Circuit City Revisited: Worst Practices Don't Work

Last April I wrote a post to this blog about Circuit City (Permanent Innovation Blog: Worst Practices in Innovation Award Winner!), which laid off 3400 of its higher-paid sales staff (who were earning around $15 per hour) in order to save money by replacing them with people earning around $9 per hour. I figured that they might save around $35 million by doing so, but I predicted that it would backfire.

Well, the results are in. It did backfire.

According to an Associated Press report by Rachel Beck published January 13, 2008, Circuit City stock is now 80% down from last April before they announced the layoff, and calls for the CEO to resign or be fired are increasing. Same-store sales were off 11% during the holiday season, at a time when the consumer electronics market is booming.

The company wasn't doing very well before the layoffs, but they definitely made things worse.

Part of the problem is that Circuit's City's store concept is tired. But a staff of knowledgeable and helpful people could probably overcome that, because so many electronics customers bring repeat business to the places they shop. If customers are leaving Circuit City for their competitors, it can only mean that they're not having the shopping experience that they want, and the role of sales staff in that experience is critical. (By the way, how many ex-Circuit City employees moved over to Best Buy? That would be be really interesting to know!)

Retailing was and remains a human activity. Could Circuit City management really have forgotten that? We'll if they did, they've re-learned it by now. But is it too late?

So what should management do now, now that they have an eroding customer base and a staff of relative novices? For one thing, they need to train their people and nurture a culture of service. This could mean that they should over-staff their stores to insure that even more sales people are there to help customers than the sales level would call for. Of course that would hurt profits in the short term, but it could pay off in the longer term.

The problem is that in a deepening crisis, managements tend to think very short term; you can just imagine the executives pouring over the daily sales reports each morning to see how things are going from day to day, and meanwhile missing the opportunity to redesign the business for long term survival.

Because clearly Best Buy has a better business model for the moment. Can Circuit City recreate itself? Or is it destined for permanent also-ran status?

The bold thinking and innovation needed to reinvent a tired business model is pretty rare; strangely, far more companies actually go out of business because they can't figure out how to reinvent themselves in the face of a competitive crisis. Instead, they keep doing the same thing in a shrinking market until they disappear all together.

This is the likely outcome, you might say, of adopting worst practices ....