1/28/2013

Best Buy Co. Inc

Customer Centricity

By: Abhishek Shukla Sidhart Lunawat Ankur Talreja Dhritikesh Manish Gupta

Case summary:
Best Buy business model has started and developed for almost 40 years as one style fits all and everything at the cheapest price. Customers habits were changing over time and his sales slowly declining as it was happening in other business, also due to the growing competitiveness. The new business model was based on clear customer segmentation, great customer service and flexibility and delegation to Store manager and salesmen. The opportunity for Best Buy was to provide a unique service and shopping experience, targeting specific customer segments to encourage retention. Best Buy determined that 20% of its customers accounted for 80% of sales, so they decided to maximize their potential contribution. Best Buy identified 5 segments of its most important customers and their main characteristics. They introduced segment leaders to deeper understand customers needs, shopping behavior and to provide training to salesmen. Special attention was given to business users as they were representing about 30% of total revenue. In order to become more service oriented, Best Buy added new specialized positions such as geek squad, home theater installer and personal shopping assistant. According to the different region, each Best Buy store would focus in no more than 2 major segments. An extensive training on staff was provided to learn how to deliver customer complete solution with attention and know how in order to maximize customers potential contribution. More delegation was given to store managers and salesmen about marketing initiatives and merchandise location in order to get the flexibility needed by the individual stores to be focus on clients needs,

This big business transformation needed some transition time to allow the whole organization to synchronize to the new strategy. Best Buy had to face several challenges in implementing this strategy. Allowing front line people to take decision could end up with a focus on everything, and retain best trained people can be not successful. Connecting with the customers is the new Best Buys philosophy and it developed in its customer centric model. I think the most critical factor for this new model is its improved talent system that helps recognize and award employees for their unique skills. Best Buy was looking for a new competitive advantage versus its competitors and it was worth the risk of changing the whole organization and skillset. Some critical aspect of the new strategy can be if a stores demographic is going to change over time that would mean rotating people and re design stores layout and this can be very expensive. Another critical aspect of this approach is related to a lower customer satisfaction that can rise because of the focus on a narrow part of its clients.

Richfield, Minnesota based Best Buy co was the leading retailer of consumer electronincs, home-office products and related services in North America its operations included the distinct store formats Best Buy future shop in Canada and magnolia. The company had reported double digit revenue growth each and every year and rarely missed its earnings. However on December 13, 2005 Best buy missed its third quarter earning per share and due to that companys stock price fell nearly 12% that day and a loss of $2 billion in market capitalization. Brand Anderson was the CEO of best buy. He was the driving force behind the move to make best buy talent powered and customer driven. He saw best buy with nearly 120000 employees as a mature retailer headed for a slow decline unless it reengaged with its customer base. After looking at 3rd quarter result the company admitted that it did not understood the concept of centricity. The company questioned itself is the bad

performance a function of poor execution, flawed model or just a lag between implementation & results. Company Background Established in 1966 by Richard M Schulze in Minnesota as a single high quality audio store. In 1970 the company grew & reached revenue of $ 1 million. By 1973 Brad Anderson a Music Buff joined the company as a commissioned salesman & by 1978 Best buy had stores across 9 different locations. In 1981 Best Buy sold its inventory (damaged in tornado) at a bargained price, which was a success & led to a new corporate name Best Buy & used its name to expand in different product lines including cameras & microwaves etc. Expansion of Best Buy By 1995 Best Buy had on average about 35 stores operating & emerged as top retailer of PCs to home users. Best Buy also conceived an idea of creating SOP manual (Standard operating platform) including all the instructions related to its operations. The aim of creating the manual was to ensure uniformity across network. For its ever expanding customer base they also opened information kiosks & provided the best trained staff service on floor. In 2001 Best Buy acquired Seattle based Magnolia Hi-Fi Inc & in 2002 in acquired Future Shop Ltd a Canadian electronic chain. Further in 3 years it expanded & integrated 20 Magnolia & operated 100 Future Shop stores. As of November 26, 2005 the company operates 796 Best Buy stores in USA, 119 Future Stores, 43 Best Buy stores in Canada, 20 Standalone Magnolia stores * 13 Standalone Geek squad outlets in USA. Best Buy success was majorly attributed to its skillful merchandising & marketing. Its Blue shirt & Khaki clad provided a competitive advantage. The blue shirts were motivated, trained & rewarded. The day for sales team started with 7-3-1 a corporate cheer, this cheer was to boost team spirit & enhance employee retention. Sometimes the staff, GMs used to yell Boom or sing Elvis

tunes to embark high sales & sometimes good work was rewarded at the spot by providing a $ 50 voucher or an monetary incentive to part timers or full timers. Controlled Revolution After 11 years of work Anderson in year 2002 took over as CEO of Best Buy. The major worry for him was the fading image of Best Buy in front of their competitors such as Wal-Mart or Target. In 2003 the competition grew tougher as Dell & Wal-Mart pitched in with products that were dominated by Best Buy earlier & started imitating models of Best Buy. Despite all other players coming in the major threat for Best Buy has been Circuit City which operates about 600 stores in USA & Canada. In a research carried by Best Buy it was found out that 1/3rd of visitors left dissatisfied, as the products did not meet the individual needs. Thus the one style fits all concept needed to be redefined thus Best Buy took 4 pivotal Strategic Initiatives: - Customer Centricity, Efficient Enterprise, Win with Service & Win in entertainment. Of these the most important was Customer Centricity . Towards Customer Centricity Best Buy stores sell items in 4 major categories: Consumer Electronics, Home Office, Entertainment Software & Appliances. The 5 main suppliers for Best Buy are Sony, Hewlett Packard, Toshiba, eMachines & Samsung representing nearly 33% of total merchandise offered. To remain in lead in USA Best Buy had to sell more high margin products & add economic value to its operations as it was nearing saturation. Best Buy determined 20% of its customers (Angels) accounted for its 80% of sales for its new products without markdowns or rebates in contrast devils were high maintenance bargain shoppers who asked for price matching & returned purchases.

Best Buy called in for consultants to foster innovation culture that would enable firm to serve better to its existing profitable customers. In May 2003, the strategy was to encourage employees to think & behave as owners & engage with customers to meet their needs & offering them a broader assortment & shopping assistance. The customer centric model revolved around servicing 5 major segments. Each segment was named differently such as Barry referred to affluent professional males of 50 years & older. Female shoppers were separated on the basis on their age & family status whereas Male shoppers were segregated on Income, affinity to explore etc.. A leader knowing the pros & cons of ran each segment independently knowing shopping behavior & attitude. The idea behind customer centricity was to become customers smart Friend & provide complete solution. The management believed that Best Buy could capitalize the trend by converging & focusing on sales staff & solutions to customers. In launching customer centricity an autocratic set of power tools to support the vision & execute it. Customer Centricity was a top to down approach that required stores, buyers & organization to work together as never before.

Customer Centricity in Practice:

Best buy decided to put a new approach into practice called the customer centricity. For this the company set up 12 labs, to test this concept in 32 of its pilot stores mostly in California. This involved the following: Changes in merchandizing. Changes in service Infrastructure renovations like home theatres.

The primary investment was mostly in labor, as they had to train the employees more to understand the customer needs and wants. During this phase they added the geek squad agents, home theatre installers, and personal shopping assistants. The major focus of the company now was shifting from products to service and people. The blue shirts also performed psyche walks to practice right behavior ahead of changes. All these practices resulted in higher gross profit of 0.5% of revenue, which in turn resulted in to adding 110 more stores to this model.

Best buy acquired companies like Geek Squad and Magnolia, which indeed were an asset to them. Another important thing adopted was joining the magnolia and a best buy store, which resulted in a great return. This was done because the customers used to visit both the stores simultaneously. Joining them provided an added advantage. Magnolia was a great asset to the company as it occupied only 1% of the retail space and generated about $6.9 million per store, which resulted in expansion of the same brand to 100 stores.

Geek Squad:
This was an acquisition of Best Buy co. Geek squad is a residential and commercial computer support service which provides 24 hr. computer installation and repair services. By 2005, it had 7000 agents providing services in US and Canadian Best Buy stores. This was a very popular service, which was giving a good result to Best Buy. Customer centricity encouraged the Blue shirts to determine the ultimate use of the product. Geek squad handled mostly the Business clients.

Customer Centricity Decisions:

Gave freedom to employees to come out of the box and sell the goods. Employees could move items around if they thought it to yield a better result. Associates were trained to approach problems scientifically by observing customer behavior. Customer centricity had also empowered the stores to tailor marketing communications by ethnic groups. The freedom given to employees and ideas adopted from them thus indeed proved to be at the better end.

The Stores:
By 2005 Best Buy operated over 900 stores in US and Canada. It decided to adopt a new technique that is to focus on customers rather product. This strategy that they were using was called as customer centricity strategy. In this only top performing stores were selected for centricity conversion.

To introduce customer centricity segment leaders worked with merchants and store organizations to suit best value proposition. GMs had to be careful in grasping the core differences between various demographic needs to avoid alienating customer segment.

Segments could work together but could not be coupled. They could Target not more than 2 segments per store. Store managers role was also very important as he had different things to manage at the same time, which meets the value proposition. Without overspending on labor the store managers had to be able to justify the sales on the floor. They had to work according to the value proposition.

Segment leader in each store also played a key role. The segment leader had to be aware of the customer requirement and train the employees about the product so that they have good knowledge of the product they are selling. The multiplier here was the understanding of the segment leader and store manager.

The sales force team managers had to know what the customers needs and wanted, especially when the customer was confused or did not know what to buy. Customer centricity put enormous pressure on the stores to move beyond implementation excellence. Six-part continuum also was important which was a part of customer centricity. 1st leadership 2nd talent 3rd SOP 4th understanding of return on invested capital 5th segmentation 6th innovation.

First three elements are foundational and others are customer centric elements. During the customer centricity approach some parts of the organization was resisting change and they only wanted to focus on innovation and nothing else. But Mr. Dunn wanted to have both innovation and customer centricity approach to focus on customer needs and wants. There was a Challenge of having 120000 people all in different places with different interpretations and different biases and own views.

From Managing Product to Managing People:

Under the new approach of customer centricity The GMs were expected to lead by engaging of the floor activities and being involved in the selling procedure. They had to manage the employees and match the customer demands. More concentration on people than products, which was a time taking job.

They also had to figure out how to get their employees especially sales people to be trusted friend and come up with solutions versus more products. Moving to owner/operator mind set from working a store like every day. With customer centricity they had to get blue shirts build relationships. Rewards to employees who add value to companies bottom line.

Best buy turned over 2/3rds of its GM in a year, which was common in the industry, but later they started retention of these GMs, which reduced the turnover.

Taking stock:

Daily feedback on customer centricity effects was given. It showed how the store teams executed strategy and its effects after implementation. The expectations were being met and the store managers knew the revenue per day department by department, they also knew where the store ranked in terms of sales and ROIC. For improvement opportunities segment leaders examined daily store scorecards for stores in which their segment were represented.

The Merchant Organization: Customer centricity succeeded the merchant organization. The main roles of the merchant organization was to decide upon buying, pricing, assorting and merchandising. Business units were divided on the following basis: MP3 Players CD Players TVs PCs Cameras

So far, Best Buy has been a merchant driven organization. However the introduction of segment organization meant that there was collaboration required within the organization so that they all work together as a team. Merchant organization was holistically redesigned. The new structure was divided into seven domains with each

of them having some merchandise under them. The Domains were categorised in the following manner: 1. Home-entertainment experience 2. Sharing Memories 3. Personal Communication 4. Listening to music 5. Playing Games 6. Home Life 7. Business Minded Each domain was taken care by a domain head that reported to 3 senior Vice Presidents via directors and team leaders. The Vice presidents functioned like chief merchants and chief strategists. They had their targets related to the Economic Value Added or EVA, Customer metrics and engagement metrics. The merchant VPs were expected to grow their business by offering accessories and services in addition to identifying the customers most likely to make purchases on these packages. The entire value proposition as observed by Best Buy executives has changed and evolved. The role of a value chain was felt to a great extent as a $5 -6 billion domain had evolved into a $ 25 billion domain. Customer centricity also meant a few changes were incorporated in decision rights. For instance, earlier merchants could try out their ideas at the stores but with the new approach idea testing was to be done in the lab stores. The segment leaders were thought of as a great input to the domains in terms of how to talk with the vendors and about building out solutions. Attempts were made to maintain a good relationship and the fact that the merchants and segments could benefit each other. Thus far, the merchant had been calling the shots and they were the decision maker, but with the customer centric approach and the introduction of the Segment, it became a touch complex.

Segment Organization and the P/L debate A move that was in accordance with the customer centricity approach adopted by Best Buy, Segment organisations were introduced. However, it seemed that there were conflict of interest when the segments articulated new sales opportunities to both the General Managers as well as the merchant organisation. The latters feared that

focussing on the new client base may jeopardise their existing customer base and also the fact that they were told to focus on a narrower customer base as compared to what they had been accustomed to thus far. The fact of the matter was there was sharing of control which was not the case with the merchant organisation who had been controlling the customer relationship and interactions entirely on their own. The segment leader worked with the store manager and his team in order to execute the value proposition. It was required that the right talent and a good reward system was in place, in order to make a successful conversion. So the segment leader felt that in order to implement his strategy at the store a person needed to be appointed. It must be noted that the profitability of the segment depended heavily on the merchants and stores. The segment was accountable for the overall profit and incremental growth. It seemed very frustrating for the segment leaders when their ideas were not accepted by the store and the merchant organization. So the point of the matter was who would be the connecting link between the customers and the overall organization. Although merchants were found to be well skilled, it was also felt that the segments be given an opening into the relationship with the clients. The stores, the merchants and the segments all had their own Profit and losses. A segment leader however strongly felt that it was an incorrect strategy and that there needed to be just one profit and loss statement for the entire organization and everyone making their contributions to it. The question, however, remained as to who owned the customer rights

Synchronization, Pace and Fragmentation: The idea behind becoming customer centric was very rational and noble. However, Best Buy acknowledged that they failed to execute it properly. In fact they felt that they overdid a few things. First and foremost the amount of synchronization and coordination that was expected as well as required was found wanting.

Expansion to a large extent was carried out but Best Buy was unable to deliver the value proposition to the. Over 250 stores had been converted into centricity stores. The margin of gross profit didnt really prove sufficient to cover selling, general and administrative expenses

Following must be taken into consideration regarding Centricity stores or converted stores.: 1. No up-gradation in a long time 2. Rising Staffing expenses 3. Higher labour costs 4. Addition of Business oriented sales associates, personal shopping assistants, etc. 5. Higher rate of increase in expenses Excessive segmentation had accounted for fragmentation. The problem over here was that everyone wanted to contribute in every matter and in such a case it is difficult to set accountability. Focusing on one segment was fine but that should not have affected the other segments and their functioning.

Unlocking the Human Potential Although the new approach had a lot of issues and problems, Best Buy strongly felt that their approach had always been right and they only needed to execute centricity a touch better. For instance innovation by individuals was on what the company began to count upon as far as the target to increase revenue by 10 % was concerned. The quality of human capital was attributed to reduction in costs and wastage and losing customers. The customers were often confused and this meant that they were likely to leave without making purchases. This is where Best Buy saw an opportunity to improve upon.