In order to analyze the external environment of Circuit City a number of analytical tools were used. The Porter's Five Forces Model is used to assess the strength of five competitive forces. An analysis of stakeholders is used to explore the impact Circuit City has outside of the company. The opportunities and threats are assessed. Strategic Group Mapping is used to gage the company within its industry. Finally, key success factors are used to explore what has worked and what has not in the past with both Circuit City and industry competitors. Following is the information and conclusions drawn from these tools.
The Porter's Five Forces Model (see appendix I) is used to explore the strength of five competitive forces: competitors, substitutes, entry, suppliers, and buyers. The rivalry among firms in the consumer electronics retailing business is moderate to strong. The main competitive firms to Circuit City include Best Buy and Wal-Mart. Price is a large factor in the competitive environment, especially price on large items including laptops and flat-screen televisions. There is also competitive rivalry around the customer service, warranties/guarantees, and store environments.
There are not a large number of competing firms in the consumer electronics retail industry, and the firms that do exist in the market have unequal size and growth. Consumers have low switching cost. It would cost more for a retailer to get out of the business than to stay in. Many firms have diverse strategies but they do tend to use each other as benchmarkers. The threat of new entrants in the consumer electronics industry is moderate to low.
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There are not a lot of competitors in the field. There is little reaction from Circuit City and Best Buy if a new entrant were to enter the industry. Newcomers will not likely see attractive profits. There barriers to entry in the consumer electronics industry include strong loyalty to existing retailers, cost disadvantage of small size firms, capital requirements to start in the industry, strong capital is needed to secure real estate, inventory and other start-up fees. The threat of substitutes is low in the consumer electronic industry. There are not a lot of substitutes in the industry. When a consumer wishes to purchase an electronic service or product there are not limited choices. Either a bricks and mortar store or from an e-commerce site.
The competitive force of suppliers is strong. The inventory in a consumer electronics store is their most valuable asset. Without the support of suppliers there is little chance of a store creating sales and other sales creating incentives. It is costly for a buyer to switch suppliers. If a product is available at one consumer electronics store than consumers will also expect to find the product in the competitor's store. There are not very many suppliers available in the market and therefore the few that are hold a lot of power.
The competitive force of buyer is strong. They are sizable purchases made in the industry and make up a large majority of the industry's product. The choices that the buyer makes have a considerable effect on the store, whether they choice is where to shop or what to buy when they chose a store. Overall the external competitive environment for Circuit City is moderate. Its strongest competitive forces are the industry rivals, Best Buy and Wal-Mart. There are strong barriers to entry, and good substitutes do not exist.
As part of SWOT analysis (see appendix III), opportunities and threats are used to look at the external environment of the company. The opportunities explore both what is happening internally at Circuit City and externally that will have a positive impact on the company. Threats are also from either inside to outside of the company. A threat is something that could negatively influence the firm. If action is taken threats can be averted. The most important aspect of threats is awareness, if Circuit City is aware of existing threats the company will be better able to react.
Circuit City's opportunities include; increase in online retail spending, because Circuit City has many issues with the placement of their retail locations and the look of their locations. The increase in online spending helps them bypass this problem. The growth in the electronics is also an opportunity, although home buying and other consumer spending has decreased, purchases of larger electronic items such as flat screen televisions have increased and experts do not see changes in this trend.
Other opportunities that Circuit City is creating for themselves include the upgrade of their stores appearance and image. As possible, stores are getting made over to become cleaner and brighter, also by decreasing the size of the stores, and moving them to more accessible locations. Threats that are pertinent to Circuit City include; the increasing cost of rental space, especially in the prime locations that Circuit City want to move stores to.
Also, as stated in Porter's Five Forces Model that power of suppliers is strong and dependence is increasing. Possibly the strongest threat to Circuit City is the competition. Circuit City is number two in the consumer electronics stores after Best Buy, because of the size, strength, and capital of Best Buy it would be difficult if not impossible for Circuit City to surpass them in volume. Another competitive force that is a large threat for Circuit City is the increase in electronics sales by retailers such as Wal-Mart and Target. Consumers are now interested in the one stop shopping of these retailers.
In the consumer electronics industry, the main success factors include; brand recognition, selection, and add-on services. Many consumers shop based on brand recognition, often consumers are wary when purchasing electronics and those who are much more likely to shop at a store that they are familiar with. When consumers decide on an electronics store; selection is a top priority, stores that offer a wide array of products in a wide variety of brands will have an advantage over those stores that do not. Newer to the consumer electronics industry is the add-on of services; these include warranties, services to set-up purchases, and services to help with any technical problems. These services offer a great value to consumers and even if they are utilized they can often be of consideration when choosing a retailer.
The environmental forces that are most likely to influence Circuit City's actions and future performance are the economic forces including interest rates, consumer's disposable income, and the general economic environment of the consumer market. Electronics is one of the most fluctuating industries with the external economic environment. As the price of high priced items, such as plasma televisions decline the ability for more consumers to purchase these items will increase, as the return on these products is low, the more sales that take place the more profit Circuit City can make.
Circuit City's future will be greatly affected by changes that Best Buy is making. Best Buy is opening smaller stores, comparable to the size of Circuit City. The consumer reaction to this change will have a large impact on Circuit City. Best Buy and Circuit City have been experiencing varying stock prices and the future of both of firms will be closely watched by investors. Changes that are being implemented or will be in the future will have a great impact on both companies. Wal-Mart and its continuing growth into new industries also poses a large threat to Circuit City, because of Wal-Mart's ability to sell items at lower prices there is a threat that Circuit City's customers will look to Wal-Mart to find deeply discounted item, even if they do not have the services to go with them.
Analysis of Organization (Internal Analysis) Theresa Even though Circuit City is the second largest consumer electronics retailer in the United States there is still a great deal of improvement that can be made internally to gain a greater amount of competitive advantage. Circuit City has a number of strengths and weaknesses in their internal environment. Circuit City does have some internal strengths it depends on to keep a competitive advantage and to remain as a predominate figure in this market.
Throughout the past five years Circuit City has had to make major changes to the structure of the corporation to deal with their financial loss. One of the more basic strengths is the store name. Everyone has heard of this company and associates the name with reliable electronics. There are more specific strengths that have helped to get the company out of debt. First of all there have been changes to the layout to better accommodate the customers. They also consolidated their merchandise information to one central location. This means that products are available when and where the consumers are demanding it. Circuit City has been consolidating so they are now more cost effective.
The consolidation should save around $110 million in 2007 and an estimated $140 million in 2009 (Pinkerton, 1). Circuit City is also working with its vendors to improve pricing change response and create a greater awareness of pricing for customers. They are also lowering the prices of extended warranties on flat panel televisions since there has been a decline in the prices. To deal the layoffs of several high paid, knowledgeable employees, Circuit City has a training program to quickly educate new employees. As most consumers are aware, Circuit City has an installation service. With Firedog, Circuit City differentiates themselves from the competition. Competitive advantage lies in the services offered to the customers. They offer installation services, accessories, warranties, and Hi Def feeds.
There are also several weaknesses that Circuit City has to address. Since Circuit City had to close 55 stores internationally they have not been able to expand to new geographic areas (Pinkerton, 1). Also due to their bleak financial position two distribution centers had to be closed which makes then international distribution less efficient. There has been a great deal of change in executive management since the CFO and the Chief Merchandising Officer Douglas Moore left the company. Analysts are keeping a close eye on how the leadership changes will change the company. Circuit City has also had to layoff 3400 knowledgeable employees which has hurt their sales (Desjardins, 1).
They have been replaced with lower paid employees. This cuts cost but can hurt their image. On average five employees from every store were let go which probably hurt company morale and had employees question their job security. Circuit City does not have sophisticated pricing and supply chain technology like their competitors do (Lloyd, 2). Circuit City's financial stance is not secure, a stock drop of 46% in the past year (Hudson, 2). Competitors such as Best Buy acquired many of the locations where Circuit City was going to open now stores resulting in much fewer store opening than anticipated.
Creating a SWOT analysis is an excellent way to analyze a firms internal and external environments but it does have its limitations. It should be viewed as only a starting point for analysis. Using the information from a complete SWOT analysis, a firm can recognize their competitive advantage (see appendix III). A strategic change can be implemented to improve areas found in the weaknesses. To view a more in depth internal analysis it is important to create a value chain analysis (see appendix V). With this information it is easier to see where the greatest amount of internal value being created and where the value is lacking. Improvements can be made accordingly.
The primary activities in the value chain analysis include inbound logistics, operations, distribution, marketing and sales, and service. Inbound logistics deals with the material handling, warehousing, and inventory control. Circuit City in particular has made drastic changes to their supply chain in the last few years. Improvements were made to their supply chain organization to help identify and react to consumer demand in a timely manner. They also reduced the time it takes from buying the products from vendors to the time it gets on the shelves of the stores. To help in obtaining inventory there is Circuit City Global Sourcing, Ltd. in China, Hong Kong and Taiwan. Products are then shipped from the manufacturing centers to the nine different distribution centers through out the United States.
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