Best Buy Case: Group 4

According to Michael Porter, companies can combat competitive forces and gain a sustainable competitive advantage by pursuing one of three generic strategies: segmentation, cost leadership, or differentiation (A to Z Management Concepts & Models, 2005). Unfortunately, Best Buy failed to capitalize on one of these strategies by trying to offer best-in-class service with a highly customer-centric philosophy while also trying to maintain its cost advantage in the market due to purchasing name brand products at a discount. Walmart on the other hand is an example of a growing competitor at the time that was able to fully exploit its cost leadership strategy by forgoing focusing on specific segments or offering a unique benefit.

Because of this, Walmart achieved a net margin of 6% in 2003 compared to Best Buy’s of 0.05% (Bourgeois and Chakravarthy, 2004). We will dive deeper into Best Buy’s main issues in implementing their centricity strategy and provide recommendations on what they could have done differently to achieve success at the time, and where they have landed today.

Presented the situation at the time, the need to adopt a new strategy when Brad Anderson became CEO was forward-thinking and wise, yet overall risky since there was little data to back up such a huge change. Best Buy was already a successful company; dominant in the industry for the previous eight years. Given that they were industry leaders for so long, it’s arguable that adopting the new strategy was unnecessary, especially at that large of scale. Although Anderson was concerned about main competitor Circuit City and up-in-coming competitors such as Wal-Mart, Target, and Amazon, Best Buy was still a market leader.

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Best Buy did see, however, that they’d nearly saturated the market with 1,000 stores. There were also changes that needed to be addressed in the market. First, the customer shift towards more service-oriented brands as opposed to those solely focused on the product was increasing. Meanwhile, other mass merchandisers were beginning to carry similar products. As a mature company with the worry that they would lose their competitive advantage, commoditization of the products could have been on the horizon. This meant in order to grow the business further, they had to look to a different strategy. Given these circumstances, it was wise of Anderson to consider adopting the new customer centricity strategy which could have proven valuable over an extended period of time; however, the implementation at such a large-scale against a fast-coming, self-imposed deadline was unnecessary and aggressive. It should have been done keeping in mind the company’s agility and ability to adapt to change of this scale. Since Best Buy wasn’t yet experiencing any negative effects in the market, they really could have taken their time to develop the best approach and make sure that their organizational structure was completely prepared for the change.

More broadly, customer-centricity strategy suggests that the company become customer obsessed and every decision is undertaken while keeping the customer at the hub. For the strategy to be successful, the brand needs to gain extensive knowledge about customers, define their needs, and provide holistic solutions for a consumer’s requirement. It’s an inside-out approach to customer needs. It involves segmenting customers and keeping these segments at the forefront of building relationships. The objective is to encourage enriching customer experience to gain trust and loyalty. Strategy of great service is different in a way where the organization pays attention to the customer and finds ways to serve them. Focusing solely on great service may imply providing the customer with what they ask for and doing whatever one can to “please them”. In contrast, customer centricity is about quickly identifying your customers and providing solutions to problems they did not know they may have had. Therefore, great service is more of an outside-in approach that may not be a complete solution to the customer’s desires and is more focused on the short-term.

Best Buy put the customer at the center of this need by beginning with researching them. They started by recognizing that consumer needs were changing towards being more service and support driven. They also found that their “One Style Fits All” in-store approach was no longer effectively converting consumers into customers. Because of this, Best Buy realized they needed to focus more on the customer and therefore decided to implement a customer centric strategy to its business model. Best Buy developed a better understanding of customer needs and differentiated customer segments that consisted of specific profiles meant to capture a large group of like-minded individuals. These segments catered to their specific wants, needs, characteristics, family dynamics, income, and education— all of which allowed the company to target them more effectively. Based on these customer segments and subsegments, Best Buy was able to develop tailored marketing and sales strategies which enabled them to better convert leads to sales. By putting the customer at the center of all decision-making processes, Best Buy promoted the culture of continuous innovation leading to better service and attention to the customer.

Best Buy had historical data on its customers, top selling items, most profitable stores, inventory stock, and much more. They utilized the data by focusing more on its top-line/profitable segment of customers. It formed clusters by profiling each of these segments and made modifications by concentrating on not more than two segments in a store. Data also provided Best Buy with clear insights into segments further personalizing and revolving marketing communications accordingly. Based on their laboratory experiments and success rates, most profit-making and adaptable stores were chosen to roll out new strategies in merchandising, service, and infrastructure. Service to the customers were expanded in other areas such as network installation, home-theatres based on their prior satisfactory feedback on services. By utilizing the existing information, they could convert the data insights into opportunities and involve both employees and customers.

In practice, Best Buy used their market research and data to create a unique value proposition for each of its identified profitable segments and put service and support at the heart of the business to meet individual needs on a deep level. On the frontlines, this strategy gave sales associates the ability to make decisions that would enable them to sell better. At a higher level, new segment leaders were introduced, and merchants responsible for buying, pricing, assorting, and merchandising now had to collaborate at a higher level to cater specifically to the defined segments. The customer centricity concept was only implemented in stores that achieved top performance and were equipped with leadership, talent, and had strong ties to following the standard operating platform. In this, only high performing stores were converted into centricity stores, which gave way to a more demoralized workforce at lower performing stores that were seen as “not worthy” of being converted.

The centricity model also took it a step further, where the stores were expected to master business acumen, the importance of segmentation, and the drive for innovation. After highly successful stores were identified to be converted, segment leaders and merchants would work together to determine which stores could benefit from a value proposition and which customer segments to zone in on. These piloted lab stores first showed positive results and realized a 0.5% higher gross profit rate of revenue.

Although Best Buy was able to positively leverage their previous acquisitions and incorporate them into certain stores that aligned with certain segments as well as provide next level service which created an ecosystem to meet customer needs, there were detriments that took hold in implementation. Centricity stores required store personnel, merchants, and segments to interact and collaborate at a higher level than ever before. While their previous success was attributed to their thoughtful merchandising which once was fully in the hands of the merchant, positions of power had shifted. Not only did they have to interact with other teams differently, but they had to think about SKUs differently and about how different products could be rolled into different domains, whereas there was no issue with this before. Additionally, each group was responsible for their own P&L, even though they each had a contribution in the overall P&L. Therefore, each group was motivated by their own profitability, while made it difficult when groups like the merchants were being told which segments to focus on when purchasing by segment leaders. Throughout the process, they focused on serving specific segments, but in the end defined too many customer profiles and tried being everything to everybody, even to segments like Jill when the stores weren’t originally created with a women-focus in mind. Profitability wise, Best Buy ran into high conversion costs and human capital costs that were not controlled or thought out previously when thinking about their overall business strategy as being able to offer the ‘Best Buy’ of brand name products.

Problems in implementation could have been avoided by bringing suggestions of management teams into the decision-making process from the early stages of strategic planning. Change desired by Anderson was too much and the timeline to achieve was too soon. Better forethought and groundwork could have eased down the pain of scalability. The new strategy empowered the store and store managers but at the same time the amount of pressure it brought to the stores cannot be missed. They were not prepared to handle it. Decisions made by segment departments were heavily dependent on merchants and stores division, which contributed to the lack of harmony between crucial units of business. Expenses incurred were more than what the profit margins could fill. This slowed down the financial standing of Best Buy. If these points were considered from the beginning of strategic implementation, they may have had fewer problems.

Today, Best Buy has proven to be successful and has grown substantially since 2004. As of Best Buy’s annual report for 2019, they have a current domestic store count of 997 stores up from 608 in 2004 (Quick links, 2019). Since this case, they’ve been able to almost double their revenue, dollars in millions, from $24,548 in 2004 to $42,879 at the close of 2019 (Quick links 2019). Based on their annual report, their purpose is to “enrich lives through technology by addressing key customer needs in areas such as entertainment, productivity, communication, food, security and health and wellness…and see the potential from expanding this focus to build deeper, lasting customer relationships” (Quick links, 2019). Seemingly still focused on customer centricity to a certain degree, they’ve also expanded into different categories since 2004 and have refocused on cost-reducing business activities.