Finding the Best Buy
INTRODUCTION
This case is a strategic overview of how Best Buy became the largest consumer
electronics retailer in the US. It reviews Best Buy’s early years and more recent
expansion through acquisitions. Industry conditions (featuring a new breed of
competitors) as well as the internal environment (featuring Best Buy’s business segments,
strategies, financial results, and leaders) are framed to build an understanding of the
company’s current situation.
Given the realities of the evolving industry, Best Buy needs to develop, integrate,
and exploit its capabilities and competencies to establish a sustainable competitive
advantage. The company’s growth, profitability, relevance, and perhaps survival, will
depend on its leaders’ abilities to find concrete and effective solutions to this challenge.
Gathering the facts from the company’s external and internal environments, examining
the features of its current strategy, and thoughtfully considering the present challenges
facing Best Buy can contribute to building strategies that will address the key issues
confronting the company and will meet growth and earnings expectations.
•
•
•
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Gather the relevant facts from the firm’s external environment. Using Porter’s
five-forces model, gauge the attractiveness of the consumer electronics retail
industry. Integrate the strengths and performance of major competitors into the
analysis.
Assess the company’s strengths and weaknesses by examining Best Buy’s internal
environment, segment performance, and financial results. Does the company have
the capacity to establish a competitive advantage that can be sustained in future
market conditions?
Identify the prominent features of the company’s current business and functional
strategies, and consider the Best Buy family of complementary products and
services.
Weigh the challenges confronting the company. What are the greatest risks for
Best Buy as it moves into the new era of connectivity? What recommendations
can be made to support the company’s growth and profitability objectives?
ANALYSIS
•
Gather the relevant facts from the firm’s external environment. Using Porter’s
five-forces model, gauge the attractiveness of the consumer electronics retail
industry. Integrate the strengths and performance of major competitors into the
analysis.
General Environment
Several conditions exist in the general environment that affect Best Buy’s
business prospects. The impact of a slow recovery from global economic woes is chief
among them. With less disposable income, consumers forgo purchases of the types of
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Finding the Best Buy
discretionary items that make up Best Buy’s product line. Tighter credit markets also
restrain the growth of consumer electronics firms. Though sales for lower-end electronics
might benefit from these conditions, stimulating sales for premium products and cuttingedge technologies requires lowering prices to attract customers (which, of course,
weakens profits). The speed and extent of economic recovery will continue to influence
Best Buy’s future growth opportunities. As personal income again rises, demand for
high-end products may return. However, new patterns of financial prudence among
consumers may delay this resurgence.
Demographic trends that impact Best Buy include the aging and increasing ethnic
diversity of the US population. The rise in dual income families and women’s purchasing
power also affect product and marketing decisions and diminish the importance of
focusing on the “typical white male of a specific age” consumer category.
The pace of technological advancements also has a significant impact on the
consumer electronics business. Prominent among technology trends is the emergence of
new ways of conducting business and accessing customers and the consolidation of
functions into single electronics devices. Although the frequent introduction of new
products is exciting and creates consumer interest, the unprecedented pace of
technological change begets additional risks and costs for Best Buy. The company runs
the risk of investing in the wrong technologies or products to satisfy customer
preferences. Best Buy incurs higher research costs associated with making sensible
technology and product decisions as well as training costs to prepare for more frequent
product introductions. As employees are continually required to learn about new
products, the potential for misunderstandings and errors threatens the company’s touted
service record. Also, shorter product life cycles can lead to market saturation, accelerate
price declines, and result in lower margins and profit levels.
Primary among the political and legal considerations that are relevant to the
consumer electronics industry is the controversial sales tax legislation for online retailers.
Without physical distribution centers in every state, many online retailers gain a distinct
advantage under today’s current sales tax laws. Best Buy maintains retail locations in the
majority of domestic states and would be more competitive if the tax laws were modified
to level the playing field.
Socioculturally, the growing popularity of the online marketplace and the
phenomenon of universal connectivity have important implications concerning Best
Buy’s strategic direction. The growth of online shopping has brought new rivals (with
lower cost structures, positioned perfectly to achieve strong market growth) into direct
competition with Best Buy. The ready availability of product information online means
that some customers can answer their technology and product questions without the
expertise of Best Buy’s staff. Because people who seek this information are also
motivated to seek out the lowest prices for products of interest, Best Buy’s strategy is
compromised on two fronts. On the other hand, connectivity trends offer enormous
opportunities for the company, especially as the complexity of functionality and the need
for interaction between devices increases.
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As Best Buy’s domestic market exhibits signs of slow growth, the search for
expansion opportunities in international markets becomes even more important. The
cultural and institutional characteristics of global markets impact the company’s business
decisions, with forays into Europe and China of greatest concern to Best Buy at this time.
Potential benefits of an international expansion strategy include new opportunities to
achieve greater economies of scale, to integrate backward into the supply chain with
lower risk, and to move inventory into secondary markets. Additional considerations that
influence the viability of potential foreign ventures include global inflation, international
trade balances, and exchange rates.
Industry Environment
Best Buy is currently the undisputed leader of the US consumer electronics retail
industry. Competition in the industry environment was already dynamic due to general
environmental forces like those mentioned above, but with the elimination of traditional
head-to-head rivals, new competitive forces are at play. Mass merchant retailers (like
Walmart) are redesigning broader consumer electronics departments and partnering with
suppliers for in-store attractions. Online retailers and second-tier competitors (such as
wholesale shopping groups and mid-level electronics firms) are also expanding and
succeeding in their attempts to grab market share from Best Buy. Their approaches differ
from those used by brick-and-mortar electronics stores that the company is accustomed to
competing against, and this introduces competitive dynamics new to Best Buy leaders.
Assessing the impact that industry forces have on the potential for success will
enable Best Buy to better position itself in the market and to formulate more effective
efforts to maximize profitability.
» Potential Entrants Globalization and broad access to the Internet are diminishing
entry barriers to the consumer electronics industry by reducing capital requirements
and deteriorating customer loyalty. Even though Best Buy’s economies of scale, cost
advantages with suppliers, and capacity to launch massive advertising campaigns do
provide some measure of protection against new entrants, new competitors are
gaining market share in the consumer electronics segment. The threat of these new
entrants is particularly ominous because they differ significantly from Best Buy in
terms of structure, focus, and sources of competitive advantage.
» Substitute Products Consumer electronics are not priority items, and many
alternatives exist that satisfy consumers’ entertainment needs. Though it can be
argued that advanced connectivity is also optional, it is becoming integrated into the
lives of consumers, and old forms of communication and information exchange are
really not a good substitute for the capabilities that many of today’s advanced devices
offer.
» Bargaining Power of Suppliers Best Buy’s scale gives the company good leverage
with suppliers. The company has over 1,400 domestic stores (with another 2,600
worldwide) and, with large order quantities, is able to pursue advantageous pricing
and availability agreements with manufacturers of consumer electronics equipment.
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Finding the Best Buy
However, shifts in supplier distribution policies have reduced the exclusivity Best
Buy once enjoyed. And the balance of power is affected by the level of supplier
concentration for the company’s product mix (5 suppliers provide 40% of Best Buy’s
products, and 20 firms supply 65% of its merchandise). In addition, some suppliers
(like Apple) are integrating forward in the supply chain and succeeding in direct B2C
online and retail channels, eliminating the need for middlemen like Best Buy.
» Bargaining Power of Buyers The trend today is for consumers to research products
online, determine purchasing intentions, and then seek the lowest price. Though
customers do not negotiate as one unit, pricing pressures have increased due to
emerging purchasing tools and processes.
» Rivalry Among Existing Firms A healthy and visible level of jockeying for
advantageous market position occurs among competing firms in this industry. Much
of this activity is price-driven. Switching costs for consumers are low, and with the
exception of Best Buy, retailer differentiation is minimal. Given economic conditions,
rivalry is increasing. And as competitors seek growth opportunities in this dynamic
industry, the intensity of rivalry is expected to rise further.
These moderate-to-strong market forces are acting against company efforts to
maximize performance. But for Best Buy, the industry is still attractive. By focusing on
products that consumers can no longer live without during slow economic times, using
the company’s influence with suppliers to secure favorable costs of goods sold, and
designing its strategy to capitalize on online purchasing behavior and to create valueadded distinctions from price-only competitors, Best Buy can continue to succeed in the
industry.
Competitor Environment
The table below compares the strengths and performance of Best Buy’s major
competitors.
Amazon
Cons. Electronics
Strengths
Walmart
Costco
Segment
Segment
Segment
- Op’l efficiencies - Economies of
- High inventory
for lower expenses scale and scope
turn wholesale
- Innovative apps - Bargaining
club model
- Price advantage power w/ suppliers - Service-oriented
- Tax advantage - Lower-end prod. - Customer value
Radio Shack
Primary
- Market niche
- Specialty
electronics
- Rebranding w/
cell phones, etc.
3-yr Annual Sales
Growth Rate
32%
3.65%
Other Growth
1-yr rate of 40%
- growth is
accelerating
Modest/stable
growth rate
3.37%
3.89%
1.65%
4.88%
Stable
Up from 3.3%
Stable
Marked increase
3-yr Annual
Net Profit
Margin
Other Margin
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Best Buy
6.57%
1.7%
5-yr rate of 8.05% 1-yr rate of 4.6%
- recession slowed 5-yr rate of -2.52%
rate of growth
- recovery
Finding the Best Buy
1-yr just 4.61%
•
Assess the company’s strengths and weaknesses by examining Best Buy’s internal
environment, segment performance, and financial results. Does the company have
the capacity to establish a competitive advantage that can be sustained in future
market conditions?
Three-fourths of Best Buy’s revenues are generated in the US, while the
international segment generates one fourth of the company’s revenues. Sales are tracked
according to six major product categories. Revenue movement across product categories
over the past year is depicted in the table below. It reveals that home office equipment is
the strongest product category in terms of sales both domestically and internationally
(gaining 3 points as a percentage of revenue to match consumer electronics in the US and
showing a 2% increase in overseas markets).
Revenue
Domestic
International
Total revenue
% revenue, by segment
Domestic:
Consumer electronics
Home office
Entertainment
Appliances
Services
Other
Total
International:
Consumer electronics
Home office
Entertainment
Appliances
Services
Other
Total
2011
$37,186
13,086
74.0%
26.0%
2010
$37,314
12,380
50,272
100.0%
49,694
37%
37%
14%
5%
6%
1%
100%
-2%
3%
-2%
1%
0%
0%
0%
39%
34%
16%
4%
6%
1%
100%
21%
55%
6%
9%
9%
< 1%
100%
1%
2%
-1%
1%
-3%
0%
0%
20%
53%
7%
8%
12%
< 1%
100%
A close review of the changes in income statement items over the past year
reveals that gross profits grew 3.9% on revenue gains of only 1.2%. Improvements in
CGS demonstrate that the company is succeeding in efforts to manage its supply costs.
On the other hand, SGA expenses outgrew revenue, indicating that fixed costs need to be
adjusted for the lower-than-expected sales levels experienced during the recession.
Difficulties with Carphone Warehouse in Europe are measured by an additional 15.6%
fall in earnings (from non-controlling interests) last year. Percentage change to income
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statement accounts are detailed in the table below. From the balance sheet, improvements
to long-term debt (which dropped 36%) are revealed.
Fiscal Years Ended
February 26, 2011
Revenue
Cost of goods sold
Restructuring charges - CGS
Gross profit
Selling, general, admin expenses
Restructuring charges
$
Operating income
Other income (expense)
Investment income and other
Interest expense
Earnings before income tax expense
Income tax expense
Equity in income of affiliates
Net earnings incl. non-controlling interests
Net earnings from non-controlling interests
Net earnings Best Buy Co., Inc.
$
February 27, 2010
50,272
37,611
24
12,637
10,325
198
1.2%
0.2%
$
3.9%
4.6%
280.8%
49,694
37,534
—
12,160
9,873
52
2,114
-5.4%
2,235
51
(87)
-5.6%
-7.4%
54
(94)
2,078
714
-5.3%
-11.0%
2,195
802
2
1,366
(89)
1,277
100.0%
-2.0%
(15.6%)
-3.0%
1
1,394
(77)
1,317
$
Whereas 2011 sales dipped in both the US and Europe regions, the company
experienced impressive revenue growth rates in Canada, China, and other international
regions. See details below.
Net sales to customers
US
$
Europe
Canada
China
Other
Total revenue
$
2011
37,186
5,511
5,468
1,952
155
50,272
-0.3% $
-1.4%
8.0%
16.4%
237.0%
1.2% $
2010
37,315
5,591
5,065
1,677
46
49,694
Strengths
Best Buy has a strong industry presence with over 1,400 retail locations in North
America and more than 2,600 stores in Europe and China. Revenue increases have been
continuously fueled by the addition of domestic and overseas acquisition assets and
internally developed ventures. Unique, value-added business segments (such as Geek
Squad and Best Buy Mobile) have provided the company with a financial cushion in
bleak economic times and have consistently increased high margin revenues to boost
overall company performance. Standardized processes within the company create
economies of scale and contribute to lower operating expenses. Additionally, Best Buy
benefits from consistent leadership and the use of solid governance mechanisms.
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Finding the Best Buy
The company is widely recognized for its superior service levels. Approaching
the electronics industry from the consumer’s perspective, Best Buy provides an extensive
product offering and is highly adept at anticipating and satisfying customer needs
associated with specific purchases. Understanding both technology and customer
expectations enables the company to deliver value-added solutions for the buyer. With its
major competition lacking in sales assistance, person-to-person contact, and support staff,
Best Buy’s position fills a void in the marketplace.
Weaknesses
Despite these strengths and advantages, market perceptions of Best Buy’s service
levels do not put the company ahead of its competitors in the minds of consumers. The
company has financial vulnerabilities stemming from downward economic and
competitive pressures on prices, increasing costs, growing merchandise inventories, and
weakened cash flow. Last year’s 16% increase in accounts receivable added further to the
risk exposure of significant bad debt losses, currently valued at over $2 billion (which
would more than wipe out the company’s net income of $1.3 billion). In addition, the
table below highlights Best Buy’s margin deficiencies, when compared to two major
competitors and the market at large.
GPM
NPM
Best Buy
Walmart
Amazon
Market Average
25.14%
2.54%
25.26%
3.88%
22.37%
2.85%
30.36%
3.87%
With the exception of a higher GPM than Amazon, Best Buy falls short against all of
these measures, especially the industry average. The company also performed below the
S&P 500 and S&P Retailing Group in a comparison of 5-year cumulative total returns.
As it considers its strategic options it will be important to address the company’s
underperformance in terms of profit margins.
Competitive Advantage(s)
Best Buy has done an admirable job selecting a business strategy and investing in
internal capabilities that provide it with meaningful sources of competitive advantage in
an industry that is mostly focused on low-price positioning. The company’s knowledgerich workforce is a unique resource in the industry. Its extensive product knowledge
produces value-added services in an environment where technology is changing rapidly.
The company’s core competency at providing customers with end-to-end solutions
through installation services, product repair, and ongoing support is another potential
basis for competitive advantage, especially as technological advancements increase
functional complexity and as device interactivity expands.
The company’s culture supports internal innovation and values the ability to
recognize and pursue new opportunities. This skill set allows Best Buy to compete
effectively against small local competitors in all of its markets. The acquisition and
development of related businesses with aligned strategies has enhanced the company’s
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Finding the Best Buy
flexibility, allowed the company to expand its product offerings, and provided a
competitive advantage against Best Buy’s strongest competitors (literally wiping them
out in the past). And the speed with which it adapts new knowledge throughout the
company (evidenced by the company’s success with foreign acquisitions that have turned
profitable) is not easily imitated.
•
Identify the prominent features of the company’s current business and functional
strategies, and consider the Best Buy family of complementary products and
services.
Most competitors employ low-cost strategies in the consumer electronics retail
industry, catering to cost-conscious consumers. Best Buy takes an alternative approach.
Not just a peddler of consumer electronics goods, the company defines itself as a serviceoriented firm.
To execute a differentiation strategy, Best Buy has formulated a customer-centric
operating model designed to enhance customer shopping satisfaction. Highly trained
employees share extensive product knowledge to facilitate customer understanding so
that consumers control the purchasing process, make informed decisions on big-ticket
purchases, satisfy their unique, individualized needs, and maximize the value and
enjoyment of their purchases. The company segments consumers according to lifestyle
dimensions and offers end-to-end solutions to meet each group’s specific needs.
Internal operations are designed to support this strategy. Marketing increases
retail foot traffic with mass marketing and television advertisement campaigns. Human
Resources provides appropriate product training to build a knowledgeable workforce and
embeds the Best Buy vision into employee service and attitudes. And to expand reach
and connection with consumers, the company has modeled its online presence to
integrate with the in-store experience, offer superior assistance, and facilitate purchases.
To grow the customer base and aggressively gain international market share, Best
Buy has primarily used an acquisition strategy. As a result, the company now has a
significant global presence, access to many important developing markets, and insights
into worldwide trends in consumer electronics. It has applied valuable experiences gained
by integrating acquired businesses into the Best Buy fold to strengthen the firm’s
capacity to skillfully test products across markets, anticipate customer needs, retain a
talented and knowledgeable employee base, and effectively target new expansion
opportunities. In addition to being able to leverage learned operational expertise, the
company’s mergers and acquisitions have expanded brand offerings for the unique needs
of different customer lifestyles.
Through its strategic actions, Best Buy has accrued an extensive body of
complementary products and services under a variety of domestic brands. The ensuing
diversified portfolio positions the company in the consumer electronics, home office,
entertainment, computer, software, appliance, audio/video, home improvement,
communication, digital music, and movie distribution segments, with a range of store
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Finding the Best Buy
formats. By spreading into a wide range of product areas, Best Buy’s related
diversification multiproduct strategy promotes profitable growth, reduces risks associated
with a single product line, and contributes to greater economies of scope. It exposes the
company to new and varied technologies and offers opportunities to share activities and
core competencies across business lines.
Recently, Best Buy devised its “Connected World” strategy, as it looks to the
future needs of the marketplace. The strategy is designed to demystify and humanize
technology so that consumers can get the most out of its expanding role in their lives.
Components of the strategy include:
»
»
»
»
•
Growing the Bestbuy.com website to capture online opportunities
Expanding the Best Buy Mobile segment in the US
Utilizing size and scale to improve international returns
Expanding stores with a smaller footprint to reduce costs
Weigh the challenges confronting the company. What are the greatest risks for Best
Buy as it moves into the new era of connectivity? What recommendations can be
made to support the company’s growth and profitability objectives?
Despite Best Buy’s strengths, marketplace advantages, and forward-thinking
strategies, the company faces a variety of troubling issues. They include:
-
How to keep its strategy relevant and effective as competitive dynamics
drastically change—especially given the difficulties of differentiating and finding
new ways to add value
-
How to enhance perceptions of superior customer service quality, achieve
judicious new product selection, and maintain a top caliber workforce with
current financial constraints, expanding competition, rapid technological
advancement, and relentless pressure on prices
-
How to revamp products and store design to serve customers’ new needs
(**Missing the mark on this challenge represents the greatest risk to Best Buy,
given the seemingly inevitable demise of the retail business model.)
-
How to manage financial stress and maximize fiscal performance with rising
operational costs, merchandise inventories, pressures on margins, and low cash
-
How to combat sales lost to online buying, new purchasing patterns, and other
market dynamics that threaten to cut out middleman distributors
-
How to improve stock performance to satisfy shareholder expectations
-
How to manage Carphone Warehouse and other unprofitable international
ventures to realize maximum potential in foreign markets
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Finding the Best Buy
STRATEGY
Although there are uncertainties and challenges ahead for Best Buy, the company
operates in exciting times. Amazing functionalities and connectivity features are
emerging that are already galvanizing consumers. Customer desire to be permanently
connected and to have instant online access is redefining the role of consumer electronics
in their lives.
Advanced technologies can be complex, and continuous product development
produces an expanding variety of devices that can confuse consumers. Also, interactivity
between devices requires technological support systems for customers. As the company
gears up for changes driven by these market forces, Best Buy is not only well-positioned
to satisfy these evolving needs, but can do so in ways that successfully differentiate the
company and add value to strengthen margins.
Based on the preceding analysis and discussion, the student should be able to
propose a business strategy that addresses key strategic issues, enhances the potential for
competitive success, and supports sustained growth and earnings. The most promising
areas of consideration are outlined below.
o Brick-and-mortar stores are waning in the industry, but only non-discount retail sites
offer customer consultation during the purchase decision process. The company
should build on the strength of its retail sites and its store-within-a-store concept.
Fashioning a Best Buy Complex is compatible with the need to design stores with
changing consumer demands in mind, capitalizes on the company’s integrative skills,
and promotes the growth of same-store sales and profits. Knowing the short windows
of new product development, sub-stores should be designed for flexible change-out as
the need to feature and support new, innovative products and services arises. Site
partnerships can be devised to add cafés, demo rooms, or social settings to draw
customers into retail locations.
o To tackle margin deterioration, Best Buy needs to vigilantly control costs without
sacrificing exceptional customer experiences. A complete cost analysis is necessary
to improve cost management, but growing SGA expenses should be immediately
addressed. Using Best Buy’s power of scale, supplier partnership arrangements can
be secured to secure the best terms for product costs and to share the costs of training
for suppliers’ new products. In addition, the sales force could be stratified to
specialize in certain technologies, to reduce the burden of training all employees on
all products. (This should be done with caution so as not to erode the overall service
quality built on a knowledge-based workforce.)
o The best way to combat downward pressure on prices is to concentrate on new
technologies for which prices have not eroded and new information that is required to
make the purchasing decision. Best Buy can build value through relevant customer
services by (1) reducing confusion around new, advanced devices, features, and
technologies and (2) supporting technology and device integration as well as
customer desire for connectivity, access, and immediacy.
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o To address easy online access to free product information and price comparisons,
Best Buy has concentrated on enhanced in-store services and displays to draw the
consumer into the retail setting, where it has an advantage. It has also established its
own online storefront (BestBuy.com). To capture the segment of the market that is
partial to online purchasing practices, the company should seek ways of transferring
its value-added knowledge model to its website, using the best information from the
supplier, revolutionary interactive decision-making tools, and convenient links to buy
products.
o Best Buy should continue to seek growing markets (like India and Brazil) for more
international expansion opportunities, using its skill at matching market needs with
appropriate product lines and its ability to rapidly integrate new operations.
o Finally, the company should carefully consider its gains and strengths in the Home
Office Equipment product segment. In addition to consultative services and
showcasing products specifically for business applications, Best Buy will need to
better understand its true rivals for this segment (such as Staples and Office Depot),
which maintain traditional and highly successful brick-and-mortar store locations
integrated with online support services.
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Best Buy
1) Business Admin Capstone
Finding the Best Buy" Please respond to the following:
➢ Read the Finding the Best Buy case study in another Attached PDF
➢ Corporate governance has become a hot issue in the U.S. over the past two decades.
From your analysis of the case study, determine two possible corporate governance
challenges that might be faced by Best Buy as a result of its rapid growth and why
they could become corporate governance issues.
➢ Make recommendations for how Best Buy can overcome these challenges. Provide
specific examples to support your response.
Please answer above question here in 120 words or more.
Please Read the Attached Best buy case study and write this post
2) Business and Society
Find a current event in the past 6 months in which a business failed to protect consumers.
Post your URL link. Provide the name of the company & the issue.
Do your findings change the way you will support the company in the future? Post must
be at least 80 words (not including spaces & punctuation) in order to be eligible for full
credit.
Please answer above question here in 80 or more.
3) Solution to global issue
Using Technology to Improve the Future
The benefits of technology to humans are almost too numerous to list. As with anything, there are
downsides to this advancement. Examine a misuse of technology that you have observed within
the global community.
Please answer above question here in 8-10 or more sentences.
Purchase answer to see full
attachment