final project

1

Best Buy

Best Buy stores, owned and operated by Minneapolis-based Best Buy Co., Inc., is one of

the nation’s leading retailers of technology and entertainment products and services.

Through more than 940 retail stores across the United States and in Canada, their employees

connect customers with technology and entertainment products and services that make life easier

and more fun. They sell consumer electronics, home-office products, entertainment software,

appliances and related services. As a Minneapolis-based company, their operations include: Best

Buy, Five Star Appliance, Future Shop, Geek Squad, Magnolia Audio Video and Pacific Sales

Kitchen and Bath Centers.

Existing Mission Statement:

Best Buy’s mission is to give our customers great experiences- whether they are shopping for

consumer electronics, home office products, entertainment software and appliances, or using

those products and related services in their homes and offices.

Existing Vision Statement:

Best Buy’s vision is to make life fun and easy for consumers.

New Mission Statement:

To give customers a great experience in every aspect of shopping including value, customer

service, and up to date technology and products.

New Vision Statement:

Make life fun and easy for consumers while offering the best product possible and growing as a

company to help fulfill those needs.

http://www.bestbuy.com/site/olspage.jsp?type=category&id=cat00000

2

Best Buy’s History:

Best Buy was started by Richard Schulze and business partner and was originally called

the Sound of Music. The first store was opened in 1966 in St. Paul, Minnesota.

The next year the second and third Sound of Music stores were opened near the University of

Minnesota and in downtown Minneapolis. In 1973, a Sound of Music facility opens in Edina,

Minnesota, featuring a 5,000-square-foot showroom and 3,000-square-foot warehouse. Sound of

Music begins to expand into the suburbs and had nine stores by the end of 1978. In 1979, Sound

of Music expands into video products; first suppliers of video and laser disc equipment include

Panasonic, Magnavox, Sony and Sharp. Stores add photography and home office products, with

video equipment and TV’s expanding to all stores in 1981. Sound of Music’s board of directors

approves a new corporate name in 1983: Best Buy Co., Inc. Best Buy opens its first superstore in

Burnsville, Minnesota, featuring expanded selling space, a wide assortment of discounted brand-

name goods, central service, and warehouse distribution. Stores also began selling appliances

and VCRs. In 1988 Best Buy stores begin selling PCs. Best Buy became the nation’s top retailer

of PCs to home users in 1995. In 1997 Best Buy became the first national retailer to sell DVD

hardware and software. Three years later Best Buy entered the online retailing business by

launching Bestbuy.com. Soon later Best Buy opened its first Canadian Best Buy store in

Toronto. That same year, 2002, Best Buy and the Geek Squad join forces. In 2003, Best Buy

opened its first global sourcing office in Shanghai, China. Later that year, Fortune magazine

ranks Best Buy #4 on its list of most admired U.S. companies in the specialty retailers industry

and Forbes magazine names Best Buy as one of America’s most philanthropic corporations. To

top it off, the next year, 2004, Forbes magazine names Best Buy “Company of the Year.”


3

Organizational Culture :

Best Buys organizational culture is much like an energized family which is kept this way

by learning. This is done by in the store training so employees can be kept up with the latest

trends and innovations that are listed on Best Buy’s personal intranet site. Best Buy does not

want their employee’s to feel like they are just another person in the company but as an

employee within the industry. Best Buy would like to think that employee’s find their jobs to be

exhilarating, challenging, rewarding, and last but not least, fun.

Best Buy’s corporate vision is to “Make Life Fun and Easy”. Best Buy also has four guides

which is linked to their vision statement and is to be used to guide the actions of the employee’s:

Have fun while being the bestLearn from challenge and changeShow respect, humility, and integrityUnleash the power of our people

Symbol:

Best Buy has become the leader in electronic retail in the United States reaching every

goal that has been set before it. In the spring of 2003 Best Buy opened their new corporate

campus, which represented the milestones that Best Buy has achieved over the past 40 years.


4

Competitive Profile Matrix:

Best Buy Competitors: Circuit City, Staples, Office Depot Best Buy Circuit City Staples Office Depot

Weight Rate WS Rate WS Rate WS Rate WS

Management Exp .08 3 .24 2 .16 3 .24 3 .24Market Share .1 4 .4 2 .2 3 .3 3 .3INV System .08 3 .24 3 .24 3 .24 3 .24Financial Position .07 4 .28 2 .14 3 .21 4 .28Product Quality .08 4 .32 4 .32 4 .32 4 .32Consumer Loyalty .08 4 .32 2 .16 3 .24 3 .24Sales .07 4 .28 2 .14 3 .21 3 .21Global Expansion .05 2 .1 3 .15 4 .2 4 .2Organiz. Structure .07 4 .28 2 .14 3 .21 3 .21Merchandise Variety .06 4 .24 3 .18 3 .18 3 .18Ecommerce .08 3 .24 3 .24 3 .24 4 .32Customer Service .09 2 .18 3 .27 3 .27 4 .36Price Competitiveness .09 4 .36 3 .27 3 .27 4 .36TOTAL 1. 3.48 2.61 3.13 3.46

The Competitive Profile Matrix represents Best Buy’s competitors and how well they

compete in various areas within the industry. Best Buy’s rating is the highest, 3.48, among its

competitors and is due to its strengths in market share, financial position, sales, and merchandise

variety. Best Buy’s closest competitor was found to be Office Depot who succeeded where Best

Buy had weaknesses. Office Depot’s strategic strengths were ecommerce and global expansion

in which they both received ratings of 4. Office Depot has excelled by pursuing markets in 21

international markets, by providing diversified language settings on there web site and providing

stores in 14 of those markets. The Competitive Profile Matrix also showed that Circuit City was

our least threatening competitor by declining market share and sales which exemplifies why they

received a weighted score of 2.61.


5

EFE Matrix:

Key External Factors

Opportunities

1. Online sales expected to rise annually 19%2. Digital products are leading the industry’s growth3. One stop shopping centers are growing in popularity4. Potential success of ‘customer centricity’5. Environment conscious customers 6. Industry-wide increase on ROE7. Companies reputation

Threats

1. Gas prices have risen by 75% over 4 years2. Leading competitors have lower cost structures3. Variety of competition nationally, regionally and locally4. Dollar value down 15% compared to GBP over the year5. Price wars6. Decrease in disposable U.S dollars7. Attorney general’s price fixing enquiry


6

EFE Matrix for Best Buy Company, Inc .

Key External Factors Weight Rating Weighted Score

Opportunities

1. Online sales expected to rise annually 19% .1 3 .32. Digital products are leading the industry’s growth .07 3 .213. One stop shopping centers are growing in popularity .08 4 .324. Potential success of ‘customer centricity’ .08 3 .245. Environment conscious customers .06 3 .18 6. Industry-wide increase on ROE .04 3 .127. Companies reputation .07 4 .28

Threats

1. Gas prices have risen by 75% over 4 years .06 2 .122. Leading competitors have lower cost structures .09 2 .183. Variety of competition nationally, regionally and locally .09 2 .184. Dollar value down 15% compared to GBP over the year .03 1 .035. Price wars .1 2 .26. Decrease in disposable U.S dollars .07 2 .147. Attorney general’s price fixing enquiry .06 1 .06

Total 1.00 2.56

The EFE is a useful analytical tool to use when attempting to analyze whether a company

is strong or weak externally in comparison to its competitors. The expected 19% increase in

online sales is a major opportunity that must be capitalized on in order for Best Buy to excel over

its competitors. The potential success of the ‘customer centricity’ approach is also an opportunity

for a growth in customer satisfaction. Price wars are the major threat to Best Buy’s profit

margins, as well as the lower cost structures of many of Best Buy’s competitors. The total score

for the EFE analysis was 2.56 This is a mediocre score although it is closer to 4 than to 1. This

result suggests that Best Buy could certainly improve on taking advantage of the opportunities


7

that are presented to them and also deal with the threats they face in a better fashion. It shows

that the opportunities outweigh the threats, and that taking better advantage of the opportunities

could lead to future success.


8

Porter’s Value Chain:

Porter's Value ChainWarehousing Products

Distributing Products

Logistical Efficiency $50,000,000

Identifying Customer Needs

Implementing 'Customer Centricity'

Generating Online Sales $100,000,000

After Purchase Support

Warranties

Rebate Offers ($20,000,000)

International Boundaries

Developing Positive Culture

Quota Restrictions

Taxes

Organizational Structure ($50,000,000)

Hiring Experienced Managers

Competitive Compensation

Internal Training

Language Barriers ($75,000,000)

High-Tech Computer Systems

User Friendly Website

User Friendly Store Layout

Outsourcing IT ($100,000,000)

Bulk Discounts

Economies of Scale $200,000,000

Total Value Added $105,000,000

IFE Matrix:


9

Key Internal Factors

Strengths

1. Innovative 2. Fortune 100 company3. Largest electronic retailer in U.S.4. Customer-centric5. Community involvement6. Customer loyalty program7. Commitment to growth8. Global9. Geek Squad-24 hour response10. Locations visible and easily accessed

Weaknesses

1. Internal ad agency2. Customer service3. Time Management


10

IFE for Best Buy

Key Internal Factors_________________Weight_____Rating_____Weighted Score

Strengths

Innovative .12 4 .48Fortune 100 company .06 3 .18Largest electronic retailer in U.S. .11 4 .44Customer-centric .08 4 .32Community involvement .06 4 .24Customer loyalty program .06 3 .18Commitment to growth .12 4 .48Global .09 4 .36Geek squad-24 hour response .06 3 .18Locations visible and easily accessed .09 4 .36

Weaknesses

Internal ad agency .03 2 .06Customer service .10 1 .10Time management .02 1 .02

Total 1.0 3.46

After evaluating Best Buy’s internal factors, we found that one of their major strengths is

their commitment to growth and innovation. Their desire to succeed has led them to be the

largest electronics specialty store in the United States. Not only are Best Buy stores everywhere,

they offer a variety of products such as appliances, entertainment software, home office

equipment, and consumer electronics. Their stores are all over the United States and Canada and

they have opened a flagship store in Shanghai to try to penetrate the market in China.

However, with the company being so large, careful attention has not always been given to

the consumers needs in the past. Some customers feel overwhelmed in an environment where

there are so many options to choose from and they may need better assistance in order to make

the right choice. With their great popularity comes a great expectation. In order to change their


11

perception, Best Buy has come up with a customer-centric model to implement in eventually all

of their stores. By developing more customer-segmented stores, Best Buy can provide their

customers with a more superior shopping experience.

The purpose of developing this model is to deliver customized store experiences,

solutions, products and services to meet the distinct needs of certain customers. Best Buy also

wanted to gain a competitive advantage over competitors such as Staples and Circuit City. In this

fast paced industry it is important to stay ahead of the game instead of playing catch up with your

competitors. Customer demand in this industry is also constantly increasing. Consumers always

want newer, better and possibly smaller products, so it is imperative that Best Buy is able to meet

their needs or demands. They are trying to bring technology and consumers together in a retail

environment that focuses on educating customers.

For the past 20 years Best Buy has had an internal ad agency. While they have done a

tremendous job, we feel that this may be a disadvantage to the company. An outside agency

would be able to offer a fresh perspective and may be able to reach a broader market. Best Buy

also needs help with enhancing its appeal to women. Most women who frequent the store are

mothers who are looking for technology to improve their children’s lives: not their own.

SWOT Matrix:


12

The SWOT matrix provided information that is helpful in pairing the company’s

resources and abilities to the competitive environment in which it operates by evaluating its

internal strengths and weaknesses as well as its external opportunities and threats. Best Buy

effectively uses its strengths to gain an advantage in its market. The following are some

strategies that we feel might help boost their efforts:

SWOT Matrix

WT StrategiesHire outside ad agency to offer fresh perspectives.

ST Strategies1. Expand domestic market-introduce current products and services into new geographic areas2. Expand international market –China

Threats1. Increase in gas prices2. Music piracy3. I- tunes4. Staples5. Circuit City

WO Strategies1. Improve current products- product development

SO Strategies1. Gain increased control over competitors through horizontal integration 2. Increase market share for present products through market penetration

Opportunities1. Online Sales2. Internet simplified3. Looking for outside ad agency4. Enhance appeal to women

Weaknesses1. Internal ad agency2. Customer Service

Strengths1. Innovative2. Fortune 100 Company3. Largest electronic retailer in the U.S.4. Customer-centric5. Community involvement6. Commitment to growth7. Global8. Locations are visible and accessible

7


13

Past Strategies

Dual branding

Space Matrix:


14


15

SPACE Matrix

Financial Strength (FS) Competitive Advantage (CA) Return on Investment (21.7%) 5 Number of retail outlets (830) -2Annual Revenues ($31 billion) 6 Quality of suppliers -2Cash Flows ($327 million) 6 Best Buys new customer-centricity store models -1Liquidity ($3.7 billion) 5 Utilization of both retail and specialty stores -2

Total FS 5.75 Total CA-

1.75 Environmental Stability (ES) Industry Strength (IS)

Rising gas prices mean decreases in sales -3 Overall sales in relation to competitors 6Increase in online sales -2 Expansion of Geek Squad to all Best Buy locations 5Online piracy has decreased software and music demands -3 Recent Growth and expansion 4One stop shops such as Best Buy will cause barriers to entry -1 Reengineerment of Best Buys supply chain 5

Total ES-

2.25 Total IS 5

A SPACE Matrix was designed to help determine the types of strategies that would be

the most strategically appealing to Best Buy Company. The SPACE Matrix directs companies to

use one of four types of major strategies: aggressive, conservative, defensive, or competitive. In

order to determine which type of strategy is best for a given company, the SPACE Matrix takes

into consideration factors in four major categories: financial strength, competitive advantage,

environmental stability, and industry strength.


16

After developing several factors for each of these major categories, all of which are listed

in the above table, it was determined that Best Buy Company should choose aggressive

strategies. This was determined by reviewing the factors, which reveal that Best Buy Company is

operating a financially strong company in a strong and stable industry with a fairly large

competitive advantage.


17

BCG Matrix:


18

BCG Matrix

Department Sales%

Sales Profits%

Profits RMSPIG Rate

%Consumer Electronics 13,265 43% 2697.77 42% 114.38% 0.09Home Office 9,872 32% 1810.25 28% 68.33% 0.08Entertainment Software 5,862 19% 1374.88 21% 124.72% -0.33Appliances 1,851 6% 612.1 9% 15.50% -0.02

Total 30,850 100%

Best Buy Company sells many different products, all of which may be categorized into

one of four departments: consumer electronics, home office, entertainment software, and

appliances. The sales figures, profit margins, relative market share position, and industry growth

rates for each of these departments are displayed in the above figure. A BCG, or Boston

Consulting Group, Matrix was performed to measure the performance of each of these

departments.

After performing the BCG Matrix, the state of each department within the Best Buy

Company was then analyzed. The consumer electronics department, which resulted in the largest

percentage of Best Buys sales, was found to be doing very well. Because of its enormous relative

market share position and its positive industry growth rate, it would be considered a star.

The department that accounted for Best Buy Company’s second largest percentage of

sales, or its home office department, was also found to be doing well. With a relative market

share position of over 68%, and its positive industry growth rate, the home office department

would also be considered a star.


19

The analysis of Best Buy Company’s third largest department, or its entertainment

software department, was slightly different from those of the top two departments. While the

entertainment software department was found to have a dominant relative market share position,

the industry growth rate in this department was negative. This simply means that Best Buy

Company’s entertainment software department can be considered a cash cow.

The appliance department of Best Buy Company represented its lowest percentage of

sales. Because this department had both a low relative market share position and a negative

industry growth rate, it would be considered a dog. However, it did still have a positive profit

margin, so it is not necessarily hurting the company.


20

IE Matrix:

The IE Matrix

THE IFE TOTAL WEIGHTED SCORES

Strong Average Weak 3.0 to 4.0 2.0 to 2.99 1.0 to 1.99

3.0 2.0 1.0

4.0 High 3.0 to 4.0THEEFETOTAL 3.0WEIGHTEDSCORES Medium 2.0 to 2.99

2.0

Low 1.0 to 1.99

1.0

Division $ Revenue % Revenue $ Profit % Profits IFE EFE (millions) (millions)

1. Consumer Electronics 10,424.54 38 2697.77 42 3.53 2.642. Home Office 9,327.22 34 1810.25 28 3.46 2.563. Entertainment Software 6,035.26 22 1374.88 21 3.52 2.374. Appliances 1,645.98 6 612.10 9 3.22 2.49

All four divisions of Best Buy fall in the fourth cell which is part of the “grow and build”

region. We plan to use an intensive strategy with elements of an integrative strategy. Because the

Appliance Division is close to cells V and VII, we want to use a more conservative approach

I II III

IV

1 2 3 4

V VI

VII VIII IX


21

strategy. We plan to use market penetration by building stores with large Appliance Departments

in China. We also plan to use a product development strategy with local brand acquisitions.

Our other three divisions combine to make up 94 percent of the company’s total revenue.

Because we are so strong in these areas we plan to use an aggressive strategy by means of market

penetration, market development, and product development as outlined in the Grand Strategy

Matrix.


22

IFE’s for each department:IFE Matrix for Best Buy Inc. Consumer Electronics Division

Criteria Weight Rating Weighted Score

Strengths

1. Innovative .13 4 .522. Fortune 100 company .06 3 .183. Largest electronic retailer in U.S. .11 4 .444. Customer-centric .08 4 .325. Community involvement .06 3 .186. Customer loyalty program .06 4 .247. Commitment to growth .13 4 .528. Global .09 3 .279. Geek squad-24 hour response .06 4 .2410. Locations visible and easily accessed .09 4 .36

Weaknesses

11. Internal ad agency .03 2 .0612. Customer service .10 2 .20

Total 1.0 3.53

For the most part, the IFE matrix for the Consumer Electronics Division resembles the

IFE Matrix for the entire company with a few exceptions. The two major strengths in this area in

comparison to the rest of the company are the customer loyalty program, and the Geek Squad

service. Customers are willing to spend a little more, especially on high priced consumer

electronics, if they are getting value in their service. Our customers can listen to advice from

knowledgeable employees and even test products before they buy. They know that if they ever

need help, our 24 hour response team will guide them to a solution.


23

IFE Matrix for Best Buy Inc. Home Office Department


Strengths


Weaknesses


Total 1.0 3.46

The IFE Matrix for the Home Office Department epitomizes Best Buy’s strengths and

weakness for the company as a whole. Key areas of interest include: highly innovative, customer

centric, and locations that are easily accessed.


24

IFE Matrix for Best Buy Inc. Entertainment Software Department


Strengths


Weaknesses


Total 1.0 3.52

The one deviation in this IFE Matrix from the overall company’s IFE is that the Geek

Squad’s 24 hour response is a major strength in the Entertainment Software Department. Most of

the technical support is software related. Because of this, we provide better service than the rest

of the industry in this regard.


25

IFE Matrix for Best Buy Inc. Appliances Division


Strengths


Weaknesses


Total 1.0 3.22

One of the reasons for Best Buy’s success is the increase in popularity in “the one-stop

shop.” Best Buy has capitalized on this demand by the introduction of the Appliance Division.

Being the largest electronic retailer in the U.S. can be both good and bad for Best Buy. Good

because, people know Best Buy will have what you are looking for if it is electronic related. It

can also be considered bad due to the popularity of the consumer electronics, appliances are

often overlooked. Although we are not as innovative in this area as some of our competitors such

as Costco and Sears, we are taking steps forward to improve.


26

EFE’s for each department:

EFE Matrix for Best Buy Company, Inc. Consumer Electronics Division

Key External Factors Weight Rating WS

Opportunities


Threats


Total 1.00 2.64

The major key opportunity in the Consumer Electronics Division is that digital products

are leading the industry’s growth. The only downside to this is that the price of digital

products is on the decline. Best Buy is combating this potential threat with their customer

centricity program. Rather than trying to be a cost leader, we want to provide excellent

customer service. Most consumers are willing to pay a little more on luxury goods if it’s

something they know they want.


27

EFE Matrix for Best Buy Company, Inc. Home Office Division


Opportunities


Threats


Total 1.00 2.56

The reason for the continued success of the home office division is the growing popularity in

one stop shopping centers. Peripherals that are included in the Home Office Division have a

much higher profit margin than the more expensive consumer electronics. Due to the

convenience factor, many people spend little time comparing prices on these cheaper goods.

Indirectly we are controlling price wars by making goods available in convenient locations for

customers.


28

EFE Matrix for Best Buy Company, Inc. Entertainment Software Division


Opportunities


Threats


Total 1.00 2.37

Particularly in the Entertainment Software Division, price wars are extremely crucial. With

the recent boom in MP3s, CD sales are at an all-time low and software is becoming increasingly

cheaper. Due to this threat to the Entertainment Software Division, we need new marketing

strategies. We need to go to local communities and find out the kinds of music people would like

to see in our Best Buy stores. We also want to provide bundle purchases where if a certain item

is purchased, discounted software is included. We can also have in-store displays where we

demonstrate the latest software for sale.


29

EFE Matrix for Best Buy Company, Inc. Appliances Division


Opportunities


Threats


Total 1.00 2.49

Although the Appliance Division is small in terms of the company’s overall size, it has

shown excellent growth in several markets. We are trying to change people’s current view of

Best Buy being an electronics only store. We hope by understanding what the consumer’s needs

are, we can make life fun and easy for them by making Best Buy a one stop shop where the value

continues beyond the purchase.


30

Grand Strategy Matrix:

Quadrant I

1. Market development

It also boils down to consumers, where they like to shop and where they spend their

money. It's as basic as how a store feels, how the products and aisles are laid out, and

how the workers there treat you. In today's connected world, where entertainment and

technology products intersect, Best Buy leads the competition with their excellent


31

customer service. We want to make sure our customers know that we care about them

making the right purchase, because their business matters to us.

2. Market penetration

By offering our products on-line with BestBuy.com, we are able to enter markets with

little or no barriers to entry. We can overcome language barriers by offering the website

in a variety of languages. By entering into China we can attempt to tap into this $100

billion consumer electronics market. Similar to the way we entered the Canadian market

Best Buy acquired a majority interest in the retail chain Jiangsu Five Star Appliance Co.,

Ltd. China’s fourth-largest appliance and consumer electronics retailer. We also have a

global sourcing office in Shanghai, China. We plan to build stores in China and continue

to penetrate this market that shows amazing potential.

3. Product development

Electronic equipment, personal computers and accessories, and storage products are just a

few of the areas we want to continue to develop. Ideally we will look at products already

on the market that have a reputation for high quality, acquire those products and adopt

them into our stores as our own.

4. Backward integration

Best Buy knows that the quality of their suppliers’ product data is critical to ensuring the

success of their Foundation Data Management (FDM) initiative in general and their

Global Data Synchronization initiative in particular. Because only product data that is

accurate, consistent and complete can support the Best Buy supply chain and meet

consumer demand, Best Buy now requires all suppliers that synchronize their data with


32

Best Buy to subscribe to the UDEX Product Data Quality (PDQ) service. Experience has

shown that developing and implementing a thorough product data quality assurance

process takes most suppliers approximately six months; suppliers with larger product

assortments will generally benefit from even more advanced planning.


33

Quantitative Strategic Planning Matrix:

QSPM

Strategy 1 Strategy 2 Strategy 3 Key Factors Weight AS TAS AS TAS _ AS TAS Opportunities1. Online sales expected to rise annually 19% .09 - - - - - -2. Digital products are leading the industry’s growth .06 4 .24 3 .18 3 .18

3. One stop shopping centers are growing in popularity .04 3 .12 3 .12 3 .12 4. Potential success of ‘customer centricity’ .09 4 .36 4 .36 3 .275. Environment conscious customers .05 3 .15 3 .15 3 .156. Industry-wide increase on ROE .05 3 .15 4 .20 3 .157. Companies reputation .10 4 .40 4 .40 4 .40

Threats _ _ _________________________________1. Gas prices have risen by 75% over 4 years .08 1 .08 2 .16 1 .082. Leading competitors have lower cost structures .06 2 .12 2 .12 2 .123. Variety of competition nationally, regionally and locally .10 1 .10 2 .20 1 .104. Dollar value down 15% compared to GBP over the year .10 1 .10 1 .10 2 .205. Price wars .06 1 .10 1 .10 1 .106. Decrease in disposable U.S dollars .08 1 .08 - - 1 .087. Attorney general’s price fixing enquiry .04 - - - - - - 1.0Strengths __ ______________________________________1. Innovative .10 3 .30 4 .40 3 .302. Fortune 100 company .06 - - - - -3. Largest electronic retailer in U.S. .09 3 .27 4 .36 4 .364. Customer-centric .08 3 .24 3 .24 3 .245. Community involvement .04 - - - - - -6. Customer loyalty program .05 3 .15 3 .15 3 .157. Commitment to growth .11 4 .44 4 .44 4 .448. Global .12 - - 4 .28 - -9. Geek squad-24 hour response .07 - - - - - -10. Locations visible and easily accessed .06 3 .18 3 .18 3 .18

Weaknesses _ _ _ 1. Internal Ad Agency .05 1 .05 1 .05 1 .052. Customer Service .09 - - - - - -3. Timing Issues .08 1 .08 1 .08 1 .08 1.0 3.71 4.27 3.75

Strategy 1: Market Penetration- Expand Domestic MarketStrategy 2: Market Penetration- Expand Internationally into ChinaStrategy 3: Horizontal Integration-Buying Competitors


34

The three strategies that Best Buy has decided to evaluate in the QSPM are Market

Penetration, focusing on expanding our domestic market in the United States; Market

Penetration, focusing on expanding internationally into China; and Horizontal Integration,

focusing our efforts on buying domestic competitors. Each of the strategies has its benefits and

downfalls.

We seek to expand our stores into existing markets in order to attain a greater overall

market share within the industry. Since our stores typically draw customers from their local

area, we run the risk of drawing customers away from current Best Buy stores, causing

comparable store sales and performance and customer traffic at the existing stores to decline.

Our future growth is partially dependent on the ability for us to build or lease new stores. We

face many issues in this stage of growth such as location choices, local zoning issues,

environmental regulations, and other regulations applicable to the types of stores that we desire

to construct that may impact our store openings. We also expect to expand into new domestic

markets. The risks that come associated with this strategy include difficulty in attracting

customers due to lack of customer familiarity with our brand, our lack of familiarity with local

customer preferences, and seasonal differences in the market. In addition, entry into new markets

may bring us into competition with new competitors or with existing competitors with a large,

established market presence.

Best Buy’s international segment was developed in fiscal year 2002 in connection with

the companies acquisition of the Canada based Future Shop. We hope to grow this segment with

our strategy of introducing new stores into China in the near future. Although we predict the


35

opening of the new international stores to be a great success, there are many factors that need to

be taken into consideration when deciding whether or not to pursue this strategy. The

international regulatory and legal environment exposes us to complex compliance and litigation

risks that could affect our operation and financial results. One of the risks that we face includes

the difficulty of complying with conflicting regulations in local, national, or international

jurisdictions. Another consideration is the impact of the changes in tax laws from one country to

another. A large issue that needs to be considered is the differences in labor and employment

laws. Labor laws in China greatly differ from the laws that Best Buy is used to conducting

business under. There are also many significant uncertainties of operating globally, including the

costs and difficulties of managing international operations, foreign operations, foreign

currencies, complex laws, contractual obligations and intellectual property rights.

Our third strategy we are evaluating is the option of horizontal integration by continuing

to purchase domestic competitors. This will benefit Best Buy by eliminating some of the

competition resulting in customers redirecting their business to Best Buy. We predict that these

acquisitions will positively affect our overall financial performance in the market. Though this is

a positive growth strategy, the acquisitions may bring about many downfalls such as the result in

difficulties in assimilating acquired companies which may result in the diversion of our capital

and our management’s attention from other business issues and opportunities. It is always a

possibility that we may not be able to successfully integrate companies that are acquired,

including their financial systems, distribution, operations and general procedures. If we fail to

integrate operating companies successfully, Best Buy could suffer materially.


36

Long-Term Objectives:

1. Expand internationally into China.

Over the next three years we will build 10 stores in China. We will build three the first year,

three the second and four the fourth. By expanding slowly, we will be able to monitor

customer purchasing behavior. This will help us better target our customers. Our priority is to

keep the customer centricity program a number one focus in the opening of our new stores.

Our system processes across all areas will be consistent in every store in China. Our goal is

that this reliability on managed routines will translate into maximum efficiency and repeat

business.

2. Increase market share domestically.

With recent improved processes and increased emphasis on customer value, Best Buy can

once again pursue an aggressive strategy. Our goal is to increase our current 20 percent

market share 5 percent to 25 percent overall within 5 years.

3. Expand in niche markets.

Through the expansion of stores with Magnolia displays we can cater to the high-end

customers. We currently have 20 Magnolia Audio Video stores separate from the Best Buy

location. We plan to increase this number to 35 over the next 5 years. We also plan to

increase our current number of in-store displays from 180 stores to 500 in the next 5 years.

Another key niche market we plan to expand in is the Geek Squad stores that specialize in

technical support service. Currently there are 12 in the U.S. We plan to increase this number

to 20, including 2 in Canada.


37

4. Continue to increase customer service with customer centric stores.

Fewer items with more technologically savvy sales support and solution-oriented offerings

will translate into repeat business. This theme is currently in place in about 40 percent of our

stores. We want to eventually integrate the customer-centricity program into all of our stores

globally.

5. Increase market share in Canada.

After the purchase of Canadian discount and warehouse store Future Shop in 2001, Best Buy

already had the infrastructure in place to enter a foreign market. In four years Best Buy went

from 0 percent to 10 percent. We can confidently expand aggressively and expect to gain

another 5 percent within 5 years.

6. Adopt acquired brands.

Best Buy currently has five private labels which include Insignia, Dynex, Init, Geek Squad,

and Rocketfish. One thing all five of these brands have in common is that they are all high-

end brands. In the minds of the customer the value is worth the extra cost. We want to

continue with this trend and continue to market any acquired brands.


38

Past Strategies:In the past, Best Buy has used a dual branding strategy to help attract more customers

with a choice of store. This strategy has helped them target different customers while giving

them more flexibility to learn and adapt by using two approaches. The key to this strategy is to

make sure that the two organizational cultures are similar enough that they can work together.

Dual branding has helped retain the Future Shop brand and it has also utilized existing

commitments to store sites.

There has been a shift from a product-centric to a customer-centric model within the

company. This customer-segmented model is intended to target 5 specific customer segments:

Affluent professionals seeking the best technology experience, younger males wanting cutting

edge technology and entertainment, fathers looking for technology to improve their lifestyle,

mothers who seek technology to enrich their children’s lives, and small-business people using

technology to improve their bottom lines. These segments represent considerable new growth or

include some of the company’s best current customers

Best Buy strives to be an effective enterprise through thorough preparation. They spend

more on employee training than any other retailer. Associates are receiving detailed customer-

centric training in order to prepare them for any problems or questions that might occur. There is

also decentralization of decision making to allow employees closest to the customer to make

informed decisions

Best Buy has made it a point to be known for offering a variety of entertainment choices.

They have partnered with Netfilx by co-branding a DVD rental service which only furthers their


39

position as a full service movie destination. In addition to Netflix, they have partnered with XM

satellite radio.

Best Strategy Analysis of Costs, Benefits, and Implementation:

After carefully analyzing the three alternatives developed in the Quantitative Strategic Planning

Matrix (QSPM), we feel that there is one strategy that is better than all the rest. We feel that the

best strategy for Best Buy is to improve sales and profit by expanding its international segment

into China. By doing this Best Buy would become the first American electronics retailer to move

into China. China’s electronics market, which is expected to exceed $300 billion usd in 2006, is

nearly twice the size of the US electronics market, only expected to grow to about $150 billion

usd in 2006. Because of the size of the Chinese electronics market, and because the electronics

market in China is growing at a rate of approximately eight percent yearly, we feel that now is

the time for the largest electronics retailer in the US to penetrate the Chinese market. Below are

some factors that are keys to the success of this strategy.

Key Aspects of Chinese Expansion

Activity ResultAverage leasing cost in metropolitan areas

$24 million yuan($3 million US dollars)

Average purchase cost of buildings in metropolitan area

$250 million yuan($32.5 million US dollars)

Expected electronics sales in China for 2006

$300 billion usd

Expected electronics sales in U.S. for 2006

$150 billion usd

Debt-to-capitalization ratio 10%Total available capital(minus Investing and Financing activities)

Approx. $270 million usd


40

As you can see by the above chart, it is very expensive to lease, or purchase, commercial

real estate in the major metropolitan areas of China, which include Shanghai, Beijing, and Hong

Kong. So, it is our recommendation that Best Buy lease property over the short-term, maybe with

an option in the lease contract to purchase the leased space within a specified number of years.

Another factor that is an equally important factor in this strategy is that Best Buy should

be able to enter the Chinese market as Best Buy. After much research on Chinese copyright laws

and the current organizations in China, our team has no reason to believe that Best Buy will have

to deal with complex procedures to secure its brand in China. In addition, as you can see from

the above chart, Best Buy has a debt-to-capitalization ratio of only ten percent. This means that

only approximately ten percent of Best Buy’s operations are financed, the rest of which are paid

in full. In addition, Best Buy has over $270 million usd in available capital, which means that

they have the funds available to invest heavily in this strategy.

Since Best Buy has never operated stores in China, it would be impossible for us to

predict the demand for our products in China. However, Best Buy’s innovative customer

centricity store model, coupled with its top-notch sales and service teams and a booming Chinese

electronics market should yield huge revenues for the company, which in turn should yield

enormous profits. We must also not forget that Best Buy currently operates three global sourcing

offices in China already, and it currently sells many Chinese brands in its stores. Because Best

Buy already directly deals with many Chinese companies, the transition into China should only

be that much easier.

After discussing many major advantages of this strategy, we must talk about inventory.

Our team recommends that Best Buy avoid building costly warehouses in China. Instead we


41

propose that Best Buy utilize a Just-In-Time inventory strategy in China. Because of the

uncertainty of success in China, and the cost of building huge warehouses in China, we feel that

that a Just-In-Time inventory system is better suited for Best Buy China’s operations. After

reviewing all of the knowledge of Best Buy as it relates to the Chinese market, our team feels

that this strategy is the most feasible, and we are optimistic that it will yield tremendous profits

for Best Buy.

We have included a high level overview of the costs of this strategy below.

Cost of ImplementationCost Activity

Year 1(3 stores)

Year 2 (3 stores)

Year 3 (4 stores)

Total Cost

Leasing Costs $9 million $18 million $30 million $57 millionCosts of Decorating and Initial Inventory

$12 million $12 million $16 million $40 million

Estimated Corporate taxes

33% 33% 33% 33%

Estimated payroll $10 million $20 million $33 million $63 million Total Cost of Opening 10 stores in China

$160 million + 33% tax based on total revenue

As you can see, our strategy proposes the opening ten new Best Buy stores in China over the

course of the next three years. The total strategy implementation is expected to incur sunk costs

of approximately $160 million usd over the next three years. We would also like to note that the

corporate tax in China is less than that of the US. Detailed income statements will be included

later in this proposal, but these are the most important costs associated with the implementation

of this strategy.


42

As it turns out, Best Buy opened its first branded store in Shanghai in January of 2007.

However, as it is relatively new we could find no exact figures describing the actual revenues

that Best Buy’s first store in China is generating. In addition, Best Buy chose to purchase retail

space in an existing building for a price that was over $30 million usd. This was different from

our proposed strategy, which suggests that Best Buy leases commercial real estate instead of

purchasing it. It is also of interest to note that Best Buy recently purchased Jiangsu Five Star

Appliance Co., Ltd, which happens to be China’s fourth largest appliance and consumer

electronics company. Best Buy gained 131 stores and a substantial market share in the Chinese

electronics software industry as a result of the acquisition. However, our strategy is primarily

driven to push the market penetration and expansion of Best Buy branded stores in China. But, I

think it is quite interesting that we selected this strategy before knowing that Best Buy had

already moved into China. Because of this, it is evident that all of our company analysis paid off,

and it is clear that the strategy pertaining to Chinese market penetration is clearly the best long-

term strategy for Best Buy at this current point in time.

The implementation of this strategy should be fairly simple. We have already determined

that Best Buy will be able to enter the Chinese market with its own brand. Because Best Buy

already maintains global sourcing offices in China, Best Buy China already has key Chinese

contacts. The implementation of this strategy will begin with the leasing of buildings in key areas

of China’s metropolitan cities. Designers hired by Best Buy will then design and convert the

layout of the buildings according to Best Buy standards. The buildings will then be stocked with

inventory and opened for business. We feel that Best Buy China should open ten new stores over

the next three years. Our strategy calls for Best Buy China to open three stores in year one, three


43

stores in year two, and four stores in year three. A detailed timetable for this strategy has been

included at the end of this section.

The following are forecasted highlights of the financial measures we hope this strategy

will achieve over the next three years.

Forecasted Financial HighlightsFinancial Measure Year 1 Year 2 Year 3

Revenue $150 million $312 million $540 millionProfit Margin 25% 27% 28%

Total available capital $15 million $50 million$110.48 million

Total operating expenses

$112.5 million

$224.64 million

$388.8 million

Total Profit$37.5 million

$87.36 million

$151.2 million

As you can see, we have high expectations for Best Buy China. We expect this new

strategy to yield revenues of $540 million usd, including profits of $151 million usd, by the end

of year three. As noted earlier, we have included detailed income statements for each year. These

incomes statements appear on the next five pages, followed by a detailed timetable describing

the implementation of the Best Buy China strategy.


44

Income Statements (Next 3 Years):

Best Buy, IncStatement of Income

Forecasted for China Strategy (2007)

Sales Revenue $155,000,000.00 Less: Sales Returns and Allowances ($5,000,000.00)Net Sales $150,000,000.00 Cost of Goods Sold ($58,000,000.00)Gross Profit $92,000,000.00 Operating Expenses: Depreciation Expense ($4,000,000.00) Leasing Expense ($9,000,000.00) Utilities Expense ($1,000,000.00) Insurance Expense-General ($2,000,000.00)Administrative Expenses: Bad Debt Expense ($3,000,000.00) Office Expense ($2,000,000.00) Office and Admin Salaries ($2,000,000.00) Payroll Tax Expense-Office and Administration ($500,000.00)Selling Expenses: Sales Salaries and Commission ($6,000,000.00) Payroll Tax Expense-Selling ($1,500,000.00) Insurance Expense-Selling ($1,000,000.00) Advertising Expense ($3,000,000.00) Total Operating Expenses ($35,000,000.00)Operating Income(Expense) $57,000,000.00 Other Income(Expense) Interest Expense ($1,000,000.00) Total other income(expense),net ($1,000,000.00)Income Before Income Taxes $56,000,000.00 Income Tax Expense ($18,480,000.00)Net Income(loss) $37,520,000.00


45



Sales Revenue $312,000,000.00 Less: Sales Returns and Allowances ($5,500,000.00)Net Sales $306,500,000.00 Cost of Goods Sold ($120,640,000.00)Gross Profit $185,860,000.00 Operating Expenses: Depreciation Expense ($6,000,000.00) Leasing Expense ($15,000,000.00) Utilities Expense ($2,080,000.00) Insurance Expense-General ($3,000,000.00)Administrative Expenses: Bad Debt Expense ($3,050,000.00) Office Expense ($3,000,000.00) Office and Admin Salaries ($3,800,000.00) Payroll Tax Expense-Office and Administration ($865,000.00)Selling Expenses: Sales Salaries and Commission ($9,000,000.00) Payroll Tax Expense-Selling ($2,500,000.00) Insurance Expense-Selling ($1,700,000.00) Advertising Expense ($4,465,000.00) Total Operating Expenses ($54,460,000.00)Operating Income(Expense) $131,400,000.00 Other Income(Expense) Interest Expense ($1,000,000.00) Total other income(expense),net ($1,000,000.00)Income Before Income Taxes $130,400,000.00 Income Tax Expense ($43,032,000.00)Net Income(loss) $87,368,000.00


46



Sales Revenue $540,000,000.00 Less: Sales Returns and Allowances ($6,000,000.00)Net Sales $534,000,000.00 Cost of Goods Sold ($220,827,840.00)Gross Profit $313,172,160.00 Operating Expenses: Depreciation Expense ($10,000,000.00) Leasing Expense ($30,000,000.00) Utilities Expense ($3,500,000.00) Insurance Expense-General ($3,800,000.00)Administrative Expenses: Bad Debt Expense ($3,250,000.00) Office Expense ($3,750,000.00) Office and Admin Salaries ($5,000,000.00) Payroll Tax Expense-Office and Administration ($1,250,000.00)Selling Expenses: Sales Salaries and Commission ($12,000,000.00) Payroll Tax Expense-Selling ($3,500,000.00) Insurance Expense-Selling ($3,000,000.00) Advertising Expense ($7,400,000.00) Total Operating Expenses ($86,450,000.00)Operating Income(Expense) $226,722,160.00 Other Income(Expense) Interest Expense ($1,000,000.00) Total other income(expense),net ($1,000,000.00)Income Before Income Taxes $225,722,160.00 Income Tax Expense ($74,488,312.80)Net Income(loss) $151,233,847.20


47

Balance Sheet (Next 3 Years):

Best Buy, Inc.Consolidated Balance Sheet

Forecasted for China Strategy($ in millions)

Assets 2007 2008 2009Current Assets Cash and cash equivalents 152 264 298 Short-term investments 73 84 92 Receivables 30 36 56 Merchandise inventories 54 58 63 Other current assets 12 15 20 Total current assets 321 457 529 Property and Equipment Land and buildings 30 44 46 Leasehold improvements 15 21 21 Fixtures and equipment 10 16 24 Property under master and capital lease 9 17 25

64 98 116 Less accumulated depreciation (12) (16) (18) Net Property and equipment 52 82 98 Goodwill 15 22 25 Trade name 4 5 14 Long-term investments 16 21 24 Other Assets 56 62 73 Total Assets 464 649 763

Liabilities and Shareholders' EquityCurrent Liabilities Accounts payable 187 213 187 Unredeemed gift card liabilities 60 73 36 Accrued compensation and related expenses 23 32 29 Accrued liabilities 40 54 44 Accrued income taxes 22 43 74 Current portion of long-term debt 25 29 26 Total Current liabilities 357 444 396 Long-Term Liabilities 28 34 38 Long-Term Debt 16 19 21 Shareholder's Equity Additional paid-in capital 25 27 31 Retained earnings 38 125 277 Total shareholder's equity 63 152 308 Total Liabilities and Shareholders' Equity 464 649 763


48

Statement of Cash Flows (Next 3 Years):

Best Buy, IncStatement of Cash Flows

Forecasted for China Strategy

2007 2008 2009Operating Activities

Net Income before dividends $ 37,520,000 $ 87,368,000 $152,000,000

Depreciation Expense $ 4,000,000 $ 6,000,000 $ 10,000,000

Increase in Receivables $(30,000,000) $(6,000,000)

$(20,000,000)

Increase in Merchandise inventories $(54,000,000) $(4,000,000) $ (5,000,000)

Increase in Other current assets $(12,000,000) $(3,000,000) $ (5,000,000)

Increase in Accounts payable $187,000,000 $ 26,000,000

$(26,000,000)

Increase in Unredeemed gift card liabilities $ 60,000,000 $ 13,000,000

$(37,000,000)

Increase in Accrued compensation $ 23,000,000 $ 9,000,000 $ (3,000,000)

Increase in Accrued liabilities $ 40,000,000 $ 14,000,000 $(10,000,000)

Increase in Accrued income taxes $ 22,000,000 $ 21,000,000 $ 31,000,000 Investing Activities

Short-term investments $(73,000,000) $ 11,000,000 $ (8,000,000)

Net Fixed Assets $(52,000,000)

$(30,000,000)

$(16,000,000)

Financing Activities Increase in notes payable $ 25,000,000 $ 4,000,000 $ (3,000,000)

Paid in Capital $(25,000,000)

$(37,000,000)

$(25,000,000)

$152,520,000

$111,368,000 $ 35,000,000

Cash at beginning of year $ - $152,520,000

$263,888,000

Cash at end of year $152,520,000

$263,888,000

$298,888,000


49

Detailed Timetable:


50

Specific Annual Objectives and Policies:

The following objectives are those that we aim to implement before the years end. All of the

objectives are aimed towards expansion of Best Buy Asia and will be reviewed at the end of the

time period.

Open a minimum of three new stores in China Develop logistical efficiency between the U.S and China Obtain 10% market share of the Chinese electronic goods retailers market Build customer loyalty in China with superior customer service – incorporating the

customer centricity model Strengthen relationships with manufacturers that are seeking to gain broader distribution

in China and North America


51

Procedures for Strategy Evaluation and Review:

1. Monitor and control forecasted results with actual results to ensure accuracy and continuous improvement.

2. Ensure that every customer will experience the same satisfaction no matter which store they go to.

3. Examine annual objectives of Best Buy to keep the company on track.4. Take corrective actions to ensure performance of the projected plans.

Strategy evaluations and reviews should be done quarterly or annually depending

on the information that is needed. Monitoring forecasted results should be done quarterly

where the other three can be reviewed on annual bases with customer surveys being the

best strategy for reviewing store satisfactions. Warning signals that should be watched for

would be lagging forecast results within the industry as well as poor revenues when

reviewing annual and quarterly financial statements.


52

Contingency Plan:

After careful analysis of our primary long-term strategy, which includes market penetration and

growth in the Chinese electronics market, we have developed a rather simple contingency plan.

We call our contingency plan the “3 S’s of the Chinese market strategy.”

Sell

The first S in the contingency plan represents “sell.” If for unforeseen reasons Best Buy is not

able to effectively penetrate and grow within the Chinese market, we simply sell as many of our

assets, for as much as we can get for them. Although we may take losses in the short-run for

exiting the Chinese market, it will not affect our business as an entire entity.

Salvage

The second S in the contingency plan represents “salvage.” After we sell our assets from Best

Buy China, we try to salvage as much as we can. This includes both our brand name and our

money.

Safety

The third S in the contingency plan represents “safety.” If unfortunate circumstances lead us to

abandon our operations in China, sell our assets, and salvage what we can from Best Buy China,

we will retreat to the safety of the American market and refocus our efforts on the American

electronics market. We are the industry leader in America, and no matter what the results of our

Chinese strategy, we will continually try to maintain this position in the U.S.


final project

Documents

best buy stores

best buy competitors

canadian best buy store

best buys vision

best buys mission

best buys history

best product possible

best buys corporate