BEST BUY CO. INC.

, HEADQUARTERED IN RICHFIELD, MINNESOTA, was a specialty

retailer of consumer electronics. It operated over 1,100 stores in the United States, accounting for 19% of the
market. With approximately 155,000 employees, it also operated over 2,800 stores in Canada, Mexico,
China, and Turkey. The company’s subsidiaries included Geek Squad, Magnolia Audio Video, and Pacific
Sales. In Canada, Best Buy operated under both the Best Buy and Future Shop labels. Best Buy’s mission
was to make technology deliver on its promises to customers. To accomplish this, Best Buy helped customers
realize the benefits of technology and technological changes so they could enrich their lives in a variety of
ways through connectivity: “To make life fun and easy,” 1 as Best Buy put it. This was what drove the
company to continually increase the tools to support customers in the hope of providing end-to-end
technology solutions. As a public company, Best Buy’s top objectives were sustained growth and earnings.
This was accomplished in part by constantly reviewing its business model to ensure that it was satisfying
customer needs and desires as effectively and completely as possible. The company strived to have not only
extensive product offerings but also highly trained employees with extensive product knowledge. The
company encouraged its employees to go out of their way to help customers understand what these products
could do and how customers could get the most out of the products they purchased. Employees recognized
that each customer was unique and thus determined the best method to help that customer achieve
maximum enjoyment from the product(s) purchased.

From a strategic standpoint, Best Buy moved from being a discount retailer (a low-price strategy) to
a service-oriented firm that relied on a differentiation strategy. In 1989, Best Buy changed the compensation
structure for sales associates from commission-based to noncommissioned-based, which resulted in
consumers having more control over the purchasing process and in cost savings for the company (the number
of sales associates was reduced). In 2005, Best Buy took customer service a step further by moving from
peddling gadgets to a customer-centric operating model. It was now gearing up for another change to focus
on store design and providing products and services in line with customers’ desire for constant connectivity.

COMPANY HISTORY2
From Sound of Music to Best Buy
Best Buy was originally known as Sound of Music. Incorporated in 1966, the company started as a
retailer of audio components and expanded to retailing video products in the early 1980s with the
introduction of the videocassette recorder to its product line. In 1983, the company changed its name to Best
Buy Co. Inc. (Best Buy). Shortly thereafter, Best Buy began operating its existing stores under a “superstore”
concept by expanding product offerings and using mass marketing techniques to promote those products.
Best Buy dramatically altered the function of its sales staff in 1989. Previously, the sales staff worked
on a commission basis and was more proactive in assisting customers coming into the stores as a result.
Since 1989, however, the commission structure has been terminated and sales associates have developed
into educators that assist customers in learning about the products offered in the stores. The customer, to a
large extent, took charge of the purchasing process. The sales staff’s mission was to answer customer
questions so that the customers could decide which product(s) fit their needs. This differed greatly from their
former mission of simply generating sales.
In 2000, the company launched its online retail store: BestBuy.com. This allowed customers a choice
between visiting a physical store and purchasing products online, thus expanding Best Buy’s reach among
consumers.

Page 1 of 12
EXPANSION THROUGH ACQUISITION
In 2000, Best Buy began a series of acquisitions to expand its offerings and enter international
markets:
2000: Best Buy acquired Magnolia Hi-Fi Inc., a high-end retailer of audio and video products and
services, which became Magnolia Audio Video in 2004. This acquisition allowed Best Buy access to
a set of upscale customers.

2001: Best Buy entered the international market with the acquisition of Future Shop Ltd, a leading
consumer electronics retailer in Canada. This helped Best Buy increase revenues, gain market share,
and leverage operational expertise. The same year, Best Buy also opened its first Canadian store. In
the same year, the company purchased Musicland, a mall-centered music retailer throughout the
United States (divested in 2003).

2002: Best Buy acquired Geek Squad, a computer repair service provider, to help develop a
technological support system for customers. The retailer began by incorporating in-store Geek Squad
centers in its 28 Minnesota stores and expanding nationally and then internationally in subsequent
years.

2005: Best Buy opened the first Magnolia Home Theater “store-within-a-store” (located within the
Best Buy complex).

2006: Best Buy acquired Pacific Sales Kitchen and Bath Centers Inc. to develop a new customer
base: builders and remodelers. The same year, Best Buy also acquired a 75% stake in Jiangsu Five
Star Appliance Co., Ltd, a China-based appliance and consumer electronics retailer. This enabled
the company to access the Chinese retail market and led to the opening of the first Best Buy China
store on January 26, 2007.

2007: Best Buy acquired Speakeasy Inc., a provider of broadband, voice, data, and information
technology services, to further its offering of technological solutions for customers.

2008: Through a strategic alliance with the Carphone Warehouse Group, a UK-based provider of
mobile phones, accessories, and related services, Best Buy Mobile was developed. After acquiring a
50% share in Best Buy Europe (with 2,414 stores) from the Carphone Warehouse, Best Buy intended
to open small-store formats across Europe in 2011.3 Best Buy also acquired Napster, a digital
download provider, through a merger to counter the falling sales of compact discs. The first Best Buy
Mexico store was opened.

2009: Best Buy acquired the remaining 25% of Jiangsu Five Star. Best Buy Mobile moved into
Canada.

INDUSTRY ENVIRONMENT
INDUSTRY OVERVIEW
Despite the negative impact the financial crisis had on economies worldwide, in 2008 the consumer
electronics industry managed to grow to a record high of US$694 billion in sales—a nearly 14% increase
over 2007. In years immediately prior, the growth rate was similar: 14% in 2007 and 17% in 2006. This
momentum, however, did not last. Sales dropped 2% in 2009, the first decline in 20 years for the electronics
giant.
A few product segments, including televisions, gaming, mobile phones, and Blu-ray players, drove
sales for the company. Television sales, specifically LCD units, which accounted for 77% of total television
Page 2 of 12
sales, were the main driver for Best Buy, as this segment alone accounted for 15% of total industry revenues.
The gaming segment continued to be a bright spot for the industry as well, as sales were expected to have
tremendous room for growth. Smartphones were another electronics industry segment predicted to have a
high growth impact on the entire industry.
The consumer electronics industry had significant potential for expansion into the global
marketplace. There were many untapped markets, especially newly developing countries. These markets
were experiencing the fastest economic growth while having the lowest ownership rate for gadgets. 4 Despite
the recent economic downturn, the future for this industry was optimistic. A consumer electronics analyst
for the European Market Research Institute predicted that the largest growth will be seen in China (22%),
the Middle East (20%), Russia (20%), and South America (17%).5

BARRIERS TO ENTRY
As globalization spread and use of the Internet grew, barriers to entering the consumer electronics
industry were diminished. When the industry was dominated by brick-and-mortar companies, obtaining the
large capital resources needed for entry into the market was a barrier for those looking to gain any significant
market share. Expanding a business meant purchasing or leasing large stores that incurred high initial and
overhead costs. However, the Internet significantly reduced the capital requirements needed to enter the
industry. Companies like Amazon. com and Dell utilized the Internet to their advantage and gained valuable
market share.
The shift toward Internet purchasing also negated another once strong barrier to entry: customer
loyalty. The trend was that consumers would research products online to determine which one they intended
to purchase and then shop around on the Internet for the lowest possible price.
Even though overall barriers were diminished, there were still a few left, which a company like Best
Buy used to its advantage. The first, and most significant, was economies of scale. With over 1,000 locations,
Best Buy used its scale to obtain cost advantages from suppliers due to high quantity of orders. Another
advantage was in advertising. Large firms had the ability to increase advertising budgets to deter new
entrants into the market. Smaller companies generally did not have the marketing budgets for massive
television campaigns, which were still one of the most effective marketing strategies available to retailers.
Although Internet sales were growing, the industry was still dominated by brick-and-mortar stores. Most
consumers looking for electronics— especially major electronics—felt a need to actually see their prospective
purchases in person. Having the ability to spend heavily on advertising helped increase foot traffic to these
stores.

INTERNAL ENVIRONMENT
FINANCE
While Best Buy’s increase in revenue was encouraging (see Exhibit 1), recent growth had been fueled
largely by acquisition, especially Best Buy’s fiscal year 2009 revenue growth. At the same time, net income
and operating margins had been declining (see Exhibits 2 and 3). Although this could be a function of
increased costs, it was more likely due to pricing pressure. Given the current adverse economic conditions,
prices of many consumer electronic products had been forced down by economic and competitive pressures.
These lower prices caused margins to decline, negatively affecting net income and operating margins.

Page 3 of 12
 Best Buy’s long-term debt increased substantially from fiscal 2008 to 2009 (see Exhibit 4), which was
primarily due to the acquisition of Napster and Best Buy Europe. The trend in available cash has been a
mirror image of long-term debt. Available cash increased from fiscal 2005 to 2008 and then was substantially
lower in 2009 for the same reason.

Page 4 of 12
 While the change in available cash and long-term debt were not desirable, the bright side was that
this situation was due to the acquisition of assets, which led to a significant increase in revenue for the
company. Ultimately, the decreased availability of cash would seem to be temporary due to the
circumstances. The more troubling concern was the decline in net income and operating margins, which
Best Buy needed to find a way to turn around. If the problems with net income and operating margins were
fixed, the trends in cash and long-term debt would also begin to turn around.
At first blush, the increase in accounts receivable and inventory was not necessarily alarming since
revenues were increasing during this same time period (see Exhibit 5). However, closer inspection revealed
a 1% increase in inventory from fiscal 2008 to 2009 and a 12.5% increase in revenue accompanied by a 240%
increase in accounts receivable. This created a potential risk for losses due to bad debts. (For complete
financial statements, see Exhibits 6 and 7.)

MARKETING
Best Buy’s marketing goals were four-fold: (1) to market various products based on the customer
centricity operating model, (2) to address the needs of customer lifestyle groups, (3) to be at the forefront of
technological advances, and (4) to meet customer needs with end-to-end solutions.
Best Buy prided itself on customer centricity that catered to specific customer needs and behaviors.
Over the years, the retailer created a portfolio of products and services that complemented one another and
added to the success of the business. These products included seven distinct brands domestically, as well as
other brands and stores internationally:

Best Buy: This brand offered a wide variety of consumer electronics, home office products,
entertainment software, appliances, and related services.

Best Buy Mobile: These stand-alone stores offered a wide selection of mobile phones, accessories,
and related e-services in small-format stores.

Geek Squad: This brand provided residential and commercial product repair, support, and
installation services both in-store and on-site.

Magnolia Audio Video: This brand offered high-end audio and video products and related services.

Napster: This brand was an online provider of digital music.

Pacific Sales: This brand offered high-end home improvement products primarily including
appliances, consumer electronics, and related services.

Speakeasy: This brand provided broadband, voice, data, and information technology services to
small businesses.

Starting in 2005, Best Buy initiated a strategic transition to a customer-centric operating model,
which was completed in 2007. Prior to 2005, the company focused on customer groups such as affluent
professional males, young entertainment enthusiasts, upscale suburban mothers, and technologically
advanced families.6 After the transition, Best Buy focused more on customer lifestyle groups such as affluent
suburban families, trendsetting urban dwellers, and the closely knit families of Middle America.7 To target
these various segments, Best Buy acquired firms with aligned strategies, which were used as a competitive
advantage against its strongest competition, such as Circuit City and Wal-Mart. The acquisitions of Pacific
Sales, Speakeasy, and Napster, along with the development of Best Buy Mobile, created more product
offerings, which led to more profits.
Marketing these different types of products and services was a difficult task. That was why Best Buy’s
employees had more training than competitors. This knowledge service was a value-added competitive
advantage. Since the sales employees no longer operated on a commission-based pay structure, consumers
Page 5 of 12
could obtain knowledge from salespeople without being subjected to high-pressure sales techniques. This
was generally seen to enhance customer shopping satisfaction.

OPERATIONS
Best Buy’s operating goals included increasing revenues by growing its customer base, gaining more
market share internationally, successfully implementing marketing and sales strategies in Europe, and
having multiple brands for different customer lifestyles through M&A (Merger and Acquisition).
Domestic Best Buy store operations were organized into eight territories, with each territory divided
into districts. A retail field officer oversaw store performance through district managers, who met with store
employees on a regular basis to discuss operations strategies such as loyalty programs, sales promotion, and
new product introductions.8 Along with domestic operations, Best Buy had an international operation
segment, originally established in connection with the acquisition of Canada-based Future Shop.9
In fiscal 2009, Best Buy opened up 285 new stores in addition to the European acquisition of 2,414
Best Buy Europe stores, relocated 34 stores, and closed 67 stores.

HUMAN RESOURCES
The objectives of Best Buy’s human resources department were to provide consumers with the right
knowledge of products and services, to portray the company’s vision and strategy on an everyday basis, and
to educate employees on the ins and outs of new products and services. Best Buy employees were required
to be ethical and knowledgeable. This principle started within the top management structure and filtered
down from the retail field officer through district managers, and through store managers to the employees
on the floor. Every employee must have the company’s vision embedded in their service and attitude.
Despite Best Buy’s efforts to train an ethical and knowledgeable employee force, there were some
allegations and controversy over Best Buy employees, which gave the company a bad black eye in the public
mind. One lawsuit claimed that Best Buy employees had misrepresented the manufacturer’s warranty in
order to sell its own product service and replacement plan. The lawsuit accused Best Buy of “entering into a
corporate-wide scheme to institute high-pressure sales techniques involving the extended warranties” and
“using artificial barriers to discourage consumers who purchased the ‘complete extended warranties’ from
making legitimate claims.”10
In a more recent case (March 2009), the U.S. District Court granted Class Action certification to
allow plaintiffs to sue Best Buy for violating its “Price Match” policy. According to the ruling, the plaintiffs
alleged that Best Buy employees would aggressively deny consumers the ability to apply the company’s
“price match guarantee.”11 The suit also alleged that Best Buy had an undisclosed “Anti-Price Matching
Policy,” where the company told its employees not to allow price matches and gave financial bonuses to
employees who complied.

COMPETITION
BRICK – AND – MORTAR COMPETITORS
Wal-Mart Stores Inc., the world’s largest retailer, with revenues over US$405 billion, operated
worldwide and offered a diverse product mix with a focus on being a low-cost provider. In recent years, Wal-
Mart increased its focus on grabbing market share in the consumer electronics industry. In the wake of
Circuit City’s liquidation,12 Wal-Mart was stepping up efforts by striking deals with Nintendo and Apple
that would allow each company to have their own in-store displays. Wal-Mart also considered using
Smartphones and laptop computers to drive growth.13 It was refreshing 3,500 of its electronics departments
and was beginning to offer a wider and higher range of electronic products. These efforts should help Wal-
Mart appeal to the customer segment looking for high quality at the lowest possible price.14
GameStop Corp. was the leading video game retailer with sales of almost US$9 billion as of January
2009, in a forecasted US$22 billion industry. GameStop operated over 6,000 stores throughout the United
States, Canada, Australia, and Europe, as a retailer of both new and used video game products including
hardware, software, and gaming accessories.15
Page 6 of 12
 The advantage GameStop had over Best Buy was the number of locations: 6,207 GameStop
locations compared to 1,023 Best Buy locations. However, Best Buy seemed to have what it took to
overcome this advantage—deep pockets. With significantly higher net income, Best Buy could afford to take
a hit to its margins and undercut GameStop prices.16
RadioShack Corp. was a retailer of consumer electronic goods and services including flat panel
televisions, telephones, computers, and consumer electronic accessories. Although the company grossed
revenues of over US$4 billion from 4,453 locations, RadioShack consistently lost market share to Best Buy.
Consumers had a preference for RadioShack for audio and video components, yet preferred Best Buy for
their big box purchases.17
Second tier competitors were rapidly increasing. Wholesale shopping units were becoming more
popular, and companies such as Costco and BJ’s had increased their piece of the consumer electronics pie
over the past few years. After Circuit City’s bankruptcy, mid-level electronics retailers like HH Gregg and
Ultimate Electronics were scrambling to grab Circuit City’s lost market share. Ultimate Electronics, owned
by Mark Wattles, who was a major investor in Circuit City, had a leg up on his competitors. Wattles was on
Circuit City’s board of executives and had firsthand access to profitable Circuit City stores. Ultimate
Electronics planned to expand its operations by at least 20 stores in the near future.

ONLINE COMPETITORS
Amazon.com Inc., since 1994, had grown into the United States’ largest online retailer with
revenues of over US$19 billion in 2008 by providing just about any product imaginable through its popular
website. Created as an online bookstore, Amazon soon ventured out into various consumer electronic
product categories including computers, televisions, software, video games, and much more. 18
Amazon.com gained an advantage over its supercenter competitors as Amazon was able to maintain
a lower cost structure compared to brick-and-mortar companies such as Best Buy. Amazon was able to push
those savings through to its product pricing and selection/diversification. With an increasing trend in the
consumer electronic industry to shop online, Amazon.com was positioned perfectly to maintain strong
market growth and potentially steal some market share away from Best Buy.
Netflix Inc. was an online video rental service, offering selections of DVDs and Blu-ray discs. Since
its establishment in 1997, Netflix had grown into a US$1.4 billion company. With over 100,000 titles in its
collection, the company shipped for free to approximately 10 million subscribers. Netflix began offering
streaming downloads through its website, which eliminated the need to wait for a DVD to arrive.
Netflix was quickly changing the DVD market, which had dramatically impacted brickand-mortar
stores such as Blockbuster and Hollywood Video and retailers who offered DVDs for sale. In a responsive
move, Best Buy partnered with CinemaNow to enter the digital movie distribution market and counter
Netflix and other video rental providers.19

CORE COMPETENCIES
CUSTOMER CENTRICITY MODEL
Most players in the consumer electronics industry focused on delivering products at the lowest cost
(Wal-Mart—brick-and-mortar, Amazon—web-based). Best Buy, however, took a different approach by
providing customers with highly trained sales associates who were available to educate customers regarding
product features. This allowed customers to make informed buying decisions on big-ticket items. In addition,
with the Geek Squad, Best Buy was able to offer and provide installation services, product repair, and
ongoing support. In short, Best Buy provided an end-to-end solution for its customers.
Best Buy used its customer centricity model, which was built around a significant database of
customer information, to construct a diversified portfolio of product offerings. This allowed the company to
offer different products in different stores in a manner that matched customer needs. This in turn helped
keep costs lower by shipping the correct inventory to the correct locations. Since Best Buy’s costs were
increased by the high level of training needed for sales associates and service professionals, it had been

Page 7 of 12
important that the company remain vigilant in keeping costs down wherever it can without sacrificing
customer experience.
The tremendous breadth of products and services Best Buy was able to provide allowed customers
to purchase all components for a particular need within the Best Buy family. For example, if a customer
wanted to set up a first-rate audio-visual room at home, he or she could go to the Magnolia Home Theater
store-within-a-store at any Best Buy location and use the knowledge of the Magnolia or Best Buy associate
in the television and audio areas to determine which television and surround sound theater system best fit
their needs. The customer could then employ a Geek Squad employee to install and set up the television and
home theater system. None of Best Buy’s competitors offered this extensive level of service.

SUCCESSFUL ACQUISITIONS
Through its series of acquisitions, Best Buy had gained valuable experience in the process of
integrating companies under the Best Buy family. The ability to effectively determine where to expand was
important to the company’s ability to differentiate itself in the marketplace. Additionally, Best Buy was also
successfully integrating employees from acquired companies. Best Buy had a significant global presence,
which was important because of the maturing domestic market. This global presence provided the company
with insights into worldwide trends in the consumer electronics industry and afforded access to newly
developing markets. Best Buy used this insight to test products in different markets in its constant effort to
meet and anticipate customer needs.

RETAINING TALENT
Analyzing Circuit City’s demise, many experts concluded one of the major reasons for the
company’s downfall was that Circuit City let go of their most senior and well-trained sales staff in order to
cut costs. Best Buy, on the other hand, had a reputation for retaining talent and was widely recognized for
its superior service. Highly trained sales professionals had become a unique resource in the consumer
electronics industry, where technology was changing at an unprecedented rate, and was a significant source
of competitive advantage.

CHALLENGES AHEAD
ECONOMIC DOWNTURN
Electronics retailers like Best Buy sold products that could be described as “discretionary items,
rather than necessities.”20 During economic recessions, however, consumers had less disposable income to
spend. While there was optimism about a possible economic turnaround in 2010 or 2011, if the economy
continued to stumble, this could present a real threat to sellers of discretionary products.
In order to increase sales revenues, many retailers, including Best Buy, offered customers low interest
financing through their private-label credit cards. These promotions were tremendously successful for Best
Buy. From 2007 to 2009, these private-label credit card purchases accounted for 16%–18% of Best Buy’s
domestic revenue. Due to the credit crisis, however, the Federal Reserve issued new regulations that could
restrict companies from offering deferred interest financing to customers. If Best Buy and other retailers were
unable to extend these credit lines, it could have a tremendous negative impact on future revenues.21

PRICING AND DEBT MANAGEMENT

The current depressed economic conditions, technological advances, and increased competition put
a tremendous amount of pricing pressure on many consumer electronics products. This was a concern for
all companies in this industry. The fact that Best Buy did not compete strictly on price structure alone made
this an even bigger concern. Given the higher costs that Best Buy incurred training employees, any pricing
pressure that decreased margins put stress on Best Buy’s financial strength. In addition, the recent acquisition
of Napster and the 50% stake in Best Buy Europe significantly increased Best Buy’s debt and reduced
available cash. Even in prosperous times, debt management was a key factor in any company’s success, and

Page 8 of 12
it became even more important during the economic downturn. (See Exhibits 6 and 7 for Best Buy’s financial
statements.)

Page 9 of 12
PRODUCTS AND SERVICES
As technology improved, product life cycles, as well as prices, decreased. As a result, margins
decreased. Under Best Buy’s service model, shorter product life cycles increased training costs. Employees
were forced to learn new products with higher frequency. This was not only costly but also increased the
likelihood that employees would make mistakes, thereby tarnishing Best Buy’s service record and potentially
damaging one of its most important, if not the most important, differentiators. In addition, more resources
would be directed at research of new products to make sure Best Buy continued to offer the products
consumers desire.

Page 10 of 12
 One social threat to the retail industry was the growing popularity of the online marketplace. Internet
shoppers could browse sites searching for the best deals on specific products. This technology allowed
consumers to become more educated about their purchases, while creating increased downward price
pressure. Ambitious consumers could play the role of a Best Buy associate themselves by doing product
comparisons and information gathering without a trip to the store. This emerging trend created a direct
threat to companies like Best Buy, which had 1,023 stores in its domestic market alone. One way Best Buy
tried to continue the demand for brick-and-mortar locations and counter the threat of Internet-based
competition was by providing value-added services in stores. Customer service, repairs, and interactive
product displays were just a few examples of these services.22

LEADERSHIP
The two former CEOs of Best Buy, Richard Shultze and Brad Anderson, were extremely successful
at making the correct strategic moves at the appropriate times. With Brad Anderson stepping aside in June
2009, Brian Dunn replaced him as the new CEO. Although Dunn worked for the company for 24 years and
held the key positions of COO and President during his tenure, the position of CEO brought him to a whole
new level and presented new challenges, especially during the economic downturn. He was charged with
leading Best Buy into the world of increased connectivity. This required a revamping of products and store
setups to serve customers in realizing their connectivity needs. This was a daunting task for an experienced
CEO, let alone a new CEO who had never held the position.

WAL-MART
Best Buy saw its largest rival, Circuit City, go bankrupt. However, a new archrival, Wal-Mart, was
expanding into consumer electronics and stepping up competition in a price war Wal-Mart hoped to win.
Best Buy needed to face the competition not by lowering prices, but by coming up with something really
different. Best Buy had to determine the correct path to improve its ability to differentiate itself from
competitors, which was increasingly difficult given an adverse economic climate and the company’s
financial stress. How Best Buy could maintain innovative products, top-notch employees, and superior
customer service while facing increased competition and operational costs was an open question.

Page 11 of 12
Page 12 of 12