IBM’s recent Summit for Consumer Electronics Emerging Technologies proved product innovation is the main driver of sales growth and profitability. To hammer home the point, George Bailey, IBM’s general manager of Global Electronics Industry, reminded the audience of CE executives that perhaps more than any other industry consumer electronics relies on continuous innovation, and to be successful CE companies must focus on delivering integrated solutions to consumers, not just innovative products.
Best Buy says it’s doing just that.
Fernando Silva, Best Buy’s director of Private Label Product Lines, delivered a keynote address at the summit that left no doubt that we live in a consumer-centric world, in which collaboration from all areas of the supply chain should drive innovation. At Best Buy, customer-centricity means “treating each customer as a unique individual, meeting their needs with end-to-end solutions, and engaging and energizing our employees to serve them,” he said. “It is our primary strategy for providing a differentiated experience for customers.”
By listening to customers and employees more closely, Best Buy is benefiting from new ideas that in the past would never have reached corporate headquarters. Through employees that regularly engage with customers, the retailer has discovered several growth opportunities. Those with the highest potential include small-business customers, new services offerings and international growth, which account for a total of at least $230 billion in revenue, according to the 2007 Best Buy Annual Report.
For decades, CE manufacturers focused on creating products while retailers have focused on selling them. Silva demonstrated that retailers are sharing some of the roles that manufacturers used to dominate, such as developing a deeper understanding of the consumer. By doing so, Best Buy is emerging as a new ally of manufacturers and technology product developers alike.
For example, Best Buy has assembled a team of engineers, technologists and product experts from Apple, Xerox, Kodak and other leading R&D companies. Silva said, “they receive, reiterate, vote and synthesize end-to-end solutions to improve the lives of our customers by listening to them. It is the intersection of the three constituents – Best Buy, partner suppliers and product developers that determines what customer needs have to be met. Silva’s team – which invites input from approximately 120,000 sales associates in over 1,150 stores in the US, Canada and China – taps into the “one million hours spent daily by the sales associates wearing blue shirts who are now agents of our customers and not of product manufacturers, as they used be in the past.”
In the supply chain, as the evolution takes place from technology to ideation to shelf, the sales associates are empowered to identify who the products are actually designed for by obtaining customer feedback, understanding the customers’ needs and wants, Silva said. As a result, the Best Buy customer base has been segmented into basic lifestyle groups. The purchasing officer is identified for each segment and an associated purchasing index is developed. The data obtained from inputs is collected and analyzed. The intelligence is then extracted for product development, product redesign, new business model development and new service offerings. The results are there for everyone to see, especially as they are applied to Best Buy’s own product brands, including Geek Squad, Insignia, Dynex, Init and RocketFish.
So far, the results have paid off. Best Buy ended the fiscal year 2007 with 40 percent of its U.S. stores operating under the consumer-centric model. The number of Geek Squad agents has grown to 5,000 and home theater installation services were brought in-house to provide a better and more consistent customer experience. Membership in the Reward Zone customer loyalty program has reached 7.2 million and, as a result, Best Buy has learned more about customer purchase patterns than ever before, Silva said.
Silva pointed out that the greatest advancement in private label products has been achieved by the grocery industry, with nearly 30 percent of their total revenues now coming from private labels. Furthermore, according to Bear Stearns research, Europe leads the private label trend with 23 percent of total sales, followed by Canada with 20 percent and the US with only 15 percent. As a result, Best Buy has decided to expand its private label business. Silva said “our job is to innovate in the application of technology and it is not our place to create the technology. The blue shirts are engaged in product development to improve marketability and build world-class private labels.”
The importance of new product development and how it serves customer needs cannot be overemphasized. At this year’s CES, CE companies debuted more than 20,000 new products. While revenues for the consumer electronics industry are up nearly 50 percent since 2001, net margins are still around 2 to 4 percent, IBM’s Bailey said. For an industry projected to reach $200 billion by 2010, a 20 percent increase over 2005, the collaborative process of Best Buy may prove to be a huge differentiator.
Bailey pointed out that the marketplace for CE retailers has undergone a significant concentration between 2001 and 2005. In 2005 the top three retailers (Best Buy, Wal-Mart and Circuit City) accounted for 48 percent of the North American market – a 33 percent increase over 2001. In this rapidly evolving marketplace, Best Buy is developing an extraordinary core competency for CE innovation by gathering and synthesizing customer intelligence that will advance collaboration with suppliers while building a huge competitive private label business for itself. Silva emphasized that Best Buy is providing “service which is always the co-production between the provider and the customer in a customer-centric environment where one must innovate to create new markets.”
Devendra Mishra is Chairman of the CESCA. He can be reached at firstname.lastname@example.org.