What is the fate of Best Buy?

As we all know Best Buy has not had a very good month so far with their CEO leaving due to “personal conduct” and the greater fact that it cannot stop hemorrhaging money due to retailers like Amazon and Wal-mart selling the same electronic goods at lower prices while maintaining better customer service.   Already, Best Buy is in the process of closing 50 stores throughout the USA (the area I live in has a BestBuy store slated to close by the end of May 2012).   Two questions to ask are:

1.       How did Best Buy get into this situation (crisis might be a better word)?

2.       How does Best Buy get itself back on track to profitability?

To understand how Best Buy got to where it is today, we need a quick primer in business strategy.  Businesses compete in one of three ways:

1.       Low-Cost: A company competes by selling its services/products at very low prices. In this case, consumers view the products/services as commodities, which means they perceive the product/service as having little or no difference in relation to a similar product/service.  As such, consumers are price-sensitive and will buy the more low-priced product/service.

2.       Differentiation with major attribute: A company competes based on one significant sustainable competitive advantage or SCA.  An SCA is an attribute a company does really well over the long-term that cannot be easily duplicated and provides strategic value to both the company and customer. Consumers perceive the product/service as being different to a similar product/service.  As such, consumers are willing to pay a higher premium for the product/service.

3.       Differentiation with various attributes:  In this regards, the company does not have one or two overriding SCAs but various competitive advantages. 

Before I go further, I would like to give credit to my former professor of international business strategy, Dr. Lance Brouthers, who developed this competition model.

For the longest time, Best Buy was utilizing the differentiation strategy with various attributes of market power, customer service, and brand.  More specifically, Best Buy surmounted its competition because while it charged higher prices than it competition (i.e. Circuit City), it located it stores everywhere with staff who were knowledgeable in utilizing the products. As such, consumers were willing to pay a premium on the product in return for the knowledgeable in-person service and the ability to get the product on the spot. 

However, its competitive advantages started to erode with the advent of internet retailers like Amazon and even physical retailers like Wal-Mart who could sell the same product for a lower price.  Quite simply, the competitive environment changed as consumers started viewing the products as commodities.  Plus with services like quick shipping and no hassle return policy (i.e. Amazon), consumers do not have to wait very long to receive their products and can easily return them for almost any reason.  Also, the younger generations are more “connected” then ever and do not need the Best Buy services to put together a computer system.

Best Buy has an inherent disadvantage in regards to its cost structure.  Best Buy has no choice but to the pass on its overhead costs (i.e. labor, building, etc.) to the consumer to stay profitable.  On the other hand, Amazon maintains its inventory in a handful of warehouses so its overhead costs are much lower and the savings are passed to the consumer. In the financial media Best Buy is sometimes referred to as “Best Browse” because consumers simply now go to Best Buy stores to look around and use their smartphones to find a better deal online.

Without a doubt, Best Buy has a tough road ahead.  Some financial media analysts are already predicting its demise.  As stated before, Best Buy has announced the closing of 50 “big-box” stores with maybe even more on the horizon.  Best Buy has also announced the remodeling of some stores tailored to mobile products, which is one of its higher margins areas.  What effect, if any, this will have is unknown but some analysts believe this is too little, too late.  In order to survive, Best will need to develop and successfully execute a very innovative corporate strategic plan.  One idea could be to utilize its big-box store size and lease the space to back to product manufacturers and let them do the heavy-lifting in regards to customer service and sales and Best Buy would derive its profit primarily from rental and some incremental sales revenue.  Best Buy can then focus more on its online presence where it could more easily compete against Amazon.

Ultimately, no one truly knows what the fate of Best Buy will be.  But if it is to survive, it cannot keep operating the way it is now.