Circuit City Stores, Inc



Circuit City Stores, Inc.

Prepared By:

Students of Strategic Management

Solomon Faizi

Hanh Ly

Son Nguyen

Jackie Vo

Prepared For:

Robert Wood

Professor of Strategic Management

San Jose State University

Bus 189 Sec 02

9 December 2002

Executive Summary

Circuit City History

The year is 1966 and Wards, a television and appliance company established in 1949, is hot. As the one and only giant of television, the company enjoys a growth rate of 2200% since 1958 and its sales continue to skyrocket. The company continues to expand itself by offering innovative products like audio equipment and diversifies by entering markets including automotive supplies, gasoline, clothing, and even children’s toys. In 1968 the company goes public while continuing to expand and focus on innovation and differentiation, grasping each opportunity gain a hold of untapped markets. In 1977 the company renames itself Circuit City and continues to prosper as the market leader in consumer electronics. Its almost 50-year reign over other companies unfortunately lasts only until the late 1990’s due to a highly saturated market with slow growth. The consumer electronics retailing industry, in the late 1990’s, becomes essentially a “zero-sum game: each percentage sales gain for one store is a loss for another” (Sack, page 7).

Best Buy’s Winning Strategies

With changing times, emerging competitors, and shifts in customer needs, Circuit City slips into second place as Best Buy moves into first, becoming today’s market leader in consumer electronics. With an aggressive demeanor to gain market share, Best Buy in 1995 began mimicking Circuit City’s expansion through the of opening new superstore chains. Being younger and with fast expansion, Best Buy now benefits from having more modern-looking stores located in more key areas that allow for both exposure and convenience. What has mainly contributed to Best Buy’s success, however, is having a strong strategic focus on efficiency. Operating with a non-commissioned sales force and placing a strong emphasis on having a low-cost structure was definitely the golden way for Best Buy. Financial comparison between Best Buy and Circuit City is illustrated in Table 1 & 2.

Table 1: Circuit City Financial Data

*source: Circuit City 2002 Annual Report

|Circuit City |

|Executive Vice President |

|Division manager |

|Regional Manager |

|District Manager |

|Store manager |

|Department supervisor |

1. Based on these two measures and any other information you may have, would you say your company operates with a relatively tall or flat structure? What effects does this have on people’s behavior?

Research suggests that the average number of hierarchical levels for a company employing 3,000 persons is seven. An organization having nine levels would be called tall, and one having four would be called flat (Hill and Jones, pp 387). If we divide the 30,000 total number of Circuit City store employees by four divisions, we’d get 7,500 employees for each division. This analysis concludes that Circuit City management hierarchy of seven layers is neither a tall structure, nor a flat structure. It is somewhere in between.

Its current management hierarchy of seven layers though not considered tall structure still seems to be somewhat too many hierarchical levels. We believe a reduction of one level at “district level” would be beneficial to Circuit City. Currently the communication between the division manager and regional managers takes longer due to existence of district management position. Furthermore, information passed through the chain of command may also get distorted either accidentally or purposely because of competitions between the district mangers to suit their own interest by passing to division mangers that information that improves his or her standing. Moreover, another disadvantage to having district manager for Circuit City is its bureaucratic cost. These managers are expensive and earn at least $100,000 per year. Therefore, considering all of the factors above, we believe that removing the district management layer would not only smoothen the communication between the store manager and the regional manager, but will also prevent conflicts of interest and bureaucratic cost.

2. Does your company have a centralized or a decentralized approach to decision making? How do you know?

Circuit City stores though broken into four divisions still uses centralized decision-making at their corporate office in Richmond, Virginia. All of the strategies implemented by Circuit City have been established at the corporate level and passed down to each division. The division then passes information to regional and regional passes information to district, which finally is passed to the stores. No one of these layers has its own autonomy of making its own strategy and decision made must be consistent with corporate strategy. All Circuit City policies, stores’ visual layouts, and products lines have been planned and designed by corporate office. Policies, visual layouts, and product sold or displayed at each store must be consistent with the corporate plan. However, there are a small number of autonomies given to the store levels for solving daily operations. An example would include a one on one price competition depending on the store. For example, a Circuit City store surrounded by too many competitors in an area may lower its prices to react to a competitor’s sale without getting approval from the corporate office. Christie Gilmore who is the store manager at the Almaden location provided information about centralized decision-making.

3. With the information at your disposal, list the main kinds of control systems used by your organization to solve these problems. Specifically, what use does your company make of (a) financial controls, (b) output controls, (c) behavior controls, and (d) organizational culture?

Strategy:

Circuit City’s main strategy is differentiation by focusing on customer service through knowledgeable sales force and excellent shopping experience. However, lately the company has been forced with intense low cost competitions to pursue a cost-leadership strategy in addition to its differentiation. The strategic planning involves both senior management and the board of directors. The strategy is developed for a three-year plan. The strategy is approved by the board of directors and passed to the senior mangers for transmission down the hierarchy layers (Investor Relations, page 2).

Strategic Control:

The major kinds of control system that allows Circuit City to monitor, measure, control, and get feed back on its strategy through the four types of control system (financial control, output control, behavior control, and organizational control) includes the followings:

Financial Control

Sales growth is one of Circuit City’s controls to measure its performance against the competitors. Each quarter Circuit city assesses the performance of its sales growth against the competitors and evaluates its position in the market. On the second quarter of 2002, Circuit City sales grew by 2%, and for the first time in 5 years it outpaced Best Buy (CC Q2 same-store sales up 10 pct, page 1).

In addition to sales growth, Circuit city also uses its stock price against competition for strategic control. However, since its withdrawal from the appliance business, Circuit City’s stocks have been performing very poorly. The sudden withdrawal from the appliance business caused panic among investors dumping Circuit City stocks and weakening its position among the competitors. Circuit has been trying to bring confidence back into the market to investors to improve its stock price, but it has not yet been very successful due to a weak economy and poor earnings.

ROE is another measurement of strategic performance that Circuit City uses. However, since its implementation of its new strategy in 2000, the ROE has stayed somewhat neutral at 8% showing no sign of improvement from the implementation of the new 3-year strategy (Investor Relations, page 3). ROK and ROE at lower levels such as store levels are not used. Each store, however, is given a volume goal each day, each month, and each year to reach.

Output Control, Behavioral Control & Organization Culture

Output control at Circuit City includes goals for everyone from divisional level to the store level. All individuals, which include, division manager, regional manager, district manager, store manager, department manager, and even sales associates have goals set by the corporate office to achieve. Setting goals involve a daily, a monthly, and a yearly sales volume and a contribution margin to reach. In return Circuit City provides its employees with a performance related compensation plan that rewards goal-oriented individuals. All sales employees are paid with a performance-based plan that not only include commission, but also monthly and yearly bonuses depending on their performance. Store managers are paid base salary plus a bonus at the end of the year depending on the performance of his or her store. Respectively district, regional, and division managers are paid the same way with a base salary plus bonuses at the end of the year depending on their performance of their district, region, and division. Top executive are paid base salary plus a percentage of the net income to stockholder’s equity. Circuit City believes that this compensation plan not only rewards individuals for their performance, but also helps Circuit City achieve its differentiation strategy by motivating store employees to be customer focus through approaching and helping everyone.

Another thing that Circuit City does to make sure that actions taken are consistent with the strategy is the continuous improvement in training Circuit City associates. Circuit City has signed a long-term cooperative relationship with Digital Think, an online leading provider of e-learning business solution (Mark, page 1) By educating its employees with product knowledge, Circuit City believes that it provides its employees with exactly the information they need, when they need it, driving sales and improving customer satisfaction.

As mentioned above Circuit City corporate culture values those employees that are customer focused. To ensure employees not only meet their sales goal, but also help customer have an excellent shopping experience at the store, Circuit City has provided customers with an online survey address at the bottom of their purchase receipt about their shopping experience at Circuit City. Customers can fill out the survey form both at the store at the time of the purchase or at home on their computer by expressing their experience at Circuit City. If the result of the survey comes satisfactory, Circuit City will reward the surveyed employee with “employee of the month” recognition award plus a monetary prize. Furthermore, Circuit City also sends mystery shoppers to the stores acting as normal customers evaluating employees’ helpfulness and knowledge. Those that were evaluated as poor will be coached, corrected, and after three corrections may eventually get terminated. By doing so, Circuit city believes that it can ensure that their employees’ actions are consistent with Circuit City’s customer focus strategy.

Another thing that Circuit City has been doing recently is the emphasis of customer focus, hassle free return, and knowledgeable sales force in their TV, radio, and published ads. All Circuit city ads end with a slogan “We are with you” emphasizing the importance of customer and their needs. This is another way of making sure that Circuit City’s message is carried to the customers in consistent with Circuit City differentiated strategy (customer focus).

To ensure further that actions taken at the stores are consistent with corporate strategy, regional and district managers periodically visit the stores. Managers evaluate the stores and measure performance by making sure that stores achieve their goals. The reports are than passed to the division managers, and from there it’s transmitted to CEO (Homewood, 30 Sept.2002).

Recently Circuit City has been forced to pursue cost-leadership strategy due to a weak economy and fierce competitions. To respond to this new problem, Circuit City has been trying hard to be priced competitively. The new strategy involves the local Circuit City stores to shop its competitions routinely and match their price. Local employees and managers shop competitions once or twice a week and react to competitor’s price without getting approval from Circuit City corporate.

Works Cited

Anonymous. Investor Relations. Circuit City Stores, Inc. Retrieved 13 November 2002.

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Anonymous. 2002 Annual Report. Circuit City Stores, Inc. Retrieved 30 September 2002.

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Anonymous. 2002 Annual Report. Best Buy Co, Inc.. Retrieved 30 September 2002.

Anonymous. “Circuit City Superstores to Feature Sharper Image Brand Products”. PR Newswire. Oct 10, 2002

Anonymous. “Circuit City Visa”. CardTrak Online. 14 May 2002.

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Anonymous. “Circuit City to Launch Co-Branded Visa Credit Card - Circuit City PLUS”. PR Newswire. 14 May 2002

Anonymous. “Amazon Inks Deal with Circuit City”. Puget Sound Business Journal. 20 August 2001.

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Anonymous. “Who Is FNANB?” FNANB Online. Retrieved 13 November 2002.

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Anonymous. “Circuit City Q2 same-store sales up 10 pct”. . 6 September 2002.

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Faizi, Solomon. Personal Interview. 30 September 2002.

Sales Counselor 408-266-1215

Gilmore, Christine. Personal Interview. 1 November 2002.

Store Manager 408-266-1215

Gilligan, Gregory J., "Circuit City's Credit Card Group Proves Highly Profitable." KRTBN Knight-Ridder Tribune. 17 May 2002.

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Hill, Charles and Jones, Gareth. “Strategic Management: An Integrated Approach” New York, New York. Houghton Mifflin Company. 2001

Homewood, Chris. Personal Interview. 30 September 2002.

District Manager 925-847-9201

Mark, Roy. “Circuit City, DigitalThink Extend e-Learning Pact”. DC.. 19 March 2002.

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Sack, Karen J. “Retailing Specialty”. Standard & Poor’s. 29 August 2002.

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