Organizational Decision-Making
Banasiewicz compares Circuit City’s decline with Best Buy’s performance to ask how managers made their decisions. Knowing the outcome makes past choices easy to criticize; evaluating the process requires asking what information and alternatives were available at the time.
THE IDEA
From the 1980s to the early 2000s, Circuit City was one of the most successful and best-known US retailers. Founded in 1949 as Wards TV in Richmond, Virginia, selling television sets out of the front half of a tire store, the company grew rapidly, changing its name to Circuit City in the late 1970s, by 2003 rising to #151 on the Fortune 500 list of the largest, as measured by revenue, US companies. And yet by 2008, the once high-flying electronics retailer filed for bankruptcy protection, shortly thereafter shuttering all 567 of its stores and laying off all of its roughly 34,000 employees. All while, Circuit City’s closest competitor, Best Buy, founded in 1966 as Sound of Music, grew into a global behemoth with annual sales (as of the end of 2017) of more than $40 billion from 1,575 stores worldwide.
Banasiewicz uses the two retailers to examine differences in senior managers’ decisions. For instance, in 2001, Circuit City chose to discontinue selling appliances (Best Buy did not); in 2003, the company decided to eliminate its commissioned sales, firing, without notice, 3,900 of its highest-paid salespeople (Best Buy employed hourly associates from the start), and then spent almost $1 billion on stock repurchase between 2003 and 2007, paying on average $20 per share for stock that was worth only a bit over $4/share at the end of 2007 (which, by the way, was around the onset of what is now known as the Great Recession, a deep and prolonged economic downturn which forced retailers to rely on their financial cushions). Knowing the outcome makes earlier decisions easy to criticize. But the outcome alone does not explain the process. What information and evidence did Circuit City’s managers rely on when making their choices? Why were their choices so different from those of Best Buy’s managers?
When to use it
Analyzing historical business failures to identify cognitive biases in executive decision-making.
Conducting post-mortem audits of organizational strategy to separate process from outcome.
Training managers to recognize and mitigate outcome bias when reviewing past decisions.
Comparing competitor strategies to understand how decision patterns lead to divergent outcomes.
FROM THEORY TO EVERYDAY LIFE
In practice
Circuit City's Decision to Discontinue Appliances
In 2001, Circuit City chose to stop selling appliances while Best Buy continued, according to the source. Evaluating the decision requires asking what managers expected to gain, what they expected to lose, and what evidence supported those expectations.
Elimination of Commissioned Sales
The source describes Circuit City’s decision in 2003 to eliminate commissions and dismiss 3,900 of its highest-paid salespeople, contrasting it with Best Buy’s hourly model. It raises questions about the expected savings, service effects, and evidence considered.
Stock Buyback Miscalculation
Between 2003 and 2007, Circuit City spent nearly $1 billion on stock repurchases at an average price of $20 per share, when shares later fell to just over $4, depleting financial reserves before the Great Recession.
A MOMENT TO REFLECT
Put it to work.
How might knowledge of Circuit City’s eventual failure bias your assessment of its managers’ earlier decisions?
What evidence or decision-making frameworks could have helped Circuit City avoid these poor strategic moves?
In your own organization, how can you guard against judging decisions solely by their outcomes rather than the quality of the process?
CONTINUE THE CONVERSATION
Source texts
- Evidence-Based Decision-Making How to Leverage Available Data and Avoid Cognitive Biases (Andrew D. Banasiewicz)