Teachable Moments — The Curious Case of JC Penney

Let’s be clear; the world does not need another article pounding Ron Johnson for his ignominious fall from grace.  And so I won’t.  Except to use this painful episode as a “teachable moment,” rather than just gratuitous schadenfreude.

So what have we learned from JCP’s failed strategy?  In broadest strokes, it’s that a strategy flawed in both concept and execution has little chance to succeed. 
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Let’s start with a reminder that JCP had to do something to change its game, which is why the Board reached out  to a proven executive who had helped transform retailing at Target and Apple.  Prior to Johnson’s arrival, JCP had become the somewhat dreary champion of promotion-driven selling, with predictably damaging impacts on the company’s financial performance and image .  

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• JCP’s merchandising and product selection was undistinguished, arguably positioning their stores in the bland middle ground between WalMart and Target
• JCP ran 590 sales promotions in 2011… more than10/week!  That takes a lot of flyers, and merchandise repricings and advertising and marketing dollars to hammer home a message that “our stuff is cheap!”
• The average customer visited a JCP store only four times a year, which means that customers were ignoring 99 percent of JCP’s sales promotions.  The constant barrage of JCP promotions merely reinforced consumer expectations that no one pays full ticket prices at Penney
• Almost three-fourths of JCP revenue came from products sold at a discount of at least 50 percent
• JCP lost money in 2011 and only earned only a 2% net income margin in 2010.

Bottom line, JCP was broken and Ron Johnson was hired to fix it by reinventing a more imaginative and profitable reason than sales-du-jour for customers to visit their stores.
By all accounts, Johnson is smart, hard working and decisive and it didn’t take long for the new CEO to stake out a bold and transformative strategy, defined by three major initiatives:   

1. Replace perpetual discounting with “fair and square” pricing, featuring far less frequent sales promotions
2. Upgrade the cachet and style of JCP’s merchandise, with heavier emphasis on recognized quality brands of clothing and housewares
3. Redesign the stores to showcase designer brands in a store-within-a-store boutique format

On the surface it’s hard to argue with the strategic direction and intent of Johnson’s strategy, except for three niggling details — a veritable trifecta of conceptual and executional flaws in the strategy:

1. The company never demonstrated compelling evidence that JCP’s customers were clamoring for such changes
2. Moreover, the company did not or could not articulate the benefits of its strategy in terms that were easily understood by consumers or, for that matter, stockholders
3. To complete the trifecta, the company raced to implement its strategy on a national scale without regional pilots to iteratively test and refine new concepts

Now this is about the point in the story that most observers conclude that Ron Johnson was either clueless, reckless, or an idiot.  But we’re not going to pile on, right? 

So let’s try throwing Johnson another lifeline.  We’ve already noted that Johnson had to take bold, imaginative action.  And he’s certainly not alone in radically transforming a sick company by aggressively rolling out an ambitious but largely untested strategy.  For example, nearly thirty years ago, Nicolas Hayek raced to implement a national rollout of Swatch in the US, ignoring pilot tests indicating little consumer interest in his boldly fashioned creations from Switzerland.  And of course Steve Jobs was famously dismissive about the need for market research or pilot tests before launching massive rollouts of the iPod/iPhone/Tablet. 

Needless to say, Swatch’s and Apple’s product launches achieved runaway and enduring success.  And Ron Johnson was there, at Apple, close to the throne of the master! 

So little wonder that Johnson would take a page out of Steve Jobs’ (and Hayek’s) playbook to transform JCP by going bold, going big and going fast!!

So why are Jobs and Hayek regarded as geniuses and Johnson a goat?  Was Johnson just unlucky?  On the other hand, maybe Jobs and Hayek were just lucky, and not deserving of their reverential acclaim.  Bad luck or bad strategy; which is it?
I’ve run out of lifelines and can no longer cut Johnson any more slack.  The reality is strategy iscontextual.  The fact that a  particular strategy worked well in one context most assuredly does not mean that it will thrive in another.  There are profound differences between the circumstances surrounding the launches of Swatch and Apple’s innovative consumer entries that simply don’t carry over to JCP’s situation.  An understanding of these differences — had JCP taken the time to think it through — would have indicated ex ante that JCP’s commitment to a rapid national rollout of an untested strategy was unwise, unnecessary and breathtakingly risky.

Let’s take the flaws in Johnson’s strategy one at a time.

1. The company never demonstrated compelling evidence that JCP’s customers were clamoring for its new strategy; and relatedly, JCP did not or could not articulate the benefits of its strategy in terms that were easily understood by its customers
What made JCP think that its consumers hated sales promotions?  After all JCP had trained their consumers for over 100 years to expect items on sale.  One could surmise that JCP catered predominantly to “bargain hunters” for whom finding an unexpected bargain was part of a game that its customers felt they could always win at JCP.  Ron Johnson changed the rules of a game that too many of his customer were enjoying and winning.  As same store sales stats soon confirmed,  customers either didn’t understand or didn’t like “fair and square pricing”.  Either way, they voted with their feet and not their pocketbooks to shop elsewhere.
So what is “fair and square pricing?”  I put this question to my MBA class this week, and as expected found that JCP had done a poor job clearly communicating its structure and intent.  One student correctly suggested that “it had something to do with less reliance on sales promotions.”  Fair enough, but to be effective, JCP had to not only say what they were not going to do, but also to clearly explain what made “fair and square” better than what consumers had become accustomed or at least inured to for decades.
And on that score “fair and square” pricing turns out to be pretty complicated and confusing.  Here’s a primer:

• All merchandise starts a “Fair and Square” price tag ~40% lower than previously undiscounted sticker pricing
• No prices will end in $xx.99… all items will now have even dollar pricing
• Each month a new theme sale will be launched, where products related to a holiday or time of year get a “Monthly Value” discount below “Fair and Square” pricing
• Either on the first or third Friday of each month, Monthly Value items that don’t sell will be further discounted at special clearance prices.
  
  

If simplicity and value were meant to be the cornerstones of redefining the JCP brand,  “fair and square” pricing as implemented falls confusingly short as transformative strategy.

In contrast, consider Swatch’s launch strategy which also was seeking to create a brand centered around value and style. With the acknowledgement that transparent pricing is easier to implement in a company with a few dozen rather than a few thousand SKU’s,  here’s Swatch’s pricing approach:  
All watches — no matter how popular, no matter how new to market, and no matter what rock star designer inspired the creation — will be priced at $40.  And that same $40 price tag will stay in force not for one month, or for one year, but for a decade.  The same simple price strategy extended around the world, with prices set at 60 DM in Germany and 7,000 Yen in Japan.

That’s how you create a brand that meaningfully conveys style and value!

One could also argue that by moving its merchandise focus upscale, further away from Sears and WalMart, JCP was distancing themselves from their core customer base in search of new clientele already well served by brands well known for higher quality merchandise — e.g. Macy’s, Bloomingdales and Target. 

Along with the new pricing scheme, did the JCP really think it its new merchandising strategy would gain more new customers than it risked losing during their strategic transition?  Apparently so.
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2. JCP raced to implement its strategy on a national scale with no regional pilots to iteratively test and refine new concepts
As already noted, there are some inspirational examples of companies that also made big bets on untested big bang launches that paid off.  So why pick on JCP on this score? 
The companies cited earlier operated under three profoundly different circumstances that  do not apply to JCP.

1. Apple and Swatch’s product launches were seeking to create NEW MARKETS that simply didn’t exist before.
2. As such, even if their big bang launches failed, it would not alienate the company’s core customer base for existing products (e.g. Apple’s desktop and laptop computers; Swatch’s parent company’s luxury brands like Omega and Longines)
3. The launches in question radically redefined their respective product categories. Nothing anything like the original iPod/iPhone/Tablet/Swatch existed before, necessitating an extremely aggressive launch campaign (in scale and marketing communications) to literally shatter consumers’ prior product perceptions.

Go down this list and you’ll see JCP’s strategic context was fundamentally different on every one of these elements. 
JCP was fighting for current market share within a well defined industry structure, not creating new markets.  It’s strategic direction clearly risked alienating its current core customers, and there was no particular reason that the strategy would have been seriously compromised by a more deliberate and staged implementation incorporating testing and iterative refinement.  After all, one could argue that Macy’s, Bloomingdales and Target were already occupying the very same space JCP was trying  to break into, so there was nothing particularly shocking or new about their brand aspiration.
Given JCP’s strategic context, Ron Johnson’s strategy reflected exceptionally poor risk management.  Ask yourself this: did the upside potential of a big bang success more than offset the downside risk of failure? 

​As viewed in this risk/reward assessment grid, the answer is decidedly not!

Lessons Learned
As a parting shot, two salient lessons learned emerge from the JCP story.

1. Strategy is context sensitive    
   Before copying and applying a strategic plan that worked before, make sure the strategic contexts between the old and  new situation are closely aligned.         
2. Strategy includes execution    
   I simply don’t buy the oft cited senior executive excuse that “my strategy was sound but the team let me down”.  CEO’s are responsible for delivering results.  If the CEO fails to fully anticipate and plan for implementation challenges — in terms of execution, technology risk and market acceptance risk  — then the strategy in question is flawed and incomplete.  A risk mitigation plan should be a part of every strategic plan to make it resilient and responsive to inherent uncertainties.  And remember, the bolder the plan, the greater the unknowns.  You better have a Plan B (and C) in mind, and a learning oriented culture before you take that big bang strategic leap.

​We’ll never know whether Ron Johnson’s strategy would have eventually proved itself in the marketplace, but we do that he ended his career with a bang and unnecessarily put his company in grave peril.