A decade ago, if you wanted to invest in Best Buy Company, you had to pay 17 times the company’s earnings to acquire its shares. The market expected significant growth and healthy profitability. And its forecasts proved to be right: Since 2002, Best Buy has added more than 3,500 mammoth stores, US$30 billion of incremental revenues, and $1 billion of additional profit. Moreover, its return on equity (ROE) rose from an already high 23 percent to an incredible 36 percent between 2002 and 2008—when the financial crisis peaked—and remained solid through 2011.
In 2013, however, despite a level of profitability and net cash flow that would be the envy of many other companies, Best Buy’s shares cost less than 10 times the company’s earnings. That’s a discount of more than 40 percent from the S&P 500, even though Best Buy’s ROE is 50 percent higher than that of the average S&P 500 company, and its stock has recently benefited from both buyout speculation and a recent deal to open Samsung brand shops in 1,400 of its stores. Why? The market sees what you see: Best Buy is getting squeezed by the competition on multiple fronts. You can get the same (if not greater) range of products at lower prices with greater convenience from Amazon and Walmart, and cooler products from cooler places like the Apple store. Why does the world need Best Buy anymore?
Indeed, the only way to justify Best Buy’s lowly valuation is to forecast negative growth from here to eternity. In effect, the market is saying that Best Buy will go the way of Circuit City, Borders, and Woolworth. To prove the market wrong, Best Buy badly needs a good dose of strategic innovation.
But is the company up to the task? Companies, particularly long-dominant ones such as Best Buy, find it almost impossible to change course to the extent demanded by a truly innovative strategy. The same traits that helped them grow and succeed at ever-larger scale—including dominant assets, repeatable processes, clear roles, and practiced expertise in key functional areas—make them heavy, inflexible, and too complex to act decisively when the winds shift. Even in the best of times, such firms struggle to adopt innovations that might upset their finely honed management systems and business models.
But that explanation tells only part of the story. It’s not just that companies struggle to implement innovative strategies, it’s that they struggle to develop them in the first place—despite the enormous time and money they spend every year on innovation and strategic planning. In our experience, this breakdown occurs because companies tend to operate in ways that limit and suppress their strategic intuition. There are four primary reasons for this situation.
First, consider a common corporate mantra: “Think big.” For some business leaders, setting big goals is a way to motivate the troops, excite the bosses (or shareholders), create a sense of urgency, or stretch their companies for greater effort. Yet goals themselves—even the big, hairy, audacious kind—rarely lead to new ideas. In fact, business history shows that big goals actually tend to follow rather than precede strategic innovation. For example, Google’s mission to digitize the world’s information came after it put together the pieces of its search-based business model. Further, goals at most companies are used more frequently to express their aspirations, particularly financial ones, than to drive strategic innovation. No amount of aspirational goal setting at Best Buy—“to become the place of choice for high-touch sales and service in consumer electronics” or “to produce consistent double-digit EPS growth”—will produce the innovative answer to its existential threat. More likely, it’ll just get in the way.