[00:00:00] Daniel Greening:

[00:00:01] Cold Open

[00:00:01] Daniel Greening: Under Ron Johnson's management, JC Penney lost about $1 billion in under 15 months.

[00:00:08] Dan Dickson: If there had been some experimentation, there could have been elements of this that could have been wildly successful. We don't know. But as combined effort, it took the company down. 

[00:00:17]

[00:00:18] Daniel Greening: Welcome to the Mindful Agility podcast. I'm your host, Dan Greening. My co-host today is Dan Dickson. Dan Dickson is a Harvard Business School graduate, corporate executive and management consultant. I'm a PhD computer scientist, startup founder, and agile coach.

[00:00:37] We seem to end up leading people and we want our people to be successful. We've been friends for about 20 years. 

[00:00:45] Dan Dickson and I love talking about success and failure. Why do some businesses succeed and others fail? Why do some leaders succeed in one context and fail in others? 

[00:00:57] Ron Johnson led a couple of retail successes and then a couple of retail failures. He created the modern Target department store from humble beginnings and the Apple Store from scratch, two huge successes. But what followed was a 17 month stint as CEO of JC Penney that generated big losses, and an eight year stint at start-up enjoy.com that ended just two weeks ago in bankruptcy. So Ron Johnson is a perfect subject for folks looking at success and failure, like Dan and me.

[00:01:32] If you want to get useful stuff done faster, this podcast is for you. Mindfulness practices help us gain greater insight, while agile practices help us get results. Each episode is an agile experiment to see if we can help you, our listener. The journey is half the fun.

[00:01:51]

[00:01:52] Daniel Greening: After a lot of research and conversation, Dan Dickson, and I ended up with three episodes on Ron Johnson. Here's what we've got. You are listening to the first episode and an introduction to Ron Johnson and a failure analysis of JC Penney. We'll talk about how failures drove management changes in the past. 

[00:02:12] The second episode introduces agility and mindfulness, and uses them as an analysis framework for businesses. Can we predict success and failure using this framework? 

[00:02:24] The third episode will apply the same framework to enjoy.com. Could this framework help investors figure out whether a company is worthy of their money? 

[00:02:34] So let's start with Ron Johnson, JC Penney and our failure analysis.

[00:02:40] About Failure

[00:02:40] Daniel Greening: People often avoid talking about failure. They may be ashamed of something they did, or they don't want to embarrass somebody else. So they don't discuss failures. The problem is that we can all learn a lot from failure. We all fail occasionally over our lifetime. 

[00:02:57] Dan Dickson: And that's really the point of what we're talking about today. There have been any number of articles on JC Penney and Ron Johnson, and most of them have been less than flattering towards Johnson, but that's not our point today. Our point today is to take a look at this and understand why this failure happened and what could have been done to prevent it and to learn from it moving forward.

[00:03:17] Daniel Greening: When we explore exactly what happened and why it happened, we can actually learn to succeed in areas where others fail. That can lead to tremendous success. 

[00:03:29] Ron Johnson

[00:03:29] Daniel Greening: Ron Johnson's initial claim to fame was transforming Target and Apple retail. What did he do that brought him this fame?

[00:03:38] Dan Dickson: Johnson's whole career was retailing. After he got his MBA from Harvard, like me, he went to work at Mervin's, And then he went to Target where he became Vice President of Merchandising and he scored his first big success. 

[00:03:50] Johnson was the guy who turned Target into Targét, and he did this by redesigning the stores and product line to appeal to a younger and trendier audience.

[00:03:58] So it's certainly a success, but it was at Apple where he had his biggest hit. Under Johnson, Apple's retail stores achieved a record level of growth, exceeding a billion dollars in annual sales within two years of their debut. And that surpassed the previous record set by Gap. 

[00:04:14] Also, the stores were wildly profitable and blew past competitors on every possible metric. In 2011, sales per square foot per year were more than $3,000. To put that in perspective, that's almost twice that of Tiffany, which is ranked number two.

[00:04:29] Daniel Greening: The jewelry retailer, right? 

[00:04:31] Dan Dickson: So that's pretty amazing So anyway, Johnson was the star at what was then the hottest company on the planet. So he had some major cachet going here.

[00:04:40] Daniel Greening: I understand he got frustrated when Tim Cook was chosen as Steve Jobs's successor at Apple. Why was he frustrated and what happened then?

[00:04:50] Dan Dickson: Well, Johnson wanted to be a CEO. He wanted to put his mark on a company and this sort of leads us into the JC Penney chapter of his career. In 2010, JC Penney was in trouble. Unlike most of its competitors, it wasn't recovering from the great recession. 

[00:05:05] And this is primarily because its customers, who tended to be middle class moms, had really suffered heavily during the recession and they just still hadn't returned. They just weren't buying. So something had to give.

[00:05:16] In October, Mike Ullman, Penney's CEO, got a call from a guy named Steven Roth. Roth and another investor named Bill Ackman announced they were purchasing 26% of Penney's stock in the belief that the company's value could be dramatically increased, provided some changes were made. 

[00:05:33] Dan Dickson: Rather than resist Roth and Ackman, Ullman invited them to join the Penney board. 

[00:05:37] Now, the board was already concerned about Ullman's leadership and health, and this really came to a head when he was injured in auto accident in February 2011, and then spent 12 weeks in recovery. 

[00:05:47] Daniel Greening: Wow. 

[00:05:47] Wow. 

[00:05:48] Dan Dickson: Really. So Ullman's ability to continue as CEO was really uncertain and there were no apparent successors at Penney. So what to do? Ullman and the board reached out to Ron Johnson at this point. 

[00:05:59] It turned out Ullman had actually reached out to Johnson before, to see if he would be interested in, joining the board. Johnson at the time said no, but it turns out he was interested in the CEO position. So he joined the company as CEO in November of 2011.

[00:06:13] Daniel Greening: That's kind of weird though, right? If you were a retailer, someone wanted your help, you could get an introduction to the business by being on their board. And that still would provide a channel for you to become the CEO, but he rejected it, initially.

[00:06:29] Dan Dickson: I, really don't know what the reason was behind that, whether he was just so completely enmeshed in Apple, he didn't want to, divide his bandwidth. 

[00:06:37] The other thing too, is that, at the time, I think he may have still been a contender for the Apple CEO. It was prior to the Cook announcement.

[00:06:44] We're just speculating here. There are a couple of possible reasons though. 

[00:06:47] Less than three months after joining the company, Johnson unveiled his new vision for JC Penney. It included an entirely new boutique layout for the stores, a slew of new upscale brands, and a simplified pricing strategy that abandoned Penney's traditional promotional pricing in favor of simplified value pricing. 

[00:07:05] And this was a risk. Moving away from a promotional pricing model the customers were used to is taking a big chance, even if the consumer would actually be getting a better deal. I spent some time in retail and it's a hard thing to do. But Ron Johnson was going to go for it. 

[00:07:19] Daniel Greening: So who else tried this? 

[00:07:20] Dan Dickson: I was a consultant for A and P for a while. They tried it. The standard is EDLP everyday low pricing. 

[00:07:27] Daniel Greening: Walmart is known for that, right? 

[00:07:29] Dan Dickson: Yeah, but Walmart is sort of a special case, but think about retail and pricing. The real promotional pricing was pioneered by Kmart in a Blue Light Special, where people would actually run through the stores with these, flashing blue lights and, oh, this is the promotion. This is the hot deal. 

[00:07:44] And the traditional model of pricing up a standard retail that pricing down a promotion is just sort of ingrained in a lot of consumers. So even 

[00:07:51] if the premise is by giving everyday low pricing, The consumer's actually getting a better deal. Uh, the consumer may not feel that way. 

[00:07:58] Daniel Greening: Plus there's feeling of entertainment when you're in the store, right? Like who knows what could happen. So it's not necessarily that they're being motivated by the price itself, but by the spectacle of getting a great deal. 

[00:08:13] Dan Dickson: it's just classic 

[00:08:15] So he was gonna go forward with that and it was a three tiered system and actually, you know, it made sense, 

[00:08:20] Daniel Greening: Was it the same as Target though? Cuz he had already done Target. 

[00:08:24] Dan Dickson: it was somewhat different. there were three pricing tiers. There was a standard price, a discount price, and then a clearance price. But again, if you put that in the context of where Penney was, their consumers were used to promotions. Oh my God, this is on promotion. This is this on sale. I'm gonna buy it now. It was just a different habit, from the standpoint of the consumer. 

[00:08:42] Not only did he have this grand vision and this restructuring of the pricing, he was gonna do it fast. Because the whole vision was accompanied by an aggressive rollout plan that called for revamping hundreds of stores by the fall of that year.

[00:08:54] He was not being timid here. He was not doing any limited rollout thing. He was gonna go for it. And, that's what happened. 

[00:09:00] The board, they were somewhat stunned by the ambitions of this plan, but they didn't resist and they didn't push for, testing or a slower launch.

[00:09:08] And actually Fortune magazine may have put it best is that Johnson, he had a new team, he had an adoring Board of Directors and a mission to reinvent his company and off he went, but it didn't quite go according to plan. 

[00:09:20] Costs started mounting. Revenues fell. Penney was alienating and losing its 

[00:09:24] existing customers and not getting new ones. That's critical.

[00:09:27] Some of the directors started expressing concerns and in early 2013, when they finalized 2012 results, it was a catastrophe. Revenues were down by 4.3 billion. Same store sales had declined by 25% and the company reported a $1 billion loss for that year. 

[00:09:45] That's pretty serious. Johnson offered to resign, and the board initially asked him to stay, uh, stuck with him initially, but eventually accepted his resignation. 

[00:09:53] In April, 

[00:09:54] 2013 less than a year and a half after the introduction of his grand vision for JC Penney, the company announced that Ron Johnson was stepping down as CEO.

[00:10:01] Yeah. It's so the total amount lost here was a billion dollars. 

[00:10:06] Yeah. 

[00:10:06] They lost a billion dollars in 2012, but you gotta remember there's some other things. To do a financial analysis, you'd have to put some kind of a baseline together and I'm not sure that's really doable because you'd have to say, well, if the company didn't do anything, what would've happened. 

[00:10:18] You get to think about some of the losses that aren't necessarily financial. Penney lost faith with its customer base it lost its key customers. It lost its employees. There are massive layouts, it lost all their wisdom. It lost credibility with their suppliers, and the board lost credibility as well, and both Roth and Ackerman resigned. So it's a lesson to learn and retail's a lot harder than it may seem. 

[00:10:41] Ullman's initial comments were to quote, "these are two of the smartest people in their industries in America. Why wouldn't we want them in the boardroom?" Well, there's no doubt that Roth and Ackerman were smart, but they certainly missed something at JC Penney, and they missed it big time.

[00:10:55] Daniel Greening: And having sharks like that in the boardroom could be dangerous and apparently it really was. 

[00:11:02] So Johnson was fired from JC Penney. He was licking his wounds, wondering what to do next. He had a 25,000 square foot house in Atherton California with plenty of cash remaining from his time at Target and Apple. We don't have to feel sorry for the guy.

[00:11:23] Dan Dickson: He is still shooting chip shots in his backyard. I believe too.

[00:11:27] Daniel Greening: Yeah. I saw his house plans. 

[00:11:29] yeah, it's a big palatial place. 

[00:11:33] Dan Dickson: Then well deserved. I mean, he earned it.

[00:11:34] Daniel Greening: Yeah. Yeah, of course. So his motivation for leaving Apple was to lead a company, which he did. He left because Tim Cook was this designated successor for Steve Jobs. So Johnson had something to prove and the JC Penney failure meant he still had something to prove.

[00:11:57] So Johnson constructed a vision for a startup company. And in 2014, he announced that his company enjoy.com had raised 30 million from some well known venture capitalists. In later rounds, they raised another $370 million in venture capital. So there's Ron Johnson and enjoy.com with a big pile of investment capital. He takes the company public in 2019 with a SPAC to raise an additional $115 million after redemptions. And in 2022, enjoy.com, just a couple of weeks ago, declared bankruptcy. 

[00:12:45] So bankruptcy is not the end of enjoy.com because it has customers and assets. But all those enjoy.com investors have lost $515 million and a lot of employees are now wondering about their future. 

[00:13:03] So $1 billion of lost profits at JC Penney, $515 million of lost investment capital at enjoy.com. That money could've been used for more productive things. We can call those two events failures. And then analyze why those failures occurred. 

[00:13:23] In this episode, we're going to focus on the JC Penney specifics. What specifically went wrong and why? 

[00:13:30] This is classic failure analysis. Looking closely and objectively at failures is fundamental to mindfulness. We'll wrap up the episode with an 80 year history of agile management philosophies and how failures drove large-scale changes in manufacturing and software management.

[00:13:50]

[00:13:52] Could it have been avoided?

[00:13:52] Daniel Greening: So let's dive deeper into JC Penney and why did it fail? 

[00:13:58] One of the things that I first noticed about this story is that at Target, Ron Johnson was there for 14 years or

[00:14:07] Dan Dickson: Yeah something like that Yeah It's not somewhere

[00:14:09] Daniel Greening: Yeah. So he was Vice President of Merchandising. He was surrounded by guardrails effectively, right? So he was operating with the help of others to succeed. 

[00:14:23] Dan Dickson: yeah, there was a key designer that he really collaborated with in terms of the redesign of Target. 

[00:14:28] Daniel Greening: Michael Graves or something like that. 

[00:14:30] Dan Dickson: Yeah. That's that's who I was thinking of was Michael Graves.

[00:14:32] So it was more of a collaboration.

[00:14:34] Daniel Greening: I see. Interesting. And he was operating from limits, right? Like, so it was Target and they had constraints on the capital that they could use to execute on the strategy. When he was at Apple, he had fewer constraints, but, in both cases, he was surrounded by management. And so he was collaborating with them. He had limits on what he could do, right.

[00:15:02] Dan Dickson: Yeah. You think about Apple. I He'd had Steve Jobs on top of him. There's an ongoing discussion really, in terms of how much of the Apple Store credit goes to Johnson and how much goes to Jobs. I don't wanna get into that cuz I just don't know.

[00:15:14] I'm still willing to give Johnson the credit for all of that. I mean, he certainly was the leader of the team. He certainly invented the Genius Bar. To your point, yeah, it was a collaboration. He was a member of a team. He may have been the leader of a team, but it was a team.

[00:15:26] Daniel Greening: He did have to appease different areas of the business, whereas, as a CEO, he wouldn't have quite so many constraints. When you've been a CEO you think you have all this power as CEO, but actually you have to get the collaboration and ascent of other people if you wanna succeed.

[00:15:48] Dan Dickson: Well, it depends how you operate. It's the CEO where who's responsible to the board. In the case of Penney, the board had Roth and Ackman, the board just basically gave Johnson, a blank check. In my experience, my boards have been a lot shall we say stricter than that, in terms of the amount of flexibility you had. Certainly they gave you running room, but by the same token and you just couldn't say, okay, no, you know, go do what you're gonna do. We trust you. We're gonna leave you alone. That was a rather unique situation.

[00:16:14] Johnson came in with an incredible resume. I mean, let's face it. What he did is , the Apple Stores is still amazing in terms of all of their metrics and things like that. You gotta give him credit..

[00:16:23] Daniel Greening: Yeah. Yeah. I've been to many Apple Stores and I have appreciated being in those Apple Stores as well. 

[00:16:30] So the board was passive, Ackman was kind of a bull in a China shop. I think, sort of forcing his way in, it reminds me of corporate raiders that go in and want to buy out a company and then fire a bunch of people and completely transform them.

[00:16:48] This has that feeling. Despite the fact that it was voluntary, right?

[00:16:53] Dan Dickson: Well, there 

[00:16:53] there was a quote actually, and it was one of the articles that, uh, we went through in researching this podcast. And the quote was, if you wake up one morning and somebody's bought 26 percent of your company, you know, something's happening. Um, I mean, it was certainly that, but in between both Roth and Ackman , I've got a caveat that I don't know either of these gentlemen, but I'm sure that they've had their own successes. And so there was a fair amount of self confidence, or maybe even arrogance going on there.

[00:17:19] Daniel Greening: Right. Also the board was full of fear too, right? They felt that JC Penney was losing market share it had had this stable management under Mike Ullman for a long time. But Mike's health was declining and they might not survive.

[00:17:38] Dan Dickson: Yeah. And it, think about the impact of the recession. It really just absolutely bullseye d their key customer base.

[00:17:44] Daniel Greening: Yeah, exactly. All right. So one problem is no guard rails on the CEO.

[00:17:49] Dan Dickson: mm-hmm

[00:17:50] Ron Johnson Executes

[00:17:50] Daniel Greening: So then another problem occurred that expenses around restructuring were uncontrolled, right? I read about Ron Johnson not actually living in Plano, Texas, or not having an apartment there. So he was flying in and out of Plano from the San Francisco Bay Area in his private jet. If he did that every week the rough cost is $1.2 million per year. And i assume those charges went to JC Penney. So that is in general administrative expenses.

[00:18:26] Dan Dickson: Yeah well, it wasn't just Johnson. It was, I think with one exception, the entire senior management team commuted in. 

[00:18:32] Daniel Greening: Oh, they all piled into his private jet? 

[00:18:35] Dan Dickson: I don't know who's whose private jet they used or what, but there was some talk about an off-campus headquarters at the Ritz Carlton 

[00:18:41] where everybody stayed when they were in, uh, in Plano.

[00:18:44] So yeah 

[00:18:45] there was a lot of that happening and that has to do with the integration of the management team with the company.

[00:18:50] Daniel Greening: Right. They weren't rubbing elbows with the existing folks. They were all separate in this kind of isolated echo chamber.

[00:18:59] Dan Dickson: When I was at GE Consumer Electronics, a new General Manager came in and one of the questions was, well, are you renting or buying? He said I just bought a house. 

[00:19:07] Daniel Greening: Oh, bought a house at the location of his job. 

[00:19:10] Dan Dickson: Yeah, exactly. And the location is that okay I'm committed. You may say that's symbolic and who cares, but things like that matter.

[00:19:17] Daniel Greening: Yeah. so that was one set of expenses, that general administrative expenses. 

[00:19:22] They were making tons of brand changes, too. So they went around and solicited boutique retailers to put their little substores in JC Penney's right. 

[00:19:37]

[00:19:37] Was there cost around that? 

[00:19:39] Dan Dickson: In some cases yeah, I think it was Levi's where they restructured the boutique approach, the store within the store. And Penney picked up a lot of those costs. I can't say it's the case of every one of them, but, certainly, Penney did bear some of those costs. 

[00:19:52] But I think the bigger, cost issue, was the one associated with the speed of the roll out.

[00:19:58] You didn't do any experimentation. You didn't do any incremental change here. You basically, just lit the fuse and off it went. If you could measure the profit impact on a limited basis, and you could sit there and say, well, this isn't gonna 

[00:20:09] work Okay fine. It's not gonna kill the company, but if you do it over the entire store base, I mean, you're either gonna have a massive success or you're gonna have a massive failure. Let's let's.

[00:20:20] Daniel Greening: Yeah. Yeah. And there were also management changes. They fired a bunch of existing executives and replaced them with folks from Apple. Is that right?

[00:20:31] Dan Dickson: Yeah 

[00:20:32] they started out with a special group. I think it was called the I-Team. There were existing employees that were supposed to be part of the change dynamic, but, they ended up letting most of those people go. So I if you look at , the management that was in place when Johnson first joined the company, it was effectively hollowed out.

[00:20:49] Daniel Greening: I see, and I think they paid these new Apple executives much more than what the previous JC Penney executives were paid.

[00:20:59] Dan Dickson: Yeah, I believe that's the case. It was a high price management team. Let's put it that way.

[00:21:04] Daniel Greening: We did talk previously about how there were no constraints on the CEO. In a sense that allowed, the CEO, Ron Johnson to think big. And sometimes we've heard people around business saying, thinking big makes all the difference, you know?

[00:21:23] Thinking Big, Testing Small

[00:21:23] Daniel Greening: But on the other hand, many of those people who think big, they say, I'm gonna think big, but I'm actually gonna operate in the small for the time being, I'm gonna use low cost experiments to see whether my big thinking idea is likely to succeed. And if not, learn more about what could succeed, but we didn't see that, in the attitude of the CEO.

[00:21:52] Without guardrails, he was free to do anything. And this expenses situation is an example of taking those limits away. He just started spending gobs of money in a big bang. It wasn't even a test really, right. It was, uh, I'm so smart that spending all this money is guaranteed to succeed.

[00:22:15] Dan Dickson: He was on CBS Sunday morning. I remember seeing the show and, one of his comments failure is not an option, I hate this comment. Not, attributed to him personally, but because a lot of people use it.

[00:22:24] Daniel Greening: Failure is a possibility, always, regardless of how we might wish it never were true. I suppose failure is not an option because you don't consider it as a possibility, but even then, it's like you're saying "I'm willfully naive." 

[00:22:46] Dan Dickson: But you gotta put yourself in his shoes. If I had had the level of success he had had at both Target and Apple, I would have a great deal of self-confidence to put it mildly. So you can sort of understand where he was coming from. I'm sure that he believed in his soul that this was gonna succeed.

[00:23:03] The interesting thing, if you go back to agile, is that if there had been some experimentation, there could have been elements of this that could have been wildly successful. We don't know. But as combined effort, it took the company down.

[00:23:15] Daniel Greening: Right. So in the expenses side, just to get clear, they basically were spending heavily on G&A. They were spending heavily on brand changes. They were spending heavily on transforming every single store in the fleet.

[00:23:31] They were firing managers and replacing them with people. And so they lost institutional knowledge. All of that stuff, taken together, was really a powerful, negative thing for their potential future. 

[00:23:48] And it took options away, right. By spending all that money, they lost capital that they could have used for new ideas that might have arisen, as they were experimenting.

[00:24:00] And then we can start talking about customer base. 

[00:24:04] So they lost their existing customers . What was happening there?

[00:24:08] Dan Dickson: Look at Johnson's experience at Target. He was doing something analogous. He was bringing in, more boutiquey, higher end brands. To replace the ho hum JC Penney brands. But the problem was, there was one example, a private label, I believe it was a woman's brand, that they eliminated and that was responsible by itself for $1 billion in revenue.

[00:24:29] And so it was, this wholesale change, you're losing what you've got and you're not replacing it with something new.

[00:24:34] Daniel Greening: Right now I'm in Alma, Michigan in the rural Midwest, there was a JC Penney here prior to this change. People don't want to stand out. They don't want to look flashy or anything like that. And so these brands are very popular. Ron Johnson took them away 

[00:24:51] Dan Dickson: It's basically just conservative. I, I happen to like, khaki colored slacks. some people would call that unimaginative, but I like that.

[00:24:57] Daniel Greening: I'm originally from here, so I just wear Levi's all day

[00:25:02] Dan Dickson: yeah.

[00:25:02] And so Yeah. And so it's, it's not, not a value judgment of the part of the customer. It's just respecting who your customer is. And understanding what they want. And if you are going to make the decision, a conscious decision to, change your brand profile, you need to understand how your current customers are gonna react. 

[00:25:19] Daniel Greening: Yeah. Yeah. If you were gonna make this change, you could have tried it in a cosmopolitan area that would be more amenable to these things and see that it worked, right?

[00:25:32] And then they could gradually expand it to the rural Midwest, if it was going to work, but they didn't do that. They just made the assumption that the product mix was really going to make a difference in terms of JC Penney positioning all throughout the country. And it did make a difference but a big negative difference.

[00:25:51] Dan Dickson: Yeah. And, and remember on top of that, you had the pricing changes too.

[00:25:54] Daniel Greening: Oh, right, right. So they eliminated promotional pricing. And yet the customer was used to that. and as you said, there's been a lot of companies that have tried to eliminate promotional pricing. He didn't listen to what other retailers had seen, that this promotional pricing didn't work in a lot of cases. I can imagine saying, oh, I've got a better idea, but he didn't even test whether that really was a better idea. 

[00:26:28] There was a executive there from the original JC Penney's, I think his name was Steve Johnson. So Steve was advocating testing. And then when they ran into some budgeting issues, Steve Johnson conveniently was cut. 

[00:26:47] Dan Dickson: Remember again where Johnson was coming from Apple. I mean, Steve Jobs completely rejected testing. He thought the whole thing was a waste of time. Some of that had to sink in, in terms of Ron Johnson's experience.

[00:26:58] Daniel Greening: Yeah. Yeah, exactly. So byebye Steve Johnson, cuz you're messing up my vibe. That is an interesting thing about Ron Johnson. When you read about him, he is sensitive to people messing up his vibe, right? 

[00:27:15] Some listeners might assume leaders always fire people who disagree with them, but the best leaders often respect dissenting voices. As long as when a decision is made, employees support it in their actions. But Ron Johnson didn't seem to be that type of guy. 

[00:27:32] Dan Dickson: Again, I having not, not worked with the guy or no know the guy personally, I can't say that is a fact, but it certainly seems that way.

[00:27:38] Promotion Alienation

[00:27:38] Daniel Greening: Yeah. Yeah. He also did some promotional, differences too. He brought in Ellen Degeneres to be a representative of JC Penney's and, that was okay. She was a popular star, but a whole bunch of things happened at once, right? Like Ellen DeGeneres. And then they put out ads showing two moms and two dads. And then there was the Million Mom March people who got angry about that. They actually started a boycott of JC Penney's. 

[00:28:13] Dan Dickson: Look back at their core customer you had a very conservative bunch of people and, they just didn't react, well to these new ads. The intention of the ads. I understand it. They're trying to be more inclusive. 

[00:28:25] And I applaud that, but they're being inclusive and rightfully or wrongfully the existing customer base is getting ticked off.

[00:28:32] Daniel Greening: I have my own bias here because I'm gay. So I appreciate that Ellen Degeneres, two moms and two dads appeared in these advertisements. But I'm also practical. 

[00:28:44] If you're trying to create more inclusiveness in your store in society. It's counterproductive to generate antagonism that destroys the vehicle, namely JC Penney, that is advancing inclusiveness. It takes mindfulness to finesse this, and it seems like they weren't very mindful about it.

[00:29:06] Dan Dickson: So you've got a confluence of things happening here. You've got product, you've got pricing, you've got promotions, you've got advertise. I mean, just a whole ton of stuff that sort of combined to effectively alienate their existing customers.

[00:29:18] Daniel Greening: right, right. We're going through these different aspects of the business. And in each case, we're seeing that there was a lot of arrogance, a lot of putting all of their eggs in one basket. 

[00:29:31] So now we can talk about the staff that had been working with JC Penney's for years, understood the customer very well, thought they were doing the right thing, probably felt the same kinds of fears that the board felt, that they were worried about growing irrelevance of JC Penney's, but they were still wanting to succeed. Right. And here comes the new guy. 

[00:29:58] So, the staff was demoralized. 

[00:30:01] Dan Dickson: Yeah, but understand at first they weren't, when Johnson first showed up. This is the Messiah, this is the savior, and so the initial reaction was excitement, but then once the reality set in and it's actions speak louder than words, type of a thing. 

[00:30:15] We've already talked about the fact, the senior management team basically didn't move to Plano. Um, and they sort of cloistered themselves in the Ritz Carlton. So they really didn't associate with the existing employees . It even came down to the point where they were demeaned. There was this acronym DOPEs. Dumb Old Penneys employees.

[00:30:31] So, there was a lack of respect and, the Apple Stores that is a rather unique retail experience and environment. And to take that, to apply it into a department store experience, like a Penney's or a Macy's, it just works differently.

[00:30:47] You don't have the kind of high profit margins. You don't have the kind of controls and things like that. I don't think these people coming in from Apple were stupid. I think it's just that their retail backgrounds was skewed because of this remarkable experience with the Apple Stores.

[00:31:01] Daniel Greening: Right, right. If you've been to an Apple Store, it feels like a very high end experience and the customer base for Apple products is high end as well. So you pay a higher price for an iPhone, for example, than an Android . 

[00:31:19] Dan Dickson: . And from an operating standpoint, the margins in an Apple Store are astronomical compared to standard retail. So you can get away with a lot of stuff there. You've got a lot more margin to play with so you can provide all these services and these high level staff and all of these other things. Whereas in the traditional retail experience, it just doesn't work the same way.

[00:31:38] Daniel Greening: The staff, obviously with the kind of attitude that we're hearing about Ron Johnson and his new folks that had come in, they really didn't have input into the decision making. So they did have institutional knowledge about the previous customer base, and it just wasn't taken into account.

[00:32:01] Dan Dickson: Yeah and understand. I mean, there's nothing wrong with culture change and sometimes it needs to happen. God knows how many books and, all of these tricks and things like that, that people do. But the people that are on the ground when you get there, I don't wanna say this is always the case, but I got thrown into a lot of companies. You gotta respect the wisdom that's inherent in the company. And it may not be all right. It may not be all wrong. Who knows, but you gotta at least respect it this just didn't happen.

[00:32:26] Daniel Greening: All right. So lastly, we can talk about the theory, the theory that this transition to this new JC Penney style would attract a new customer base that would more than make up for any losses to the old customer base. 

[00:32:45] Dan Dickson: mm-hmm 

[00:32:46] Daniel Greening: And that didn't happen.

[00:32:49] Dan Dickson: No, it didn't. Despite the marketing campaigns that we're trying to be more inclusive and so forth. I gotta give Johnson a little bit of a break here. At least one article he's saying that Penney should have stuck with the strategy longer than they did.

[00:33:01] The store transitions were still underway when he left. So it's not like the whole redone thing was out there operating. Actually some of the new pricing got pulled back midstream. 

[00:33:13] In an agile environment, if you had taken a single market. And really put the program in place all the way and gotten hard data about it. You would've been infinitely better than if you had blown the whole, country, , wide open, like they did,

[00:33:28] Daniel Greening: Right. If they had taken a narrow market, like let's say a San Francisco or New York 

[00:33:34] Dan Dickson: or a Chicago or a Peoria or whatever,

[00:33:36] Daniel Greening: or a Peoria, right. But if they had made this transformation and then. Think about the amount of capital that they would have to try different things to serve that market. And it may be that even the original model could have been amazing. They could have tested it in Peoria and discovered that it took a while to transition the customer, to get them used to the new pricing model, to attract the new customer base that would enjoy this model more. And then discover the actual cost of rolling out this new strategy. 

[00:34:18] Now you can budget that, and you can go to investors or lenders and say, we're gonna make this giant transition. It's gonna cost a lot, probably more than a billion dollars with this initial roll up, but it's gonna cost a lot, but it's gonna be worth it. And here we have proof, right? So now the investors will be on board with you, but because they didn't do any testing, they didn't have any data that they could confidently go to a lender or an investor. And. "Hey, you know what? Back this thing, we've got lots of signal showing that this is gonna be a successful strategy."

[00:35:03] So it's sad, right? It could have been successful. We just don't know. And part of the reason we don't know is cuz we didn't use testing or experimentation.

[00:35:14] Dan Dickson: JC Penney is a national brand and I accept that, but I gotta believe, and especially in the terms of the strategy that Johnson was espousing, where you had multiple individual boutiques inside the shell with a town square in the middle, that you could change your product mix for different parts of the country. And so it may have been actually a situation where you could adapt. Talking about San Francisco, certainly the market there is gonna be different than a Peoria or whatever, and that's fine. this model could actually have an advantage in terms of being able to adapt to those individual markets. And they didn't have a chance because of the lack of an agile approach. They didn't have a chance to test that.

[00:35:52]

[00:35:54] Summary

[00:35:54] Daniel Greening: This was Ron Johnson's first CEO role, and it was a really big one with no guardrails. The corporate board of directors was fearful of doing nothing, it didn't have any ideas of its own, they hired wunderkind Ron Johnson as a great savior. 

[00:36:11] He spent money at an extravagant rate first to support his executive staff, many of whom commuted from the San Francisco Bay Area. And it cost money to build new boutiques for stores within the store model. And it cost money to transform every single store in the fleet. 

[00:36:30] The new staff created tribes by denigrating former JC Penney staff, and of course by not joining the Plano community. They lost a lot of institutional knowledge when they let a bunch of existing employees go. 

[00:36:45] They dumped lucrative, private labels that appealed to their existing customer base and lost a billion dollars in revenue. They made big pricing changes, replacing promotional pricing with an everyday low price model few retailers had successfully executed. 

[00:37:04] JC Penney wanted to appeal to a hipper crowd. So they brought in Ellen Degeneres, a famous lesbian talk-show host. Americans loved her. That makes sense. Then they blast it out ads showing two moms and two dads, the Million Mom March folks started a boycott of JC Penny's. 

[00:37:23] So all of these costs and lost revenues might've been okay. If the driving theory had been true. That providing trendy brands would attract a new customer base or convert the existing customer base. But it didn't. 

[00:37:40] Failure Analysis

[00:37:40] Daniel Greening: Why should we do failure analysis? Failure motivated at least two radical management frameworks that were adopted by almost all companies in a sector. Smart folks first analyzed failures then constructed counter-intuitive frameworks to prevent failure. 

[00:37:59] The first framework is Lean Manufacturing, which is today used by virtually all automobile manufacturers and many other manufacturers. 

[00:38:09] Toyota created this framework in the 1950s when faced with a national crisis in Japan. They were emerging from world war II, after the industrial base had been bombed into oblivion. Toyota studied American manufacturers like Ford and decided if they wanted to compete, they had to do something radically better. 

[00:38:29] Their model was just in time manufacturing. They didn't start building the car until the minute someone ordered it. And then they scrambled to assemble all the pieces. Initially, japanese cars were crappy, but they supported a team-based experimental philosophy in the company. And they definitely had a philosophy. 

[00:38:51] They called it Toyota Production System. It encouraged team collaboration on building cars, defined waste very broadly, and described how decisions converged from an ongoing dialogue between leaders and workers throughout the organization. When you get trained in Toyota Production System, or now Lean Manufacturing, you adopt a mindset, a philosophy, and it goes far beyond your work life because it helps you at home, too.

[00:39:21] So did it work? We could do a whole episode on this with some great stories, but in short, yes. Toyota was the most profitable car manufacturer in the world in 2008, but it wasn't the most productive. It produced fewer cars with a higher profit margin. In contrast General Motors produced a lot of cars. But went bankrupt in 2009, just a year later. 

[00:39:49] General Motors got a lot of support from government to rebuild. But then in 2021, Toyota became the most productive car manufacturer. It produced more cars, with a higher profit, than any other in the world. It now makes twice as much as General Motors. 

[00:40:09] Switching gears to the software industry , in the 1980s, a growing number of massive software project failures started to become obvious. 

[00:40:18] Daniel Greening: About a third of software projects were failing. And by this term, I mean, they were either abandoned completely, or they were released to clients who refuse to use them. The cost of some failed projects were in the millions and a few reached a billion dollars. 

[00:40:33] Stressed out managers would often assume that software project failures were due to insufficient planning. So engineers planned more and failures got worse. But some wise folks started to realize that because software development was a fundamentally creative process, it couldn't be predicted longterm. This is when iterations, low cost team-based experimentation, and other approaches became the norm. Many frameworks were developed during this time. And this framework category is generally termed agile. 

[00:41:09] You'll sometimes hear developers bellyache about agile techniques, because they're now used everywhere and they require discipline. But they saved many software projects. About 10% of agile software projects fail versus a third of traditionally managed software projects.

[00:41:27] The most popular agile framework is Scrum. Scrum is more general than most such frameworks. It has been applied to a wide variety of project fields, including education, marketing, finance, , and corporate organization. Agile practitioners in the software world borrow freely from other fields. 

[00:41:47] All these frameworks play well together so some colleagues and i have started to refer to any collaborative experimental waste reducing framework as agile.

[00:41:58] To summarize, failure analysis led to new outcomes and manufacturing and software. Agile practices are now spreading to other areas, including overall business management.

[00:42:09] I don't know whether I said all this to convince you it's worth your time to do failure analysis because of the opportunity to develop new ways to succeed, or to give you a little backgrounder or an agile history. But maybe i've done both.

[00:42:24]

[00:42:25] Close

[00:42:25] This is the first of what we think will be three episodes on Ron Johnson. 

[00:42:31] The next episode, will lay out characteristics of agile and mindful organizations and discuss specific examples of the JC Penney transformation that would have been done differently with that philosophy. 

[00:42:44] If you liked this episode, be sure to join us for the next two. To get a reminder when the next episode drops, be sure to follow the podcast in your favorite podcast app or get on our mailing list at mindfulagility.com. 

[00:42:59] Daniel Greening: Mirela Petalli normally guides a meditation related to the episode, following our close. We don't have a guided meditation for this episode but we will likely have one for the next one.

[00:43:11] Many thanks to Dan Dickson for the idea of analyzing Ron Johnson, and for joining me in this episode. 

[00:43:18] We got great feedback on beta versions of this episode from reviewers. They were. Amelia Hambrecht, Jeff Stuit. Laureatte Loy, Dan D'Agostino, Tanija Constantares, Janet O'brien, Matt Zimmerman, Mona Waasenaar Herson. and Divya Maez. Thank you so much everybody!

[00:43:42] The Mindful Agility Community, a Facebook group, helps direct our efforts. Sometimes excerpts from those meetings end up in our podcast. We'd love to have you join.

[00:43:52] I'm Dan Greening. See you next time. 

[00:43:55]