Why Circuit City Is Bankrupt and Best Buy Thrives

Simply put, Circuit City was stuck in transactional-economy mode, while competitor Best Buy is making the transition to a business model where delivering value to customers is not just focused on price.

Circuit City, the consumer electronics giant, announced a few days ago that they would be closing a significant number of stores and laying off employees. Yesterday they filed for bankruptcy protection.

Over at Best Buy, they are busy getting ready for the holiday shopping season.

Here are my observations and contrasts:

• Management versus Employee compensation: The CEO of Circuit City made in the neighborhood of $8 million per year. The CEO of Best Buy made $4 million. Perhaps more importantly, Circuit City made a cost-cutting blunder a while back by firing more expensive and experienced employees and replacing them with lower paid people.

• Investing in Employees: While Circuit City was dumbing down their frontline people, Best Buy was investing in training and employee retention strategies. One example is their investment in blueshirtnation.com, the internal social networking site that has reduced employee churn and gets employees to motivate and help each other learn how to serve customers better.
• Customer-focus versus discounting: Best Buy has made a number of strategic shifts over the past few year. One, they purchased the Geek Squad, so they could provide better post-sale support both in the stores and in the customers’ homes. They use customer scenario planning in an effort to customize the shopping experience to key customer groups. Circuit City has focused on discounting and cost-cutting.
• Websites and Social Media Presence: Circuit City has been stuck in Web 1.0 mode. Their site is a selling site, a brochure online and not easy to navigate. Best Buy continues to experiment with online strategies that have the customer at the center of their efforts. They don’t always get it right, but they are actively and rapidly learning. Circuit City is going bankrupt.

Some will blame Circuit City’s problems on the economy and declining consumer confidence. Another view is that the downturn in the economy just brought bigger issues to the surface faster. Best Buy figured out that customers want value and value is not just the lowest price. Customers want to deal with businesses that help them. One, help them make informed decisions whether via a customer-friendly website or knowledgeable and enthusiastic employees. Two, they want help in consuming the products they buy, whether it is installation of a new flat screen TV or fixing a problem with their computer.

The hard lesson for transaction-oriented companies to learn is that in today’s marketplace, a solid product at fair price is expected. The competitive differentiation is in the things that enable customers to have a better experience—buying and using the things they buy.

John I. Todor, Ph.D., is the managing partner of The Whetstone Edge, LLC, a customer-centric consulting firm that helps clients build customer equity by engaging customers online via social media and delivering compelling offline customer experiences. He is the author of Get with it! The Hands-on Guide to Using Web 2.0 in Your Business.