Best Buy is a company on the brink. It's being attacked from every angle. Apple and Microsoft are driving computer shoppers to their own stores. The proliferation of cheap bandwidth is making it easier than ever to consume media via download instead through the purchase of a physical good. And pretty much every product you can buy at Best Buy, you can get at Amazon cheaper and with free delivery — so people do. It's just not a good decade to be Best Buy.
So, naturally, watching their profit margin drop precipitously as customers flock to these other retail centers, Best Buy is trying to figure out a way to compete. It's too bad they're doing so by fighting their biggest disruptor head-on: by offering to match Amazon's price on everything.
In this month's HBR, Professor Clayton Christensen and I have an article that describes how to develop core business strategy in the face of disruption. The article, "Surviving Disruption," represents our first attempt in two decades to outline the other side of disruption — how to manage legacy businesses. Key to our advice is the implicit acknowledgement that all disruptive businesses find their strength in some technological or business model innovation that is fundamentally better positioned than their upmarket competitors in serving some segment of the population. In the case of Amazon and online retailing, the store free business model, with centralized distribution facilities, and incredible scale, positions the disruptive business to win the customers shopping on price alone. For Best Buy, turning to fight their disruptor head on is asking for swift defeat.
To survive disruption, managers of legacy businesses need to change the game. Best Buy needs to take stock of its unique advantages and compete for the customers that disruptive entrants are currently poorly positioned to win.
As an example, think about why both consumers and businesses turn to Best Buy today. Some consumers go to see how their products look and feel before purchasing (often from Amazon), some go to ask Best Buy's store representatives for advice on their next purchase (often occurring at Amazon), some go to pick up the latest greatest video game for immediate satisfaction, some go for last-minute electronic equipment before an event (like buying a new TV before the Super Bowl), and so on. Equipment makers turn to the chain for very different reasons. Some turn to Best Buy for widespread distribution (for which many they also turn to Amazon), some turn to Best Buy for display environments (a few also employ their own retail stores to this end), and still others turn to Best Buy for their knowledgeable sales force (namely the high-end component makers who position their goods within Best Buy's Magnolia stores within the store).
Based on the theory of disruption alone, it's hard to say what the retail giant should do. But it is rather easy to say what the big box electronics store shouldn't do — namely, match Amazon's prices. Right now, Best Buy is attempting to protect its customer population and increase its sales by taking a low cost strategy against a company fundamentally advantaged in low cost sales. Any way you look at it, they're strategic maneuver is flawed. Imagine that Amazon makes 5% margins today selling a TV through their online channel at the same price that Best Buy is selling the unit. That 5% margin might come not from scale, but from the absence of stores, retail employees, and reduced working capital requirements. With the policy instituted by Best Buy's management, what's to keep Amazon from selling at cost to drive Best Buy out of business? (The answer might simply be that Jeff Bezos is happy to have Best Buy serve as Amazon's unprofitable show-rooming partner).
Because Amazon is inherently advantaged in the low cost, commodity, transaction due to the very technology the store is built upon, Best Buy shouldn't be competing with the e-tailer head to head. It should be competing differently.
To survive their disruption, Best Buy should be looking for opportunities to optimize their business model around the jobs that Amazon can't do for customers. Maybe, for example, Best Buy could offer exclusive products for the customer who fears buying a product without seeing it in person. Customers with this job-to-be-done would happily pay a premium to buy a product they saw in person if it weren't available through online retailers for less. For instance, Best Buy could be the perfect home for retail distribution of products launched and funded through Kickstarter, which has seen 2012 as the year of the crowdfunded consumer electronics.
Exclusive distribution certainly won't be enough for Best Buy to right the ship. But there are literally hundreds of other ideas that could insulate the company from attack. It could charge equipment manufacturers for showroom space, forcing their profit to come from those customers who can't afford to set up their own distribution networks in the same fashion as Microsoft and Amazon. It could offer incredible on-site service that required customers to have purchased at a premium at a Best Buy (in the same way customers flock to the Apple's Genius Bar for help when the littlest thing goes wrong with their hardware). It could even focus more of its operations on the last-minute needs customers have for which no delivery network is fast enough, growing its automatic kiosk network.
The key is — however — that for each of the ideas for which customers will pay a premium, positions Best Buy as something other than a transactional retailer. For the Minneapolis giant to survive its disruption, it needs to be a uniquely positioned solution to customer problems.