Case Studies Marketing Strategies

Case: Best Buy – Looking Forward – A New Way

The Best Buy Company, Inc. started out in 1907 in St. Paul, Minnesota under the name, Sound of Music, and specializing in audio equipment.[endnoteRef:1] It wasn’t until 1983 that the company changed its name to Best Buy. This represented a strategy shift to expand its operations into a wider assortment of discounted brand-name goods (e.g., appliances, videocassette recorders), central service, and warehouse distribution. “Despite rapid growth, Best Buy had become barely profitable in 1997 when the stock price bottomed out. … Management implemented changes throughout the retail stores that returned the chain to a position as a market leader.”[endnoteRef:2] Its expansion continued well into 2003. Along the way it had expanded geographically throughout the United States and Canada; added DVD hardware and software to its line of products; launched its Bestbuy.com website, and Redline Entertainment (an independent music label and action-sports video distributor); acquired Magnolia Hi-Fi (a high-end electronics retailer), Future Shop (a Canadian electronics chain), Musicland (a music and entertainment software retailer), and Geek Squad (a 24 hour computer support taskforce). By the end of 2003 it had over 600 stores.[endnoteRef:3] [1: http://en.wikipedia.org/wiki/Best_Buy] [2: “Brad Anderson 1949 - ,” Reference for Business, Encyclopedia of Business, 2nd ed., http://www.referenceforbusiness.com/biography/A-E/Anderson-Brad-1949.html] [3: http://en.wikipedia.org/wiki/Best_Buy]

Parallel to the company’s expansion was the rise of employee Brad Anderson . Anderson joined the company in 1973 as an audio-components salesperson when it was still named Sound of Music. He had an Associate of Arts degree from Waldorf College, a Bachelor’s in sociology from the University of Denver, and had attended Northwestern Seminary for one year.[endnoteRef:4] [endnoteRef:5] He worked his way up by starting in sales (1973 to 1981), to store manager (1981 to 1986), Vice President (1986 to 1991), Executive Vice President (1991 to 2001), President (2001 to 2002), and CEO and Vice Chairman (2002 to present).[endnoteRef:6] It was when co-founder Richard M. Schulze promoted Anderson to Vice President that he began to help shape the direction of the company. Anderson became Schulze’s “right hand man” where they both transformed the “chain from a commission-driven store to a discount store, warehouse-style format.”[endnoteRef:7] [4: Holm, Sheri Booms (2003), “Best Buy CEO Contemplates Faith and Leadership in the Workplace,” Story Magazine, Luther Seminary, 4th Quarter, http://www.luthersem.edu/story/default.aspx?article_id=67&issue_id=10] [5: “Brad Anderson 1949 - ,” Reference for Business, Encyclopedia of Business, 2nd ed., http://www.referenceforbusiness.com/biography/A-E/Anderson-Brad-1949.html] [6: “Brad Anderson 1949 - ,” Reference for Business, Encyclopedia of Business, 2nd ed., http://www.referenceforbusiness.com/biography/A-E/Anderson-Brad-1949.html] [7: “Brad Anderson (executive),” http://en.wikipedia.org/wiki/Brad_Anderson_%28executive%29]

In 2002, Brad Anderson succeeded Richard M. Schulze as CEO. This represented a pivotal point for Best Buy. At the time, competition was heating up in the electronics retail arena with competitors like Circuit City, Wal-Mart, and Costco. Price had become a main means for competition and, as a consequence, a shakeout was looming in the future. (Ultimately, it would be Circuit City that lost out, but this doesn’t occur until 2009.) At about the same time, “Best Buy ran into difficulties stemming from the 2001 acquisition of the Musicland chain. Through the Musicland acquisition, Best Buy was attempting to reach new customers and to increase sales of consumer electronics at Musicland stores. However, there were overall declines in mall traffic and in CD sales, partially due to music piracy, and Musicland customers did not purchase more electronics. Anderson developed a new company strategy focusing on existing Best Buy customers and sold the money-losing Musicland group in 2003.”[endnoteRef:8] [8: “Brad Anderson 1949 - ,” Reference for Business, Encyclopedia of Business, 2nd ed., http://www.referenceforbusiness.com/biography/A-E/Anderson-Brad-1949.html]

Meanwhile, Anderson had become aware of research by Columbia Professor Larry Selden which showed that “unprofitable customers can wreak havoc on a customer’s bottom line and stock price. … The notion of analyzing customer profitability and adopting strategies to either shed ones deemed unprofitable or change pricing, services or policies to improve their economics has been around for awhile – though few companies have had the [courage] to actually execute such strategies. Those that have, generally are manufacturers or distributors, who in most cases can simply cut off unprofitable customers/channels if they want. It’s quite another thing for a retailer to do so, given retail price transparency, generally homogeneous service policies, and open door access to all customers. … Despite resistance from his leadership team, CEO Anderson [had] forced through [the] changes that cater to the most profitable customers and discourage the devils.”[endnoteRef:9] This had become known as the “Angels-Devils” strategy.[endnoteRef:10] Perhaps, it also has some reference to Anderson’s seminary background. [9: (2004) “Best Buy Uses New Customer Analysis and Segmentation Strategy,” News and Views, November 18, http://www.scdigest.com/assets/NewsViews/04-11-18-1.cfm?cid=403&ctype=content] [10: McWilliams, Gary (2005), “the Customer Isn’t Always Right: Best Buy Wants to Keep the Wrong Kind of Shopper Out if its Stores,” The Wall Street Journal, January 2005, http://www.wsjclassroomedition.com/archive/05jan/bigb_bestbuy.htm]

In essence, Anderson’s strategy is utilizing the customer lifetime value (CLV) metric for the purposes of navigating Best Buy’s strategy. He is attempting to use a forward looking metric for strategy purposes. Anderson referred to his initiative as “customer centricity.” “The idea … was to create new stores that reflected the shopping patterns of local communities. Customer centricity was described in Forbes as involving ‘a massive effort to identify and serve the company's most profitable shoppers by rebuilding stores, adding to staff, and upgrading wares.’ Best Buy management reviewed products ‘to see what sold and what didn't in order to adjust merchandise according to the income level and buying habits of shoppers at every location.’”[endnoteRef:11] “Best Buy estimates that as many as a fifth of 500 million customer visits each year are undesirable. And the CEO wants to be rid of them. He says the strategy is based on a theory that advocates rating customers according to profitability, then dumping the up to 20% who are unprofitable. The new approach upends standard practice among mass merchants, who typically seek to maximize customer traffic.”[endnoteRef:12] “To deter the undesirables, it is cutting back on promotions and sales tactics that tend to draw them, and trimming them from marketing mailing lists.”[endnoteRef:13] “… Best Buy also started new restocking fees on returns, ended relationships with many shopping [the] Web, started selling returned merchandise only over the web, not in the same store where it was returned, policies all designed to thwart the devils.”[endnoteRef:14] [11: “Brad Anderson 1949 - ,” Reference for Business, Encyclopedia of Business, 2nd ed., http://www.referenceforbusiness.com/biography/A-E/Anderson-Brad-1949.html] [12: McWilliams, Gary (2005), “the Customer Isn’t Always Right: Best Buy Wants to Keep the Wrong Kind of Shopper Out if its Stores,” The Wall Street Journal, January 2005, http://www.wsjclassroomedition.com/archive/05jan/bigb_bestbuy.htm] [13: McWilliams, Gary (2005), “the Customer Isn’t Always Right: Best Buy Wants to Keep the Wrong Kind of Shopper Out if its Stores,” The Wall Street Journal, January 2005, http://www.wsjclassroomedition.com/archive/05jan/bigb_bestbuy.htm] [14: (2004) “Best Buy Uses New Customer Analysis and Segmentation Strategy,” News and Views, November 18, http://www.scdigest.com/assets/NewsViews/04-11-18-1.cfm?cid=403&ctype=content]

“As part of its research, for example, Best Buy discovered that 55 percent of its customers were women, and that for the most part they loathed their shopping experience at the retailer. Men look for a specific product at a discount price. Women want not just a digital camera, but a printer, cable, and other accessories -- and they care far more about these things than price. Equally important, they want help with installation, while most men prefer to try to put things together themselves. Accordingly, Best Buy adopted mostly common-sense solutions once it understood the issues involved. Related products were bundled together. In many stores, kids now have special play areas while their moms browse. To help with installation, the company acquired Geek Squad. Buy a flat screen TV and they'll have it running before your favorite show airs.”[endnoteRef:15] [15: Gulati, Ranjay (2010), “Inside Best Buy’s Customer-Centric Strategy,” April 12th, HBR Faculty, Harvard Business Review, http://blogs.hbr.org/hbsfaculty/2010/04/inside-best-buys-customer-cent.html]

They have applied the “customer centricity” theme to the point of even conceptualized store layouts and their amenities along the lines of customer profiles. For example, “Jill stores feature personal shopping assistants (PSAs) who know how to steer a homemaker to the right digital camera for her family. Buzz stores have broad assortments of video games. Stores can target more than one segment … ‘Centrizing’ a store is a big investment -- a typical Barry department alone requires as much as $600,000 for lighting and fixtures. Best Buy also invests in schooling employees in financial metrics such as return on invested capital so that they can gauge for themselves the effectiveness of merchandising displays. (Recent example: Buzz departments have an area where kids can try out Dance Pads, a video game accessory you activate with your feet.) Specialized salespeople, such as PSAs and home-theater experts, get additional training that may last weeks.”[endnoteRef:16] [16: McWilliams, Gary (2005), “the Customer Isn’t Always Right: Best Buy Wants to Keep the Wrong Kind of Shopper Out if its Stores,” The Wall Street Journal, January 2005, http://www.wsjclassroomedition.com/archive/05jan/bigb_bestbuy.htm]

Initially the stock market didn’t react well to Best Buy’s strategy with a 12% plunge in its stock price. But once the strategy started to play out, its stock price quickly rebounded in 2006.[endnoteRef:17] As of 2011, “As the world's leading consumer electronics specialty retailer, Best Buy would appear to be well positioned to capitalize on improving discretionary consumer spending patterns. However, … the fall of Circuit City and other industry participants has invited increased competition from mass merchants, warehouse clubs, and online retailers, changing the economics of the consumer electronics retail category in the process. Although Best Buy's customer-centric shopping environment and service offerings provide some differentiation, [the financial markets may not be] … convinced that the firm has enough of an economic moat to fend off its encroaching rivals over time.”[endnoteRef:18] It competitors today include Wal-Mart, Costco, Amazon.com, RadioShack, and HHGregg Incorporated. [17: Bolye, Matthew (2006), “Best Buy's giant gamble: Brad Anderson's consumer electronics superstore rules the market. So why is he messing with his business model?,” March 29th, Fortune, http://money.cnn.com/magazines/fortune/fortune_archive/2006/04/03/8373034/index.htm] [18: (2011), “Best Buy Co. Inc., BBY,” Morningstar, February 11th, http://quote.morningstar.com/Stock/s.aspx?t=BBY&culture=en-US&region=USA&r=992394&byrefresh=yes]

Research the Best Buy current situation. Based upon the information provided in the case and what you find out from your research, what would you recommend Best Buy do? What would a CLV perspective suggest they do? How well do you think Best Buy will do in this market? Explain your rationale.

References:

Mark E. Hill, Chapter 12 Page 4