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03/29/2007

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That's what you get for firing your experienced domestic comment processing team and outsourcing the work to India.

[Circuit City]can choose to either wage war based on costs -- slashing their margins to the bone and decreasing the shareholders ROI -- or they can try to add value with service so that people will pay something of a premium to shop at Circuit City. Cutting experienced for low-cost employees seems to indicate which way they're choosing to go, and their margins will suffer appropriately.

Where to begin?

Reducing wage costs by itself will increase rather than decrease a company's margins. Wages are part of operating expenses. If operating expenses fall and prices remain constant, margins increase.

You are assuming that decreased wages will not only be accompanied by falling prices, but by price cuts greater than the decrease in wages paid. Why you assume this I don't know. It's certainly not an assumption based upon any recognized economic principle.

However, let's assume that your model proves correct. A low price / low margin business model isn't synonymous with failure. Indeed, it can result in substantial profits -- just ask the folks in Bentonville, Arkansas.

Furthermore, you model assumes that enhanced services can be provided at no increased cost. If that's so, it's actually an argument for, rather than against, firing the higher compensated incumbants.

If service oriented workers cost more, then Circuit City must set prices higher than it otherwise would in order to maintain its margins. If, on the other hand, service oriented workers don't cost more, what in the hell was Circuit City getting in exchange for its higher wages?

As for the assertion that there are "lots of people" willing to pay $50 more for a fridge in order to keep Circuit City employees in high cotton, perhaps lot's of people would say that to pollsters. I'm dubious, however, that those polls tell us much about how folks will actually behave when it comes time to whip out their wallets.

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