James Cash Penny founded J. C. Penny in 1913. Penney started his first retail store in 1902 in a small mining town in Wyoming. Formerly called the Golden Rule, Penny acquired experience as a partner within the drug store company. Penny eventually purchased a full interest in all three locations and incorporated the company under a new name. J. C. Penny (JCP) began as a general store offering a wide variety of services within its stores.
At the shift of the century, the store fell behind the competition after losing consumer interest. The adverse effects of the external environment involving the recession in 2007 caused consumers to become hypersensitive to the price of goods. This, in turn, affected the company's ability to generate sales as a foundation for competitive success. JCP’s organizational structure did not possess the capabilities to compete on price with other large discount retailers. JCP’s status as a mid-tier retailer created specific difficulties in profitability regarding supplier costs and the firm’s ability to remain competitive. Since the recession, the company has experienced constant erosion of its margins and other financial ratios. An increase in operating expense and the hefty cost of restructuring has forced the company to report an adverse net profit and negative net income. Circumspection from shareholders forced JCP’s board to seek out new leadership to turn the company around and save it from its deteriorating performance.
JCP responded to the challenging competitive conditions by developing and utilizing a network of more than 2,500 suppliers. The increased amount of suppliers enabled the firm to reduce suppliers' power efficiently. Ron Johnson, the former CEO vowed to rejuvenate the company with a refined pricing strategy and an engaging atmosphere. Johnson’s strategy was oriented toward differentiating JCP from competitors in ways that created value for customers. This case is important from a strategic perspective because it signifies the significance that leadership has on the perception of the company and the expectation of growth. The purpose of this analysis is to examine the story of the failed leadership J. C. Penny Company endured under Ron Johnson and identify lessons to be learned.
Upon his start, Ron Johnson had a bold and specific strategy to get consumers to buy more than the average of four times per year. Within just a few months, Johnson labeled JC Penney’s current strategy of multiple sales and significant discounts as “desperation.” His plan instead called for an immediate revamp and overhaul of all stores, changing the layouts of high-traffic selling centers in the middle to hang out areas, and getting rid of the constant sales. Johnson also wants to get rid of the vast variety of private labeled items and be more generic to push profitability and control costs. “Two things Mr. Johnson is not interested in are celebrity lines and private-label apparel. Mr. Johnson, a believer in brands, says in-house labels lack distinctiveness and pricing power.” (Management: A Practical Introduction, 2009)
Based on Michael Porter’s characteristics of an effective strategy I believe JC Penney did not have a good strategy for growth. Although Ron Johnson’s reputation heightened when he created the layouts of the Apple stores and genius bars, JC Penney is a different type of business. JC Penney does not have the same wow factor of the latest and greatest technology that Apple had. The point of going to a store is to enter, locate and identify what items are closest to what the customer desires and then leave. There may be a growth in sales for JC Penney with the changeover to inexpensive generic brands, but the chances of expansion are closing in on most brick and mortar stores.
According to Michael Porter’s four competitive strategies, JC Penney follows the first stating “Cost Leadership Strategy.” This strategy explains the meaning as “keeping costs and prices low for a wide market share of customers, ” and it seamlessly describes JC Penney and Ron Johnson’s business model of changing from private labeled items to more generic. These generic brands can create more fluidity at prices avoiding the increase in sales as well as the price for consumers on all levels of income. The balance of some private labeled products will pull in the eye of many consumers who will peak around and better their average of consumers buying items four times per year. The problem was that Ron Johnson had misread what shoppers wanted. Shoppers are not purely relevant actors, and they are frequently attracted to shops not by the guarantee of fair pricing, but by the lure of hunting for deals and “beating the system.”
Another lesson was that a leader should test ideas in advance. Why didn’t Ron Johnson understand what customers enjoyed? He did not ask them; instead, he radically redid the pricing strategies without running pilot tests to gauge consumer interest. The fact that J. C. Penney's core consumers loved coupons and prospecting “deals” should have never come as a surprise to Ron Johnson.
In the end, the relationship between Ron Johnson and J. C. Penney was doomed to fail because he misread the brand. Coming from the tech world, Johnson envisioned an Apple bar-like experience with rows of coffee bars and boutiques where customers would come to hang out in the store because it was a fun place to be. He did not agree with the traditional competencies of the brand and all along was bent on changing the brand rather than gently tweaking it as needed.