Investigating a Circuit City Company - Article Example

Number To Investigate Circuit Company and Why They Went Bankrupt One word should come to the mind of a strategically thinking Chief Executive Officer (CEO) regarding the company’s going concern - longevity. A company’s success lies in its adroitness in addressing the long-term viability of the business. This is the challenge facing most businesses today and was the case for the now defunct Circuit City. Circuit City was a victim of the ever rapidly changing market, as its executives undertook a series of missteps and missed opportunities over the course of its six decade plus life. The company was one of the largest consumer-electronics retailers and was also one of the pioneers in the industry, having been founded by Samuel S. Wurtzel as a television store in 1949 (Hartung, 2010) Circuit City achieved tremendous growth from its inception through to the early 1990s. This growth was highlighted by the company’s stock increasing at an annual average rate of 50.5 percent in the decade after going public in 1983, beating all industry peers and placing it at the top of the Fortune 500 service companies' rankings for having the highest return to investors. (Gilligan, 2008) Emerging competitors like Best Buy and Wal-Mart, did not stand a chance of dethroning Circuit City as the dominant force in the consumer-electronics retail market during this period. However, before long, the scenario changed. The grasp that Circuit City held on the market steadily loosened following a string of decisions made in the 1990s. This began when the company tested new ventures that distracted its executives from the core business. Circuit City intended to keep up its rapid growth rate by exploring a variety of businesses. It created CarMax in 1993 and followed that by entering the home-security business, which it eventually sold. Later on it was to test the installation and repair of home air-conditioning and heating systems, which it discontinued. The chain even considered opening large furniture stores but scrubbed that plan. (Gilligan, 2008) After all this, the company still invested more than $200 million into creating and selling Divx, a digital video disc rental system. This was to be a massive failure as the system’s viability was questioned by Hollywood studios and other retailers, forcing the company to pull the plug on the project. Circuit City had a lot going on as its executives tried to figure what business to explore, all along straying further from its core business - consumer-electronic retailing. Why over-invest in unknown businesses with low growth rates, rather than invest in known markets with high growth rates? (Hartung, 2010) These experiments allowed Best Buy to gain considerable advantage over Circuit City. Circuit City was complacent in addressing the obvious growing threat from its most formidable competitor, Best Buy - a fatal mistake in the fiercely competitive and fast-evolving retail-electronics industry. Best Buy was a Minneapolis-based retailer that was half the size of Circuit City by sales and number of stores in the early 1990s. Circuit City did not take Best Buy seriously enough since they were not making as much revenue as they did, so why question a successful model they thought. Best Buy on the other hand did not want to emulate Circuit City; it was rather a question of how to be better and different from Circuit City. The intensity of Best Buy’s growth was so significant that by the late 1990s it had a commanding lead over Circuit City in sales per store and unseating Circuit City as the top consumer-electronics retailer by revenue. From then on, Circuit City was always playing catch up. Due to the expansion of the business into new markets, Circuit City set up many of its new stores in areas with low market growth. These inferior locations opposed to high growth areas where its competitors set up shop, was later a real cause of concern since the new stores had lower returns. Circuit City did not put much thought in the areas it put up stores, as it believed that wherever it went consumers would follow them. Best Buy on the other hand was more strategic and put stores on the fringe of a growing area as Circuit City put up shop in more mature parts of a town. Circuit City was too focused on making short term profits rather than building value for customers in the long term. Best Buy was initially a music, video games and computer software retailer before it ventured into mainstream consumer-electronic retailing. However, Circuit City initially did not embrace the sale of these products until the turn of the millennium. The company then stopped the sale of appliances to use the space for the new products like movies, video games and digital cameras, which were all Best Buy’s forte for years. This move alienated some of their long-time customers and forcing them to shop at rival retailers. Although such products brought in a lot of foot traffic to stores, they did not have considerable margins compared to the appliances they had stopped selling. To make matters worse Best Buy was the market leader in the sale of these products, therefore Circuit City held a lower market share. Another atrocious decision taken that committed Circuit City to its own demise. Circuit City employees were highly trained and worked on commission, a salary system ingrained in the retailer’s culture for decades. However, Best Buy was of the view that employees working on commission tended to be pushy as the commission was an incentive to sell more. Therefore, a sales person on commission would try to steer shoppers to more expensive products, which most consumers disliked. Circuit City later realized that their model was not ideal and stopped paying commissions in early 2003, having to lay off 1,800 sales people and others who were receiving higher paychecks than what rival companies were paying. This was a source of severe backlash from shoppers and analysts, further deepening the company’s wounds. These slip ups eventually caught up with Circuit City and a series of losses were posted in the years prior to its liquidation. During its 2005 fiscal year, Circuit City turned a profit of about $61 million and in its very last reported quarter, the company lost $239.17 million. But it gets worse: the company's net change in cash--a good indicator of executive management--amounted to a loss of $512 million over its last four years (Gilligan, 2008). It was also reported that the company’s stock was at some point trading for less than the cost of a postage stamp (Gilligan, 2008). The drop of stock prices led to Blockbuster considering a takeover but later withdrew their bid due to the severe financial crisis facing Circuit City. So significant was the drop in stock prices that the New York Stock Exchange halted trading when the stock hit 10 cents a share. This later forced the company to lay off thousands of its workers, close hundreds of stores and consequently having to leave most markets as the business tried to keep afloat. By then, the time it had left could be counted in days and weeks, rather than months. However, only so much can be done by a Captain of a sinking ship. Eventually the ship sinks and hits the ocean floor. In 2010, the sound of the sinking company hitting the ocean floor was heard; it was game over for Circuit City. The company filed for bankruptcy protection amidst pressure from its many creditors and thereafter liquidated all its assets. Its creditors only received 70.5 percent of the liquidated assets whereas the stockholders ended up losing everything. The Circuit City story was a like a rollercoaster ride, full of exhilarating ups and downs. However, it again boiled down to one word at the very end, longevity. It was always a question of whether the company could be able to sustain itself in the long term. This proved to be the downfall of the company, as it is widely believed to have been as a result of its slow reinvention to meet the changing market demands, amid rising competition from its rivals. A myriad of managerial blunders and a whole lot of corporate greed took down his industry giant. As a result, Circuit City was forced to close shop! Works Cited Gilligan, Gregor J. “Circuit City's Strategic Miscues Added Up.” Richmond Times-Dispatch. Web. 10 Nov. 2008 Hartung, Adam. “Size Doesn't Matter, the Big Do Fail - GM, Circuit City, Dell, Microsoft, GE.” Forbes Business. Web. 17 Dec. 2010 Read More