Best Buy Customer Centricity Analysis - Harvard Business School Case 506055

This was, I think, one of my better case responses - prepared for corporate strategy class.

Best Buy’s customer centricity campaign was an experiment in adapting their tried-and-true business processes to better meet the needs of their customers. In the case, this change brought with it some success, but came up short in many other important areas. Nonetheless, while there may have been some troubles with tactics and implementation, this strategy and general customer focused approach is quite important for Best Buy’s continued success.

Yahoo Finance defines Best Buy’s industry as simply “Electronics Stores.” It could also be accurately described as “Consumer Electronics Retailing.” Success in this industry has traditionally been dependent on a few key success factors. Most important among these has been scale – companies need to maintaining a large enough size to offer a wide variety of products, have a strong negotiating position with suppliers, and control the territory through a significant number of well placed retail locations. Constantly trying to open more stores than one’s competitors however, brings market saturation and represents a limit to growth. Understanding this, Best Buy’s management decided to pursue the Centricity project so that they could intensify through customer focus rather than extensify through store openings, and thus continue their growth. In implementation, however, they wound up losing some important benefits of scale. Negotiating power was lost when merchandise decisions became less centralized, and because each store became focused on certain segments, it became more difficult to meet all of their customer’s needs in a given geographic area.

Other success factors involve effectively training and managing the large number of employees required for the large scale operations, adequately explaining the features and benefits of new technologies, and capitalizing on cross-selling opportunities. With the Centricity project, Best Buy took on a difficult managerial challenge. Where they had previously managed their reasonably homogenous 120,000 employee base through a flexible but consistent set of “Standard Operating Procedures,” they now had a more diverse workforce consisting of personal shoppers, technicians, and other experts, and their standard processes needed to be customized for each segment. This increased expertise helped the company better present the technology, give valuable recommendations, and cross sell, resulting in larger margins. At the same time though, it made managing their teams more difficult, meaning higher SG&A expenses and increased labor costs. In total, “Expenses increased 21.7% in the third quarter of 2005 as compared with 19.5% in the prior year.” (p13) In a tight margin business like electronics, small percentage differences like this can make a big difference.
Tangible resources are important to Best Buy, for example, having the right number of stores, each with up-to-date furnishings. Intangible resources however are substantially more important to them. As an example, their strong brand presence has developed through their knowledgeable staff, which in turn developed from the lively and rewarding corporate culture they established. Through these intangible resources, it has been possible for Best Buy to develop some difficult-to-imitate capabilities strongly rooted in the firm’s human capital. These are consciously cultivated to form a competitive advantage. To quote from the “About Best Buy” page on their website “We’re about people. People just like you. And, yeah, we know every company says they’re about people, but we really mean it. Really!” The case also notes that CEO Brad Anderson believed “Best Buy’s key competitive advantage was ‘owning the last 10 feet to the customer.’”(p4) Further, Anderson believed that ”Best Buy had always been ‘a merchant driven company.’” (p10) Their three most important capabilities - opening new stores, choosing the right merchandise and closing sales well - are all tied to knowledge and understanding that has been built up and passed along from employee to employee. These capabilities could be considered core competencies, and were based on many resources the company developed involving training, product education, motivation, and corporate culture, with other factors, such as store layout also factoring in.

With the Centricity campaign, they tried to build up their core competencies, but in fact their implementation efforts fell short because their activities did not properly utilize the ones they already had. Centricity did address the issue that they could no longer continue to grow simply by opening new stores, a core competency that may have been eroding, but did not look to take advantage of those skills extensively during the transition phase. The new methods also stepped over the merchandise managers, whose developed knowledge and methods lead to the strong product mix Best Buy was known for. Their expertise was not properly leveraged, but instead combined with new segment managers. Finally, with the increased knowledge demands of the segments, employee training and motivation became more difficult. This impacted the ability of their salespeople to be as dynamic as they had been in the past. Instead of just knowing the products, the floor employees had to know the people as well. Exhibit 7 shows the extent to which employees were expected to get in the heads of their customers. As noted above, these changes did make them more effective, but at a greater cost. Still, the strategy being sound, these are some problems that can be addressed over time. New core competencies must be developed as others erode, but Best Buy simply could have done better in utilizing their existing capabilities. Despite any criticism, the final proof may be in the failure of Best Buy’s direct competitor Circuit City, whose stock Yahoo Finance has recently quoted at 1.70 per share, down from $30 two years earlier. One would like to think this has something to do with Centricity.