BestBuy Co.

BEST BUY REPORT

Prepared by: Aziz Ghani & Sola Soetan

Aziz Ghani : azizghani0@gmail.com 1416-856-6737

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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

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Recommended Strategy 26

Implementation 27

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Executive summary

BestBuy is one of the largest consumer electronics retailers in the world with 19% share of the

global 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 happening and how the company can overcome its financial difficulties and emerge on as a

leader again.

Using several analysis techniques including PESTLE and Porter’s Five Forces, we have

concluded that the company is dealing with fierce competition both online and offline. This

fierce competition drives prices down, thus eating into the live-blood of any retailer – the

margins. Sluggish economy, gloomy customer expectations towards the future and resulting

reduced spending on consumer electronics have provoked a price war and made BestBuy

introduce a price-matching policy. 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. This coupled with the company’s plan to attract and retain its

employees will eventually negatively impact 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

alternatives 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 control 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 manufacturer

of these products, tap into consumer electronics market and start selling products at a higher

profit margin, thus contributing directly to the bottom-line. The implementation of this strategy

is done in 4 steps. Step 1 – allocate the budget, step 2 – allocate the team, step 3 – allocate the

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product, step 4 - train employees.

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Current performance

BestBuy is the largest retailer of consumer electronics in the world. The company has 1,503

stores in the U.S. and 2,876 stores in Canada, China, Mexico and eight European countries.

BestBuy is 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 people 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

under 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.

BestBuy continues to offer Geek Squad support services, and BestBuy Mobile store is still

active. In the year 2014, the company expects to close additional between five to ten US BestBuy

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

Shop, Connect Pro, Future Shop and Geek Squad. In Europe the corporation operates under the

brand names of The Carphone Warehouse, The Phone House and Geek Squad. In China BestBuy

sells under the brand names of Five Star and BestBuy Mobile. The operations in Mexico are

registered 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

China in select Five Star outlets. BestBuy Express was also introduced in a small-format store in

Mexico. The latter focuses on high-traffic and convenience purchases with a large volume of

accessories offerings. In Europe BestBuy repositions and resizes the existing stores aiming at

revenue maximization. In 2013 alone the corporation closed 126 stores and opened 122 new

ones.

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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

initiative was put into place after a successful pilot conducted over the holiday season of 2013.

BestBuy 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

televisions, 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 sales. Overall lower gross profit and operating income in international

segment was driven by a combination of lower sales in Canada and China, a decrease in gross

profit in Europe, adverse product mix and increased promotional costs.

BestBuy incurred a net loss of $443 million US dollars (USD), a significant reduction from last

year net loss of $1.3 billion USD. In 2013 the company had $45.1 billion USD in revenue, which

represents a decrease of 5.6 billion USD compared to the previous year. The decrease in revenue

is 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 promotion costs. The company recorded $451 million USD of restructuring expenditures

related to Renew Blue cost-reduction initiatives, European store transformation and U.S. large-

format store closures among other operational changes.

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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

our 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

profitability across the whole organization. The strategic plan aimed to increase revenue was

called Renew Blue strategy and was focused on making BestBuy the preferred brand and

destination for technology 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 and

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

continue to review its portfolio of stores globally. Also, 2014 will be a transition year for the

organization 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.

Strategies

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To remaining consistent with its mission and vision BestBuy is currently implementing the

following:

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 browsing 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

beginning 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 through 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 initial 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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Corporate Governance

In 2012 BestBuy went through major corporate governance restructuring at top management

level. Mr. Hubert Joly became President and Chief Executive Officer in September 2012 and the

Executive Vice President, Chief Administrative Officer and Chief Financial Officer Ms. Sharon

McCollam 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 Committee. The Public Policy Committee is composed of independent directors that meet

four or more times in the year depending on the discretionary judgment of the members. At the

end of March 2013, 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

company’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

somewhat politically unstable, almost entire economy is fueled by American and European

demand for 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

was filed in February 2011 and alleges that corporate officers violated earnings guidance

regulations in 2011 financial statements. The second laws suit filed in June 2011 and claims

breach of fiduciary duty and failure to correct public misrepresentations and material

misstatements and/or omissions regarding fiscal 2011 earnings projections. Also the plaintiffs

declare that certain directors 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 provoking negative publicity, invest further in positive publicity and

will overcome the short-term reputation damage.

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Also, BestBuy’s encounters a liability for warranty replacements and repairs resulting from

product defects, while suppliers do not reimburse or cover such costs. In addition, BestBuy is

accountable for personal injury, death or property damage caused to customers by exclusive

brand products. These two factors require a serious financial analysis with access to privately-

owned information on brands, models, claims, lawsuits from consumers (if any), thus it is

impossible to evaluate these factors as posing threat to the company.

None of the above-described factors can significantly influence BestBuy’s business except for

the 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

may 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 BestBuy

and unfortunately 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

the 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. In the same year BestBuy took full advantage of the consistent growth of ecommerce

by introducing their price-matching policy resulting in increased revenue and declining margins.

Customer traffic increased in the traditional bricks-and-mortar retail stores since price-conscious

customers analyzed the product in traditional stores and then purchased them online to take

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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

traffic 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

retail. Consumers have twenty four hours access to stores by literarily just reaching into their

pockets. BestBuy has been able to positively embrace the current online purchasing customer

behavior by allowing consumers to shop, have personalized shopping lists, match competitors

prices, implement self scanning and self checkout and reward its customers with loyalty points.

Another step in the mobile purchasing industry is led by tablets. “Recent research indicates that

by 2014, more than one in three American Internet users will have a tablet device, and 52 percent

of tablet owners prefer to shop online using their tablets”. Another fashion trend is again positive

for BestBuy. 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

is 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

preventing just about anybody from entering this market. First, advertising is costly; it takes a

long time to 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 needed to start the business, invest in the first production batch, advertising and

delivery to customers. This threat is virtually non-existent for BestBuy.

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Bargaining power of buyers

The bargaining power of buyers is high due to a strong competition from Internet-based

businesses, wholesalers, discount chains and home improvement superstores. Consumers have

numerous alternatives when purchasing online, therefore prices remain relatively low and profit

margins thin; as sellers compete among each other using a low-price strategy. The fact that

consumer electronics are non-essential products also increases purchasing power of consumers.

BestBuy is a disadvantage and has to do price-matching, eating into its margins, but they can

attract more people than 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

the 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.

Moreover, 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 attain high volumes of sales; therefore

BestBuy 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-

mortar retailers and online operators. BestBuy’s main competitors are Amazon and Walmart.

These competitors’ product offers are more diversified into various types of products besides

consumer electronics, which makes them less category-dependent. Due to the wide selection and

similarity of consumer electronics products offered by all competitors, there is low customer

retention and strong competition for maintaining their market share.

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Other Environmental factors

Customers

BestBuy successfully changed from being a commission-based company to a fully-integrated

customer-centric company. BestBuy implemented customer-centricity strategy as a manner of

differentiating itself from competition. Over the years, BestBuy has acquired different companies

in other 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

Technologies Inc. to be able to offer cloud services, data center services and professional

services. To 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 retail 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 respond 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.

BestBuy 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 Growth

(yoy):-0.00 0.22 0.01 0.02 0.11

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

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Gross Margin

(ttm):0.23 0.26 0.38 0.25 0.30

EBITDA (ttm): 1.89B 2.92B 55.87B 36.65B 129.68M

Operating Margin

(ttm):0.02 0.01 0.29 0.06 0.01

Net Income (ttm): -349.27M -101.00M 37.75B 17.09B N/A

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

expected):2.15 10.53 0.85 1.59 1.30

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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External Factors Weight RatingWeighted

ScoreComments

1 2 3 4 5

Opportunities

Increased demand for tablets,

eReaders, mobile phones and

appliances.0.10 3.50 0.35

The demand for these products

increases revenue.

Increased mobile purchasing

capability.

0.10 3.00 0.30

Online retail is more

accessible than ever, due to

increased capabilities of cell

phones and tablets.

Short product life-cycle and

obsolescence.

0.20 2.00 0.40

Technology innovation has

reduced product life- cycles

and increased product

obsolescence.

Diversification of the business:

offering further supporting services

along with the products sold.

0.05 1.00 0.05

This will increase profit

margin and overall

competitiveness.

Threats

Slow economic recovery and reduced

consumer spending.

0.10 3.00 0.30

Consumers are spending less

due to high unemployment

rates and economic instability

in North America.

BestBuy liability regarding warranty

replacements and product defects.

0.10 1.00 0.10

Current manufacturers of

branded products do not cover

the cost of defective

merchandise.

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The strong competition in the 0.20

electronics industry decreases

revenue margins. 2.50 0.50

Internet-based businesslow-cost strategy decreased

traditional retailers’ profit

margins.

Consumer electronics products are

discretionary items.

0.15 3.50 0.53

Discretionary items sales

decrease in times of economic

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

information to company executives in which at this point information flow to the 3 main sub-

organizations. These 3 sub-organizations have their own management team headed by middle

management 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 regional 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 communication channels, such as Employee News Feed and email system. The

company develops a list of objectives, goals and duties, which employees must accomplish.

BestBuy’s chain of command is clear and easy to understand.

Corporate Culture

BestBuy corporate culture reflects change from traditional business methods to a more

contemporary and flexible work schedule. Their culture is the result of employees complaints

about the demanding nature of their work and is well-defined and consistent with knowledge-

based human-resource objectives. BestBuy introduced Results-Only Work Environment (ROWE),

which over time 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 implementation of the ROWE program, the company experienced a rise in

productivity, reduction in voluntary turnover and increase in employee morale. The ROWE

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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

communicating to employees more efficiently and gain deeper understanding of an employee’s

strengths and weaknesses. Despite being a multinational company, BestBuy successfully

integrated employees from acquired companies into its organizational culture.

Regardless of the success of the program, the current CEO Hubert Joly announced that the

ROWE 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, something current corporate culture does not require. All employees will

have to work 40 hours per week with few exceptions. Joly believes this is the first step in

changing the basic corporate culture in BestBuy. (Source: Business Insider, 2013)

Corporate Resources

Marketing

BestBuy's current marketing objectives include meeting the technological needs of customers

and making products available to customers with end-to-end solutions. The current marketing

objectives are in line with the company's mission, strategy and policy. BestBuy strives to become

a service-oriented company. The company spends a large amount of money on advertisement in

print, 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

loyalty program that allows customers to earn points on purchases. These points may later be

redeemed towards future purchases. Currently this program is only effective in the U.S. and

Canada. BestBuy 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

cash and cash equivalents, short-term investments and cash flow generated from operations.

BestBuy’s revenue tends to be decreasing. In FY 2012, revenue was reported to be $51 billion

USD, whereas in FY 2013 it went down to $45 billion, in most part caused by decreasing sales.

The total revenue decline in FY 2013 was 2.1%. Sales declined 2.9% in FY 2013 vs. FY 2012.

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Cash

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flow was $1.5 billion USD in 2013. BestBuy needs to maintain enough liquidity to meet current

financial 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.

This means that the company's liquidity is declining which is not a good sign, if the retailer is to

maintain 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.

Current financial condition of the company is deteriorating which is mostly due to the

inefficiency of maintaining global expansion.

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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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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

attract and retain its employees for the future. Employees are trained and educated about the

products offered in stores. BestBuy offers Stock Compensation Plans to all its employees under a

plan called "Omnibus Plan"1.

All employees are expected to comply and work towards BestBuy's objectives and mission.

Employees 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.

BestBuy must be up-to-date with new products to allow it in adapting to the change in

technology and consumer preferences. BestBuy seeks to collaborate with new and existing

manufacturers to sell their products to enable it to be a one-stop-shop for consumer electronic

products. The stores are continuously changing their design to allow customers to interact more

with products and to allow the stocking of products efficiently. Research is done in customer

service as well to make sure 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

operates in 11 different countries. BestBuy reported having 4,379 stores around the blobe. The

majority of BestBuy stores operate under the same standard procedure in terms of inventory

1 http://www.sec.gov/Archives/edgar/data/764478/000076447813000014/bby2013x10kt.htm#sA97A074035424C4938E47AAECA5AC4F5

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management, customer relations, staff training, displaying of merchandise, product sales and

services, 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 transportation by forecasting store sales effectively, transporting fuller trucks, and

using railway as the 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

employed assists in running their operations at all management levels. Furthermore the system

aids in forecasting 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 increase and lower costs. BestBuy is focused on growing its online sales. The website

has been redesigned and currently uses Oracles ecommerce platform to operate online sales.

BestBuy reported $477 million USD sales through its website in 3Q 2013. This is an increase of

10.5% compared to 2Q 2012.

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Strategic Alternatives Internal

FactorsWeight Rating

Weighted

ScoreComments

1 2 3 4 5

Strengths

Largest retailer

of consumer

electronics in

the world

0.10 5.00 0.50 BestBuy’s size and purchasing power provides the

company with a strategic advantage.

Exclusive right

to sell certain

products

0.20 4.00 0.80 The organization has exclusive rights to products such

as music, and TV sets.

Broad range of

electronic

product

offerings and

prices

0.20 3.00 0.60 BestBuy offers a wide selection of products and

services.

Customer-

centric model

0.10 3.00 0.30 BestBuy provides an enhanced in-store customer

experience.

Weaknesses

High marketing

cost

0.15 2.50 0.38 BestBuy spend considerable resources on advertising

They are less

diversified that

its competitors

0.15 1.00 0.15 Walmart and Amazon do not rely exclusively on

consumer electronic sales.

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High cost of

operations

0.20 3.00 0.60 BestBuy carries significant expenses associated 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

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be partially offset plus BestBuy will be receiving a small percentage of the fast food chain’s

revenue. 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.

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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

appliances.

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.

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Acquire a current third-party supplier that BestBuy uses to outsource its private label products.

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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 from 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

differentiates among competitors in concentrating on the service it offers to its customers rather

than price. BestBuy will need to come up with a strategy to allow it to gain back the market share

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back. They have done a number of strategic moves to maintain their position in the market by

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opening separate mobile stores, expanding to European and Asian countries and diversifying

their product offerings, but investors have lost the confidence in BestBuy to be able to come with

a strategy to turn the company around. Due to current challenges faced by BestBuy from

shareholders and both internal and external environmental factors, the strategy feasible and

viable to BestBuy current situation is vertical growth through backward integration. BestBuy

gets a third party to manufacture private labels it carries and backward integration will increase

the existing positive 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

consumer electronic retail and has one of the highest market share (over 19%) which will aid the

success of this strategy. BestBuy currently own brand names such as Dynex, Insignia, Init,

Rocketfish and Geek Squad which its uses to offer cost-competitive consumer electronics

product to the market. 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 usage of these products. Since the formula that drive BestBuy is to focus on better

solving the unmet needs of its customers, acquiring one of its third-party manufacturers to

produce product meeting the needs of consumers will differentiate from competition and give it a

stepping stone into consumer electronics manufacturing. BestBuy has the necessary

infrastructure and human resources experience needed to implement this backward integration.

Some of the consumer electronics products 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 discontinue dependence on third-party

manufacturers of its private label products. This strategy will address BestBuy’s objective for FY

2014 to reduce cost of goods sold, increase profit margin, rise in stock price and end continuous

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net losses. BestBuy will undergo a corporate restructuring to integrate the newly-acquired

company.

Implementation

To successfully implement the recommended strategy, BestBuy should carefully analyze and

allocated the available resources. Also, BestBuy should carefully choose manufacturers as our

strategy is vertical growth through backward integration. Implementation of the recommended

strategy is followed by several stages. For this particular strategy implementation period would

be 3 years 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 able to convince the future success of recommended strategy to the

stakeholders and present information to related parties very effectively. Mission, vision and goals

of the strategy should be clearly 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, classified as available-for-sale securities. We believe that available

funds should be adequate to acquire 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 terms of products, cost, quality and supply chains. The third

stage followed by this process is to determine what kind of products to offer and design of the

products. At this point BestBuy is looking to acquire a manufacturer who can supply various

consumer electronics products, such as TV sets, 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 BestBuy 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 strategy is in the best interest of the company and

excels the sales from existing and potential new customers. There should be very effective flow

of information between BestBuy and the manufacturer. The systems that allow manufacturer to

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integrate with

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BestBuy which can make the process of easier for products BestBuy needs in future. The fourth

stage of implementation is to train employees on what they are dealing with and also to provide

excellent customer service. The final stage would be to remain constantly innovative, be price-

effective 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

through series of actions. A detail survey has to be conducted by the company to figure out if the

customers are satisfied or not. Sales, Revenue and Return on Investment are also to be examined.

If the figures and trends show all these three elements of financial statements have increased and

created satisfactory results, it should be assumed that the strategy we implemented is doing well.

Corrective 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

alternative third mentioned above which is BestBuy increases its product offering in private

labels, particularly in kitchen and household appliances.

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BestBuy Co.

Pro forma Income Statements

For 2014 to 2015

2014 2015 2016RevenueRevenue Of Tv and E-Reader $2,418 $2,491 $2,541Revenue Of Tablets $536 $568 $585Net Revenue $2,954 $3,059 $3,126

Cost of goods SoldDirect Material 531.72 $550.57 $562.65Direct Labor 443.1 $458.81 $468.88Factory 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 $2,344.40Gross 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,

computing and mobile phones, entertainment, appliances, services and others. 33% of the total

revenue 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 tablets. The total revenue from TVs and E-reader comes to be $2,418 million USD

and tablets is estimated 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 then calculated to be $ 443.10 which after deduction of $250 million

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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

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risk-heightens7. http://businessfinancemag.com/risk-management/best-buy-needs-confront-its-residual-

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from-the-apple-store.html12. 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/3278216. 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.html18. 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

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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

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