How did we accelerate customer centricity last year? In true Best Buy fashion, we decided to explore the limits of our capacity for change. For example, we converted a record number of stores to the customer-centric operating model. We finished the year with 300 stores, or 40 percent of U.S. Best Buy stores, operating under this model. We expanded the number of Geek Squad agents by 5,000, and brought our home theater installation services in-house to provide a better and more consistent experience for our customers. We grew memberships in Reward Zone, our customer loyalty program, to 7.2 million, and learned more about customer purchase patterns.

In addition, because customer centricity relies on employees engaging with customers in new ways, we also focused on increasing employee retention. We changed how we manage our people. We made more extensive use of strengths-based tools and did a better job of listening to our employees. We also created an incentive system in which all store employees could share. This work yielded results as well—employee retention improved by 15 percent.

To support our strategy, we have embarked on a four-year program to transform our supply chain and information technology systems. Our transformation goal is a simple infrastructure that is built on “vanilla” applications and processes tried and tested from the food industry. To date, the results are both material and promising: our customer-facing POS systems are faster, cost less and have the flexibility to adjust as we transform our multi-channel experience for customers.

Naturally, along with the benefits of our transformation came new challenges. For example, our current product-centric organization could not effectively support the new business model. In the interest of speed, we created parallel groups to support customer centricity in store management, finance, training, legal and marketing. Supporting two operating models was costly; yet our plan was to focus on efficiency after we had implemented customer centricity in all markets. We believed that speed to market was more important.

Testing Our Capacity Limits
In retrospect, we moved too quickly in some areas. In the fiscal third quarter, the volume of changes peaked, leading to a dispersion of results. Specifically, the performance of customer centricity stores converted in our fiscal third quarter was modestly below our expectations. We stopped conversions for 90 days, and our analysis indicated that we had overestimated our capacity for change. We had asked stores to implement customer centricity, hire more services personnel, introduce Image Labs, reset their enter- tainment software space and implement a new approach to appliance sales. Most stores had executed well on one or more of these dimensions. Yet no store was able to demonstrate the same level of success with all of these dimensions. These results indicated to me that the overall strategy was intact, but we simply had asked too much of our people within the third quarter.

Fiscal 2007 Goals

• Implementing our customer-centric operating model at all U.S. Best Buy stores
• Continuing to add new stores and Magnolia Home Theater locations
• Building our Best Buy For Business capabilities and presence
• Further growing our services business
• Enhancing our ability to provide complete, end-to-end solutions
• Carefully pursuing international growth opportunities

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