Is JCPenney Killing Itself with a Failed Strategy?

A few years ago, JCPenney was a traditional, low-end department store that appeared to be in a slowdecline. Bill Ackman of Pershing Square Capital Management, a hedge fund investor, bought a large stake in the comp- any and pushed to hire a new CEO, Ron Johnson. John- son, who had successfully created the Apple retail store concept,wastaskedwithturningaroundthecompany's fortunes.

In January 2012, Johnson announced the new strategy' for the company and rebranding of JCPenny. The strategyannouncedbyJohnsonentailedaremakeofthe JCPennyretailstorestocreateshopsfocusedonspecific 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 pricingsystem.

The old approach of offering special discounts through- outtheyearwaseliminatedinfavorofanewcustomer- value pricing approach that reduced prices on goods acrosstheboardbyasmuchas40percent.So,theprice listedwasthepricetobepaidwithoutfurtherdiscounts. The intent was to offer customers a "better deal" on all productsasopposedtoprovidingspecial,highdiscounts on selectedproducts.

The intent was to build JCPenny into a higher-end (a littlemoreupscale)retailerthatprovidedgoodpriceson brandedmerchandise(mostlyclothesandhomegoods). Thesechangesoverlookedthefirm'scurrentcustomers; JCPenny began competing for customers who normally shopped at Target, Macys, 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 S4.28 billion less than in 2011, and the firms stock price declined by 55 percent. Interestingly, itsInternetsalesdeclinedby34percentcomparedtoan increaseof48percentforitsnewrival,Macys.Allofthis translatedintoanetlossfortheyearofslightlylessthan

$1 billion for JCPenny.

It seems that the new executive team at JCPenny 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 JCPenney is competing against and absolutely slaughtering an importantcompetitor,anditscalledtheoldJ.C.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 prod- uced increases in sales per square foot, but the old stores sales per square foot markedly declined. It appears that Penney was not attracting customersfrom 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 tosatisfy customers and gain a competitive advantage. Additionally, the former CEO of JCPenney, Allen Questrom, described Johnsonashavingseveralcapabilities(e.g.,intelligent,strong communicator) but believes that he and his executive team made a major strategic error and was especially insensitive to the JCPenny customerbase.

The question now is whether the company can survive such amajordeclineinsalesandstockprice.In2013,itannounced thelayoffofapproximately2,200employeestoreducecosts. In addition, CEO Johnson announced that he was reinstit- uting 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 persquarefoot,whereastheolderstoresareproducing$134 per square foot. Will Johnson's strategy survive long enough for all of the stores to be converted and save the company? Theanswerisprobablynot,becauseJohnsonwasfiredbythe JCPenny board of directors on April 8, 2013, about 1.5 years after he assumed the CEOposition.

question

1.What strategy was the new CEO at JCPenney seeking to implement given the generic strategies?

2.What was the result of change in strategy implemented?

3.Why was this strategy a disaster forJCPenney?

4.What does it mean to be "stuck in the middle" between two strategies (i.e. between low cost and differentiationstrategies)?