Source: Forbes.com
Credits: Larry Downes (Forbes Contributor)
Dated: 2012-01-06 

Why Best Buy is Going out of Business...Gradually

Electronics retailer Best Buy is headed for the exits. I can’t say when exactly, but my guess is that it’s only a matter of time, maybe a few more years.

Consider a few key metrics. Despite the disappearance of competitors including Circuit City, the company is losing market share. Its last earnings announcement disappointed investors. In 2011, the company’s stock has lost 40% of its value. Forward P/E is a mere 6.23 (industry average is 10.20). Its market cap down to less than $9 billion. Its average analyst rating, according to The Street.com, is a B-.

Those are just some of the numbers, and they don’t look good. They bear out a prediction in March from the Wall Street Journal’s Heard on the Street column, which forecast “the worst is yet to come” for Best Buy investors. With the flop of 3D televisions and the expansion of Apple’s own retail locations, there was no killer product on the horizon that would lift it from the doldrums. Though the company accounts for almost a third of all U.S. consumer electronics purchases, analysts noted, the company remains a ripe target for more nimble competitors.

But the numbers only scratch the surface. To discover the real reasons behind the company’s decline, just take this simple test. Walk into one of the company’s retail locations or shop online. And try, really try, not to lose your temper.

I admit. I can’t do it. A few days ago, I visited a Best Buy store in Pinole, CA with a friend. He’s a devoted consumer electronics and media shopper, and wanted to buy the 3D blu ray of “How to Train Your Dragon,” which Best Buy sells exclusively. According to the company’s website, it’s backordered but available for pickup at the store we visited. The item wasn’t there, however, and the sales staff had no information.

But my friend decided to buy some other blu-ray discs. Or at least he tried to, until we were “assisted” by a young, poorly groomed sales clerk from the TV department, who wandered over to interrogate us. What kind of TV do you have? Do you have a cable service, or a satellite service? Do you have a triple play service plan?

He was clearly—and clumsily–trying to sell some alternative. (My guess is CinemaNow, Best Buy’s private label on-demand content service.) My friend politely but firmly told him he was not interested in switching his service from Comcast. I tried to change the subject by asking if there was a separate bin for 3D blu rays; he didn’t know.

The used car style questions continued. “I have just one last question for you,” he finally said to my friend. “How much do you pay Comcast every month?”

My friend is too polite. “How is that any of your business?” I asked him. “All right then,” he said, the fake smile unaffected, “You folks have a nice day.” He slinked back to his pit.

As a sometime business school professor, I could just imagine the conversation with the TV department manager the day before. “Corporate says we have to work on what’s called up-selling and cross-selling,” the clerk was informed in lieu of actual training on either the products or effective sales. “Whenever you aren’t with a customer, you need to be roaming the floor pushing our deal with CinemaNow. At the end of the day, I want to know how many people you’ve approached.”

But this is hardly customer service. It’s actually getting in the way of a customer who’s trying to self-service because there’s no one around who can answer a basic question about the store’s confusing layout. It’s anti-service.

Going Bankrupt Gradually, then Suddenly

We left the store, my friend having made his purchase but both of us fuming. I was reminded of a line from Ernest Hemingway’s “The Sun Also Rises.” One character asks another how he went bankrupt. “Two ways. Gradually, then suddenly.” Best Buy, I thought, is doing the same, just as many big box retailers have done in the last decade.

First comes the strategic bankruptcy, well in progress at Best Buy, where management’s sole focus is improving some arbitrary metric from last quarter, even when doing so actually interferes with customers trying to buy something else. The financial collapse comes later. But if history is any guide, the second part, once it starts, will be quick.

As with many large retailers unable to cope with new channels and new consumer expectations, the company will continue to sputter on fumes, slowing down bit by bit until one day it just stops moving. Think of Elek-Tek, Virgin Megastores, or KB Toys. (See a non-exhaustive, nostalgia-inducing list of recently-failed retailers over at Wikipedia.)

The new conventional wisdom says that big box retailers like Best Buy are going the way of the dinosaur. Online giants, notably Amazon, are the future. Online retailers are more efficient, because they lack physical locations, and so can offer better prices. Shopping online is also more convenient. On the web, consumers can shop anywhere they are, day or night. (Amazon has a market cap of $80 billion and a P/E of 91.)

Best Buy and other traditional retailers complain that Amazon can undercut them in prices because the site doesn’t charge sales tax, and that Amazon customers use Best Buy as their showroom, taking advantage of the extensive, well-stocked locations and knowledgeable staff to research products they actually buy from someone else online.

Online competitors are certainly part of Best Buy’s problem, but not for the reasons it thinks. What’s really going on is more basic. Best Buy just doesn’t understand its customers’ point of view.

More than a decade ago, in “Unleashing the Killer App,” I wrote that while transitioning to the Internet was revolutionary for retailers, it was merely evolutionary for customers. “Ensure continuity for the customer,” I said as one of my twelve rules for building killer apps, “not yourself.”

What I meant was that consumers easily adapt to alternative retail channels. Before the Internet, there was catalog shopping and home shopping from television. For consumers, buying online was just the next step in an obvious progression of more convenient ways to buy.

For brick-and-mortar retailers, however, the shift was jarring. Moving online required new thinking, new management structures, and new strategies.  It would also require integrated front and back-end information systems. Customers would expect inventory to be transparent between the web and the stores, and that specials and “exclusives” would be consistent across all channels. Whatever attributes they associated with a retailer’s brand—whether price, quality, convenience, expertise, service—would need to be translated to the online experience and enhanced.

To compete successfully against new online retailers, traditional retailers would also need to find ways to transform the expensive liabilities of physical locations with limited hours and high labor and inventory costs into assets that complemented rather than competed with the online experience.

Best Buy’s Wounds are Mostly Self-Inflicted

Many retailers have struggled to make the transition; some have fallen on their swords along the way. So far, Best Buy fails on every measure. The company has its own website, of course, and offers customers the opportunity to order online and pickup and return in-store. (At the Pinole store, there is a separate line for pickups at the customer service desk, though it is staffed by the same people who handle returns and other service problems. Lines are longer and slower than for in-store checkout.)

But the website doesn’t seem to be programmed for even basic inventory management. An article in the Minneapolis Star Tribune, the company’s hometown newspaper, reported a few days before Christmas that the company had only just informed some customers that online orders, some placed the day after Thanksgiving, couldn’t be filled and were being cancelled. The out of stock items included the most popular items, including TVs and iPads, “as well as other tablets, cameras, laptops, PS3 games and the Nintendo Wii.”

The company issued a statement that read: “Due to overwhelming demand of hot product offerings on BestBuy.com during the November and December time period, we have encountered a situation that has affected redemption of some of our customers’ online orders.” [ Emilie says : As is almost invariably the case, the passive voice is used to attempt to disguise the guilty party. ] 

Let’s parse that sentence for a moment. The company “encountered a situation”—that is, it was a passive victim of an external problem it couldn’t control, in this case, customers daring to order products it acknowledges were “hot” buys. This happened, inconveniently for Best Buy, during “the November and December period,” that is, the only months that matter to a retailer. For obvious reasons, the statement ties itself in knots trying to avoid mentioning that the “situation” occurred during the holidays.

The situation that Best Buy “encountered” has “affected redemption” of some orders. Best Buy doesn’t fill online orders, it seems. Rather, customers “redeem” them. So it’s the customers, not Best Buy, who have the problem. And those customers haven’t been left hanging; they’ve only been “affected” in efforts to “redeem” their orders. It’s not as if the company did anything wrong, or, indeed, anything at all.

It’s all so passive. It’s also a transparent and truly feeble pack of lies. Here’s what the honest and appropriate release would have said: “Due to poor inventory management and sales forecasting of the most popular products during our key sales season, we can’t fill orders we promised to fill weeks ago in time for Christmas.”

There’s a little more to the Best Buy’s press release: “We are very sorry for the inconvenience this has caused, and we have notified the affected customers.”

Again, note the use of the passive voice—”this” refers to the “situation” that Best Buy “encountered.” The “situation,” not Best Buy’s poor operations, “has caused” inconvenience to customers. It’s not something Best Buy did wrong. It’s like they’re reporting the weather; something utterly out of their control about which the company is a mere observer. They’ve “notified the affected customers” despite, it seems, no sense of obligation to do so, let alone to find a solution to a problem entirely of the company’s own creation. How sorry are they, do you think?

Again, here’s my rewrite: “Three days before Christmas, too late for the customers to make alternative arrangements, we are just now letting our would-be customers know. We have no excuse for such amateur behavior.”

According to the article, the company refused to answer any questions beyond the release. Here are a few: How many customers were affected? What specific products were involved? How has the company failed so badly to perform to even the lowest standards imaginable for a retailer at Christmas? Did the company expect anyone would be fooled by the ridiculously obtuse statement of non-apology?

It’s Not Amazon that’s Killing Best Buy—But Best Buy Could Certainly Learn How it’s Done Right

It’s not competition from Amazon that’s killing Best Buy here; Best Buy is doing most of the damage to itself. But let’s compare the two to see how retailing–online or otherwise–is done correctly.

First, it’s hard to imagine anything so pathetic happening at Amazon, and even harder to imagine the company failing to own up to its errors. Amazon does not take orders it cannot fill, and it does not wait until the last minute to cancel them without offering any kind of solution.

Amazon lives and breathes the customer’s point-of-view. It completely engineers its business practices, its systems, and its people to support it. When they make a mistake, they admit it and they fix it. Immediately. Once, when I had a problem with a new TV that turned out to be a manufacturing flaw, the company begged me to let them pick up the unit, send something else, and install it for me. That was more solution than I needed, let alone asked for.

It’s not just Amazon’s prices that are better, in other words. Its customer service is superior in every way. And unlike traditional retailers, it recognizes its own potential disadvantages and innovates ways to overcome them. The company has no retail locations to pick up merchandise, but it ships instantly, often for free. It has no on-site sales experts to answer questions, but the pages of its products are filled with videos, FAQs, and customer reviews and answers.

The company keeps track of all previous orders, and uses its database to make helpful recommendations of other purchases.  Phone support is instant, responsive, and knowledgeable. Returns are simple and unburdened by restocking fees and other gotchas. Inventory is precisely managed in a single system that spans all distribution points and third party partners.

Best Buy could have done all of this years ago, and done it better. It had decades of experience in retail, in customer service, in distribution, in forecasting, in marketing and sales. It had, one presumes, computer systems that could have been upgraded to integrate with a new online front end. It had expertise in the electronic products it sells, and potent leverage over key manufacturers to ensure favorable terms and access.

(Years ago, the CEO of a leading appliance manufacturer told me he felt obliged to keep a low profile on the Web or face the wrath of his main retail partner. Not many years later, the partner, Circuit City, was out of business. Oops.)

But Best Buy squandered all of those assets. And now, along with many of its big box peers, the company is caught in a death spiral. Not because of new competitors who, fairly or unfairly, are eating its lunch. These wounds are self-inflicted.

What is management so busy with that it can’t fill orders for the most popular products during the most important weeks of the year? Since 2009, CEO Brian Dunn has been busy pursuing a strategy of protecting market share over profit. In the quarter ending November 30, 2011, store sales increased 1%, the first increase in two years. Margins, however, sank–net income dropped by 29%.

The annual report is largely silent on initiatives; the company’s website says only that “To meet the unique product and service needs of our customers, our stores and operating models are being transformed to shift our focus from product-centric to customer-centric.” If only.

The company doesn’t report, of course, on customer satisfaction. But there’s a postscript to my personal story. In part because he was distracted by the “expert” sales staff prying into his personal finances instead of actually providing assistance, my friend mistakenly purchased the wrong DVD of a NASA documentary—he accidentally got one he already had. We returned the next day to exchange it for the correct one. Sorry, said the customer service staff, DVDs are “software” and can’t be returned or exchanged once sold. No exceptions.

True enough, the return “policy”—several hundred words printed on the back of the sales receipt—says that software cannot be returned. Why not? It’s our policy.

But I already have this one, my friend said. “We can’t help you.”

Not to beat a nearly-dead retailer, but does Best Buy know that Amazon not only allows easy return or exchange for DVDs without restrictions, the company will even buy back ones you’re finished with? And even if the customer is outside the return window or is otherwise technically not entitled to do what she’s asking to do, the company bends over backwards to bend its policies in the interest of happy customers and the on-going customer relationship.

Whistling in the Dark

I’m not shilling for Amazon or any other successful online retailer here. My point is much more basic. Amazon neither invented nor appropriated its basic strategies from Best Buy or anyone else. It simply does what consumers want. Best Buy does what would be most convenient for the company for consumers to want but don’t, then crosses its fingers and prays. That’s not a strategy–or not a winning strategy, in any case, now that retail consumers aren’t stuck with the store closest to home.

There’s no magic to retailing “hot” products and doing so at a profit. Efficient inventory and distribution, managing customer relationships for the long term, competitive pricing, pre and post-sales support for technically complex items: these are the most basic elements of competitive advantage for a retailer that actually wants to stay in business, now but in the past as well. Most of what Amazon does right has nothing to do with technology or the Internet at all.

Instead, Best Buy is futilely focused on the mathematics of market share. It’s groping with questionable expansion in Europe and China, and with services such as its recently-acquired Geek Squad subsidiary. (It also bought Napster in 2008, then sold it to Rhapsody this year for an undisclosed amount.)

What else has the company got? Management, at least, still believes it has competitive advantages–advantages that even make it attractive to shareholders. According to the company’s most recent annual report,

We believe our dedicated and knowledgeable people, store and online experience, broad product assortment, distinct store formats and brand marketing strategies differentiate us from our competitors by positioning our stores and Web sites as the preferred destination for new technology and entertainment products in a fun and informative shopping environment.”

There’s just one problem. Not one word of that, at least in my experience, is true. Their “people” are not knowledgeable; they are annoying. The store “format” is entirely generic; perhaps a little confusing. The stores and Websites are not “preferred destinations”—they are destinations, at best, of inertia, or in the case of exclusives, destinations of the only resort. The “shopping environment” is the opposite of fun and informative. It’s depressing and humiliating, as in “I can’t believe I had to go to Best Buy to get this.”

What you’re hearing is the sound of a once-leading retailer whistling in the dark. The only question is whether Best Buy management and investors actually know that, or whether it’s obvious only to consumers. My guess is that they don’t “believe” a word of this, but don’t want to admit it to themselves. (It’s clear from the Christmas debacle that they wouldn’t feel obliged to admit it to anyone else.)

Best Buy is living in the corporate equivalent of what psychologists call a state of denial. In business, that’s usually the first step in a failure that ends with a spectacular collapse.

Gradually, then suddenly.

Source: Forbes.com
Credits: Larry Downes (Forbes Contributor)
Dated: 2012-01-09 

Customers vent, whistle blowers reveal internal turmoil, CEO Brian Dunn responds

For years I’ve worked with clients who want to tap the power of the Internet to distribute and transform information, but I’ve never experienced that power quite like I did last week.

My article, “Why Best Buy is Going out of Business…Gradually,” became something of a sensation. By the end of the week, the article had generated coverage in major business media and across the Internet. Late Friday, even the company’s CEO, Brian Dunn, posted a response. (More on that in a moment.)

A few numbers tell the tale:

• The article has so far received over 2.3 million page views. By Friday morning, Forbes Managing Editor Bruce Upbin noted, more people had read my article than would shop at a Best Buy all week.
• The article was shared by over 12,000 Facebook users and more than 15,000 Twitter users.
• In addition to nearly 1,000 comments on Forbes, the article spawned conversations on other discussion boards including Reddit, TechMeme,MetaFilter, and TechCrunch. It was the most-read story on LinkedIn andForbes this week, and was featured on Google News and other news aggregators.
• Thousands of readers responded, most with their own horror stories of dealing with the chain.
• I received hundreds of personal emails, most from people who just wanted to vent their own frustration at the poor customer service they had received. Many were from ex or current employees of Best Buy, who confirmed that the management problems I mentioned were epidemic.

Yet my purpose in writing the article couldn’t have been more modest. I have long been interested in why managers and executives misinterpret changing market dynamics. (I’ve written two books on the subject, including “Unleashing the Killer App,” which is still relevant to Best Buy’s current problems.) I’ve just started work on a new book on disruptive market transformations, which will teach even large companies to avoid getting caught in the trap.

Then a pre-New Year’s visit to a local Best Buy store had the unintended consequence of focusing my attention on the electronics retailing giant, which continues to struggle despite the disappearance in 2009 of one of its main competitors, Circuit City.

The poor service at the store led me to dig into the company’s balance sheet and strategic plan, as well as the company’s embarrassing decision to cancel 30,000 online orders just a few days before Christmas for lack of inventory.

Like many companies surprised by the unpredictable transformation of markets at the hands of disruptive digital technologies, I concluded, Best Buy appeared to be going out of business two ways: “Gradually, then suddenly.”

By early Monday morning, it was clear something unusual was happening. In the middle of the night on a national holiday, there were over 100,000 page views just in the first few hours.

As the week went on, momentum built. The page views accelerated mid-week, and new stories about the article proliferated in print, on the radio, and on the web. After Best Buy CEO Brian Dunn wrote his own response to the article on a company website, the volume of buzz amped up again.

By week’s end, the article and its response had been reported by, among many others, The Wall Street Journal (“Best Buy CEO Defies Critics”), The Financial Times (“Best Buy Chief Hits Back at Critics”), and National Public Radio (“Is Best Buy Built for the Long Haul?”).

Clearly, I’d struck a chord with Best Buy customers. And while any large retailer is bound to have generated its share of horror stories, there was something more personal about the abuse Best Buy customers reported and the sense of combat fatigue they felt on entering the store. Just page through the comments on the original post to see what I mean.

(As a side note, I apologize to those who sent me literally thousands of emails, Tweets, and discussion comments. I feel your pain, and wish I had time to respond to each of you individually.)

But the story inevitably hit a few nerves as well.

The company did not respond to my written request for comment or reply to the article. But Best Buy insiders passed along what appears to be the company’s internal script for responding to customer and press inquiries about my story:

Refer to the following PR talking points when handling any customer inquiries about this article:

We disagree with the premise of blogger Larry Downes in his recent post on forbes.com. We think Best Buy is here for the long term. After all, Best Buy plays a unique role in the world of consumer electronics – we combine the “what” of the industry (the world’s most comprehensive portfolio of cutting-edge products) and the “how”, services to turn everything on, connect it and protect it. We have strong growth initiatives that include global connections, expanded services, expansion into China and a growing e-commerce presence. 

Yes, we know that we had issues with some online orders over the holidays and as a result, we disappointed some customers. We are truly sorry if we ruined anyone’s holiday. Rest assured that we are working on resolving the issues that caused those problems so that they will not occur again. 

We know our accountability starts and ends with our customers. 

We will continue to define ourselves by relentlessly focusing on the customer and going where the growth is. 

I also heard from plenty of current Best Buy employees, both via Forbes and through private emails. Best Buy has a strong sales culture at the stores, and some employees took the article personally. I called out some of their (non-obscene) comments on the original post, in part because I think they inadvertently highlight what’s wrong with the company’s current strategy.

Employees, I learned, are strongly conditioned to see every customer who walks in the store as a potential target, one who needs to be coerced into buying something other than what they came looking for.

But you can’t treat the customer as an adversary in a battle of wills. You can’t provide superior service when you’ve been drilled to view each person who walks into your store as prey. You can’t be a trusted source of expertise on consumer electronics when, as many former employees told me, failure to follow the company script means getting your hours cut or simply being fired.

Best Buy employees are trained to focus on customers. But not so much to serve them as to overpower them. It is not being “customer-centric” when your laser-beam focus is on sizing the customer up and looking for weaknesses in their resistance to buying products and service they didn’t come looking for.

That, at least, was the conversation until Friday. Then the other shoe dropped.

Hitting a Nerve

On Friday, Best Buy reported weaker sales than expected for the critical end of the year period. Revenue was down 1.2% from last year. Internationally, the drop off was 4.3%.

Not catastrophic numbers, to be sure, but, coupled with the vocal response to my article, it capped a very bad week for the company’s senior management. Analysts began talking about a private equity takeover.

Later that day, Best Buy CEO Brian Dunn published his own long blog post, which he titled “My thoughts on Best Buy’s recent media coverage.” Though Dunn’s post doesn’t reference Forbes directly, most of the subsequent press coverage assumes it was written in response to my original article. Dunn’s reply also closely mirrors the internal script that was sent to me on Wednesday.

Dunn, who has been CEO since 2009, began by acknowledging two points of my criticism which he thinks “got it right”: the cancellation of Christmas orders and the slow implementation of the company’s “customer-centric” strategy. He wrote:

The cancellation of some internet orders just before Christmas was our fault, and it’s not representative of how we EVER want to treat our customers. I’ll spare you the technical explanation of how and why it happened, but we know we did not deliver a good experience and we’re truly sorry. We’ve worked to make amends with customers whose holidays were made less happy because of our mistake, and we’re working diligently to make sure it doesn’t happen again.

That’s a much better apology than the one I quoted in my original article. (“Due to overwhelming demand of hot product offerings on BestBuy.com during the November and December time period, we have encountered a situation that has affected redemption of some of our customers’ online orders.”) Dunn admits that it was the company’s fault, not a “situation” it “encountered,” and doesn’t pretend that the “November and December time period” is something less crucial than the holiday season.

On the other hand, it’s easy to apologize weeks after the fact, after 30,000 customers have already been given the non-apology from managers and customer service reps.

More to the point, my criticism wasn’t so much the failure of Best Buy to manage its inventory or to identify the back order problem in time for customers to make other arrangements so much as the effort to distance itself from the problem through obtuse language that made the company look as if it, not the customers, was the victim. Dunn now says the cancellation was the company’s fault, which gets to my actual criticism. Since I wasn’t one of the affected customers, I can’t say whether the belated apology will be acceptable to those whose efforts at “redemption” of their orders were “affected.”

(The initial failure to take responsibility, by the way, turns out to be worse than I thought.  A company insider sent me what appears to be the official script given to customer service personnel sometime after Dec. 14 in response to the cancellations. “Recently,” according to the instructions, “some media outlets have been bringing attention to Best Buy’s recent cancelled customer backorders. Please ensure that you are utilizing the following messaging when speaking with a concerned customer.” After reading the message (“Due to overwhelming…”), CSRs were instructed to “Verbalize empathy to our customers regarding the cancellation of their backorder.”)

Dunn also thinks I got it right with regard to the company’s lack of integrated operations and I.T. systems (the “technical details” his reply “spares” us):

Another area where we have received fair criticism is the overall speed of the transformation of our business model – something we are working hard to address. We’ve accelerated changes to key elements of our model already (the significant expansion in the number of products available on Bestbuy.com and the launch of our online Marketplace are two recent examples), but we need to move even faster, particularly in creating a more seamless experience between our stores, web sites, call centers and services teams. We recognize people can and do shop from anywhere, and they expect thoughtful, helpful interactions from us every step of the way. We continue to invest in a number of areas – from employee training, to critical system enhancements – to ensure our customers always receive the kind of experience they deserve and expect from us, wherever and whenever they choose. But, simply put, that work needs to happen faster – and we’re taking significant steps to accelerate the pace.

As I put it in my original article, quoting from “Killer App”: to survive the transformation to Internet commerce, an existing business needs to ensure continuity for the customer, not for itself. Dunn apparently agrees, though it still isn’t clear what has taken the company over a decade to get it right.

Best Buy Continues to Miss the Point

Dunn, however, took issue with two key arguments in my article. First, he disagrees with “critics” who say that “the internet has made physical retailing (i.e., stores) irrelevant.” Second, Dunn says, “there are those who question the validity of Best Buy’s business model. This misguided perspective is especially troubling for me, because it blatantly and recklessly ignores overwhelming evidence to the contrary.”

Assuming these are comments directed at me, let me respond to them in turn.

First, I went out of my way to say that the Internet has not made physical stores irrelevant. Dunn is simply setting up a strawman and then knocking it down. Of course “stores” are not irrelevant, nor will they be anytime soon for most categories of physical goods (exceptions: software, music, books and other media consumed increasingly on digital devices). Overall, online commerce is still a small fraction of total retail sales. Fifteen years after the invention of the automobile, buggy whip sales were also still going strong.

What I did say was that there were many lessons Best Buy could learn about customer service from successful online retailers such as Amazon. After pointing out several examples, I emphasized that “Most of what Amazon does right has nothing to do with technology or the Internet at all.” Indeed, I pointed out,

Best Buy could have done all of this years ago, and done it better. It had decades of experience in retail, in customer service, in distribution, in forecasting, in marketing and sales. It had, one presumes, computer systems that could have been upgraded to integrate with a new online front end. It had expertise in the electronic products it sells, and potent leverage over key manufacturers to ensure favorable terms and access.

…But Best Buy squandered all of those assets. And now, along with many of its big box peers, the company is caught in a death spiral. Not because of new competitors who, fairly or unfairly, are eating its lunch. These wounds are self-inflicted.

On Best Buy’s “business model,” (a meaningless phrase I ban from my MBA strategic planning courses) Dunn’s response is even more troubling. The “overwhelming evidence” Dunn cites for the validity of Best Buy’s current strategy is a long list of financial metrics. They suggest, at best, the company is not on the verge of immediate collapse. And that isn’t something I would argue with—nor did I in the original article. After all, the title of the article emphasized that the company’s collapse, if it didn’t mend its ways, was still well into the future.

My point was simply that by focusing on outdated metrics, companies often find that the end can come, when it does arrive, quite suddenly. If you compare yourself to current competitors and not the disruptors, you never see the new structure of your industry coming. (Think of Blockbuster, which outlasted its physical video rental competitors only to be quickly swamped by Netflix once a critical mass of digital product and delivery channels emerged.)

Given the demographic trends, technology disruptors, and the company’s culture, Best Buy’s failure sometime in the not-too-distant future seems inevitable. The company had $1 billion in cash in early 2011 (almost $2 billion in early 2010, however). That, and the inertia of current customers who aren’t yet angry enough to shop elsewhere, will keep the business profitable—if on increasingly smaller margins–for some time.

But when you’re walking in the wrong direction, it’s certain you’ll never reach the destination you have in mind. And insisting you are going the right way when all the evidence points to the contrary makes it unlikely that you’ll allow yourself to be turned around in time. It might feel better to blame those who suggest another route or find fault with the new maps they offer, but it doesn’t solve the real problem.

As I said, it’s not too late for the company to save itself. A truly integrated physical-and-online retailer, offering a seamless, hassle-free experience for customers to shop at home and pick up at the store, or become educated at the store and then place the order later on their smartphone, could prove a genuine threat to online retailers. Treating the online and mobile channel as an asset rather than a necessary evil, and using it to enhance rather than confuse the brand, has proven a winning strategy. For others.

Or perhaps Best Buy could move from a commodity seller to one that offers premium service for a premium price. That appears to be working well for Apple and its retail locations. Some subset of highly-profitable customers are willing to pay for service, as long as that’s really what they get.

But if you’re going to use poorly-paid employees (or so many of them told me) and focus their training on sales techniques rather than product knowledge, you will lose to online retailers who can sell cheaper and offer alternative forms of expertise, including from other customers.

If Best Buy still has a competitive advantage, it’s based on information superiority. Most customers who walk into the stores don’t know what other retailers are charging for the same goods. They don’t know if an extended warranty is cost-effective, or whether the add-ons proposed by a Best Buy sales associate are worth the added price. They can’t easily sift through the terms of a Best Buy credit agreement to know whether or not they can get better terms elsewhere.

Any information advantage the company maintains over its customers, however, is surely temporary. Demographics alone suggest that the next generation of customers (at least) will have that knowledge or will know how to get it. Betting that you know more than your customers and using that knowledge to squeeze out a few more points of margin may have worked before the information revolution, but it doesn’t work anymore. As the head of a major automobile company told me at the dawn of Internet commerce, “Sooner or later, the last stupid customer will walk in the door.”

And then what? Well, at that point you’d better be able to offer them either a better price or a more satisfying in-store experience. Preferably, both. Starting now, physical locations will only pay their way on the balance sheet if they provide some value-added: an experience customers value and which cannot be easily duplicated.

Who’s doing that now? Beyond the Apple stores, think of other “experience” retailers: Starbucks, Nordstrom, Abercrombie & Fitch, Trader Joe, Williams & Sonoma, Rainforest Cafe and American Girl all come immediately to mind. They’re the proof that in the next generation of physical retailing, it’s add value or adios.

“Distinct store formats” (to quote Best Buy’s most recent annual report) aren’t enough. You need to be Disneyland.

The company’s financial statements, by the way, do not separate revenue from physical goods, services (Geek Squad, warranties), or credit and finance charges. So it’s hard to know what really drives profit – product sales or everything else. If it’s everything else, and the margins on everything else start to slip, it really is game over.

So what “business model” is Dunn referring to when he writes that I “blatantly and recklessly” ignored “overwhelming evidence”? Is it one based on fighting over the scraps of a succession of competitors going out of business for ominous if unarticulated reasons, or the “fun and informative shopping environment” the company says is Best Buy’s core customer strategy? The latter might actually have a chance of succeeding. But the response to my article should give pause to anyone who thinks that’s what Best Buy is delivering today.

Is Best Buy an Organization that Explains Away Problems or Learns from Mistakes?

For now, Best Buy is making money on inertia. It is at war with its customers. So far, the company is better armed. That, I think, explains the depth of feeling in the comments I received from customers. As electronics and media purchases move slowly but steadily online, big box retailers are inevitably consolidating or closing. With the demise of Circuit City and other electronics retailers (which closed why, exactly?) Best Buy is increasingly the store-of-last-choice for offline sales.

Consumers who still prefer to buy consumer electronics in person have fewer alternatives. So even those who resent Best Buy’s aggressive tactics to upsell more expensive products, add-on services from Geek Squad, extended warranties, and high-interest credit cards, may not have anywhere else to go. Eventually,they’ll learn to avoid going anywhere at all.

For now all indicators—both on the balance sheet and in the stores–are that Best Buy is following a losing strategy, or rather, no strategy at all. It’s trying everything, and nothing is working. Short-term, the company is up and down. Long-term, the company hasn’t got a roadmap that anyone believes in.

The responses to my article could, in the hands of the right senior executives, form the playbook for a compelling new strategy for Best Buy, one that could do far more than simply preserve the company’s existing market share. But rather than drink in all that free advice, the company’s responses simply wish it away. It’s more denial, now tinged with a dose of anger. According to Dr. Elisabeth Kübler-Ross’s classic psychiatric study, for a patient with a terminal diagnosis those are the first and second stages of grief.

In many years (OK, many, many years) as an entrepreneur, investor, and consultant working with Fortune 500 companies, I’ve found there are two kinds of senior executives. There are those who see mistakes as an opportunity to improve their business and those who waste their energy explaining away real problems.

It isn’t fair to judge the company’s corporate culture based solely on Dunn’s response to my article. Best Buy is after all a public company and what executives say in public is highly constrained. But all things considered, it sure sound like the company is in my second category.

Hey Mr. Dunn, prove me wrong. We’ll both be at CES in Las Vegas this week if you want to talk. No charge.

Larry Downes I am an Internet industry analyst and consultant. I'm also the author of three books, including the Business Week and New York Times business best-seller, “Unleashing the Killer App." My most recent book is “The Laws of Disruption." I've held faculty positions at Northwestern University, the University of Chicago and the University of California--Berkeley.

Source: ExtremeTech.com
Credits: Matthew Murray
Dated: 2012-01-06 

Bye bye, Best Buy?

I admit it: I shop at online retailers all the time. A significant chunk of the Christmas presents I gave this year were in the form of Amazon gift certificates. And if you’ve been reading me here for any length of time, you know that I spend more time browsing and buying things from Newegg than I do hanging out with some members of my family. But I still felt my heart sink into my kneecaps as I read Larry Downes’s story on Forbes.com, “Why Best Buy is Going out of Business… Gradually.”

In the story, Downes cites some chilling statistics about Best Buy losing market share, 40% of its value, a decreased market cap, and a B- average analyst rating. He also discusses the ways the company has failed to extricate itself from old-world thinking. In the ways its employees order products, aggressively try to up-sell or cross-sell when dealing with shoppers, and even address their own mistakes, the company is digging its own grave. Where Amazon makes even the most tedious and usually distasteful tasks a breeze — never have I had an easier time exchanging a product than I did my malfunctioning first Kindle — Best Buy introduces only frustration and confusion. And thus it’s no surprise that customers are turning away from it in favor of other options. [ Emilie says : Not really. Meshed started calling them "Worst Buy" after his first visit there over a decade ago. He swore that *any* European - or even South African - retailer could beat the pants off them in every aspect of their operation. Neither of us have had any reason to think otherwise. ]

Given what’s already happened to other major electronics chains like CompUSA and Circuit City, there’s real reason to fear the disintegration of Best Buy. And if or (gulp) when it happens, it would be a major loss to both casual and serious buyers.

Wait — please don’t brand me as some incurable Luddite who can’t negotiate the transition to a digital marketplace. That’s not remotely true. Aside from clothes, certain tech products are about the only things I feel a need to buy in person. When I’m getting books — hey, not everything is yet available for my (replacement) Kindle — I never hesitate to do that online rather than at one of New York City’s roughly 800 Barnes & Noble stores. I’ve never accepted the argument that being able to rifle through a book’s pages and feel its cover is of any particular importance; for me, what matters is the content on the inside, and the easier that is to acquire, the better. Ditto cookware and other basic household appliances.  [ Emilie says : This may be true at the bottom of the market and for poorly educated American shoppers. It is not true of the higher quality goods sought by more discerning buyers and it definitely not true when more expensive goods attempt to masquerade as superior when all many of them are is pricier. ]

But when it comes to many tech-related purchases, being able to see, and in many cases feel, what you’re getting is crucial to making sure you’re not wasting your money or your time. For all the benefits of Amazon and Newegg, they prevent the direct interaction that is sometimes the most important information you can acquire before you lay down your credit card. Online reviews are frequently excellent for assessing a product’s bare capabilities, and especially good sites (like Newegg) give you all the specifications you need to make an intellectually informed decision. That’s just not always enough. Don’t you want to see your prospective HDTV’s screen in action, slide your fingers across a keyboard to see if it meshes with your typing style and preferences, get a concrete idea of how convenient a laptop really is for you, or sit down at the fully featured desk you plan to buy for using that computer? Even with our current, highly advanced web-based purchasing culture, some things can’t be left to mere faith.

Many customers will suffer if there are no longer stores that cater to those types of products — and, in turn, the products themselves will suffer. There are still some smaller, independently owned shops out there, but they can be few in number, hard to find, and short-lived, whether in the smallish town where I’m originally from or New York City (where they seem to pop in and out of existence with no advance notice). Then there’s the matter of last-minute emergencies, which e-tailers have never been adept at handling; more than once, I’ve found myself in the middle of building a computer only to find I’m out of thermal paste, and been grateful there’s a Best Buy a few blocks away where I can pick up another tube without having to wait a couple of days for Newegg to send me another. Department stores and discount clubs like Walmart, Office Depot, Staples, and Costco, may sometimes have what I’m looking for, but despite their dizzying selections, they rarely (if ever) stock enough of the specific items a truly discriminating tech buyer needs. And not everyone has one of the increasingly few alternatives, such as a Fry’s, anywhere near them.

The white knight to the rescue

Luckily, not all hope is lost. If any company has proven the continuing viability of living-and-breathing retail outlets, it’s Apple, which is constantly opening new Apple Stores all over the world. True, these offer a lot more than just products for sale; you can get repairs, replacements, expert advice, and even training workshops as well, in addition to eye-grabbing architecture and interior designs that make entering one almost like stepping into a modern art museum. But that’s exactly the point — Apple, seeing how the public was changing the way it shopped, changed the nature of its stores to match. That company gives people a good reason to shop in person rather than just online.

That, as Downes argues, is what Best Buy most needs to work on. If it does, it’s possible the company will turn things around, or that a new alternative (preferably one with friendly same-day delivery within major cities?) will emerge; right now, I’m skeptical of both. This sector of the brick-and-mortar business hasn’t looked good for a while, and neither have the Best Buys I’ve frequented in recent years. They’ve been populated with fewer salespeople, with the remaining ones not quite as knowledgeable as those who came before, and been hampered by a drastically reduced selection that seldom makes shopping there even on the best day as satisfying as browsing Newegg on its worst. There have been a number of times I’ve gone in expectant and left annoyed; and a couple of years ago, the company lost out selling me an impulse iPhone because none of the clerks would wait on me. It doesn’t always seem like the customer is really its first priority, something you always are whenever you buy from a website.

Nonetheless, you can bet I’m going to try to throw Best Buy as much of my extra business as I can over the next months and years. There are things I don’t like about the company and how it operates, but it still offers me a convenience I often need — and that e-tailers can’t come close to matching. That’s worth a couple of extra bucks to me now and then — as is being able to find thermal paste on a moment’s notice. Even if Best Buy’s name can seem something of a misnomer these days, it’s better than the nothing that’s far too close to being all we’ll have left if it goes away.