Best Buy CEO Brad Anderson explains why the electronics retailer’s
big investment in its workforce is paying off.
Interview: Bradbury H. Anderson, CEO, Best Buy Co. Outlook Journal, February 2005
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Back in 1973, it must have seemed like a dream job: Selling stereo equipment at Sound of Music in St. Paul, Minnesota, meant Brad Anderson could spend most of his day listening to his favorite artists, like Elton John.
A lot has changed in 32 years. Anderson’s original employer has grown into Best Buy Co., the $25
billion-in-revenue market leader in consumer electronics retailing—with Anderson at the helm as CEO. He’s still a passionate music fan, however, and Best Buy still seems like it’s the place to be for listening.
In October 2004, Anderson was
one of a small group treated to an impromptu private performance—
by Elton John, following a concert the rock star gave in Las Vegas.
 But Anderson’s biggest passion these days is serving Best Buy’s customers. In fact, the customer is at the heart
of a new strategy, called “customer centricity,” which is the giant retailer’s $50 million gamble that it can maintain its market-leading position by providing more and better service and high-end products.
The stakes are high. Best Buy has an industry-leading 16 percent share of the $130 billion US consumer electronics and packaged media retailing market. But to stay competitive in this cutthroat business, the company must go toe-to-toe on price with Wal-Mart, which now has an 11 percent share of
the market, up from slightly less than 7 percent in 1996.
Anderson says Best Buy plans to match Wal-Mart on price for products that both stores carry. Still,
he realizes this is only part of a winning strategy. So the company has identified five target customer segments in which it hopes to build
a loyal and profitable base by selling higher-margin products and offering services that are more
relevant to the customer’s lifestyle and priorities. The five target segments—ranging from busy suburban moms to affluent professionals who want the best and latest electronic gear—were chosen because of their profit potential.
To better serve these customers,
the company is making a huge investment in retraining its sales associates. The program is broad and deep—encompassing not only standard product training in an
ever growing array of complex merchandise but, more important, training in financial analysis as well. For example, Best Buy sales associates in the 22 so-called lab stores with pilot customer centricity programs in place can calculate the return
on invested capital for the store.
With such strong grounding in
business, Anderson says, employees are now able to offer sound feedback to headquarters on what they think the business needs. In the past, they might have asked for more inventory or more staff without understanding the impact on the overall bottom line. He also feels comfortable giving employees more power to make critical decisions, such as what to sell and what to highlight in individual stores.
The strategy hasn’t come cheap.
As a result of its implementation, Best Buy’s SG&A rose to 22 percent of revenues in the first six months of fiscal 2004; it was 16 percent in 2002. But Anderson is convinced the outlay is worth it, since the company is getting better insights from its employees than ever before. And employees are now able to add more value by informing customers in the target segments about products they may
not have considered.
The strategy has already started
to pay off. In the second quarter,
22 pilot stores collectively achieved a comparable store sales gain more than double that of other US Best Buy stores—which, in turn, outperformed their competitors. Close rates are higher than at Best Buy locations without the customer centricity program. This success has emboldened Anderson to roll out the strategy to an additional 68 locations.
Outlook Managing Editor Tish
Burton caught up with Anderson
in November, just a week after the Elton John concert, to talk about customer centricity and what Anderson has learned so far.
Outlook: What happens when a
customer walks into one of your customer centricity lab stores?
Do you have someone who determines if the person is from one of the five target-customer segments?
Anderson: Customer centricity is
an extraordinarily complex capability that will allow us to provide our customers with superior experiences, now and in the future. It requires that we take full advantage of the talent and creativity of every Best Buy employee working in our stores across the country.
Today, it’s a process that is still evolving. There are stores in which essentially the entire staff has been trained in terms of how you identify customers for the segment that store is going to deal with—which is in no case more than two segments at this stage.
Then there are people in the store who are deeply skilled in both
identifying customers with specific segments and knowing what to do with those segments.
How do they do it?
We ask [our salespeople] to ask qualifying questions before they present products.
How many qualifying questions?
It varies, based primarily on the nature of the particular product. If you are coming in to replace a notebook PC, you would get many more questions—if things happen ideally, and I can’t claim that they always do—than if you are coming in to buy a phone. So it’s dependent on the complexity of the transaction. And
in customer centricity, you’ve got this added element of trying to identify what is driving the customer’s needs.
What if a customer doesn’t fit
any of these segments?
Then they would be handled just
the way they would be handled in any other store.
Which means the salesperson who approaches the customer initially stays with him or her?
Yes—or turns them over to another sales associate in a different department. [However, if the customer is in one of our] segments, they may be handled by one single sales agent, who has been trained around the particular lifestyle
needs of that customer. These
salespeople are trained in [many] product categories and have more sophisticated training.
This training program is very rigorous. Why did you think it was necessary, for example, for salespeople to know how to calculate return on invested capital for the store and other aspects of financial analysis?
There are two key benefits. For years, [we went] into stores to do employee focus groups. Very little of [what our employees said] was usable, and we heard the same thing over and over again. For example: “If you can [give me] three times as much inventory, we would have much higher sales.” [Or:] “If you could give us much more labor, we could dramatically increase sales.”
And, invariably, whenever we would either increase inventory or increase the amount of labor, we would see virtually no lift in sales. The sales force didn’t have enough information to do the sort of business analytics necessary to really know whether increasing inventory by a large amount [would help the business. They didn’t understand that an increase in inventory meant that] you now have to sell it or we go out of business. That factor wasn’t even in the thinking of the employee.
[After the training], the huge
[benefit] was that we actually
did get advice from the employees we could use.
The second part of it is that employees know they are increasing their own value because they understand the process of the business in a way that they didn’t understand until they got the education. So they potentially work [smarter], which,
in turn, could impact their rewards. And, at the same time, they have a better grasp at why certain decisions are made at a more macro level. When they see us do something as
a company, they can contextually understand why we took that action, because they have got a foundation that’s more thorough.
All this training has made the employees very valuable. Are you concerned they might leave?
There are two things about that. One is that the process of creating a more significant customer engagement allows us to do things we weren’t able to do before, and two, we build a [stronger] financial foundation
that means eventually we would be able to reward our employees for
the extra value.
  We actually will have a need for more sophisticated employees. That [need] will hopefully grow at the same rate as our employees’ talents grow. This is not a place where
you learn what you need to know and your value is maximized and it’s over with. This kind of learning increases their value.
This is an expensive strategy—not
just the training but also your goal
to pay your employees more. SG&A was up to 22 percent for the first nine months of the year. Are you concerned about that?
First, there are some one-time expenses in the second quarter. Without those, SG&A actually would be going down. [Those figures] include the ramp-up for moving from 22 lab stores to 68 new stores. And some expenses in the first half are one-time expenses related to [outsourcing] a
lot of services and writing them off. So if you excise those things, we are feeling pretty good about the progress we are making on SG&A.
What’s your target number for SG&A?
The near-term target is about 19 on an annualized basis.
You have decentralized decision making. Can you give me some examples of the types of decisions that the sales associates are now allowed to make that they couldn’t make previously?
Our employees are figuring out
how to connect the product we sell [to the customer]. Here’s a specific example: [An employee] pointed
out that we have small-business
customers who run their own construction shops and that we have software which can actually [help] them do their work much more easily. Before we would have identified that software on a macro basis and just shipped it out to the store. [Then it was] up to the customer to find it.
Now employees bring that product forward and tell customers that they have identified this as [helpful for people in] their customer segment. They then subsequently found that the customer still didn’t quite understand how to use it. So the next step was to actually build a display that let the customer try it out.
  What was the result?
We sold many times the amount of software as we would have without implementing that employee’s idea
to let the customer experience the software. So instead of the marketing person just making the decision to buy it, they now also have to change the level of replenishment because the rate of sales exploded based on discovering how to connect up the customer to a product that’s in the marketplace. It changes the whole loop: It changes the role that everybody has—and it moves power out
to the field, away from the center.
In some ways, you have two different marketing propositions. This is a price game, and you are still competing with people like Wal-Mart on price. But at the same time, you are trying to set yourself apart by offering more high-end products and also offering more service. How are you managing those two different brand propositions?
That goes to the core of the point here, which is that the discipline of market leaders is not possible to follow.
We have to compete with Wal-Mart on price in the areas where we intersect with Wal-Mart. And we also offer very complex, sophisticated services to exactly the same customer segment. So we are going to have to sell him the TV at whatever the Wal-Mart price is and be able
to deliver complex services where
he wants them.
But some people may just presume that Wal-Mart is going to be cheaper.
Well, they may—but as long as we have got an engaged, knowledgeable person to communicate with the
customer about complex technology and how it is relevant to that customer’s life, we have got a way to tell our story. And some of the evidence that it is actually working is the fact that I think we are gaining market share on Wal-Mart.
How are you planning to continue
to innovate? What is the next step after customer centricity?
I don’t think there is really an “after customer centricity.” Customer centricity is not a one-time effort, it’s
a capability that will guide our business into the future. We are testing five [customer] segments now; we need to identify additional segments and then test those segments with customers. I think it is a living process, and some of the segments we may find either become part of the fabric of the way we operate or [we] excise them from what we do. But we constantly should be refreshing that offering with deeper and deeper understandings of our customers’ desires. So I think it is a continuous loop.  For more information, please
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