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Best Buy Marketing Case Study

Robert Paul Ellentuck EMBA 2011 Marketing Management Professor Hassan 16 October 2009

COPYRIGHT 2009 ROBERT PAUL ELLENTUCK

Industry Overview

Industry

Big box concept Specialty Store in Consumer Electronics Segment Top 5 2002: Best Buy, Wal-Mart, Circuit City, Dell, Amazon.com Top 5 2008: Dell, Best Buy, Wal-Mart, Circuit City, CDW Emerging discount retailers emerging -consumer choosing price over service/support Competition online etailers growing - free delivery on large purchases Consumer base evolving from technological novices to technologically competent

Major Players for Consumer Electronics


Market Development

Sources: Lal, R., Knoop, CC-I., and Tarsis, I. (October 2006;, Spinali, L. and OHier, J. (2009); Pressler, M.W. (2004)

Industry Overview cont

Big Box push to increase sales of high margin products Emphasis evolved to offering service and support to customers Consumers now focusing more on price over service and support Popularity of online purchasing increased; free shipping and delivery Big box concept declining; scaled-down version of stores emerging

Top 5 Consumer Electronics Merchandiser Comparisons


2003
10K Category Revenue ($B) Gross Margin (%) Cash ($B) Debt (%) Best Buy 21 25 2 11 Wal-Mart 256 22 5 16 eBay 2 81 1 2 Dell 35 18 4 3 Amazon 5 17 1 90

Source: United States Securities and Exchange Commission via their web (2009) and Lal, R. , Knopp, CC-I., and Tarsis, I, (October 2006)

Top 5 Consumer Electronics Merchandiser Comparisons


2008
10K Category Revenue ($B) Gross Margin (%) Cash ($B) Debt (%) Dell 61 19 10 2 Best Buy 40 24 2 6 Wal-Mart 374 15 47 21 Circuit City 12 21 1 6 CDW Corp Not Available Not Available Not Available Not Available

Source: United States Securities and Exchange Commission via their web (2009) and Spinali, L. and OHier, J. (2009)

Company Overview
Sound of Music 1967- St. Paul, MN Grab and Go New Logo1989 Best Buy Becomes company name - 1983 Global Expansion - Asia, Europe, Mexico, Turkey 2003-present Fortune 500 Top Co Customer #56 - $45 Billion Centricity 2009 Implemented - 2003

Best Buy Mobile stores & 2nd Largest Consumer Best Buy Sale @ SOM Electronics Retailer - 1993 Geek Squad to Europe 2003 tornado hit 9 Stores -1981 CEO Dunn replaces Public Offering - $33.6M retiring Anderson 12 Stores - 1986 2009 Fortune names Best Buy Top 10 performing stock, 2000
Source: Bestbuy.com, Fortune (5/4/09)

Company Overview (Consumer Driven)

We believe that focusing on customers' needs generates growth opportunities At Best Buy, we aspire to be a responsible, values-driven global corporation we believe that's what you expect And we believe in customer centricity - the idea is that a customer isn't just looking for a product, but a solution or experience that improves her life Ranked highest in customer satisfaction among national and multi-regional from 2009 report by J.D. Power and Associates

Sources: Bestbuy.com, Wolfe (2009)

Company Overview (Evolving Customer Centricity)

Customer-centricity (CC) retailing


Embraced by broad range of organizations Uses insights from analytics to identify/understand core group of valued customers Predicts what motivates shopping behavior

Essential for retailers facing demands of competitive marketplace Forward-looking strategy; must permeate every area of enterprise Reinvents retailer's value proposition

Source: Biggs, John (2009)

Company Overview (Products)

Branded products designed out of customer research and priced to fill gaps Dynex, Init, Insignia, and Rocket Fish Napster Working with Dell to have a streaming audio/video computer Geek Squad Affordable technological assistance services Best Buy Mobile and Car phone Warehouse Smaller footprints focusing on mobile products and solutions in US and Europe

Source: Bestbuy.com, Sidibe, G (10/7/09 )

( Revenue by Product Group)


FY2008
Sales
CE 38% Home Office 34% Entertain SW 17% Appliances 6% Services 7%

Company Overview
FY2005

Sales
Entertain SW 22% Home Office 34% CE 38% Appliances 6%

Source: Bestbuy.com 10 K(FY2008), (FY2005)

Product (Big Box Retailing)


Best Buy Then (2005) Big Box large retail footprints Everything under one roof

Best Buy Now (2009)

Introducing Smaller Foot- Print stores Competitors are following suit in Specialty Markets Overall lower costs Customer Centricity

Standard Operating Procedures (SOPs) Products Sold by category Organizational Structure

Top Down; One P&L

Source: Shevory, Christina (2009)

Product Solution Based (Customer Centricity)

Model California Based Test Skewed Results Roll-out: no financial modeling beyond Pilot test Stores Aggressive Rollout Plan - 12 labs to 32 pilots to 110 stores nationwide Leveraged prior acquisitions (e.g. Geek Squad) Organizational structure - organized to unorganized Product mix by solution based on Personas

Competitive Analysis
Out of Business CEO blamed demise on poor macroeconomic conditions Unknowledgeable sales staff Late to the game with Firedog customer service business, didnt resonate with customers as well as Best Buys Geek Squad Unfortunate position Mid-level player Top retailer in the country Lost leaders in drive traffic Convenience & wide range of products in one store 17% margins in CE (Mid player) Quality and service General merchandise Lack of flexibility

Dell
Customized products Reliability, Service and Support Customers cant go to retailers for custom-built products Huge global brand Customer Relationship Management and IT support business strategy Addition of new categories to business may hurt brand May need to reconsider free shipping to customers

Sources: Spolsky, Joel (2009), Kavilanz, Parifa (2009), Cuizon, Gwendolyn (2009) and www.marketingteacher.com

SWOT Analysis
Strengths
Heavily driven customer satisfaction/customer service based Standard Operating Procedures; guaranteed standard experience across network Valued, trained, rewarded workforce Central corporate structure/territory

Weaknesses
Customer Centricity model fragmented by individual store locations Creation of unified sales force more costly in other markets Valued, trained, rewarded workforce expensive to replicate across other markets Turf battles /Lack of synchronization between business units

Opportunities
Centricity; max profit in high-end products and solutions Solution based to increase sales of products and services Expansion of CC model into all U.S. stores

Threats
Low priced big box stores playing into highly competitive arena Market expansion into other markets/regions Online sales

Weaknesses to Strengths
FROM (2005):
CC model fragmented by individual store locations Creation of unified sales force based on CC more costly in other markets

TO (2009):

Valued, trained, rewarded workforce expensive to replicate across other markets Turf battles /Lack of synchronization between business units

Still have major customer segments; grouped by location more (eg. DMAscluster stores in market) CC model working if solutions are sold; revenues justify expense CC model working if work force is trained to sale; upsell a customer & sale solution Corporate needed to see segment leaders mutually benefitted from CC model

Threats to Opportunities
FROM (2005):
Low priced big box stores playing into highly competitive arena

TO (2009):

Market expansion into other markets/regions


Online sales

Sell products with services and solutions; Best Buy also has their own brands Best Buy started expansion into China in 2003 Best Buy now also multiple online channels

Linking Internal and External

Organization changing at same time as industry is changing; extreme dynamic occurring Pace and synchronization of rollout affected internal organization and sales revenues Customer Centricity model increases sales per foot and expands externally because they hit saturation in US Overall big box concept pushing for lower priced items

Change from Input to Output

Price of technology, appliances, home office equipment costs dramatically reduced during time-period Home offices continues to be sustainable with 34% of product mix revenues year over year Services increased 7% of revenues from FY08 vs. FY05 Down economy resulted in two competitors out of the market more competition from Big Box retailers (e.g. Wal-Mart and Target) Increase in online purchasing for music, games, etc. impacting entertainment software

Source: Bestbuy.com 10 K(FY2008), (FY2005); Sidibe, G (10/7/09 )

Problem Definition
Implementation of Customer-Centricity caused internal organizational conflicts and it increased operating expenses, which led to a loss of the overall brand image and fragmentation. The organization had lost focus during the implementation process resulting in the overall goal of providing an outstanding customer experience.

Alternatives Evaluation
A.

Continue to convert all stores to Customer Centricity; allow time for concept to mature Create a hybrid; continue with Customer Centricity; group personas/segments to market level instead of individual store (e.g. DMAs/cluster stores into local market)

B.

Alternatives Evaluation contd


C.

Abandonment of Customer Centricity to SOP common Best Buy (Big Box) customer experience Shift channels of distribution from primarily offline retail brick & mortar to more online channels for cost efficiencies

D.

Best Alternative Rationale

Allow time for the concept to mature; continue to convert all stores

Heritage of valuing customer relationship Prepares for future of industry and competition Big Box price driven vs. Big Box solution Connects to company values & retains talent/staff Localization and segment relate to closer community, customer, and retail experience Creates opportunity for new products and services for high profit margin sales

Customer-Centric Best Practice


Best Practice

Best Buy

Last mile retail Localization Assortment Outperform peers Supply Chain inclusive Six weeks or less of inventory Above average annual sales increases, year-to-year Promo to Supply Pricing (Optimization) Overcome Organizational Behavior

Adoption rate among stores high Found Growth in localization: Assortment, store size, globalization Out performed peers in specialty (CE) Big Box Struggled in implementation phase Increases in year over year annual sales, but diminishing No, higher than optimal to cover expenses Organization struggled and now is empowered

Source: Baird, N. and Kilcline, B. (2008). The New Customer-Centric Retail Supply Chain: Benchmark Report 2008. Copyright RSR Research, LLC. All rights reserved.

Customer Centricity Personas

Marketers increasingly using personas

Identify mindset and goals of customers/Better predictor human behavior Some companies report 400% conversion rate

Forrester survey - one in four companies with revenues above $200M planned to increase spending on persona research Persona research made a dramatic difference in Best Buy performance and overall revenues during turbulent times as their closest competitors filed bankruptcy.

Sources: Howlett, Greg (2007) and Gardener, Elizabeth (2007), Sidibe, G (10/1/09 )

Implementation Plan

Communicate internally and externally that customer centricity model is new mode of operation Create task force that reviews strengths/weaknesses of model; make changes based on recommendations Slow down pace of store conversions Devise actions for implementation plan Calculate how new model is affecting sales per sq foot Make adjusts to model as needed

Implementation Plan Time Schedule

One year for implementation based on when store was converted Modify the conversion process (slower pace) than the ones in initial conversion process Benchmark in 3-6 month increments based on how stores were initially converted

References
Industry Overview (Slide 2) Lal, R., Knoop, CC-I., and Tarsis, I. (October 2006). Best Buy Co., Inc.: Customer-Centricity. Harvard Business School, exhibit 4a Spinali, L. and OHier, J. (March 2009). Dealerscope.com annual top 101 rankings report on consumer electronics retailers/etailers Pressler, M.W. (Sunday 11 July 2004). Big-Box Stores Rule Top 10 List: Wal-Mart's No. 1 Rank Shows U.S. Goes for Price, Washington Post online edition, page F01 Top 5 CE Merchandiser s and their 10K Select Category Comparisons (Slides 4 and 5) Lal, R., Knoop, CC-I., and Tarsis, I. (October 2006). Best Buy Co., Inc.: Customer-Centricity. Harvard Business School, exhibit 4b Spinali, L. and OHier, J. (March 2009). Dealerscope.com annual top 101 rankings report on consumer electronics retailers/etailers United States Securities and Exchange Commission via their web (2009) Company Overview (Slide 6) Bestbuy.com, Fortune (4 May 2009) Company Overview (Consumer Driven) (Slide 7) Bestbuy.com, Wolfe (28 September 2009). Majap Survey: Best Buy Tops In Customer Satisfaction. Twice.

References
Company Overview (Evolving Customer Centricity) (Slide 8) Biggs, John. Wal-Mart stepping into the big box breach. Crunch Gear. 18 May 2009. CrunchGear, Web. 4 Oct 2009. http://www.crunchgear.com/2009/05/18/wal-mart-stepping-into-the-bigbox-electornics-breeech. Company Overview (Products) (Slide 9) bestbuy.com, Sidibe, G (10/7/09 ) Interview Company Overview (Revenue by Product Group) (Slide 10) Bestbuy.com 10 K(FY2008), (FY2005) Product (Big Box Retailing) (Slide 11) Shevory, Christina. A Recession Play Mini Versions of Big-Box Stores. New York Times 19 May 2009, Print.

References
Competitive Analysis (Slide 13) Spolsky, Joel. Why Circuit City Failed, and Why B&H Thrives. Inc. 1 May 2009. http://www.inc.com/magazine/20090501/why-circuit-city-failed-and-why-bh-thrives.html# Kavilanz, Parija. Circuit City to shut down. CNNMoney.com. 16 January 2009. http://money.cnn.com/2009/01/16/news/companies/circuit_city/ Cuizon, Gwendolyn. SWOT Analysis of Dell Computers. Suite101.com 5 March 2009 http://strategic-business-planning.suite101.com/article.cfm/swot_analysis_of_dell_computers http://www.marketingteacher.com/SWOT/amazon_swot.htm Change from Input to Output (Slide 18) Bestbuy.com 10 K(FY2008), (FY2005); Sidibe, G (10/7/09 ) Interview Customer-Centric Best Practice (Slide 23) Baird, N. and Kilcline, B. (2008). The New Customer-Centric Retail Supply Chain: Benchmark Report 2008. Copyright RSR Research, LLC. All rights reserved.

References
Personas (Slide 24) Howlett, Greg. Developing Personas to Boost Your Retailing Success. Marketing Pilgrim. 13 November 2007. Marketing Pilgrim, Web. 4 Oct 2009. http://www.marketingpilgrim.com/2007/11/developing-personas-to-boost-your-retailsuccess.html Gardner, Elizabeth. Personalizing. Retailer. November 2007. Internet Retailer, Web. 4 Oct 2009. http://www.intemetretailer.com/article.asp?id=24243 Sidibe, G (10/7/09 ) Interview

References (Interview)
Michelle Dunn conducted Interview of Gail Sidibe, Director of In-store Entertainment, Western Territory for Best Buy via telephone on 10/7/09 Gail Sidibe has worked for Best Buy for close to four years in her present position. She also spent 6-months as a General Manager of Store in the East Bay, CA. Prior to Best Buy, Ms. Sidibe worked for HEAR Music as the Director of Music Acquisition. Customer Centricity is very active program in all stores. Localization is at the heart of the Best Buy as a business. Ms. Sidibe is very proud of the companies commitment to communities that they serve through their corporate responsibility program. It is reflected in the stores, employees from corporate, territories and store levels and it includes volunteering. In addition, Ms. Sidibe believes that most retailers use some sort of Customer Centricity. Merchandise mix reflects the retailers point of view, skewed to demographics and shopping patterns at the store level. (Her example was Nordstrom and Gap) It is no longer something we talk about as we have already put it into practice. She wasnt part of the growing pains most of the implementation came into being after I arrived. Ms. Dunn inquired about the economic down-turn in the economy, if that had an impact on the merchandising mix and competition. Gail Sidibe made it a point that two of Best Buys competitors left the market; however, the Targets and Wal-Marts have been more active in consumer electronics . As for her Department, In-store Entertainment, Best buy gas gain in market-share of CDs and DVDs over the new competitive retailers. It was noted that Gail did make mentioned that iTunes and Amazon as well as down-loadable software had made more of an impact on the business. Her Department is moving into more gadgets (eBooks readers (e.g. Sony), Leap frog and Sharper Image label products As a side note, Gail indicated that Dell is working with Best Buy in creating a bundle computer with Napster streaming audio and video. .

References (Interview) cont


Michelle Dunn conducted Interview of Gail Sidibe, Director of In-store Entertainment, Western Territory for Best Buy via telephone on 10/7/09 Finally, Ms. Dunn asked if Ms. Sidibe could comment on the transition between Mr. Dunn and Mr. Anderson as the CEO. This was very smooth transition, corporate create virtual town halls for all employees.. We knew that Mr. Anderson was retiring, so it wasnt a surprise. The company is till focused on excellent customer service even as it expands into other countries (Kalampour is a new location), new mobile focused stores with the Carphone Warehouse have been very successful, She mentioned that the American Consumer Org and JD Power had named Best Buy number one in customer service. Gail has a lot of pride being a part of the Best Buy family.