Introduction
Best Buy is the largest retail electronics store in the US. It operates in the large-format consumer electronics segment. The company, which was established in 1966, operates through two segments: domestic and international segments. The domestic segment account’s for a bulk of the company’s revenue. The company places its operations into six categories; namely, consumer electronics, appliances, entertainment, home office, services, and other non-core items such as food and beverages.
Since its inception, Best Buy continued to expand its operations and overall success. Throughout the twentieth century, the company was a major force in the US retail industry. However, the greatest success for the company came after 2000. The company expanded its market reach through international acquisitions and ventures. Although not all of these ventures were successful, Best Buy managed to establish a strong international presence. Nevertheless, today, Best Buy faces a serious threat from online retailers such as Walmart and Apple. These competitors are able to provide lower prices for their electronic products because they do not have to maintain brick-and-mortar structures. Moreover, they do not have to pay sales tax. The aim of this paper is to conduct analysis of the industry, Best Buy’s competitors, and its value chain. On the basis of this analysis, the paper undertakes an evaluation of the strategy that Best Buy has followed.
Analysis of the industry
Threat of new entrants
The threat of new entrants is very high. Best Buy is under a threat of entry of new online retailers that do not need to build and maintain brick-and-mortar premises. At the same time, these emerging retailers do not have to pay sales tax, meaning that they are able to sell their products at more competitive prices. It is relatively easy for a new online retailer to emerge largely because of the new capabilities that come with recent technological advancements.
An entry of new entrants is likely to put Best Buy’s business model at risk. The company is likely to face the challenge of a major reduction in profit margins. Worse still, markets coups have proven to be a major threat given Amazon’s recent strategy that enables its customers to obtain bar codes from products stocked in other retail stores and using them to search and purchase products in its online store at lower prices.
Bargaining power of suppliers
Companies operating in this industry stock a wide variety of products. This compels them to maintain business relationships with hundreds and in some cases even thousands of suppliers. However, for the sake of reliability and continuity, many retailers (including Best Buy) are compelled to obtain more than fifty percent of their products from a handful of suppliers. In the case of Best Buy, these suppliers include Samsung, Sony, HP, Apple, and Toshiba. These are major suppliers and it is highly unlikely that a disruption in the supply of their products will occur. However, these major suppliers are increasingly letting online distributors and warehouse clubs sell their products, thereby denying brick-and-mortar retailers the exclusive access that they have continued to enjoy for decades. This phenomenon increases opportunities for the suppliers to increase their bargaining power.
Bargaining power of buyers
The bargaining power in the retail industry is very low. In most cases, the prices of electronic products are set by large suppliers, such that it becomes impossible for retailers to bow to the demands of buyers without jeopardizing their profit margins. The best that the buyers can do to get a better deal is to choose between brick-and-mortar store and an online store. Online stores often provide lower retail prices compared to other business formats. However, even in the online environment, the buyer’s bargaining power is greatly curtailed.
Threat of substitute products
In the retail industry, new products are being released into the market all the time. Retailers have to stay abreast of changes in technology in order to ensure that they always stock the products that customers want. In today’s globalized world, tech-savvy customers are always on the lookout for the most sophisticated products. Retailers are compelled to increase their offerings and to extend the scope of their businesses by providing consultation services. The objective is to ensure that sellers give customers what they want instead of just imposing new products on them.
The consumer electronics industry is especially highly vulnerable to the entry of substitute products. In many cases, these products are not only technologically advanced, they also offered at lower prices. This new trend continues to affect not just the products being provided but also related services. For example, the proliferation of the smartphone and tablet computer market has led to a consolidation of numerous functions including computing, phone-calling, games, camera functions, and GPS navigation.
As technology continues to change, the retail and consumer electronics market is being supplied with an endless supply of new substitute products. Therefore, retailers operate in a constant risk of getting stuck with unsold stock that has suddenly become obsolete or unpopular. An important option for such retailers is to channel these newly obsolete products to secondary markets where new technological advancements are yet to be embraced. Moreover, firms in the industry are able to engage in backward integration through the development of their own “house brand†products that carry lower financial risk.
Rivalry among competing firms
Rivalry among competing firms in the consumer electronics industry at the retail level is high. Best Buy is unhappy with Amazon’s recent “market coup†in which Amazon customers gain access to bar codes of products stocked by Best Buy for reference purposes only. Such customers are aware that Best Buy offers most of its electronic items at a higher price compared to Amazon. Therefore, once they gain access to the product details of a product at Best Buy, they cross over to the Amazon website to search for the same product and to purchase it at a lower price.
In the traditional retail model, Best Buy’s traditional rivals, Circuit City and CompUSA, have already collapsed. However, the exit of these rivals has been replaced by the resurgence of rivalry with online retailers. In the US, the rivalry has taken a political dimension. This is because of the existence of US laws that subject products sold through brick-and-mortar stores to sales tax. Retailers with a physical presence in the US have repeatedly complained that both their physical and online sales are subjected to sales tax. They are opposed to the practice of excluding online retailers from sales tax even after they have already established physical “distribution centersâ€. According to brick-and-mortar retailers, the distribution centers are not in any way different from the old-model retail centers, and they should therefore be subjected to sales tax as well.
Analysis of competitors
The retail industry is always undergoing major changes today. Best Buy’s competitors keep changing in terms of strategies, competitive advantages, target segments, and mode of operation, thereby creating a state of flux. Weak competitors are increasingly being eliminated from the industry since the emergence of the internet era. Best Buy is threatened by obsolescence and the only way out is to adopt online business solutions. Similarly, mass merchandisers have been a major source of competition for Best Buy. Two main companies that used to pose serious competition to Best Buy, CompUSA and Circuit City, were eliminated from the industry primarily because of failure to adopt online business systems.
In the absence of traditional competitors, Best Buy is being pitted against new competitors who have adopted unfamiliar business models. Most of these competitors use online, mass market, and warehouse club approaches. It is extremely difficult for a brick-and-mortar electronics store like Best Buy to compete in these unfamiliar platforms.
One of the new competitors is Amazon.com, an online book-selling company that was established in 1990. The company has since diversified its operations into music, video, toy, and electronics segments. Amazon has continued to grow at an alarming rate since its inception. In many instances, the growth has resulted from the company’s own business model. In other cases, it has been contributed to through acquisition of online businesses such as Netflix and Zappos.com.
Recently, Amazon launched a new smartphone app that enables consumers with smartphones to capture the bar code of a product in a store and receive price information instantly from Amazon. This new application has catapulted Amazon to a dominant position in the consumer electronics market, thereby making it one of Best Buy’s fiercest competitors. Amazon makes competition even stiffer by providing prices that are lower than those of Best Buy. This competition has compelled Best Buy to launch a new online platform by the name BestBuy.com.
Walmart is also a major competitor in the industry. It is the world’s largest retail store and has been in existence for more than 60 years. Initially, Walmart focused its retail operations on the US market. However, after the US market became saturated, the company started putting most of its energies on the international segments. Today, the international division is growing more rapidly than the domestic division. Although Walmart’s core business is not in the electronics market, it is the second largest seller of electronics after Best Buy.
Radio Shack is also a major competitor in the retail consumer electronics industry. Like Amazon, Radio Shack has benefited a lot from acquisitions, which have enabled it diversify into many areas, including furniture, consumer credit, and furniture. However, its core business remains consumer electronics. Radio Shack does not pose serious competition to Best Buy. Nevertheless, the company is in the process of rebranding itself. Today, its financial performance creates the impression that it is in the recovery process.
Costco is also one of the main competitors of Best Buy. Like Amazon and Walmart, Costco has grown by leaps and bounds by extending its operations across the US border into Canada, Europe, Asia, and Mexico. The retailer has over the years obtained an upscale image although it is still able to provide “quick-sale†electronic items at low prices. This enables the retailer to sustain high-level profitability despite gaining a smaller margin on each product.
In terms of future objectives, Best Buy’s goals seem to resemble those of Costco, Radio Shack, and Amazon. All these companies are keen to maintain a strong online presence as well as to diversify their product offerings to gain bigger margins. However, Costco and Radio Shack seem to lag behind in the adoption of online capabilities. Therefore, their priorities may diverge from those of Amazon and instead move closer towards those of Walmart. However, Best Buy, Radio Shack, and Costco seem to be reluctant to face the massive risk that come with an overhaul of the old retail model and replacement with a fully-fledged online model.
The current strategy has intensified competition among all competitors. Currently, all the competitors except Amazon have their sights on both brick-and-mortar and online sales. They are also keen to diversify into new products. Costco, Best Buy, and Radio Shack are concerned that their business models may collapse if they fail to choose a new business model that will provide a solution to the current problem of dwindling profit margins.
Best Buy endeavors to position itself as the best retailer in terms of customer service and product line. Its competitors are likely to start pursuing this goal as well. Like Best Buy, the competitors are also likely to start looking for a new industry in which to invest as a way of dealing with the increased commoditization of products that they have traditionally been selling. They are also likely to start exploiting each others’ weaknesses more aggressively. Amazon has already set the pace by attempting to exploit the brick-and-mortar capabilities of competitors by creating platforms through consumers can obtain product information from competitors’ physical stores.
It should be assumed that the retail market will be much more volatile in the future than it is today. Companies like Amazon have been working to offset the status quo since their inception. Therefore, competitors should assume that the prevailing market phenomenon may be overturned yet again, thereby creating new frontiers in the quest for competitive advantage and market dominance. The response is like to be one in which companies that are unable to set the pace in the adoption of new technologies, platforms, and trends act as fast-followers. Best Buy is likely to operate like a fast-follower while Amazon will achieve industry leadership in the retail consumer electronics segment. Competitors who fail to either act as leaders or fast-followers will most likely fail to survive in today’s competitive retail industry.
Analysis of value chain
Value chain analysis is the process through which the primary and support activities that add value to a company’s final product are identified and then analyzed with the aim of reducing costs and increasing differentiation. The main support functions include finance, human resources, and management information systems. On the other hand, the main value chain activities include supply-chain management, operations, distribution, sales and marketing, and follow-up services. Best Buy has an option of whether adopting cost advantage strategy or the differentiation advantage strategy. In the cost advantage, the aim is to reduce costs while in the differentiation advantage strategy, the aim is to come up with superior products and services. The best option for the company is the differentiation advantage strategy.
The choice of the differentiation advantage strategy is based on the realization that for many of the products that the company stocks, superior substitutes are available. Examples include electronic and media games. These products should be eliminated. In their place, the company should focus only on consumer electronics as well as supporting peripherals and components that have a leading edge in the market. This will enable Best Buy to make the best use of its strategic assets in a differentiation process that sets all the company’s offerings apart from their core competitors. This will necessitate efforts to leverage all internal systems, internet capabilities, as well as physical locations. The resulting integration process will enable the company create value as well as regain its leadership position in the industry in terms of customer service.