is high. There is a strong price competition from brick-and- mort
ar retailers and online operators. BestBuy’s main competitors are Amazon and Walmart. These c
ompetitors’ product offers are more diversified into various types of products besides consumer e
lectronics, which makes them less category-dependent. Due to the wide selection and similarity o
f consumer electronics products offered by all competitors, there is low customer retention and st
rong competition for maintaining their market share.
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BestBuy Co.
Other Environmental factors

Customers
BestBuy successfully changed from being a commission-based company to a fully- integrated cus
tomer-centric company. BestBuy implemented customer-centricity strategy as a manner of differ
entiating itself from competition. Over the years, BestBuy has acquired different companies in ot
her segments to serve customers better. For example, Magnolia Hi-Fi Inc. was acquired with the
purpose of targeting upscale customer segment. In FY 2012 the retailer acquired mindSHIFT Tec
hnologies Inc. to be able to offer cloud services, data center services and professional services. T
o change the consumer shopping experience, BestBuy bought Future Shop, started operating dual
brand to attract more customers. BestBuy sells consumer electronics products online and in retai
l stores under different brand names. Due to the accelerated innovation in consumer electronics,
consumer demand shift from one consumer electronics product to another, there is a need to resp
ond to changing consumer preferences in a timely manner.
Competitors
BestBuy operates in a highly-competitive industry. BestBuy’s primary competitors are consumer
electronics retailers, such as Walmart and Internet-based businesses, such as Amazon. BestBuy's
competitors thrive to compete on price. The company works to beat its competitors by providing
excellent customer service and in-store experience; also BestBuy price match. In the U.S. BestB
uy has seen bigger impact from its online competitors due to the fact that online-only businesses
are exempt from collecting sales taxes in some of the states.
The following table provides comparison of BestBuy to their direct competitors.
Direct Competitor Comparison
BBY AMZN AAPL WMT Industry
Market Cap: 14.67B 150.28B 462.33B 246.47B 2.24B
Employees: 165,000 88,400 72,800 2,200,000 17.00k
Qtrly Rev Gro

-0.00 0.22 0.01 0.02 0.11
wth (yoy):
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BestBuy Co.
Revenue (ttm): 48.15B 66.85B 169.40B 473.00B 4.19B
Gross Margin (
0.23 0.26 0.38 0.25 0.30
ttm):
EBITDA (ttm)
1.89B 2.92B 55.87B 36.65B 129.68M
:
Operating Mar
0.02 0.01 0.29 0.06 0.01
gin (ttm):
Net Income (tt

-349.27M -101.00M 37.75B 17.09B N/A
m):
EPS (ttm): -1.39 -0.23 40.11 5.14 -1.39
P/E (ttm): N/A N/A 12.69 14.74 31.28
PEG (5 yr exp
2.15 10.53 0.85 1.59 1.30
ected):
P/S (ttm): 0.30 2.25 2.73 0.52 0.31
BBY = BestBuy Corp.

AMZN = Amazon.com Inc.
AAPL = Apple Inc.
WMT = Walmart Stores Inc.
Industry = Consumer Electronics Stores
Source: http://ca.finance.yahoo.com/q/co?s=BBY
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BestBuy Co.
Weighted
External Factors Weight Rating Comments
Score
1 2 3 4 5
Opportunities
Increased demand for tablets, e The demand for these pro
Readers, mobile phones and ap ducts increases revenue.
pliances. 0.10 3.50 0.35
Increased mobile purchasing ca Online retail is more acce
pability. ssible than ever, due to in
creased capabilities of cel
0.10 3.00 0.30 l phones and tablets.
Short product life-cycle and ob Technology innovation h
solescence. as reduced product life- c
ycles and increased produ
0.20 2.00 0.40 ct obsolescence.
Diversification of the business: This will increase profit
offering further supporting serv margin and overall comp
ices along with the products sol etitiveness.
d. 0.05 1.00 0.05
Threats
Slow economic recovery and re Consumers are spending l
duced consumer spending. ess due to high unemploy
ment rates and economic
instability in North Amer
0.10 3.00 0.30 ica.
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BestBuy Co.
BestBuy liability regarding war Current manufacturers of

ranty replacements and product branded products do not c
defects. over the cost of defective
0.10 1.00 0.10 merchandise.
The strong competition in the 0 Internet-based business
low-cost strategy decreas
.20
ed traditional retailers’ pr
electronics industry decreases r
2.50 0.50 ofit margins.
evenue margins.
Consumer electronics products Discretionary items sales
are discretionary items. decrease in times of econ
0.15 3.50 0.53 omic uncertainty.
Total Scores 1.00 2.53
Internal Environment
Corporate Structure
BestBuy is structured in a way that information travels from top to bottom. The CEO passes info
rmation to company executives in which at this point information flow to the 3 main sub-organiz
ations. These 3 sub-organizations have their own management team headed by middle managem
ent that connects top level management to regional managers. There are over 40 regions, each of
which consists of districts. These districts each has its own district manager that report to the regi
onal manager. There are over 20 stores headed by General Manager in each district. Each store’s
departments are overseen by a supervisor who answers to General Manager. BestBuy has a good
structure that allows communication from top to bottom through company designed communicati
on channels, such as Employee News Feed and email system. The company develops a list of obj
ectives, goals and duties, which employees must accomplish. BestBuy’s chain of command is cle
ar and easy to understand.
Corporate Culture
BestBuy corporate culture reflects change from traditional business methods to a more contempo
rary and flexible work schedule. Their culture is the result of employees complaints about the de
manding nature of their work and is well-defined and consistent with knowledge-based human-re
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BestBuy Co.
source objectives. BestBuy introduced Results-Only Work Environment (ROWE), which over tim
e was adopted by all departments of the company except for the legal department. ROWE allows
employees to carry out their duties however they want as long they got the job done. After the i
mplementation of the ROWE program, the company experienced a rise in productivity, reduction
i n v o lu n t a r y t u r n o v e r a n d in c r e a s e in e mp lo y e e mo r a le . T h e R O W E
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BestBuy Co.
program enables manager to review and re-evaluate their relationship with their subordinates and
assess the level of stress they undergo. Managers then create a well-organized method of commu
nicating to employees more efficiently and gain deeper understanding of an employee’s strengths
and weaknesses. Despite being a multinational company, BestBuy successfully integrated emplo
yees from acquired companies into its organizational culture.
Regardless of the success of the program, the current CEO Hubert Joly announced that the ROW
E culture would be totally revamped to a culture that encompassed accountability. Furthermore,
he stated that for accountability to be restored there was a need to have all employees on board, s
omething current corporate culture does not require. All employees will have to work 40 hours p
er week with few exceptions. Joly believes this is the first step in changing the basic corporate cu
lture in BestBuy. (Source: Business Insider, 2013)
Corporate Resources
Marketing
BestBuy's current marketing objectives include meeting the technological needs of customers an
d making products available to customers with end-to-end solutions. The current marketing obje
ctives are in line with the company's mission, strategy and policy. BestBuy strives to become a s
ervice-oriented company. The company spends a large amount of money on advertisement in pri
nt, TV and other media. Industry analytical reports state that BestBuy spent $913 million USD in
FY 2013, $995 million USD in FY 2012, $862 million in FY 2011. BestBuy offers customer loy
alty program that allows customers to earn points on purchases. These points may later be redee
med towards future purchases. Currently this program is only effective in the U.S. and Canada. B
estBuy operates 1,503 domestic stores and 2,876 international stores.
Finances
BestBuy’s current financial objective is to increase revenue. BestBuy funds its operations by cas
h and cash equivalents, short-term investments and cash flow generated from operations. BestBu
y’s revenue tends to be decreasing. In FY 2012, revenue was reported to be $51 billion USD, wh
ereas in FY 2013 it went down to $45 billion, in most part caused by decreasing sales. The total r
evenue decline in FY 2013 was 2.1%. Sales declined 2.9% in FY 2013 vs. FY 2012. Cash
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BestBuy Co.
flow was $1.5 billion USD in 2013. BestBuy needs to maintain enough liquidity to meet current f
inancial objectives and expand globally.
Further breakdown of 2.1% revenue decline in 2013 are shown in the table below.
Comparable store sales impact (2.8%)
Net store changes (0.2%)

Non-comparable store sales channels(1) (0.6%)
Impact of foreign currency exchange rate fluctuations (0.3%)
Total revenue decrease (2.1%)
During FY 2013 BestBuy made dividend payments in four installments, $224 million USD.
In terms of liquidity, for FY 2013 company managed the current ratio of 1.1x vs. 1.2x in 2012. T
his means that the company's liquidity is declining which is not a good sign, if the retailer is to m
aintain access to current credit facility as a source of external funding. BestBuy currently holds $
1.0 billion USD of 364-day credit facility and $1.5 billion USD of five- year credit facility. Curre
nt financial condition of the company is deteriorating which is mostly due to the inefficiency of
maintaining global expansion.
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BestBuy Co.
The following table summarizes the major ratios of BestBuy for the FYs 2011 - 2013.
1. Liquidity Ratios F/Y 2013 F/Y 2012 F/Y 2011
Current Ratio 1.1x 1.2x 1.2x
Quick Ratio 0.44x 0.39x 0.40x
2. Profitability Ratios F/Y 2013 F/Y2012 F/Y2011

Net Profit Margin -3.12% -2.43% 2.54%
Gross Profit Margin 24.1% 24.8% 25.1%
Return on Investment -21.43 -18.48 14.85
Earnings Per Share -4.63 -3.36 3.08
3. Activity Ratios F/Y 2013 F/Y2012 F/Y2011

Asset Turnover 2.49x 3.00x 2.78x
Inventory Turnover 4.39x 6.56x 6.61x
Accounts Receivable Period 8.94 Days 14.30Days 13.15Days
Accounts Payable Period 37.40Days 33.51Days 27.42Days
4. Leverage Ratios F/Y 2013 F/Y2012 F/Y2011
Financial Leverage (Average) 3.69 4.27 2.69
Source: http://ca.finance.yahoo.com/q/sec?s=BBY
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BestBuy Co.
Human Resources
As of FY 2013, BestBuy employs 165,000 people globally. BestBuy employees are well-trained,
experts in their fields and offer the best quality services to consumers. The company works to att
ract and retain its employees for the future. Employees are trained and educated about the produc
ts offered in stores. BestBuy offers Stock Compensation Plans to all its employees under a plan c
alled "Omnibus Plan"1 .
All employees are expected to comply and work towards BestBuy's objectives and mission. Emp
loyees are permitted to buy the company's common stock at 15% discount from the market price.
Research & Development

Consumer electronics industry experiences continuous innovation and technology advances. Best
Buy must be up-to-date with new products to allow it in adapting to the change in technology an
d consumer preferences. BestBuy seeks to collaborate with new and existing manufacturers to sel
l their products to enable it to be a one-stop-shop for consumer electronic products. The stores ar
e continuously changing their design to allow customers to interact more with products and to all
ow the stocking of products efficiently. Research is done in customer service as well to make sur
e their experience is at the best possible level. BestBuy also continuously researches competitors
pricing, to enable them in pricing competitively.
Operations & Logistics

BestBuy operates through its physical retail locations and its website. The retailer currently opera
tes in 11 different countries. BestBuy reported having 4,379 stores around the blobe. The majorit
y of BestBuy stores operate under the same standard procedure in terms of inventory
1http://www.sec.gov/Archives/edgar/data/764478/000076447813000014/bby2013x10kt.ht m#sA97A074035424C49
38E47AAECA5A C4F5
23
BestBuy Co.
management, customer relations, staff training, displaying of merchandise, product sales and ser
vices, designed and controlled through the corporate management team. Products are shipped to
stores from distribution centers or directly from manufacturers to stores. The company currently
operates 35 distribution centers globally which allows it to efficiently transport the products from
the manufacturer to its stores. BestBuy has implemented a strategy to reduce the cost of its tra ns
portation by forecasting store sales effectively, transporting fuller trucks, and using railway as th
e most cost-effective means of transportation. Stores can also supply each other with products in
case of a stock out.
Information System
BestBuy is highly dependent on its information system to operate its business. The system emplo
yed assists in running their operations at all management levels. Furthermore the system aids in f
orecasting sales, provides an efficient supply chain management, processes transactions, operates
its ecommerce website and allows for efficient staff planning. All this has resulted in revenue in
crease and lower costs. BestBuy is focused on growing its online sales. The website has been red
esigned and currently uses Oracles ecommerce platform to operate online sales. BestBuy reporte
d $477 million USD sales through its website in 3Q 2013. This is an increase of 10.5% compared
to 2Q 2012.
24
BestBuy Co.
Strategic Alternatives
25
Internal Fa Weighted
Weight Rating Comments
ctors Score BestBuy Co.
1 2 3 4 5
Strengths
Largest retail 0.10 5.00 0.50 BestBuy’s size and purchasing power provide
er of consum s the company with a strategic advantage.
er electronics
in the world
Exclusive rig 0.20 4.00 0.80 The organization has exclusive rights to produ
ht to sell cert cts such as music, and TV sets.
ain products
Broad range 0.20 3.00 0.60 BestBuy offers a wide selection of products a
of electronic nd services.
product offeri
ngs and price
s
Customer- ce 0.10 3.00 0.30 BestBuy provides an enhanced in-store custo
ntric model mer experience.
Weaknesses
High marketi 0.15 2.50 0.38 BestBuy spend considerable resources on adv
ng cost ertising
They are less 0.15 1.00 0.15 Walmart and Amazon do not rely exclusively
diversified th on consumer electronic sales.
at its competi
tors
High cost of 0.20 3.00 0.60 BestBuy carries significant expenses associate
operations d to employee overhead and stores lease.
Total Scores 1.00 3.33

Make space available for a chain of popular fast food restaurants in all stores. Building lease will
26
BestBuy Co.
be partially offset plus BestBuy will be receiving a small percentage of the fast food chain’s reve
nue. The restaurant must operate during regular business hours of BestBuy.
Pros
 This will help to partially offset buildings lease costs.
 The restaurant will attract more customers to walk into the store and will keep them in the
store longer.
 A low-cost strategy to implement, it will be at the cost of the fast-food to set the
restaurant and the operation.
Cons
 All stores will have to change the layout to fit the restaurant.
 The restaurants food quality and service is controlled by a third party, and any bad
publicity can have a negative impact on BestBuy.
 This move may lose more business to BestBuy due to store layout change, than bring new
business in. Unfortunately, this may be known once the restaurant is established.
Offer same-day shipping.
Pros
 Provide customers with a service that would allow it to differentiate itself amongst its
competitors.
 Corporate offices and businesses will be easy targets to take advantage of the service, this
will increase BestBuy’s customer base.
 Compete against Amazon in a way that’s very hard for them to implement, due to its
limited number of distribution centers around the country.
 Increases sales to customers who are willing to pay the price and need an expedited
service.
 It’s a low cost strategy to implement, and can have a positive effect in sales.
 BestBuy has the necessary infrastructure to efficiently implement this strategy, due to
their retail presence in different cities.
27
BestBuy Co.
Cons
 Stores must hold larger inventory on stock to prevent stock outs.
 Customers don’t walk into the store to purchase other items, only the products they need
are purchased.
 Reduce profit margin if cost is passed onto to BestBuy.
 If shipping cost is passed to the consumer, it will make the price too high for
competitiveness in the market place. Therefore, BestBuy would lose potential sales and
possibly market share.
BestBuy increases its product offering in private labels, particularly in kitchen and household ap
pliances.
Pros
 Higher profit margins when compared to branded products.
 Reduced dependence on branded products.
 Exclusivity of the product, competitors will not have the same product.
 Control over price, and marketing plans.
Cons
 The setup of the private label has to go through intensive research, logo, brand name, and
design.
 BestBuy must audit the quality of the manufacturers that will be used to manufacture for
their private label.
 The quality of the product will impact BestBuy and not the manufacturer that produces it.
 BestBuy trusting a third party to manufacture a product that will be sold under their name.
 There is no support from manufacturers in marketing and selling the product.
 If the product does not sell, BestBuy will be responsible for liquidating the unsold
merchandise.
 Warranty of the product will be BestBuy’s responsibility.
Acquire a current third-party supplier that BestBuy uses to outsource its private label products.
28
BestBuy Co.
Pros
 Higher profit margin due to backward integration.
 Reduce dependence on third-party suppliers, and instead take control of the
manufacturing.
 A stepping stone into consumer electronic manufacturing.
 Have a competitive advantage over competitors who retail products manufactured by
popular electronic companies.
 Have more control over the quality of its private label product.
 BestBuy will be manufacturing consumer electronics products that already sell in all its
stores, allowing forecasting and supply of products to flow effectively fro m the
manufacturer to the retail outlets.
 Reduce the cost of logistics and distribution due to the private label brands being
manufactured in one place rather than many different manufacturing plants.
 Consistency in the quality of the product due to having a sole manufacturing plant for all
the private label brands.
Cons
 Large investment in acquiring a manufacturer.
 Dependence on products from one manufacturer. In case of disruption BestBuy will not
be able to be supplied with products.
 Trade embargo and tariff rate changes can make manufacturing of the product in that
country unfeasible.
Recommended Strategy
BestBuy has been incurring losses since FY 2012. Competition in the market has been on the rise
, Market share is being lost to Walmart and Amazon due to low prices they offer. BestBuy differ
entiates among competitors in concentrating on the service it offers to its customers rather than p
rice. BestBuy will need to come up with a strategy to allow it to gain back the market share back.
29
BestBuy Co.
They have done a number of strategic moves to maintain their position in the market by
30
BestBuy Co.
opening separate mobile stores, expanding to European and Asian countries and diversifying thei
r product offerings, but investors have lost the confidence in BestBuy to be able to come with a s
trategy to turn the company around. Due to current challenges faced by BestBuy from shareholde
rs and both internal and external environmental factors, the strategy feasible and viable to BestB
uy current situation is vertical growth through backward integration. BestBuy gets a third party t
o manufacture private labels it carries and backward integration will increase the existing positiv
e profit margin. BestBuy currently generates large portion of its revenue through sales of product
from its private label brand.
Although the retailer’s private label brand has the highest profit margin among other well-known
brands that it currently sells, it has the highest risk due to the low quality and the liability of the
product warranty is the responsibility of BestBuy. The company has a well-known brand in cons
umer electronic retail and has one of the highest market share (over 19%) which will aid the succ
ess of this strategy. BestBuy currently own brand names such as Dynex, Insignia, Init, Rocketfis
h and Geek Squad which its uses to offer cost-competitive consumer electronics product to the m
arket. Warranty liabilities under these brand names are on BestBuy even though the products are
produced by outsourced manufacturer. Also BestBuy has a team that designs, develops and tests
consumer electronics products under these brand names. The qualities of these products under its
brand name are not controlled by BestBuy even though it is liable for any risk caused by the usa
ge of these products. Since the formula that drive BestBuy is to focus o n better solving the unmet
needs of its customers, acquiring one of its third-party manufacturers to produce product meetin
g the needs of consumers will differentiate from competition and give it a stepping stone into con
sumer electronics manufacturing. BestBuy has the necessary infrastructure and human resources
experience needed to implement this backward integration. Some of the consumer electronics pr
oducts currently offered under its brand name include televisions, car electronic accessories, Blu-
ray, Home Audio and tablets. The demand for these products is high and they accounted for large
share of BestBuy’s revenue. Acquiring one of its manufacturers to produce these products under
one of its brand name will give BestBuy competitive advantage in the market and will discontin
ue dependence on third-party manufacturers of its private label products. This strategy will addre
ss BestBuy’s objective for FY 2014 to reduce cost of goods sold, increase profit margin, rise in st
o c k p r i c e a n d e n d c o n t i n u o u s
31
BestBuy Co.
net losses. BestBuy will undergo a corporate restructuring to integrate the newly-acquired compa
ny.
Implementation
To successfully implement the recommended strategy, BestBuy should carefully analyze and allo
cated the available resources. Also, BestBuy should carefully choose manufacturers as our strate
gy is vertical growth through backward integration. Implementation of the recommended strateg
y is followed by several stages. For this particular strategy implementation period would be 3 yea
rs which can be subdivided into short, medium and long horizons.
The first stage is to allocate the budget and manage financial requirement for the implementation
. This is very crucial stage for BestBuy. The team responsible for strategic planning should be ab
le to convince the future success of recommended strategy to the stakeholders and present inform
ation to related parties very effectively. Mission, vision and goals of the strategy should be clearl
y stated to all employees. BestBuy currently holds cash and cash equivalents of $1.2 billion USD
and $1.5 billion USD of five- year credit facility. BestBuy also holds long term investments, clas
sified as available- for-sale securities. We believe that available funds should be adequate to acqu
ire electronics manufacturer. The second stage is to form a team who are experts in the field and
select three manufacturers in Asia and do negotiations with them. The team will negotiate in ter
ms of products, cost, quality and supply chains. The third stage followed by this process is to det
ermine what kind of products to offer and design of the products. At this point BestBuy is lookin
g to acquire a manufacturer who can supply various consumer electronics products, suc h as TV s
ets, Tablets and E-Reader at one stop. The cost of acquiring manufacturer is estimated to be $250
million USD. Acquiring a manufacturer who can supply all these products will benefit BestBuy
in various aspects of the business. This will create consistency in the quality of the products that
are being offered to customers under private labels. This is another significant advantage BestBu
y will achieve from this is economies of scale and reduce dependency on third- party suppliers as
BestBuy can have more control over its private label manufacturers. Implementation of this strat
egy is in the best interest of the company and excels the sales from existing and potential new cu
stomers. There should be very effective flow of information between BestBuy and the manufactu
r e r . T he s y s t e m s t ha t a l l o w ma n u f a c t ur e r t o i n t e gr a t e w it h
32
BestBuy Co.
BestBuy which can make the process of easier for products BestBuy needs in future. The fourth s
tage of implementation is to train employees on what they are dealing with and also to provide e
xcellent customer service. The final stage would be to remain constantly innovative, be price-eff
ective and meet the needs of consumers.
Evaluation and Control

After the strategy has been successfully implemented, BestBuy must assess if the new strategy is
taking company in the desired direction. The evaluation of the strategy implemented is made thro
ugh series of actions. A detail survey has to be conducted by the company to figure out if the cust
omers are satisfied or not. Sales, Revenue and Return on Investment are also to be examined. If t
he figures and trends show all these three elements of financial statements have increased and cre
ated satisfactory results, it should be assumed that the strategy we implemented is doing well. Co
rrective measures are to be adopted to fix any issues that are creating problems for the company.
(Please refer to page 19 to view pro forma statement)
Contingency
In case if the above recommended strategy does not perform well, BestBuy should adopt alternat
ive third mentioned above which is BestBuy increases its product offering in private labels, parti
cularly in kitchen and household appliances.
33
BestBuy Co.
BestBuy Co.
Pro forma Income Statements
For 2014 to 2015
2014 2015 2016

Revenue
Revenue Of Tv and E-Reader $2,418 $2,491 $2,541
Revenue Of Tablets $536 $568 $585
Net Revenue $2,954 $3,059 $3,126
Cost of goods Sold

Direct Material 531.72 $550.57 $562.65
Direct Labor 443.1 $458.81 $468.88
Factory Overhead $797.58 $825.85 $843.98
Manufacturers Margin $443.10 $458.81 $468.88
Total Cost of goods sold $2,215.50 $2,294.03 $2,344.40

Gross Profit from new factory $738.50 $764.68 $781.47
Income Realized from new Plant

Manufacturers Margin(from above) $443.10 $458.81 $468.88
Less: Cost of Investment ($250)

Gross Profit $193.1 $458.81 $468.88
Revenue for FY 2013 is $4085 (million) USD. This revenue consist of consumer electronics, co
mputing and mobile phones, entertainment, appliances, services and others. 33% of the total reve
nue coming from consumer electronics consist of 65% revenue coming from TVs and E-readers
and 25% revenue is from BestBuy's private label brands. Computing and mobile phones make up
44% of the total revenue out of which 19% is accounted for tablets and 30% from private label t
ablets. The total revenue from TVs and E-reader comes to be $2,418 million USD and tablets is e
stimated to be $536 million which makes the total amount to be $2,954 million USD taking into
account all other factors. The cost of goods sold which comprises of Direct material, direct labor
and factory overhead is forecasted for FY 2014 is $ 2,215 million. Manufacturers margin of is th
34
BestBuy Co.
e n c a lc u la t e d t o b e $ 4 4 3 . 1 0 w h ic h a f t e r d e d u c t io n o f $ 2 5 0 mi l l io n
35
BestBuy Co.
paid for investment gives a gross profit of $193.1 million.
References
1. http://www.aacstudents.org/informative-essay-example-exploring-the-organizational-
structure-of-best-buy.php
2. http://journalofinternationalmanagement.wordpress.com/2011/05/15/trusting-your-
employees-the-case-of-best-buys-rowe-program/
3. http://www.businessinsider.com/best-buy-ceo-workers- need-to-feel-disposable-not-
indispensable-2013-3
4. http://finance.yahoo.com/blogs/daily-ticker/best-buy- losing-best-chance-survival-jeff-
macke-181740101.html
5. http://www.forbes.com/sites/lauraheller/2012/03/29/best-buy-cost-cutting-to-profitability/
6. http://seekingalpha.com/article/941701-best-buy-corporate-governance-and- financial-
risk-heightens
7. http://businessfinancemag.com/risk- management/best-buy-needs-confront- its-residual-
risk
8. http://business.time.com/2012/11/01/brand- names-just-dont-mean-as-much-anymore/
9. http://www.computerworld.com/s/article/9220698/Best_Buy_rebuilding_IT_capability_it
_outsourced_starts_hiring
10. http://finance.yahoo.com/news/pf_article_112269.html
11. http://www.techspot.com/news/49294-best-buys- new-retail-layout-borrows-heavily-
from-the-apple-store.html
12. http://www.grinningcheektocheek.com/best-buy- new-store-format
13. http://online.wsj.com/article/BT-CO-20130821-710360.html
14. http://www.insigniaproducts.com/support/warranty.html
15. http://forums.bestbuy.com/t5/TV-Home-Theater/Insignia-offers-breakthrough-two- year-
TV-warranty/td-p/32782
16. http://www.forbes.com/sites/lauraheller/2013/04/30/best-buy-quits-carphone-warehouse-
bids-europe-adieu/
17. http://voices.yahoo.com/expanding- foreign-markets-international-operations-
2131554.html
18. http://www.extremetech.com/computing/112363-bye-bye-best-buy
19. http://vdonnell.pbworks.com/f/Best%2BBuy%2BStrategic%2BChange.pdf
20. http://www.businessinsider.com/how-best-buy- is-turning-things-around-2013-7
21. http://www.cnbc.com/id/100470877
22. http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol- irhome
23. http://www.investopedia.com/stock-analysis/062513/best-buy-ecommerce-its-savior-bby-
wsm-msft-aapl.aspx
36
BestBuy Co.
24. http://www.businessinsider.com/best-buy-e-commerce-presidents-3-step-plan-2012-10
25. http://ca.finance.yahoo.com/q/co?s=BBY
26. http://financials.morningstar.com/ratios/r.html?t=BBY&region=USA&culture=en-US
37

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BestBuy Co.

BEST BUY REPORT

Prepared by: Aziz Ghani & Sola Soetan

2. Enhance the multi-channel customer experience. To measure customer satisfaction

External Environment: PESTLE

Porters Five Forces

Bargaining power of buyers

Bargaining power of suppliers

Threat of substitute products

Rivalry among competing firms

Other Environmental factors

The following table provides comparison of BestBuy to their direct competitors.

Direct Competitor Comparison

BBY AMZN AAPL WMT Industry

Market Cap: 14.67B 150.28B 462.33B 246.47B 2.24B

Employees: 165,000 88,400 72,800 2,200,000 17.00k

Qtrly Rev Gro

Revenue (ttm): 48.15B 66.85B 169.40B 473.00B 4.19B

Net Income (tt

EPS (ttm): -1.39 -0.23 40.11 5.14 -1.39

P/E (ttm): N/A N/A 12.69 14.74 31.28

P/S (ttm): 0.30 2.25 2.73 0.52 0.31

BBY = BestBuy Corp.

BestBuy liability regarding war Current manufacturers of

Net store changes (0.2%)

Impact of foreign currency exchange rate fluctuations (0.3%)

Total revenue decrease (2.1%)

Current Ratio 1.1x 1.2x 1.2x

Quick Ratio 0.44x 0.39x 0.40x

2. Profitability Ratios F/Y 2013 F/Y2012 F/Y2011

3. Activity Ratios F/Y 2013 F/Y2012 F/Y2011

Inventory Turnover 4.39x 6.56x 6.61x

Accounts Receivable Period 8.94 Days 14.30Days 13.15Days

Accounts Payable Period 37.40Days 33.51Days 27.42Days

4. Leverage Ratios F/Y 2013 F/Y2012 F/Y2011

Financial Leverage (Average) 3.69 4.27 2.69

Research & Development

Operations & Logistics

Total Scores 1.00 3.33

Offer same-day shipping.

Evaluation and Control

Pro forma Income Statements

For 2014 to 2015

2014 2015 2016

Cost of goods Sold

Manufacturers Margin $443.10 $458.81 $468.88

Total Cost of goods sold $2,215.50 $2,294.03 $2,344.40

Income Realized from new Plant

Less: Cost of Investment ($250)

paid for investment gives a gross profit of $193.1 million.

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