Why Retailers Need To Be Wrong More Often

The Issue Of Risk

Making a prediction means accepting the risk of being wrong. It’s not the same as risking corporate capital of course, but the incentives are similar. Being right strengthens my credibility; avoiding experiments that might fail protects executives’ careers and budgets.

In both cases, the incentives favor caution at the expense of discovery and learning.

When you think about the best things that have happened to specific companies, or even the best things that have happened in your own life, most of the time those things happened because you took a chance on a move, a relationship, a job, something whose outcome could have gone very well or gone bad, and I mean very bad.

Looking back at Amazon, expanding beyond books and turning its internal technology into AWS both seem like obvious decisions now.

When you look at Walmart’s online growth and its use of stores for pickup, it’s obvious that they should have done those things.

None of those outcomes were clear when the decisions were made.

Both companies took enormous chances to create those businesses and they made many mistakes and lost billions on the way to success. The ex-CEO of Sears Canada criticized one of Walmart’s larger deals when it happened, a $3.3 billion acquisition of Jet.com, and his prediction turned out right, Walmart shut down Jet.com in 2020.

But while the Jet.com acquisition may have failed on its original terms, the knock-on effects from risk-taking can’t always be foreseen. Walmart is now growing rapidly online and gaining market share. Sears today is virtually nonexistent.

Both companies understood that long-term success would include failures, even big ones. Those failures didn’t change their commitment to growth and experimentation or make the people involved radioactive.

A CEO of a payments company told me, “If my people aren’t wrong 20% of the time, I tell them they’re not taking enough risk.”

When SpaceX needed to reduce the number of parts in its biggest rocket engine, Elon Musk told his engineers that if they don’t have to put back at least 10% of the parts they cut out, then they’re not taking enough risk.

Both CEOs were saying that people should be encouraged to take more risk, not punished for it.

It’s the opposite of our natural instincts and our behavior.

Why That’s More Important Than Ever

We are living in a world where more once-in-a-century types of changes are happening with regularity. In the last 25 years we have seen the September 11^th attacks followed by the wars in Afghanistan and Iraq, the financial crisis, Covid, drastic changes in weather, smartphones, social media, supply chain upheaval, interest rates and now, the rapid acceleration of artificial intelligence.

Each one of those things should have been enough change for a generation and yet they keep on coming.

The only way to get ahead of those massive changes is to embrace risk, to do the things that will keep us ahead.

Without risk, there’s no way to embark on new journeys that will lead to success in unforeseen circumstances. It doesn’t mean doing every crazy thing that comes into your head, it means making judgments about what might work and testing it to see.

The lesson is not to stop examining failure. It’s to distinguish between bad outcomes and bad decision-making. It’s to study what went wrong and change the process when necessary but not to punish people for a well-considered experiment just because it failed.

Now we are in a world of artificial intelligence and no one can say how that will work out. We only know it will bring massive changes and we can’t see what it will mean and how it will work out.

If retailers and brands don’t take more risk and try more new things, they are going to fall behind. If their culture is too resistant to change or too critical of experiments that don’t work out, their odds of survival go down.

My own record illustrates the same bias. For ten years, I have urged retailers and brands to be more daring and experimental, yet roughly 90% of my predictions that can now be judged were correct. That may reflect insight, but it also reflects caution: I wasn’t taking enough risk. To be right in the long run, I need to be wrong more often.

Almost every retail technology company I know says its biggest problem is implementation. Even proven technologies struggle to get retailers and brands to adopt them. The perceived risk is just too high.

Venture investors see that low rate of adoption and are very reluctant to put capital into retail technology.

It’s a negative spiral where retailers don’t adapt, great ideas can’t get incubated, technologies don’t get developed and the industry falls behind.

The Next 10 Years

In the next decade, companies that confuse avoiding mistakes with managing risk will fall behind. The winners will make consequential bets whose outcomes are genuinely uncertain and accept that some will fail.

To adapt to the future, retailers need to change and so do I.