Leading JC Penney Back to Growth
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Leadership Jan 5, 2015

Lead­ing JC Pen­ney Back to Growth

Three ways retail­ers can over­come lead­er­ship quagmires.

What is the JC Penney business strategy for growth?

Based on insights from

Paul Hirsch

The going has been rough for ven­er­a­ble retail­er JC Pen­ney recent­ly, with a suc­ces­sion of CEOs all fail­ing to pro­vide long-term sta­bil­i­ty and growth. Mar­vin Ellison’s appoint­ment to the top spot, effec­tive in August 2015, marks the company’s fourth change of lead­er­ship in as many years. The stock has slid from over $40 in 2012, bump­ing along at less than a quar­ter of that today. There is lit­tle sign that the shuf­fle at the top will recharge the com­pa­ny. What’s the mat­ter with Penney’s?

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JC Pen­ney has some things going for it: It is pop­u­lar in rur­al areas and with cus­tomers over 35. Its pric­ing strat­e­gy deep­ens cus­tomer loy­al­ty through dis­count­ing and the use of coupons. It has devel­oped part­ner­ships with upscale cloth­ing and cos­met­ics retail­ers and has been able to attract a strong fol­low­ing to its website.

Though it faces the usu­al mar­ket fac­tors — mid­mar­ket retail is hol­low­ing out, malls are less pop­u­lar than they used to be, Ama­zon has shift­ed the over­all retail envi­ron­ment — Penney’s is not even keep­ing up with com­peti­tors like Kohl’s, which is oper­at­ing in that same environment.

Paul Hirsch, a pro­fes­sor of man­age­ment and orga­ni­za­tions at the Kel­logg School, describes three ways oth­er trou­bled com­pa­nies can avoid a sim­i­lar fate.

1. Know What the Mar­ket Values

With more than 100 years in the mar­ket, JC Pen­ney has a long his­to­ry of know­ing what its cus­tomers want. But as with any large retail­er in the age of Ama­zon, cling­ing to what has worked in the past is no longer a viable strat­e­gy. In try­ing to rein­vent itself, the com­pa­ny has strug­gled at times to iden­ti­fy and cap­i­tal­ize on what the mar­ket val­ues about it.

When Ron John­son — who devel­oped the Genius Bar” dur­ing his time as head of Apple stores — took over in 2012, he set out to remake JC Pen­ney stores more in line with what Apple had done. This meant no coupons, more space in the stores, and agree­ments with high­er-end brands. The attempt to lure younger, hip­per cus­tomers to the store shoved aside what made the com­pa­ny unique: discounts.

To retain cus­tomers dur­ing a revamp, Hirsch stress­es the impor­tance of a mea­sured tran­si­tion from estab­lished cus­tomer likes to the next big thing. JC Penney’s sur­vival depends as much on being able to decide what about its busi­ness is worth keep­ing as which inno­va­tions to imple­ment. Hirsch describes this shift in empha­sis as devel­op­ing a phi­los­o­phy where lead­ers say, We want to keep what is still work­ing well and mod­ern­ize it, rather than throw out all that we did before and replace it.”

For this shift to work, tim­ing and orga­ni­za­tion­al coor­di­na­tion are key. Make sure the imple­men­ta­tion of ideas comes when the ideas are ready and when peo­ple are on board,” Hirsch says. Under John­son, Penney’s was adver­tis­ing for new prod­ucts that had not even been rolled out into stores yet — so they had some issues get­ting that part right.”

2. Over­haul with­out Alienating

John­son thought he could sell Penney’s retail cloth­ing the way you sell an iPhone,” Hirsch says — that is, by mak­ing it seem hip. Which was a mis­take. Penney’s mer­chan­dise was not unique and John­son was not anoth­er Steve Jobs.”

In the process, Johnson’s style clashed not just with the desires of JC Penney’s cus­tomers, but also with the cul­ture of the orga­ni­za­tion. He tried to change a lot of things at once — some of which were work­ing well for the com­pa­ny. If employ­ees dis­agreed they were asked to leave, some­times brutally.

Respect­ing their his­to­ry is actu­al­ly a good way to bring peo­ple around.”

In terms of the inter­nal groups in the com­pa­ny, if you basi­cal­ly attack what their lega­cy is, you’re going to alien­ate more peo­ple than you need to,” Hirsch says. Respect­ing their his­to­ry is actu­al­ly a good way to bring peo­ple around.”

Johnson’s tenure holds cau­tion­ary tales for exec­u­tives tak­ing over in the wake of inef­fec­tu­al lead­ers. A new CEO in these cir­cum­stances is going to have to get out in the stores and lis­ten and take ideas, Hirsch says. This includes pay­ing atten­tion to the peo­ple on the bound­aries of the orga­ni­za­tion, not just those who are repeat­ing what they think you want to hear.”

The new CEO should align man­agers who are already respect­ed with­in the com­pa­ny into coali­tions in sup­port of change, rather than para­chut­ing in with a group of strangers to order employ­ees into unfa­mil­iar territory.

Acknowl­edg­ing that any over­haul is like­ly to come with reduc­tions in the work­force, a new CEO will have to stay sen­si­tive to the over­all cul­ture of the orga­ni­za­tion. The way down­siz­ing hap­pens requires a deft touch, Hirsch notes, because the oth­er employ­ees are watching.

3. Beware Activist Investors

One ele­ment of the upheaval at Penney’s has been the intru­sion of activist investors — in the form of Bill Ack­man from the hedge fund Per­sh­ing Square and Steven Roth of Vor­na­do Real Estate. The two worked their way onto the JC Pen­ney board, helped get John­son brought in as CEO, and start­ed push­ing for rad­i­cal change at the company.

Activist investors can be advan­ta­geous for a com­pa­ny, espe­cial­ly one that has high poten­tial but has strug­gled to take advan­tage of it. But these investors have a rep­u­ta­tion for want­i­ng change to come quick­ly and for push­ing share prices to rise in the short term. Focus­ing on stock price by down­siz­ing or sell­ing off real estate may not be in the long-term inter­est of the company.

Hirsch rec­om­mends com­pa­ny lead­ers antic­i­pate the changes activist investors would impose and start imple­ment­ing them — but in a more mea­sured way, in order to proac­tive­ly defang these investors.

If you meet them in the mid­dle, you keep them off your board,” Hirsch says. It’s not that you’re doing things they don’t want done. It’s that you’re doing things less rad­i­cal­ly. This makes you less like­ly to be a tar­get of activist investors who just want to see the stock price go up. If you leave them low-hang­ing fruit, they’ll take it.”

Featured Faculty

Paul Hirsch

James L. Allen Professor of Strategy & Organizations, Professor of Management & Organizations

About the Writer

Fred Schmalz is the business editor of Kellogg Insight.

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