Is JC Penney Killing Itself with a Failed Strategy?

A few years ago, JC Penney was a traditional, low-end department store that appeared to be in a slow decline. Bill Ackman of Pershing Square Capital Management, a hedge fund investor, bought a large stake in the company and pushed to hire a new CEO, Ron Johnson. Johnson, who had successfully created the Apple retail store concept, was tasked with turning around the company's fortunes.

In January 2012, Johnson announced the new strategy for the company and rebranding of JC Penny. The strategy announced by Johnson entailed a remake of the JC Penny retail stores to create shops focused on specific brands such as Levi's, IZOD, and Liz Claiborne and types of goods such as home goods featuring Martha Stewart products within each store. Simultaneously, Johnson announced a new pricing system. The old approach of offering special discounts throughout the year was eliminated in favor of a new customer-value pricing approach that reduced prices on goods across the board by as much as 40 percent. So, the price listed was the price to be paid without further discounts.

The intent was to offer customers a "better deal" on all products as opposed to providing special, high discounts on selected products. The intent was to build JC Penny into a higher-end (a little more upscale) retailer that provided good prices on branded merchandise (mostly clothes and home goods). These changes overlooked the firm's current customers; JC Penny began competing for customers who normally shopped at Target, Macy's, and Nordstrom, to name a few of its competitors.

Unfortunately, the first year of this new strategy appeared it to be a failure. Total sales in 2012 were $4.28 billion less than in 2011, and the firm's stock price declined by 55 percent. Interestingly, its Internet sales declined by 34 percent compared to an increase of 48 per- cent for its new rival, Macy's. All of this translated into a net loss for the year of slightly less than $1 billion for JC Penny. It seems that the new executive team at JC Penny thought that they could retain their current customer base (perhaps with the value pricing across the board), while attracting new customers with the new "store-within-a-store" concept. According to Roger Martin, a former executive, strategy expert, and current Dean at the University of Toronto, "... the new JC Penney is competing against and absolutely slaughtering an important competitor, and it's called the old JC Penney."

Only about one-third of the stores had been converted to the new approach when the company began to heavily promote the concept. Its new store sales produced increases in sales per square foot, but the old stores' sales per square foot markedly declined. It appears that Penney was not attracting customers from its rivals but rather cannibalizing customers from its old stores. According to Martin the new CEO likely understands a lot about capital markets but does not know how to satisfy customers and gain a competitive advantage.

Additionally, the former CEO of JC Penney, Allen Questrom, described Johnson as having several capabilities (e.g., intelligent, strong communicator) but believes that he and his executive team made a major strategic error and was especially insensitive to the JC Penny customer base.

The question now is whether the company can survive such a major decline in sales and stock price. In 2013, it announced the layoff of approximately 2,200 employees to reduce costs. In addition, CEO Johnson announced that he was reinstituting selected discounts in pricing and offering comparative pricing on products (relative prices with rivals). The good news is that transformed stores are obtaining sales of $269 per square foot, whereas the older stores are producing $134 per square foot. Will Johnson's strategy survive long enough for all of the stores to be converted and save the company? The answer is probably not, because Johnson was fired by the JC Penny board of directors on April 8, 2013, about 1.5 years after he assumed the CEO position.

a. If you are appointed as a new CEO taking charge of JC Penney, what business-level strategy would you implement? Provide THREE (3) arguments supporting your choice.

b. From a strategic management perspective, suggest THREE (3) key lessons that can be learned from JC Penney's case.