Breathtaking blunders! Stunning miscalculations! Half-witted strategy! Derive pleasure from other people's foolish—and extremely costly—mistakes.

 

25

David Caruso Leaves NYPD Blue:
“I’m Ready for My Close-up”

If you don’t think making the transition from TV stardom to movie stardom is a tricky business, just ask Shelley Long where she keeps her Oscars. That said, few attempts have demonstrated more shortsightedness and less business acumen than Caruso’s 1994 decision to leave the critically acclaimed NYPD Blue for Hollywood after a single season. When his reported $100,000-per-episode salary demand was rejected by ABC, Caruso walked. And for what? Two 1995 crapfests, Jade and Kiss of Death, which grossed about eight bucks at the box office. Caruso’s story makes a neat fable about career myopia and opportunity cost: With the continued success of Blue, Caruso could have built enduring brand equity (see Friends) and grown into his salary demands (see Matt LeBlanc’s $750,000-per-episode paycheck). Instead, he lost half a decade of productivity, and we were left staring at Dennis Franz’s naked backside.

24
La Choy Orders Up Egg Rolls:
Enjoy Our New Giant Frozen Sodium Grenades

Though it didn’t lead to a massive corporate disaster, La Choy’s poorly planned 1988 foray into the giant egg roll business conclusively illustrates how not to market a new product. “The egg rolls were introduced as part of this ‘Fresh and Lite’ concept,” says Syd Finkelstein, a professor of strategy and management at Dartmouth’s Tuck School of Business, who’s working on a book about corporate blunders, “but ‘Fresh and Lite’ sounds like some kind of hygiene item, not dinner.” What’s more, “they weren’t fresh, they were frozen,” he says of the oilcan-size egg rolls. “And they certainly weren’t light—these things were enormous.”

23
The States Ratify the 18th Amendment:
They Had to Be Crocked

Consider this recipe for idiocy: Start with 13 years of lost tax revenue. Stir in gigantic law enforcement costs, massive police corruption, overstuffed prisons, increasingly lethal forms of hooch, and a twist of organized crime. We call it Prohibition.

22
Heaven’s Gate Opens:
Yesterday’s Waterworld

United Artists greenlights Michael Cimino’s 1980 bloated four-hour western, with its then-unheard-of $44 million budget. The film earns a pathetic $1.5 million at the box office, gets torched by critics, and pulled from theaters after three days. In the process, it nearly bankrupts UA.

21
Boston Market Overexpands:
Talk About a Feeding Frenzy

Back in 1993, Boston Chicken (later rechristened Boston Market) seemed the ideal IPO: On the first day of trading, shares doubled in value, to nearly $49. Its “home meal replacement” strategy created a new niche: fast comfort food. It was quick, a little upscale, high-priced but higher quality. In terms of financial engineering, the people running it—CEO Saad Nadhir was the same guy who made Blockbuster so successful—knew exactly how to explode a concept . . . at least on paper. The only trouble was their team didn’t really understand restaurant operations. Just consider Boston Market’s elaborate franchising scheme, whereby local developers borrowed money from the corporation to build outlets rather than raise the capital themselves; when the loans were paid back, the company misleadingly counted the returned money as income. That system gave the company every incentive to overexpand. Then, after the restaurants broadened their menu, lunch sales cut into all-important dinner sales. By 1998, Boston Market was $900 million in debt and its stock was worth less than a buck a share. McDonald’s eventually made a cut-rate buyout, for $173.5 million.

20
Premier Cigarettes Go Up in Flames:
I Wouldn’t Walk Five Feet for This Lousy Smoke

Like the hangover cure or cold fusion, the smokeless cigarette may make someone very rich someday. Until then, consider R.J. Reynolds’s Premier, the Edsel of cigarettes. Launched in 1988, Premier had a carbon tip that was heated rather than ignited; smokers could then inhale warm air seasoned with tobacco “flavor beads” (we don’t know either), which were low in tar and toxins. Within a few months, the product was unceremoniously yanked. No surprise, considering “three-fourths of the people in the taste tests had no interest in this product at all,” says Tuck’s Finkelstein. “When they tested them in Japan and translated the results into English, they said something to the effect of ‘This tastes like shit.’" Most significant, the identity of the product—and its market—was never brought into focus. Was this a cigarette? A cure for smoking? A medication? Would it stay hot when stuck between the tuning pegs of a Stratocaster? No one knew. Total loss: $325 million.

19
The Dinosaurs Go Extinct:
A Grave Misstep by Some Cold-Blooded Characters

One of the primary tenets of business is to expect the unexpected. The former reptilian rulers of the earth dropped the ball big time when they succumbed en masse to extinction. Forget the loss of life—the loss of licensing and royalties from Jurassic Park was the real tragedy. That kind of money buys a lot of skin lotion and heat rocks.

PROFESSOR’S PICK
Chrysler’s Tactless Takeover
“Daimler-Benz’s $38 billion acquisition of Chrysler tops my list. Who would have thought that D-B’s chairman, Jürgen Schrempp, would be able to make the value of an entire company disappear almost overnight? His most notorious feat was to make Chrysler’s top management flee by first promising them they’d be equals and then stripping them of power and running everything from Germany. It’s ironic that now some industry insiders are predicting D-B might itself be a takeover target. New owners might try to unload Chrysler, but who’d want to buy it now that Schrempp has worked it over?”
—Michael B. Metzger, Arthur M. Weimer Professor of Business Administration, Kelley School of Business, Indiana University

18
The Allante Hits the Skids:
Worst of All, It’s a Cadillac

Seeking to change its geriatric image and nab beaucoup yuppie bucks, Cadillac went after the Mercedes market with the sleek, “ultraluxury” Allante in 1987. GM even hired Ferrari godfather Sergio Pininfarina to design the body. But the sporty makeover proved about as sexy as Barbara Bush in a thong. The $55,000 Allantes were leaky, squeaky rattletraps. By the end of ’87, the company had sold fewer than half of a projected 4,000 cars, though the Allante did garner prestigious Flop of the Year honors from Automotive News. The take-away: Mired in groupthink and trying to mimic the quicker-to-market style of Japanese automakers, Cadillac forgot that quality control is more important than timing for a company that prides itself on class and customer service. As such, the Allante stands as a symbol of Cadillac’s decline, from annual sales of roughly 320,000 in the mid ’80s to about 182,000 in the late ’90s.

PROFESSOR’S PICK
HoJo’s Orange Roof Collapses
“Back in 1965, Howard Johnson’s revenues were bigger than those of McDonald’s, Kentucky Fried Chicken, and Burger King combined. But HJ failed to see how much the market and its customers were changing. When the company realized something was wrong, instead of initiating real change, they decided to fake it. They ran ads promising a whole new hotel-and-restaurant chain (‘We are turning HJ upside down’), but really they did only cosmetic work. As a result of management’s inability to change—or even convincingly fake it—the company is now a remnant of its former self.”
—Sandro Formica, assistant professor of marketing, Cornell School of Hotel Management–ESSEC Business School, Cergy-Pontoise, France

17
Schlitz Rejiggers Its Ingredients:
Beer—Why Mess With It?

Through the early ‘70s, Schlitz was, believe it or not, the second-best-selling beer in America. But in 1974, the corporation’s cost-cutting wizards hit upon “accelerated batch fermentation,” pretentious biz-speak nonsense that meant slashing the brewing time by two-thirds and replacing barley malt with corn syrup. It was a textbook case of “Can we increase market position by streamlining and cutting corners, even if we ruin our product in the process?” The new “improved” brew was cloudy, foam-free, and full of chunky yeast flakes. Schlitz’s once venerable brand staggered like a sloppy Marquette freshman on a six-day bender. By 1980, sales had dropped 40 percent, and the stock price had crashed from $69 to $5. Can anyone say “intervention”?

16
Fox Gives Up Star Wars Licensing:
Yes, Sir, That’s My Boba

When George Lucas persuaded 20th Century Fox to make Star Wars, Fox figured it was getting a sweet deal: Lucas agreed to write and direct the film for a paltry $150,000 along with a cut of the profits and, oh, let’s see, the rights to sequels and merchandising. Since the studio didn’t even have a merchandising department, it didn’t blink. Or think. Star Wars then proceeded to rewrite the rules about how movies were marketed. In the end, Fox’s signing off on that one apparently inconsequential contract clause was the equivalent of its handing Lucas a check for about $1 billion.

15
Ford Rolls Out the Edsel:
So Out of Touch with Its Market That It Became Legend

Not even a prime-time CBS promotional special hosted by both Bing Crosby and Frank Sinatra could boost sales of this antiquated two-ton tank. Bad name, bad research, bad design. Just plain bad.

14
Long-Term Capital Management:
Nothing “Long-Term” About It

What do you get when you take some of the most esteemed financial minds of the 20th century—including a couple of Nobel Prize winners in economics—and put them in charge of a hedge fund with roughly $4.8 billion, leveraged 25 to 1? You get an office full of hubris and a debacle that nearly closed the doors of a few prominent Wall Street firms. Led by former Salomon Brothers wunderkind John Meriwether, the partners at Long-Term Capital Management (LTCM) developed a method of trading securities based on historical financial models they believed to be sacrosanct. At first, profits came hand over fist. But the models failed to predict the havoc that was inflicted on the global bond market by Russia’s 1998 debt default. LTCM’s handful of partners personally lost $1.9 billion, according to Roger Lowenstein’s profile of the firm, When Genius Failed. After having more than quadrupled its investors’ capital initially, the firm was finally sold to a Fed-organized consortium of Wall Street banks. “In net terms, the greatest fund ever—surely the one with the highest IQs—had lost more than 77 percent of its capital while the ordinary stock market investor had been more than doubling his money,” writes Lowenstein. The moral: No one can predict the market, and only the biggest fools try.

PROFESSOR’S PICK
Mitsubishi Buys Rockefeller Center
“One of the biggest business miscalculations ever was Mitsubishi’s investment in Rockefeller Group, Inc., owner of New York’s Rockefeller Center. In the late ‘80s, the Japanese company sank more than $1.4 billion into the 12-building complex. Yet large capital improvements were needed, and property revenues were insufficient to support debt service on the mortgage. Mitsubishi anticipated rising rents, but when rents and property values went south, RGI defaulted on its mortgage and handed the property over to creditors. Mitsubishi paid too much for an international trophy property and clearly overlooked the fundamentals.”
—Lynne Sagalyn, professor and Earle W. Kazis and Benjamin Schore Director, MBA real estate program, Columbia University Graduate School of Business

13
AT&T Purchases NCR:
Dial “M” for Total Freakin’ Mess

Judging from recent history, AT&T has no trouble finding ways to lose money. But its 1991 attempt to gain a foothold in the computer industry by acquiring NCR Corp. takes the cake. According to Michael Craig, a former class action lawyer and author of The 50 Best (and Worst) Business Deals of All Time, the company spent almost two years pursuing a hostile takeover—and enduring a barrage of negative publicity—that eventually netted them the computer maker for $110 per share, or $7.4 billion total. (If you’re keeping score at home, that’s a premium of nearly 100 percent over the per share price prior to AT&T expressing interest.) Between 1992 and 1996, NCR lost nearly $4 billion. That’s a lot of cash to learn a lesson every first-year MBA already knows: “Just because a corporation is successful in one area,” Craig says, “doesn’t give it license to enter other areas.” Oh, and the kicker? To help finance the takeover, AT&T sold its 19 percent stake in a little company called Sun Microsystems, which it had acquired for $517 million in the late ‘80s. Even with the tech slide, that stake would still be worth more than $12 billion today.

12
The Red Sox Sell Babe Ruth to the Yankees:
The Curse of the Bambino

Though it’s hard to fathom now, the Boston Red Sox dominated baseball until 1920. Their world championship teams of 1915, ‘16, and ‘18 rode the arm of left-handed pitcher George Herman Ruth, a portly drunkard with a dazzling earned run average. At the end of 1919, when the average salary hovered around $4,000, Ruth asked for 10 large. Cash-strapped Sox owner Harry Frazee, a sketchy character who had a knack for financing Broadway flops, casually made the most boneheaded business decision in sports history: He sold Ruth to the Yankees for $100,000 and a $300,000 loan. The legacy? Ruth became the legendary “Babe Ruth.” The Yankees became the team of the century, winning the pennant in 1921 on their way to 26 world championships. And the Sox, of course, haven’t won a Series since the sale.

PROFESSOR’S PICK
The Einstein Bros. Bagel Invasion
“Five years ago, an Einstein Bros. bagel store opened across the street from the old-style bagel shop where I ate breakfast every morning for years. The two stores promptly split the market. After a year of intense competition, the old-style shop was forced to close. Two months later, citing poor sales over the past year, Einstein Bros. closed its store. They’d won the battle; had they remained, they’d have had the market to themselves and sales would have doubled. Closing the doors not only was a bad business decision, but it’s forced me to make my own breakfast every morning.”
—Michael Trick, associate professor of operations research and president, Carnegie Bosch Institute, Carnegie Mellon

11
Disney Goes Euro:
Thawed Walt to French: “Sorry, This Place Sucks”

The good news: Euro Disney, opened in 1992, is now the most visited tourist destination in Europe. The bad news: The park is more than $2 billion in debt and in the midst of a huge redesign, which may be the financial equivalent of trying to walk off a stroke. Why the Space Mountain–size speed bumps? “You’ve got Michael Eisner trying to expand his presence, fulfill Walt’s dream. But who was thinking about the details?” says Ohio State management professor Paul Nutt, author of the forthcoming Why Decisions Fail: The Blunders and Traps That Lead to Decision Debacles. And the details, as every CEO should know, are critical. “They didn’t factor French culture into the equation,” he says. “Hotels are going to drive the park, but people in Paris made the place a day trip and brought picnic baskets with their own food. That’s why hotel rooms were at 30 percent occupancy and concessions were down. Typical Disney: Their products are incredible, and their business practices suck.” If Disney had done more market research and had less blind trust in the strength of its brand, Euro Disney might have realized its unlimited potential.

10
People Express Flies Too High:
The Sky Was the Limit

There have been larger airline industry fiascoes, but the fate of Newark, New Jersey–based People Express remains the saddest, since the concept was so promising. “They invented the low-fare carrier in 1981—you could go to small northeastern cities for 19 bucks a pop—and there was real fear in the boardrooms of the large airlines,” says Steven Morrison, a professor of economics at Northeastern University who specializes in the economics of air travel. Service was no-frills and generic. So was the company philosophy. People Express chairman and Harvard Business School alum Donald C. Burr used a horizontal management style, making every employee a stockholder and manager. And for a while, business soared. But not content with being the burliest midget on the block, People Express stupidly tried to compete with the big boys, and moved into large cities. Burr bought 50 planes from Braniff (talk about bad juju), and managed to lose $80 million in an ill-advised acquisition of Frontier. By 1986, the corporation was $345 million in the hole; finally, it was absorbed by Continental. The morals here are clear: (1) Too much horizontal leadership can lead to no leadership at all, and (2) never lose sight of your core competency. “You see the lesson in what Southwest does,” says Morrison. “They’re slow and steady, keep to what they do best, and add just two or three new cities a year.”

09
Quaker Oats Buys Snapple:
“The Wrong Thing to Do, the Wrong Way to Do It”

In 1994, stodgy Quaker Oats, a $6 billion company, buys upstart Snapple for $1.7 billion. Snapple bottoms out faster than Robert Downey Jr. at Mardi Gras. In 1997, Quaker unloads Snapple for a wispy $300 million. What the hell were they thinking? Fitness buff and Quaker CEO William Smithburg was legendary for having turned Gatorade into a market-dominating monster. He figured he could do the same with Snapple. Smithburg assumed Snapple and Gatorade had the same market and distribution channels, says Ohio State’s Nutt, “but Snapple was franchised and Gatorade was centralized. There was no synergy between the products. That could have easily been determined in advance, but the board of directors was asleep.” When the board finally woke up, Smithburg found himself without a job.

08
Decca Records Turns Down the Beatles:
“All My Troubles Seemed So Far Away”

After auditioning both bands in 1962, visionary Decca Records A&R man Dick Rowe signs the immortal group Brian Poole and the Tremeloes instead of the Beatles. He tells Beatles manager Brian Epstein: “We don’t like their sound; guitar groups are on their way out.” Oops. It’s exactly the kind of thing that happens when you’re too cautious and playing not to lose: “Assuming neither band would set the world on fire, Decca refused to sign two ‘beat’ groups and go to the trouble of marketing and promoting both,” says Bruce Spizer, lawyer, MBA, and author of The Beatles Story on Capitol Records. Decca wouldn’t take a risk, so it couldn’t win. Rowe kept his job—and later made good by snatching up the Rolling Stones—but Decca was eventually absorbed by Universal. As of the late ‘90s, the Beatles, who signed with giant EMI, were still earning nearly $100 million a year.

07
The Dutch Catch Tulip Fever:
The Old New Economy

It’s not U.S., of course, but it’s an apt metaphor for the Internet flameout. During the 17th century, the lowly tulip inspired the first modern stock-market bubble and took the Dutch economy down in the process. By the 1630s, an individual tulip was going for around 1,000 florins (that’s about $200,000 to you and me). Caught up in the frenzy, the Dutch neglected every other industry; speculation ran so rampant that economists actually pondered the possibility of an entirely tulip-based New Economy: All Dutch currency would be backed by bulbs. Of course, the bulbs burst, leaving the country’s economy in ruins. Are there any worse financial decisions than the ones a society makes collectively?

06
New Coke Fizzles:
If It Ain’t Broke, Break It

The New Coke debacle can be viewed as the triumph of brilliant executives who did their homework and took an intelligent risk . . . or as an example of how corporate idiocy can stigmatize a great brand. By the early ‘80s, Coca-Cola’s market share had dwindled to 23 percent (it was 60 percent at midcentury), because of both soft-drink segmentation and the insurgent Pepsi’s masterful Pepsi Challenge campaign. CEO Roberto Goizueta and anxious president Don Keough gave the go-ahead to tweak the cola’s top-secret formula. After exhaustive research and testing, New Coke was unveiled in April 1985—with disastrous results. What went wrong? “Taste tests couldn’t measure the strength of the brand,” says Ambar Rao, a professor of marketing at Washington University’s Olin School of Business. “In their research, they forgot to include the fact that they would be supplanting original Coke, and you don’t know the strength of a brand until you have people imagine a future without it.” Coca-Cola-addled crackpots flooded the 800 line; Coke became a national joke. A scant three months later, Coca-Cola was reintroduced, only now it was called Coca-Cola Classic. “In doing so, they reaffirmed brand equity and turned a horrific defeat into victory,” says Rao. By the end of 1986, New Coke had gone the way of Corey Hart, while Coke’s shares were at $117, their highest ever.

05
IBM Gives Gates a Birthday Present:
How Big Blue Blew It

In 1981, after a 13-year battle with the Department of Justice over its monopolization of the mainframe computer market, a kinder, gentler IBM embraces Microsoft’s operating system—MS-DOS—but decides not to acquire the exclusive licensing rights. This lack of initiative and foresight allows Microsoft to distribute MS-DOS to IBM’s competitors—which sets the stage for Microsoft’s ascendance and costs IBM billions.

04
Iridium Takes to the Sky:
The Plan That Fell to Earth

It’s 1987. Cell phones are an unreliable novelty. Ambitious Motorola conceives a global telecommunication scheme so grandiose, it could’ve been dreamed up by Howard Hughes in a hermetically sealed hotel room: 72 orbiting satellites (later wisely trimmed to 66) providing phone access anywhere on earth. They called the system Iridium. Now, in 2001, after less than four years in the sky, Iridium is being scrapped. And let’s not forget to mention the cost: a little more than $10 billion. “It’s still a good service if you’re out in the middle of the desert or something, but that’s not much of a customer base,” says Eric Johnson, a professor of business administration at Tuck. “Motorola simply couldn’t keep the costs down. Calls were $5 a minute; the unwieldy phones were thousands of dollars apiece, and had antennas the size of billy clubs.” Also, the units didn’t work well indoors. But the real miscalculation was in the ludicrous 10-year lead time. Someone forgot that technology waits for no one: A long-term, tech-based, infrastructure-intensive project like Iridium was doomed before it ever got off the ground. Just think how far ahead of the field Motorola would be if it had spent that $10 billion here on earth.

03
Jobs Drops the Ball:
Apple Fails to License Its Operating System

The Apple saga proves you can have the better product and the more creative people but neither will matter if your business strategy is awful. Through the mid 1980s, Apple was the undisputed leader in the burgeoning field of personal computers; by the late ‘90s, it was bleeding billions and wasn’t even in the top five. What happened? “Apple came up with the Mac in 1984, and it was years ahead of everything else. They were so arrogant they couldn’t imagine anyone ever catching up,” says Jim Carlton, a Wall Street Journal writer and the author of Apple: The Inside Story of Intrigue, Egomania, and Business Blunders. By being protective and not licensing its product, Apple locked itself in a box. “Now you can buy a cheap PC from hundreds of companies, and you can only buy the more elegant, more expensive Mac from one company,” says Carlton. “Which one is going to appeal to corporate IT directors? The lesson here is to be paranoid, not arrogant. And always open your products to as many markets as possible.”

MUSICIAN’S PICK
The Smoot-Hawley Act
“The Smoot-Hawley Tariff Act [1930 legislation that raised tariffs on foreign imports to 59 percent from 40 percent] was hands down the most destructive piece of protectionist trade legislation ever passed. In my opinion, it’s the reason that World War II and the Cold War happened.”
—Moby, whose 1999 album, Play, has sold 6.5 million copies

02
Xerox and the PC:
It’s Not the Toner, Stupid!

Most business disasters occur when corporations’ eagerness to act outstrips their ability to predict the future (see Iridium). In contrast, Xerox saw the future ... and ignored it. The gearheads at its Palo Alto Research Center not only designed the graphical user interface and the laser printer in the early ‘70s but also invented the PC. “And not just the PC in isolation that you had in the early ‘80s,” says Douglas K. Smith, co-author of Fumbling the Future: How Xerox Invented, Then Ignored, the First Personal Computer. “It was the network of computers. It was 90 percent of what we experience today.” But stolid Xerox had already blown nearly $1 billion on SDS, a small computer company that had faltered; and besides, Xerox made copiers. “Their manufacturers didn’t know how to produce it; their salespeople didn’t know how to sell it,” says Smith. “They were finance driven, focused on profits, profits, profits. Maybe this stuff would’ve been profitable in the future, but you couldn’t think about it on a quarterly basis.” As we watch Xerox teeter because of its inability to embrace change, the lesson here is obvious: If you’re going to do research and development, you’d better have strategies in place for moving on your discoveries. “If you don’t,” says Smith, “you might as well just skip the R&D.”

01
The South Secedes:
War ... What Is It Good For?

The South’s secession is the single stupidest, costliest business decision in American history: a dreamy-eyed attempt to preserve a feudal, agricultural, morally bankrupt, slave-based economy against the juggernaut of industrial capitalism. Glaring ethical issues aside for the moment, it’s a parable about how not to react to new economic realities. The North had more than 100,000 factories—compared with the South’s 20,600—not to mention industrial production of $1.5 billion, nearly 10 times that of the woefully undercapitalized Confederacy. The Southern war machine should have known that it would be impossible to catch up. In Gone with the Wind, Rhett Butler summed it up pretty succinctly: “The Yankees are better equipped than we. They’ve got factories, shipyards, coal mines, and a fleet to bottle up our harbors and starve us to death.” The cost: more than 620,000 lives, billions of dollars, and the nauseating burden of endless Civil War reenactments.