Assessing Risk: A Deep Dive Into Best Buy
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Dear Subscribers,
The two most requested topics I get from all of you have been the following:
To provide more company specific examples in my deep-dives
To have an article focused specifically on risk management
For today’s article, I’ve managed to encapsulate both requests and I hope you get some valuable tips and tactics from it.
Companies that don’t adapt, tend to have a really bad time. Business leaders who grasp this reality and instead, embrace a healthy dose of paranoia are far better equipped to fend off threats and navigate towards promising opportunities.
This deep-dive will be exploring one of my personal favourite examples of a company who adapted in the face of turmoil: Best Buy. Recognizing that their future held potential pitfalls, the company made a remarkable shift in direction by capitalizing on a distinctive asset exclusive to physical retail—their brick-and-mortar stores.
Fast forward to today and Best Buy is chasing some pretty big opportunities that I want to explore in detail, which are the following:
1 - Their billion dollar push into healthcare
2 - Battling Amazon with a Strategic defence: Their own version of Prime.
Here, we will look into these new strategic objectives and put on our project management hats to do what we excel at: conduct a risk assessment and identify potential opportunities and threats. In essence, what should the leadership team focus on mitigating or exploiting, and how should these risks be prioritized? Rest assured, there will be plenty to unravel and explore.
But before we dive into the future, let's take a peek at how Best Buy adapted its business in response to the growing threat of e-commerce.
A Looming Threat
In early 2010, with most of the world still recovering from a recession due to the financial collapse and consumers everywhere becoming more and more comfortable with online shopping, the leaders at Best Buy were starting to get worried. in-store sales were at all time lows with no signs of improvement on the horizon. Pair this with a lacklustre online presence and high turnover rates at all levels, it was hard to look for any signs of positivity for the once powerful retail company.
With a few more years of struggle and in desperate need of change, the company sought out a promising CEO who had earned a reputation over the years for successfully taking over companies in profound turmoil and transforming them. That CEO's name was Hubert Joly.
When approached to take on the role of CEO for Best Buy, Hubert admitted that he didn't know much about the retail industry, so he was a bit hesitant. However, he decided to do a deep-dive analysis of his own to uncover whether the pain points he identified were fixable, as he explained in this McKinsey interview.
I got the call from a friend and I told him, “I don’t know anything about retail and the place is a mess.” So, before any interviews with the board’s search committee, I did an outside-in analysis on Best Buy and the sector. I did store visits, I read everything I could, and what I saw was that, of course, this was the all-you-can-eat menu of challenges. You had strategic challenges with Amazon and some of the technology companies vertically integrating. You had operational challenges with the service quality having gone down significantly. You had leadership challenges, since my predecessor had been fired, and you had shareholder challenges with the share price dropping significantly and the company’s founder and lead shareholder, Dick Schulze, trying to take it private.
~Hubert Joly
After his outside-in analysis, Hubert did accept the role at Best Buy and went on to perform one of the greatest business transformations the world has ever seen.
As highlighted by this Forbes article, the performance metrics during this turnaround were truly remarkable.
Five consecutive years of sales growth
A 25.8 percent non-GAAP return on investment, up from 10.5 percent in 2013
Achieving GAAP operating income targets two years ahead of schedule
A doubling of U.S. online sales from 2012, to $6.5 billion (17 percent of all Best Buy revenue)
~ Forbes, April 4, 2021
So how did Hubert and Best Buy do it? There were a few things that came in to play:
The company went from measuring close to 50 KPIs to just 2: Improving revenue and improving margins
Significantly revamped and continuously optimized their online store
Most importantly, converted their most precious asset, the physical store to a vendor showroom, which resulted in key partnerships and additional revenue.
This last point was a masterful stroke of genius by Hubert and the leadership team. For context, Best Buy was noticing a worrying trend. Consumers were going to Best Buy stores with their mobile phones and performing price comparisons in real time with online competitors, mostly Amazon. Shoppers were technically using Best Buy as a testing ground to try out new products and then going home to order said product through Amazon at a cheaper price.
Instead of pushing back on this inevitable way of shopping, Best Buy embraced its role as a showroom, offering up its own retail space to the likes of Samsung for a rental fee and/or preferred rates on units.
This strategy has made it significantly easier for Best Buy to price match with Amazon. After all, it's hard to beat the satisfaction of walking out of a physical store with the product you've been eyeing.
After leading Best Buy to a much healthier position, Hubert Joly decided to step down as CEO, passing on the reins to Corie Barry, the first female CEO in the company's history. With the company's momentum on their side and the understanding that the current and future landscape will continue to be as disruptive as ever, Corie and Best Buy are determined to stay on the offensive.
Transformation 2.0
Over the past two years, Best Buy has been developing an entirely new strategy to address the challenges posed by major online competitors while also exploring fresh revenue streams. These strategic initiatives can be categorized as follows:
1 - Expansion into healthcare.
2 - Introduction of a Membership Model (Subscription)
Let’s get into the specifics on why the company feels these two moves will position them well for the future.
Expansion Into Healthcare
One of the added benefits of making a purchase with Best Buy is the inclusion of technical support provided by their Geek Squad team. The service is usually at an additional cost to the customer and a source of additional revenue for Best Buy. The leadership team has come to realize that this service, which was a focal point for consumer electronics specifically for entertainment, should have a much wider scope.
With that in mind, Best Buy made a significant splash into the healthcare industry through the acquisition of Current Health for $400 million. Current Health is a technology-enabled company that facilitates care-at-home by connecting patients with telehealth services, patient monitoring solutions, and various connected devices through technology vendors throughout the USA.
Looking at this from the outside in, it appears that Best Buy is leveraging their expertise in at-home technical support to venture into the realm of at-home healthcare. This strategic move indicates their confidence in extending their existing resources to cater to the healthcare sector.
Deborah Di Sanzo, the President of Best Buy Health, says basically that in their press release announcing the acquisition on the companies website:
“The future of consumer technology is directly connected to the future of healthcare, We have the distinct expertise in helping customers make technology work for them directly in their homes and by combining Current Health’s remote care management platform with our existing health products and services, we can create a holistic care ecosystem that shows up for someone across all of their healthcare needs.”
This is an ambitious move by the retail giant and I feel they have a good grasp on what they need to do to win here. Leaving the care to the healthcare professionals and owning the technology in this space that makes care at home possible.
Introduction of a Membership Model (Subscription)
Best Buy acknowledges that it will always face a challenge when competing against Amazon Prime, the world's largest loyalty program. Although they may never develop something as extensive and far-reaching as their competitor, Corie and the leadership team recognized the need to take action and recover some of the lost revenue, particularly during peak periods like Black Friday and the holidays.
And the company has done that with their own membership program called My Best Buy. And while this service has been available for awhile now, just recently they have expanded to offer some additional tiers, as explained in their press release:
My Best Buy Memberships™
My Best Buy: Our free existing membership plan built for customers who want convenience, including benefits like free shipping with no minimum purchase1.
My Best Buy Plus: A membership plan built for customers who want value and access. For $49.99/year2, My Best Buy Plus includes everything you get with My Best Buy, plus benefits like exclusive member-only prices; exclusive access to sales, events and products; free 2-day shipping with no minimum purchase3, and more.
My Best Buy Total: A membership plan built for customers who want protection and support. For $179.99/year2, My Best Buy Total includes everything you get with My Best Buy Plus, plus Geek Squad® 24/7 tech support, up to two years of product protection (including AppleCare+) on most new Best Buy purchases while you’re a member4, and more.
Two big things stand out to me, especially after spending some time reviewing this company:
Their middle tier seems to be a direct move against Amazon. Offering free 2-day shipping for a small annual fee may be a great value add for the more frequent shopper. I’m assuming Best Buy has looked at the data and see the benefits in introducing this segment to the mix.
Best Buy once again leverages that untapped asset I brought up earlier, their Geek Squad team offering tech support at home. This time, included in the annual fee. While this is a great value add for the customer, I also believe this is a way for the company to scale that team and their operations to better handle the expected load from the new Healthcare unit.
Best Buy continues to make interesting moves, and this time, their approach seems slightly less ambitious when compared to their healthcare push. If you ask me, it's evident that the company is striving to safeguard its core while expanding into new territories. I think this is the right approach.
Only time will reveal the effectiveness of this two-pronged strategy. Meanwhile, let's engage in a bit of fortune-telling ourselves and identify potential risks.
The Risk Assessment
Before diving into this section, I want to clarify that the risks I'm about to discuss are based on my own research and do not represent the risk strategies employed by Best Buy. The purpose of this article is to illustrate the importance of considering a wide range of risks when embarking on a transformation initiative.
I’m also going to limit this deep-dive to 10 risks just for the sake of length. We could probably write an entire book when assessing a companies risks!
I will be breaking down the risks based on the two new strategies presented in this article. one thing to pay special attention to is the way my risks are written. Each risk highlights the cause and potential impact, if realized. This approach not only makes your risks comprehensive and easy to understand the whole picture, but it also helps frame mitigation strategies, as you will already know the root cause.
Let’s dig in.
HealthCare
Risk #1: With a significant focus shifting to the new healthcare business unit, there is a considerable risk that Best Buy will overextend itself beyond capacity, leading to a lack of focus on the core aspects of their business model.
Risk #2: The healthcare industry has highly structured and sometimes restrictive regulations given the nature of the industry. There is a risk that the internal teams will not be fully prepared to meet the demands from these parties, resulting in significant delays in launching new initiatives in this space.
Risk #3: Considering the regulatory bodies in healthcare mentioned in Risk #2, there is a possibility that a feature, initiative, or asset may be released without meeting compliance standards. This situation could lead to financial penalties and adversely affect the company's reputation.
Risk #4: Since the target audience for upcoming healthcare products and services differs significantly from the consumer electronics entertainment segment, there is a potential risk that the collected data can offer a new layer of customer segmentation and upsell opportunities. This would greatly enhance the potential for future financial gain.
Risk #5: Given the current Geek Squad team will be leveraged to offer at home setup of any healthcare products, there is a risk that the current team may not be properly trained to handle this additional workload, resulting in costly errors and potential customer dissatisfaction.
Membership Model
Risk #1: With the introduction of free 2-day shipping, there is a risk that demand may increase faster than available inventory levels, resulting in unnecessary refunds, missed sales, and dissatisfied customers.
Risk #2: Introducing unlimited free 2-day shipping to customers with an annual fee carries the risk of external transportation costs, such as fuel, airfare, and fees from shipping carriers, increasing beyond acceptable levels. This can lead to decreased margins.
Risk #3: With the company offering free technical support for their highest membership tier, there is a risk of achieving economies of scale, utilizing all resources to maximize capacity across business units, which will have a positive impact financially through effective operations.
Risk #4: As the membership layer resides atop their retail segment, there is a potential risk that Best Buy may expand this product to other business units, leading to a substantial enhancement in their competitive advantage.
Risk #5: If the membership program gains in popularity greater than expectations, there is a risk that customer inquiries will flood our call centres, resulting in missed revenue and dissatisfied customers.
Where Do We Go From Here?
Assuming we have crafted a comprehensive list of positive and negative risks, the next step will be for Best Buy's leadership team and transformation task force to begin a prioritization exercise. I have discussed this extensively in the past, but in a nutshell:
Use a spreadsheet to score each identified risk using criteria such as impact, complexity, and likelihood. Tally these scores to obtain a total risk score.
Segment the risks to determine which ones are the most critical to build strategies around. The goal here should be to focus on those that will reduce severe negative impacts and those that offer the greatest opportunities.
Most importantly, you will want to regroup with this team at regular intervals to identify, score, and prioritize new risks that may arise or existing ones that may have evolved. Risks are agile, so we will have to be as well to stay on top of them.
After focusing on Best Buy for the last month, I feel pretty positive about the direction they're headed. They have a solid leadership team and understand that staying static is not the approach to take to survive long-term in this new environment.
While exciting, kick-starting two massive initiatives can be quite risky indeed. It will be interesting to see how this plays out. I, for one, am looking forward to it.