Why Circuit City Is Bankrupt and Best Buy Thrives

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Simply put, Circuit City was stuck in transactional-economy mode, while competitor Best Buy is making the transition to a business model where delivering value to customers is not just focused on price.
Circuit City, the consumer electronics giant, announced a few days ago that they would be closing a significant number of stores and laying off employees. Yesterday they filed for bankruptcy protection.
Over at Best Buy, they are busy getting ready for the holiday shopping season.
Here are my observations and contrasts:

  • Management versus Employee compensation: The CEO of Circuit City made in the neighborhood of $8 million per year. The CEO of Best Buy made $4 million. Perhaps more importantly, Circuit City made a cost-cutting blunder a while back by firing more expensive and experienced employees and replacing them with lower paid people.
  • Investing in Employees: While Circuit City was dumbing down their frontline people, Best Buy was investing in training and employee retention strategies. One example is their investment in blueshirtnation.com, the internal social networking site that has reduced employee churn and gets employees to motivate and help each other learn how to serve customers better.
  • Customer-focus versus discounting: Best Buy has made a number of strategic shifts over the past few year. One, they purchased the Geek Squad, so they could provide better post-sale support both in the stores and in the customers’ homes. They use customer scenario planning in an effort to customize the shopping experience to key customer groups. Circuit City has focused on discounting and cost-cutting.
  • Websites and Social Media Presence: Circuit City has been stuck in Web 1.0 mode. Their site is a selling site, a brochure online and not easy to navigate. Best Buy continues to experiment with online strategies that have the customer at the center of their efforts. They don’t always get it right, but they are actively and rapidly learning. Circuit City is going bankrupt.

Some will blame Circuit City’s problems on the economy and declining consumer confidence. Another view is that the downturn in the economy just brought bigger issues to the surface faster. Best Buy figured out that customers want value and value is not just the lowest price. Customers want to deal with businesses that help them. One, help them make informed decisions whether via a customer-friendly website or knowledgeable and enthusiastic employees. Two, they want help in consuming the products they buy, whether it is installation of a new flat screen TV or fixing a problem with their computer.
The hard lesson for transaction-oriented companies to learn is that in today’s marketplace, a solid product at fair price is expected. The competitive differentiation is in the things that enable customers to have a better experience—buying and using the things they buy.

4 COMMENTS

  1. Right on John!

    Cutting edge analysis – you have exactly captured the difference which has turned out to be the survival factor for Best Buy.

    Beyond just striving for “better experience” Best Buy is focused on the hard work of operational improvement, instead of being focused on high salaries and earning management bonuses with short term cost cutting as was the case of Circuit City.

    This reminds me of the Aesop’s fable The Ant and the Grasshopper
    http://en.wikipedia.org/wiki/The_Ant_and_the_Grasshopper

    with the part of the Ant played by Best Buy and Circuit City taking a bow as the Grasshopper!

    Mei Lin Fung
    Blog: Professionals Earn Customer Trust

  2. Mei Lin,

    Thanks for the comments. The Ant and the Grasshopper fable is apt. Since I wrote this blog Best Buys announced that they expect lower earning than earlier projected. Well, that is true for nearly everyone in the retail business. However, in Best Buys case, they recognize the economic crisis is changing consumer buying behavior and are trying to adapt to the new dynamics. That’s not Grasshopper behavior.

    John

    John I. Todor, Ph.D.
    Author of Get with it!. The Hands-on Guide to Using Web 2.0 in Your Business.

  3. Here is an example of why Circuit City will not stay open. Today I tried to order the WII Fit. I called the 800# only to be told I could not order the WII Fit unless it was part of a bundle. I thought this seemed rather odd since what I was trying to order had a valid SKU. After talking with a supervisor Deron employee #596245, it became clear. The SKU I was ordering was only $89.00 they were trying to force me to order 2 additonal accesories to call it a bundle. When going to the site to see what would qualify to make it a bundle you see how stupid their marketing really is. There were only 10 accesories most being just colored covers or a travel bag. So they lost an order because I would not order $40.00-$60.00 worth of JUNK.

  4. I use to work for Circuit City in my younger days in the past. I was working in the PST section selling small electronic items like MP3 players, clock radios, video games ect. I started out make $7.25 per hr and got a rasie every 6mts. I never enjoyed my stay there because the supervisors would try to overwork all the employees there for what we was getting paid. Eventually, i quitted CC and never looked back! The big differeces between Best Buy and CC is the customer service. When you enter BB they let you have the freedom to brouse around without being botherd and never hassle you with buying anything.

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