Circuit City Management Problems, Research Paper Example

Introduction

In recent years, the economic downturn has wreaked much havoc on many industries throughout the United States, as businesses both large and small have struggled to remain afloat in response to financial losses and other related concerns. One industry that has significantly suffered as a result of this downturn is retail, as many companies have been unable to retain their once vast customer bases, as consumers reduced their level of spending on many goods, including electronics. One company that could not recover from this economic downturn was Circuit City, which suffered tremendous losses and could not overcome these challenges for a number of critical reasons. Therefore, it is important to identify the primary reasons behind Circuit City’s primary failures, and to recognize how the company could not overcome its problems and eventually closed its doors. The following discussion will address these failures in greater detail, emphasizing the importance of management’s role in the demise of the organization over a period of time.

Analysis

Many of Circuit City’s most significant failures may be attributed to its executive management team, rather than the economic downturn which was taking place in the American Economy (Reisinger, 2008). In spite of evidence which pointed to room for only one significant retail technology-based competitor, the opposite was true: “There is room for multiple big-box electronics retailers. If Circuit City executives established a business model that competed with Best Buy’s instead of trying to copy it, none of this would have ever happened, and we would be wondering which retailer will have the better holiday shopping season” (Reisinger, 2008). Unfortunately, the executive management team in charge at Circuit City did not make many wise executive decisions that would improve the company’s business model, and rather than increasing its revenues and level of cash on hand, the company experienced tremendous losses which were difficult to overcome (Reisinger, 2008). These efforts did not leave executives with many choices but to file for Chapter 11 bankruptcy, in spite of the different opportunities that were available for the company to turn itself around, even in an extremely difficult retail marketplace (Reisinger, 2008).

In spite of a difficult retail environment during the economic downturn and the credit crisis which plagued the United States, it was determined that in reviewing Circuit City’s history of successes and failures, the company and its executives were unable to accept and adapt to changes in its business practices and model, which were essential to its continued success in a challenging retail market, and with heavy competition from Best Buy (Hamilton, 2008). According to Hamilton (2008), “Circuit City became complacent — a fatal mistake in the fiercely competitive and fast-evolving retail-electronics industry. The problems began a decade ago, when Circuit City failed to secure prime real estate — its out-of-the-way locations were often just inconvenient enough to tempt customers to head to other retailers, like Wal-Mart. Then Circuit City stopped selling appliances. It didn’t move as aggressively into gaming as it should have. And it missed out on big in-store promotions with thriving companies like Apple Computer.” Under these circumstances, it was determined that Circuit City could not effectively compete with Best Buy and even Wal-Mart and Target, who sold a variety of similar products at competitive prices (Hamilton, 2008). Furthermore, with the business’ decision to stop selling major appliances, those customers needing refrigerators, stoves, and dishwashers looked elsewhere for these products, along with their electronics needs, such as televisions, DVD players, and home theatre systems (Hamilton, 2008). Fortunately, for Best Buy, the company was able to capitalize on these openings and to expand its sales growth within these product areas (Hamilton, 2008). It was difficult for Circuit City to retain its sales of its glory years when it did not sell as many big-ticket products as its closest competitors, which was a significant failure for the organization and its ability to sustain its once promising level of success (Hamilton, 2008). As a result, Circuit City could no longer compete at the same level as Best Buy, and never recovered from these problems (Hamilton, 2008). Therefore, even though its executives recognized the potential of the organization, it did not follow through and accept change, which led to its eventual demise (Hamilton, 2008).
In response to the challenges of the electronics retail industry in the 2000s, Circuit City was unable to compete for a variety of reasons. When the company filed for Chapter 11 Bankruptcy, it was determined that there were significant challenges associated with its managerial structure, although these same executives were likely to place the primary blame on other circumstances (Meadows, 2009). The management team’s poor decision-making also led to other problems, such as the following: “More recently, Circuit City changed the pay scale for its sales—eliminating commissions and laying off 3,900 salespeople in 2003, and then in 2007 laying off its 3,400 highest-paid salespeople because management bean-counters thought they were costing the company too much. The latter layoff was especially crippling, because the highest-paid salespeople were naturally the best and most-experienced salespeople. Without its top sales staff, the quality of Circuit City’s customer service tanked and sales naturally slowed” (Meadows, 2009). Under these conditions, it was determined that the lack of  focus and support for the customer service and sales teams was one of the critical factors in the consumer’s decision to visit other retailers for electronics, because these competitors possessed numerous options that were difficult for Circuit City to compete with (Meadows, 2009). At this time, the lack of focus on customer service and sales was distracting to many customers, who were turned off by this approach: “In particular, the televisions showing disappointing results are “intensive sales” requiring more informed employees, Allen said. ‘It’s a big-ticket purchase for somebody. And if they feel like they’re not getting the right advice or are being misled by someone who doesn’t know, it would be definitely frustrating. They will take their business elsewhere’” (Meadows, 2009). As a result, the organization failed miserably in its efforts to be a customer-service oriented business, and customers took their sales elsewhere (Meadows, 2009). For a retailer of this magnitude and with its current focus, it was determined that the organization could not overcome these deficiencies, and it also appears that management was not willing to concede and to make the changes that were required to facilitate these changes (Meadows, 2009). This led the organization to a place where it could not overcome its tremendous losses, and had no choice but to close its doors (Meadows, 2009).

The lack of managerial focus and emphasis on the appropriate sales model led Circuit City to its eventual demise. Prior to the company’s decision to close its doors, the following observations were made: “If you want to handicap a management team’s ability to successfully turn a company around, look at their candor with investors, if they’re clued in to their problems and how they react when things aren’t going well/proceeding according to plan. When I look at Circuit City, I’m more disturbed by their executive’s cluelessness and lack of candor, than I am by the financial results themselves. Q1’s loss wouldn’t be as disturbing if the management team was clued in enough to execute a successful turnaround plan, as opposed to being a legion of spin-doctors who have done nothing but wreck the company over the past two years” (Seekingalpha.com, 2008). Under these circumstances, it was determined that the company did not recognize its own degree of failure, and therefore, was unable to make amends for said failures and to recover from its losses (Seekingalpha.com, 2008). As a result, the business could never properly recover, and could not achieve its once successful level of growth (Seekingalpha.com, 2008). As a result, the company was unable to sustain a challenge in the wake of its most formidable competitors, including Best Buy (Seekingalpha.com, 2008). Therefore, the company could no longer compete and had no real choice but to close down and cut its losses (Seekingalpha.com, 2008).

Circuit City’s massive and highly public failure demonstrated that companies struggling to survive in the wake of poor economic conditions and heavy competition must be a cut above the others if they have any real chance of survival in a complex environment, particularly in the retail sector. It is generally assumed that without a strong and steadfast management structure, a company such a Circuit City is unable to survive, even when filing for Chapter 11 Bankruptcy in this case. Testimony in front of the United States Congress demonstrated these principles as follows: “Circuit City’s liquidation can be directly traced to  three principal factors: the company’s poor financial results, its  inability to obtain realistic credit terms from trade vendors, and the  devastating reality that the US financial markets were mired in such  profound and unprecedented turmoil that financing–both debtor-in-possession and exit financing–was impossible to secure” (U.S Government Printing Office, 2009). These findings suggested that the organization could not recover from a series of losses that set the business back well beyond its ability to be successful in an already precarious economic situation (U.S. Government Printing Office, 2009). As a result, it was determined that in spite of a small yet significant market share, the company could not recover from stinging losses, and the primary difference between this organization and others with a similar fate is that the managerial structure and team that was in place at the time did not possess the skills and talents that were necessary to achieve the desired fate, and to recognize how to best overcome these challenges and to make sense of the economy and its role in shaping the electronics retail industry (U.S. Government Printing Office, 2009). These elements also demonstrated that the management team was either incapable and/or did not possess the level of knowledge that was required to recover from its losses and to take responsibility for its actions to promote change. In some ways, it appears that the organization’s management team simply gave up and caved in rather than seeking to determine how to approach change effectively. As a result, closing the company’s doors appeared to be the easy way out.

In response to these challenges and the impact of these efforts on the retail electronics industry, Circuit City’s massive failures were largely put upon the shoulders of its management team, who appeared to have no clue how to overcome adversity and financial difficulties and to make sense of the realities of the economic situation that they faced. Therefore, the company folded and could not recover, which led to its massive demise and public embarrassment. Under these conditions, the Circuit City failure continues to be one of the most influential bankruptcies and closures in recent history, and has paved the way for new questions in regards to how managers operate within large corporations, and how they make their decisions from within. Finally, the company experienced the following: “Reports indicate that  its year-to-year foot traffic plummeted by double-digit amounts and its downward spiral was exacerbated by poor management, as exemplified by the short-sighted decision to fire several thousand of its most experienced and highly-paid hourly workers and replace them with inexperienced substitutes. Vendors also lost confidence in Circuit City’s reliability and became reluctant to provide inventory. Consumers have scaled back spending and found credit card credit drying up, a particularly damaging hit to Circuit City which makes most of its sales on credit cards” (U.S. Government Printing Office, 2009). In response to these choices, the company’s failure is not surprising, given its economic position and lack of growth and sustainability in an already difficult economy.

Conclusion

Circuit City’s failure and the closure of its stores may be attributed to a number of factors, but its poor managerial structure and decision-making capabilities were the primary reasons behind its massive downfall. The company could simply not recover from many years of bad decision-making, which led to a significant series of challenges which were difficult to overcome and to make sense of, given the state of the economy during this period. Therefore, Circuit City failed to impress retailers with its less than wise choices, and by removing the “customer service” part of the equation, its customers slowly but surely disappeared. Therefore, the business’ filing for Chapter 11 Bankruptcy was not a surprise to many, and within the business world, its managerial structure became the talk of the town. Nonetheless, the massive loss of jobs and the lack of follow through by the management team, who simply appeared to give up on the company, are disheartening, and continue to spark interest in the manner in which retailers make decisions regarding their sales efforts in an economy that continues to be precarious and difficult to manage. Circuit City’s failures are important to recognize, and they demonstrate how one company’s management team virtually shut down operations without a second thought.

References

Hamilton, A. (2008). Why Circuit City busted, while best buy boomed. Retrieved from http://www.time.com/time/business/article/0,8599,1858079,00.html

Meadows, C. (2009). Lessons from Circuit City’s bankruptcy. Retrieved from http://www.teleread.com/drm/lessons-from-circuit-citys-bankruptcy/

Reisinger, D. (2008). Circuit City execs killed the company. Retrieved from http://news.cnet.com/circuit-city-execs-killed-the-company/

Seekingalpha.com (2008). Circuit City needs a management overhaul. Retrieved from http://seekingalpha.com/article/82351-circuit-city-needs-a-management-overhaul

U.S. Government Printing Office (2009). Circuit City unplugged: why did Chapter 11 fail to save 34,000 jobs? Retrieved from http://www.gpo.gov/fdsys/pkg/CHRG-111hhrg47924/html/CHRG-111hhrg47924.htm