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November 25, 2008

Circuit City

by mikediliberto

By now just about every news outlet and blogger has penned an article debunking the press release from Circuit City citing “decreased consumer spending” and “unfavorable economy”. After all, it is hard to believe that the economy pummeled Circuit City while sparing Best Buy.

Over the course of the past few days, I’ve read a multitude of articles citing poor real estate selection, exit from the appliance business, placing too much importance on flat panel TV margins, and the like as the “true reasons” for their demise. I think it is far more simple, and far more sinister. Circuit City lost the game because they failed to tap their most powerful resource: their people. They didn’t listen. They didn’t engage their employees or their customers. Circuit city has tens of thousands of employees in their stores and many of these employees are within the lucrative target demographics and value propositions which Circuit City was chasing. Yet time and again, Circuit City failed to engage these associates to help them drive innovation from the store level upward. Decisions were all made “at corporate”, giving employees very little ownership of the company. This type of quasi-military structure worked half a century ago when Circuit City started, but it has no place in the modern workplace.

There was an important lesson that should have been taken away from the DIVX experiment which Circuit City undertook in the late 90s, and that lesson is, now that people can communicate easily over the Internet, the backlash from a determined community of users can affect your business very negatively. Here, the most powerful consumer electronics company in the world (at the time) lost over 100 Million dollars, mostly attributable to the vigilance of a few Internet home theater forums. The lesson here is, no matter how much money you spend, or how you try to spin the story, it is your customers that will define you. Your only choice now is whether you want to be a part of the conversation or not.

Customer driven innovation is the embodiment of this stream of thought; the way to be successful with your customers is to listen to them and let their demands mold who you become as a company. Just as a determined group of internet users can harm you, a group of customer evangelists can build your brand from the outside in. Some retailers have caught on; they let store associates and managers make decisions to help their stores address local market demand; they drive change in the reverse of their supply chain, from the bottom up; even Walmart does this to a certain degree. The dawn of the social media era has been embraced by these same retailers. These days, it is not uncommon for customers to exchange Twitter messages with C-level executives, or interact with them on their blogs. Circuit City’s blog and twitter account amounted to little more than thinly veiled marketing efforts.

On March 28th 2007, Circuit City famously sacked their 3,400 most experienced, most passionate, and most highly paid workers. Both outside and inside the company the message was clear: “we do not value our associates very highly”. Internally, another subtle vibe was likely felt, which was “don’t rise to high, or be paid too well, or you’ll get the ax as well”. Neither one is conducive to employees working hard or trying to get ahead; any undergrad business major can tell you, the way to motivate your employees is to give them the impression (real or otherwise) that their hard work will be rewarded with higher pay and promotions. So if we break for a quick logic lesson:

If [Work Hard] implies [Higher Salary]


If [Higher Salary] implies [You Will Be Fired]


[Work Hard] implies [You Will Be Fired]

And that, dear friends, is why most Circuit City employees were paid $8.00 per hour to play solitaire.

The DIVX lesson really should have come up as the board considered the plan to sack these workers. Someone should have stood up and said, “but the people will lash out at us for this, and you all remember what happened last time, with that DIVX thing, right gentlemen?” But nobody stood up; everyone believed, naively so, that customers and employees would just stand there and take it. Wrong. In true freakanomics style, Circuit City misjudged the environment they were in, and once again, made a strategic misstep which saved 3.5 million dollars in the short term in exchange for bankrupting the company in the long term.

So what does this all boil down to? The same thing my father gets in trouble for all the time: Not listening. Circuit City failed to listen to their associates, they failed to listen to their customers and they ignored their critics. They failed to embrace change. Even before social media was “cool”, Circuit City failed to listen to their employees, they failed to engage their customers in meaningful dialog. They led from the top, while ignoring the bottom. They neglected to engagee their customers in dialog. They foolishly thought that just because they were once a case study in “Good to Great”, they were imune to failure. When business textbook authors write their chapter on the danger of organizational silos, I think Circuit City would make a great case study.

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