Mistakes Were Made — Just Not By You

Lessons from the missteps of corporate America offer best practices for innovation.


WHEN BUSINESS LEADERS see another company try something and fail, they likely have one of two reactions. The first is “schadenfreude,” which translated from German means “a pleasure derived from the misfortunes of others.” Not only is schadenfreude not advisable in an ethical sense — bad karma and all that — but it’s not particularly useful either. Instead, credit unions should strive to achieve “wissenschaden” or “knowledge derived from the misfortunes of others.”

Everyday, major corporations and innovative start-ups decide to take a significant wager on a new idea. When it works, fortunes are made and pictures appear on the cover of Fast Company magazine. When it fails —and especially when it fails in a spectacular fashion — these new ideas become the stuff of myth. Here are a few recent examples to pay attention to and learn from so that your credit union can avoid similar pitfalls.

Red Envelope Blues

For a time, Netflix could do no wrong. Founded in 1998 by a multimillionaire upset at the late fees he was charged on his overdue copy of Apollo 13, Netflix introduced Americans to a novel concept — DVD rentals delivered by mail for flat rate (including postage) with no late charges, ever. The enterprise soon grew its library of less than 1,000 titles into hundreds of thousands of movies, television shows, and special events and its original payper- rental model was joined (and eventually eliminated) by a tiered monthly subscription model.

The impact of this company would be felt across the business world. At its apex, Netflix was spending almost $600 million annually on postage, a position that resulted in those ubiquitous red envelopes receiving preferential hand-processing by the United States Postal Service, according to MSN.com. Meanwhile Blockbuster, once the primary player in the home movie rental arena, wound up in bankruptcy and closed hundreds of stores. Movie and television studios began to line up to offer Netflix distribution rights and the company even began producing original content.

Given their tech-savvy roots, it is no surprise that Netflix was also at the forefront of streaming media content. Originally offered as a bonus, subscribers could access up to one hour of streaming content each month per dollar spent (i.e., a $16.99 subscription yielded 17 hours of streaming content). Netflix eventually offered customers the option to pay a higher subscription cost to get unlimited streaming content. Americans had just begun to fall in love with all kinds of new mobile and personal computing devices, and before long Netflix streaming media was accounting for approximately one-third of North American web traffic, according to Sandvine.com.


In September 2011, Netflix announced that it would be transitioning exclusively into the streaming media business. The girl that had originally brought consumers to the dance — DVD rentals by mail — was going to be spun off into a separate business entity called Qwikster, which would have its own website and own subscription model. While the subscription prices would remain similar, consumers would have two accounts on two separate websites to manage — Netflix for streaming content and Qwikster for DVD rentals.

As a result, America lost its mind. The blog post announcement of the change by founder Reed Hastings received 23,000 comments — an overwhelming majority of them negative— in just a few short days. The company was accused of reaching deeper into consumer wallets in the wake of recent subscription increases (and in the midst of the Great Recession). The prospect of having to create brand new accounts led many to cancel their subscription entirely. Twitter and Facebook were filled with people taking the company to task or making fun of the new company’s name.

Hastings and Netflix backpedaled quickly. In less than a month, Hastings posted another blog centered on a simple message:

It is clear that for many of our members two websites would make things more difficult, so we are going to keep Netflix as one place to go for streaming and DVDs. This means no change: one website, one account, one password… in other words, no Qwikster.


Change is often hard, but it is especially difficult when you have an invested, communication- savvy consumer base. Hastings and Netflix underestimated the passion customers had for their business model. While many agreed Netflix had sound business reasons for its decision, the company failed to communicate these reasons effectively. Moreover, the so-called new opportunity it offered consumers came with additional costs and hardships that did not justify continuing the relationship. In a sense, Netflix created its own internal transaction friction.

No one doubts that Netflix will eventually get out of the DVD rental business. But when that time comes, they’ll surely do it in a more efficient, savvy, and consumer-friendly way than their first attempt.

Looking Forward, But Forgetting The Past

One of my fondest childhood memories was the annual arrival of the J.C. Penney’s Christmas catalog. I would skip right to the toy section, then sit with my Crayola magic marker and circle everything I wanted Santa Claus to leave for me under the tree. I would dog ear the pages, and leave the catalog open and located in a conspicuous location — however, this strategy rarely worked.

James Cash Penney got into the retail business at the turn of the 20th century, starting with a few general purpose merchandise marts typically located in downtown areas. The enterprise quickly grew from 34 stores in 1912 to roughly 1,000 stores by 1928.

This expansion allowed the company to purchase and develop many internal store brands including the aforementioned catalog, which was first launched in 1963. The company also expanded the definition of a department store by creating full-fledged shopping centers, where customers could buy clothing, household items, appliances, and auto supplies.

As consumer centers moved away from downtown retail areas in favor of cheap and plentiful land in the suburbs, J.C. Penney led the charge. They opened large anchor stores in shopping malls across the nation, acquiring and dropping a variety of other retail offerings (including corner drug stores and automotive centers) along the way.

Despite its position as an American retail leader for almost 100 years, new giants eventually arose take a big chunk out of J.C. Penney’s marketplace. Wal-Mart (founded by former J.C. Penney employee Sam Walton) and Target climbed their way to the top of the mountain through their respective strategies of rock-bottom pricing and savvy/chic shopper marketing. As shopping malls struggled to stay open, the company was often forced into outdoor shopping megaplexes, sharing highway signage with the same stores that were eroding its customer base.


In June 2011, Ron Johnson was announced as the new CEO of J.C. Penney’s. Johnson had previously been credited for much of Target’s rise in the marketplace and was instrumental in the creation of the super successful Apple stores.

Johnson’s ideas for his new company were big and bold. First, individual departments were to be replaced with small boutiques — each with their own design and staff uniforms — and the emphasis was shifted to high-end brands rather than the private labels the company had spent the last century developing. J.C. Penney even bought a considerable share of lifestyle maven Martha Stewart’s company so as to include her products in their own boutiques.

Secondly, J.C. Penney eliminated the longtime concept of weekly sales specials. A convoluted three-tier pricing structure was introduced — “Everyday” pricing reflecting what used to be sale prices, “Monthly Value” items with special pricing for a 30-day period, and a so-called “Best Price” which was limited to specific items on the first and third Fridays of each month (i.e., the typical paydays for consumers).

Value conscious shoppers were appalled. They did not come to J.C. Penney to buy a $60 Martha Stewart Living mixing bowl. They came to get all the kids’ back-to-school clothes in one fell swoop. They counted on weekly savings flyers or coupons to help stretch their paychecks. If J.C. Penney wasn’t going to help them do that, it was just as easy to visit another store up the street.

Ron Johnson’s tenure as CEO lasted less than two years. One of his final contributions — before being replaced by his original predecessor Mike Ullman — was an aggressive media and social media mea culpa tour that stated:

“Recently JCPenney changed. Some changes you liked, some you didn’t. What matters with mistakes is what we learned. Come back to JCPenney, we heard you.”


It is tempting to hire a turnaround artist to try and save a sinking ship. However, it’s important to make sure that this individual understands your culture, your consumers, and your brand. Johnson tried to use the same tricks he used at Target and Apple at J.C. Penney. In doing so he wound up damaging the company brand, misunderstanding consumer wants, and alienating core customers. When J.C. Penney became unrecognizable, their shoppers went elsewhere.

The company has since returned to weekly sales and is pumping the brakes on their boutique concept. They are trying to resurrect their image by emphasizing the values that built the company. Customers are returning, but it’s still too soon to determine the full toll of Johnson’s “JCP” experiment.


July 15, 2013



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