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Case Analysis Best Buy has the Blues(Shirts)
Instructions: Please read the following case entitled "Best Buy Has the Blues (Shirts)". After reading this case, you should prepare an analysis following the guidelines I have provided. The purpose of this assignment is for you to demonstrate that you can apply the concepts, principles, and theories presented in the course readings. Your analysis must employ only the facts presented in the case description below. You must resist the temptation to introduce facts not in evidence in the case description by searching the internet for updated information. The company’s present situation is not necessarily the ideal solution that could be derived from a careful analysis of the facts as presented here.
This assignment is worth 80 points. Please post your completed case analysis under the "Assignments" tab.
Best Buy Has the Blues (Shirts)
Down the hall from the CEO’s office at Best Buy headquarters in Minneapolis, MN, there is 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 good health strategically, and keeping Best Buy’s strategy up and functioning. Anderson regularly prescribed doses of customer focus or, more precisely, focus on the customers’ 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 are in your 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 line-level employees who interact with our customers each and every day.”
This two-fold principle was at the heart of one of the first important innovations that Anderson, then the 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 did not 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% a year in the early 1990s.
The same principle motivated one of the first moves that Anderson made after he became CEO in 2002. Four months after his promotion, he bought a Minneapolis start-up firm that specialized in installing and repairing personal computers. 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 beginning that the technical-services market would continue to grow, but perhaps more importantly, he realized that competitors like Walmart 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 annual profit.
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 find suburban mothers, price-conscious family guys, or youthful gadget fiends. Beginning in 2003, Anderson started “centrizing” Best Buy stores by realigning them to cater to their most profitable segment or segments. A given location, for instance, may be geared toward young gadget fiends, while another might be geared toward suburban mothers. The store serving the first segment will have a broad range of videogames and special stations for trying out accessories, while the store serving the second segment will have a staff of personal shopping assistants to help a mother find the right digital camera for recording family activities. If a store caters to affluent tech enthusiasts, as about 40% of them do, there will be a home theater expert on hand.
Centrized stores require specialized 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 in-store 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 also 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 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 and angry individual, who was sitting there saying, ‘Why don’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, the company has begun developing relationships with small high-tech start-ups in order to prime the flow 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 branded products, including an Insignia line of PCs, TVs, and DVD players. 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 like Walmart and Dell, but also help it build relationships with start-ups specializing in cutting-edge categories.
More importantly, perhaps, Best Buy has reengineered its supply chain, or 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 is 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 discussed above, 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. As a result, suppliers must be continuously responsive to signals that come directly from stores, and agile enough to reconfigure shipments and all of 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 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 our 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 was already among the top-ten revenue-generating outlets in a 1,300-store global chain.
In a sign of volatile times, Best Buy announced in November 2008, when fourth-quarter sales threatened to decline from 5% to a whopping 15%, that it expected revenues for fiscal 2009 (which ended in February 2009) to fall short of projections. When the smoke had cleared, sales had gone up 4%, 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%, 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 market-share gains we’ve made will be sustained.”
Assignment: Due to your expertise in strategic management, you have been hired by Brad Anderson to evaluate Best Buy’s current strategy and make a recommendation as to which generic competitive strategy Best Buy should adopt. You should also recommend a strategy or strategy that will help the company better compete in the home goods retailing industry, which is now in the maturity stage of the product life cycle.