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How Best Buy Business Model Transformation Saved It From Sure Failure

While from a superficial look at its revenues streams, Best Buy seems the same company it was back in 2012. In reality, in the last decade, Best Buy has gone through a massive transformation of its business model. In 2019, Best Buy made over $42 billion in revenues and $1.9 billion in operating income, the highest operating results since 2011, when the company started to lose ground.

Let’s see look at this case study, and why it’s so interesting from the business model transformation standpoint!

The story of an (almost) disrupted business

In 2012, Best Buy was going thourhg hard times. As its revenues slew down and its margins tightened, the executives’ team was struggling to understand what was happening with their business.

Traditional approaches and business tools didn’t help in understanding what was going wrong. Yet the business was in danger. For an organization that as of 2012, was making over fifty billion dollars in revenue, but at the same time had seen its operating income tighten, from a whopping $2.37 billion in 2011 to just over a billion in 2012; understanding what was happening was a matter of life or death.

And Best Buy had to figure that out quickly.

Looking back in 2012, the company didn’t find a clear explanation for its tightening margins yet. In the 2012 shareholders letter, that is how, former Interim CEO, Mike Mikan, described the situation:

The consumer marketplace is changing rapidly, and we have to change with it. Best Buy not only has to adapt to new realities in the marketplace, where competition is strong. We also must anticipate changes before they occur and lead the way with innovative products and services.

He was called to bring the company back on its tracks, and it would take a few years, and several experiments before Best Buy would finally understand how to deal with that crisis.

Enter the showrooming effect

As digital companies, e-commerce, and comparison apps had grown in popularity. More and more people could go to Best Buy, look at the latest tech gadgets; play with them, and then finalizing the purchase on an online platform, like Amazon.

That is called “showrooming.” In short, consumers would examine the merchandise available in physical stores (like Best Buy); they would take the time to browse, and evaluate what suited them best, and also made a choice. But at the time of purchase, rather than finalizing it on the traditional brick-and-mortar retail store, consumers would buy the same item online.

What for? Well, they could find it at a more convenient price. And with the rise of comparison apps, Amazon stores and else, that was extremely simple and frictionless to do.

That simple practice of “showrooming” apparently was killing Best Buy margins.

How to deal with it?

Where is the disconnect?

When Best Buy executives tried to figure things out, they started to take several steps and experiments. Among them, the Best Buy executive team also tried to stop showrooming altogether, by working out some ingenious barcoding strategies to preventing consumers from comparing prices on other online stores.

But things didn’t improve. In 2015, in a Shareholders Letter, Best Buy started to articulate its vision and finally understanding how to tweak its business model to accommodate those new consumer behaviors, such as showrooming by focusing on added services that could not be provided online:

In FY15, we articulated our value proposition around advice, service and convenience at competitive prices and started to use Expert Service. Unbeatable Price. as our signature. We also defined our growth strategy, Renew Blue: Ignite the Possible, around key growth opportunities across product categories, “Life Events” and Services, all supported by the transformation of our key functions.

Best Buy business model change

When Best Buy had understood that there was no way out from the “showrooming effect” it started to focus on a few key steps, as highlighted in the 2015 Shareholders’ Letter:

We have significantly improved the customer experience. Our Net Promoter Score (NPS) is up by 450 basis points, and we have gained market share across multiple product categories.

And it continued:

We have been deliberate about developing more strategic partnerships with our key vendors, entering into these vendor partnerships when they make sense for the customer, the vendor and you, our shareholders.

What it meant is that Best Buy, on the one hand, started to match the pricing that customers could find on Amazon. While, on the other hand, they began to redefine the way they made money, by using their physical space to showcase their vendors, in exchange for dollars. As explained in the 2015 shareholders letter:

Our vendors spend billions of dollars developing amazing new technology products. There is typically a growing gap between what these products can do and what customers may be aware of, or understand. The successful commercialization of these products increasingly requires the customer to be able to touch, feel and experience them in real life. Often, a customer needs a physical experience and must use their senses to make a purchasing decision (think about buying a pair of headphones or buying a new TV).

Redefine how Best Buy makes money

To face and thrive when new consumers’ phenomena had shown up, like showrooming, Best Buy had to redefine the way it made money, and its business model.

Stores-within-store strategy

As highlighted in the Best Buy 2019 Shareholders’ Letter:

We continue to partner with our vendors (i.e., the world’s foremost technology companies) to help them commercialize their technology. Over the last seven years, our vendors have invested with us to improve the customer experience through storeswithin-stores and other unique vendor experiences. We ended fiscal 2019 with more than 5,000 of these experiences across our U.S. stores.

This is what Best Buy called “vendor experiences.” Or agreements with the company’s vendors to offer stores within Best Buy that could showcase their products:

best-buy-samsung-vendor-experience

Example of a Best Buy “Vendor Experience” offered by Samsung within Best Buy retail stores (Source: bestbuy.com)

In-Home Advisor Program

Best Buy also moved aggressively in expanding its service and support offering in the stores (something hardly matchable on online stores for now), like the in-home Advisor program, which provides free in-home technology consultations that counted in 2019, more than 500 advisors visiting more than 175,000 to customers’ homes.

Best Buy also launched the “Total Tech Support program,” which provides 24/7 support for all of a customer’s technology regardless of when and where they bought it.”

In other words, Best Buy is doubling down where digital-based businesses aren’t willing to go.

After years of tweaking with its business model, Best Buy operating income was again close to two billion dollars in 2019.

Key takeaways

  • Business change is unsettling for anyone, small and large organizations. And the fact that large, established and existing organizations have executives teams made of smart individuals, it doesn’t help
  • Understanding and acting upon business model disruptors isn’t simple, and it requires a broad view of an industry and a broader understanding in general of the forces that are shaping the business world
  • Where new entrants can afford to break and redefine the value chain, established businesses usually don’t see that as an option as that would jeopardize their money-making machines
  • When through the money-making machine is broken those established businesses have to move fast and experiment with new ways of doing business, so they have to be open to redefine how they make money
  • They need to understand also the core of the disruptor business model, so that they can tweak and change their business to enter and cover parts of the value chain where the disruptors can gain access (take the case of Best Buy going all in with “vendors experiences” and support for customers in the physical stores, or in their homes)

Other business models case studies:

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Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach over half a million business students, professionals, and entrepreneurs in the last year | Gennaro is also Head of Business Development at a tech startup, he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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