5 ways to save Best Buy from extinction

January 3, 2013: 11:11 AM ET

How Best Buy can transform itself from a bloated showroom into a tech leader.

By Jack D. Hidary, contributor

120820114040-best-buy-gallery-horizontalFORTUNE -- Best Buy is in a downward spiral. The company's stock price is down 50% over the last year and key executives have jumped ship. Best Buy's head of digital strategy, Steve Gillett, left recently to join Symantec. The company has given its founder, Richard Schulze, an extended period to put a bid together for the company -- sensing that going private may be its best option.

Whether Best Buy (BBY) stays public or not, it must define a roadmap for its future. The core business of retailing commodity electronics is broken and will not produce ongoing profits. Online competitors like Amazon (AMZN) have forced Best Buy into becoming a bloated showroom for consumers to touch and feel product only to buy the same product online for less. Best Buy's store "helpers" are notoriously uninformed about the technologies in the store. Compare the experience with an Apple (AAPL) store where nearly every blue-shirter is personally embedded in Apple technology.

Best Buy should take a page from the IBM (IBM) playbook and shift from low-margin sales of commodity products to high-margin and high-engagement services. Instead of focusing on the Fortune 100 as IBM does, however, Best Buy can serve small and medium-sized business and consumers. Among the core assets of the company are its trusted brand and its well-placed real estate leases. Best Buy can leverage these two assets in a new way to deliver a fundamentally different proposition -- instead of offering commodity product with poor service, Best Buy can offer services, training and innovation.

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Here are five tactics to implement this strategy:

1. Offer on site, in-store and online training. Companies such as General Assembly (GA) have created successful networks of digital training centers. Best Buy can bring in GA or other providers and use part of their big box stores as training centers. This will bring in high-profit streams of revenue while engaging the customer in a much deeper way than selling them a commoditized flat screen. Best Buy could also arrange for on site training at corporate campuses. Companies are struggling to keep up with the latest technologies and would welcome a brand-name, national training provider to teach their employees on site.

Best Buy can partner with Microsoft (MSFT), Cisco (CSCO), Salesforce.com (CRM) and others to deliver online and on site training modules. It can also work with Udacity, Coursera and other online course providers to offer a common space for video conferencing and study sessions for their classes.

2. Slash the number of SKU's by 50% in every store. Instead of every location in a dense region trying to be all things to all customers, have each store specialize in a few tech sectors. The Best Buy in Union Square in NYC, for example, boasts an extensive music technology section complete with a 20-foot high wall of digital guitars -- a feature not replicated many other NYC Best Buy shops.

Best Buy should also expand beyond commodity products and begin focusing on innovative categories, for example, personal health monitoring and quantification. Everything from weight scales that are connected to Wi-Fi networks to pulse monitoring watches will be increasingly popular as consumers use technology to manage their health and lifestyle. Designated Best Buys could become health tech centers with partners including GE (GE), Nike (NKE) and others.

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This approach will drastically decrease the amount of working capital dedicated to holding inventory. By slicing inventory down to the key products that consumers wish to buy, Best Buy frees up capital to deliver a top-flight training and service platform. A focus on revenue growth when all that revenue only brings more losses is misguided. Best Buy should clearly seek to replace commoditized revenue with higher-margin revenue that engages key customer bases.

3. Turn 20% of every store into a tech incubator for startups. Incubators have blossomed in the past few years in urban centers including San Francisco, New York, LA and Washington, DC. Since Best Buy has a big footprint in suburban locations, it can host incubators that will attract startups that cannot be or do not wish to be in urban settings.

Incubators will bring several benefits to Best Buy:

- Best Buy can showcase the cutting-edge tech from the startups. While a customer may not be able to purchase the technology it will attract back the tech-oriented base that Best Buy has lost. This is similar to how car enthusiasts attend auto shows even though one cannot purchase a car at those events.

- Startups create community. Just offering lots of stuff in a big box is a losing formula in the world of electronics unless you create a compelling reason for people to show up and purchase there. Best Buy can create its own community network by hosting hackathons and other tech gatherings centered on their in-house incubator which will attract hundreds of potential customers for each event.

4. Put all staff through a rigorous assessment process and keep only those with a deep passion for technology. It would be better to have fewer sales staff per location and have those be knowledgeable than have a larger staff of disaffected talent -- the predicament Best Buy is in currently.

5. Pour significant resources into scaling Geek Squad. The service organization mus evolve from a Best Buy captive service to a decoupled offering in the way that OnStar is now decoupling from GM (GM) products. OnStar is a big home run for GM and is now available for non-GM cars thus expanding GM's share of the automotive wallet.

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As small and medium businesses (SMBs) contend with rapidly changing technology including mobile platforms and social media they will need more help from skilled professionals. Home technology is also exploding with multiple iPads, smartphones, laptops, DVRs and other devices now common in many residences. SMBs and consumers will welcome a branded, trusted service from Best Buy to make sense of this emerging tech.

Through this strategy, Best Buy can transform itself from a white elephant chain to a nimble leader catalyzing adoption of new technologies. Instead of waiting for tech companies to come up with hardware that it then tries to sell at zero margins, Best Buy can shift to help SMBs as well as consumers use these new technologies and host the brainpower of future innovation. Best Buy will not only dramatically increase in value, but it will create a sticky, loyal community of customers who will now have a reason to visit the locations and purchase services and good from Best Buy and recommend Best Buy to their networks.

Jack Hidary is a startup investor and co-founder and former CEO of Dice.com (DHX). Send Jack comments: @jackhidary

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