SIX Six Fatal Mistakes of a Once “Good to Great” Company

Don Eames President and CEO of Eames Management Group Former Senior Vice President of Copyright © 2009 Eames Management Group CIRCUIT CITY SIX Six Fatal Mistakes of a Once “Good to Great” Company 2

TABLE OF CONTENTS

The World Asks the Question

1. Arrogance

2. Real Estate

3. Home Appliances

4. Commission Model

5. Firedog

6. Talent

Revenue and Net Income Snapshot

Learn from Others’ Mistakes

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The copyright holder is licensing this eBook under the Creative Commons License, Attribution 3.0 http://creativecommons.org/licenses/by/3.0. This eBook can be shared by email, posted on Facebook, Twitter and other social media networks, blogs, etc. CIRCUIT CITY SIX Six Fatal Mistakes of a Once “Good to Great” Company 3

THE WORLD ASKS THE QUESTION How Could This Happen?

As I was enjoying my cup of Masala Chai tea with the CEO of a new start-up electronics retailer in New Delhi, India, I was asked a question: “What happened to Circuit City?” It is really amazing to most people that a company like Circuit City could go from solvency to bankruptcy and liquidation so quickly. Wherever I go in America, Russia, Middle East, India or elsewhere, leaders of large organizations want to know the story. In Jim Collins’ 2001 book “Good to Great”, Circuit City is featured as a company that made a leap from a good performer to a great performer. Jim wrote: “Circuit City became to the retailing what McDonald’s became to the restaurants – not the most exquisite experience, but an enormously consistent one.” In the early 1980’s the company had built a culture of discipline that produced superior execution of the “4-S” model (service, selection, savings, satisfaction). “It was because of this consistency that Circuit City took off in the early 1980’s and beat the general stock market by more than 18 times during the next 15 years.” The problems that Circuit City faced started years before but the severity was compounded by the current economic climate. External threats included weakening consumer demand, growing unemployment, tight credit and collapsing housing markets. Internally the organization suffered from several years of declining sales, a weak balance sheet, skeptical vendors worried about getting paid and increasing competition from Best Buy and low service/no service retailers. Aside from these current realities, in my opinion, Circuit City made six fatal mistakes which resulted in one of the most significant business failures in retail history. These mistakes undermined their own progress and ultimately killed them. By understanding and analyzing these mistakes, today’s leaders must learn how to steer their companies away from these potential failures. This is the purpose of this eBook.

Special thanks to our Senior Strategy Consultant, Vitaly Demin, for helping me put this eBook together.

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COMMISSION MODEL sales SixFatal Mistakes of the of , them and faced and the their fact compensation model it almost most smart professional was commissioned that with from successful to they as falling one change they commissioned made and in a Once “Good to Great” Company sales sales were, 1989 a selling and retail the half results, of decisions executive share trained declined people highly The Losing and . decision do held people decades the companies It staff things results profitability, . was to impact on were Terry trained the T . selling hourly to heir Circuit are to to they at be Circuit overall to differently of move old terminated Best Smith, on Best figure made a in rate this staff but major could City models the employees, the outcomes to . 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Circuit 2006 Unlike company’s developed first, retailing, of do , . service lacked Circuit It City’s each Best took with and and not not 8 Circuit City’s stock (Google Finance) CIRCUIT CITY SIX Six Fatal Mistakes of a Once “Good to Great” Company 9

6. TALENT Your Best Employees Are Your Greatest Asset. Keep Them

They Let Them Go In 2007, faced with falling sales and profits, Circuit City had to find a way to improve their overall profitability. A decision was made to reduce their labor costs, the largest contributor to SG&A. In one day 3,400 sales associate jobs were eliminated. People holding these jobs were their most tenured, knowledgeable, successful and highly compensated employees. They were replaced by new, much less experienced sales people that were unproven and under-trained. The results proved disastrous. “Firing 3,400 of arguably the most successful sales people in the company could prove terrible for morale,” wrote Colin McGranahan, an analyst with Sanford Bernstein & Co.

Hurting the Core ANY ORGANIZATION IS ALL ABOUT PEOPLE The morale of the remaining employees plummeted  Make retention of your best people one of resulting in even more turnover. With the loss of their the top priorities best employees, the Circuit City customer experience deteriorated and much like in the restaurant business,  Create a great culture inside your when customers have just one bad experience they organization where your employees would almost never come back. There are just too many love to belong choices.  Invest in training. Untrained or under-trained employees are usually dissatisfied with their This fatal mistake resulted in an unrest inside the jobs which negatively affects themselves , organization, lost customers, lost productivity, lost other employees and customers revenue and lost profits from which they never

recovered.

(Google (Google Finance) Circuit City’s Circuit City’s stock CIRCUIT CITY SIX Six Fatal Mistakes of a Once “Good to Great” Company 10

REVENUE AND NET INCOME SNAPSHOT 1991-2008

$14,000,000

$12,000,000

$10,000,000

$8,000,000

Revenue $6,000,000 Net Income

(in thousands USD) $4,000,000

$2,000,000

$0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

-$2,000,000 CIRCUIT CITY SIX Six Fatal Mistakes of a Once “Good to Great” Company 11

LEARN FROM OTHERS’ MISTAKES Hopefully, This eBook Helps

Unfortunately… About Don Eames Throughout my consulting work all over the world, I see executives and top managers of major companies making the Don worked for Best Buy in senior leadership same mistakes described above. Some are arrogant, some positions for 17 years including Senior Vice President refuse to recognize the necessity of change, some fail to invest of Retail Stores and Senior Vice President of in talent, etc. It takes a lot of work to convince people to do Operations, Training and People Development and things differently, especially if they have operated the business Growth Strategies. During his time at Best Buy, the their own way for a very long time. company’s total annual revenue grew from about $400 million to over $35 billion. The challenge for business leaders is to seek innovative ways of developing their businesses while learning from mistakes of After leaving Best Buy in 2006, Don founded his own the past. management consulting company, Eames Management Group, and has since been working on Hopefully, this eBook provides insight into these mistakes as projects in the US and abroad for over three years they illustrate the demise of one of the greatest retail now. The work includes large retailers in the US, organizations ever built. It is very hard to ignore the facts that Russia, Europe, Kuwait and India. proved this management behavior wrong. The core competencies of the EMG company are development of comprehensive growth strategies, implementation of changes inside an organization, improvement of retail performance, effective retail real estate strategies, services integration and talent optimization. Don Eames and the EMG team can be contacted for Follow Don on Twitter at consulting services at www.eamesmgmt.com. twitter.com/DonEames

Circuit City, Best Buy and other company and product names are trademarks of their own companies. This eBook is available for free download at http://eamesmgmt.com/CIRCUIT_CITY_SIX_eBook . CIRCUIT CITY SIX Six Fatal Mistakes of a Once “Good to Great” Company 12

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