Stop the Transformational Change–It’s Too Bold for Penney’s, but Now What?

The recent turmoil at Penney’s illustrates the challenges of transformational change. And, when transformational change goes awry, merely halting the bold moves and attempting to reverse the damage does not eliminate the challenges. At Penney’s, challenges remain even after ousting its CEO, former Apple executive Ron Johnson, who was hired to bring about transformational change. So, now what for Penney’s?

Johnson was ousted from Penney’s after his bold pricing moves, which eliminated coupons and discounts, triggered a devastating revenue drop. To undo this, Johnson was replaced by former Penney’s CEO Myron Ullman. And, in a reversal of Johnson’s pricing, Penney’s has been promoting bargains like five dollar tee shirts and one dollar flip flops. But, will a reversal make Penney’s successful?

Recognizing and reversing excess boldness is certainly a plus. The destructive nature of bold change is why my Winning Moves® report “Evolution, Not Revolution” is subtitled “How to Innovate without Destroying Your Company“. Based upon my research, the report discourages bold change and, instead, recommends taking evolutionary steps. Indeed, much like my report warns, Penney’s bold moves were quite destructive.

But, although success comes via evolutionary steps, this kind of stepwise transition was missing from Penney’s transformation attempt. Yet, since misperceptions about innovation are common, it is easy to miss the crucial role of stepwise transition, much like Penney’s apparently did. Apple’s spectacular success has glorified innovation to the point where the importance of any underlying stepwise transition is not obvious and is often ignored. Thus, misperceptions about Apple’s innovation abound. This leads to unrealistic expectations for transformational innovation. And, that appears to be what happened at Penney’s.

Thus, being swept up in the glory of innovation does not necessarily reflect badly upon Johnson’s executive ability. In fact, Johnson is highly capable, with an impressive track record at Apple and Target. His bold moves at Penney’s most likely reflect relatively common misperceptions about innovation. So, as I see it based upon my 25+ years researching business success and failure patterns, Ron Johnson apparently was derailed by misunderstanding the complex nuances of innovation. Innovation is so widely touted as the route to economic resurgence, and Apple is so renowned for its stellar innovation, that it is not unusual to miss the underlying, but ever so important, role of stepwise transition, as Johnson apparently did.

So, unlike others who attribute Johnson’s fate to poor timing in a weak economy or to lack of testing, I see misjudging the importance of stepwise transition as a major cause of Penney’s problems. Successful stepwise transition pays attention to differences between where you are and where you will go, and it takes evolutionary steps in the desired direction. The steps must fit the business, not merely adopt what worked well elsewhere, in a far different environment. So, rather than Penney’s just adopting approaches from Apple, more attention to how Apple and Penney’s differ was required. Based upon those differences, evolutionary steps that fit Penney’s were needed to change more gradually.

But, under Johnson, there was no stepwise transition to take Penney’s closer to being more like Apple. As a result, innovation can be perilous, especially due to financial strain. Without stepwise transition, existing business can easily disappear long before new business is attracted. So, money can dry up, making it tough to afford the bold moves. This happened at Penney’s, where revenue slumped and Johnson’s bold moves became difficult to afford.

Furthermore, it has been said that a major problem for Penney’s was Johnson not understanding Penney’s core customers. On the other hand, a Wall Street Journal piece in the editorial section (“How J.C. Penney Laid an Egg” by Holman W. Jenkins, April 17, 2013), which portrays Johnson rather favorably, takes the position that he was not naive about Penney’s core customers. As I see it, Jenkins may be right since the extent to which Johnson did or did not understand Penney’s customers is not crystal clear.

Granted, Johnson’s taste in shirts differs from that of customers at Penney’s, where cotton shirts he preferred sold poorly. Yet, Johnson may have understood quite well that typical Penney’s customers were not like the upscale market he sought to target. But, regardless of whether or not Johnson understood Penney’s customers, he did not seem to understand the appropriate choice of target markets during what should have been a transitionary period. This most likely reflects a glorified view of innovation and missing the need for stepwise transition.

Nonetheless, Penney’s still faces “now what” questions. Reversing the ill-fated pricing decisions may have some benefit. But, as pointed out in the Wall Street Journal article, “Not Much Future in Penney’s Past” by Justin Lahart, April 17, 2013, reinstituting discounts doesn’t address Penney’s longer term challenges. So, as I see it, Penney’s should not ignore transition when it reverses Johnson’s bold moves. Penney’s recognized the downside of boldly trying to apply Apple-like ways to transform itself into an upscale retailer. Now, it needs to consider whether its current price promotions are boldly revamping Penney’s into somewhat of Wal-Mart. True, heavy discounting may have advantages in today’s lackluster economy, but bold change is generally not good strategy. Whether Penney’s shifts upward or downward, stepwise transition is essential.

Additionally, Penney’s must recognize that its struggles are only partially, not entirely, due to price. Merchandise mix also plays a role, as illustrated by two recent letters to the editor in the Wall Street Journal (“Two Views on J.C. Penney’s Slump”, April 20, 2013). A letter from Tracy Alig Dowling, once a core customer, says she stopped shopping at the new Penney’s because it no longer carried the basic items she typically bought there. In contrast, a letter from Kathleen E. Kling, who describes herself as a Dillard’s, Loft, and TJMaxx shopper, tells how impressed she was with the new Penney’s. These letters demonstrate that winning back core customers, like Tracy, is not strictly about price. For Tracy, the bigger issue is that Penney’s no longer carries the products she wants. And, like Tracy’s, Kathleen’s letter also reflects merchandise preferences.

Provided Penney’s still has or can readily rebuild the strengths needed to do so, there are advantages to reattracting core customers, like Tracy, who want to shop at Penney’s. It may be easier to maintain their loyalty than that of trendier new customers the transformed Penney’s seeks to attract. Additionally, Penney’s must address whether the allegation that there aren’t enough Tracies out there is true. Or, is Penney’s not doing enough to identify what it can offer those core shoppers? Some of them who want the basics might also buy some trendier items, if Penney’s can get the mix right.

Moreover, the letter from Kathleen, who likes the new Penney’s, suggests that some of what Johnson did is working. This is consistent with reports of higher sales per square foot in the Johnson redesigned areas of Penney’s stores. Yet, Kathleen’s letter, tells us she came into the store not for the trendy new merchandise she likes, but for the basics–underwear for her husband. Once in the store, however, she was impressed with the new merchandise and bought more than the mere basics she came for. Now, she expects to return to Penney’s more often, not just occasionally when her husband needs underwear. Penney’s should pay attention to this. It suggests that even where Johnson’s bold moves are working, they combine the basic needs of Penney’s core shoppers with some of Johnson’s new trendiness. Thus, it is not bold change, but moving stepwise from where Penney’s is now that brings success.

So, going forward, Penney’s needs to determine its stepwise transition. It is a company that lost many core customers, yet increased sales per square foot in areas where Johnson’s new approaches were implemented. Penney’s must assess how to build upon that, perhaps by reattracting core customers with basics, and by evaluating what else to offer them, including whether they might buy some of Johnson’s new offerings. Penney’s should give thought to whether it can find an effective way to integrate its basic business with Johnson’s trendiness, while blending pricing promotions with merchandise mix.

Plans to work toward better understanding customers, which Mr. Ullman emphasized when he retook the reins as CEO, are only part of what Penney’s needs. Penney’s must also assess the strengths of where it is now, and determine how to build on them in a stepwise manner, that allows an affordable transition. And, Penney’s should not forget what it recently learned the hard way: bold moves are not “Winning Moves”. Stepwise transitions are generally more successful, and that’s what Penney’s transformation has been missing.

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