Best Buy Customer Centricity Analysis - Harvard Business School Case 506055

This was, I think, one of my better case responses - prepared for corporate strategy class.

Best Buy’s customer centricity campaign was an experiment in adapting their tried-and-true business processes to better meet the needs of their customers. In the case, this change brought with it some success, but came up short in many other important areas. Nonetheless, while there may have been some troubles with tactics and implementation, this strategy and general customer focused approach is quite important for Best Buy’s continued success.

Yahoo Finance defines Best Buy’s industry as simply “Electronics Stores.” It could also be accurately described as “Consumer Electronics Retailing.” Success in this industry has traditionally been dependent on a few key success factors. Most important among these has been scale – companies need to maintaining a large enough size to offer a wide variety of products, have a strong negotiating position with suppliers, and control the territory through a significant number of well placed retail locations. Constantly trying to open more stores than one’s competitors however, brings market saturation and represents a limit to growth. Understanding this, Best Buy’s management decided to pursue the Centricity project so that they could intensify through customer focus rather than extensify through store openings, and thus continue their growth. In implementation, however, they wound up losing some important benefits of scale. Negotiating power was lost when merchandise decisions became less centralized, and because each store became focused on certain segments, it became more difficult to meet all of their customer’s needs in a given geographic area.

Other success factors involve effectively training and managing the large number of employees required for the large scale operations, adequately explaining the features and benefits of new technologies, and capitalizing on cross-selling opportunities. With the Centricity project, Best Buy took on a difficult managerial challenge. Where they had previously managed their reasonably homogenous 120,000 employee base through a flexible but consistent set of “Standard Operating Procedures,” they now had a more diverse workforce consisting of personal shoppers, technicians, and other experts, and their standard processes needed to be customized for each segment. This increased expertise helped the company better present the technology, give valuable recommendations, and cross sell, resulting in larger margins. At the same time though, it made managing their teams more difficult, meaning higher SG&A expenses and increased labor costs. In total, “Expenses increased 21.7% in the third quarter of 2005 as compared with 19.5% in the prior year.” (p13) In a tight margin business like electronics, small percentage differences like this can make a big difference.
Tangible resources are important to Best Buy, for example, having the right number of stores, each with up-to-date furnishings. Intangible resources however are substantially more important to them. As an example, their strong brand presence has developed through their knowledgeable staff, which in turn developed from the lively and rewarding corporate culture they established. Through these intangible resources, it has been possible for Best Buy to develop some difficult-to-imitate capabilities strongly rooted in the firm’s human capital. These are consciously cultivated to form a competitive advantage. To quote from the “About Best Buy” page on their website “We’re about people. People just like you. And, yeah, we know every company says they’re about people, but we really mean it. Really!” The case also notes that CEO Brad Anderson believed “Best Buy’s key competitive advantage was ‘owning the last 10 feet to the customer.’”(p4) Further, Anderson believed that ”Best Buy had always been ‘a merchant driven company.’” (p10) Their three most important capabilities - opening new stores, choosing the right merchandise and closing sales well - are all tied to knowledge and understanding that has been built up and passed along from employee to employee. These capabilities could be considered core competencies, and were based on many resources the company developed involving training, product education, motivation, and corporate culture, with other factors, such as store layout also factoring in.

With the Centricity campaign, they tried to build up their core competencies, but in fact their implementation efforts fell short because their activities did not properly utilize the ones they already had. Centricity did address the issue that they could no longer continue to grow simply by opening new stores, a core competency that may have been eroding, but did not look to take advantage of those skills extensively during the transition phase. The new methods also stepped over the merchandise managers, whose developed knowledge and methods lead to the strong product mix Best Buy was known for. Their expertise was not properly leveraged, but instead combined with new segment managers. Finally, with the increased knowledge demands of the segments, employee training and motivation became more difficult. This impacted the ability of their salespeople to be as dynamic as they had been in the past. Instead of just knowing the products, the floor employees had to know the people as well. Exhibit 7 shows the extent to which employees were expected to get in the heads of their customers. As noted above, these changes did make them more effective, but at a greater cost. Still, the strategy being sound, these are some problems that can be addressed over time. New core competencies must be developed as others erode, but Best Buy simply could have done better in utilizing their existing capabilities. Despite any criticism, the final proof may be in the failure of Best Buy’s direct competitor Circuit City, whose stock Yahoo Finance has recently quoted at 1.70 per share, down from $30 two years earlier. One would like to think this has something to do with Centricity.

Case response for Mid-Misouri Energy - Harvard Business School case

This is my own personal analysis. Not my best case analysis but still good all the same. - C

Mid-Missouri Energy is considering the expansion of their ethanol plant. Based on an analysis of external factors, specifically considering the general, industry, and competitor environment, it is my recommendation to double the capacity of the ethanol plant.
General Environment Factors
Most of the general environmental factors point towards expansion. As the world continues to develop, and the population continues to grow, competition for the worlds limited supplies of oil will continue to increase. This is a primary cause of the rising cost of gasoline that can be seen in exhibit 13 of the case. Considering the fact that so much of the built environment in the US is only accessible by car, and also that people love to drive and are reluctant to give up their large vehicles, a drastic reduction in fuel consumption seems unlikely. As ethanol refining technology develops, and governments begin to mandate the use of gasoline blended with ethanol, it becomes a more viable and widespread technology. Since ethanol is most efficiently derived from sugarcane, which does not grow well in most of the US, it would be difficult to use it as an export with sustainable competitive advantage. Because ethanol can alternatively be produced using mostly domestic inputs however, the US as a whole may be less subject to global competition for oil imports. Together with a long American history of corn based agriculture, it is likely that the governments will further incentivize the use of ethanol. All this suggests that the general environment is right for expansion.
Industry Environment Factors
The Ethanol industry is difficult to compete in primarily due to the impact of suppliers. Corn growers dictate how much corn they will sell for ethanol, and this is based on the going price for corn at the time, which is affected by the weather, and the productivity of other nations. The fact that corn prices may be high or low means that corn supply for ethanol can be inconsistent. The strength of competitors is also an important consideration. This is a commodity business with many organizations competing for the lowest price, and it is hard for one competitor to differentiate from another, further each vying for not just the same buyers, but the same suppliers. Summing this up, as an MME manager mentions “The competition in this business is not in selling ethanol, but in buying corn. It doesn’t matter if you have an agreement with an elevator; if there is no supply you don’t get the corn.” (p15).
Being in the industry now, though MME has two distinct advantages: the cost of new construction, and their solid supply of corn commitments from growers. The building of processing capacity represents a significant investment, and represents a large barrier to entry. Original construction cost was $50 million, and to expand the plant at current construction pricing will cost $75 million. While some other barriers to entry may be low, these are not easy investments for a new company to make. In regards to corn commitments from MME members, these provide a steady supply of feedstock for the plant and are directly tied to the production of the investing farms. This represents an advantage over even the largest players in the ethanol industry, like Archer Daniels Midland, who are forced to buy all their stock or make other individual commitments. Looking at another force, the power of gasoline as a substitute may be waning as demand increases and costs rise. Exhibit 5 shows a rapidly growing industry. Because they are well placed in this industry they should take advantage and expand. Further, based on the I/O model of strategy, being in a desirable industry brings success. Since this industry is still growing fast, making it desirable, it would make sense under the same logic to expand further and reap the benefits of scale.
Competitor Environment Factors
The actions of MME’s competitors, most notably the new entrant whose plant is being built 15 miles from their own, seems to make a strong case against expansion. Still, MME is in a strong competitive position, being established in the region, having existing supply commitments, and a plant built by one of the top contractors. While some collective owners are divided over whether to sell out, MME as a whole hopes to maintain their place in the ethanol industry, and keep the company functioning as both a money making enterprise, and a hedge against commodity prices for their farmers. They are pursuing a strategy of cost leadership through consistent production, building captive supply through an agricultural collective. Other firms in the industry also seem to be pursuing this collective strategy, though it seems many of the larger ethanol producers are privately help companies or public corporations. The new local competitor seems to be pursuing this strategy to some extent as well, though their predominant strategy appears to rely on good access to the grain storage infrastructure. As mentioned above however, just because the elevators have agreements doesn’t mean the supply is there – MME has a more consistent supply. Nonetheless, the competitor “would be buying corn from some of the same sources MME relied upon,” (p14) which would put a pressure on MME since they cannot get all their grain from their member-owners. This is particularly complicated by expansion, because as the feasibility study cited on p14 notes, “there was sufficient corn in the area to supply an expanded plant so long as corn demand in the area did not significantly increase from other buyers.” This does not factor for the purchasing of grain from outside the region though, which while costly, may be offset by the benefits that scale and plant quality can bring them in expansion. Further, a very important consideration is that for MME to remain competitive in the Ethanol market, they must continue to expand. If they cannot keep ahead of industry consolidation and improve their efficiencies at least as fast as their larger competition, they will be out of the market anyway.
Conclusion
While there is still much information missing as to whether plant expansion is truly the best idea, it is recommended to consider this possibility strongly since MME is in a good competitive position relative to the industry, the market is growing, the global and national needs are there, and the survival of the firm may well depend on keeping up with increases in scale and efficiency.