Best Buy: How To Break Out Of Commodity Hell

The lesson: Segment your customers into distinct demographic groups and figure out how you can serve each one better

Best Buy Co. (BBY ) looks like the ultimate Big Box consumer electronics store -- commodity products at low prices. In fact, the company has been plotting an escape from low-margin hell. It's undertaking a radical shift to improve the customer experience, bring innovative products to market, and generate new retail concepts."We empower our people to listen and serve, and, at the same time, we go upstream to find out what the suppliers are doing. It's about speed to market. We know what the customers are looking for, and we have a time advantage in getting it to them," says Executive Vice-President Ron Boire.

Nothing about this is business as usual. The company has divided its customers into five distinct demographic groups and is doing extensive market research to figure out how to serve them better. For instance, info gathered in the suburban community of Naperville, Ill., resulted in studio d, a concept store there aimed at soccer moms that sells the latest gizmos and offers classes in how to use them. It's just one of three concept stores Best Buy has launched in the past 16 months, some of which may become new chains. The most offbeat: eq-life shops, where customers can attend a Pilates class, get a massage, and buy health-related tech gear.

Rather than waiting passively for large consumer electronics makers to ship their latest goods, Best Buy has started creating its own. One example: Its Geek Squad service team dreamed up an external disk drive for PCs packaged in its own protective case. Best Buy sketched out a concept for partners to engineer and manufacture. Time lag: just 120 days from concept to delivery. The company now has a handful of house brands and expects to increase overall margins by 0.5% by 2008.

Another wrinkle: Best Buy has also started tapping tech startups so it can bring the hottest innovations to market. Kal Patel, executive vice-president for strategy, meets regularly with entrepreneurs in Silicon Valley and Asia. One recent discovery: Slingbox, a $250 device from Sling Media Inc. that lets people pipe TV programming from their homes to their PCs wherever they are. It's a brand-new concept. When Slingbox launched last July, Best Buy had a three-month head start on most rivals. That paid off: The company got a close early look at a promising new product category, and Slingbox became one of the year's surprise hits.

To quickly incubate ideas, the company runs "accelerated leadership" programs that pull together employees from many backgrounds. They're held in rooms at headquarters set off from the bustle of daily business where there's a calming indoor stream and waterfall and even a small cabin for private conversations. Now that's thinking outside the Big Box.

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