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.

During 2020, the following transactions were recorded by the Port Hudson Community Hospital, a private sector not-for-profit institution:

1. Gross charges for patient services, all charged to Patient Accounts Receivable, amounted to $1,950,000. Estimated contractual adjustments with third-party payors amounted to $550,000 and the Hospital estimated implicit price concessions would total $25,000.
2. Charity services, not included in transaction 1, would amount to $96,000, had billings been made at gross amounts.
3. Other revenues, received in cash, were parking lot, $35,000; cafeteria, $57,500; gift shop, $12,500.
4. Cash gifts restricted by the donor for programs amounted to $38,750 for the year. During the year, $77,000 was expended for technician salaries supporting the program identified by the donor (debit Operating Expense—Salaries and Benefits).
5. Mortgage bond payments amounted to $74,000 for principal and $46,000 for interest. Assume unrestricted resources are used.
6. During the year, the hospital received, in cash, unrestricted contributions of $63,000 and unrestricted income of $53,750 from endowment investments. (It is the hospital’s practice to treat unrestricted gifts as nonoperating income.)
7. New equipment, costing $182,000, was acquired, using donor-restricted cash that was on hand at the beginning of the year.
8. An old piece of lab equipment that originally cost $200,000 and that had an undepreciated cost of $40,000 was sold for $22,000 cash.
9. At the end of 2020, pledges (restricted as to purpose) were received in the amount of $195,000. These are intended to be received and expended in 2021.
10. Cash contributions were received from donors restricted for plant acquisition, $218,750.
11. Bills were received for the following items: Utilities $158,500 and Insurance $92,000. These will be paid in January of 2021.
12. Depreciation of plant and equipment amounted to $225,000.
13. Cash payments on accounts payable amounted to $208,500. Another $834,500 was expended on wages and benefits.
14. Cash collections of patient accounts receivable amounted to $1,210,000. These were in settlement of patient accounts totaling $1,662,000. Contractual adjustments associated with these totaled $430,000 and price concessions totaled $22,000.
15. Closing entries were prepared.

Required:
a. Record the transactions in the general journal of the Port Hudson Community Hospital.
b. Prepare a Statement of Operations for the Port Hudson Community Hospital for the year ended December 31, 2020.
c. Prepare a Statement of Changes in Net Assets for the Port Hudson Community Hospital for the year ended December 31, 2020. Assume beginning net assets are $7,225,000

During 2020, the following transactions were recorded by the Port Hudson Community Hospital, a private sector not-for-profit institution:

1. Gross charges for patient services, all charged to Patient Accounts Receivable, amounted to $1,970,000. Estimated contractual adjustments with third-party payors amounted to $560,000 and the Hospital estimated implicit price concessions would total $27,000.
2. Charity services, not included in transaction 1, would amount to $100,000, had billings been made at gross amounts.
3. Other revenues, received in cash, were parking lot, $37,000; cafeteria, $60,500; gift shop, $13,500.
4. Cash gifts restricted by the donor for programs amounted to $40,450 for the year. During the year, $80,600 was expended for technician salaries supporting the program identified by the donor (debit Operating Expense—Salaries and Benefits).
5. Mortgage bond payments amounted to $77,200 for principal and $48,400 for interest. Assume unrestricted resources are used.
6. During the year, the hospital received, in cash, unrestricted contributions of $65,800 and unrestricted income of $56,250 from endowment investments. (It is the hospital’s practice to treat unrestricted gifts as nonoperating income.)
7. New equipment, costing $186,000, was acquired, using donor-restricted cash that was on hand at the beginning of the year.
8. An old piece of lab equipment that originally cost $220,000 and that had an undepreciated cost of $44,000 was sold for $24,000 cash.
9. At the end of 2020, pledges (restricted as to purpose) were received in the amount of $205,000. These are intended to be received and expended in 2021.
10. Cash contributions were received from donors restricted for plant acquisition, $225,250.
11. Bills were received for the following items: Utilities $161,100 and Insurance $93,600. These will be paid in January of 2021.
12. Depreciation of plant and equipment amounted to $231,000.
13. Cash payments on accounts payable amounted to $213,900. Another $839,100 was expended on wages and benefits.
14. Cash collections of patient accounts receivable amounted to $1,214,000. These were in settlement of patient accounts totaling $1,672,000. Contractual adjustments associated with these totaled $434,000 and price concessions totaled $24,000.
15. Closing entries were prepared.

Required:
a. Record the transactions in the general journal of the Port Hudson Community Hospital.
b. Prepare a Statement of Operations for the Port Hudson Community Hospital for the year ended December 31, 2020.
c. Prepare a Statement of Changes in Net Assets for the Port Hudson Community Hospital for the year ended December 31, 2020. Assume beginning net assets are $7,255,000.

Recording and Reporting Equity Investment: FV-NI

Adjust FVA at Year-End

On November 1, 2020, Drucker Co. acquired the following investments in equity securities measured at FV‑NI.

Kelly Corporation—600 shares of common stock (no-par) at $60 per share. Keefe Corporation—360 shares preferred stock ($10 par) at $20 per share. On December 31, 2020, the company’s year-end, the quoted market prices were as follows: Kelly Corporation common stock, $52, and Keefe Corporation preferred stock, $24. Following are the data for 2021.

Mar. 2, 2021 Dividends per share, declared and paid: Kelly Corp., $1, and Keefe Corp., $0.50.
Oct. 1, 2021 Sold 120 shares of Keefe Corporation preferred stock at $25 per share.
Dec. 31, 2021 Fair values: Kelly common, $46 per share, Keefe preferred, $26 per share.

• Journal Entries and Financial Statement Presentation for 2020
• Journal Entries and Financial Statement Presentation for 2021

a. Prepare the entry for Drucker Company to record the purchase of the securities.

b. Prepare any adjusting entry needed at December 31, 2020.

c. Indicate the items and amounts that should be reported on the 2020 income statement of Drucker and its year-end balance sheet. Assume that the investments are classified as current.
Note: Use a negative sign to indicate a loss.

Feedback

You have correctly selected 13.

Partially correct

How much should the company report as current assets on the December 31, 2020 classified balance sheet?

Glacier Products Inc. is a wholesaler of rock climbing gear. The company began operations on January 1, Year 1. The following transactions relate to securities acquired by Glacier Products Inc., which has a fiscal year ending on December 31:

Required:

1. Journalize the entries to record the preceding transactions. For a compound transaction, if an amount box does not require an entry, leave it blank. In your computations, round per share amounts to two decimal places.

2. Prepare the investment-related asset and stockholders’ equity balance sheet presentation for Glacier Products Inc. on December 31, Year 2, assuming that the Retained Earnings balance on December 31, Year 2, is $445,000.

Interview:

1. For this assignment, you are to develop 10 questions that you would ask a management official responsible for the financial planning for the healthcare organization..
2. Make sure the questions will give you insight into what the company looks for when preparing their yearly budget, fiscal planning strategies, as well as how they monitor their financial condition throughout the year and make adjustments as needed.
3. For this activity include the following:

• A list of all 10 questions you would ask the financial manager of the chosen organization.
• A rationale (50–100 words for each question) for each question.

In total this assignment should be 350 to 500 words in length.

Q = A university is hiring new construction company and need to come with a blueprint. They are debating on how much distance/km belonging to a forested park can be preserved. Within this region, there are 250 residents and each have an identical inverse dmnd function where P = 20 - Q. Here, Q represents the amount of distance/km preserved. P is the representing per distance cost; that an individual is willing to pay for the amount of distance (Q).

Note: Margnal cost value is $800 per distnce/km

1. To support this question, Incorporate the marginal cost curve/, marginal benefit curve and write aggregate demand and plot these into graph

2.How much km is required fro be preserve in the context of efficient allocation,