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Circuit City plan: Bold strategy or black eye?

Some management experts are questioning the decision of electronics retailer Circuit City to fire 3,400 sales clerks and replace them with lower-paid workers. The move could have a chilling effect on the company's work force and disrupt customer service.

When U.S. manufacturers want to cut labor costs they often close up shop and head for a Third World country to find cheap labor. But when retailers want to cut costs they don’t have that option because they need stores in American towns if they want to sell to Americans.

Circuit City has found a unique way around this conundrum. On Wednesday officials at the struggling electronics retailer announced they would fire 3,400 of their highest-paid clerks and replace them with workers who will take less money, essentially hoping to find their own bargain-basement work force right here in the good old USA.

It’s all part of a plan to save money and cut costs for the big-box chain, which also reduced sales growth expectations this week. By shutting stores, outsourcing its IT department and cutting 9 percent of its 40,000 store employees, the company hopes to save $110 million in its current fiscal year and $140 million next year, says Circuit City spokesman Jim Babb.

“The essential need we have was to bring expenses of our business into line with current marketplace realities. We acknowledge this is a painful step,” says Babb, referring to the  firings.

Indeed, it’s probably a major ouch for workers who are being pink-slipped not because of their performance but solely because they were making more money than the company deemed appropriate. “These were folks who through no fault of their own were being paid more than what the hourly wage range was in their markets,” Babb explains.

How they ended up earning the above-market wages is a puzzler, because Circuit City’s managers presumably approved the pay levels.

I asked Babb if store managers were just too generous in compensating their workers, and after a long pause he said: “I’ll let you draw your own conclusions.”

Babb would not comment on how much Circuit City workers make or what these new lower-wage employees would be offered.

Circuit City employees who included their salary information on reported making anywhere from $8 to $15 an hour for sales work. The federal minimum wage is $5.15 an hour, although many states require a higher minimum. Congress is moving ahead on a bill that would raise the federal minimum wage to $7.25 an hour over two years.

That leaves Kevin Clark, an assistant professor of management at Villanova School of Business, to ask, “Where will Circuit City find quality workers at a significantly lower wage?”

Circuit City doesn’t seem to be worried.

“We have and continue to pay competitive wages in our stores, and we will find people who take these jobs,” Babb predicts.

David Lewis, president of OperationsInc., a human resources consultancy, agrees that you can always find people to take the jobs, but he believes Circuit City’s move ultimately will weaken the organization. “It will give them short-term gains, but for the long term it’s like shooting yourself in both feet with a howitzer,” he notes.

Most employees who take on a new job hope to someday get a raise, but the message Circuit City is sending, Lewis says, is “don’t progress that much, because eventually you’ll become to expensive and get fired.”

Alas, the cheaper workforce Circuit City seeks may end up coming from among the very people they are now letting go. While all the terminated workers will be given severance packages based on their years of service, they will all have the opportunity to reapply for their same jobs after a 10–week period — presuming they are willing to accept a lower wage, of course.

While many human resource professionals were stunned by Circuit City’s bold announcement, on expert believes the company deserves praise for its candor.

"Circuit City has been very up front about the fact that this is a cost-cutting move in order align its costs more closely with industry averages," said David Urban, professor of marketing at Virginia Commonwealth University in Richmond, where Circuit City is based. "Electronics retailing is a tough business, with a lot of pressure on profit margins. Therefore, the major players in that business have to seek efficiencies wherever they can.”

Not everyone agrees.

Career and human resources expert Roberta Chinsky Matuson doesn’t expect other companies to follow Circuit City’s lead.

“Smart competitors will see this as an opportunity to hire those talented people that Circuit City just let go,” she says "“The guy at Circuit City who came up with this ‘strategy’ should be fired."

Aside from the impact on workers, consumers can expect some customer-service hiccups since many of their higher-wage earners, who probably have more experience, are leaving. “We expect to be able to hire and train good people,” says Babb, “but anytime there’s a major change in our stores there always a chance for some volatility for a while.”

“The move sends a chilling message to other employees and can be expected to have a significant negative effect on the work climate in Circuit City's stores," says Villanova's Clark, noting that Circuit City appears to be terminating sales floor personnel.

"From a strategy perspective, customer-facing sales personnel would appear to be a core resource and potential differentiator for a consumer products retailer," he says. "Especially in an era of rapidly changing and more complex consumer electronics, knowledgeable sales personnel who are perceived by customers as 'experts' can be a source of competitive advantage.”

But for many it all comes down to the best deal. Electronics retailing, like so many businesses, is becoming all about price, adds Urban, the Virginia Commonwealth professor. Consumers, he adds, aren’t fixated on customer service; they want to save $20 on a computer.

Still, there are successful companies that focus on making their workers happy and thus create a better experience for the consumer, says Linda Ford, a corporate culture consultant. “Look at great companies like Southwest Airlines, who understand that happy employees make for happy customers. Companies like these can create a market and then dominate it because the people are invested in the success of the company, not because they can hire cheaper labor than their competitors.”