Best Buy and Future Shops in Canada
Introduction
Imperfect competition happens when a firm has excessive control over the market of a particular good or service. This firm is in a position to charge more that the prevailing market rates as far as prices of the goods and services are concerned. The firm does not have so many competitors and therefore it has a sole control over the market. Imperfect competition can also be described as markets or industries that have two or more sellers as well as buyers but fail to match the criteria for perfect competition. The best examples of imperfectly competitive markets are monopolies and oligopolies (Dubofsky 597). These markets are competitive but imperfect. Competition can be analyzed from two different perspectives; competition among few firms and competition among many firms.
Competition among a few firms is evident when only a handful of participants are involved. The competitors know each other very well. In this scenario, one seller can be able to gain competitive advantage by offering a more quality product than other sellers offer. However, this competition rarely leads to an efficient use of resources. Competition among many firms involves hundreds, thousands or even millions of participants where each participant is lost among the masses. The only way a seller can be in a position to gain competitive advantage is through production of the best product. This type of competition brings out the best and ensures the most efficient use of resources. Four market structures fall under the category of imperfect competition (Dubofsky 599). These include monopolistic competition, oligopoly, monopsony competition and oligopoly.
Monopolistic and oligopolistic market structures are the most common types. In a monopolistic competition, there are relatively few competitors if any and they have a modest degree of market control in terms of supply. Product differentiation in a monopolistic competition is a key feature. Outputs by the producers are close but not identical. This helps in satisfying the diverse consumer wants and needs. In the oligopoly market, there are a few relatively large competitors. Each competitor has a substantial market control. The sellers make interdependent decisions thus leading to intense competition. The sellers are motivated to cooperate through mergers and collusions. Imperfectly competitive markets structures are not efficient in allocation of resources. This is because they have market control.
Whether the market control is modest or significant, the sellers face a negatively sloped demand curve while the imperfectly competing buyers face positively sloped supply curves. In both cases, the price is not equivalent to the marginal cost. Because imperfectly competitive markets are inefficient in the allocation of resources, the government intervenes occasionally to correct the situation. In case it uses ineffective policies, this makes the situation even worse. This paper will look into detail various aspects as to why the owner of Best Buy did not replace Future Shop, even after acquiring it. The strategies that both Best Buy and Future Shop are using to gain market share; the merits and demerits of both Future Shop and Best Buy operating as one as compared to other electronic stores such as Amazon.
Best Buy Company as well as its subsidiaries is one of the leading world companies that operate as retailers of electronics, home office products, entertainment software, appliances and other related services. This company has subsidiaries in countries like Canada, United States, China, Europe and Mexico. It has control over retail stores and websites with eleven brands namely; Best Buy, Five Star Appliances, Future Shop, Geek Squad, Magnolia Audio Video, Best Buy Mobile, The Car phone Warehouse, Audio visions, Napster, Pacific sales and Speakeasy. Best Buy has about 165000 employees that it manages worldwide (Bar 239). This company was formerly founded as sound of Music Inc. in 1969 by Richard Schulze. After almost 20 years of operation, it changed officially its name to Best Buy with the first superstore launched in 1983. Between 1984 and 1987, it expanded from eight storesto twenty-four with its sales jumping from $29 million to $240 million.
Best Buy decided to venture into the Canadian market in the late 1990’s where the Future Shop had dominated for long. It wanted to expand its market share and grow internationally through venturing into a new market. Initially, Best Buy wanted to set up its own stores in various Canadian cities to compete already against Future Shop (Bar 241). They would establish a few stores in Toronto in 2003 followed by a three-year expansion program leading to 15 more stores. Future Shop also planned to defend Best Buy strategy by increasing its store count to close to 120 over the four years.
This kind of competition was termed as unhealthy and therefore the owners of both shops met and decided that they would succeed further if they teamed up as compared to competing against one another thus Future Shop was purchased at $560. This was an acquisition to expand the market share by venturing into new markets. After the purchase, Best Buy adopted the dual-brand strategy. They decided to keep Future Shop brand and add Best Buy a second brand into the market. This strategy would seem funny because costs would be doubled with both brands under the same management. Both branches would require marketing capital thus making it highly costly. The marketing dollars would be divided into two. Another risk associated with this strategy was that customers would be blinded due to blurring identities in the eyes of customers.
However, this did not discourage them as both management teams embraced it as an opportunity. The Ex-CFO of Best Buy international (John Noble) gave out three reasons why they adopted the strategy. The first reason he gave was that the Canadian Electronics consumer market was inadequately supplied with Future Shop as the leader and occupying only 15% of the market share. Secondly, Best Buy had signed about eight real estate leases before regarding the Future Shop as a potential target for acquisition and therefore they were committed to these locations. Operational factors were the third reason. It would take a long period to convert Future Shop stores into Best Buy stores.
To ensure competitors were set apart from Best Buy, Schulze introduced the warehouse-like store format in 1989 that took sale staff off commission. This reduced the number of employees per store by a third thus saved on costs and made Best Buy to ascent and become the second largest consumer electronics retailer in the U.S by 1993 (Bar 239). Since then, Best Buy has been able to shine under a superior management by implementing innovative concepts in its stores, expanding domestically and internationally to become the world’s leading consumer electronics retailer.
Best Buy has over 1000 stores in the United States and it has established itself to become a leader in retail electronics. Through acquisition of new technology, Best Buy has expanded its products and services to reach new markets thus establishing new warehouses. Best Buy bought the existing electronics stores to gain immediate presence in those countries. This made it gain valuable knowledge about the local consumers. Rather than rebranding each store, Best Buy kept the names of the stores it acquired. Expansion of the warehouse system has played a significant role in Best Buy revenue growth and success. Most recent data shows that Best Buy has almost doubled the number of stores every five years domestically (Bar 242). The international store was after the acquisitions of the Carphone Warehouse and Five Star Appliances.
The Future Shop is located in Canada with an overall goal of developing trusted, personalized service with the customer in mind. It is the largest consumer electronics retailer in Canada with 139 stores operating across Canada provinces. Best Buy purchased it in November 4, 2001 at $580 million. The company was then renamed as Best Buy Canada Limited, which is wholly owned by America. Best Buy operates Future Shop as a separate entity with most of the locations registered under their original name. Since the acquisition, the Future Shop has continued to grow and opening new stores across Canada. The executives from the Future Store retained their positions within the company. Best Buy and Future Shop full- time employees (950) were laid off on January 30, 2014 to restructure layers of management and provide better services to the growing online market that is operated by Amazon (Mergent 856). Ron Wilson, who is the president and CEO of Best Buy Canada, was keen enough to note that most online sales had grown by 50% over 2013.
Before the acquisition, both shops were managed by different management teams. This means that the managers made decisions that were different to govern the two separate entities. After the acquisition, both shops were joined under one umbrella of management. The top most in the hierarchy of authority is the president who falls under the top management with various vice presidents representing various departments. These departments include marketing, manufacturing, finance and human resources. In the middle management level, we have regional mangers representing the Northern, Central and Southern regions. Under the regional managers are the district managers and group managers come last in the middle management level.
The last in the hierarchy are the first line managers composed of area managers. The top management in Best Buy expands the company and keeps it competitive. The middle line managers communicate well with their managers, respond well to issues, energize and nurture their employees. They also prepare budgets, organize meetings and compile reports. These managers hire workers, utilize the limited resources, are updated in terms of technology and they anticipate future actions (Carney 172). First line managers comprise of supervisors, team leaders and facilitators and they oversee the work of management done at the operational level by employees, associates or team members. Their function is to convert middle managers goals and objectives to fit the daily operations. They interact closely with the customers daily thus affecting the company’s image and the quality of service experienced by external customers.
The owner of Best Buy acquired the future Shop and combined them into one business but did not replace the future Shop. This is called an acquisition. A firm can be acquired by another firm in various ways. The first one is through a merger where the boards of directors of two firms reach an agreement to combine and seek stockholder approval to succeed in the combination. In this case, at least 50% of the shareholders of the two firms have to agree to the merger. The target firm stops existing and becomes part of the acquiring firm. Another way of acquiring firms is through consolidation where a new firm is created after the merger and both firms receive stock (Coyle 150). An acquisition can also take the form of a tender offer where a firm places an offer to buy the stock of another firm at a certain price and this is communicated through advertisements and mailings to stockholders. This enables it to bypass the incumbent management and board of directors of the target firm. Tender offers are best suited for hostile takeovers. The firm that is acquired continues to exist even if the minority stockholders refuse the tender. Practically, most tender offers end up into mergers if the acquiring firm is successful to gain control over the target firm. Another way to acquire firms is through purchase of assets where a firm acquires the assets of another and a formal vote by the shareholders of the firm being acquired is still needed. The final category of acquisitions involves a firm being acquired by its own management or a group of investors via a tender offer. After the transaction, the acquired firm ceases to exist as a public entity and becomes a private business. This is called a management buyout.
Acquisitions can be friendly or hostile. The acquisition premium is the difference between the acquisition price and the market price before the acquisition. In consolidations and mergers, the acquisition price is what will be paid by the acquiring firm for each of the target firm’s shares. The price depends on negotiations between the acquiring firm and the target firm’s managers. In tender offers, the price offered by the acquiring firm to the target firm should be enough to gain control over the target firm. This price may be higher than the initial price that the acquirer offered. Best Buy owner acquired the Future Shop with various reasons in mind. The first one would be that he or she wanted to create a monopoly. This means that he or she wanted to create a monopoly (Kaplan, 138). This means that he or she would take control of the electronic market and act as the sole supplier of the equipment.
Future Shop could not be replaced since it added up the monopoly power for it was a renowned supplier of electronics. Another reason would have been to reach into new markets and expand the market share. The future Shop had its own market share even before Best Buy acquired it. Therefore, the owner of Best Buy considered it unwise to replace Future Shop because he or she would tamper with the already existing market share. Replacing the Future Shop would mean changing its existing market share (Bhide 36). Replacing the Future Shop would lead to a new brand name. This would require a lot of time and resources to make the new brand firm known to the market. Replacing Future Shop would also bring a different impression to the market since the customers considered Future Shop to be best but after it is replaced, they have the fear of the unknown. This would reduce the market share.
Best Buy bought Future Shop but retained its executive. Replacing Future Shop would mean creating a new administration altogether. This would be highly costly and the new administration would probably take more time to adjust to the new environment. The owner of Best Buy is cost effective. Considering Best Buy is from the United States, replacing Future Shop in Canada would look like an American invasion. Retention of the brand quality was important. Various complains have been raised concerning the Best Buy’s acquisition of the Future Shop that the competition Bureau should not have allowed the takeover since it gave the company too much a monopoly in consumer electronics (Carney 175). This is from consideration that the Canadian market place is small. Retaining the two store chains, which offer slightly different products and market strategies, is an enough weapon against any new competitors that may want to start up or enter the Canadian market.
Customer acquisition determines the market share and therefore it has to be managed. This depends on various activities like pricing programs, advertising, alternative and direct marketing systems, sales promotions and personal selling methods. Customer acquisition creates sales lifeline and return visits which is vital to a company’s long-term success. This provides a comprehensive response to the challenges of competition. There are various strategies, which a company can use to acquire customers and expand its market share. This can be done by identifying new markets, developing the existing or branding programs. New customers can be found in existing markets while others may be found due to situations change (Bradley 40). Through product differentiation, new customers may also be attracted in existing markets. To find new markets, a company is required to expand into domestic and international markets.
Product development is another strategy in marketing where new goods and services are developed. Product line extensions make it easier for the marketing team to meet more specific consumer needs. Developing powerful brands is another strategy to expand market share. To create powerful brands, a company begins with brand awareness, brand equity then brand loyalty. Brand awareness involves making it known to people that the brand exists then offering unique products. To gain brand equity, customers have to perceive and believe that certain products are different and better. It consists of five parts namely differentiation, relevance, esteem, knowledge and emotion (Dubofsky 597). Brand loyalty comes in when a consumer makes a concerted effort in finding and purchasing a specific brand. It can take place between consumers and retail operations. Loyal customers encourage others to try the brand.
Best Buy and Future Shop use various strategies to gain the market share. They treat customers as unique people by meeting their needs with end-to-end solutions. They have practiced non-commissioned strategy, which gave customers a more control during their purchases. In 2004, Best Buy implemented an innovative strategy called the customer-centricity in its stores. This strategy views Best Buy and Future Shop as a customer portfolio other than products portfolio. The company understands its customer base at a deeper level thus targeting their needs. Another strategy is cross industry expansion. The companies have acquired entire or major stakes in nine companies that complement its existing products, services and culture since 2000. This has expanded the company’s operations into Canada, China and Europe. They have also added a variety of appliances including kitchen and bath appliances. They focus on strengthening the market position by expanding into cellular phone sales to compete with their rivals.
Best Buy and Future Shop distribution channels are effective to meet its customer needs. Except for the major appliances and large TV screens, distributions are shipped from the manufacturer to the distribution centers. Major appliances are shipped to the satellite warehouses in respective major markets. Best Buy and Future Shop have a reputable brand name due to their sound management. This helps in creating a powerful brand hence customers associate with it thus customer loyalty. They also offer a wider range of products accompanied by excellent services. This has enabled them to open stores both domestically and internationally thus expanding their market share. Therefore, Best Buy and Future Shop have branded their business by acquiring new firms, product differentiation and above all giving the customer the first priority.
Combining both Best Buy and Future Shop is associated with advantages and disadvantages. One of the major advantages is synergy. Operating synergy allows a firm to increase their operating income, increase growth or both. Best Buy and Future Shop will enjoy economies of scale because combining the two firms leads to cost efficiency and high profit generation. Combining both firms means reduced competition and a higher market share hence a greater pricing power resulting in higher margins and operating income. Both firms combined means a combination of different functional strengths thus stronger marketing skills (Bradley 40). There will be a higher growth in new or existing markets if the two firms are combined. Combining the two firms will ensure financial synergies as big companies have an access to wider and cheaper pool of funds than small companies.
Best Buy and Future Shops combined will reduce risks, increase their debt capacity, and lower their before-tax cost of financing. Managerial synergies are evident because combining the two firms will mean that the high performing management team will replace the poor-performing one. Incompetent managers will be removed thus company’s performance. On the other hand, the disadvantages are evident. The first demerit is the culture clash. These firms have different corporate cultures, which may breed conflicts. These conflicts make it hard for the two companies to work together (Straub 175). Diseconomies of scale are evident due to the increased cost of coordination. Consumers may not view the two firms as compatible since both are associated with their own weaknesses and strengths. This is a big threat to the market share. Layoffs may be done in order to reduce the labor force of the two firms. This has a negative effect on the employees for they may fear to lose their jobs thus losing trust in the organization. This demotivates employees and reduces on productivity. The disadvantages may create opportunities to competitors like Amazon, eBay and stample to take over.
Conclusion
From the discussion, it is evident that the Best Buy is a leading firm in the electronic retail business. Acquiring the Future Shop has enabled it to expand its market share and counter the competition from rival companies such as Amazon. This has been possible due to its ethical practices in consumer treatment. Consumers are a priority to the success of any firm because they provide the market share. Therefore, Best Buy and Future Shop should be in a position to do an analysis concerning the needs of their consumers and satisfy them with immediate effect. The future Shop was retained to ensure that the market share is expanded since this was a combination of Best Buy’s market of customers as well as the Future Shop. Although there has been a lot of competition from other electronic retailer companies, best Buy was able to overcome the challenges after acquiring the Future Shop (Bar 239).
According to the 2013 financial reports, domestic revenue of Best Buy in the third quarter has increased to $7.85 billion. This was due to the store sales increase of 1.7%. The domestic sales would have been 2% despite the short-term disruptions due to the rollout of the floor space optimization, the deployment of the window stores and the continuous rationalization of non-core business. In the international segment, the revenue was $1.52 billion, which was a decline as compared to the year 2012 (Best Buy annual report 2013). This was due to store sales decline of 6.4%, foreign currency fluctuations among others. The gross profit rate was marked at 21.2%.Other strategies like product differentiation and customer satisfaction to ensure market share have been put in place to ensure a competitive advantage. This competitive advantage ensures that there is brand loyalty as well as brand equity thus increasing on the company’s sales. Customers who are loyal to an organization can market the organization appropriately.
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