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As the nation’s leading consumer electronics retailer,

Best Buy istrying to be the best. And by responding to

changing trends, it’s trying something new in the

process—the fifth major evolution in its history.

Best Buy was founded under the name Sound of

Music in 1966 as a home and car stereo store by Dick

Schulze (who remains as board chairman), who got

tired of working for his father, who would never listen

to his ideas on how to improve the family’s electronics

distribution business. However, while chairing a

school board in the early 1980s, Schulze realized that

his target customer group—15- to18-year-old males—

was declining sharply. He decided to broaden his

product line and target older and more affluent cus-

tomers by offering appliances and VCRs—the first

major evolutionary change. In 1981, a tornado

wiped out his entire store (but not the inventory).

Schulze decided to spend his entire marketing budget

on advertising a huge parking lot sale. The successful

sale taught him the importance of strong advertising,

wide selection, and low prices—lessons that would

serve him well as he built his business. In 1983,

Schulze changed the name to Best Buy and began

to open superstores. The change in store format and

the fast-rising popularity of VCRs led to rapid growth.

The number of stores grew from 8 to 24 and revenues

skyrocketed from $29 million to $240 million.

In 1989, Schulze introduced the warehouse-like

store format—the second major evolutionary change. By

setting up stores so customers could browse where they

wanted, the company was able to reduce the number of

employees, a real cost-saver. Larger store formats were

introduced in 1994 and the company kept opening

new stores. By 1997, the company realized that it

had overextended itself with its expansion efforts, the

supersized stores, and costly consumer financing pro-

motions. In response, the company went through a

massive makeover, scaling back expansion plans and

doing away with its “no money down, no monthly

payments, no interest” program.

In 1999, Best Buy went through its third major

evolutionary change as digital electronics began to

flood the market. Store formats now highlighted digital

products and featured stations for computer software

and DVD demonstrations. It also decided to branch

out into audio and video stores by acquiring the

Magnolia Hi-Fi chain of stores and The Musicland

Group (Sam Goody Stores, Suncoast, On Cue, and

Media Play music stores). This strategy would turn out

to be a mistake, and Best Buy sold off the entire

Musicland subsidiary in June 2003.

In 2004, the company went through its fourth

major evolution—a focus on bundling high-end

electronics with service and installation, without

giving up the low prices. Best Buy CEO Brad

Anderson admitted the strategy was risky, stating,

“Nobody has been able to do this before. If we can

only figure out the puzzle.” Why did they start

messing with a successful formula? Because

Anderson felt there was “trouble” ahead. The com-

pany’s store base was maturing. Imports were

flooding the market and shorter product life cycles

were exerting severe price pressures on some of the

company’s most profitable products—digital TVs

cameras, and home entertainment systems. And

then there were Wal-Mart and Costco. These mass

merchants and even direct seller Dell were ramping

up their consumer electronics offerings. At the time,

Anderson reasoned, “If we do nothing, Wal-Mart

will surpass us by the simple fact they’re adding

more stores than we are each year.” There was no

way Best Buy could win by “trying to chase the cus-

tomer out of Wal-Mart.” However, even though Best

Buy felt that it couldn’t compete on merchandise, it

could compete with add-on services. Best Buy’s

acquisition of Geek Squad, a Minneapolis start-up,

was key to that strategy. In addition, Best Buy

began to sell private-label goods. It opened an

office in Shanghai in September 2003 that allowed

it to source products directly.

The company’s current strategy evolution started

with a massive effort to identify and serve its most

profitable shoppers (a process called “customer

centricity”), a strategy based on the belief that not

all customers are profitable ones. Some are lucra-

tive, while others cost more to sell to than their busi-

ness is worth. After researching massive amounts of

sales and demographics data, Best Buy identified

some lucrative consumer segments: Barry, the afflu-

ent tech enthusiast; Jill, a busy suburban mom;

Buzz, a young gadget freak; Ray, a price-conscious

family guy; Carrie, a young single woman; and oth-

ers. Each store is oriented toward the segments that

most reflect its customer base. Continuing its

commitment to this centricity strategy, Best Buy is

“getting in touch with its feminine side.” As a com-

pany vice president said, “We were a boy’s toy

store designed for boys by boys.” No more. Best

Buy is feminizing its stores by doing things such as

turning down the volume of store music, lowering

the bright lights, training salespeople to talk to cus-

tomers about their lifestyles, and eliminating the

flashing lights—all of this in an attempt to create a

softer, more personal atmosphere. In addition, Best

Buy is going smaller. Most of its new stores will be

30 to 40 percent smaller than the standard “big-

box” size format that has been popular over the

last decade. Two reasons are behind this decision.

The first is that electronics products are getting

smaller and shoppers are increasingly buying music

and movies online so not as much space is needed.

Question: . What opportunities and threats do you think are

facing this industry?explain the rationale behind your answers