A Lesson In Leadership: How Circuit City Forgot the Value of Their Employees

So I thought I would take a break on this post from my usual topics of failure or innovation and instead focus on a lesson in leadership and philosophy.  Last week Alan Wurtzel wrote an insightful post titled “What Circuit City Learned about Valuing Employees” for the HBR Blog.  The article describes how important it is to respect your employees and give them the opportunity to grow.  For the first 50 years this was a core value at Circuit City but by 2000 the company’s executives had all but eviscerated that belief and by the end of 2009 Circuit City was gone.  As I read this article I kept thinking that these were some very important lessons to be learned for every retailer, especially Circuit City’s last remaining true competitor, Best Buy.

Closed Circuit City Store, Roseville, MN

Alan Wurtzel was President and CEO of Circuit City from 1966 until 1986 and was the son of Sam Wurtzel, the man who founded Circuit City in 1949.  The company was originally known as Wards Company and was headquartered in Richmond, VA.  According to Alan his dad always know that the only way to get results was through the efforts of your people, which meant respecting them and giving them an opportunity to grow.  This thinking was different than much of the management theory of the day that had followed from the Henry Ford assembly lines and mass production theory from Frederick Taylor where every worker was just a part of the machine.

Alan mentions how his father was excited to have read similar thinking in “The Human Side of Enterprise” by MIT professor Douglas McGregor.  McGregor had explained his alternative hypotheses of people management (called personnel back then) Theory X and Theory Y.  In Theory X employees were naturally lazy and thus had to be closely supervised and controlled.  But Theory Y was almost the opposite in the belief that people enjoyed mental and physical activity, sought opportunities to be creative, and wanted to succeed at work.

Alan suggests that it was because of his father’s focus on treating his employees well and creating opportunities for them to grow that Circuit City flourished.  Between 1949 and 2000, Circuit City would grow to become the most profitable independent consumer electronics chain in the United States.  But there was a fundamental shift going on inside the organization during its last decade of existence.  Employees were being seen as fungible and disposable economic units more akin to Theory X.  Alan cites this shift as the primary cause of Circuit City’s demise, “When workers are treated as cogs in a machine instead of flesh-and-blood human beings, they naturally fail to give their best efforts. When that happens, sales and margins decline, turnover increases and profits plummet.

While there have been other reasons cited as playing a part in Circuit City’s demise, including poorer performing retail locations and a lack of enough cash on hand to weather the economic downturn, there was no doubt that a broad base of their employees were roiling when they simultaneously eliminated commissions and laid off 3900 salespeople in 2003.  In 2007, Circuit City again laid off 3400 of their better paid sales associates and implemented a “wage management” program that cut salaries of almost every remaining employee.  Throughout the decade there had been numerous customer lawsuits including false advertising and breach of contract.  And by 2008 there was major concern in the vendor community as Circuit City prepared for bankruptcy filings, the company had debts of $2.3b and owed Hewlett-Packard $119m and Samsung Electronics $116m.

During the 2000’s Circuit City had violated all three tenants of the “Retail Silver Rule: Do not do unto your employees, customers, or vendors what you would not have them do unto you.”  (See Silver Rule vs Golden Rule). They had violated their employees, they had violated their customers, and they had violated their vendors by treating them with disrespect or taking advantage of them.

Food for thought:

  • In the era of GPS tracking locators, Big Data, and compressing margins do we need to be concerned with companies moving back towards Theory X?
  • Providing growth opportunities is extremely important for employees in most organizations but how do you adjust when there is a long term slowdown in the economy and there is little movement and fewer opportunities?
  • Many companies profess lofty values, like the golden or silver rules, but are there times when it is ok to break these rules?  In times of crisis?

5 replies to “A Lesson In Leadership: How Circuit City Forgot the Value of Their Employees”

  1. Chris | Nov 9, 2012, 5:08 pm


    This is a very interesting article. As someone who watched Circuit from the outside looking in, you could almost see it happening. Long-term employees were becoming disillusioned about where things were headed and what their role in all of it was. At first it wasn’t as big of a deal, because many employees were still motivated by their commission checks, but as that went away, what replaced their drive??

    With Best Buy moving away from commission long before, they learned a long time ago that if you don’t have that money incentive, you have to have something else, and ultimately they had that with the CULTure they created, so much so that for many people it almost felt like a really great cult. People at every level were motivated to do more, to learn, to do things without being asked, and to work whatever was needed to make things happen. People came in just looking for a job and suddenly ten years had gone by and they were managers or district staff members (or higher!) because they were so enamored with the CULTure they were a part of in Best Buy. They defied Wall Street, the industry, and anyone else who thought they couldn’t become THE place for consumer electronics.

    One of the running jokes was always “this is THE most important holiday season EVER”, but ultimately this year it could really be true, and maybe not as much for the entire company, but this time for many of the employees who are wondering what the future looks like, and what their role in it, and then whether their contribution will be valued….or just a cog in the wheel…….I certainly know how I think that’s going to turn out, but I’ll save that for another time.

  2. Scott | Nov 13, 2012, 11:18 am

    I enjoyed working at Circuit City from 1992 to 1998, holding roles of Assistant Manager, Store Manager, and District Manager. When I first started with Circuit City, it felt like all the right elements of a successful business were in place – strong customer base, passionate employees, leadership engaged in creating better value propositions to drive customer engagement, etc.
    I had the pleasure of working in multiple markets from St. Louis to Detroit and the feeling was the same in each market.
    As we moved into late 1997 and early 1998 you could feel a dramatic change in the environment. Sales began declining, comp sales were challenging, and leadership began the inevitable drive towards maximizing profits by controlling costs. It was no longer about top-line revenue and growing the customer base. While we all know you must manage costs, especially in a challenging environment, the issues facing CC were less about the economy and more about the value propositions. Best Buy had moved in and changed the eco-system and CC struggled to find its niche. Best Buy was a new, exciting experience for customers and CC stores felt tired and dated and customer traffic dropped in most markets where the two companies competed.
    (You can find analogies in other parts of retail where a company struggles to find its place, i.e. Kmart struggling to find its niche between Walmart and Target)

    A quick story:
    In late 1998, Circuit was driving one specific initiative called DIVX. This was before the explosion of DVD players on the market – and when 98% of the products on “the wall” were VHS players. The company set outrageous goals for the selling of the $400 Zenith DIVX player that was confusing for employees to explain and customers to understand. To make the story short, I remember a conversation with my Regional Manager about the importance of DIVX to the holiday season and his comment was “if you do nothing else right this holiday season, you will sell DIVX”. Now, I understand driving new initiatives, and in fact, in my last role with Best Buy, that was my job, however, when you have an entire organization focused on a product that, if the outrageous goals were met, would still only amount to less than 1% of your total business, it seems priorities are out of whack.

    Customers could see the shift in employee behaviors; employees felt berated by leadership; and you could sense the organization headed in the wrong direction.

    To your question above regarding Theory X, I do not believe the current generation of employees will allow this to happen to them. Companies who operate with that mindset will lose the best talent and will struggle to innovate in a way that will keep them relevant in their industry.

  3. Bill Murray | Nov 29, 2012, 10:34 am

    It was painful to watch Circuit City implode, much like Comp USA (Who had a better selection). Once Circuit City did their little game where they laid off any sales person over a certain pay grade and rehired them at a lower pay grade, it was over. I and many of my friends refused to shop there. I was amazed at the boneheaded maneuver.

    Interestingly, having worked at companies that are both Theory X and Theory Y, I find the difference to bleed into their overall outlook on life, Authoritarian versus small d democratic. Authoritarian only gets you so far, but it is very seductive. (I also highly recommend The Authoritarians by Bob Altemeyer for insight into the personality. http://home.cc.umanitoba.ca/~altemey/)

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