10 Big Business Blunders
Ego and greed: a common recipe for executive error
Caught off-guard by the remarkable popularity of the Apple II computer, the IBM ers had decided to rush their own version of the PC to market. But instead of building it from scratch, they decided to slap it together with off-the-shelf parts. Gates was happy to oblige with his programming software, but he lacked an operating system, so he referred them to Kildall. His wife, however, sent them packing after refusing to sign IBM's dense nondisclosure form.
That's when Gates & Co. stepped back in. A friend across town also had an operating system called QDOS (for "quick and dirty operating system"). "We just told IBM, 'Look, we'll go and get this operating system from this small local company, we'll take care of it, we'll fix it up, and you can still do a PC,'" Microsoft CEO Steve Balmer explained in the documentary Triumph of the Nerds .
Microsoft purchased unlimited rights to QDOS for $50,000, tweaked it, and sold it to IBM for $80,000. But with one proviso. While IBM would have the right to install it royalty free in as many computers as it wanted, Microsoft would retain the right to sell the renamed MS-DOS to others. "No problem," replied the IBMers, who couldn't imagine who else might want it.
AT&T
Dialing the wrong number
The right choice seemed obvious to Charles Brown. Forced by a trust-busting federal judge in 1982 to jettison either AT&T's regulated local telephone monopoly or its equipment business, the AT&T CEO chose to keep hardware. With the personal computer business taking off and the melding of computers and telecommunications right around the corner, AT&T could leverage its vast resources to dominate the PC market and transform its stodgy image and middling stock price. AT&T Information Systems was soon born, and the company's first IBM-compatible PC, built with Italy's Olivetti, debuted in the summer of 1984.
But the computers weren't fully compatible. Moreover, AT&T's technologists weren't keen on working with outsiders. Over the next five years, the company lost as much as $3 billion. Yet AT&T's fatal attraction for PC s continued as new CEO Robert Allen set his sites on NCR, which AT&T purchased in a 1991 hostile takeover for $7.5 billion, twice what NCR shares sold for before AT&T came calling. But over the next five years, NCR lost nearly $4 billion before being spun off for less than half of what AT&T paid for it in 1991.
In the end, Brown was right about the coming PC wave. But AT&T chiefs made the classic "industry of the future" mistake, says Harvard's Kanter, "They arrogantly leapt into something totally new, thinking their past success in telephones would add up to the same in computers."
Boston Chicken
Laying an egg
Hell hath no fury like a coupon clipper scorned. Or, at least, that's how executives at Boston Market (originally Boston Chicken) first explained why they were having trouble keeping up the momentum at their restaurant chain in 1997. When management attempted to wean penny-pinching customers off a popular coupon promotion, they ran to the nearest KFC. For a company that touted itself as the next McDonald's for its "home-meal-replacement" strategy of putting a rotisserie chicken in every pot, the flattening sales led to its stock's falling more than 82 percent from its $41.50 high at the end of 1996. Shareholder lawsuits accused the company of hiding more than $750 million in losses incurred by its franchisees, which had borrowed up to 80 percent of their start-up costs from the company. Though most franchisees were losing money as the chain grew to more than 1,100 stores, the company showed a profit, partly by booking the loan repayments as income. In a move similar to those later detected at Enron and elsewhere, "they adopted a financing strategy to keep start-up costs off their balance sheet," says Dartmouth's Sydney Finkelstein, who interviewed company executives for his book Why Smart Executives Fail and What You Can Learn From Their Mistakes. Instead of Boston Market's becoming the next McDonald's, McDonald's became the next Boston Market, purchasing the by-then-bankrupt company for a pittance in 2000. How's that for eating crow?
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