Circuit City bankruptcy analysis

External Environment – Retail Circuit City failed to adapt to changes in the external environment. First, as Best Buy grew, competition in the industry increased significantly. During the strongest periods of Circuit City’s growth, the company had the largest market share in the industry, but as it lost share it entered into a duopoly competition with Best Buy.

This placed downward pressure on prices, precisely at a time when it became clear that Circuit City was less popular with consumers overall, and as it was facing some financial pressure from a decision to overhaul its stores. The other thing that the company struggled to identify was that it was struggling through a boomtime in the mid-90s. Normally, a retailer should be doing well during an economic boom, but they were not.

Management should at that point have realized that they were in trouble, and started making strategic moves to defend the company when the inevitable economic downturn occurred. Circuit City did not survive more than a few months into the downturn before it declared bankruptcy, because it entered the downturn in a vulnerable state. Circuit City’s management also made some critical errors. First, it maintain the commissioned sales staff model for way too long.

This model had fallen out of favor with consumers long ago, and they were turning to Best Buy as a result, as Best Buy was delivering a superior shopping experience. Further, cutting big ticket items like appliances in favor of DVDs and the like was not going to work well in a commission environment – nobody needs or wants an aggressive salesperson when they are making small purchases like that.

By the time management made this change, it was already starting to struggle, and the company was barely profitable at this point. Management had been too slow to make the necessary changes, waiting years past the point where Best Buy took over top spot in the industry before even looking at the commission issue, let alone anything else that might affect.