Case Study 2

Achieving a Competitive Wage Structure

In March 2007, the second largest retail consumer electronics company, Circuit City, announced a plan to terminate 3,400 employees out of an in-store work force of 40,000 (9 percent) in order to cut labor costs. The company stated the dismissals had nothing to do with individual employees job performance but rather were simply designed to replace workers earning top pay rates with new employees who would be hired for less do to the same job. A terminated employee stated in an interview that he was told any employee who earned more than 51 cents above the pay rate established for their job at their stores location would be subject to termination. Terminated employees could reapply for any available positions after 10 weeks. The terminations, along with other cost cutting actions, were expected to save the company $110 million in fiscal year 2008 and $140 million per year starting in fiscal 2009. Management believed the plan would enable Circuit City to compete better with rival firms such as Best Buy and RadioShack. Circuit City reported that sales fell 4.3 percent in the quarter ending May 31, 2007, and sales at stores open at least one year fell 5.6 percent during the same time period. On January 17, 2009, Circuit City Stores Inc. announced plans to close 567 U.S. stores and lay off 34,000 employees. Facing $3.2 billion debt and unable to find a buyer, the company was ordered by a judge to enter involuntary bankruptcy proceedings and immediately liquidate company assets to pay off creditors.

QUESTIONS

1. Discuss your opinion regarding the merits of Circuit Citys labor cost- cutting strategy. How might the strategy affect the following competitive issues: ability to cut prices on goods sold; customer service; and recruitment and retention of retail employees?

2. Circuit City employees were not represented by a labor organization and did not have a collective bargaining contract specifying terms and conditions of employment. How might Circuit Citys labor cost- cutting strategy have been affected if its retail employees were union members in a bargaining unit covered by an existing labor agreement?

3. As a Human Resources Manager of a firm facing immediate closure, what might be some of the tasks you would be expected to perform as part of the closure process?