STRATEGIC MANAGEMENT THEORIES: A CASE STUDY OF BEST BUY
Introduction
Best Buy Company is one of the largest electronics dealers in the world with over 3000 stores globally and a market dominance of 19% in the United States. It was incorporated in 1966 as sound of music, which was a retailer of audio component, it later expanded to selling video products and video cassettes recorders. In 1981, the company changed its name to Best Buy Co. It started by operating a super store and using marketing techniques for promotion of its products but later in 2000 it launched its online retail store BestBuy.com. Through different acquisitions of small retailers of electronics and high-end dealers of audiovisual products, the company was able to enter the markets of Canada and the United Kingdom. The company has grown expanded to dealings in China, Russia, South America and the Middle East and besides there being some barriers of entry into the different markets, the company has been able to withstand then due to its size in both market share and revenue.
The mission of the company is to continue providing services to the customers in audio-visual services by helping customers realize technological improvements in their lives through audio-visual connectivity. However, the company is facing a stiff competition from some brick and motor companies like Walmart, Game Stop Co and Radio sharp Co. It also faces competition from online competitors like Amazon and Netflix, which are continuing to grow both in revenue and market share. In order for theist Buy to continue with its success in electronics and audio-visual services delivery, it needs to be able to deal with the growing competition, economic downturn, a look in its products and services and change in leadership of the corporation.
Problem statement
Best Buy Co for a long time has been enjoying sort of a monopoly in electronic dealership conquering the largest customer base as compared to other dealers in electronics. However, it is facing a competition challenge from Wal-Mart, which is increasingly growing into customer electronics. The company is also under financial and economic stress that is affecting not only the ability to deal with competitors but also the internal dealings of the company and this has seen a reduction in revenue generation by the company. The company has to be able to deal with this challenge since it might lead to not only having a competitive advantage over them but to also drive Best Buy out of the market. Best Buy’s approach includes provision of highly trained associates who offers services on features of products sold by the company, therefore the business of Best Buy is based on them. Therefore, if the challenges in both competition and financial crisis are not addressed, they could have serious effects on the approach and this could lead to reduced sales and continued decrease of revenues by the company.
Background of study
Since its corporation, Best Buy has saw its growth rise leading to the being the leading retailers in the company for electronics. “With eight years leading to 2004, the company had not missed an earning and its revenue was growing with a double digit” (Knoop, 2006). However, in the third quarter of FY2005, the company made a 12% decline, which led to a loss of about 2 million U.S dollars. This decline was attributed to the aggressive opening of over a hundred stores and changes in consumer approach. The financial hiccups for the company started then due to a lack of balance between taking care of the existing stores and the new ones being opened. Even if the company was able to recover its earnings in the following financial years, the 2 million loss had an impact on the business of the company.
The revenue of the company continues to grow however the net income keeps on reducing and this could be caused by increased operating cost and the price pressure witnessed in the company. Due to increasing competition from other companies (both Mortar and Brick and Web based), the company has been reducing the prices of its products to develop a competitive advantage. However, lowering the process can go be done for so long until the company is over run by its competitors and therefore it should develop another strategy for maintaining its relevance in the market. The price of the shares for the shareholders has also been reducing and this could lead to losses for the investors, which could make them walk out of the company. The aim of an investor is making profits and if they cannot realize the profits expected as return for their money, then they have no business staying in the company.
Amazon and Game Stop are posing a great challenge to the earning of Best Buy, Amazon has a constant selection of low prices and this led to its dominance in the internet however after continue reduction in the operating margin, Bets Buy has fixed its costs. One of the main pillars for Best Buy is the games spot but with the entry of Games Stop, Best Buy faced a challenge competing with them. “Game Stop has very knowledgeable staff to whom Best Buy cannot compete with” (Hess, 2017). This therefore saw the margins of Best Buy fall to about 22% compared to 29% and 31% by Amazon and Game Spot respectively. The company attributes its growth to market share and international sales; however, with Amazon as a web company that delivers worldwide, Best Buy’s international sales have dropped by 10% while Amazon’s international sales grew by 18%. The problem is that the decrease is not a onetime challenge like it was in FY2005, where they missed earnings for the third quarter, this decrease has been experienced for a number of years now thus leading to about 10% of the overall stock being at stake.
Analysis of the problem
Best Buy Company is still holding some dominance in the market share however, this is the only advantage left for the company and it offers very thin margins for the company. Due to the dragging international sales, the company cannot risk any more reduction in prices as this would see even fewer revenues being generated. “However, the company is in competition who are willing to lose money in order to gain the market share, for instance Amazon is willing to lose money by reducing its prices in order to gain the market share and the customer base it needs both locally and internationally” (Hoffman, 2010). The company therefore needs to develop other strategies for growing its revenues and to continue dominating the market share both locally and internationally.
Best Buy co. introduced an online platform for its sales of electronics as BestBuy.com however; its sales cannot be compared with Amazon’s. The company simplified online buying process in its platform and made it easy to search for products but this action does not seem to make any changes to the online sales. The company is under pressure both in physical and online sales and the profit margins keep on getting thinner. Besides the profit margins and sales are crucial for the survival of the business but the pressure does not seem to go away. The company is still the biggest in terms of physical stores and market share however, its revenues does not support the size of the company and it is being overtake by the new entrants in the industry. Entry into the market of most industries today face less barriers as compared to earlier days where it was completely difficult mainly due to high overhead and initial capital and advertising reasons. However, in this era of internet, everyone is opening an online shop and it is getting very difficult for the old companies to deal with the new entrants into the market.
However, the company can still utilize its presence as a big company as compared to entrants to gain its competitive advantage against other firms in the industry. “Customers of electronic products mainly prefer physical buying of their products where they get to have a one on one contact with the seller to know the features of the products” (Hoffman, 2010). Therefore, the company still have a chance in capitalizing on customer loyalty that it has built over the years. If the company would manage to develop customer loyalty without necessarily affecting its prices, then the company could manage to get back to its initial position in the industry. It should be able to come up with other strategies dealing with product and service differentiation rather than discounts and price reduction and this would see the consumer loyalty being reinstated for the physical stores to continue growing. The company also has the capability of big and expensive products and service promotion through advertisement, which it should be focusing on to restore consumer confidence.
The competitors are not going away anytime soon, with the aggressiveness seen from Amazon, and then it is a clear sign that it is willing to fight for its position to the end and it is willing to win the fight. Therefore, Best Buy should stop developing short-term goals in dealing with its competitors; it is time for the company to develop a lasting strategy on how to deal with the existing competition and return to former glory. In 2000, Best Buy was able to acquire Magnolia Hi-Fi, in 2001 it ventured into international market by acquiring Future ltd. and purchased music land. In 2002, Best Buy acquired Greek Squad, in 2006, it acquired Pacific Sales Kitchen and Bath Centers Inc. it also acquired 75% of Jiangsu Five Star Appliance Co and later acquired the remaining shares in 2009 allowing it to move to Canada. In 2007, it acquired Speakeasy Inc., Carphone Warehouse Group and Napster companies. These acquisitions shows the market strength of Best Buy such that it was able to create an empire by buying out small dealers in electronics and opening shops all over. The success in Russia, Middle East and China is attributed to the good quality of products and services the company provided to its consumers.
Best Buy was able to create and develop customer loyalty beyond the United States and Canada and this means that not all is lost and the company can still reclaim its market even with Amazon posing a great challenge to them. “The company should focus on its strengths while minimizing and dealing with the weaknesses and this means that instead of trying to compete with the sales Amazon is making, they should focus on growing theirs as long as their revenues keep growing and their profit margins increases” (Hess, 2017). The financial challenges have been a pain for the company making the financial standing of the company in NYE to fall, the value of the shares is also falling making the investors to start rethinking their decisions, however if the sales and competitions issues are addressed, then the company can claim its position in the stock exchange market.
Discussion
Best Buy Company is one of the leading retailers of electronics in the World and besides facing financial pressures; the company still holds a big influence in the electronics industry both locally and beyond the borders. The company however is facing stiff competition from Brick and Mortar Company Walmart, web based company Amazon and the gaming company Game Spot. These companies challenge the market advantage previously enjoyed by Best Buy as they are not only targeting new customers but also old customers previously Best Buy’s customers. Therefore the company has to work extra hard in ensuring that customer loyalty prevails and in ensuring that the quality of its goods and services surpasses those of its competitors such that even if their cost is slightly higher, the customers would still want to buy them.
Best Buy Company through numerous acquisitions managed to move beyond the boundaries of the United States to Canada, the United Kingdom, Russia, China and the Middle East. Therefore, the company has a strong holding in terms of assets and global domination and even if its international sales are reducing, the company has a saying in the global electronics industry. The steps the company has been taking for its come back seems to work for some time but they cannot be trusted to work in the future, Best Buy, therefore, should develop a long-term strategic plan that will help it salvage the company and make it better in the future.
Summary
Best Buy co. was formed in 1966 as sound of Music but later transformed to Best Buy in 1980s; in 2000s, it acquired a number of companies namely Magnolia Audio Video, Greek Squad, Pacific Sales, Carphone Warehouse and Jiangsu Five Star. The company, therefore, commands a 19% market share in the United States with over one hundred and fifty thousand employees and more than two thousand stores in Canada and other countries. Between the years of its inception and 2009, the company experienced immense growth but with increasing competition from major Brick and Motar companies such as Walmart and e-commerce companies such as Amazon, its growth has been limited and sales have been declining over the years. However, not all is lost and the company can still return to its glory by developing long term strategies on dealing with its competitors and improving on products and services differentiation to give them advantage over other dealers in the same industry.
Conclusion
Financial stress and competition has been a problem facing the Best Buy Company for some time now and this has seen reduction in profit margins and revenues. The financial challenges experienced are due to increased operating cost and reduced sales leading to diminished profits. Competition, especially in the online market of the Best Buy Company, has seen the company juggle from lowering product prices to differentiation of products and services but this does not prevent the competitors from taking over the industry. Amazon and Walmart have been the two biggest competitors for Best Buy and these two companies have grown the sales of the electronic and audiovisual product considerably over the years leaving Best Buy under the mercy of loyal customers. Best Buy’s only advantage in the industry is the immense market share that it enjoys in physical stores and this is because in the sale of electronics, customers prefer direct and personal sales. However, this is not a guarantee since the competitors such as Amazon are willing to lose money in order to gain the market share by converting physical buyers to online buyers.
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