...Recognition approach had low faithful representation. Since the revenue associated with the service of the contract has not yet been completed, which means the revenue had not been earned; therefore, it was less precise to recognize it at the sale. It will understate the liability and overstates sales revenue because this method realizesfull revenue at the point of sale and adjusts later if “actual costs under the service contract fell short” (Bruns 2). Full Revenue Recognition approach will increase the stock price because overstate of sales revenue. * Deferral of revenue method records the product sales and extended warranty separately, it will have a higher relevance because some of the customer did not purchase warranty. According to Circuit City Stores, Inc. (A), “between 40% and 70% customers would purchase both the item for sale and the...
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...consistent with the actual substance of sales transactions involving equipment and extended warranties. Circuit City matches up almost perfectly with the five criteria in Exhibit 2. They incur the selling costs, they have a service network in place and warranty expenses are forecasted with a great deal of accuracy. Very few customers go above the allocated cost of the service warranty, thus Circuit City does not employ a deductible. After a warranty is purchased, Circuit City’s cost and profit can be expensed with a reasonable degree of accuracy. The uncertainty is so low, it’s almost as if the warranties were like any other physical product, and can be treated as such under Approach No. 1. With all of this in place, it would be unnecessary to use Approach No. 2 (deferral of revenue). Circuit City warranties are not comparable to insurance contracts as stated in Exhibit 3, because unlike the insurance contracts, Circuit City warranties are paid up front, and in full, and buyers cannot cancel their warranty or renegotiate the terms after their warranty has expired. Circuit City also has enough experience and data to show that warranty expenses are very predictable and hardly deviate from their expectations. It is almost like selling another product, where the cost and profit are known well in advance. I would steer clear of Approach No. 3 (partial revenue recognition) as Circuit City warranties do not match up with most criteria necessary for this approach. I.e. only 40-70% of...
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...being a separate transaction and two, sale of the extended warranty as another transaction. Any given sale could differ from another given sale in that maybe “customer A” buys a product and an extended warranty and “customer B” only buys the product. How do you account for different transactions of the same product? I propose you do this by viewing and accounting them as two separate and individual transactions. As the case states the revenue is not fully complete because services rendered have not been earned until the extended warranty period is complete. You can still earn interest on the money by putting it into a separate account maybe something like an escrow account and tracking it that way until the contract is complete and you can enter the remaining portion as net profit. By accepting this approach of accounting you can also adjust any numbers that may fall short or exceed the $20 estimate of an extended warranty’s future costs a little easier because you are separating it from the sale of the product. The issue is important to Circuit City because they offer a product and an extended warranty option with each product. At times a customer may purchase both the product and the extended warranty and other times a customer may purchase just the product. When a sale of just...
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...Journal of Business Cases and Applications The rise and fall of Circuit City Amy Hart The University of Tampa Erika Matulich, Ph.D. The University of Tampa Kimberly Rubinsak The University of Tampa Kasey Sheffer The University of Tampa Nikol Vann The University of Tampa Myriam Vidalon Nielson Abstract Circuit City paved its way in the consumer electronics retail market by committing to its Five S’s operating philosophy – selection, savings, service, satisfaction, and speed. However, the company fell victim to several poor business decisions in the early 2000’s that eventually led to the filing of Chapter 11 bankruptcy in 2008 and its closing in 2009. This case highlights the importance of identifying appropriate product differentiation strategies, building a distinctive competence, monitoring the competitive landscape and making sound business decisions. It will landscape, also aid the student’s understanding of the role and impact of management and explain the importance of employee engagement, satisfaction, and retention. Keywords: Circuit City, Five S’s, customer service, product differentiation, competitive ity, landscape, employee retention, Alan McCollough, Philip Schoonover, layoff, Chapter 11 bankruptcy Rise and fall, Page 1 Journal of Business Cases and Applications INTRODUCTION history This case covers the time period in Circuit City’s history between the decision of CEO Alan McCollough to halt the sale of appliances in 2000 and the decision of CEO Philip...
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...Case Study Part1 From the case “The Rise of Circuit City Store, Inc.”, I have learned a lot about the development of the nation's second-largest consumer electronics retailer. Even though it went bankrupt, I still admire its whole development process. It was founded in 1949 by Samuel S. Wurtzel and became pioneer in their business of consumer electronics. However, I also see some problems here which cause the company failed. The first problem I want to say is that the company went on a store expansion too fast which resulted in too many stores in neighborhoods. As I learned from the microeconomics, marginal revenue will goes down as the number of stores goes up. That means when the scale of the store reaches to a certain degree, the profit goes to the maximum. Any new store will only produce a negative income. From the case, we can see that Circuit City kept adding stores almost every year, regardless of the changes in the internal and external environment. I can’t say I agree with this strategy, but at that time, it really increased the sales and profits. However, when it came to the Depression, because of the lack of demand, there was really no need to add new stores. Here, I guess I want to mention another related problem. The case mentioned Interest rates several times, and it is really important for a company. When it goes up, the demand will decrease, at the same time companies may feel hard to loan money. Furthermore, it could cause some credit problems which...
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...INTRODUCTION Circuit City Stores, Inc. was an American retailer in brand-name consumer electronics, personal computers, entertainment software, and (until 2000) large appliances. The company opened its first store in 1949 and pioneered the electronics superstore format in the 1970s. By the end of 2008, Circuit City was the second largest U.S. electronics retailer, behind Best Buy. There were 567 Circuit City Superstores nationwide, ranging in size from 15,000 to 45,000 square feet. On November 4, 2008, Circuit City announced that it would close 155 stores and lay off 17% of its workforce by the end of the year as a result of continuing difficulties in remaining profitable. On November 7, 2008, Circuit City laid off between 500 and 800 corporate employees from its Richmond, Virginia headquarters. The approximately 1,000 remaining corporate employees were consolidated into one building in an effort to further reduce costs and improve profitability. On November 10, 2008, Circuit City filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. At that time, Circuit City's stock prices traded well below $1 per share (10 cents to be exact), and were removed from listing on the New York Stock Exchange. Starting January 16, 2009, Circuit City began liquidating its remaining stores, and all were closed by March 8, 2009. The former headquarters of Circuit City Stores, Inc., along with the 58 acres of land was sold in September 2010, for US $5.8 million to...
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...Case Study One Daniel Smith Southern Wesleyan University April 2, 2016 1) Think back on our discussion in the chapter section, Caveat Emptor-Be An Informed Consumer, evaluate whether the replacement of highly paid workers with lower-paid workers did or did not cause Circuit City to perform so poorly. How confident are you in your evaluation? Why? After reviewing the article, one can be confident that the replacement of highly paid workers was what made Circuit City perform poorly, which led to Circuit City closing. One can be confident that high paid skilled workers is what hurt Circuit City due to Best Buy being able to outperform Circuit City with less quality people and lower wages. Highly paid workers hurt Circuit City due to Circuit City not being able to compete with Best Buy; then replacing the high paid skilled workers with lower paid unskilled workers is what put Circuit City over the edge. The only way that Circuit City could compete with Best Buy is through customer service and when it replaces the high paid workers, it lost the customer service too. 2) Do you believe that the compensation changes at Best Buy are a major reason for its current difficulties? Since Best Buy is making cuts in departments that will not affect customer service, one can determine that the compensation changes are not a major reason for Best Buy’s current difficulties. The major reasons for Best Buy’s difficulties are increased competition from discount stores like Amazon...
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...This case covers the time period in Circuit City’s his Alan McCollough to halt the sale of appliances Schoonover to lay off 3,400 employees in 2007 sound strategic business decisions, target marketing, and customer input. points to the need for a retailer in such a competitive marketplace, with both brick and online competitors, to find its c customer value are keys to success. This case is suitable for both undergraduate and graduate courses in Marketing and/or Business Administration or Management, in areas where the students are stu Business Strategy or Marketing Planning. BRIEF HISTORY Circuit City opened its doors to the public in 1949 under the name of Wards Company. This date marked the beginning of the electronics superstore concept in the United States (BCRC, 2009). Within 10 years, Wards became a four store chain with total sales of $1 million per year (BCRC, 2009). In 1965, the company began its expansion through the acquisition of several television and home appliance stores in the United States (BCRC, 2 came under new management and the focus shifted to consolidating the business. all unprofitable stores and invested the revenues generated in a $2 million electronics superstore (BCRC, 2009). The store shifted Ward’s focus from home appliances to the growing consumer electronics market. It offered more than 2,000 products, including video and audio equipment and major appliances. Due to the company’s high volume sales, it was able...
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...Cost Cutting at Circuit City The demise of Circuit City as the number two consumer electronics outlet in the United States in November, 2008 was in microcosm what General Motors and the real estate market were to the country as a whole during the greatest economic collapse since the Great Depression. One could fault the velocity of economic decline as the primary catalyst causing Circuit City ultimately to decide that liquidation was the only viable option in the face of mounting losses, however there appears to be at least one highly publicized decision suspected to be a precipitator of failure – the firing of more than 3,400 established workers to make way for the hiring of lower skilled, lower paid replacements (Circuit City to fire more than 3,400 workers, 2007). Faced with mounting losses and stifling competition from competitor Best Buy, as well as lesser consumer electronic outlet competitors such as Wal-Mart and CompUSA (Rosenbloom, 2008), the Circuit City board of directors chose cost-cutting in human resources as the decision alternative best suited to regain a competitive footing (Circuit City to fire more than 3,400 workers, 2007). Against the backdrop of the Rational Decision-Making Model, the choice appears to have been made in a vacuum in that while problem definition may have been straightforward enough (loss of revenue, decreasing sales), one could reasonably question the rationality of the criteria used and the weights assigned to those criteria (Robbins &...
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...Circuit City (Extended Warranty) Case I feel of the three approaches to accounting for the extended warranty, approach Deferral of Revenue is best. My reasoning for this is because it allows you to view and potentially process the total transaction into two separate transactions making it easier to track and account for. This approach also gives you the potential to resell the warranty contracts to a third party provider if you find that the program is not profitable or does not conform to the way you want to handle operations of the extended warranty. I would account for and process each sale as one, the product being a separate transaction and two, sale of the extended warranty as another transaction. Any given sale could differ from another given sale in that maybe “customer A” buys a product and an extended warranty and “customer B” only buys the product. How do you account for different transactions of the same product? I propose you do this by viewing and accounting them as two separate and individual transactions. As the case states the revenue is not fully complete because services rendered have not been earned until the extended warranty period is complete. You can still earn interest on the money by putting it into a separate account maybe something like an escrow account and tracking it that way until the contract is complete and you can enter the remaining portion as net profit. By accepting this approach of accounting you can also adjust any numbers...
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...Characterization of Best Buy’s competitive strategy When I ask men to name their favorite store, the answer is almost always Home Depot, Lowes, or Best Buy. Companies that are so beloved usually have strong competitive advantages. The term “usually” is emphasized because it is not always the case—Borders was a beloved store by book readers and is now out of business. Home Depot and Lowes have strong competitive advantages, while Best Buy’s are eroding in a remarkably similar way to Borders. Home Depot and Lowes are often the largest home improvement stores in their city and carry the largest selection, which gives them the advantage of scale. Similarly, Best Buy has the advantage of being the largest brick and mortar source for electronics in most cities. Borders also had the advantage of being as big as or bigger than all of its competitor’s stores. The other advantage Home Depot, Lowes, and Best Buy share is locality. If you have a Home Depot five minutes away, you are unlikely to drive a half hour away to another store. And if Best Buy is the closest place to pick up a new television, computer, or Ipad, they will likely get your business. However, Borders was also the nearest bookstore for many people before it went bankrupt. In other words, scale and locality can be very weak competitive advantages. Online Sales The main difference between being a large home improvement retailer and a large electronics retailer is online sales. Most people are very...
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...Best Buy- Circuit City Case-17% 1. Be an informed consumer evaluate where the replacement of highly paid workers with lower paid worker did or did not cause Circuit city to perform so poorly. How confident are you in your evaluation? Why? In evaluating whether or not the replacement of highly paid workers with lower –paid worker at Circuit City caused them to perform poorly I found several factors that lead me to believe this to be true. Circuit City started off being the number one retailer of electronics. It was faced with competition from Best Buy and other large retailers such as Wal-Mart. Circuit City was forced with making changes within the company to keep their position within the market that they didn’t take. In 2003 Circuit city announced the layoff of 3900 workers, following this announcement opening stock price from 2001 to 2003 declined significantly. Also, in 2007 Circuit City fired 3,400 of the highest paid store employees at that same time their customer satisfaction index declined. Circuit City’s compensation strategy was in direct correlation to the business tactic, it rewarded its knowledgeable top performers. Circuit City never considered that by eliminating top earning sales people for less experienced sales people that it would have an indirect effect on the company as a whole. No longer to do they employ skilled and knowledgeable professionals whom customers relied on. Ultimately, managing total compensation strategically means fitting the compensation...
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...Best Buy On the Brink Background Best Buy and Circuit City were the two major brick and mortar stores where consumers were able to purchase electronics. With the rising technology and E-commerce, Circuit City was not able to adapt to the changing environment and now Best Buy is on the same path as its former competitor. Best Buy had to close down fifty stores and fire over 400 employees due to its poor financial performance. Best Buy CEO Brian Dunn explained that there was no innovation by the company to adapt to the changing market on how consumers were purchasing electronics. Consumers are now price comparing with Best Buy’s products with online retailers. Online competitors of Best Buy are utilizing the new emerging technologies to help make purchasing of products convenient to the consumers. Problem Statement Best Buy is on a slow downward slope towards bankruptcy, if the company does not have any new innovation in the way it sells its products to consumers. Best Buy needs to understand how consumers are purchasing electronics and restructure how its employees are interacting with customers. Amazon is taking advantage of being an online retailer which means that Best Buy has to take advantage of their physical locations. Alternative Solutions One of the strategies Best Buy can implement is to offer a price match guarantee to the customers if they can find a lower price than Best Buy’s products then Best Buy will match the price. This strategy will attract more customers...
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...apply the core competencies of efficient and effective logistics also known as service, selection, savings and satisfaction from Circuit City to CarMax. Based on the VRIO framework, Circuit City had a competitive advantage which they applied to CarMax strategy. Their VRIO framework was based on efficient and effective logistics along with the 4w business model of service, selection, savings, and satisfaction which was valuable, rare, and difficult to imitate and organized to capture. By maintaining the same core competencies of Circuit City, CarMax has become the leading used car company with Fortune 500 status. 2. What type of diversification is Circuit City’s CarMax? Circuit City was following an unrelated diversification strategy. Circuit City went from a market of electronics to used cars which has no linkage. CarMax had its own CEO and was managed as a standalone business with profit and loss responsibilities separate from Circuit City. The linkage between electronics and used cars is not apparent. 3. Looking at the core competence-market matrix depicted in Exhibit 8.8, does Circuit City’s CarMax diversification fall neatly into one of the four quadrants? Why or why not? It falls neatly into the lower right quadrant. Circuit City was able to redeploy and recombine core competencies to compete in a new market for them of used automobiles. Circuit City was not building new core competencies to protect and extend current market position nor were the building core competencies...
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