Fundamentals of Management 6th Edition by Ricky Griffin

Exercise 20

Thinking Outside the Big Box
Down the hall from the CEO's office at Best Buy headquarters in Minneapolis, there's a row of hospital beds, each containing the effigy of an ailing or deceased American retailer. Bedside charts reveal dire financial results. A nearby sign reads: "This is where companies go when their strategies get sick."
As CEO of Best Buy, the world's largest consumer-electronics retailer, from 2002 to 2009, Brad Anderson saw his job as keeping the company in strategic good health, and to keep Best Buy's strategy up and functioning, Anderson regularly prescribed doses of customer focus-or, more precisely, focus on the customer's experience at Best Buy. "In our world," says Anderson, "the way you win the game isn't the price of the TV-which is about the same for all retailers-but the experience you give customers once they're in our stores." For Anderson, this principle led quite naturally to the corollary that success in retailing depends on the people who are most responsible for the customer's in-store experience-"those linelevel employees who interact with our customers each and every day."
This twofold principle was at the heart of one of the first important innovations that Anderson, then right-hand man to founder and CEO Richard Schulze, implemented at Best Buy. In 1989, the company stopped paying commissions to its sales staff and put them on salary instead. The move didn't go over well with the big suppliers who expected a retailer's salespeople to push their premium products, but customers appreciated the break from high-pressure sales tactics, and revenues at Best Buy jumped by 25 percent a year in the early 1990s.
The same principle motivated one of the first moves that Anderson made after becoming CEO in June 2002. Four months later, he bought a Minneapolis start-up that specialized in installing and fixing PCs. Within a year, he had opened Geek Squad "precincts" in more than 20 Best Buy stores, and by 2005, there was a Geek Squad presence in every store in the chain. Whether working at the customer's home, in a Best Buy outlet, over the phone, or online, the Geeks constitute a first line of defense against the technological frustrations that can sap the value out of an electronics purchase and the goodwill out of a customer experience. Anderson was confident from the first that the technicalservices market would continue to grow, but perhaps more importantly, he realized that competitors such as Wal-Mart and Costco would never offer the kind of customer services that Best Buy could offer through the Geek Squad. On sales of $1 billion, the Geek Squad now generates about $280 million in profits annually.
By far, however, Anderson's most ambitious strategic gambit has been the "customer-centricity"-or just plain "centricity"-initiative. The keys to centricity are demographics and segmentation. From store to store, the most valuable customers-the ones whose patronage is most lucrative-don't necessarily belong to the same group of people. At one outlet, for example, the most profitable customers might be affluent tech enthusiasts; elsewhere, they may be suburban mothers, priceconscious family guys, or youthful gadget fiends. Beginning in 2003, Anderson started "centrizing" Best Buy stores-realigning them to cater to their most profitable segments (or combination of segments). A given location, for instance, may be geared toward young gadget fiends, another toward suburban mothers. The first will have a broad range of video games and special stations for trying out accessories; the second will have a staff of personal shopping assistants to help a homemaker find the right digital camera for recording family activities. If a store caters to affluent tech enthusiasts (as about 40 percent of them do), there will be a home-theater expert on hand.
Centrized stores require specialist employees, and employees are also crucial to the success of the centricity concept because it relies on personnel who are empowered to develop the most effective instore interactions with customers. Personal shopping assistants and home-theater experts may get weeks of training, and most line-level jobs call not only for evaluating the success of the centrized experience, but for recommending enhancements to it. "The closer you get to the customer," says Anderson, "the better your ability to see what the needs of the business are.… A person in a blue shirt in a store [a Best Buy associate] probably has the best single insight as to what your needs are.… I could take you through anything we do today … and all of it came from some individual-usually a misunderstood angry individual-who was sitting there saying, 'Why won't you do this?' and was having trouble being heard."
Under Anderson, Best Buy has also implemented various other strategies to overcome the limitations inherent in being a retailer of commodity products at low prices and low profit margins. For one thing, it's begun developing relationships with small high-tech start-ups to prime flows of new products into the market. That's how Best Buy got a three-month jump on competitors with Slingbox, a device that lets users channel TV programming from their homes to their PCs. Best Buy has also introduced its own house-brand products, including an Insignia line of PCs, TVs, and DVDs. The results in established product categories have been uneven so far, but Best Buy believes that developing its own product lines will not only allow it to compete on price with competitors such as Wal-Mart and Dell, but help it build relationships with start-ups specializing in cutting-edge categories.
Perhaps most importantly, Best Buy has reengineered its supply chain-the flow of products from suppliers to end users. It was always very good at getting high volumes of products out of factories and onto its shelves, but in keeping with the priorities of customer-centricity, it's now focusing on the components of the process most closely related to the task of meeting the needs of customer segments. All stores carry products for every customer-centric segment, but as we've seen, centrized stores focus on the needs of just one or two segments. To meet shifts or peculiarities in store-level demand, for example, frontline employees may be empowered to override inventory-management plans and stock higher inventories of certain products. Suppliers, therefore, must be continuously responsive to signals that come directly from stores-agile enough to reconfigure both shipments and all the information flows related to them.
Before Brad Anderson stepped down in June 2009, he expressed his faith in the effectiveness of customer-centricity to support the company's latest-and most critical-strategic initiative: "Our customer-centric business model," he explained, "gives us the confidence to be able to grow outside of the United States. We know that we must do three seemingly simple things to succeed: gain deep insights into our customers' priorities and lifestyles; figure out how we can encourage and nurture employee ingenuity on behalf of our customers; and then offer solutions that will result in great experiences for our customers." So far, Anderson's bet on centricity appears to be paying off. "We're still figuring out how customer-centricity works in China," reports Bob Willett, CEO of Best Buy International, but after just one year, Best Buy's four-story, 87,000-square foot Shanghai store is already among the top-ten revenuegenerating outlets in a 1,300-store global chain.
In a sign of the volatile times, Best Buy announced in November 2008, when fourth-quarter sales threatened to decline anywhere from 5 percent to a whopping 15 percent, that it expected revenues for fiscal 2009 (which ended in February 2009) to fall short of projections. When the smoke had cleared, however, sales had gone up 4 percent (in keeping with the company's original projections), thanks in part to another Brad Anderson gamble that had paid off: Although comparable-store sales (sales in stores that have been open for at least a year) had declined 6.8 percent, the losses were offset by revenues from 138 new stores that had been opened in the preceding 12 months. "While the environment continues to be as challenging as we expected," said Anderson, "consumers are being drawn to brands that they trust, and they are responding to our customer-centric model. In this light, we believe that the marketshare gains we've been making will be sustained."
How do Anderson's two new strategies increase Best Buy's differentiation advantage? How do they increase Best Buy's low-cost advantage?