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 firstmajor 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 promotions. 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 MusiclandGroup (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 customer 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 lucrative, while others cost more to sell to than their business is worth. After researching massive amounts ofsales and demographics data, Best Buy identified
some lucrative consumer segments: Barry, the affluent tech enthusiast; Jill, a busy suburban mom; Buzz, a young gadget freak; Ray, a price-conscious family guy; Carrie, a young single woman; and others. 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 company 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 customers 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