Circuit City Trying to Develop a Winning Retail Model

Case Type: industry analysis; business competition, competitive response.
Consulting Firm: AlixPartners first round full time job interview.
Industry Coverage: consumer electronics; retail.

Case Interview Question #01277: Your client Circuit City is a major consumer electronics retailer that operates a chain of stores across the United States. The company sells audio / video equipment, digital cameras, cell phones, computers, memory sticks, external USB hard drives, content (CDs, DVDs), and software.

Recently, Circuit City Stores has seen increased competition from bricks and mortar stores like Wal-Mart and Target as well as online retailers like Dell and HP. They have hired your consulting firm to help develop strategies to deal with the competitions. Your client Circuit City has 3 major questions for you:

(1) How is the consumer electronics retailing industry evolving?
(2) What is the winning retail model?
(3) What should we do?

Possible Answers:

1. Case Analysis

Candidate: To answer these three questions, I’d like to look in 3 areas.

First I’d like to know more about the current market including understanding customers, the products they are buying, and how these have changed over time.

Next, I’d like to take a look at the different types of competitors that are affecting our client and our client’s profitability.

Lastly, I’d like to know more about our client in terms of their business model, including core competencies, strategic direction, and their store model, to better understand what options are realistic.

Is there a particular place you would like me to start?

Interviewer: Before we get started, can you tell me what you think makes a successful retail model?

Candidate: Sure. I think there are several elements.

First, I think that a retailer needs to have a clear understanding of their customer base. This will drive two things: having the appropriate product mix to serve them and serving them through the appropriate distribution channel (online vs brick and mortar).

Secondly, while the above two factors are critical, our client needs to ensure that they will allow for profitability and so careful consideration needs to be paid to revenue and cost considerations.

Lastly, to the extent that is possible, we would want to make sure that our business model is not easily duplicated so that we can maintain a competitive advantage.

Interviewer: Sounds good. Let’s focus on the CD/DVD market. What are the differences between the two categories?

Candidate: There are potential differences between consumers as DVDs don’t have as high an adoption rate as CDs. There are also potential differences between age groups of consumers — I would think younger people might buy more audio products than older people.

Interviewer: Those are reasonable. What about in terms of title fragmentation?

Candidate: I would think that DVDs are much more consolidated in terms of titles as 10 blockbusters a year probably account for the majority of sales. I’m not sure this applies to CDs which I would think have a much wider distribution in terms of titles.

Interviewer: How do you see consumer buying patterns change?

Candidate: More and more, consumers are buying content directly. You can buy songs directly over the Internet, thus decreasing the need to buy entire CDs. You can also get video on demand removing the need to buy DVDs.

Interviewer: So what are the implications of this?

Candidate: From the perspective of our client, CDs and DVDs are not going to be a substantial part of their business going forward because the ability to buy content directly from producers removes the middleman. Our client will more directly need to rely on other parts of its product mix in order to be successful. In the interim, it is critical that our client manage the transition carefully in order to maximize the opportunity associated with this closing window which will likely last for several more years.

Interviewer: Agreed. So, let’s assume that we did some additional analysis and it turns out that our client needs to double the volume of its other products to counteract this. Fixed costs don’t grow in proportion to sales — they grow on a 75% scale curve meaning that even though sales double now fixed costs are only 75% of what they were on a % of revenue basis. Our gross margin is 25% and net income is 0%. What would our net income be if we doubled volume?

Candidate: Let’s say that Year 1 revenue was $100 making operating profit $25 and fixed costs $25. In Year 2, we would make $200 and our operating profit would be $50. Given the scale curve, our fixed costs should be about $50 * 75% = ~$38 giving us net income of $12 or 6%.

Interviewer: Exactly. Thank you.

2. Commentary/Recommendations:

This is a fantastic sample case because the dialogue provided by the candidate demonstrates exactly what the case interview experience can end up being like. Most importantly it demonstrates exactly how that experience can differ wildly from what you were originally expecting, and what the case interview books tell you to expect.

At the outset of the discussion, the candidate develops a framework for answering the question. All they have to do now is walk through that framework right?

Wrong.

After the candidate sets out the framework, the interviewer then practically takes over, firing questions at the candidate, choosing a particular niche market to focus on, and never really giving them a chance to thoroughly walk through their carefully laid out framework. The poor candidate is left feeling totally defensive, thinking on their feet to come up with answers to the interviewer’s interrogation rather than having the chance to ask the questions and gather information at their own pace.

If this happens to you (and it undoubtedly will), don’t panic!! It is quite common and not necessarily a bad thing. Despite not getting a chance to do their own analysis this candidate has still nailed the case because they set out a good framework and gave intelligent answers to the interviewer’s questions.

This is my assessment of what is going on and why this happens so often:
* Case interviews are about giving the interviewer a chance to gain an insight into your thought process — can you think like a consultant.
* The candidate set out a reasonable framework (not necessarily the only one but a reasonable one) and the interviewer has taken this as a sign that they know what they are doing. The framework in and of itself is 80% of the answer to the case.
* The interviewer then chooses not to let you walk through the framework, either because they are bored with having asked the same question ten times already that day or because they think they doing so will give them very little extra insight into your thinking beyond what they already got from hearing what your framework was going to be.
* Instead they choose to test you more deeply by asking you a series of questions that give them more insight into your ability to really understand and think about a business problem or market.
* Far from being a sign of failure, getting grilled with questions in this fashion may actually be a sign that you are doing well.

Note, there is a fundamental difference between interviewers asking you questions to prompt you because you don’t seem to know what you are doing and interviewers asking you questions (as in this case) because they are really testing you.

Don’t assume you can sit back and let them ask you the questions they are interested in. You cannot. You are always responsible for driving the case and you need to set out a framework and start working your way logically through it. If however, at some stage during this process, the interviewer starts firing questions at you then you need to be able to work with it. Answer their questions as insightfully as you can and let them take you where they want to go.

Think about what things would be like in the real world — How would the CD market be different to the DVD market? You must have had plenty of experiences with both so apply some common sense and you are more than half way to a decent answer.

If the questions run out, then tie everything back in to your original framework and keep going. But more times than not the questions will only run out when they bring you to a case conclusion.

These interviews can be terrifying because you fell like you have lost control, but they can also be the most rewarding and, in my view, are the ones most likely to earn you an offer.