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Kwantlen Polytechnic University *

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Marketing

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Feb 20, 2024

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docx

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Analysis The current situation at Best Buy is a result of several interrelated factors. Firstly, the rise of online retailers, especially Amazon, has significantly impacted Best Buy's traditional business model. Online competitors offer greater convenience, lower prices, and a vast product selection, attracting customers away from physical stores (Exhibit 4). Secondly, the consumer electronics industry's notoriously slim profit margins have put pressure on Best Buy's profitability. Best Buy incurs a very low gross profit margin of 24.8% (Exhibit 5) and this leads to a negative net profit margin of -2.43% (Exhibit 5). The company faces challenges in maintaining healthy margins while offering competitive prices to customers. Thirdly, there has been a significant shift in consumer preferences towards mobile devices and away from traditional consumer electronics, such as televisions. This change in demand has required Best Buy to adapt its product mix and offerings to cater to evolving customer needs. Fourthly, Best Buy's international expansion has faced hurdles due to difficulties in understanding and adapting to diverse markets. The struggles in China and Europe (Exhibit 1) illustrate the need for a deeper understanding of international consumers and competition. Consequently, Best Buy's slower response to changing market dynamics and an inability to effectively differentiate itself from competitors have contributed to its current decline. To address these challenges, the critical issues identified must be tackled with strategic and focused solutions. By doing so, Best Buy can regain its position as a profitable and thriving consumer electronics retailer in the market. Critical Issues  Best Buy faces stiff competition from online retailers like Amazon, which offer convenience and often lower prices. Best Buy needs to find ways to compete effectively in the online space and offer unique value to customers.  The shift in consumer preferences towards mobile devices and away from traditional consumer electronics like televisions impacts Best Buy's product mix. The company needs to adapt its offerings to cater to changing consumer demands.  Best Buy faces challenges in its international expansion efforts, as seen in the struggles in China and Europe. Understanding and adapting to diverse international markets is crucial for success. Definition of Success Best Buy needs to have positive net income by the next fiscal year since they are suffering a loss of $1.2 billion in 2012. This will allow Best Buy to be able to compete with competitors such as Amazon which has increased sales worldwide over the same period. Decision Criteria  Net Profit should increase by $1.2 billion in the next fiscal year to have at least a positive net income.  Best Buy should aim to open an additional of 10 stores internationally in the next fiscal year.  Best Buy should strengthen its online presence in the next fiscal year so that Best Buy revenues from online customers are 10% of the overall revenues.

Options Analysis Option 1: Strengthen International Expansion and Presence Best Buy will focus on an aggressive international expansion strategy, targeting the opening of 10 new stores in strategic international markets within the next fiscal year. This will involve extensive market research, selecting suitable locations, and adapting product offerings to meet local demands. The cost will be market research expenses, store setup costs, logistics, and hiring local staff. This option directly addresses the criteria of opening 10 additional international stores and increasing net profit by $1.2 billion 1 . Furthermore, this can help increase revenue streams and reduce reliance on the domestic market. The margin of safety is 40% because it can easily fail if stores overseas fail to operate. The failure of this option has high risks as there are costs associated as mentioned above and there are many uncertainties in entering new markets such as regulatory challenges, different customer behaviour, and cultural differences. Option 2: Integrated Omnichannel Strategy Best Buy will adopt an integrated omnichannel approach that combines both physical and online retail to provide a seamless shopping experience for customers. This strategy involves leveraging the strengths of both channels to drive sales and improve customer satisfaction. The costs associated with this option are technology integration, employee training, marketing efforts, and refining the supply chain. This option will increase revenues from both online and offline stores by $20 million per month and achieve the 10% online revenue target. The critical issue tackled with this option is Best Buy can cater to the preferences of different customer segments and stay competitive in the retail industry. The margin of safety is 50% as Best Buy has control over its online sales. It is important to note that to be successful in this option, Best Buy must be effective in the implementation and seamless integration of various channels. Failure of this option is very minor as there is not much cost invested in this option. Option 3: Combined Online and International Expansion Strategy Best Buy will pursue a combined strategy by enhancing its online presence and simultaneously expanding internationally. This approach will involve investments in online platform upgrades, marketing, logistics, and store setup in target international markets. The costs of these options are website and app upgrades, marketing expenses, logistics infrastructure, market research, store setup costs, and hiring and training staff. This option achieved all the decision criteria of opening stores overseas, increasing net income, and strengthening online shopping revenues to 10% of overall revenues. Since this is a combined strategy, Best Buy needs to manage simultaneous investments, potential challenges in entering new markets, and increased competition. However, the benefits include diversification of revenue sources, potential cost savings, and increased market reach. The margin of safety is 60% as Best Buy has control over its online sales and relies on overseas stores if 1

strong research is done before opening stores overseas. The risk of this option is high since this is a combined strategy, costs will be high, and the reputation of Best Buy internationally may not be good. Recommendation The recommended option is option 3: combined online and international expansion strategy. The reason is that it covers all the decision criteria, and it combines two crucial elements (online presence and international expansion) which are the problems needed to be tackled by Best Buy. The online enhancements can lead to increased online sales, cost savings from improved operational efficiencies, and expanded customer reach. Simultaneously, entering new international markets can unlock fresh revenue streams, market share growth, and potential economies of scale. By leveraging both approaches, Best Buy can generate synergistic effects that lead to a more substantial increase in net profit, well beyond the $1.2 billion target. This option requires an online platform upgrade, market research for international expansion, and strategic partnerships. Best Buy should invest in upgrading its website and mobile app to provide a seamless and personalized shopping experience for online customers. This includes optimizing user interfaces, implementing secure payment gateways, and enhancing product recommendations based on customer preferences. For international expansion, Best Buy needs to perform in-depth market research on international markets such as purchasing power, regulations, and competition. It is also crucial that Best Buy collaborates with local partners in international markets to support a smooth international market entry.

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EXHIBITS Exhibit 1: SWOT Analysis Strengths: 1. Established Brand: Best Buy has a well-known and recognized brand globally, providing a strong competitive advantage. 2. Extensive Retail Network: The company operates a vast network of physical stores, allowing it to reach a large customer base. 3. Customer Centricity: Best Buy's focus on customer needs and preferences has resulted in enhanced customer loyalty and satisfaction. 4. Geek Squad: The Geek Squad service has created a competitive edge by offering technical support and installation services, enhancing the customer experience. 5. Diversified Product Portfolio: Best Buy offers a wide range of consumer electronics and home appliances, catering to various customer segments. Weaknesses: 1. Declining Market Share: Best Buy has faced increasing competition, resulting in a loss of market share to online retailers and discounters. 2. Low-Profit Margins: The consumer electronics industry's low-profit margins pose a challenge for Best Buy to maintain profitability. 3. International Struggles: The company has faced difficulties in expanding and adapting to international markets, impacting its global growth potential. 4. Over-reliance on Physical Stores: The shift towards online shopping has put pressure on Best Buy's traditional retail model. 5. Limited Differentiation: Best Buy faces difficulty in differentiating its offerings from competitors, leading to increased price competition. Opportunities: 1. E-commerce Growth: Expanding the online sales platform can tap into the growing trend of online shopping and reach a broader customer base. 2. Mobile Technology: Capitalizing on the increasing demand for mobile devices and accessories can drive sales and profits. 3. Smart Home Products: Embracing the smart home trend and offering related products and services can attract tech-savvy customers. 4. International Expansion: Identifying and addressing the unique needs of international markets can lead to successful expansion. 5. Strategic Partnerships: Collaborating with key technology providers and content creators can enhance the product mix and customer offerings. Threats:

1. Intense Competition: Best Buy faces fierce competition from online retailers, discount stores, and other consumer electronics chains. 2. Technological Advancements: Rapid changes in technology may make certain products obsolete, impacting sales and profitability. 3. Economic Uncertainty: Economic downturns can affect consumer spending on discretionary items like consumer electronics. 4. Price Wars: Engaging in price wars with competitors can negatively impact profit margins and erode market share. 5. Changing Consumer Behavior: Shifts in consumer preferences towards online shopping and digital content consumption can challenge Best Buy's traditional business model. Exhibit 2: Marketing Mix (4Ps) Product: Best Buy offers a wide range of consumer electronics, home appliances, mobile devices, and related accessories. It also provides services like the Geek Squad for technical support, installation, and repairs. Price: Best Buy adopts competitive pricing strategies to attract customers and compete with online retailers. It offers price matching guarantees to match competitors' prices and retain customers. Promotion: Best Buy invests in various promotional activities, including advertising, social media marketing, and email campaigns. It also runs seasonal sales and promotional events to drive customer traffic. Place: Best Buy operates a vast retail network with physical stores across the USA and internationally. It also maintains an e-commerce platform to cater to online shoppers. Exhibit 3: PEST Analysis Political Factors: Changes in government policies, trade regulations, and tax laws can impact Best Buy's international operations and supply chain. Economic Factors: Economic fluctuations, inflation rates, and consumer spending patterns can affect Best Buy's sales and profitability. Social Factors: Shifting consumer preferences, demographics, and cultural trends may influence Best Buy's product offerings and marketing strategies. Technological Factors: Rapid technological advancements in consumer electronics and e-commerce can present opportunities and challenges for Best Buy. Exhibit 4: Porter's Five Forces Analysis

Threat of New Entrants: The consumer electronics retail industry has a moderate barrier to entry due to capital requirements and the need for an extensive distribution network. However, online retailers pose a threat as they have lower overhead costs. Bargaining Power of Suppliers: Best Buy's bargaining power with suppliers is relatively high due to its large-scale purchasing power. However, exclusive supplier agreements may limit flexibility. Bargaining Power of Buyers: Customers have a moderate level of bargaining power due to the availability of alternative retail options and the ease of comparing prices online. Threat of Substitutes: Best Buy faces a high threat of substitutes, especially from online retailers and discount stores offering similar products at competitive prices. Competitive Rivalry: The consumer electronics retail industry is highly competitive, with numerous players vying for market share. Best Buy faces intense competition from online retailers like Amazon and brick-and-mortar competitors like Walmart and Target. Exhibit 5: Financial Ratios Gross Profit Margin: Gross Profit = 24.8% of Total Sales = 0.248 x $50,705 million = $12,574.24 million Gross Profit Margin = (Gross Profit / Total Sales) x 100 Gross Profit Margin = ($12,574.24 million / $50,705 million) x 100 ≈ 24.8% Net Profit Margin: Net Income = -$1,231 million Net Profit Margin = (Net Income / Total Sales) x 100 Net Profit Margin = (-$1,231 million / $50,705 million) x 100 ≈ -2.43% Solvency Ratio: Total Equity = $4,366 million Total Liability = $10,540 million Solvency Ratio = Total Equity / Total Liability Solvency Ratio = $4,366 million / $10,540 million = 0.414 Quick Ratio: Current Assets = $10,297 million Current Liabilities = $8,855 million

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Quick Ratio = (Current Assets - Current Liabilities) / Current Liabilities Quick Ratio = ($10,297 million - $8,855 million) / $8,855 million ≈ 0.163 or 16.3% Exhibit 6: Option Investment Analysis – For 12 Months Option 1 – Strengthen International Expansion and Presence Option 2: Integrated Omnichannel Strategy Option 3: Combined Online and International Expansion Strategy Market Research: $10,000 Open 10 New Stores Overseas: $10,000,000 Marketing: $25,000 Technology Integration: $1,000,000,000 Employee Training: $500,000,000 Marketing: $25,000 Technology Integration: $1,000,000 Marketing: $25,000 Store Setup: $10,0000,000 Total Investment: $10,035,0000 Total Investment: $1,525,0000 Total Investment: $11,025,000 From this table, Option 2 has the least investment and it is most cost-effective. Exhibit 7: Option Analysis Decision Matrix Option 1 – Strengthen International Expansion and Presence Option 2: Integrated Omnichannel Strategy Option 3: Combined Online and International Expansion Strategy Cost of Option $10,035,000 $1,525,000 $11,025,000 Forecast of Profit $1.2 billion $240 million $1.5 billion DC1: Increase Net Profit by $1.2 billion Yes, this option achieves DC1. No, it does not achieve DC1. The profit is only $240 million. Yes, it exceed DC1 due to income from opening 10 stores overseas and online sales. DC2: Open Additional 10 Stores Yes, this option opens 10 stores. No, this option only establish online shopping. Yes, this option opens 10 stores. DC3: Increase Online revenues by 10% No, this option only opens 10 stores and does not satisfy the increase in 10% online sales. Yes, this option increases 10% of online sales. Yes, this option increases 10% of online sales. Risks Uncertainties in entering new markets such as Needs to compete with status quo such as Amazon. Uncertainties in new markets and compete with

regulatory challenges, different customer behavior, and cultural differences. online competitors. Benefits Increased sales and reduce reliance on domestic market. Increase sales and diversify revenue streams. Increase sales, diversify revenue streams, and overseas presence. Failure Impact Failure of this option will be major as investment in opening stores has been made. Failure of this option will be moderate as the cost invested is not as much compare to other options. Failure of this option will be major because lots of investments in opening stores overseas and technology integration. Margin of Safety Margin of safety is 40% as this option can easily fail if stores overseas fail to make profit. Margin of safety is 50% as the shop can control their online sales. Margin of safety is 60% as the shop can control their online sales and they can somewhat rely on overseas stores since marketing and research has been done.

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