The Turnaround Trap: Apples Aren't Penneys

One of the more enduring business management conceits is that a gifted executive can manage anything. There have been some notable examples over time: Lou Gerstner, who went from being CEO of RJR Nabisco to successfully assuming the same position at IBM and is credited with saving that company. James McNerney, who moved from GE to 3M to Boeing and though not always triumphant (yet), his serial popularity as a leader attests to his skills. Allan Mullaly has gone from Boeing to Ford and is acclaimed for rescuing the auto maker. There are others, of course, but they are notable mostly for their rarity.

Great hopes were invested in Ron Johnson, the CEO of Apple's retail division. He is recognized as the operational mastermind behind the company's iconic stores and their stratospheric sales. Having conquered that high price-point, high tech market, he came to the attention of retailer JC Penney, a company caught between pricey designer boutiques, mega-discounters like Walmart or Target and the digital commerce revolution. It was thought that his creativity and success would somehow translate from the iPad and iPhone to the less lofty realm of sun dresses and mens' socks.

You don't want to ask how that's working out.

It's not so much that skills are not transferable, but it is insights, perceptions and judgements that really matter. As the following article explains, sometimes a leader's success in one sphere renders her or him deaf, dumb and blind to the hazards of another. The usual cautions about hubris and ego apply, as do the enduring lessons learned from failure and the exemplary benefits of humility. But perhaps most importantly, Warren Buffett's quote below captures the structural risk inherent in assuming that solutions which may apply in one situation are transitive. JL

James Surowiecki reports in The New Yorker:

“When a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact.”

In January of 2012, Ron Johnson, the new C.E.O. of J. C. Penney, gave a speech unveiling his ambitious strategy for reinventing the hoary old retailer. It was a much anticipated event. Penney was directionless and barely profitable, and Johnson was a retail superstar. He had helped make Target hip, pioneering partnerships with big-name designers like Michael Graves, and had then moved to Apple, where he orchestrated the creation of the Apple Store. Johnson’s presentation did not disappoint. He made it clear that he wasn’t going to just stabilize Penney; he was going to revolutionize it. Coupons and sales, which had become ubiquitous, were going to be replaced by what he called “fair and square pricing.” The stores themselves would be radically redesigned, becoming curated showcases of mini shops, arranged by brand. J. C. Penney, Johnson said, would become “America’s favorite store.”

Fourteen months later, J. C. Penney is America’s favorite cautionary tale. Customers have abandoned the store en masse: over the past year, revenues have fallen by twenty-five per cent, and Penney lost almost a billion dollars, half a billion of it in the final quarter alone. The company’s stock price, which jumped twenty-four per cent after Johnson announced his plans, has since fallen almost sixty per cent. Twenty-one thousand employees have lost their jobs. And Johnson has become the target of unrelenting criticism. “There is nothing good to say about what he’s done,” Mark Cohen, a former C.E.O. of Sears Canada, who is now a professor at Columbia, told me. “Penney had been run into a ditch when he took it over. But, rather than getting it back on the road, he’s essentially set it on fire.” Johnson is scrapping his pricing strategy but is sticking by the mini-shop concept: last week, Joe Fresh boutiques débuted in stores across the country. Meanwhile, rumors of Johnson’s imminent departure are everywhere, and last year’s pronouncement is starting to look like the business equivalent of George Bush’s “Mission Accomplished” speech.
The biggest problem with Johnson’s strategy is simple: he misread what Penney’s customers wanted. Doing away with constant markdowns was, on the face of it, sensible: instead of starting with a high price and quickly marking it down, start with a lower price. But Johnson failed to see how attached customers were to markdowns. “In most of the retail universe, price is the most powerful motivator,” Cohen said. “This game of cat and mouse with regular, ever-changing discounts is illogical, but it’s one that lots of consumers like to play. Johnson just ignored all that.”
The way Penney implemented its plan also hurt. For one thing, Johnson didn’t test his pricing strategy—perhaps because of his experience at Apple, where market research has always been anathema. In addition, he rolled it out before the stores had been remodelled or filled with new merchandise. This drove old customers away without giving new ones a reason to come in. Offering pain and no gain is no way to remake a company. “Anytime you’re trying to change the way you do things, small wins are important,” Michael Roberto, a management professor at Bryant University, told me. “Small wins help you build support both internally and externally, and they make it easier for people to buy in.”
Given Johnson’s track record, plenty of people are shocked by what’s happened. Yet hiring him was always a huge gamble. As Cohen put it, “He had never been a C.E.O., never mounted or managed a turnaround, had limited fashion-apparel experience, and had no experience in the middle-market space.” Johnson’s champions assumed that, because he had done great work elsewhere, he would do great work at Penney. But the circumstances at Johnson’s previous companies were radically different from those at Penney. Target was a thriving company that had already positioned itself as a trend-aware, fashionable store, so Johnson had plenty of support in the effort to make it cooler. And, while the Apple Store is a brilliant retail concept, its success was surely helped by the fact that it has been home to three of the best-selling consumer products ever. At Target and at Apple, Johnson was running with the wind, not against it. At Penney, he’s trying to do something very different: remake a company’s DNA. Penney’s board no doubt believed that Johnson’s record guaranteed that he’d succeed. But this perception probably reflects what psychologists call “the fundamental attribution error”—our tendency to ignore context and attribute an individual’s success or failure solely to inherent qualities. (People who watch one basketball player shoot free throws in a poorly lighted gym and another shoot in a well-lighted gym attribute the latter’s greater success to ability rather than to conditions.) Skill is important, but so is context: being great at selling cheap fashion or cool technology products doesn’t mean you’ll be great at turning around a middle-market retailer.
Of course, this cuts both ways. Right now, Johnson looks like a complete fool. But turnarounds are hard to pull off, especially in retail. One study found that efforts at merely getting a money-losing retailer back to profitability succeed only thirty per cent of the time. Radically remaking a major company, as Johnson is trying to do, is even harder. So, if Johnson isn’t as good as he looked at Apple, he’s probably not as bad as he looks at Penney. Indeed, his biggest mistake may simply have been taking the job in the first place.