Best Buy

To analyze the profitability and troubles of Best Buy and to understand the industry it chose to compete in, we use Porter’s Five Forces model that is briefly explain below:

THREAT OF NEW ENTRANTS
A big box electronic store requires huge capital. Salaries, rent and other billings are some of the expenses that physical stores incur. This is one of the major factors new entrants consider to enter this market. Another is the fact that incumbent like Best Buy has already achieved the first-mover advantage. This can be seen from its multiple good store locations. Likewise, Best Buy has established brand value and relationship with significant channels with customers and suppliers after being in the business for x number of years. This suffices

In fact in the case of Best Buy, 65% of its products come from 20 suppliers only with 5 of those comprising of almost 40% of its merchandise in fiscal year ended March 2008. The 5 biggest suppliers are Apple, Samsung, HP, Sony and Toshiba. In general, this is not healthy for the business. Though, the top 5 suppliers are major manufacturers in the electronic industry, putting all eggs in one basket is not an ideal process. In addition, other electronic retailers such as hhgregg, RadioShack, Wal-Mart and Target, including online retailers like Amazon and eBay, also rely on the same suppliers as Best Buy. Maintaining the relationship with these suppliers is a major concern for Best Buy especially since to be the first or to be the different in the market to have a certain product will increase its economies of scope. Moreover, though Best Buy offers its house brand like Insignia TV, it still has a limited ability to do backward integration, as this requires bigger capital and advance technology. Thus, we can conclude that bargaining power of suppliers is high. Although, the mentioned major suppliers already have their own brick and mortar and online stores, research shows that retailers are still essential because they are an effective way to extend reach and to check and test the electronic products (Kwok,

Significant competitors are Amazon, Walmart, Costco and Radio Shack. Amazon can compete against Best Buy because its operating expenses are lower than bricks-and-mortar operations. It can avail less than average lease obligations, payroll, insurance and utilities among others. In addition, Amazon sells its products without sales tax in most locations. Walmart can compete with Best Buy by using its unmatched economies of scale and scope, considerable bargaining power with suppliers and well-developed logistical competencies. Costco on the other hand offers products that are of a slightly higher quality compared to other mass-market merchandisers, but can offer low prices by almost exclusively stocking items that sell quickly. This allows Costco to take a smaller margin on each item while continuing to provide exceptional value to its customers and maintaining a high level of profitability. Lastly, Radio Shack competes in small variety of traditional consumer electronics (i.e. TV, DVD players, stereo equipment, MP3 players, navigation systems, electronic toys) but it is most well known for selection of batteries, electronic parts and components. Though its specialty is a market niche that has not been intruded upon by its larger competitors, it has not been profitable enough to carry the chain especially after losing its market share to Best Buy during the