2009 Fifth International Conference on Natural Computation
Business Intelligence Successes at a Catalog and Online Retailer
Dien D. Phan and Mark B. Schmidt
Business Computer Information Systems Department
St. Cloud State University, St Cloud, MN 56301. U.S.A.
ddphan@stcloudstate.edu, mbschmidt@stcloudstate.edu
Abstract
The proliferation, growth, decline, and re-growth of
the retailing industry during the past several decades
has allowed for the creation of new applications for
business intelligence. Along the way there have been
many spectacular successes as well as many failures.
This paper attempts to apply business intelligence
using ecological theories at Fingerhut Inc. as an
example noting its successes and failures.
1. Introduction
The somewhat cyclical nature of the high tech
industry in the past decades has lead to researchers
relying more on intelligence concepts with theoretical
underpinnings from chaos theory, ecology, biology,
and business intelligence [8, 12, 15]. There appears to
be interest in evaluating natural order and
information as they relate to business strategies in the
modern e-commerce milieu.
Many companies such as Air Liquide and Southwest
Airlines for many years have applied the swarm
theory to solve complex business operation problems
[11].
The ecosystem concept can also be applied to analyze
ecommerce systems because of their dynamic and
technical nature. In its infancy, the e-commerce
industry was described early on as chaotic by Don
Tapscott who argued that Web businesses “are
destroying the old model of the firm” and “all
business will soon be e-business” [7, p. xv].
Pundits in the early days of e-commerce frequently
predicted that catalog and mail-order telephone-order
(MOTO) retailers would have a natural advantage
when entering online business because the nature of
their operations was conducive to the rapid pace and
978-0-7695-3736-8/09 $25.00 © 2009 IEEE
DOI 10.1109/ICNC.2009.622
dynamic nature of online ordering. However,
Fingerhut, the second largest MOTO company in
1998, failed in its entry to e-commerce, which left
many people wondering what went wrong.
2. Concepts and Strategies
The rapid proliferation of high-tech industries in the
U.S. during the past decades has received much
attention from organizational ecologists and IS
researchers alike. As Moore [12] stated: “In a
business ecosystem, companies co-evolve capabilities
around a new innovation… A business ecosystem,
like its biological counterpart, gradually moves from
a random collection of elements to a more structured
community.” Due to the dynamic nature of
stakeholder relationships, these ecosystems require a
great deal of flexibility.
2.1 Multi Agent Modeling and Swarm
Behaviors in E-commerce
In the past decade, AI research has made much
progress in modeling complex business operations
with the help of multi-agent systems in which groups
of intelligent agents work independently and interact
quickly like the bee and ant colonies. Agent based
modeling simulates human organizations using
multiple intelligent agents. Each agent follows simple
rules and interacts quickly to adapt changes in the
ecosystem.
Organizational ecologists have argued that nature
may provide a good model for organizations to
follow. For example, [18] note the herd behavior in
on line auctions. Swarm behavior is being applied in
the heuristic problem solving approach [17]. The
basic premise of swarm theory is that the complex
behavior of many creatures may be well-coordinated
by quick and simple interactions. Individual ants or
bees are not smart but their colonies can solve
complex problems in finding the most efficient ways
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to locate food sources or in assigning tasks. By
studying how ant and bees use their interactions to
solve complex problems, scientists can develop
mathematical models to solve problems in business
operations such as routing trucks and scheduling
airlines.
When bees begin the swarm process to find a new
hive, a few bee scouts first check out a few possible
hive locations and report back to the group by
dancing. The more the scouts dance, the better the
bees like the site. Other scouts check out the
competing sites and join the dance for the hive that
they like the most. In the end when the dancing
swarm becomes very large and dominant, the swarm
flies off to the new sites with the queen bee [8].
Thanks to rapid communications created by Internet
technology, consumers today can follow the bee
swarm process to find the best products and services
within hours. Given the availability of Web sites,
ads, discussions and blogs for special discounted
items with limited stock and limited offering time,
consumer swarm behaviors naturally occurred. For
many retailers, their success depends on the
Christmas season, specifically during the short period
between Thanksgiving and Christmas. Especially for
low income customers who are “living pay-check-by-
paycheck”, sales at discounted stores such as
Walmart and Kmart are likely to peak at payday or
the day after the payday. Thus low price sales
promotion at the peak shopping times for limited
quantity products can generate consumer swarms and
hijack sales opportunities of competitors. For
example, after Walmart announced the sale of the 32”
Sharp LCD TV model 32SB23U and 32SB24U for a
deep discounted price of $398 with limited quantity
on December 14, 2008, consumers started electronic
discussions about this promotion many days in
advance. In order to keep customers for the holidays,
electronic retailer giant BestBuy quickly announced
the price match online. After another blogger noted
that Best Buy stores were selling the same model for
the same price, shoppers flocked to Walmart and Best
Buy to buy these TVs. These items were sold out
within a day [16].
American Air Liquide currently uses the ant strategy
to manage its operations. It produces medical gases at
about a hundred locations in the U.S. and delivered
them to buyers. Because the daily fluctuation in
electricity rates causes the fluctuation in gas
production cost at each location, Air Liquide
developed an AI based model that mimics ants-
finding-the-best-routes for foods for its delivery
trucks. Every night, the software gathered forecasts
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of customer demand, manufacturing cost based on
electricity rate and by 6:00 AM the next day, Air
Liquide get a solution for production and delivery for
the day. Instead of picking up shipments from the
nearest location as they used to do, drivers now have
to pick them up from whichever plants that produced
gases at the lowest cost-plus-shipping price. With the
high fluctuation of electricity costs from one location
to another, Air Liquide found out the savings have
been substantial to cover the costs for drivers to drive
the extra distances.
Another example is Southwest Airlines wich
successfully used the ant-based model software for
pilots to find air plane arrival gates which have the
shortest waiting time at Sky Harbor Airport in
Phoenix.Today it is testing this model to direct
customers to the shortest waiting ticket counters [11].
Cemex Company which delivers ready-mix cement
in Monterrey, Mexico is another business example of
organization’s self-organizing. Due to unpredictable
traffic congestion, advance reservations for delivery
of cement frequently arrived late. Management
decided that by using the global positioning system
(GPS) for trucks at various locations throughout the
city, no advance reservations were needed. Instead
of using dispatchers, the nearest available drivers
were to schedule themselves once the orders came in.
This self-organizing at Cemex resulted in increased
on-time delivery, fewer trucks, and better customer
satisfaction [3].
2.2 Intelligent Agents and Data Mining
Intelligent Agent is a special purpose knowledge-
based information system that performs specific tasks
on behalf of its users. In e-commerce, a simple
intelligent agent application can be a shopping bot
that searches all retailers Websites to find their prices
and provide details such as retailer names, ratings,
opinions, and expert reviews. Other intelligent agents
can perform proxy bidding in online auction. The
more complex intelligent agents scan the
environment to learn, track, and predict competitor’s
and consumers behavior patterns.
As companies expand their web of customers, BI is
used to further mine the customer relationships. BI
applies intelligent agent model in consolidating,
analyzing, and providing access to vast amount of
data for business decision making. Major tools of BI
include on-line analytical processing (OLAP) and
data mining (DM).
An interesting data mining application in retailing
business is market basket analysis or recommender
systems using an item-to-item collaborative filtering
technique [10]. This technique determines which
products customers are likely to purchase together in
a shopping cart (a “market basket”). Once the retailer
knows that customers who buy one product are likely
to buy others, it can recommend other products. [1]
and [2] noted the long tail phenomenon of this
recommender system in selling obscure products. The
long tail is a colloquial name given to a product
distribution curve at the long tail end because the
demand for the products is low. This technique has
helped Amazon and Netflix satisfy customers’
demand for obscure products that traditional stores
would not stock.
3. Case Study: Fingerhut Inc.
In 1988, Fingerhut was the second largest catalog
mail order company in the U.S., after JCPenney.
Revenues reached 1.8 billion. By 1999, it entered e-
commerce and was purchased by Federated
Department Stores. After the losses of the Christmas
sales in 1999, Federated Department store closed
down Fingerhut and liquidated all Fingerhut assets.
During the summer of 2002, the remaining of
Fingerhut was repurchased by former Fingerhut
executive Ted Deikel and Petters Group. By
November 2002, Fingerhut was resurrected by
November 2002. In 2008, total sales reached $500
million.
3.1 Methodology
This study employed several data collection methods,
which include personal interviews, invited guest
speakers, attending press conference, and information
gathering from local media coverage. The interviews
with managers included two former Fingerhut
managers in IT and Marketing department, an on
campus discussion with three Petters Group’s
executives, and an interview with president of Petters
Group.
3.2 Fingerhut’s Competitive Strategies
Fingerhut had two main competitive strategies. The
first involved locking in customers while the second
involved its unique data mining capabilities. It
targeted and locked in customers in the “sub-prime”
market. These customers were willing to pay a
premium for the extra buying power that was not
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offered elsewhere. Fingerhut also had sophisticated
data mining capabilities. They were able to
efficiently analyze and extract information about
buying habits and demographics that allowed it to
pinpoint products that may interest consumers [15].
3.3 BI Success
Fingerhut’s data mining capability helped the
company track customers’ buying behaviors [13]. As
soon as intelligent agents could identify significant
new patterns in demographics and cluster behavior,
Fingerhut sales agents could reach customers with the
right offerings at the right times. After the orders
were entered into the system, the recommender
system searched for buying behavior of other
customers who ordered the same products, and
suggested Fingerhut to ship specialized catalogues to
the customers. If a customer bought cookware,
Fingerhut would first follow up with specialized
cooking and kitchen catalogues. Then telemarketers
would call to follow up with other products,
especially to sell products that were in the “long-tail”
- products of low demand. The recommendation
system worked well with a good rate of repeat
purchases. Through data mining sequence analysis,
Fingerhut found that customers who recently changed
their residence were likely to triple their purchasing
in the 12 weeks after their move, with a peak in
buying in the first four weeks. Their selections often
followed a pattern— new furniture,
telecommunications equipment, and decorations, but
seldom jewelry or home electronics. The company
used this discovery to tailor a new "movers’
catalogue" to entice such customers. Thanks to its
data mining capability, its customized credit line to
customers, and the effectiveness of its tele-marketers,
Fingerhut put more effort into selling furnishings and
appliances to customers who moved. Because of the
data mining success, by 1998 its warehouses were
stocked with an abundance of appliances and
furnishings [15].
The data mining capability could tell Fingerhut what
customers would buy, how much they would spend,
who would be likely to pay their bills, and who
would not. For many sub-prime customers who could
not manage their spending and credit by themselves,
Fingerhut credit agents gave individual advice to
make sure that they would not fail. This win-win
strategy required a lot of dedication and effort by
Fingerhut.
Thanks to the accuracy of behavior predictions,
Fingerhut customized how much to sell to individuals
based on the ability to pay on a one-on-one basis, and
therefore gained completed trust from their
customers. Whenever a customer wanted to buy more
than the limit allowed by Fingerhut, the credit agent
first advised them to delay the purchase. After
payment status was improved, the agent
recommended the customer to make purchases. “We
wouldn’t let them buy if we knew they could not pay
the bill,” said a former telemarketing manager.
Another application of BI was the Mail Stream
Optimization to optimize the number of catalogues
mailed to individual customers. In order to reduce the
cost of printing and mailing catalogs, Fingerhut must
determine the right catalogues to be mailed to
individuals and the appropriate mailing time periods.
Previously, Fingerhut built an application called a
Promotional Scoring System (PSS). PSS scored
Fingerhut's entire customer list with customer
segmentation models for each catalogue, and based
on these scores, Fingerhut would create a mailing list
for each catalogues. Because of similarities between
catalogues, customers often received redundant
catalogues to the point that the most profitable
customers received most of the 100 plus available
catalogues. However, removing a catalogue might
cause the loss of up to 80% of potential sales
generated from that catalogue. Fingerhut needed to
analyze all the permutations of mailing over 100
catalogues and the impacts on profits from each
permutation to determine the point where the savings
from not mailing redundant catalogues would not
harm profits. With 1,400 pieces of data for each of
the 70 million customers, this was a time consuming
task (22 days) for the existing Promotional Scoring
System (PSS). With the Mail Stream Optimization,
the processing time was reduced from to 10 hours
and thus the decision to reduce number of catalogue
mailed to customers could be done more frequently.
As a result, Fingerhut was able to reduce advertising
expense by 6 percent [4].
Fingerhut’s BI was so successful that about 80
percent of the company’s sales came from repeat
buyers and viral marketing. “We’ve never done
business without some form of database marketing.
It’s the heart and soul of this company, and we
wouldn’t be in business without it” said Andy
Johnson, senior vice president of market development
at Fingerhut in 1998 [13].
3.4 Entry to Online Business and Federated
Acquisition
Seeing the rapid revenue growth and soaring stock
prices of many other online retailers such as
Amazon.com, buy.com, and price.com, Fingerhut
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management wanted to emulate their successes and
remake Fingerhut into an e-commerce player. In 1998,
it hired William Lansing to launch Fingerhut e-
commerce business.
In 1999, when Federated Department Stores wanted a
quick entrance into e-commerce, it acquired
Fingerhut for $1.7 billion. Lansing formed an e-
commerce group, ramped up hiring, and increased
investment in new e-commerce startups. By 1999,
Fingerhut received order fulfillment contracts with 22
companies including eToys and Walmart.com.
3.5 The Failure of Fingerhut
With increased number of orders over the Christmas
1999 season, Fingerhut order systems encountered
massive failure. eToys, the company that contracted
Fingerhut to fill and deliver orders, suffered numerous
order problems and terminated its contract with
Fingerhut. Other companies that hired Fingerhut to fill
orders also terminated their contracts.
Fingerhut revenues dipped significantly in 2000 and
2001 which caused Federated to suffer a $795 million
loss. By 2000, Fingerhut’s order fulfillment contracts
dropped from 22 to eight. Federated suffered heavy
losses and closed the entire Fingerhut business in the
spring of 2002.
3.6 Fingerhut resurrected
When Fingerhut closed its doors in 2002, there was
again a dearth in the niche of the sub-prime market.
This is due in part to the fact that K-generalists had
no interest in such a market. As most customers in
the sub-prime market could not easily switch to other
retailers, there were many loyal customers in need of
products. Capitalizing on this opportunity, FAC
Acquisition Inc. of Petters Group and Ted Deikel
completed the purchase of what remained of
Fingerhut from Federated in the summer of 2002.
Fingerhut Direct Marketing Inc. was launched as a
privately held company. The new catalog for the
fall/winter 2002 season was mailed out on November
2, 2002 to its former customers in the sub-prime
market. By December, Fingerhut’s online retail web
site was launched, just in time to take orders for the
holiday shopping season.
Learning from the previous failure, the new
Fingerhut did not return to many of the old markets it
entered in 1999. Taking a more conservative
approach, they now only enter selected markets
which they feel can be served well by their core
competencies. Today Fingerhut is gradually
transforming itself into a more eco-oriented, self-
organizing, and self-learning company and relying on
Business Intelligence capabilities. For customers, its
direct mailing catalog sales and sales calls on
paydays generate frequently generate buying swam
from its low income customers. For employees,
intelligent agents detect and communicate to other
associates what products would sell well to each
customer, credit limit, and whom to avoid. This
swarm process is very effective because technology,
fashion, and taste change rapidly. In the area of
customer service, each service agent can use his/her
own judgment to change credit and payment
schedules if a customer cannot make their payment
rather than closing their account and turning it over to
a collection agency.
As a results, Fingerhut revenues continues to grow
double digits in both online sales and total revenues,
exceeding the growth of online retailing industry in
each categories for the period of 2005 to 2008 [6, 7,
9].
4. Conclusion
This study has validated existing ecological and
business intelligent models. Today online retailers
today can rely on intelligent agents in self-learning,
self-organizing, and adaptive given rapid changes in
the environment.
After the failure, Fingerhut was resurrected and
transformed into a humble company. It now focuses
only on businesses within its core competency that
exploit business intelligence. There are plenty of
opportunities to exploit the network relationships of
its business ecosystem. Opportunities also exist in the
use of Web content and blogs to generate swarm
behaviors for special discounted promotion products.
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