What Unplugged Circuit City?

When Circuit City filed for Bankruptcy protection in November 2008, management still expressed hope that the 60 year-old company could be saved. But on Friday January 17th 2008, they threw in the towel and announced the closing of 567 stores in the United States.

This announcement ended a long struggle to recover in a ruthlessly competitive market that was made even worse by a record-breaking recession and a shift in consumer buying patterns from big-box retail stores to the Internet.

Not that management didn’t try.

W. Alan McCollough, Chairman of the Board, in the 2007 Annual Report wrote, “Certainly one of our greatest accomplishments has been the transformation of our senior management team.”

Other changes were made and included an emphasis on multi-channel integration, appointment of in-store concierges, introduction of tablet PCs to improve customer service,  and restructuring of supply chains.

But it was too little and too late. The turnaround project failed.

What, then, went wrong, and what lessons can we learn?

The evidence strongly suggests that management focused inward, slashed costs and made only incremental changes. The New York Times on January 17, 2009 suggested that they had too many stores, were guilty of choosing “cheap” real estate to locate stores, and had laid off too many of the company’s most experienced sales staff.

Customers, frustrated by poor technical support abandoned Circuit City in favor of Best Buy. Further, Best Buy, one of two survivors that includes Wal-Mart, was significantly more skilled in merchandising; their stores were alive compared to the discount-store dated look at Circuit City.

It is not unusual for organizations on the brink of failure to turn inward and take action by changing infrastructure.  But this may be exactly the wrong move to make since their problems almost always suggest a history of internal focus at the expense of an external focus on the competitive environment.  What comes to mind, of course, is the Detroit’s Big Three. Perhaps the reason that it is common to look inward is that it is more comfortable to make changes in those factors over which management is familiar  …layoffs and executive restructuring … than to venture outward and respond to changes in the competitive marketplace where an honest and objective evaluation of the environment could demand unfamiliar disruptive changes.

For Circuit City it was clearly too late for continuous improvement or making the kinds of changes that would count. They needed more than the transformation of the senior management team, they needed a transformation that would disrupt the entire organization from top to bottom. But more importantly, a change that would focus on the customer’s needs.

While it is somewhat misleading to compare Apple Inc. with Circuit City, there are some interesting similarities.  In 2000, and five years after a power struggle forced Steve Jobs out, he returned to transform a company that was also in trouble. He proceeded to cut several projects like the Newton, Cyberdog and Open Doc, projects that would have continued an unimpressive series of attempts to compete in a very competitive market.  With his eye for design and aesthetics, notwithstanding his difficult management style, he initiated new projects that would produce such breakthrough products as the iPod, iPhone, iTunes the MacPro and the MackBook. From 2003 to 2006 the price of Apple Stock increased tenfold. With this disruptive transformation of an ailing company, he succeeded in making it one of the toughest competitors in the electronics business.

Here is the main point. While Apple succeeded by focusing externally on the consumer, Circuit City failed by focusing internally on infrastructure. Apple was thinking out-of-the box, while Circuit city was thinking inside-the-box.

Indeed, Circuit City needed more than a change in senior management. They needed a radical transformation from top to bottom, a change that would have shifted its focus to the external environment and a transformation that would have required a ruthless evaluation of existing practices.

So, what unplugged Circuit City?  Actually, management pulled the plug almost ten years ago and since then the company has been running on rechargeable batteries. With few options in an economy unwilling to lend to marginal borrowers, not even those batteries could be recharged.

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