IN THE 1990S, Circuit City was the largest and most successful consumer-electron
ID: 405681 • Letter: I
Question
IN THE 1990S, Circuit City was the largest and most successful consumer-electronics retailer in the United States. Indeed, Circuit City was so successful it was included as one of only 11 companies featured in Jim Collins’ bestseller Good to Great.To qualify for this august group of high performers, a company had to attain “extraordinary results, averaging cumula-tive stock returns 6.9 times the general market in the 15 years following their transition points.” 1 Indeed, Circuit City was the best-performingcompany on Collins’ good-to-great list, outperforming the stock market 18.5 times during the 1982–1997 period. How did Circuit City become so successful? The company was able to build and refine a set of core competencies that enabled it to create a higher eco-nomic value than its competitors. In particular, Circuit City created world-class competencies in efficient and effective logistics expertise. It deployed sophisti-cated point-of-sale and inventory-tracking technology, supported by IT investments that enabled the firm to connect the flow of information among geographi-cally dispersed stores. This expertise in turn allowed detailed tracking of customer preferences and enabled Circuit City to respond quickly to changing trends. The company also relied on highly motivated, well-trained sales personnel to provide superior service and thus build and maintain customer loyalty. These core competencies enabled Circuit City to implement a “4S business model”—service, selection, savings, and satisfaction—that it applied to big-ticket consumer electronics with an unmatched degree of consistency throughout the United States. Perhaps even more important during the company’s high-performance run, many capable competitors were unable to replicate Circuit City’s core competen-cies. Further underscoring Circuit City’s superior per-formance is the fact, as Jim Collins described it, that “if you had to choose between $1 invested in Circuit City or $1 invested in General Electric on the day that the legendary Jack Welch took over GE in 1981 and held [that investment] to January 1, 2000, you would have been better off with Circuit City—by [a factor of]
six times.”
2
In the fall of 2008, however, Circuit City
filed for bankruptcy. So what happened?
Circuit City’s core competencies lost value
because the firm neglected to upgrade and protect
them. As a consequence, it was outflanked by Best
Buy and online retailers such as Amazon. Moreover,
Circuit City’s top management team was also dis-tracted by pursuing noncore activities such as the cre-ation of CarMax, a retail chain for used cars, a foray
into providing an alternative to video rentals through
its proprietary DivX DVD player, and an attempted
merger with Blockbuster (which filed for bankruptcy
in 2010).
Perhaps the biggest blunder that Circuit City’s top-management team committed was to lay off 3,000 of
the firm’s highest-paid sales personnel. The layoff was
done to become more cost-competitive with Best Buy
and, in particular, the burgeoning online retailers. The
problem was that the highest-paid salespeople were
also the most experienced and loyal ones, better able
to provide superior customer service. It appears that
laying off key human capital—given their valuable,
rare, and difficult-to-imitate nature—was a supreme
strategic mistake! Not only did Circuit City destroy
part of its core competency, it also allowed its main
competitor—Best Buy—to recruit Circuit City’s top
salespeople. With that transfer of personnel to Best
Buy went the transfer of important tacit knowledge
underlying some of Circuit City’s core competencies,
which in turn not only eroded Circuit City’s advantage
but also allowed Best Buy to upgrade its core com-petencies. In particular, Best Buy went on to develop
its innovative “customer-centricity” model, based
on a set of skills that allowed its store employees to
identify and more effectively serve specific customer
segments. Highlighting the dynamic nature of the
competitive process, however, Best Buy now faces its
own challenges competing with online retailers such
as Amazon. Employees at Circuit City stores and even at the
headquarters in Richmond, Virginia, were shocked
and devastated when the firm actually ceased opera-tions in March 2009. More than a year after the clos-ing, former headquarters workers noted that the firm
had a good, hard-working, and family-friendly atmo-sphere. They believed to the end that, in the worst
case, another firm would buy Circuit City and per-haps reduce its size but not permanently close the
business.
Question 4: What is the future of Best Buy as the leader in big-box electronics retailing as it faces tough competi-tion with Amazon and other online retailers? What
core competencies in big-box retailing are critical
not only to survive but also to gain and sustain a
competitive advantage?
Explanation / Answer
Answer:
Future of Best Buy as the leader in big-box electronics retailing depends upon the decisions to be taken by management of Best Buy. Right change at right time is necessary to lead big-box electronic retailing. Closely watching strategy of amazon and other online retailers is also needed while making business strategy of Best Buy. Best Buy should not commit mistakes as committed by Circuit City. If above points are kept in mind, future of Best Buy as the leader in big-box electronics should be bright.
Core competencies in big-box retailing that are critical not only to survive but also to gain and sustain a competitive advantage, are as below:
(1) Retention of old employees as they know how to serve customers better.
(2) Application of new innovative ideas for example Best Buy applied “customer-centricity” model to gain competitive advantage.
(3) Not to pursue non-core activities such as the creation of Car-Max, a retail chain for used cars as done by Circuit City.
(4) Expertise in logistic system.
(5) Good understanding of customer behavior and their preferences.
(6) Making business strategy keeping in mind 4S which are service, selection, saving and satisfaction.
(7) Wide range of products considering all sections of customers.