Case Study Part1

From the case “The Rise of Circuit City Store, Inc.”, I have learned a lot about the development of the nation's second-largest consumer electronics retailer. Even though it went bankrupt, I still admire its whole development process. It was founded in 1949 by Samuel S. Wurtzel and became pioneer in their business of consumer electronics. However, I also see some problems here which cause the company failed.

The first problem I want to say is that the company went on a store expansion too fast which resulted in too many stores in neighborhoods. As I learned from the microeconomics, marginal revenue will goes down as the number of stores goes up. That means when the scale of the store reaches to a certain degree, the profit goes to the maximum. Any new store will only produce a negative income. From the case, we can see that Circuit City kept adding stores almost every year, regardless of the changes in the internal and external environment. I can’t say I agree with this strategy, but at that time, it really increased the sales and profits. However, when it came to the Depression, because of the lack of demand, there was really no need to add new stores. Here, I guess I want to mention another related problem. The case mentioned Interest rates several times, and it is really important for a company. When it goes up, the demand will decrease, at the same time companies may feel hard to loan money. Furthermore, it could cause some credit problems which may bring big troubles to a company or even the whole industry.

Another essential problem I can see here is that Circuit City didn’t pay much attention to its customer service. From the end of the case, we can see that Best Buy was in a leading position when we taught about customer service. In fiscal 2000, Best Buy’s low service model was proving to be a major challenge. And when Circuit City continued to use its commissioned sales counselors, Best Buy switch to self-service and low levels of salaried staff in 1989 revolutionized their store organization, cut operating costs, and placed more control in the hands of consumers1. Best Buy was already 20% bigger than Circuit City and growing much faster in fiscal 2000, which proved that Best Buy’s strategy was more advanced and successful. In today's economic environment, although cost control is very important, customer service also plays a significant role. Compared to Best Buy’s strategy, Circuit City’s commissioned sales counselors increased its cost, as we can see in Exhibit 3b. And when Circuit City wanted to control its expenses, according to the information I collected from the Internet, in March 2007, it announced plans to lay off its highest-paid hourly employees, including salespeople, and replace them with cheaper workers2. “To save money, it stopped paying commissions to its sales force and then fired 3,400 of its most experienced sales people3.” Circuit City ignored the importance of customer service, which resulted in the loss of customers. This was a fatal mistake.

The last but not the least problem is that the competitors are really strong and aggressive. From Exhibit 2, we will find that Best Buy was the top consumer electronics retailers in the United States in 2000, occupying 15.1% market share. Circuit City could only sit behind Best Buy. And through all charts given in the case, Best Buy was in a leading position after 2000. Except Best Buy, there were other ambitious competitors. Sears, Wal-Mart, and Home Depot clashed over the appliance market. Price cutting and discounting made the field increasingly competitive. Appliance market is a profitable market and there will always have new entrants, some of them are really strong and aggressive. Circuit City had no choice but fight for survive.

There is something Circuit City can do to solve those problems. First of all, control the speed of expansion and the credit problem. When adding a new store, Circuit City should observe the economic environment first, and then calculate the cost and revenue finally choose an appropriate place. To make the company’s financial health good, Circuit City should keep enough cash flow and control the credit scale. Hiring an experienced CFO could be a smart move.

Second, pay much attention to customer service. There is no doubt that customer service is essential in our business today. I have heard an old saying in China that “Customer is God”. So, no matter what happened to a company, customer service cannot be ignored. As for the cost control, Best Buy has set a good example to Circuit City. Best Buy switch to self-service and low levels of salaried staff in 1989 revolutionized their store organization, cut operating costs, and placed more control in the hands of consumers. So, if Circuit City wants to save money, customer service won’t be a right place to go.

Third, in a perfectly competitive market, the reality is, competitors will always exist. So, Circuit City should do better than before. Competition brings you not only pressure, but also power. Circuit City can learn the business model which Best Buy uses, if it proved to be more successful. But don’t abandon your own business culture, your vision, mission, values and strategies. Also, innovation is an effective way to beat competitors and gain market share. In addition, doing some market research to figure out the whole environment of the market and what the customers’ need are can be a wise choice. Anyway, there are hundreds of ways to face competitors, but the key thing is to constantly improve the competitiveness of the company itself.

Reference:
1. The Rise of Circuit City Stores, Inc. by John R. Wells, Galen Danskin, Harvard Business School, Jun 29, 2012. Prod. #: 713401-PDF-ENG

2. http://content.time.com/time/business/article/0,8599,1858079,00.html

3.http://www.cbsnews.com/8301-505125_162-28241493/eight-reasons-why-circuit-city-went-bankrupt/