As I think about Best Buy's strategic risk management issues, I keep coming back to the notion of "residual risk."
Best Buy is getting hammered by business professors, writers and pundits for – well, it's difficult to pinpoint the exact reason, as the nature of the criticism quickly veers toward the "personal" in the corporate sense (which companies should expect since corporations, like individual citizens, have the right to free speech).
That said, the source of Best Buy's challenges relate to a strategic risk that has lurked for years. I'll frame the current Best Buy story and then come back to residual risk.
Earlier this month, Forbes blogger and Internet industry analyst/consultant Larry Downes wrote a blog entry titled "Why Best Buy is Going out of Business...Gradually." Having just completed an article on the consulting issues and trends within the U.S. retail industry, I enjoyed reading Downes' piece. Although the headline is a grabber, Downes is not saying anything that almost any retail consultant has not said (at least off the record) in the past six to 12 months. The culprit of Best Buy's struggles is well-known: Amazon.com.
Amazon can provide essentially any product available in Best Buy's stores at lower prices. Given its lengthier and deeper experience as an online retailer, Amazon now dodges most of the supply chain and logistics issues that customers encounter at Best Buy's online store (and, to be fair, at many other online stores run by traditional, bricks-and-mortar retailers). Amazon, thanks mostly to its investment in logistics and technology during the past decade, is conquering the competition. Amazon's competition includes bricks-and-mortar book stores, electronics stores, toy stores and other flavors of retail businesses.
"Best Buy is a showroom for Amazon," says a top U.S. retail consultant. "Bricks-and mortar-bookstores are showrooms for Amazon. If you are Best Buy, OfficeMax or another larger retailer with a massive investment in store space, you should be very worried today." In other words, shoppers stroll into Best Buy to pick up and examine the latest tech gadgets, ask sales representatives questions, and then order the product on their smart phones from Amazon while strolling out the door and heading home.
To address this strategic risk, retailers are – or should be – greatly enhancing the in-person experience (i.e., services) available within their stores while greatly slashing costs (while improving internal processes, a neat trick that is keeping retail consultants very busy and happy, by the way) so that they can also offer lower prices.
Some retailers seem to have strong approaches to doing this; walk into a PetSmart with your puppy and you can talk to other pet-owners walking their dogs, consider adopting a kitten from a local animal-rescue organization, sign up for dog-training classes, visit the veterinarian and/or get your pooch groomed. (You'll also want to buy your kibble there because the weight of dog food makes online ordering and shipping a less attractive proposition.)
Best Buy, like most other traditional retailers, is struggling to address the strategic risk Amazon poses. For some reason, this struggle captivates business readers. In a follow-up post on Jan. 9, Downes reported that his original entry had so far received more than 2.3 million page views (or, as he took time to note, "more people had read my article than would shop at a Best Buy all week").
Many of those Forbes readers also took time to describe the unsatisfactory in-store service interactions they had experienced. This is where the personal (and perfectly valid) nature of the criticism ramps up: Downes wrote about a personal encounter in Best Buy store during which he and a friend felt like they were being hawked used cars. Two days before Christmas, New York Times tech blogger David Streitfeld gift-wrapped his own account of a negative in-store experience at Best Buy: "To venture into a Best Buy during these last days before Christmas is to see land-based retail hastening in its own demise, as if lambs were born with jars of mint jelly tied around their neck."
Retail is highly personal. All of us, including business writers and bloggers, shop. Risk managers in the retail industry should, and many do, pay close attention to reputational risk issues. Negative word of service and supply chain problems spread quickly and broadly in our social media-enabled world.
But what can, or should, retail risk managers do about Amazon.com? The answer may have something to do with ramping up their attention to residual risk. According to COSO's ERM "Application Techniques" report, residual risk is "the risk that remains after management's response to the risk."
Best Buy and other traditional retailers saw Amazon coming years ago. In response, they lowered prices and worked to strengthen their in-store service and customer experience offerings (e.g., Geek Squad). But residual risks remained; these moves were not sufficient as Amazon's offerings grew more expansive (what can't you buy from Amazon these days?), less expensive and faster (my Amazon Prime membership, an annual fee, gets me "free" second-day shipping along with unlimited access to the digital movies and television shows via the Roku player I bought through, yes, Amazon.).
In the retail sector, Amazon represented a residual risk that transformed into a massive strategic risk, in part, because too many management teams did not accurately estimate the future impact of Amazon's business model on their own business.
What residual risks may be lingering (too dully) on your organization's risk radar? I believe this is an important question for all companies, including (oddly enough) Amazon.
Best Buy, independent bookstores, shoe stores and most other retailers have not yet figured out a way to more effectively compete with Amazon. But they, or new entrants, will one day soon (my money is on good old-fashioned shopping malls after they receive a wireless/social-media/Amazon makeover).
If and when that happens, Amazon may be responding to its own reputational risk management challenges.