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In 1998, Fingerhut Company had been a thriving mail order retailer with annual
revenues of $2 billion. It was making a successful transition to electronic commerce.
This venerable catalogue company was rapidly opening Internet Web sites and buying
equity stakes in other on-line retailers. With its expertise in filling and shipping catalogue
orders, Fingerhut successfully marketed its order-fulfillment competency on a contract
basis to other companies, such as eToys and Wal-Mart. Business analysts were
impressed by Fingerhut’s diversification strategy. Fortune magazine declared Fingerhut
one of the “ten companies that get it.” Impressed with the company’s performance,
Federated Department Stores acquired Fingerhut in February 1999 for $1.7 billion.
Federated’s management confidently predicted that the corporation’s overall Internet
sales would reach $2 billion to 3 billion by 2004 with the addition of Fingerhut.
Twenty months after purchasing Fingerhut, Federated discovered that its Internet
sales had only reached $180 million and were not likely to go much higher anytime
soon. Management found that although Fingerhut had an excellent strategy for the
Internet and its catalogue businesses, its implementation of that strategy had been
dismal. Fingerhut’s fulfilment contracts had dropped from 22 to 8 after allegations of
poor service and a very visible dispute with eToys. The company had also mismanaged
its plan to provide additional credit to its catalogue customers. The result was a number
of special charges and layoffs totalling around $400 million in 2000. As a result,
Federated’s stock dropped 35% in value. What went wrong? According to a former
Fingerhut executive, “The infrastructure was always a step-and-a-half behind.”