Question

MiniCase 6—How JCPenney Sailed into a Red Ocean

How JCPenney Sailed into a Red Ocean

This activity is important because, as a strategic leader, you must be able to guide your company toward effective strategic positions of cost leadership, differentiation or a blue ocean strategy.

The goal of this exercise is to illustrate the risks of attempting a blue ocean strategy.

Read the following case on JCPenney and then answer the questions that follow.

JCPenney was once one of the top department stores in the United States, with more than 2,000 locations at its peak. Indeed, the retailer was so common in the suburbs that one could not imagine a shopping mall without a JCPenney. Generations of America's children were mesmerized by its annual holiday catalog. As recent as 2007, JCPenney had enjoyed a market valuation of $18 billion. In a bit over a decade, JCPenney's market cap had fallen to a mere $269 million. Thus, the retailer lost 98.5 percent of its valuation or $17.7 billion in a bit over decade. Many observers expect JCPenney to follow Sears—once the leading American retailer—to also file for bankruptcy, which Sears did in 2018. What went wrong?

Of course, all retailers are exposed to the same threat, Amazon, which has become synonymous with online shopping. Although Walmart, Target, and Best Buy all have become more competitive in recent years, JCPenney sped up its own demise with a bad business strategy. In particular, under former CEO Ron Johnson, JCPenney learned the hard way how difficult it is to change a strategic position. When hired as JCPenney's CEO in 2011, Johnson was hailed as a star executive. Johnson was poached from Apple, where he had created and led Apple's retail stores since 2000. Apple's stores are the most successful retail outlets globally in terms of sales per square foot. No other retail outlet, not even luxury jewelers, achieves more. This poaching didn't come cheap: JCPenney paid Ron Johnson close to $53 million in total compensation in 2011, even though he didn't start until November of that year.

Once on board with JCPenney, Johnson immediately began to change the company's strategic position from a cost-leadership to a blue ocean strategy, attempting to combine its traditional cost-leadership position with a differentiation position. In particular, he tried to reposition the department store more toward the high end by providing an improved customer experience and more exclusive merchandise through in-store boutiques. Johnson ordered all clearance racks with steeply discounted merchandise, common in JCPenney stores, to be removed. He also did away with JCPenney's long-standing practice of mailing discount coupons to its customers. Rather than following industry best practice by testing the more drastic strategic moves in a small number of selected stores, Johnson implemented them in all of the then 1,800 stores at once. When one executive raised the issue of pretesting, Johnson bristled and responded: "We didn't test at Apple."1  Under his leadership, JCPenney also got embroiled in a legal battle with Macy's because of Johnson's attempt to lure away homemaking maven Martha Stewart and her exclusive merchandise collection.

The envisioned blue ocean strategy failed badly, and JCPenney ended up being stuck in the middle. Within 12 months with Johnson at the helm, JCPenney's sales dropped by 25 percent. In a hypercompetitive industry such as retailing where every single percent of market share counts, this was a landslide. Things went from bad to worse. In 2013, JCPenney's stock performed so poorly it was dropped from the S&P 500 index. Less than 18 months into his new job, Johnson was fired. JCPenney had lost over two-thirds of its market valuation (or $6 billion) under Johnson's leadership. The attempted overhaul of JCPenney under Johnson also left the company burdened with more than $4 billion in debt. Myron Ullman, his predecessor, was brought out of retirement as a temporary replacement.

Under Johnson's leadership, JCPenney failed at its attempted blue ocean strategy and instead sailed deeper into the red ocean of bloody competition. This highlights the perils of attempting a blue ocean strategy because of the inherent trade-offs in the underlying generic business strategies of cost leadership and differentiation. As a result, JCPenney continues to experience a sustained competitive disadvantage and may go out of business.

To turn around the 120-year-old icon, the board appointed Marvin Ellison as CEO in 2015. With a strong background in operations management and leadership skills honed at The Home Depot, he focused on lowering JCPenney's cost structure while increasing perceived value offered to its customers. In an attempt to stem losses, in 2017 JCPenney closed some 140 retail stores across the United States out of a total of 1,000 remaining outlets. Marvin Ellison was lured back into the home improvement industry when he was appointed CEO of Lowe's in 2018.

In October 2018, Jill Soltau was appointed CEO of JCPenney. She was previously the CEO of Jo-Ann Stores, a fabric-and-craft retailer. Her new business strategy is not yet clear, and several top executive positions were still vacant as of spring 2019. Soltau retained McKinsey, a strategy consulting firm, to help with the turnaround. One question she faces is whether to continue selling appliances, which her predecessor brought back in 2016 to take away sales from failing Sears. JCPenney had discontinued sales of appliances in 1983 to focus on apparel, and the majority of JCPenney's sales still come from apparel, an area the retailer has neglected in recent years, even though JCPenney was once the go-to apparel retailer for American middle-class families. Whether Soltau will successfully sharpen JCPenney's strategic position and thus make the American icon competitive again remains to be seen.

**JCPenney filed for bankruptcy in May 2020, after the publication of this case.

AFTER READING THE CASE ANSWER THE FOLLOWING QUESTIONS:

• While all brick-and-mortar retailers face the threat of Amazon and online shopping in general, why did JCPenney perform so poorly while other retailers such as Walmart, Best Buy, or Target fare better?
• Ron Johnson was hailed as a star executive at Apple, where he led the company's highly successful retail arm. As CEO of JCPenney, he applied the "Apple playbook," for example, moving JCPenney toward the higher end of the market or going with hunches ("we didn't test at Apple"), rather than applying more traditional decision making. Why did his attempt to change JCPenney's strategic position from cost-leadership to a blue ocean strategy fail so spectacularly? What are some of the lessons?
• You are part of the McKinsey strategy consulting team that the new CEO, Jill Soltau, retained to help turn around JCPenney. What recommendations would you give her? In particular, what type of business strategy would you want JCPenney to pursue, and how would you make the changes necessary? Be specific.

Answer 1

1. While all brick-and-mortar retailers face the threat of Amazon and online shopping in general, why did JCPenney perform so poorly while other retailers such as Walmart, Best Buy, or Target fare better?

JCPenny had tried a blue ocean model of business that focused on unparalleled unique quality products/services and become a market leader. It is the best model tried at the wrong time when online giants and the best quality services are already in the market.

In the same digital destructive situation, Walmart could excel well in the business because they opted the 'Everyday Low Cost [ELDC]' motto to survive and succeed in the market. This model is totally against the blue ocean model which aims at a unique quality product with a uniquely high price!

2. Ron Johnson was hailed as a star executive at Apple, where he led the company's highly successful retail arm. As CEO of JCPenney, he applied the "Apple playbook," for example, moving JCPenney toward the higher end of the market or going with hunches ("we didn't test at Apple"), rather than applying more traditional decision making. Why did his attempt to change JCPenney's strategic position from cost-leadership to a blue ocean strategy fail so spectacularly? What are some of the lessons?

Instead of applying the ideas like ending the discount program and the coupon system that generated store traffic and adopting a round fair system, in a few stores and make it a universal practice across all branches when the success is confirmed, Ron Johnson implemented the policies across all the stores. It was not so easy to implement and manage as he brought out radical changes against the traditional model of operation than gradual implementation. Running the business with almost an entirely new set of top officials and executives was a dangerously challenging job especially when online giants were engulfing the whole retail market.

3. You are part of the McKinsey strategy consulting team that the new CEO, Jill Soltau, retained to help turn around JCPenney. What recommendations would you give her? In particular, what type of business strategy would you want JCPenney to pursue, and how would you make the changes necessary? Be specific

Recommendation to the new CEO of JCPenney, Jill Soltau are;

1. Get back to what JCPenney did in the past to grow to a good position in the retail market i.e. obsess the customers with a daily discount excitement program than fixed fair prices.

2. Go for a premium retail program only after regaining confidence in the market. This is only possible when the customer is obsessed with lower prices, incentives, bonuses, and discounts. Proper care is to be taken to avoid a cheap reputation with too much discount alerts.

3. Gradually adopt online verticals and increase the loyalty of existing regular customers.

4. Develop longstanding bonding with customers through the subscription model and door to door delivery during the pandemic and bad weather situations.

5. Invest more on Research and Development and innovations.