"From Good to Great to Gone: The Rise and Fall of Circuit City

IN THE 1990S, Circuit City was the largest and most successful consumer-electronics retailer in the United States. Indeed, Circuit City was so successful it was included as one of only 11 companies featured in Jim Collins’ bestseller Good to Great. To qualify for this august group of high performers, a company had to attain “extraordinary results, averaging cumula- tive stock returns 6.9 times the general market in the 15 years following their transition points.”1 Indeed, Circuit City was the best-performing company on Collins’ good-to-great list, outperforming the stock market 18.5 times during the 1982–1997 period.

How did Circuit City become so successful? The company was able to build and refine a set of core competencies that enabled it to create a higher eco- nomic value than its competitors. In particular, Circuit City created world-class competencies in efficient and effective logistics expertise. It deployed sophisti- cated point-of-sale and inventory-tracking technology, supported by IT investments that enabled the firm to connect the flow of information among geographi- cally dispersed stores. This expertise in turn allowed detailed tracking of customer preferences and enabled Circuit City to respond quickly to changing trends. The company also relied on highly motivated, well- trained sales personnel to provide superior service and thus build and maintain customer loyalty. These core competencies enabled Circuit City to implement a “4S business model”—service, selection, savings, and satisfaction—that it applied to big-ticket consumer electronics with an unmatched degree of consistency throughout the United States.

Perhaps even more important during the company’s high-performance run, many capable competitors were unable to replicate Circuit City’s core competen- cies. Further underscoring Circuit City’s superior per- formance is the fact, as Jim Collins described it, that “if you had to choose between $1 invested in Circuit City or $1 invested in General Electric on the day that the legendary Jack Welch took over GE in 1981 and held [that investment] to January 1, 2000, you would have been better off with Circuit City—by [a factor of] six times.”2 In the fall of 2008, however, Circuit City filed for bankruptcy. So what happened?

Circuit City’s core competencies lost value because the firm neglected to upgrade and protect them. As a consequence, it was outflanked by Best Buy and online retailers such as Amazon. Moreover, Circuit City’s top management team was also dis- tracted by pursuing noncore activities such as the cre- ation of CarMax, a retail chain for used cars, a foray into providing an alternative to video rentals through its proprietary DivX DVD player, and an attempted merger with Blockbuster (which filed for bankruptcy in 2010).

Perhaps the biggest blunder that Circuit City’s top- management team committed was to lay off 3,000 of the firm’s highest-paid sales personnel. The layoff was done to become more cost-competitive with Best Buy and, in particular, the burgeoning online retailers. The problem was that the highest-paid salespeople were also the most experienced and loyal ones, better able to provide superior customer service. It appears that laying off key human capital—given their valuable, rare, and difficult-to-imitate nature—was a supreme strategic mistake! Not only did Circuit City destroy part of its core competency, it also allowed its main competitor—Best Buy—to recruit Circuit City’s top salespeople. With that transfer of personnel to Best Buy went the transfer of important tacit knowledge underlying some of Circuit City’s core competencies, which in turn not only eroded Circuit City’s advantage but also allowed Best Buy to upgrade its core com- petencies. In particular, Best Buy went on to develop its innovative “customer-centricity” model, based on a set of skills that allowed its store employees to identify and more effectively serve specific customer segments. Highlighting the dynamic nature of the competitive process, however, Best Buy now faces its own challenges competing with online retailers such as Amazon.

Employees at Circuit City stores and even at the headquarters in Richmond, Virginia, were shocked and devastated when the firm actually ceased opera- tions in March 2009. More than a year after the clos- ing, former headquarters workers noted that the firm had a good, hard-working, and family-friendly atmo- sphere. They believed to the end that, in the worst case, another firm would buy Circuit City and per- haps reduce its size but not permanently close the business.

How did Circuit City get to be so successful that it was featured in the book "Good to Great"? Why and how did it later lose its competitive advantage and have to file for bankruptcy? What do you think the company could it have done differently to adapt and survive?