FORTUNE:

Q&A with Best Buy CEO Brad Anderson

As competitors like Circuit City and CompUSA struggle to find their way, Anderson, CEO of Best Buy, answers your questions, and questions from professor and author Larry Selden.

By Matthew Boyle, Fortune writer

(Fortune Magazine) -- Where do you find new business ideas? --Alfredo Machado, Milwaukee

I believe that some of our best ideas have come from the people who are furthest removed from the CEO's office - those line-level employees who interact with our customers each and every day. We've got a wonderful team of eccentric people working in our Manhattan store on 44th Street and Fifth Avenue. Now, there's a large Brazilian community near the store, and the manager said, "Hey, we don't do anything to cater to them." So he hired folks who spoke the language in the store. They wound up discovering that there are cruise ships of Brazilians that come to New York City, so they contacted the travel company and found that the store was a desirable stop for them. So all of a sudden we have buses of tour groups pulling up on Sundays. If we waited for someone in Minnesota to come up with that idea, we'd still be waiting.

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Anderson's Best Buy rises four spots on the Fortune 500, to No. 72.
Questions for... Martha Stewart
Martha Stewart
Author, TV host, and the founder of Martha Stewart Omnimedia answers your questions in the Dec. 8 issue of Fortune.

Now's your chance to ask Stewart about launching your own company, how the market turmoil has impacted her empire, and whatís next for the titan of homemaking?
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Previous Q&As
Fortune's Matthew Boyle asks
Circuit City recently fired employees who made too much money. What do you make of its struggles? Do you think the company can recover from the bad PR?
We've had a number of instances where we had to make difficult choices. So even though they're a competitor, no one wants to be forced to make those choices.
Will you hire any of them?
To be honest, we could hire them.
How do Circuit City's struggles impact your strategy?
They are having difficulty now, but six months ago they had phenomenal revenue growth. That was a real good motivator for our team.
What is the latest gadget you bought?
My Christmas gift was a Sony laptop that's supposed to edit high-def content from a camcorder. But we haven't been able to figure out how to make it work. The Geek Squad is on it.

Best Buy (Charts) forced Circuit City (Charts, Fortune 500) to change its business model in order to compete. How are Wal-Mart (Charts, Fortune 500), Target (Charts, Fortune 500) and Costco (Charts, Fortune 500) forcing you to adapt? --Jason Brooks, Concord, N.C.

The first thing we did to differentiate ourselves was taken directly from discount-store chains. [We created] well-lighted stores with noncommissioned salespeople. We did not invent that. Today, if you look at the standards we are using to improve our supply chain - reducing the time from manufacturer to consumer - they are taken from Wal-Mart, Tesco and Target. In those cases, we are a fast follower. In our world the way you win the game isn't the price of the TV - which is about the same for all retailers - but the experience you give customers once they are in our stores.

Best Buy and other retailers have been criticized for stringent return policies, yet they continue to be restrictive. Going forward, how do you balance stopping the small percentage of abuse with just taking care of your customers? --Ron Becker, Corona, Calif.

Obviously, having the total solution is going to help lessen returns. But given the fast pace in which technology changes, we do have to set a return time frame suitable to our business. We feel we have a fair return policy but are always interested in what the customer has to say.

What's the best advice you can give to someone who aspires to be an entrepreneur? --Paul Zdechlik, Edina, Minn.

Find an unmet customer need and make it your passion to profitably satisfy it. This should guide your work, and you should surround yourself with others who share that same passion. When a company starts out, its founders are very aware that it's a people-powered effort. But then as the company grows, something strange happens. With success, the company naturally focuses more and more on the tactics and efficiencies of running a larger organization. Finding time to sit and think about customer needs becomes harder and harder. The enterprise comes to think of itself in terms of what it is, rather than who it is.

Any organization is a human endeavor, but in the pursuit of efficiency, most big organizations work hard to dehumanize, depersonalize it. We think you can do both: run a successful and growing company that depends on the unpredictability and ingenuity of its employees.

What are Best Buy's plans for selling the Apple iPhone? --Vinay Awasthi, Mountain View, Calif.

I can't comment on that at this time.

Who do you see winning the high-definition DVD war? And how soon do you think it will be decided? --Mike Wilson, Norwalk, Conn.

It's too early to declare a winner. Customers are interested in high-definition content, but the format war is keeping most people on the sidelines. As long as two formats are competing for customers, confusion will prevent mainstream acceptance. We continue to advocate for an end to this dispute, but there is no way of knowing what the timeline for resolution will be.

Flat-panel TVs are driving your revenues today. What will be your revenue drivers when they reach maturity? --Daren Baughman, Raleigh

In many ways, we are at the beginning of several product cycles that may run for five, maybe ten years. We are dealing with the first generation of the new TVs, a new cycle of gaming platforms, and computing enhancements with Microsoft Vista. That said, it's difficult to predict exactly what the next technology will be, but we do know that it will be something that further integrates devices as they stand today.

What's your strategy for expansion into China? --Wei Mingliang, New York City

We entered China in 2003 with a global sourcing office in Shanghai. Last year we acquired Five Star, China's third-largest appliance and consumer electronics retailer. The Five Star team has been enormously useful in helping us to better understand the Chinese retail environment. Earlier this year, we opened our first Best Buy-branded store in Shanghai, which is much more similar to the North American store experience. We plan to open another 20 to 23 Five Star stores in China, and another two to three Best Buy stores, within the next 12 to 18 months.

PEER QUESTIONS

From Larry Selden Professor, Columbia University (Emeritus) Graduate School of Business Co-author, "Angel Customers and Demon Customers: Discover Which is Which and Turbo-Charge Your Stock."

As competition in your traditional markets continues to intensify with competitors such as Wal-Mart, Costco and Target expanding their offerings and trying to source product at ever lower cost internationally, the principles of segmenting your customers and developing differentiated value propositions for each would seem to be ever more important. In that competitive, battle educated and engaged "blue shirts" (Best Buy associates) that feel empowered to serve the client and create innovative solutions would seem to be the "killer" advantage. I personally have seen the power of this advantage at Best Buy and it is really a way to dominate the competition, no matter who it might be. How do you plan to accomplish this in a world where all of the gravity seems to be toward centralization, standardization and "dehumanization?" Howard Schultz has recently acknowledged that Starbucks may be facing the same challenge over the past few years of their exceptional growth.

We know that our ability to create an environment that encourages employee innovation in support of a better customer experience is as important as having deep insights about our customers in the first place. We have evolved from being an organization that thrived on process and standardization to one that finds increasing value in understanding the unique differences of both our customers and our employees. In the late 90s, we were all about our ability to replicate the same operating procedures across the chain. Today, those SOPs provide a foundation for our ability to offer varying value propositions that appeal to different groups of customers. Using that foundation as a launch-pad to unleash the power of our people, in service of customers, is our daily, hourly challenge ­ and it's absolutely "job one" for the entire Best Buy enterprise.

Many retailers that expand internationally fail to achieve either the levels of customer satisfaction or profitability they earn in their home markets. Too often the retailer tries to "cookie cutter" the model that succeeded in their home market. But the success in the home market is often based on an understanding of customers and their needs which is not rigorously codified but has grown through trial and error over the years. However, the big leap into foreign markets taking on local competitors often does not permit the luxury of time to grope to customer solutions. This is especially true for a high profile company like Best Buy growing its presence in Canada and entering China. Do you think that the muscles Best Buy has built during your four-plus year journey to implement Customer Centricity in the U.S. can, indeed should, enable you to shorten the time to winning with foreign customers and very importantly increase the odds of large financial payoffs? Isn't the key to compete on systematically collecting superior customer insights and then being able to distill that down to the actions of your store associates?

Our customer-centric business model gives us the confidence to be able to grow outside of the United States. We know that we must do three seemingly simple things to succeed: gain deep insights into our customers' priorities and lifestyles; figure out how we can encourage and nurture employee ingenuity on behalf of our customers; and then offer solutions that will result in great experiences for our customers.

Sounds easy, but this is actually extraordinarily complex. And, it's working. In Canada, we doubled our market share by understanding our customers and their preference for two different brands and varying value propositions. In China, we picked the market based on the opportunity we saw with an optimistic consumer, an expanding economy, an immature retailing industry and the chance to change the business model and better meet customer needs. Our Best Buy store in Shanghai was squarely aimed at consumers there, based on interviews in the street, in their homes, and in our stores. The insights from those consumers along with those of our Chinese team continue to help shape our business there. The business model is more similar to what we have here in the States, yet the products are different because the mix must reflect the customers¹ desires. Top of page