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Best Buy: Down With Executives?

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Are rank-and-file employees smarter than their bosses?

A story in this morning's Wall Street Journal details Best Buy's (NYSE: BBY  ) efforts to balance "the wisdom of crowds" against its sheltered executives.

Three years ago, an executive asked hundreds of employees to predict the number of Best Buy gift cards the company would sell in a single month. The average employee's pick wound up being closer to the actual number than the internally projected figure.

Best Buy has since gone on to set up a more formal predictions market called TagTrade, where employees are encouraged to make their projections on everything from hot product trends to the success of new services.

The article also details similar employee-level forecasts used by Google (Nasdaq: GOOG  ) to predict things like Gmail signups or the chances of a product launching on time. General Electric (NYSE: GE  ) and Intel (Nasdaq: INTC  ) have also experimented with the concept, according the story.

It's a neat approach, but the more startling implication is that executives aren't any smarter -- in fact, probably less smart, in a "street smarts" sense -- than their underlings. This naturally may lead shareholders to wonder why they're paying their executives so well, and padding their contracts with chunky stock options as retention tools, when the average Joes and Janes have more clarity than the MBA-bearing pros.

Hands off the hands-on approach
When his company was still getting started, Wal-Mart (NYSE: WMT  ) founder Sam Walton would drive his now-legendary pickup truck to his stores. As rich and powerful as Walton became, he never forgot that gauging the pulse of his company's front line was vital to the company's success.

Companies have gotten away from that approach, now that software provides real-time inventory updates. But while new tech has armed companies with the tools to measure what is selling now, it can't accurately predict what will sell in the future. That's where retail employees can outsmart the company's executive buyers, since they're constantly in direct contact with customers.

One of my favorite investments is regional amusement park operator Cedar Fair (NYSE: FUN  ) . I've visited the company's headquarters, which is easy enough to find -- it's smack dab in the middle of Cedar Point, the company's most popular park. When you're surrounded by your product and your customers, you find it that much easier to decide what rides to add next, and how visitors are enjoying their day, without resorting to long-distance exit turnstile surveys.

In defense of the boardroom
Naturally, you don't want to flip a company's ranks upside-down. That would be anarchy. The best of both worlds involves tapping the street-smarts of the hungry front line with executives humble enough to trust the crowd's instincts over their own.

That's easier said than done, of course. In the real world, suggestion boxes can collect cobwebs. Few companies may follow Best Buy's lead into tapping the collective genius of their hires.

In fact, Best Buy's biggest competitor may have gone the other way last year. Remember when Circuit City (NYSE: CC  ) let go 3,400 of its pricier unit-level associates? The company argued that it could replace them with newer, cheaper hires on the sales floor.

How did that work out for Circuit City? Not well at all, judging by the current stock price. Cutting costs may have made sense to the beancounters, but thousands of Circuit City's most knowledgeable sales people got shown the door.

"It's not just that you're letting go what may be some of your productive associates," I wrote at the time. "What kind of message does this send to your remaining hires? Don't overachieve. Lay low. Do just enough to stay with the pack."

The layoffs may have been a morale-deflating move in retrospect. But now, having learned about Best Buy's employee-empowering initiatives, I realize that Circuit City also did itself in by sending away the brain trust it needed most.

Best Buy execs are smarter because they lean on their smarter hires. That's not incompetence at the top -- it's competent humility. Send in the crowds.

Related Foolishness:

Wal-Mart Stores, Intel, and Best Buy are Motley Fool Inside Value recommendations. Google is a Motley Fool Rule Breakers selection. Best Buy is a Motley Fool Stock Advisor pick. The Fool owns shares of Best Buy. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz prefers shopping at Best Buy to Circuit City, though he remains a fan of Best Buy blue and Circuit City red. He does not own shares in any of the companies mentioned in this story, save for units in Cedar Fair. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

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