Best Buy-Business: Problems and Technological Solutions - Essay Example

Best Buy- Business Problems and Technological Solutions Table of Contents I. 3 II. Best Buy Company Background/Overview 3 III. Business Problems Discussion/Analysis 5 IV. Solutions- High Level 6 V. Benefits of Solving the Business Problems 7 VI. Technical/Business Approach 8 VII. Changes to Business Process 9 VIII. Technologies/Business Practices Utilized for Solution Augmentation 9 IX. Conclusions, Recommendations 11 X. Implementation Plan, High Level 11 XI. Project Summary 12 1References 14 I. Abstract This paper identifies two business problems at Best Buy, relating to one, the way it manages its costs relative to competition, and two, the way the company has lagged behind Amazon in terms of online retailing, something which now threatens to marginalize Best Buy and to eventually render the company obsolete over time, if it does not address its online shortcomings. The paper outlines recommended strategies tied to reducing costs and improving its online sales strategies and channels, and evaluates the strengths and potentials of initiatives to better promote and develop Best Buy’s online store assets. This paper also details technological solutions to enable and to augment the proposed business solutions to get Best Buy back on its feet financially and strategically. These technological solutions are the use of an ERP system or the enhancement of the existing ERP system to make the supply chain more efficient; and the use of data analytics to better understand buyer behavior and preferences (Crosby, 2014; McIntyre, 2014; Zacks Equity Research, 2014; Google, 2014). II. Best Buy Company Background/Overview Best Buy is a retailer of electronics products for consumers, products for computing and for cellular communications, related products for entertainment, home appliances, and the services that are tied to their merchandise. Best Buy is a multinational concern. Aside from owning physical retail outlets spread out in its key geographic markets, Best Buy also has several web properties as well as call centers. Its e-commerce platforms include The Phone House, Future Shop, Magnolia Audio Video, Geek Squad, Pacific Sales, Best Buy Mobile, Five Star, The Carphone Warehouse, and Best Buy. The company divides its operations as a multinational between the United States market on the one hand, and the international market on the other, with the latter made up of its combined operations in Mexico, Europe, China and Canada. In these different latter markets Best Buy employs different subsets its stable of brands. For instance, in China, Best Buy makes use of its Five Star Brand, while in Europe Best Buy has traction as The Carphone Warehouse, Geek Squad, and The Phone House. The US market is comprised of six product segments or categories, namely mobile telephony and computing, services, electronics for consumers, the appliances segment, entertainment products segment, and the others segment. The entertainment division offerings include digital downloads of media, as well as DVD and CD sales, together with Bluray sales. Services include after sales and warranty-related services. The international market comprises various subsets of these core offerings in the US, with China for instance offering four out of the six segments discussed above, excluding food, and excluding entertainment products. The Mexican operations, meanwhile, have all of the six business segments on offer. The company ended fiscal year 2013 with $49.6 billion in revenues and $249 million in losses, and more recent assessments of Best Buy’s prospects are markedly dim, as evidenced by the large fall in its share prices and the general negative view of analysts relating to its financial health and prospects moving forward (Pederson, 2014; Hoover’s Inc., 2014; Google, 2014; Reuters, 2014; Maxfield, 2014; McIntyre, 2014). III. Business Problems Discussion/Analysis From a high level view point, the basic problems at Best Buy have to do with what can be considered as very major shifts in the nature of the retailing business in the core segments where it competes. One such shift is related to the declines in the prices of major appliances and electronics, which have impacted Best Buy inordinately due to its lack of overall diversification into other product categories. Another shift has to do with the shift in channel focus away from physical stores and into online, where Amazon dominates and where its offerings in digital downloads, in Amazon Prime, and in the serving up of the online platform via its Kindle tablets, have no counterparts in Best Buy. This has led to the hemorrhaging of sales and clients away from Best Buy, to the point where revenues have been on a sustained decline for the latter part of 2013, leading to a collapse in the share price, by up to a third, since the start of 2014. From a starting share price in the high $30’s at the end of 2013, the share price plummeted to about $25 at the start of 2014 and has stayed there. This reflects a wiping out of all the share price gains that the company had made from 2012 onwards, when the company seemed to have been successful in its efforts to shore up its financials. That said, some of its initiatives are being seen as promising, especially as those relate to cutting costs, which have been aggressive, and strengthening its online presence through its strategy of allowing customers to buy online and to expect shipping of their purchases via the physical outlets. Included in its lauded initiatives too are Best Buy partnerships with key partners, making use of its retail store network for instance to push Microsoft and Samsung products through dedicated store fronts (Google, 2014; McIntyre, 2014; Maxfield, 2014; Zacks Equity Research, 2014). Put another way, the key problem for Best Buy is that it is faced with intense competition from Amazon, which has been excellently managing its costs, excelling in online retail, and has been successfully challenging Best Buy’s traditional strengths in its physical retail outlets with its own logistics and orders fulfillment capabilities build-out. This translates to two big challenges for Best Buy: matching and out-excelling Amazon online, and matching and outdoing Amazon in managing costs and keeping them down, to shore up company profits (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). IV. Solutions- High Level To restate, the problem of being able to compete with Amazon and neutralize the threat it poses to the long-term viability of the Best Buy business translates to being able to address two fundamental business concerns, one being the shortcomings of Best Buy’s online strategy, and the other the need for Best Buy to better manage its costs and make them optimally low. This latter concern is not something that can be achieved overnight, but is to be understood as an on-going process to be continually fine-tuned over time (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). The high-level solution to the problem of being able to compete with Amazon online is likewise something that does not consist in a single initiative, but in a wide variety of initiatives to shore up Best Buy’s online business. The move for instance to covert its physical store network into orders fulfillment and showcase center, while customers order online, is very promising, and this can be made a centerpiece high-level solution to be complemented by support activities and corollary solutions. This high-level solution also ideally includes gathering the support of partners that excel in those areas where Best Buy is weak, such as in tapping mobile platforms to extend the reach of its online offerings (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). The high-level solution to the problem of inefficient and suboptimal management of costs entails a set of initiatives precisely to trim costs, and those include re-engineering processes within the stores and in the supply chain to be able to identify areas for cost improvement. The move to cut several thousand store-level management positions in Best Buy is a step in the right direction (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). V. Benefits of Solving the Business Problems The massive drop in the share price of Best Buy is an indication of the gravity of its problems relating to keeping itself viable in the long term, given the way Amazon has presented itself as a force to make Best Buy’s business model obsolete, unless Best Buy plugs its strategic holes and seriously pursues a viable online strategy. If Best Buy is able to address its online weaknesses, while at the same time improving its cost structure to continually find ways to lower its operational costs, then Best Buy has the opportunity to transform itself and its business model to be competitive with Amazon in the long term. This translates to Best Buy being long-term viable and profitable (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). VI. Technical/Business Approach Fortifying its online presence means being able to leverage its existing strengths in logistics and supply chain capabilities at the level of the physical stores. Online can be a hook to this excellent installed network of physical stores. Orders fulfillment for online orders can be done leveraging Best Buy’s proven supply chain and distribution capabilities. Moreover, the advantages of the highly-developed and well-positioned physical stores can be further extended by using these stores as physical locations where customers can view products and where partner-sellers, such as Samsung and Microsoft, can reach customers in merchandising pushes. In other words, where Amazon has an excellent online store front, Best Buy has an excellent physical store front and logistics and supply chain capabilities at the backend, which it can leverage in the same way that Amazon leverages its online strengths. Best Buy’s online ordering and store delivery model can work, and is a step in the direction of being able to add true value and differentiation to its online presence. Moreover, Best Buy can also forge strategic partnerships with Microsoft for instance, to bolster its capabilities in mobile and in online selling, where it is weak and where Amazon is strong. Initiatives such as allowing key partners to set up virtual stores within the Best Buy online portals are recommended steps in this direction (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). With regard to reducing costs, reducing management head count at the stores is a good first step. In line with this, process re-engineering from purchasing to inventory management to order fulfillment can be expected to further pare down costs moving forward. This is to be an iterative exercise with a strict focus on making the supply chain more efficient and less costly over time (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). VII. Changes to Business Process Purchasing can be timed and sized in step with demand and offtake at the stores, to optimize inventories and to reduce costs tied to overstocking and to holding more inventory than is actually sold. This has implications for working capital, and for overall reducing operational costs. Tuning this requires changing the way purchasing decisions are made, so that they factor in stock movement at the store level almost in real time. These are the kinds of continuous process and cost improvements that are to be set in place. The business process changes are tied to achieving such improvements in costs and in efficiencies in the supply chain (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). Changes to the business process tied to distribution, logistics, purchasing and orders fulfillment are also in order given a more aggressive push into online retailing. This is on the cost optimization side of the online retail push. On the maximization of revenues side, the online push can benefit from changes in the business processes that intentionally incorporate the marketing and promotion of the online channel in the physical stores. This can take the form of making Best Buy’s online stores being more prominently promoted in the physical stores (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). VIII. Technologies/Business Practices Utilized for Solution Augmentation There are two technologies that can enable and augment the proposed solutions to address the two problems of deficient online strategies and high costs of doing business. One is the use of an enterprise-wide ERP solution, and the other requires consolidating the company databases of customer transactions into a data warehouse for data analytics and data mining. This latter technological solution is for the company to be able to better understand customer purchase behavior, to better inform purchasing and the creation of sales forecasts(Crosby, 2014; McIntyre, 2014; Maxfield, 2014). Reducing operational costs in the long term requires being able to automate as many aspects of the supply chain as possible, and in being able to integrate data on store sales for different products with purchasing and forecasting. This end-to-end integration, made possible by an excellent ERP implementation, will allow for such data integration to be successful. This ERP system can also integrate orders data from the online store assets of Best Buy, and the ERP system can then coordinate orders fulfillment and inventory management making use of data from both the physical stores and the online stores (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). Assuming that Best Buy also has an extensive database of customer purchases through time, Best Buy can mine those data for user preferences and buying behavior and patterns, that it can then use to better forecast sales, better manage inventories, and to improve its online store offerings. Here data warehousing and data mining initiatives can be on-going, and incorporate new data from the online channels moving forward. The insights can be fed back into initiatives to make operations more cost efficient, and can also inform programs to make the supply chain more cost efficient, by being able to predict customer behavior and being able to forecast stock movements more accurately. Moreover, the data warehousing and data mining/analytics are to be implemented in the least costly and most effective ways possible, and given that online transactions are to be included, the use of a cloud analytics solution is the most ideal (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). IX. Conclusions, Recommendations Left to itself, and with no changes, Best Buy is in danger of sliding into terminal decline. It cannot compete with Amazon on price as it stands, and needs to shape up cost structure-wise. There is a need therefore to leverage ERP and similar technologies as an aid to making the cost structure leaner. There is also a need to deploy an excellent online strategy that leverages Best Buy’s traditional strengths tied to its physical store network, and that makes use of its current databases of customer interactions at the store level. Insights from analyzing and mining these databases can improve inventory management and purchasing, all the way to orders fulfillment, and can also improve Best Buy’s online stores (Crosby, 2014; McIntyre, 2014; Maxfield, 2014; Zacks Equity Research, 2014). X. Implementation Plan, High Level The initiatives to cut costs are iterative, but they do have concrete goals and timelines. Best Buy is racing against time to reverse declines in revenues and to stem losses, and cost reductions are just one part of the equation. The other part of the equation is raising revenues and improving margins. The goal to reduce annual costs by a billion dollars within the short term means that process re-engineering and leveraging an excellent ERP system must occur within the span of a year, by the end of the first quarter of 2015. Given the need to reduce costs soonest, the present ERP system can be optimized to achieve the goal of being able to time purchases in line with sales in the physical stores. The short-term goal in this regard is to achieve the integration of the data from purchasing all the way to orders fulfillment at the stores (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). The timeline to radically improve Best Buy’s online channels strategy is also short, given that Amazon is posed to ruin Best Buy’s long-term business, and given that Best Buy needs an online strategy to boost sales and reverse its financial slide. Within the next three quarters the plan is to be able to actively promote the online stores of Best Buys in the physical stores, and to track the success of such promotions efforts using sales-related metrics at the online store level (Crosby, 2014; McIntyre, 2014; Maxfield, 2014). XI. Project Summary Amazon is a long-term threat to Best Buy as a viable company, and the company is pressed for time to achieve a turnaround given its rapid sales declines and ballooning losses, and given the collapse in its share price. The latter is an indication of radically reduced levels of confidence on Best Buy’s prospects, from the point of view of the investing community. The threat to Amazon can be addressed by Best Buy developing its online presence and excelling in online retailing. It can also be addressed by putting in place iterative processes for reducing costs throughout the supply chain. This paper recommends dealing with those twin problems, which in essence boils down to neutralizing Amazon’s strengths in cost excellence and online retailing excellence. The recommendations are to utilize data mining and analytics from a well-developed aggregation database of transactions data, and to set in place an iterative process for reducing costs, making use of an ERP system to integrate data from purchasing all the way to ordering and orders fulfillment (Crosby, 2014; McIntyre, 2014; Zacks Equity Research, 2014). 1 References Crosby, J. (2014). Best Buy sharpens its cost-cutting. Star Tribune. Retrieved from http://www.startribune.com/business/247497061.html Google (2014). Best Buy Co Inc. Google Finance. Retrieved from https://www.google.com/finance?cid=4408 Hoover’s Inc. (2014). Best Buy Co., Inc. Hoover’s Company Profiles. Retrieved from http://www.answers.com/topic/best-buy-co-inc Maxfield, J. (2014). Why the S&P 500 is Trashing Best Buy and Game Stop. The Motley Fool. Retrieved from http://www.fool.com/investing/general/2014/04/13/why-the-sp-500-is-thrashing-best-buy-and-gamestop.aspx McIntyre, D. (2014). Best Buy Back in Deep Trouble. 24/7 Wall Street. Retrieved from http://247wallst.com/retail/2014/03/29/best-buy-back-in-deep-trouble/ Pederson, J, (2014). Best Buy Co., Inc. Gale Directory of Company Histories. Retrieved from http://www.answers.com/topic/best-buy-co-inc Reuters (2014). Best Buy Co., Inc. Reuters.com. Retrieved from http://www.reuters.com/finance/stocks/companyProfile?rpc=66&symbol=BBY Zacks Equity Research (2014). Upgraded Research Report on Best Buy. Zacks. Retrieved from http://www.zacks.com/stock/news/129102/upgraded-research-report-on-best-buy Read More