Pittsburgh, Pennsylvania
December 10, 2008

Mr. Thomas Stewart, Editor
Harvard Business Review
60 Harvard Way
Boston, MA 02163

Re: “Seven Ways to Fail Big,” Harvard Business Review, Sept. 2008

Dear Mr. Stewart:

I want to call your attention to the errors and inaccuracies set forth in the above referenced article as well as the unfounded and misleading attack upon the honesty and integrity of the many former employees of the G. C. Murphy Company.

The article purportedly addresses the “most inexcusable business failures of the past 25 years” and the accompanying summary of examples includes the following statements:

“Ames Department Stores acquired discount chain G. C. Murphy, which had no inventory checking system. Disgruntled Murphy employees reputedly stole goods off delivery trucks, then logged complete shipments into stores. Ames lost $ 20 million in merchandise.

These statements are not completely accurate and leave the HBR reader with a very misleading conclusion. At the time of the acquisition of Murphy’s by Ames, in 1985, Murphy’s had effective inventory control systems in place for all of its’ stores and warehouses as well as periodic physical inventory counts and reconciliations to the financial records. However, these inventory control systems were immediately cancelled by Ames upon its acquisition of Murphy.

Furthermore, the $20 million loss occurred in 1987, two years after the acquisition and was spread throughout all of Ames stores, not just the former Murphy stores. Additionally, by that time Ames had established their own merchandise mix as well as their own systems of inventory control, and nearly all of the Murphy employees, previously responsible for these functions, had been released or had resigned as a consequence of the acquisition.

The juxtaposition of the last sentence in this summary is particularly misleading as its intent seems to be to leave the HBR reader with the unjustified and incorrect conclusion that theft by Murphy employees was the underlying reason for the $ 20 million loss. This simply is not true and is grossly unfair to the approximately 19,000 former Murphy employees.

In the body of the article, the authors, Paul B. Carroll and Chuka Mui, again state that:

“Disgruntled Murphy employees were reportedly stealing goods off delivery trucks and then logging in complete shipments into stores” and make the further statement that “shrinkage is industry speak for theft.”

The purpose and juxtaposition of these two statements is clearly an attempt to support the incorrect conclusion of the authors that the $ 20 million inventory loss, or shrinkage was directly attributable to theft by Murphy employees.

In this regard, extensive subsequent investigation by Ames of the $ 20 million inventory loss never pinpointed theft or any other specific source as being the major cause of the loss. Although some people, such as the authors, may think that shrinkage is industry speak for theft, this is not really true.

A much better definition of shrinkage can be found in the fifth edition of Retail Accounting and Financial Control, published by John Wiley & Sons. This definition makes it clear that shrinkage ordinarily represents an aggregate of recordkeeping errors and actual physical losses and that shrinkage can result from many factors other than theft.

Some of the more common factors which cause shrinkage, as discussed in this book, include breakage, defects, spoilage, erroneous inventory counts, lost, misplaced or inaccurate documents, price change errors, cash register errors, fraudulent refunds, merchandise returns and inventory liquidation and disposition issues as well as theft by customers, vendors and employees.

In this regard it should be noted that, immediately after the acquisition of Murphy, Ames implemented their own loss prevention and operating procedures throughout the former Murphy stores. They also transferred large inventory quantities and conducted extensive inventory reduction sales as they attempted to quickly put their own inventory mix and operating practices into the former Murphy stores. When activities such as these take place there is an increased risk that shrinkage may occur.

One further misleading point is the absurd overall conclusion, in this article, that one of the best examples of inexcusable business failure in the past 25 years is Ames Department Stores, which (according to the authors) failed mainly because of its acquisition of the G. C. Murphy Company in 1985 and the subsequent $ 20 million inventory loss, two years later in 1987.

However, Ames was not liquidated until 2002, some 17 years later, and experienced several years of successful operation as well as the acquisition of both Zayre and Hills Department Stores during the intervening period.

In this regard the authors briefly mention that Ames overpaid when they made the $ 800 million Zayre acquisition, but never develop this point. The authors also fail to mention the $1.25 billion gain on debt discharge that Ames reported in 1992, which has far more financial significance than the $20 million inventory loss in 1987.

Ames purchased the G. C. Murphy Company after Murphy had achieved three consecutive years of record sales and earnings. These results and the Company’s many years of success were completely attributable to the dedication and diligence of its honest, hard working employees, many of which had worked for Murphy’s all of their careers.

In many instances these folks were also the children and grand children of Murphy employees.

If the authors want an honest evaluation of the former employees of The G. C. Murphy Company I suggest they read For the Love of Murphy’s by Jason Togyer, published by Penn State University Press in 2008.

In summary I believe that the inaccuracies, misleading conclusions and implied wide spread acts of theft by former Murphy employees, as set forth in the above referenced article, are very irresponsible and unjustified. Accordingly, correction or retraction of the applicable sections of the article would be appropriate.

Sincerely,
Thomas F. Hudak
Former Chairman of the Board
G. C. Murphy Company