An analysis of business practices and leadership decisions between Circuit City Stores, Inc., and Best Buy

1. A COMPARISON OF CIRCUIT CITY STORES, INC.
TO BEST BUY CO., INC.
Prepared for
Dr. Jofen Han,
Professor for BUS 3700
Western Michigan University
Prepared by
Benjamin Puffer,
Student of BUS 3700
Western Michigan University
December 3, 2008

2. STATEMENT OF THE PROBLEM
Recently, retail stocks in the consumer electronics industry have plummeted. With Circuit City’s stock price
hovering at around $0.50 per share, it’s surprising to see Best Buy’s stock clinging to the $25 per share realm. Since
both businesses are extremely competitive with each other, there must be differing business practices that cause
investors to see Best Buy as a solid investment and Circuit City as a bad deal.
PURPOSE AND SCOPE OF WORK
The purpose of this study is to determine what business practices have caused investors to fear investing their
capital in Circuit City stock and decide to allocate their hard-earned cash in Best Buy stock. The study will evaluate
the differing methods both companies use to win customers, such as sales strategies and marketing positions,
retain customers, such as repeat business incentives and merchant credit, and stay competitive, such as price
policies and competitive advantages. A comparison of successful and failed business decisions will account to the
difference in each organization’s stock price.
SOURCES AND METHODS OF DATA COLLECTION
Business data, such as financial statements and ratios, will be used to compare the financial outcomes of each new
organizational focus as they were rolled out over the past 5 years. The financial position of each company before
and after every major focus adjustment will provide insight into which plans were effective and which plans were
ineffective.
Sources:
1. AnnualReports.com – for financial statements
2. Corporate and Industry Research Reports – for data comparisons
3. Standard & Poor’s Industry Surveys – current situation and outlook comparisons
PRELIMINARY OUTLINE
The preliminary outline of the study is as follows:
I. What changes has Best Buy made over the past 5 years?
a. What was changed?
b. How did Best Buy know what to change?
c. Who did the change effect?
d. How did the change impact the organization?
e. Was the change for the better? Worse? Why?
II. What changes has Circuit City made over the past 5 year?
a. What was changed?
b. How did Circuit City know what to change?
c. Who did the change effect?
d. How did the change impact the organization?
e. Was the change for the better? Worse? Why?
III. What business practices proved to be the most successful?
a. How were they successful?
b. Why were they successful?
IV. What practices could be directly contributed to the difference in Best Buy and Circuit City’s stock
prices?
a. How would they contribute?
V. What could Circuit City do to improve their stock price?
VI. What could Best Buy do to keep their stock price from declining further?

3. CONTENTS
PAGE
Executive Summary…………………………………………………………………… 1
Introduction…………………………………………………………………………….. 2
The Inability to Learn From Mistakes……………………………………………….. 4
Taking Focus Off of Core Business…………………………………………. 5
Firing Experienced Workforce……………………………………………….. 6
Failure to Proactively Change Core Strategies…………………………………….. 7
Leasing Bad Locations………………………………………………………... 7
Eliminating Appliance Sales………………………………………………….. 9
Conclusion……………………………………………………………………………… 10
References……………………………………………………………………………… 12
LIST OF ILLUSTRATIONS
CHARTS PAGE
1. Bar Chart Comparison of 2007 & 2008 Quarter 1 Revenue,
Gross Margin, and Net Earnings for Best Buy……………………………… 2
2. Bar Chart Comparison of 2007 & 2008 Quarter 3 Revenue,
Gross Margin, and Net Earnings for Circuit City…………………………… 3

4. A COMPARISON OF CIRCUIT CITY STORES, INC.
TO BEST BUY CO., INC.
EXECUTIVE SUMMARY
Circuit City’s stock price has dropped from over $30 in 2004 to now being delisted by the NYSE.
This is due to numerous major decisions on the part of Circuit City’s top management, which
can be summarized as below:
1. The inability to learn from mistakes:
a. The company was distracted from its core business twice in the past 10 years.
i. The monumental failure of Divx left Circuit City over tens of millions of
dollars in the red with no sign of accomplishment.
ii. Selling off a successful chain of CarMax left Circuit City without extra
necessary cash flow to continue operating its business.
b. Circuit City fired its most capable sales people twice in the past 5 years.
i. In 2003, the company laid off 1,800 of their best sales people in order to
change from commission-based compensation to hourly compensation.
ii. In 2007, the company laid off an additional 3,400 employees who were
paid more than the industry average for their position in order to cut costs.
Meanwhile Circuit City’s CEO was compensated nearly $8M during that
year.
2. Failure to Proactively Change Core Strategies
a. Management’s strategy for the past 15 years has been to secure “B” rated real
estate for store locations and lease each location.
i. The view that Circuit City was a “destination location” guided top
management’s decisions on store placement. Meanwhile, Best Buy
purchased prime real estate where convenience and proximity to other
high-demand stores brought more customer traffic in.
ii. By leasing each store location, the organization cut its real estate cost,
but failed to grasp the possibility of moving store locations while inside a
lease contract.
b. Circuit City failed to evolve with the consumer electronics market, and top
management’s decision to exit the home appliance market left a large hole in the
company’s bottom line.
i. The company exited the home appliances market months before the
2001-2004 housing boom in order to replace the store space with
entertainment media meant to encourage customer traffic. The company
has never replaced the revenue and margin it lost from appliances with
the revenue and margin gained by offering media.

5. INTRODUCTION
Circuit City and Best Buy, the two major competitors in the Consumer Electronics industry, have
had two very different experiences over the past 15 years. Best Buy, a small fledgling company
in the 1980’s, has become the dominant superpower in the CE segment. In contrast, Circuit
City, the previous superpower in the 1980’s and early 1990’s, filed for Chapter 11 Bankruptcy
protection in November, 2008. How did these two competitors end up at opposite ends of the
business-life spectrum?
Best Buy, who filed their Q1 report earlier this year, reported an overall growth of 13 percent in
revenue, retaining a gross margin of 23.5% in the products and services sold, and an overall
decrease in net earnings to $179M, which was $192M during the same quarter a year before.
Best Buy states that this was due to a change in their overall product mix, with more low-margin
flat-panel TV’s being sold instead of high-margin projection TV’s and more consumers
purchasing low-margin products such as GPS and Computers (Best Buy Co., Inc., 2008).
Best Buy increased revenue by 13% in both domestic and international segments of their
business, which they believe was due to the net addition of 145 new stores over the past year,
3.7% gain with same-store sales, and favorable fluctuations in foreign currency exchange rates
(Best Buy Co., Inc., 2008).
The major loss for Best Buy was a decrease in same-store sales for Consumer Electronics,
which dipped from a .8% increase the same time a year prior to a decrease of .7%, and sales
for Appliances, which dropped from a 2.4% gain the prior year to a loss of 3.6%. Both of these
categories were high-margin products; however, Best Buy seems to have countered the loss by
increasing sales of lower margin products.
Net Earnings (in $M)
Revenue (in $B)
Gross Margin %
0
5
10
15
20
25
Q1 2008
Q1 2007
179 192
9.8
8.75
23.5 23.4
Figure 1
Bar Chart Comparison of 2007 & 2008
Quarter 1 Revenue, Gross Margin,
and Net Earnings for Best Buy

6. Circuit City’s Q3 figures weren’t as pleasing at Best Buy’s Q1 figures to investors. Just before
the Q3 results were published, Phil Schoonover, CEO of Circuit City, resigned. This definitely
indicated that there were some internal problems with Circuit City, but the Q3 report shocked
most of the business world. Circuit City reported a decrease in revenue from $2.64B to $2.39B,
increased gross margin of 21.29% from 20.65% a year earlier, and an increase in net loss from
$63M a year before to $239M (Circuit City Stores, Inc., 2008).
Overall, Circuit City reported a loss of revenue in all categories of their domestic market,
including “double-digit” declines in computers, televisions, and home audio.
Understandably, the investing community withdrew the majority of their funding from Circuit City,
whose stock had plummeted from around $30 per share in 2004 to less than $1 per share after
those results were published. Best Buy’s stock price has lingered above $40 per share since
2005. The financial statements of these two companies does provide some insight into how
each company performed, but what business decisions have caused Circuit City to have such a
drastic difference in performance than Best Buy? Two major flaws have emerged in Circuit
City’s business models: their inability to learn from mistakes and a failure to proactively change
core business strategies.
Net Loss (in $M)
Revenue (in $B)
Gross Margin %
0
5
10
15
20
25
Q3 2008
Q3 2007
Figure 2
Bar Chart Comparison of 2007 & 2008
Quarter 3 Revenue, Gross Margin,
and Net Earnings for Circuit City

7. THE INABILITY TO LEARN FROM MISTAKES
In business, the ability to take each mistake and use the knowledge from that experience to
make your business model better is one of the most valuable. Repeating mistakes costs
businesses money, and when a company is striving to save all the money it can in order to
improve its business model, repeat mistakes are the last problem a company wants to have.
Over the past 15 years, Circuit City has failed to evaluate its mistakes in order to discover
valuable information. The three major failures that Circuit City failed to learn from involved
neglecting its core business and diluting the sales ability of its frontline employees.
Taking Focus Off of Core Business
Retaining focus on a company’s core business is an essential element to efficiency. When
companies lose focus of what aspects of their business they have a competitive edge in,
competitors can sneak in and take away market share. Circuit City failed to retain its focus on
serving customers in the retail CE industry twice during the past 10 years. The disc format Divx
and a spin-off no-haggle car dealership called CarMax both caused Circuit City to lose focus of
what its main competitive edge was: customer service.
In 1997, the Consumer Electronics industry decided to begin the rally for a new dominant video
format to replace the very antique VHS. Much to everyone’s dismay, Circuit City decided to
invest in a pay-per-use disc called Divx. After the industry ignored Circuit City’s new format and
chose to use DVD as its new video media, Circuit City had lost over tens of millions of dollars
with nothing to show for its investment (Smith, 2008). This worthless investment ultimately
ended up being a new compression format for computer-based videos, but Circuit City’s
investment never paid off.
CarMax, a non-negotiating retail car dealership, was created by Circuit City in 1993 (Gillian,
2008). Creating a subsidiary to deal with an entirely separate industry turned out to be a good
idea for Circuit City. However, instead of retaining this venture and continuing to allow this
second business to flourish, Circuit City sold the chain in 2002 (Smith, 2008). The CarMax chain
continues to be successful.
The loss of focus on key business competencies allowed Circuit City’s Consumer Electronics
chain to lose efficiency, thus causing the executives to make another business decision: fire
their workforce.

8. Firing Experienced Workforce
Line-level staff is at the core of any business. If you can’t sell your product or service, your
company can’t survive. Since sales staff tends to be motivated more by money, most
organizations use commission-based pay to incentivize their salespeople.
When Circuit City first started, they compensated their sales staff with commissions. Such was
the norm until 2003, when executives decided to change the method of compensating their core
employees. Best Buy’s sales force had been on hourly wages ever since the company
restructured from The Sound of Music into Best Buy. According to Gilligan, Circuit City stated
that market research didn’t say consumer preference was against commission, but that the
change was made in order to reduce costs due to the lower margin of digital products (Gillian,
2008). This cost reduction strategy amounted to the layoff of 1,800 extremely-well qualified
sales people.
This wouldn’t have been incredibly horrendous, had this change in compensation been made
only once. In 2007, under CEO Phil Schoonover’s direction, Circuit City laid off an additional
3,400 store workers, including sales people and staff, who the organization deemed to be paid
higher than the industry average (Gillian, 2008) (Smith, 2008) (Felberbaum, 2007). Making the
choice to fire the most capable sales people in the organization once was bad enough for
diluting Circuit City’s sales ability, but making that decision again further damaged the
organization’s reputation as a potential resource for customers seeking advice on a CE
purchase.
Management compensation compared to line-level employee compensation brings up another
quandary. During the year Schoonover’s executive team fired 3,400 employees, Circuit City
compensated him nearly $8M in salary, bonuses, and stock options. This is in stark contrast to
Best Buy’s CEO being paid $4M in total compensation (Todor, 2008). Circuit City’s decision to
prioritize its CEO’s compensation higher than its employees working with customers
demonstrates a lack its lack of understanding over who holds the keys to the performance of the
organization. Compensation is only one aspect of the major strategies Circuit City has failed to
proactively change.

9. FAILURE TO PROACTIVELY CHANGE CORE STRATEGIES
Organizational evolution is essential to having the necessary flexibility to change with industry
demands. If an organization is incapable of adjusting to fluctuations in product demand, the
company could easily be outmaneuvered by a competitor. Such is the case with Circuit City and
Best Buy. Circuit City’s choices of retail store locations and choice of product availability both
contributed to Best Buy’s rise and Circuit City’s fall.
Leasing Bad Locations
In the retail world, it’s all about location, location, location. If a store is situated in an area too
difficult to access, customers refrain from visiting the store due to the frustration of getting into
the parking lot. If a store is too far away from other stores, customers tend to frequent the
competitor who is closest to their other shopping locations instead of the distant location. Best
Buy understood this. Circuit City didn’t.
While Best Buy secured prime real estate for store locations, Circuit City’s leadership team
viewed their chain as a “destination retailer,” which would cause consumers to visit their store
anywhere they placed it. This view would prove to be fatal when Best Buy built a store in the
same market at Circuit City.
Because Circuit City consistently chose the developed sections of towns to place stores, the
cost of purchasing the land would have been immense. This is why one of Circuit City’s
corporate strategies is to lease the real estate for the stores they build. According to the
company’s latest report, lease termination costs were $78.6M (Circuit City Stores, Inc., 2008).
Normally, this wouldn’t be a big issue; however, with the locations the chain chose being
inconvenient enough to tempt buyer to shop elsewhere, buying out of those leases in order to
move store locations proves difficult.
Once Circuit City saw its situation due to the previous decision of leasing store locations, it
would have had the opportune time to discontinue this practice when it began building the
Circuit City of the future stores, simply called “The City.” Again, Circuit City didn’t learn from its
previous mistakes and continued to lease the new store locations.
At the end of their Q1 period, Best Buy had amassed a total of 949 stores. Circuit City had 714
at the end of Q3. In November of 2008, just months after the company posted its Q3 results,
Circuit City announced that it planned to close 155 locations, some of which had just been built
over the past year. The lack of corporate insight into where and how to create new stores has
plagued Circuit City’s bottom line for decades. Another notable decision was the choice to exit
the Home Appliance market in 2001.

10. Eliminating Appliance Sales
Offering the right products at the right time is a business necessity. If customers want a product
in the industry you currently offer other products in, it’s common sense to offer that product as
well. Circuit City’s decision to walk away from the home appliances market just months before
the housing boom of the early 2000’s began turned out to be a huge oversight of top
management.
Ever since initial inception, Best Buy had offered entertainment media to shoppers. Movies,
music, and computer software were determined to be big traffic-drivers. The young adults who
frequently purchased less expensive items ended up purchasing the big-ticket items once they
were older. Circuit City saw that Best Buy’s plan was working, so they initiated a business plan
to utilize the same strategy. This meant the need to clear out space inside stores to place the
new entertainment media. Top management’s decision was to exit the appliances market, which
was a high-margin product, and replace it with low-margin (sometimes negative margin) media
products. Circuit City never regained the revenue it lost from selling the big-ticket appliances
through the increased traffic from media sales (Gillian, 2008)

11. CONCLUSION
While Best Buy is still moving ahead strong, Circuit City struggles due to its inability to learn
from its mistakes and proactively change core business strategies. If Circuit City wants to
survive and remain competitive, it needs to reevaluate its key business components. The
following are suggestions for continuing business operations in the domestic US market.
1. Close down more locations: Closing more locations changes inventory and staffing levels to
a manageable level, reduces overhead, and allows the organization to focus on improving
behaviors that influence performance.
2. Revitalize incentive-based pay: Incentive-based pay for all employees with direct contact
with customers gives the employees motivation to provide an “above and beyond”
experience and incentivizes salespeople to close sales and preserve margin.
3. Relocate poorly-placed store locations: In order to exit the leases, lease buyouts may be
necessary, but gained revenue and margin could outweigh the negative effects on cash
flow. Plus, the positive effects on customer traffic could provide more word-of-mouth
advertising.
4. Remodel outdated stores: Providing a consistent feel when visiting a store helps customers
become familiar with the store layout and allows them to find what they’re looking for easier
and quicker. The updated look would also help customers feel that Circuit City cares about
how their company is represented.
5. Make a definitive corporate decision: When employees know what the organization is
focused on, they are able to concentrate on that goal and succeed. When decisions are
constantly changed and corporate focus shifts, employees are confused and have difficulty
knowing what goals to commit and align their performance toward.
Starting with the recommendations above, the company would need an overall commitment on
the part of top management in order to make the necessary changes to the company. If top
management isn’t decisive and committed to making the change, employees will sense that and
fail to commit to organizational objectives. Decide. Commit. Succeed.

12. REFERENCES
Best Buy Co., Inc. (2008). Form 10-Q Quarterly Report For Best Buy Co., Inc. Period Ending
May 31, 2008. Minnesota: Securities and Exchange Commision.
Circuit City Stores, Inc. (2008). Form 10-Q Quarterly Report For Circuit City Stores, Inc. Period
Ending August 31, 2008. Virginia: Security and Exchange Commission.
Felberbaum, M. (2007, December 22). Circuit City's Shares Tumble After Loss Widens.
Retrieved November 25, 2008, from Washington Post: http://www.washingtonpost.com/qp-
dyn/content/article/2007/12/21/AR200712210225.htm
Gillian, G. (2008, November 10). Circuit City's Strategic Miscues Added Up. Retrieved
November 25, 2008, from Charlottesville Daily Progress:
http://www.dailyprogress.com/cdp/business/technology/article/circuit_citys_strategic_miscues_a
dded_up.htm
Hamilton, A. (2008, November 11). Why Circuit City Busted, While Best Buy Boomed. Retrieved
November 25, 2008, from TIME: http://www.time.com/time/printout/0,8816,1858079,00.html
Smith, S. (2008, September 29). How Circuit City Got Here. Retrieved November 25, 2008, from
TWICE: http://www.twice.com/index.asp?layout=articlePrint&articleID=CA6600302
Todor, J. (2008, November 12). Why Circuit City Is Bankrupt and Best Buy Thrives. Retrieved
November 25, 2008, from Customer Think:
http://www.customerthink.com/blog/why_circuit_city_bankrupt_bust_buy_thrives