In Depth December 10, 2009, 5:00PM EST

Why Tech Bows to Best Buy

As the last major electronics retailer standing, the chain has unparalleled clout. And CEO Brian Dunn means to use it, shaping technologies and helping to develop products

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Illustration by Thomas Porostocky

By Cliff Edwards

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For the past four years, employees at Best Buy (BBY) have taken regular tours of what the company called its "retail hospital." A group of about a dozen would don white lab coats, walk a row of real hospital beds, and scan charts describing the maladies afflicting each of the giant retailer's major competitors. But this fall, Best Buy staffers made their last trip to the darkened room on the company's Richfield (Minn.) campus. The retail hospital is closing because all of Best Buy's major rivals have succumbed to terminal illness. "It's kind of like ultimate fighting," says Barry Judge, the company's chief marketing officer. "One retailer goes down, and then who's next?"

At least for now, Best Buy stands as uncontested champ. It's the last major consumer electronics retailer in the country this holiday season, after the liquidation of Circuit City earlier this year. But Brian J. Dunn, who became Best Buy's chief executive officer in June, isn't taking success for granted, especially with rising competition from nontraditional rivals such as Wal-Mart Stores (WMT) and Amazon.com (AMZN). So Dunn has ambitious plans to take advantage of Best Buy's newfound clout: He wants to go beyond the typical big-box retailer role of selling commodity products such as televisions and personal computers and become a central player in determining which products come to market and how big-spending customers choose the latest gear.

The plan is already under way. Rather than waiting for electronics makers to ship Best Buy the same products that its rivals get, Dunn's lieutenants are walking factory floors with executives from companies such as Hewlett-Packard (HPQ) and Toshiba, influencing product development and design. The retailer is pushing suppliers to use standardized software and digital services so consumers can listen to music or watch movies on any device. And Best Buy has set up its own venture capital fund to pour millions of dollars into startups from Silicon Valley to Asia. The goal is to shape development of new technologies in promising fields such as green vehicles, digital health, and home monitoring. "We are talking to players deep into engineering the future," says Dunn. "It leads us nicely to a space where we can make a real difference to consumers."

"AVANTE GARDE"

Shoppers wandering Best Buy aisles this holiday season will see the difference. Along with the latest flat-screen TVs, digital camcorders, and computer games, the company's shelves are stocked with exclusive items. Among them: the thinnest laptop on the market, a motorcycle that runs solely on electricity, and a watch-like gadget you attach to your wrist to monitor daily activity and sleep patterns. "We want to become a digital playground where people come in, experience it, try it, and find out how all these things can work together around their life," says Dunn.

The strategy, for all its ambition, could backfire. As Best Buy broadens its focus, it risks clashing with crucial partners. The company is already selling certain products in competition with suppliers, and will likely push other products off store shelves to make room for gear it's developing. Best Buy's new role makes it a kingmaker for companies that play along and a serious threat for those that refuse. "Best Buy is avant-garde in its thinking," says Eugene Fram, a retail expert and professor emeritus at the Rochester Institute of Technology's College of Business. "The big question is whether they can succeed without alienating their partners."

Executives at several major consumer electronics companies worry privately about Best Buy's growing influence.