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Dynamic Capability in Action:

Why RadioShack Failed

By David Silverman

ABSTRACT

This case study leverages dynamic capability theory to propose a framework that explains the demise of RadioShack. Once an electronic retailing powerhouse, this company went bankrupt in 2015 after years of stagnation and slowdown. Dynamic capability theory has been applied to analyze how firms “integrate, reconfigure, gain and release resources—to match and even create market change. (Eisenhardt and Martin 2000)” A lack of these capabilities can prevent firms from surviving in competitive and evolving markets, such as the electronics retailing industry, as was the case with RadioShack. From our study we have concluded that an erosion of manufacturing, financial, and managerial resources; combined with a failure to generate competitive advantage in new markets left the company in a position that made it impossible for it to survive as the electronics retail environment rapidly changed throughout the 21st century.

Keywords: RadioShack, dynamic capability theory, capability upgrading

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BRIEF HISTORY

The question of what makes companies succeed or fail has challenged managers and investors since the dawn of organized enterprise. Companies that once dominated their industry go defunct and ultimately end up bankrupt, replaced by a once diminutively sized startups, catapulted to prominence due to market developments or the creation of breakthrough technologies. This process dubbed “creative destruction” by Schumpeter drives the market forward and lays the foundation for the analysis we will conduct (Howitt and Aghion 1992). This study focuses on the tragic story of RadioShack, a company that rose to prominence on the back of growing usage of consumer electronics; but later succumbed to the development of e-commerce and the evolution of the electronics market in a way that eliminated the products that it sold.

FOUNDING RadioShack was founded in 1921 by two brothers in order to supply radio equipment. The

name “RadioShack” came from the part of a ship that house the machinery needed for sending out and receiving radio transmissions. The company expanded its operations, however due to poor management it almost went bankrupt and was acquired by Charles D. Tandy in 1963. He took over the company and subsumed it into the general Tandy Corporation brand (Bois 2015). It would not be until later that it was renamed “RadioShack”. Tandy implemented management level changes. He pioneered multiple components of the RadioShack business model that we will later single out and identify as being crucial to success of the franchise.

Expanding into the broader market of Citizen Band radio gave RadioShack its first major growth market. The meteoric rise of this product segment created substantial opportunities for the company to grow and expand its operations to new customers. RadioShack previously held a very strong but narrow appeal to customers in the DIY market (The Handbook of Texas No Date). These were experimenters and kit builders who would bring in their electronic equipment for testing and buy replacement parts to install themselves. Citizens Band brought in new customers that were less technically sophisticated and who would purchase high value equipment in order to get onto the air.

Personal computing had not yet become a household phrase, but that did not stop Tandy from launching a variety of parallel development projects with the hope that some would be successful. Unfortunately, he would not live to see his vision come to fruition (Farman 1993). In 1978 Tandy passed away from a heart attack at age 60, causing his company to enter a period of drift absent a larger strategy.

RISE OF THE COMPANY The company was taken over by Philip North, a high ranking executive in the company

and friend of Tandy. North was not a technical expert, but he leveraged the talents of John Roach who would ultimately become the CEO and chairman of RadioShack soon thereafter. Roach had studied physics and mathematics as an undergraduate, and he foresaw the importance of the microprocessor and the microcomputer (Texas Christian University No Date). Roach had directed

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Tandy to enter the computer market while Tandy was at the helm. Now the CEO, Roach made every effort to win the personal computing race.

Roach implemented multiple changes within the company to make this possible. He reduced reliance on internally sourced software and introduced computers that were IBM-compatible. The hardware was still internally sourced, which allowed profits to remain high. Specialized RadioShack Computer Centers were established to differentiate the brand and have stores only focused on computer sales. Roach also spent money on research and development to ensure that the company would not be left behind by new developments in the field. RadioShack also acquired companies that build hard drives and microprocessors to further bolster this capacity. This kept manufacturing know-how in house and allowed the company to continue internally sourcing components.

Roach also orchestrated a continued expansion into generic retail, further moving away from the private label branding of the company. Newly established electronic equipment chain stores sold all types of non-RadioShack branded equipment. The company started to become a victim of its own success, as the radio outlet stores that served as the foundation of the marketing strategy were pushed to the periphery. More focus was directed towards large superstores that were owned by Tandy Corporation. Roach founded Computer City, a chain of superstores that offered all brands of computer hardware and software. He also started Incredible Universe, a massive mini-mall setup with millions of dollars in inventory and thousands of products. As one might expect, this expansion was not cheap to conduct. Tandy Corporation restructured its operations to facilitate this move, and sold its existing asserts to finance the operation.

Starting in 1991, the components of the company responsible for the manufacture of computer hardware, memory tapes and software were all sold off for cash and notes. This methodology of selling off assets continued into 1993, as RadioShack sold off more divisions and factories that made TV antennas, wires, cables, audio tapes, video tapes and other crucial products. These expansions were extremely expensive and tapped out many of the financial resources acquired from divesting assets. This transformation was in very successful in the short run. Stores owned by Tandy Corporation became two of the biggest home appliance and electronics retailers in the southern United States.

Unfortunately, this strategy faced many difficulties in the market. Competition from rivals like Best Buy and Circuit City was well as general retailers like Kmart and Wal-Mart forced many of these chains to close down. Tandy Corporation shuttered down many of its retail chains, as well as the entire Incredible Universe chain. As this occurred, new leadership tried to revitalize the original business in RadioShack. Leonard Roberts became CEO in 1995 and began forming alliances within the electronics industry. Sprint and RadioShack teamed up, and Sprint began offering services within RadioShack outlets. This store within a store concept was extended to Compaq to create exclusive "Compaq Creative Learning Centers" in RadioShack stores (Forest 1996). Roberts eventually became CEO of the company in 1998 due to his success with revitalizing the RadioShack brand. More partnerships with companies like Thomson Multimedia to sell televisions, VCRs, camcorders, DVD players and audio products as well as Microsoft to sell internet services continued to drive forward revenue. RadioShack launched an e-commerce site in 1999, and re-branded to RadioShack Corporation in 2000 to culminate its refocusing on the RadioShack core business.

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DECLINE RadioShack continued its transformation as it moved into the 21st century. The company

pursued its “store-within-a-store” concept as and non-house brand products for distribution. The company also discontinued the distribution of its catalogue in 2003, bringing an end to a practice much adored by the customer base. A new initiative called “Fix 1500” was implemented to correct company issues. The program placed the lowest 1500 store managers into a re-training program to boost sales. Managers were given 90 days to improve their performance, and many were terminated or demoted. During this program the company was the target of a class-action lawsuit claiming the company forced employees to work long hours without overtime pay. A settlement was reached, however it created a plentitude of negative publicity for the company. Eventually the Fix 1500 program was discarded, but not after it had inflicted substantial harm on company morale. In this time period RadioShack also terminated its employee stock purchase plan, further removing motivation for employees to perform.

In 2005 RadioShack appointed a new CEO, David Edmondson. Under his guidance RadioShack expanded its partnership with different phone companies, following the “store-within-a-store” concept that was pioneered with RCA products by Edmondson. RadioShack began a campaign to rebrand itself more strongly into the mobile phone space. In a bizarre turn of events the CEO David Edmondson admitted to lying on his resume in early 2006 and resigned (Norris 2006). The COO Claire Babrowski took over for a brief period to handle operations in the interim. She launched a strategy to increase sales while driving down overhead. Babrowski vacated the position quickly to work at Toys “R” Us.

A new CEO, Julian C. Day was appointed after her resignation in that same year. The changes he made involved the closing of 500 stores and a downsizing of the company headquarters. Many employees received an email that they had been fired, causing many to feel it was insensitive to the workers of the company (Weiss 2006). In 2009, RadioShack conducting a marketing strategy branding itself as “The Shack.” The goal of this was to boost the sale of mobile products, but unfortunately it ate away at the core business of selling electronics components (Schnurman 2011). Following this rebranding RadioShack continued to sign more contracts with mobile phone distributors. They entered the no-contract market with a litany of phone companies, further amplifying their push towards mobile sales (Zmuda 2009). Employees were also encouraged to sell Dish Network subscriptions and add-on packages to further boost revenues. Despite these measures, performance failed to improve and Day stepped down in May of 2011.

BANKRUPTCY In what seemed to be a familiar pattern, RadioShack CFO James Gooch succeeded him,

but he stepped down in early 2013 following poor stock performance. He was followed by Dorvin D. Lively, who stepped in to fill the top spot in the interim until another executive could be found (The New York Times 2012). Eventually Joseph Magnacca took charge in 2013, he had worked to turn around Walgreens and the board expected a similar performance for RadioShack. Unfortunately this was not the case for RadioShack (Burritt, RadioShack’s New CEO Faces Challenge as Profit Slides 2013). In 2013 it received capital from Salus Capital Partners and

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Cerebus Capital Management. These loans contained provisions that restructured future refinancing and limited store closures. As a consequence of this RadioShack was unable to close stores that were bleeding cash and dragging down the bottom line. As time progressed their debt received lower and lower bond ratings and the company was losing cash daily. At the start of 2015 RadioShack delayed rent payments and was delisted from the New York Stock Exchange (Parrish 2015). The chain then filed for bankruptcy to dislodge the restrictions on store closures, and promptly worked to close its stores. At the beginning of April 2015, the fund Standard General acquired 1,743 RadioShack locations and established a partnership with Sprint to sell phones through them. RadioShack has now re-launched as a Sprint storefront, and new management says that they are entirely distinct from the previous RadioShack entity.

COMPETITIVE LANDSCAPE

RadioShack conducted operations in the retail consumer electronics marketplace. In this industry there is substantial competition for market share, especially due to the non-differentiated nature of products being sold. RadioShack competes with a variety of entities such as big-box stores, large specialty retailers, discount retailers, warehouse retailers and internet retailers. Its phone business specifically competes with the retail presence of other wireless service providers. Many of these competitors are larger than RadioShack and have a larger market presence, giving them a competitive advantage. It is within this competitive landscape that RadioShack had to eke out a competitive advantage (RadioShack Corporation 2014).

NATURE OF RETAILING From a general perspective retailers make their profit by taking products sold at

wholesale and breaking them down for sale to smaller consumers. They charge a retail margin on top of this in exchange for the services they provide the end consumer with. These retailers deliver the product to consumers and provide them with the information needed to make an informed purchase decision. Retailers can generate massive profits if they are successful. Consumers need retail outlets to get the products that they desire most. In an area as hot as electronics there is substantial profit to be made connecting consumer desires with industry supply. The products being sold are often very trend based, and thus retailers can make large profits by positioning the correct inventory in their stores.

SOURCES OF COMPETITION As one might expect, large profits draw in competing firms. RadioShack has had to

compete with many other retailers. Big-box stores likes Best Buy, Target, etc. have the advantage of utilizing a larger store space to house more products under one roof. This allows them to create cost savings by diluting away some of the fixed costs needed to operate a store. RadioShack needs to incur these increased fixed real estate costs with each store that they open. The business model behind RadioShack requires many stores having a substantial negative impact on the bottom line. When selling small electronic components this approach made sense. However,

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selling products that use substantial displays can utilized almost all of the prime space within a smaller RadioShack store. Big-box stores can also retailer larger electronics components like televisions, appliances and speaker kits. The small size of RadioShack stores precluded the sale of these items, something that had substantially grown over the past decades.

The development of e-commerce sites, Amazon being a primary example, has also challenged the entire retail sector. Consumers can access a dizzying array of products while sitting at home in their pajamas. Information of these products abounds in the reviews on the retailer website and throughout informational website throughout the internet. Upgrades in shipping speed have made buying on-line almost as quickly as buying in person. The crucial punchline here is that buying online is often substantially cheaper because the retailing margin discussed above is sliced out. Even the specialty components carried by RadioShack such as the batteries and electronic equipment can be purchased online for a far lower price. Consumers don’t even need to leave their house, as these products can easily be shipped anywhere around the United States. The end result of these two countervailing forces was that RadioShack was crushed in the middle. They lacked the scale and size to retail big items that are hard to ship or need to be seen in person to be purchased. Household appliances, stereo equipment, and televisions are goods that consumers usually want to examine in person before purchase. RadioShack had stores that were too diminutive in size to stock these products. The other side of the spectrum featured small components like batteries and electronic components that could easily be ordered online. Since RadioShack had eliminated its manufacturing functions they were essentially marketing the same products available online, albeit with a markup to cover the expense of the retail store. Thus RadioShack was trapped in a rapidly shrinking middle, forced to sell middle sized tech goods such as mobile phones, networking equipment, electronic toys and small audio equipment.

DYNAMIC CAPABILITY THEORY This case study uses the analysis outlined in Dynamic Capability Theory, a strategic

management perspective designed to address corporate competitiveness in the high velocity technology sector (Teece, Pisano and Shuen 1997). This theory emphasizes the examination of the intrinsic capabilities that a firm has and how they are used to generate competitive advantage. Essential elements of this theory relate to the capacity of organizations to reconfigure and leverage existing sets of resources in the face of rapid technological change. These resources often consist of processes that integrate, reconfigure, gain and release resources to adapt to market change (Eisenhardt and Martin 2000). It is our belief that this theory can be effective at explaining why certain companies have been able to survive and innovate in modern market conditions and while other companies have not.

Utilizing this theory we have comprised a model explaining how the dynamic capabilities RadioShack once had were eroded away, leading to its collapse. The company developed a strong basis of manufacturing and R & D functions. In order to fund the development of more retailing capacity these assets were sold, depleting the unique capability of RadioShack to source its own products. This retail expansion failed, and RadioShack was trapped without its manufacturing assets or an increased retail presence. The company moved into selling mobile phones, however shrinking profits in that industry coupled with the rise of e-commerce caused the company to

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stagnate. As a last effort management accepted emergency funding from creditors, a move that surrendered too much control to these lenders, and ultimately caused RadioShack to default on these loans.

EROSION OF ORIGINAL CAPABILITIES When we apply the theory of Dynamic Capability to RadioShack we can see the

capabilities that made RadioShack successful had unfortunately eroded away over time. Research and development is an essential component of developing competitive advantage within a company. The ability to develop new technologies that are not available in the market is one the most important bases from which a company can generate competitive advantage. These technological capabilities can give firms the ability to extract monopoly like rents from ownership of this valuable intellectual capital. Tandy established manufacturing functions that made this possible. Eventually Tandy Corporation would manufacture about half of the goods sold in RadioShack stores. Manufacturing plants in North America and overseas would produce electronic wire and compute components under the "Realistic" brand name (Reference for Business No Date). This was a crucial internal capability for the company. This allowed RadioShack to provide internally sources components at a higher markup. It also made it more difficult for competitors to copy its specially designed components and was thus useful to lock in a competitive advantage for the company.

Tandy also worked to strengthen the brand image of the company with aggressive marketing. Items were utilized as loss leaders, designed to bring in customers to generate revenue from the sale of other products. Testing of electronic equipment and free batteries drew customers in the store to motivate the consumption of other products. Advertising proclaimed an endless stream of "super sales" designed to draw in business. This high volume of advertising worked in tandem with a culture of entrepreneurship that heavily compensated employees for performance. Bonuses were many multiples of the base salary and were based on a percentage of the profits that each employee helped to generate. This helped to increase customer loyalty to the store and drive repeat business. Developing this strong base of loyal RadioShack customers was one of the most valuable assets to the company, as their repeat business continued to drive sales.

Unfortunately, these organizational competencies started to dissolve after Tandy passed away. The internal manufacturing functions that allowed the development of private label brands were divested and the budget allocated to research and development was reduced. This money spent on aggressively branding the company was curtailed and reallocated to fund an expansion into electronics retailing. Instead of continuing to spend money in creating research and development capabilities that helped grow margins, these capabilities were scrapped to finance the construction of big box stores. It was these capabilities that originally made it possible for Tandy Corporation to design the computers that were able to compete at a world class level and provide them with substantial market share in the 1980s and early 1990s. After internal research and development was abandoned with the expansion into the Incredible Universe and Computer City stores Focus was shifted towards selling third party brands that were readily available from competing firms. These brands did not carry a high margin for RadioShack and created no

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competitive advantage that they could defend from other firms. Given the lack of any specific know-how or valuable internal processes, it is unsurprising that RadioShack entered a period of decline and had to begin sacrificing its financial resources and internal control to outside creditors to stay afloat.

FAILED TRANSITION INTO PURE RETAIL The organization reorientation towards electronics retail was problematic and laid the

seeds for the future destruction of the company. There are retailers that do succeed and do make substantial margins. The issue is that RadioShack stores never developed the competitive advantage to distinguish themselves in the market. These stores suffered from being the jack of all trades yet master of none. Simple products were available from general superstores like Target and Walmart, while more specialized electronics were provided by companies like Best Buy. Selling the manufacturing capabilities prevented these stores from having any advantage in product, and the substantial overhead to maintain some of their extensive facilities made them unnecessarily expensive to maintain.

RadioShack’s originally high margins were buttressed by a “hole in the wall” store concept. Compared to many other stores, RadioShack is relatively diminutive in size. This has enabled the company to conduct its retail distribution while minimizing real estate costs. Reducing real estate costs was important to minimize the profit reducing effect of rent expense that plagues retail stores. Designing the stores in this fashion also allowed Tandy to rapidly expand their presence and effectively penetrate the market by distributing his stores across the nation.

The executives in RadioShack substantially misplayed their cards and expanded into big box stores when the market was declining. They expended substantial resources to develop a stake into large retail stores. The Incredible Universe expansion was a massive misreading of the market. RadioShack was expanding the size of its stores while the market was favoring efficiently sized stores or electronic distribution. Management was trying to break into an over-crowded industry instead of working to develop their full capabilities in the area they already had an understanding of. This expansion was effectively financed by sales of the manufacturing assets and resources that were absolutely keep to the success of the RadioShack distribution network. Selling off these assets to finance the ultimately failed expansion into larger stores left the company without the large stores or the manufacturing assets that made small RadioShack stores a success.

The birth of e-commerce was devastating to this new strategy. Although in its infancy this force would complicate the business model for RadioShack because the specialty and niche components sold by the company could also be found online. This meant that previously rare and unique components only available in store could be purchased online at a lower markup due to a lack of costs associated with renting the retail space and dealing with the other cost overhead associated with stores.

When we consider this it is evident why RadioShack had big problems with their strategy. Just as e-commerce started to grow, RadioShack moved into almost pure play retailing. Aside from their mobile phone business they tried to sell electronic trinkets and electronic components

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to consumers (Shlachter 2014). Anyone could go online and buy the exact same component for a lower price. Given that RadioShack had already sold off its manufacturing functions there was no reason that a RadioShack component was superior to a product sold by any other brand. This just meant that RadioShack was selling you a rebranded product with a retail markup, something you could just as easily purchase online for a lower price without the inconvenience of leaving your house.

INABILITY TO GENERATE NEW COMPETITIVE ADVANTAGE The issue of deployment is essential to the theory of dynamic capability. Companies must

have the sufficient foresight to anticipate opportunities that arise in the market and take advantage of them. After a major blunder that culminated in a failed expansion into big box retailing, RadioShack needed to find a new market. They had lost their manufacturing and R&D capabilities that were the original foundation of their success. This caused the firm to enter new, more easily penetrated markets, which did not have the same revenue potential. This new market involved the sale of mobile phones. There were multitude problems that made mobile phones less than ideal for RadioShack’s business model. What was problematic is that this business model failed to generate any internal competitive advantage that would allow the company to succeed and create lasting revenue potential. These mobile phones took up a lot of the valuable store space at RadioShack. The “hole in the wall” concept was very successful when working with small electronic components. This was not the case for mobile phones with displays that took up substantial amounts of space in the store. They were also sourced by external companies and RadioShack could only make profit by selling a phone with an expensive contract attached to it. Changes in the phone market caused margins on phone retailing to fall over time. Cell phones had become a commodity, and the market has increasingly become dominated by a few companies. This reduced return business as these contracts lasted for multiple years, thus reducing the need of customers to return to the store. The structure of the relationships with these mobile phone companies also disadvantaged RadioShack. They lacked bargaining power over these phone companies and as a consequence were not able to negotiate any special discounts or deals for distribution. This made it impossible for them to generate any unique capabilities associated with selling these phones. Part of the problem here was that a firm needs to initially have resources in order to acquire new ones. At this point in time RadioShack had essentially divested many of its resources and lacked any unique value adding capabilities. As margins in the mobile phone market have continued to shrink RadioShack has been squeezed out of a profit. As they have spent valuable time to develop meager competitive advantage in this field they have sacrificed the ability to generate any meaningful competitive advantage in any other division. RadioShack also failed to anticipate functional changes in the mobile phone market that they had placed almost all of their eggs into. When mobile phones first became relevant there was a massive variety of phones in the market. Consumers would choose from dozens of handset models that all had their nuances and idiosyncrasies. The market now has compressed and many consumers pick from a selection of a few cutting edge models that dominate the market. This has eliminated the niche for RadioShack salespeople, and has made it hard for RadioShack to

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deliver differentiated value. When everyone sells the same Samsung phone there is no reason to prefer RadioShack over any other phone retailer.

The way that RadioShack conducted its strategic pivot to re-center itself after these changes was ultimately a strategic blunder. They moved into the market for wireless phones. Unfortunately, it was not possible to develop a lasting competitive advantage in the phone distribution industry. RadioShack was providing undifferentiated services in selling the phones that other companies made. There were not steps made to develop capabilities that would allow RadioShack to meaningfully differentiate itself from any other company that distributed phones. Selling phones became the last resort for RadioShack, and ultimately the company was forced into bankruptcy.

BREAKDOWN OF MANAGEMENT ROUTINES A complete analysis of dynamic capability would be incomplete without an interrogation

of the behaviors higher level managers engaged in while interacting with their employees. Failure in expanding into phone sales caused management to scramble and behave in a poor fashion. Successfully managing employees can be envisioned as a very important form of dynamic capability. Staying relevant in the face of changing economic conditions requires strong management of employees to leverage their skills and knowledge. When we examine the management style of the individuals at the higher ranks of the company we can see that they were not managing their human capital properly and were instead destroying the organization culture that made RadioShack successful in its infancy.

The “Fix 1500” program is one of the first examples of such a program. There are multiple issues with the design of the program. To start, it essentially assumed that the managers of the store were incompetent and needed to be reformed. Doing this sends a poor message to managers, as it displays a lack of trust in their judgement which would undermine their feeling of power in the organization. A culture of entrepreneurship among RadioShack managers was essential to the success of the organization under Tandy, and was that culture was eliminated with this program. In order to implement this program it also seems that there was a process of overworking employees. This is evidenced by the lawsuit advanced against RadioShack alleged there was unpaid overtime being charged to employees – a practice that is sure to degrade company morale – which is also highly illegal. A plan which allowed employees to own company stock was also scrapped, a move that telegraphed a low level of commitment to employees.

It was on this basis of managerial issues that another problem arose, one that was equally as strange as it was entertaining. CEO David Edmondson was exposed for falsifying information on his resume. He claimed he had attended a small, unaccredited institution on the Pacific coast called Pacific Coast Baptist College. Even this modest claim was untrue, as he did not graduate from this institution. This misrepresentation was brought to light by the Fort Worth Star-Telegram. The newspaper reported inconsistencies in his educational history, sparking an investigation by the RadioShack board. An independent law firm was hired to examine his credentials, and he quickly resigned thereafter (Morrison 2006). One cannot underemphasize the effect that this blunder had on respect for the higher ups of the organization. How can an average worker have respect for their company if at the

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highest level it is discovered that misrepresentation has occurred. This came at the same time as the unpopular changes to the culture above. This created what could be considered a deadly combination, where upper management was eroding tangible support for their employees while subsequently undermining their own credibility. Employees in stores would now respect management’s proposals less, reducing the ability of these managers to repair the failing company and generate profits from its current capabilities. After Edmondson resigned the next CEO continued to create this toxic culture that substantially undermined the faith of employees in the company. Julian C. Day made moves to downsize the company, and in doing so dismissed many employees via email. As one might imagine this reduced employee connection with the managers, and further served to alienate them from top level management. Following these blunders management did improve their treatment of employees but never regenerated the strong level of trust that previously existed (Christmann 2015). RadioShack’s issues became primarily business model related as it entered the last decade of its existence, but the poor treatment of employees left substantial wounds that could not easily be mended by the management of the company.

When we consider this poor treatment of managers and employees we can see that this eroded the culture that Tandy had worked to instill. His style of management encouraged entrepreneurship on the part of store employees and rewarded creativity. Employees had great respect for management and the ability to move through the organization. This was not the case after these poor managerial decisions and scandals.

During the period of decline management repurchased stock to try and prop up the share price. Eventually the market forces pushing the price down became too great, and the buyback and dividend were suspended in 2011 in order to retain what little cash was left. This exhausted resources in the company, and left it in need of more external financing. Moody’s reduced the bond ratings to junk status, making the company unable to access capital at an affordable price (Moody's Investors Service 2012). After being cut off from the capital markets the company had to turn to alternative sources of funding. In an attempt to turn the company around it accepted loans from Salus Capital Partners and Cerebus Capital Management. They provided the company with capital to sustain their operations, but came at the cost of reducing their ability to be nimble and reorganize their strategy (Knowledge@Wharton 2015).

This debt limited store closures to 200 per year, a condition that would make it very hard for the company to conserve cash as its financial resources continued to dwindle. This greatly reduced the ability of management to configure their products to the demands of the market. It was no longer a problem related to the vision of management or their inability to change their business model to suit consumers. It was now the letter of the financial contracts that hamstrung their behavior. In 2014 the company would face the repercussions of engaging in such a restrictive financing arrangement. The management tried to close over 1,000 store locations, a move that was refused by these creditors. These creditors vetoed the move, arguing it would materially erode their ability to collect in case of a Bankruptcy.

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CONCLUSION

If we take a step back and examine the rise and fall of RadioShack we can distill lessons on how to develop a successful company, and how to potentially prevent that company from eroding away and going out of business. Tandy did a fantastic job growing the company from nothing into the largest electronics manufacturer in the world. One of the ways he was able to accomplish this was through the use of vertical integration. This is an economic process that involves owning multiple stages in the product supply chain. Manufacturing private label products and then retailing them in RadioShack stores was efficient at keeping profits within the company instead of surrendering them to manufacturers. This was also very useful at keeping company products competitive with the market. Keeping manufacturing internal helps to prevent competing retailers from emulating your product and stealing your customers.

When we view RadioShack’s corporate path we can see that the major error was made when these facilities were sold. Divesting the manufacturing and research and development assets that RadioShack utilized was absolutely devastating to the business model. This made RadioShack unable to compete with other retailers, as they had no specialized products to market. This divestiture was accompanied by an unsuccessful move into large scale electronics retailing.

The lesson here is stick to what you are good at. RadioShack had the capabilities to sell products in small stores, not in massive supercenters like Incredible Universe. These massive supercenters went against the business model designed by Tandy. A store focused on selling a limited selection of high margin items that were branded with a private label. RadioShack lacked the organizational design and know-how to make these massive supercenters a success. They added on too many expenses to the bottom line; destroying the low overhead, high profit business model that drove RadioShack.

After these supercenters failed RadioShack was forced into new markets in an attempt to generate new competitive advantage. Unfortunately this expansion into mobile phone sales went against another capability of RadioShack, which was its small store size. Stores were small and designed to market items that took up very little space and carried high margins. RadioShack management erred when they used up store space with high volume phone displays. Displays for cellular phones took up crucial store space, and eliminated the benefit enjoyed by the store design. Filling the store with phones eliminated the ability of management to adapt to the market. Instead of having a nimble inventory that was moved off the shelves quickly they were instead selling phones off of clunky displays. Placing priority into the mobile phone market stymied the development of any other capabilities, and left the company unprepared for declines in phone retail margins as well as the consolidation of the mobile phone market.

In an attempt to compensate for the misjudged expansion into phone retail, management destroyed its human capital through mismanagement of their employees. Implementing management retraining programs and forcing employees to work unpaid overtime were all attempts to compensate for a dysfunctional business model set by the executives in the company. As more employees were fired to cut costs a toxic culture took hold of the company.

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This destroyed any remaining ability of management to productively utilize its employees, and substantially curtailed their ability to use their human capital to adapt to market demands.

All of these issues built up as pressure on the company, destroying its worth in public markets. Management tried to increase the stock price with buybacks, however they were unsuccessful and ultimately destroyed the credit rating given to the company by the bond markets. Having lost this crucial capability to borrow capital from the public markets the company was forced to seek external funding to remain solvent. This external funding came at a steep price, and ultimately drove the company into bankruptcy as creditors locked up the ability of management to function and save their ailing firm.

The crucial lesson that can be learned from this is that companies should stick with what they are good at, and certain capabilities are better to retain than to sell. Had RadioShack retained its manufacturing capabilities and not ventured into the uncertain region of large scale retail they would have been far better off. RadioShack had no major experience with large scale electronics retail. Launching the Incredible Universe and other large retail stores brought the company into an area where they had no experience or expertise, and thus it is unsurprising that they failed. This deviation also caused a major misstep for RadioShack, selling their manufacturing capabilities. Even though the company did receive money for the sale, these profits were probably small in comparison to the rents they could have received had they remained in the component manufacturing and distribution business. Exiting this business and selling their internal capabilities made them functionally equivalent to any other retail company. They had lost the special sauce that gave their products value, and would allow them to remain price competitive with other retailers. Sustaining their business model and retaining these manufacturing capabilities would have produced far superior outcomes for RadioShack, and might have allowed them to keep operating into the present day.

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Burritt, Chris. 2013. RadioShack’s New CEO Faces Challenge as Profit Slides. February 7. Accessed May 11, 2016. http://www.bloomberg.com/news/articles/2013-02-07/radioshack-names-walgreen-s-magnacca-as-ceo-after-falling-sales.

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Appendix 1: CEO TIMELINE

CEO Start Date End Date Tenure

Charles D. Tandy 11/15/1963 11/4/1978 14.98 Years

Philip North 11/4/1978 7/1/1981 2.66 Years

John Roach 7/1/1981 12/31/1998 17.51 Years

Leonard H. Roberts 1/1/1999 5/19/2005 6.38 Years

David Edmondson 5/19/2005 2/21/2006 0.76 Years

Claire H. Babrowski 2/21/2006 7/6/2006 0.37 Years

Julian C. Day 7/6/2006 5/16/2011 4.86 Years

James F. Gooch 5/16/2011 9/25/2012 1.36 Years

Dorvin D. Lively 9/25/2012 2/11/2013 0.38 Years

Joseph C. Magnacca 2/11/2013 4/1/2015 2.13 Years

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APPENDIX 2: COMPANY TIMELINE

• Started in 1921 by two brothers

• Company began to grow in the Boston area

• Mismanagement causes credit collection issues leading to insolvency that necesitated intervention

• Charles D. Tandy is approached by business partners to take a stake in the business

• Tandy establishes stake in the business which he eventually grows to complete ownership

• This begins period of change for the company

Founding

1920s-1960s

• Tandy implements a series of changes to boost profitability

• RadioShack focused on gross margin and volume of sales

• Intensive advertising was utilized to drive sales and raidly grow a customer base

• The company developped private label products which facilitate vertical integration and kept a larger share of the profits within the company

• Consumer Band (CB) radio and eletronics components for the do-it-yourself market were major markets

Rise

1960s-1980s

• Tandy suddenly passed away from a heart attack and left the company to his close associates

• They moved the business towards the manufacture of eletronics components for computers

• By dedicating substantial sums towards research and development as well as hiring outside talent RadioShack was able to become the largest consumer eletronics manufactuturer in the world and was a staple in many towns accross the country

Peak

1980s-2000s

• RadioShack executives made a crucial mistep by divesting their manufacturing functions

• This stripped the company of any meaningful competitive advantage and forced them into the less suitable phone retail makret

• Accompanying this was a series of poor choices by management that eroded away at the relationship between the executives of the company and their employees

• The company failed to generate revenue and eventually became insolvent

Decline

2000s-2015