Circuit City Proves Penny Wise and Pound Foolish

By George Anderson

When Circuit City made the decision last March to lay off 3,400 of its most experienced sales associates because they were making too much money (earning $14 or $15 an hour), many people believed the move defied logic. Why, after all, would a company already struggling to keep up with the competition intentionally weaken the part of the organization that dealt directly with consumers?

At the time of the layoffs, Circuit City CEO Philip Schoonover told Reuters that the move would "deliver improvements in our selling, general and administrative expense rate while maintaining appropriate investments to drive our key strategic initiatives such as digital home services, multi-channel and home entertainment."

(See RetailWire 3/30/07 - Circuit City Gives Best Paid the Boot)

Nine months in, the concerns expressed about the move now appear prescient as Circuit City reported holiday sales that were 11.4 below the same period in 2006 when the pricier employees were still on hand.

Peter Cohan, a management consultant and professor at Babson College, told The Associated Press that Circuit City "violated a basic principle of good business" when it made the decision to let the workers go.

"They (executives) were so focused on cutting costs that they failed to take into account the real value of good salespeople," said Mr. Cohan.

Dean Baker, co-director of the Center for Economic and Policy Research, said Circuit City management's publicly admitted willingness to get rid of higher paid employees brought about an unwelcome cultural change inside the company. "Why would workers have the incentive to put in any extra effort?," he asked.

The change in attitude among the chain's employees hasn't been lost on consumers who AP reports have made disparaging observations online about the company and the shopping experience.

Discussion Questions: How does Circuit City fix the situation created by the company's decision to go with less experienced store staff? Does the same management team that made the decision to lay off 3,400 workers have the credibility within the organization to lead it out of the current hole its in?

• ALL BUSINESS: Cost Cutting Nightmare - The Associated Press/Google