Best Buy Corporate Governance And Technology Case Study

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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. • • • • 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 1 Best Buy 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. 2 Best Buy Finding the Best Buy 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. 3 Best Buy 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 4 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 5 Best Buy Finding the Best Buy 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. 6 Best Buy 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 7 Best Buy 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 8 Best Buy 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 9 Best Buy 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. 10 Best Buy Finding the Best Buy 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. 11 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.
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Corporate Governance and Technology
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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.

Corporate governance is the main determining factor when it comes to organi...


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