Best Buy Co., Inc. Customer-Centricity
Best Buy Co., Inc. Customer-Centricity
The consumer electronics giant, Best Buy, was first established in 1966 with a single location and a staff of three in St. Paul, Minnesota, selling audio equipment targeted at 18-25 year old males. Initially Sound of Music/Best Buy grew through acquisition, expanding to nine locations in the Twin Cities area by 1978. The name, Best Buy, and expanded product line, ranging from audio and video equipment to large appliances, were a result of a “best buy” sale of damaged inventory at bargain prices in 1981. In the mid-1980s, Best Buy launched superstores similar to those of their main competitor, Circuit City and expanded by 15 stores between 1985-86. In 1989, Best Buy launched itself as a self-service, value-store staffed with a salaried sales force to provide a no-pressure shopping experience. This approach resulted in Best Buy becoming the second largest electronics retailer. By 1995, Best Buy was opening an average of 35 new stores annually and in 2000, the retailer responded to the market by launching BestBuy.com.
Best Buy attributes some of their success to their SOP, standard operating platform, which is a 200 page “how to” manual for nearly every feasible store situation ranging from product sales and service to inventory management. The purpose of the SOP was to train the sales force and promote uniformity across the organization. In addition to the SOP, Best Buy’s skillful merchandising and marketing, along with their sales force (“Blue Shirts”) are credited with the success of the retailer. Blue Shirts received extensive training and enjoyed a unique and rewarding corporate culture, with part-time associates making $8.00 per hour and full-time employees earning $20.00.
Sales associates often received public recognition for strong performance in addition to immediate rewards such as restaurant vouchers. Supervisors were also incentivized based on annual department and store performance. Starting store managers in mid-size stores were compensated with salaries between $50,000 and $150,000. The success resulting from these practices did not go unnoticed by competitors such as Wal-Mart and Dell, who imitated many of Best Buy’s strategies and stole well trained Blue Shirts.
Best Buy continued their growth by opening new stores and through the acquisition of various competitors through the U.S. and reaching into Canada, with the acquisition of Future Shop Ltd. in 2002. By November 1995, Best Buy operated 796 Best Buy stores plus 20 Magnolia Audio Video stores in the U.S. and 162 Best Buy owned stores in Canada (978 stores, not including Geek Squad outlets). In contrast, Circuit City operated over 600 stores in the U.S. and Canada around the same time, however, Best Buy managed to double the sales per square foot of their main competitor. With nearly 1600 stores between the two main players in the electronics market, the market is nearing saturation and growth will have to be achieved by a means other than new store openings.
Best Buy’s pre-centricity model was easy for competitors to imitate and encroach on Best Buy’s market share. Best buy borrowed the superstore concept from Circuit City and Circuit City mirrored Best Buy’s staffing model and merchandising decisions. Low prices and a wide selection are hardly inimitable characteristics. While wide selection and expansive product offerings at discount prices (due to volume purchases) may be difficult for new entrants to copy, it is a minor/temporary barrier to entry with the introduction of the internet.
Best Buy’s CEO, Brad Anderson, joined the company in 1973 when he joined the staff of three at the then single, Sound of Music, location. A music buff addicted to sales, with his long tenure with company and in the industry seems like the logical choice to lead the company to even greater success as CEO. Prior to becoming CEO in 2002, Anderson had spent 11 years as President and COO of Best Buy. Like most industries, it seems electronics consumers were prone to change as products evolved, so did the end-users and their buying habits. Best Buy had a history of being able to adapt to the changing markets and their ability to do so contributed to their success (i.e. the vastly expanded product line, evolution to superstores, expansion, acquisition, converting from commission to salaried sales force.).
The perception that customers were focusing less on the technical aspect of products and redirecting their attention to service and support, led to Anderson’s custom-centricity initiative. This transition and the rollout of 144 new “centricity” Best Buy stores was being blamed for the company missing third quarter earnings in 2005, resulting in a 12% decline in stock value and a loss of nearly $2B in market capitalization. Did Anderson perform the proper strategic market planning analysis before selecting and implementing the centricity initiative?
Assess the need for a change in Best Buy’s strategy when Brand Anderson became CEO.
If the centricity concept is being blamed for not meeting earnings and the decline in Best Buy’s stock price and market capitalization, the question becomes was there a need for this change to the company’s strategy, was the strategy poorly implemented, was there a delayed market response to the change, or was the launch an overly aggressive action of a newly appointed CEO? The Best Buy leadership team first needed to evaluate whether there truly was a need for a (drastic) change and if so, was centricity the appropriate response to the market.
The electronics industry and retail in general is cyclical and while Best Buy needs to be proactive and receptive to market changes, it is not uncommon for the industry to experience temporary contractions that would not require (costly and risky) restructuring of the company’s value proposition. Granted, Best Buy’s one style fits all approach may have been too broad and unrealistic for the long-term. Ignoring the signs that the market was changing or a delayed reaction to those changes could be more costly or even fatal than centricity and the alleged result on earnings and stock price.
There are several approaches for Best Buy to evaluate this situation, the most desirable of which might be the Structure-Conduct-Performance-Paradigm. I will provide somewhat of a Resource Based View (listing a few marketing resources) and mention some of their Dynamic Capabilities, as provided in the case. Best Buy should fist consider their resources and the strengths that have made them successful in the past. While the past is not always indicative of the future, a historical perspective will provide some insight as to not only what has worked in the past, but how the company was able to implement various strategies to learn from their successes and failures.
Historically, Best Buy has utilized their knowledge resources well. Their rapid growth and success would imply a strong customer and competitor knowledge. Overall, the Best Buy reputation, as the place to get brand name electronics at discount prices with just the right amount of customer service, has proven to be a positive reputational resource. Blue Shirts are a (human) resource that should not be overlooked; retention is crucial, as training is costly. Blue Shirts are a valuable (informational) resource to gain insight into what customers “really want,” as sales associates have the most direct customer interaction.
Extracting this information from sales associates is a cost effective approach to assess the market before implementing major changes, such as centricity. Best Buy’s unique culture and structure are organizational resources that distinguish the company from the competition and support (non-managerial) employee retention. While supplier relationships are clearly a solid relational resource, customer relationships are somewhat of a gray area for Best Buy, as many customers are not loyal and often buy through various channels. Best Buy has responded to trend by launching their Reward Zone program to incentivize return customers and as a source to gain customer knowledge.
An obvious physical resource of Best Buy is its number of stores, which results in volume purchases, allowing the company to sell brand name merchandise to customers at discount prices. In contrast, an operation of this size with nearly 1000 stores and 120,000 employees incurs significant overhead costs (a potential weakness and often the first resources to be cut in an effort to reduce expenses). Many of the aforementioned resources are imitable in some way or another. For example, employees can be trained or Blue Shirts poached or the competition could open more stores and purchase more inventory, strengthening their relationships with suppliers and pass along the resulting volume discounts to customers. A resource based view would indicate that while these are valuable resources to Best Buy, they (along with many of the company’s resources and capabilities) are substitutable (i.e. suppliers can be interchanged) and imitable by the competition.
In response, Best Buy strives to not only offer the customer similar products and attributes as the competition, but to find a way to do so that provides a sustainable advantage. What makes Best Buy superior to its rivals? This requires a constant assessment of Best Buy’s marketing capabilities and this need to differentiate might explain Anderson’s drastic centricity approach. Pricing management is a complicated marketing capability at Best Buy with new technology products being constantly introduced, while others are becoming obsolete. It seems Best Buy excels in the selling and channel management marketing capabilities, with their ability to attract and retain knowledgeable sales associates and to maintain ongoing relationships with key suppliers.
The likely and often misused approach would be for the organization to perform a current SWOT analysis to consider their strengths, weaknesses, opportunities, and threats. I have already listed a few of Best Buy’s strengths (size, supplier relationships, Blue Shirts). Additionally, Best Buy has a history of evolving in response to the changing market and applying various innovative concepts in response. The ability to foresee or quickly assess and respond to market change seems to be a strength of the retailer. While extensive product offerings are a strength of Best Buy, having a significant inventory of products that rapidly become outdated is a necessary weakness of being an electronics retailer; finding a way to manage this would be a significant opportunity.
Accordingly, keeping up with rapidly changing products and customer interests are a threat of Best Buy any technology retailer. Anderson is exploring the opportunities component of the analysis when he and his team identified and pursued the following initiatives: “customer centricity, efficient enterprise, win with service, and win in entertainment,” ultimately selecting on customer centricity. A few obvious threats to be considered are competitors such as Wal-Mart, Circuit City, and Amazon, as well as the ever changing electronics market. Not keeping up with the latest trend, product, or channel could be fatal and explains why Anderson and his team concluded the need to focus on customer centricity, which he felt was a proactive response to the shopping experience that customers were seeking going forward.
What does the Customer-Centricity strategy imply and how is it different from a strategy of simply providing great service?
The Customer-Centricity strategy implies that Best Buy knows their customers well and that only a few sub-segments are profitable enough to merit an increased level of service and attention. This increased focus on these target segments or fewer/more profitable clients and the assumption that catering to these customers will result in solution purchases is the foundation of Anderson’s initiative. The concept seems to do very little to increase sales to the groups outside of the target segment(s) and seemingly does not consider the untapped potential of these customers. This approach is in contrast to the concept of trying to be “everything to everyone” or “one style fits all.” Centricity was an effort to meet customer individual needs while still maintaining the chain’s broad focus.
The idea of centricity was based on research that had found many of Best Buy’s customers were leaving dissatisfied and that roughly 20% of customer visits were unprofitable. It was an effort to revamp the store’s value proposition, which was a deviation from their previous winning formula and questionably a step a in a different direction from a core competency. Instead of the “one style fits all” approach which admittedly would leave some customers dissatisfied, while attempting to cater to the masses, Best Buy’s approach to centricity involved focusing on only one or two distinct customer segments at each store, which also required a new set of segment leaders. This approach was also a focus on Best Buy’s most profitable segments in an effort to deter their unprofitable shoppers.
Best Buy could have expanded their customer service efforts, while still maintaining the “one style fits all” concept through a far less radical change than centricity required. This would seem to be the logical choice and would have relied more on the strengths that made Best Buy great. With the market nearing saturation due to the number of stores, the focus became to sell more to existing customers (versus adding stores to acquire new ones) based on a better understanding of customers’ requirements and “lavishing them with attention, service, and know how.” This would have been attainable by tweaking Best Buy’s current strategy. Both approaches would involve collecting and analyzing customer data and creating an appropriate action plan based on the findings.
One aspect of the change was to “encourage employees to think and behave as owners and engage with customers to meet their unique needs.” This is one way to provide great service and obtainable outside of the centricity strategy. The objectives of building loyalty with profitable segments and leveraging the company’s existing assets, is not unique to centricity and could have been achieved by providing great customer service to all customers, while focusing on those that are more profitable. Both options involve customer research and additional training of sales associates; it would seem not implementing centricity, which required revamping the store format, new processes, and risked isolating some segments would be the more cost effective method to address the expected shift in the market.
Best Buy assumed that their customers were comprised of 5 major segments, who combined accounted for 50%-90% of total revenue. These 5 segments were identified by shoppers’ demographics, behaviors, and attitudes, then assigned a name (Barry, Buzz, Jill, Ray, or BB4B (small businesses with less than 20 employees)) and assigned a segment leader focused on deeply understanding their segment’s shopping behavior and attitude. The case states “the idea behind customer-centricity was to become the customer’s “smart friend” and provide a “complete solution.” While being a trusted advisor to customers and working to sell bundles of products is a logical response to the changing customer orientation, this could have been achieved by less drastic means than those used to implement Anderson’s centricity. This concept seems to center around Best Buy’s market orientation, specifically the increasing customer benefits component, as Best Buy already cannot take much action to further decrease the buyer’s costs.
The introduction of Reward Zone was a step in the right direction for the centricity initiative. The benefits of the reward program were multifaceted; providing additional customer data as well as incentivizing current customers to be repeat customers and to make additional purchases. This is one means by which to help Best Buy achieve a SCA, however, many competitors offered similar programs. It is unclear whether Best Buy directed much, if any attention on their competitor orientation.
In addition to gathering and analyzing customer data, it is advisable for the company to consider the strengths, weaknesses, strategies, and capabilities of their competitors. Anderson’s centricity plan does not appear to consider competitor orientation and focuses solely on a few select target segments. Keeping with the market orientation research, Best Buy already uses low costs as a source of competitive advantage and they are hoping that centricity will be a source of differentiation, however, competitor orientation is critical to the success of such an initiative.
Customer-Centricity has many similarities to simply providing an increased level of customer service. The most significant difference is the focus on the chain’s most profitable segments, specific to each store and complicated testing and implementation process that was chosen for the launch. Both concepts could be used to move toward solution selling and the “smart friend” concept. Centricity and improved customer service could involve empowering managers and encouraging employees to think and behave as owners. Centricity was a drastic way to improve customer service, which resulted in some pilot stores reporting double the performance gains of other U.S. locations.
There were many benefits that resulted from Anderson’s strategy such as reward zone and Geek Squad, which complimented the goal of providing a solution by adding a service component that Best Buy did not previously provide. Geek Squad was also a means by which to suggest a solution sale as well as it placed the retailer in the customer’s home or business, further strengthening the relationship with customer and providing the opportunity for addition recommendations and referrals when the “Geek” was onsite. The scientific approach that was used in the implementation of centricity was unique to the strategy, but in many ways could have been applied to multiple approaches to improve the customer experience. Centricity was ultimately a differentiation strategy used in hopes of being difficult for competitors to imitate. When Anderson launched centricity, he clearly realized that long term survival is more important than short-term profits. If nothing else the strategy is rare and difficult to imitate.
How was the new Customer-Centricity strategy implemented? What do you see as the strengths and weaknesses of the strategy’s implementation as described in the case?
The Customer-Centricity strategy was first introduced in 12 laboratory stores, then 32 pilot stores (most of which were in California), then introduced to 110 addition stores after some pilot stores reported performance gains double some comparable U.S. stores. Deviating from the clearly defined SOP, associates were now trained to approach problems using a scientific method involving the creating of a hypothesis regarding the customer, testing it, and analyzing the results. If the hypothesis was substantiated, it could be tested in other stores, and ultimately become a general recommendation throughout the organization.
This was concept of centricity that empowered associates and increased innovation from within, which is a strength of the new strategy. In contrast, the SOP was created to promote uniformity across the organization; this scientific component of centricity is a deviation from the uniform concept(s) that had been attributed to the company’s success. The resulting confusion in practices and procedures, while they may ultimately lead to a positive outcome and greater innovation, could be viewed as a weakness of the strategy (at least during the transition period).
The additional responsibilities placed on managers and staff, were a struggle and weakness. Employees who had previously been given guidelines for most any issue were now being given the freedom to develop and test their own responses, however, they were held accountable for the resulting outcomes. It was now up to the store manager to execute the value proposition. GMs were expected to lead by example, in light of the increased responsibility. The new processes were stated to take “five times more time” and while the resulting innovation is good, the extra effort required resulting in a turnover rate of two-thirds among GMs and an expectation among associates to be compensated for their extra effort.
However the ability for associates to tailor responses to individual customer situations, should ultimately improve customer satisfaction and loyalty, leading to increased profits. The entire focus of centricity is to increase customer satisfaction and improve retention, as acquisition is becoming increasingly difficult. This realization and reaction is itself if a response to the changing market, which is a strength of the organization. The empowerment of employees will result in exceeding customer’s initial expectations, as they are not accustomed to individualized solutions. This is another strength of centricity and how it was implemented.
I question why the majority of the initial 32 pilot stores were in California and why only top performing stores were selected for centricity conversion. It would seem focusing on a single geographic region would generate findings based on an isolated group of similar customers. Marketing studies suggest that in order to increase confidence, research must be replicated in diverse environments over time. This does not appear to be the approach with the testing of centricity at Best Buy and could be viewed as a weakness. I further question the decision to launch the concept in only top performing stores. It makes sense to test the strategy in some top performing stores to see if their performance improves further; it does not make sense to risk a large number of top performing locations with an unproven theory that could negatively impact their performance.
It seems logical to use the profits from top performing sites to offset some of the potential losses that are typical with the ramp up period of any significant launch or change. If a store is a top performer, I would first analyze what contributing factors make those stores top performers, be it location, management, or customer interactions, etc. to see if these points of differentiation could be applied to other locations to improve the performance of lesser stores, before revamping how the most successful locations achieve their success. There are many strengths and weakness of centricity and how Best Buy chose to implement it, the reality is that it is a long-term approach, which typically result in short term struggles and reduced profits.
How would you resolve the tension between the three parts of the organization (merchandizing, stores, and segments)? Is the notion of a three-legged stool viable? Can Best Buy sustain its competitiveness with P&L responsibilities residing with three different organizations?
The new strategy forced collaboration among groups that had not previously collaborated. It increased responsibility and accountability, while taking away control from groups that were accustomed to being in power. Shifting focus from a wide segment to a particular customer’s needs was a new concept requiring different resources. Segment organizations were now held accountable to deliver incremental growth. As a result of all these changes, the various parts of the organization felt “completely handcuffed.” As the previous sections indicate, higher gross profit margins could not compensate for the conversion costs of the changes being implemented.
While the goal may have been to “have everybody feel like they’re part of the same story,” making three parts of the organization responsible for their individualize P&L only added to the tension. I do not dispute that the organizations should monitory P&L and be held accountable, but when the success of the organization is the common goal, they should be working together to improve the overall P&L of the organization. This approach made it unclear which part owned customer insight and who should report to whom and how they should work together. Clarifying these gray areas of ownership and responsibility are the first step in resolving the tension among the groups. The current practices promote confusion and tension. A uniformed approach would be optimal.
In a retail organization, such as Best Buy, merchandizing, stores, and segments, are all critical to success. In varying situations, one “leg of the stool” may receive greater attention or responsibility, but that is typically for the advancement of the organization as a whole or to offset some of the focus of another part of the organization. All three legs are necessary for Best Buy to properly deliver their value proposition and all three are necessary to help management implement the marketing strategy. Merchandizing, stores, and segments are all part of Best Buy’s marketing mix. Merchandising and segments contribute to stores, but all are intertwined. The individualized P&L structure and scorecard assessment add to the tension and switch the weight placed on each leg, but without a leg or if one leg gets too weak (not enough focus), the stool (entire organization) could collapse.
As new products are suggested and tested, this changes the (buying and selling) processes, causing merchandising to be more reactionary than they were accustomed to being in the past, shifting the weight from one leg to another, but not reducing the importance of that organization. The absence of any one particular group or attribute could be detrimental to the organization as a whole. While each piece is interdependent and critical to the whole and policies should be designed accordingly. The realization that each piece contains and shapes the other will result in policies that help to reduce the tension between varying parts of the organization. While Best Buy is focusing on the customer and tailoring products and services to meet their needs a reflection on internal practices and satisfaction would be helpful and achieving those goals and should be considered, tested, and adjusted as well.
It will difficult for Best Buy to sustain its competitiveness with P&L responsibilities residing with three different organizations. As mentioned in the prior to sections, this practices ad tension to the organization, which is not good toward long-term success, and causes undue competition among the various organizations. Merchandizing is encouraged to improve their P&L, this may come at the price of a negative impact on the store’s P&L. This is the result of collaboration and reduces the competitive advantage of the overall organization. Centricity involves significant and complex changes, which both help and hinder the marketing strategy implementation. The success of the change will require the cooperation of all groups within the organization, especially merchandizing, stores, and segments.
Having policies and practices in place that discourage cooperation within the organization by holding complimentary groups accountable for separate measurements does not help Best Buy (or any organization) create synergies leading to a sustainable competitive advantage. The degree of alignment in itself is an implementation driver and contrasting accountability measures do not lead to alignment of goals. Best Buy experiences enough competitive rivalry in the marketplace without encouraging it internally among organizations. Best Buy is clearly a marketing organization and contributing factors of success are: “all the components of marketing organization fit together … in a way that simultaneously fits with the requirements of the firm’s strategy … while also matching the needs of the marketplace.”
Centricity is Anderson’s strategy to match the needs of the marketplace; the changing strategy requires some changes in various aspects of the company (including merchandizing, stores, and segments), however, it is still a requirement that they fit together, like the legs of a stool. I question if the continuation of separate P&Ls are the optimal way to maintain the fit and cooperation that is necessary for the success of a marketing organization. This seems contradictory to fit and is obviously a source of tension. How long before this becomes apparent and reveals itself to the marketplace; what effect with this have on stock price and market capitalization?
In order for centricity to be successful, Best Buy must alter their resource deployments to conform to their strategy changes to achieve the intended goal(s) vs. creating practices that foster tension without any long-term benefit. Granted, it is a tradeoff to fit the strategy to the structure or the structure to the strategy, which is complicated by the complexity of the organization. It is a requirement that they match their resources to their capabilities to their strategy and to market conditions. I hope that I have provided a few suggestions on how they could go about achieving this goal. While I have questioned many aspects of centricity and its implementation, it was obviously a success as unlike Circuit City; Best Buy still exists today (although they continue to struggle due to short product life cycle and the ever changing technology market).
University/College: University of California
Type of paper: Thesis/Dissertation Chapter
Date: 2 November 2016
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