· Corporate governance has become a hot issue in the U.S. over the past two decades. From your analysis of the case study, determine two possible corporate governance challenges that might be faced by Best Buy as a result of its rapid growth and why they could become corporate governance issues.

· Make recommendations for how Best Buy can overcome these challenges. Provide specific examples to support your response.

Introduction

In the battle to become the largest consumer electron- ics retailer in the US, some might say that Best Buy is up by a few rounds. Beginning as a single location car and home stereo store in 1966, Best Buy has grown into a massive firm with 1,400 stores in North America and over 2,600 stores in Europe and China.1 As recently as 2007, Best Buy was seen as the team to beat, boast- ing a strong lead in market share over its competitors, large and consistent profits, healthy stock returns, and a global expansion strategy. In accomplishing this feat, Best Buy brought down its biggest competitors—Circuit City and CompUSA.2 With CompUSA out of the way (at least temporarily) in 2007, the economic recession and the ensuing reduc- tion in consumer discretionary spending added the last bit of leverage needed to topple Circuit City in 2009.3 This allowed Best Buy to emerge as the clear champion of the large format consumer electronics retail segment; a position many consider prophetic of future success. However, whether the downfall of its competitors is the result of Best Buy’s superiority or simply the inevi- table demise of a retail model that is becoming obsolete remains to be seen. Unfortunately for Best Buy, recent results suggest that the latter might be the case. As shown in Exhibit 1, Best Buy’s recent stock returns have been consistently below those of the S&P retailing group as well as those of the S&P 500.4 In addition, revenue growth slowed to a miniscule 1.6 percent over the course of fiscal year 2011.i While the recession can be blamed at least in part for this reversal of fortunes, more of the blame likely lies with the presence of new competitors in the industry including the better diversified Walmart and Costco, additional “go straight to the source” Apple stores, and the monster of online retail—Amazon i Best Buy’s fiscal year 2011 closed on February 26, 2011. .com. In fact, Amazon’s stock price increase is a near mirror image of Best Buy’s stock price decline.5 Likewise, these new competitors have been gaining market share in the consumer electronics segment while Best Buy has been losing it.6 The threat of these new entrants is particularly ominous in that they are quite different from Best Buy in terms of their structure, focus, and features that customers find attractive. For example, it is not uncommon for a customer to browse Best Buy for a particular product, use Amazon’s app on their smartphone to scan the barcode, and then purchase the product from Amazon at a better price while still in Best Buy—a scenario that has led to a new—and painful— nickname for Best Buy—“Amazon’s showroom.”7 History In 1966, Richard Schulze, disgruntled that his suggestions for improvement weren’t being taken seriously, quit his family’s electronics distribution business and, together with a partner, started his Minnesota-based home and car stereo store called “Sound of Music.” The firm grew through acquisitions and the opening of new stores and hit the million-dollar revenue mark by 1970. During the 70s, Schulze’s company experienced significant financial success, allowing him to expand the chain and buy out his partner. Even early in his managerial career, Schulze showed an uncanny ability to adjust to market trends and seek out profitable opportunities. For example, his position on a school board gave him insight into the fact that the customer pool of 15- to 18-year-old males (his target demographic) was shrinking. Consequently, he adjusted his business approach by diversifying into appliances and video equipment with the goal of targeting the expanding demographic of older and wealthier customers emerging in the 80s. As another example, when a tornado destroyed one of his stores but left the inventory largely unharmed, Schulze held a “no frills parking lot sale with reduced prices. The approach was so successful that in 1983, Schulze reorganized the business into a superstore format under the “Best Buy” brand name and in 1985, took the new company public.