Best Buy historically competed with Circuit City and CompUSA in the large format consumer electronics retail segment and with both competitors out-of-the-picture, one would expect Best Buy to be in an enviable position now. Yet the reality could not have been more different as Best Buy is still struggling because the nature of the industry and competition has changed tremendously. Best Buy’s closest competitors now do not include large electronic specialty retailers but instead e-businesses and all-purpose retail giants such as Wal-Mart and Costco. Best Buy’s recent failures have not only been due to external factors but also internal factors such as the failure of leadership to monitor the changing competitive landscape and respond to it in a timely manner. While the domestic market still accounts for the bulk of overall sales and net income, international share may increase due to saturated domestic markets. Similarly, the company may also build greater presence in e-commerce to compete more effectively with Amazon. But the rapid growth may also create certain corporate governance issues for the company.
If we look at the company’s top leadership, it is clear that most of the executives have been with the company for quite a long time and the organizational culture places a huge emphasis on promotion from within. One of the trends that have been occurring within the industry has been the growing role of technology in various aspects of operations such as supply chain network, marketing, and distribution. Thus, one corporate governance issue may be whether the company should continue to promote from within or bring fresh and young faces from outside with greater technological proficiency as well as willingness to try out-of-the-box strategies. The structure of the top leadership may become a corporate governance issue because electronics products are becoming a commodity and even Best Buy has been forced to improve income primarily through lower costs rather than higher price markups as buyers of electronic products are highly price sensitive on the average. Technology offers one of the most effective ways to reduce costs and improve profitability as Amazon and Apple demonstrate. Some may argue Wal-Mart achieves high profit margins despite maintaining a primarily brick-and-mortar format but Wal-Mart is an outlier rather than a norm. The rising dependence on technology to further improve operating efficiency and boost sales may force Best Buy to look for fresh and younger talent in the management that has the technological experience and expertise to help Best Buy become more competitive.
Another corporate governance issue that may arise is whether the company continues to employ primarily centralized decision-making format or de-centralizes its organizational structure to better compete globally. Best Buy has been unsuccessful in Turkey where it basically exported its U.S. format and its home-grown formula also didn’t work in China. The company only started doing well in China after it started rebranding itself as Five Star (an acquisition). Best Buy’s experiences in international markets such as Turkey, Europe, and China demonstrate that localization strategy may be more effective in some markets. Thus, the company may have to transfer more powers and decision making authorities to its international divisions in order to succeed so that they can develop competitive strategies in accordance with local trends and competitive landscape.
Recommendations to Overcome Governance Issues
One of the strategies Best Buy can pursue to ensure a more technologically-proficient leadership team is to require its leaders to go through training programs. But such a strategy may yield low returns as technological proficiency requires steep learning curve. In addition, technology continues to evolve at a rapid pace. Thus, a better alternative may be to bring more fresh faces from outside into the management team who have a proven record of successfully employing technologies at large organizations to create new core competencies. A quick look at the company’s board of directors makes it clear that the company still doesn’t give due importance to technology. Even though Geek Squad’s founder Robert Stephens was still with the company as Chief Technological Officer during the year 2011 (Lee, 2012), he came to Best Buy as the founder of an acquired company rather than as an executive with extensive experience in managing technology at a large organization. Best Buy needs someone who knows how to successfully embed technology in most if not all aspects of operations in order to achieve greater operating efficiencies as well as improve profitability. Almost every major organization now has a Chief Technology Officer (CTO) with extensive experience in successfully employing technology to improve operations. This includes Best Buy’s competitor Wal-Mart whose CTO Chip Hernandez served in the same role at Countrywide and Union Bank of California before joining Wal-Mart in 2009 (Bloomberg Link).
As far as decision-making authority is concerned, Best Buy could decentralize its organizational structure by creating regional divisions around the world who have complete autonomy in serving their respective local markets. This will also enable the leadership at the Corporate Headquarter to primarily focus on monitoring the environment and developing competitive strategies rather than keeping tabs on every major and minor aspect of operation. As organizations grow larger, monitoring and control become a more challenging task and diseconomies of scale may set in. Best Buy will continue to expand in international markets and its international experience already demonstrates the benefits of taking into account regional differences when developing competitive and marketing strategies.
One of the most effective tools to analyze the competitive environment is Porter’s Five Forces of Competition which includes supplier power, buyer power, competitive rivalry, threat of substitution, and threat of new entry (MindTools). As far as supplier power is concerned, it is high in the industry because we know electronic giants such as Sony, Apple, and HP have several distribution channels available to them and some of them have even set up their own distribution channels in the form of e-shops and brick-and-mortar retail outlets. This has also been one of the factors behind Best Buy’s declining profit margins. The buyer power is also high because even though Circuit City and CompUSA have gone out of business, their place has been more taken up by others including Wal-Mart, Costco, Amazon, and Radio Shack. Competitive rivalry is also intense as demonstrated by Best Buy’s declining profit margins and slowing sales growth rate. The threat of substitution is also high because all the industry players offer products from almost the same brands such as HP and Sony and the rise of e-commerce has only expanded options for customers. The threat of new entry is also high. Even though Best Buy is primarily a brick-and-mortar retail network, one of the major sources of competition has been e-commerce organizations. Unlike brick-and-mortar shops, e-shops can be set up quickly and relatively cheaply without expensive capital investments which is why Amazon has higher profit margins than Best Buy.
Given the competitive environment, Best Buy’s closest competitor is Wal-Mart. Wal-Mart is also quite similar in business structure since it operates an extensive network of brick-and-mortar establishments and also has quite similar presence online. Amazon might have made a closer competitor but customers usually prefer in-person experience when purchasing high-ticket and bulky items such as home appliances. Wal-Mart has also emerged as the closest competitor because electronic products are becoming a commodity and more and more customers are giving higher priority to price aspects. This plays to Wal-Mart’s advantage as the retail giant competes on the basis of low prices and its huge size gives it considerable leverage against suppliers.
As far as Wal-Mart’s corporate governance is concerned, the company has quite a decentralized organizational structure as evident by the fact that it has a separate President and CEO for Wal-Mart’s international operations. The company even has a separate President and CEO for its online operations (Wal-Mart) which explains in part how the company continues to be so highly profitable despite its enormous size. Even though many top executives have risen through the ranks including current CEO Mike Duke, Wal-Mart has not been shy to hire outside talent such as Bill Simon, President and CEO of Wal-Mart U.S., who joined the company in March 2006 (Wal-Mart). In contrast, Best Buy still has relatively centralized organizational structure and most of its executives had risen through the ranks as of 2011.
As far as the future prospects are concerned, Wal-Mart is most likely to be successful in the long term. First of all, despite being much larger in size, Wal-Mart had significantly higher profit margin in the year 2011. The company’s huge size also gives it significant negotiation power against suppliers which Best Buy doesn’t have. Moreover, the newly emerging trends in the electronics industry favor Wal-Mart whose strength has always been low prices. Wal-Mart also has greater international presence than Best Buy and possess greater resources, thus, it will also be in a better position to resist setbacks or adverse economic conditions.
Code of Conduct
Best Buy’s code of conduct offers several suggestions to employees regarding their everyday conduct. First of all, the company expects its employees to go beyond the minimum legal obligations to display the highest ethical standards. The company also believes every employee should have the opportunity to grow and realize his/her true potential. Best Buy is also committed to an accommodating environment in which diversity is celebrated and workers have freedom from harassment and unnecessary intrusion (Best Buy, 2009).
The employees are also expected to demonstrate the highest customer service standards. The company places huge emphasis on customers and regard them as the center of its business strategy. The company also places a huge premium on customers’ trust in the company and expects employees to take all necessary measures to protect customers’ privacy. Similarly, the company is also dedicated to its shareholders and expects its employees to make business decisions that protect the economic interests of the shareholders. Best Buy also places huge emphasis on other stakeholders including employees, suppliers, and vendors and expect them to act in ethical manner in all types of situations such as not utilizing unethically obtained information on competitors because the company believes in fair competition. Best Buy is also committed to making positive difference in the communities in which it operates, both domestically and globally (Best Buy, 2009).
Best Buy. (2009). Best Buy Code of Business Ethics. Code of Ethics.
Bloomberg Link. (n.d.). Chip Hernandez. Retrieved August 21, 2013, from http://www.bloomberglink.com/people/chip-hernandez/
Lee, T. (2012, March 7). Best Buy’s chief geek checks out. Retrieved August 21, 2013, from http://www.startribune.com/business/141761523.html
MindTools. (n.d.). Porter’s Five Forces. Retrieved August 21, 2013, from http://www.mindtools.com/pages/article/newTMC_08.htm
Wal-Mart. (n.d.). Executive Management. Retrieved August 21, 2013, from http://corporate.walmart.com/our-story/leadership/executive-management