Notes on Strategic Management Practices
Expanded notes from Chicago Booth Alumni Strategic Management Practices Issues monthly Group Discussion of selected topics and supporting articles
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When I noticed the battering Ron Johnson received for attempting to reposition and re-brandthe stalwart American department store JC Penney, I recognized a great case for peer learning among strategy as well as design thinking innovation professionals. Johnson seems to have had the best experience for the job and an attitude that placed the customer experience at the forefront of his proposed changes. Falling stock price and fleeing customers tell a different story.
The Stock price when he took over as CEO on November 1, 2011 was $31.71. Less than 14 months later, the day the discussion group met, the stock closed at $18.87. In the last few days, the stock appears to be improving, most likely with the announcement that Johnson has backtracked on his strategy. But I’m getting ahead of myself.
Two weeks ago, after reading a few background articles ( links and titles follow this posting), the discussion group met to review JCP and Ron Johnson’s strategy. Several questions raised in the course of the discussion prompted me to dig up additional history about this company and the changing conditions heating up the competition in this market sector.
The days in which stores stood between buyers and consumer good manufacturers are dwindling. Location or proximity to the consumer may still have an edge but your competition’s ability to insert themselves into the face to face transaction has dramatically altered the sales dynamic. Mobile communication devices make it easy for sellers to find buyers anywhere anytime; and yet, the playbook for many stores , from department stores to specialty retailers, fail to keep pace with the change in buyer behavior, perception and thus fail to live up to increased expectations.
Multi-channel interaction technologies perform double if not triple duty. Enabling information access by consumers for product details can direct attention to sales opportunities and enrich transaction data adding details and insights on behavior related to choice, in-store placement and preference. Investments to enhance the customer experience easily generate additional sales but can also generate greater operating efficiency. In store sensors make it possible to track consumer behavior similar to online consumer data collection software. Once connected to specific consumer transactions the algorithms to generate value based pricing logically follow. That is, if pricing leverages the multiple data sources which is typically the domain of merchandisers and not a strategic function. RFID technologies and bar codes now increase supply chain efficiency all the way up to the checkout counter. (Note, JC Penney benefited from the tenure of VanessaCastagne ,a former SVP from Walmart, and led online platform development efforts and integrated supply chain controls from 1999-2004. ) This data is just as valuable to suppliers, many experiment with QR codes that allow them to forge direct relationships to customers via social media channels that can compete or play compatible with the store by directing consumers to specific purchase outlets either online or in store.
The arrival of direct consumer access, anywhere and anytime raises the stakes for all store owners. Setting priorities and synchronizing these technology introductions challenges management in every sector. For department stores and retailers alike, they have little time to adapt old school merchandising skills that support the brand image and staff to client interactions while maintaining the cashflow necessary to make it all work. Oh, and figuring out the pricing thing in real time…that too!
Well that’s a tall order for any leader, let alone one who also needs to placate a trigger happy board and investors with high expectations. It’s not a surprise that within one year of assuming the CEO spot at JC Penney, Ron Johnson has backtracked on his strategy. Year over year sales declines of 26% are bitter pills for any business and the verdict on Johnson’s leadership choices are premature at best.
A little more background may help. Just as the 2011 holiday sales season commenced, Ron Johnson took the reigns and immediately set to the task of engineering a massive strategic overhaul of the JC Penney business. Johnson in his first few months had opportunity to learn the level of in-house capabilities and competencies of his team from operating reports generated throughout retail’s peak sales cycle, but did he?
On February 1, 2012, four months into his arrival, he launched plans to update the store designs to a town square model and simplify pricing that would put an end to sales coupons. The ideas were bold, but not as daring as many armchair critics suggest.
Success required implementation excellence, akin to the level of APPLE retail but at the scale of Target and the execution precision of McDonald’s. Was that the department store JC Penney?
FYI, Apple had spent a year developing ideas before hiring Johnson in 2000, and built a prototype store near Apple headquarters where they tested their concept. In May 2001, they opened their first two stores in May 2001, in Virginia’s high-end Tysons’ Corner shopping mall and in Glendale Galleria in Glendale, Calif. A little over two years later,Apple had opened over 70 stores in locations such as Chicago, Honolulu and Tokyo. (See the full WSJ reported story). By contrast, Johnson when he arrived at JC Penney threw together a strategy and placed huge bets based on a short-lived prototype experience.
Where was the evidence that the chain’s mix of products and brands when pigeonholed into the three-tier pricing strategy change would match customer assessments of their value? Note, he replaced the pattern of ongoing price adjustments and coupon offers with: every day pricing 40% off list, with the suggested retail price removed; distinct monthly special offers; and best prices-clearance items. All prices would end in $.00, not $.99 .
The 50% failure rate of new product launches Gartner and other studies explain as ” poor knowledge of what price the market will bear for a new product. ” Greg Petro writing for Forbes 1/22/2013 shared these and other findings, which someone on Johnson’s team must have read and studied. Price signals to consumers the relative market value of a product or service, but the market dynamics are challenging to manage. Interestingly, in 2011 several department stores began to play with intraday pricing by connecting their awareness of external competitors prices and match or best them at the point of sale. The unique price advantage Apple holds also made Johnson recognize the operating efficiencies gained from static and more constant price communication to customers. In seeing the efficiency he may have overlooked the market dynamics.
In 2007, Macy’s had its head turned around by customers after it attempted to cut by half the frequency of its coupons and sales. Of course this move engineered by Federated, the new parent, followed their large purchase streak and coordinated efforts to re-brand under the Macy’s name a series of regional based retailers (i.e. the May company, Marshall Field’s etc). The idea was to help regionally loyal customers recognize the opportunities for price the bigger national Macy’s offered. Consumers were unwilling to adjust and found local alternatives preferable. There’s something different about what a retailer can do and a department store, Greg Petro learned and reported in a Pricing series for Forbes.
“Compared to Department Stores and Brands, Specialty (and Vertically Integrated) Retailers have the most control when it comes to pricing. Vertically Integrated Retailers control the entire process. The best ones design product from the beginning to target specific price and margin points. They also control the in-store experience, which can’t be ignored when understanding the value of the brand and how it affects pricing.”
Refreshing retail experiences that appeal to the millienials as they begin to raise families and need the value that Jc Penney was historically famous for delivering has all the marks of a sound strategy on paper. Johnson clearly has the bench strength in delivering both; but, does he have the stamina and correspondingly the capital for the task. (http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aU2MttAfdFYU&refer=news)
The bigger the change, the more steps to implementation and the greater the chance to fail. Shaking up JCP takes capital and cash, especially since sales growth depends on the successful integration of online and in store sales. Until recently, no links existed between online and in store experiences. The onset of omni-channel increases the ease with which customers can experience more integrated, consistent connections. The closer my online shopping experience finding merchandise, and having it in my hands as well as sharing the social experience of shopping with friends matches the experiences in store creates both great challenges and enormous opportunity for retailers to manage. To avoid customer confusion, in store sales staff need to have access and awareness of online sales promotions, merchandise and pricing. Historically, a gifted sales person who knew their customer and purchase history offered assurance of their choice and saving the customer time. The results increased their overall satisfaction with the purchase which by association carried over to the store. Now, online tools offer what the sales associate did and offering more control to customers who research at home and may venture into a store to get a complete feel but won’t necessarily complete the purchase on the spot. It may not be reasonable, but the expectations of consistency of offer, price and service between in store and online keeps growing.
JC Penney’s margins, like many of its competitors were shrinking. Getting the experience for customers right without changing pricing must have seemed ludicrous to Johnson, but from an implementation point of view, it may have had more immediate impact on the top line. As customers adapt to omni-channel opportunities and sales people adjust their relationships with savvier customers, new segments and behaviors may emerge.
Perhaps, Johnson felt that there was no point in putting his team through a drawn out change process and felt it better to catch up all at once. Being first, may have its advantages but it also comes at great cost which Johnson has begun to experience.
http://dealbook.nytimes.com/2012/11/12/a-dose-of-realism-for-the-chief-of-j-c-penney/
Notes on Strategic Management Practices 