How gardening might have saved J C Penney
On the day that J.C. Penny announced Ron Johnson as their new CEO, their stock price rose 17%. Penny board member Bill Ackman, whose hedge fund owned 18% of J.C.Penny, described Johnson as "the Steve Jobs of retailing."
By the time Johnson took up his post at the struggling department store chain, in November 2011, optimism had pushed the stock price up nearly 50%, from $24 to $35. After announcing his vision and strategy in January 2012, the stock price climbed even further, to $42. Eighteen months after he took up his post, the J.C. Penny Board fired Johnson, with the stock price at $16. Bill Ackman said that Johnson’s reign was "very close to a disaster".
Up until then, Johnson had a stellar career in retailing, first at "superstore" retailer Target and then at Apple.
A graduate of Stanford University and Harvard Business School, Johnson started his retailing career at Mervyn's, a California-based retailer, with nearly 200 stores in 10 states.
"I wanted to run a company one day," said Johnson, “and I needed to learn the business from the ground up. I took a job in the stockroom, and I figured if I worked hard, put my head down, I would work my way up to have a chance to lead.”
After he joined Target, it took him ten years, from 1990 to 2000 to work his way up from the head of housewares to vice-president of merchandising. His big idea was to introduce designer wares into Target's stores. It worked. Target gained a reputation as a hip place to shop and increased its number of stores by about 50%, during Johnson's tenure, from 600 to 900, in 40 states.
In 2000, Steve Jobs recruited Johnson to create Apple's retail stores. Up until then, Apple sold through other retailers, such as Target. But Jobs felt that this didn't give Apple sufficient control to show Apple products in their best light. By 2011, Apple had 300 stores, worldwide, and was ranked first in the U.S. for dollars sales per square foot.
After he joined J.C. Penny, Johnson moved quickly. In late January 2012, he announced a three- part plan:
1. Eliminate discount pricing.
2. Organise merchandise by brand not function.
3. Rebrand as JCP.
His vision was a store with individual brand boutiques, shops within a shop. The boutiques would be organised around a "town centre" where customers could meet, eat, and interact with friends. A J.C Penny store would become a destination, not just a place to shop. He got rid of cash registers, replacing them with roaming employees, checking out customers using iPads, just like at Apple.
Over the following twelve months, Johnson rolled out his vision to eleven-hundred stores. Challenged on the risk of his approach, Johnson said, "at Apple, we didn't test anything".
Unfortunately for Johnson, however, J.C. Penny's existing customers were confused by the changes to layout and pricing. In particular, according to Corey Phelps, a strategy professor at McGill University, Penny's customers "loved the thrill of hunting for the discounts", something that disappeared in the new format.
Already falling sales plunged dramatically, along with a commensurate fall in the share price. J.C Penny's Board fired Johnson and replaced him with his predecessor, Mike Ullman, who undid almost every one of Johnson's changes.
According to Corey Phelps, Johnson had fallen into the common trap of assuming that what worked somewhere else would work in a new setting. Johnson's approach was the epitome of approaching change like a mechanic.
That is, however, is not quite the end of the story. J.C. Penny continued to struggle after Johnson's departure. As I write, J.C. Penny's share price stands at less than $1.
In January 2019, The Motley Fool investment website wrote:
"Johnson was onto something that is only now becoming apparent. Had he rolled out the changes in test markets to give customers time to acclimate to his new ideas, instead of launching them nationally all at once, he'd have had time to see which were more appropriate for the store and which were maybe too radical. Now, his ideas are being tested by other retailers who are being lauded as innovators."
The comment is ironic because, at Target and Apple, Johnson had indeed tested before rolling out. At Target, he conducted small-scale experiments, gradually introducing designer products and gauging reaction.
And Apple didn't have a single store when Johnson arrived. Johnson created mockups in a warehouse near Apple's headquarters, to test out ideas. Then Apple began with just two stores. Every new store opening, after that, was effectively an experiment. Testing is in the DNA of any successful tech' company, including the mighty Apple.
His contention that, "at Apple, we didn't test anything", sounds like the defensive response of a man in a hurry. In an interview in January 2012, shortly after taking the reins at J.C. Penny, Johnson said, "all my ideas just sort of come. I don't know how to explain it. It's all intuitive I think. You just kind of have an instinct for this stuff."
Trusting intuition is, however, a risky business, according to Nobel prize-winning psychologist Daniel Kahneman. Intuition does not drop from the sky, as a gift from the gods. It is only valid if it’s based on extensive experience. Even then, says Kahneman, doing the same thing many times does not make you an expert. An expert is someone who consistently achieves a desired outcome, when measured objectively.
By that yardstick, Johnson’s assertion that “it’s all intuitive” sounds more like hubris than expertise, given that it is based on just three experiences: Meryvn’s, Target and Apple.
Sadly, this is a familiar organisational change story. Someone who made a big splash elsewhere is appointed to a new, more senior or more prestigious role, determined to make a significant, fast, impact. The new appointee attributes their previous successes solely to their insight and determination, rather than circumstances in which they found themselves, or the people that helped them.
Psychologists call this phenomenon The Fundamental Attribution Error. When we succeed, we tend to attribute our successes to our personal qualities and skills. When we fail, however, we tend to blame unfavourable circumstances or other people. When we evaluate others, it’s flipped. Other fail because they were not up to the task or succeed because they got lucky. It’s our default setting.
Three years after leaving J.C. Penny, Johnson told a retail conference in Las Vegas that the failure at J.C. Penney was due to the company’s “stagnant culture” and that “people there were entrenched and resisting him.” He was unrepentant about his time at J.C. Penney, “I still think if we had continued on, the company would have been a lot better than [that] painful u-turn,” said Johnson.
Incidentally, the other side of the Fundamental Attribution Error is that when we evaluate the performance of others, we see things the other way around. We tend to believe that others succeed because of favourable circumstance, but if they fail, we attribute it to their lack of experience, skills or necessary personal qualities.
You can protect yourself against overconfidence by taking small steps, experimenting like a gardener. A gardening approach doesn’t preclude you from making significant organisational changes. The incremental changes Johnson made at Target and Apple accumulated into something that was industry changing in both cases.
My new book, Gardeners not Mechanics: how to cultivate change at work will be out later this year.