Yes, it was his hubris

In the Wall Street Journal, columnist Holman Jenkins writes about Ron Johnson’s term as JC Penney chief:

Every human effort is flawed. Failure is not proof of incompetence. So don’t buy the narrative that Mr. Johnson was done in by his hubris and cluelessness about retail. At Sears starting in 1989, a new leader introduced a new strategy of dramatically reduced promotions and manipulative “discounts.” Instead, Sears would feature “everyday low prices,” in-store boutiques and jazzier merchandise. Yes, the same formula. And Mike Bozic lasted the same 17 months that Mr. Johnson did.

I agree that failure is not proof of incompetence. But failure isn’t the reason Johnson has been charged with hubris. It’s not clear to me from Jenkins’ column why we shouldn’t buy the hubris narrative.

Johnson’s hubris was that he made network-wide changes to the business without evidence those changes would help. He never considered that he could be wrong. Some folks like it when someone swings for the fences, but shareholders should be leery when someone comes in with a shoot from the hip attitude. It’s the rare occasion that ends well.

If Johnson’s strategy would have worked across the entire network, it would have  worked on a smaller scale, first. He could have made the changes in a market, at much less cost and risk to business. Not testing his ideas first, when he has the ability to do that, is hubris…or stupidity, or a little of both.

More Signals vs. Causes: Business Edition

In the Wall Street Journal, Rachel Emma Silverman reports on efforts by large company managers to learn from startups.

A couple of the observations made me think of the signals vs. causes thread.

Mr. Osifchin also took note of startup-company quirks, such as the large bell that staffers rang to gather colleagues and magnums of Champagne feathered with Post-it Notes encouraging workers to meet deadlines so that the bottles could be opened.

More likely, the large bells and Champagne celebrations reflect milestone celebrations for folks that are heavily invested and stand to benefit a great deal from the company’s true success.

That success probably represents something larger than the standard large company 10 – 20% bonus that is predicated on factors other than your team’s success — like if the rest of the company delivers, or someone limits your payout to get more for their buddies.

In other words, they don’t work better because of the bells and champagne. They work better because of the incentives. The bells and champagne just help them blow off the steam that comes with that kind of effort.

Here’s another one:

After comparing notes, the executives found that senior managers at the startups spent a significant amount of time in product meetings, says Brad Smith, Intuit’s CEO. That observation led the company to decide its executives should spend more time in the product-development trenches, says spokeswoman Cassie Divine.

More likely, senior managers at startups are the original founders of the product and they have a good idea of what they want it to become.

Senior managers at large companies achieved their status with bully bureaucrat skills, not delivering what the customer wants. Put these guys in the trenches and they’ll feel the need to dominate the discussion and show all the underlings why they’re the big-shots.

What is your company focused on? Startups fail. Big businesses fail. Big businesses were once startups that got a hold of a valuable enough value proposition to sustain itself.

But, if you want to learn something from successful startups, learn this. They respond and evolve to what customers want, not what a steering committee full of empty suits who are far removed from their customer base wants. They have to survive.

The senior leaders of startups are closer to their customers. They probably started off solving a problem they were experiencing and discovered others experienced the same problem and were willing to pay for a fix.

Leaders of steering committees will say they are focused on what customers want. They don’t recognize what they really mean is they are focused on the stylized, segmented, homogenized interpretation of what the steering committee members want the customer to want.

Want to replicate a startup? Remove as many obstacles to getting a true read on the customers’ response as possible.

Then, get the startup people out of corporate and give them some rope. If they succeed, the rewards should be rich. If they fail, they shouldn’t get a paycheck. They should lose something.

From the story, I’ll give credit to GE for doing more than mistaking signals for causes:

General Electric Co.’s “GE Garages,” created in partnership with four tech startups, are roaming workshops that allow GE’s own workers and visitors to tinker and noodle together on new products. GE also began a companywide venture-capital initiative earlier this year, making the firm an investor and partner in some 60 startups.

Ahead of my time :)

My business school professor: What is the number one goal of a firm?

I raise my hand.

My business school professor: Seth?

Me: To please the customer.

My business school professor: Wrong! To maximize shareholder value. You could please customers by giving your product away for free, but that wouldn’t please your shareholders.

Me: With all due respect, it wouldn’t please your customers for very long if you go out of business by giving away your product for free — especially if they value your product, now would it? 

My business school professor: [This-discussion-is-over glare] [Proceed to explain why maximizing shareholder value is the key goal of a firm].

I never bought the ‘maximize shareholder value’ credo, or at least the moronic behavior it led to. I do believe it is the manager’s job to maximize shareholder value, but I never believed that was the goal. Rather, it is a result of pleasing customers.

I’ve seen too many short-sighted decisions come from the ‘maximize shareholder value’ mantra because the customer was left out of the equation.

 

I was pleased to see this article from Steve Denning on Forbes.com, The Dumbest Idea in the World: Maximizing Shareholder Value. Here’s a key snippet from the article:

Although Jack Welch was seen during his tenure as CEO of GE as the heroic exemplar of maximizing shareholder value, he came to be one of its strongest critics. On March 12, 2009, he gave an interview with Francesco Guerrera of the Financial Times and said, “On the face of it, shareholder value is the dumbest idea in the world. Shareholder value is a result, not a strategy… your main constituencies are your employees, your customers and your products. Managers and investors should not set share price increases as their overarching goal. … Short-term profits should be allied with an increase in the long-term value of a company.”

I remember one example of this short-sighted focus on shareholder value when I as an engineer for a utility company.  One of our big industrial customers — infected by the shareholder value mantra — approached us seeking to buy the electrical facilities at their plant. We delivered power to them at the low voltage they needed to run their equipment. We also had special switchgear at their site — that we owned — to provide the volume and reliability they needed. We charged them extra for this enhanced service.

They computed the simple math of the cash outlay to buy the equipment from us, the fees that would save them and the cost they thought it would take to maintain the equipment. I saw their analysis. On paper it looked like a good investment, one that would add to their shareholder value by reducing costs and increasing profits.

But, their experience was different. They quickly learned that the higher fees they use to pay us included something they didn’t have — expertise and opportunity cost. They realized that trying to figure out how to maintain electrical switchgear took time away producing the products they made for their customers.

They first hired us back to maintain the equipment and then eventually sold the equipment back to us and ‘got out of the business of maintaining electrical switchgear’ so they could again focus on delivering value for their customers.

In their initial analysis, they forgot to include their customers.

 

Idea for Hostess Union Workers

Buy your employer.

That way you can run it however you like and pay yourselves what you like. You’d have nobody to negotiate with but yourselves.

Also:  I’d be willing to bet $20 that we will be able to buy freshly made Twinkies a year from now. Any takers? I don’t see an Intrade market on this.

Also #2: I’m surprised we’ve made it this far without any calls for government to step in and bail Hostess out to save 18,500 jobs.

Are auto workers are more deserving of being bailed out than cupcake workers? Are we more willing to see what really happens in bankruptcy this time?

Personal Preference Bias

I’ve read and heard a fair amount from critics of JC Penney’s disastrous everyday-low-price strategy. But, much of it is too simple.

Critics speak of JC Penney’s customers as if they are all the same. I’ve read things like maybe they liked sales prices or JCP has to attract a new customer base to replace the old one.

While JCP sales were down considerably, they were still doing 75% of the volume they did the previous year. That is a huge decline for a retailer, but the sales didn’t go to zero and that says something. Three-fourths of customers didn’t mind the change.

In my experience with consumers and retailing, it is not uncommon for about 25% of sales volumes to come from promotions and coupon offers such as the sales JCP use to run. A fair part of that percentage are folks in whatever product category that are bargain hunters. Another chunk are from folks who are not typical bargain hunters — they may shop on value — but they may just come across a deal too good to pass up. I was recently perusing Kohl’s and saw a griddle for half the price I’ve seen elsewhere. I’m not a typical bargain hunter, but I popped on it.

There’s no reason JCP can’t satisfy value shoppers and bargain hunters alike. Other retailers have figured out how.

Even low-price leaders Walmart has “Rolbacks” in the aisle. Target has a dollar section near the front. Old Navy has clearance racks hidden in the back. Banana Republic has its mall based-locations, carrying higher priced, in-season fashion. But, they too have limited clearance sale space in the back. They also have separate Factory Stores where you don’t get the latest, but you get good stuff at sales prices.

Management at these companies recognize that not everybody is the same and they try to find ways to satisfy varying consumer preferences in creative ways that don’t detract from the experience of others. That’s typical retailing.

In my opinion, that’s the key insight that escapes JCP CEO Ron Johnson — everyone is different.

Johnson was in charge of retailing at Apple. Certainly, many folks rave about the Apple store experience. But most of these ravers have very similar preferences when it comes to electronics — they love Apple!

So, Johnson didn’t have very tall task in delivering a retail experience that satisfied a relatively narrow consumer segment. He made a store for Apple devotees.

Ask yourself this. Does Apple need a store? Not really. Apple products would sell with or without their stores.

Johnson is remaking JCP to satisfy a segment of consumer that is smaller and more narrow — a group that he likely sees himself in — than the group that JCP was satisfying before he arrived, which is not usually a successful strategy.

I call this personal preference bias. Successful managers usually find ways to overcome their own personal preferences and give more weight to the varying preferences of their customers.

It’s an easy mistake to make. Ron Johnson probably thinks he learned from his former boss, Steve Jobs, that designing things to meet your personal preference is good. And, there might be something to that when you are trying to innovate from ground zero.

Steve Jobs wasn’t even Steve Jobs

I’ve been noodling on a post for a while about the effects Steve Jobs has on the business world. He’s seen as a hero and other leaders want to also be heroes. They love hearing about this guy who was so difficult, meticulous and sort-of command-and-control. It makes them think they can do it too.

But, they usually turn out to be envious goats who take the batta-batta-batta-“iPad”-swing, miss, then get fired.

The leaders of Intuit don’t want to be Steve Jobs. This is from an excellent piece in Forbes about innovation at that company.

Plenty of companies are a religion, where people take their cues from the top. Intuit is a science lab, where anything can be tested and proven incorrect. “When you have only one test, you don’t have entrepreneurs; you have politicians. When you have lots of ideas you have entrepreneurs,” says Cook.

He’s found a kindred spirit in Smith, who became CEO in 2008. “Genius and a thousand helpers are not going to solve the problems of today or tomorrow,” says Smith, 48… “There are very few Steve Jobses out there. We run small teams and lots of rapid experiments. No politics. No PowerPoints.”

I agree. I’ve seen innovation choked by politics in organizations that take their cues from the top. I’ve seen those same organizations languish and go through multiple leaders who all had the same general idea – their idea, whatever that was.

Other ideas could not get the resources even for a small test because those would take resources away from the leader’s idea. Too bad the hit rate for new ideas is so small. That’s the key insight that the leaders either don’t realize or think they can outsmart it. Or they don’t care because they’ll make a decent sum whether they produce or not.

But, I even think the Steve Jobs story as command-and-control genius is overplayed. No doubt the guy was hard-charging genius. But his greatest genius of all was opening his products to benefit from lots of small tests that would come through the iTunes and app communities.

If iPods and iPhones were just music boxes and phones, I would probably have neither. But, along with these devices, Jobs created a wide community to create stuff for them to make them more useful with minimal political drag on which apps and podcasts could be made available.

This resulted in lots of small bets placed by the thousands of developers and podcast creators and that resulted in tons of content and functions that more and more people found useful, even if it was just a handy way to kill time while standing in line at the grocery store or as a pacifier to keep me from saying truthful, but career-limiting, things in business meetings.

I bought my first iPod when I got tired of listening to the few podcasts that I followed on my computer and discovered that listening to those podcasts while exercising and traveling was something I valued. That was a start.

So, now I have both. And since then, I have found many other ways to make them useful — most of which are not produced by Apple. I have three music boxes: my library, Pandora and another app that lets me tune in radio stations. I play Words/Chess with Friends, but with Family. I ask Siri stupid questions and occasionally, it gives me a useful answer. I don’t get lost. And so on.

The key point: It was those many other things that made iPod, iPhones and iPads the success. I don’t believe any of Apple products would have been nearly the success if they only stored music and surfed the web. iPods probably would have been slightly more successful than the Nomad MP3 players if all they did was store and play music.

So, congrats Steve Jobs. You figured out how to make money off Wikipedia’s operation model and Wikipedia itself (another tool I often refer to through my Apple devices) (I wonder if there is a Wikipedia article on that?) and fool most folks into thinking it was all you.

Ron Johnson Termination Watch

How long will it be before the JC Penney board fires Ron Johnson?

I’d say it’s getting close.

First, without evidence to support his decision, last December he overhauled the company’s price strategy. Many people would agree that Johnson’s ‘everyday-low-prices’ change sounded reasonable, except for it would seem, customers.

In the first quarter of Penney’s new pricing strategy, sales tanked. As is typical with such leadership failures, rather than admitting a mistake and reversing course, Johnson entrenched himself with his strategy by saying it will take 3-years to see a difference. Good luck with that.

I’ve seen other leaders make the same claim. They usually weren’t around long enough to see if they were right.

As a true measure, if you believed Johnson made the right call, did you buy more stuff at Penney’s because of its new pricing strategy? Why or why not?

I have a characteristic that most CEOs don’t have. I can admit that I don’t know. Johnson’s strategy may have been a good one. But, if I were running the company, I wouldn’t make a wholesale change unless I had strong evidence that it would help.

JC Penney has enough stores that they could change the price strategy in a few and see if it helps or hurts profits. That’s called a randomized market test or field trial.

I believe shareholders pay managers to put their egos aside and use the resources they have to figure out how to make the best decisions for the company, decisions that please the customers and generate more revenue and earnings for shareholders.

Often, however, boards of directors are attracted to the cowboys who throw caution to the wind and make BOLD changes based on their gut instincts. It’s unfortunate that those board members rarely lose their jobs. So goes the woes of corporate governance.

Johnson now has a new idea. Seems right up his alley, coming from Apple. It’s tech related.That’s a typical move from a failed CEO. Move to your strength after you blow it on something else.

But, it’s a red herring. He hopes his cool new idea will take your mind off his previous rotten idea. He wants to use technology to get rid of cashiers. Kind of neat (unless you like your job as a cashier). But, will that cause you to want to spend more money there? I don’t see the case for it.

But, still, Johnson hasn’t learned the most important lesson. It doesn’t appear that he’s testing his change. The article says this will happen. There’s no talk about this change being explored in market testing. Maybe it’ll work, but we don’t know and if he rolls it out without testing it, he’s just creating more risk for shareholders.

Shareholders can’t afford cowboys.

I’m going to give away a valuable secret to success in retailing. It’s so painfully obvious, but also so elusive for so many ego-driven CEOs. Ready? Here it is. Sell what people want.

Often, cowboy CEOs don’t understand this secret. They try to remake the business into something that meets their own personal preferences not realizing that their preferences do not match that of their customers.

A happy, former Walmart employee

You don’t often hear this side of the Walmart story (H/T Carpe Diem). Here are a few of the things this former Walmart employee had to say:

I worked hard and came back during a break from college to be promoted to work in the photo lab (more responsibility, higher rate of pay). I also saw many full-time employees that I worked with move up to become department managers, assistant store managers, and even move on to the corporate office.

Every evening I would go to a meeting with the store manager, who would tell us the stock price, how much we had sold that day, and if there were other expectations before we left for the night.

I also saw the opposite end of the spectrum. Some fellow associates seemed content to do the bare minimum and didn’t go anywhere in the company because of it. In fact, they are still at the same level.

In my opinion, these are also the employees that you hear speaking negatively of Walmart’s employment practices. They want something for nothing from the company and they aren’t getting it.

Market Share Myth

Company managers love to chase market share.  They like it because it’s a competitive head-to-head score, like a score to a baseball game. If you “take” market share from your competitors, then you’re beating them up and that’s good. If they take it from you, that’s bad.

I don’t think we should worry much about market share.  I have several reasons.

First, it isn’t necessarily a good read on the measure of business health.

Consider a simple ad absurdum: Would you be better off by doubling market share by cutting price in half?

No. You may be worse off. What if you cut your salary in half and got two jobs?

Sure with more clients, you’re less dependent on any one client. But, it will cost twice as much to serve those clients. So, you’ve doubled your costs while keeping revenue flat. And, you may have attracted a less loyal client that is more likely to leave you.

Several years ago, a company I worked with exited a line of business that had given it some market share and consistent financial losses for six years. It showed no signs of producing profits. There’s another name for such a line of business: unnecessary cost.

The managers kicked themselves on the earnings conference call for losing that market share. Rather than kicking myself, I would’ve celebrated giving up that line because it would mean getting rid of an unnecessary cost and more money for shareholders.

Getting rid of unprofitable market share, as in the example above, can be good. Acquiring unprofitable market share can be bad.

Earnings is a better measure of health.

Second, focusing on market share keeps managers too focused on their existing product lines. The best makers of buggy whips probably acquired significant share of the buggy whip market as the automobile was replacing the buggy.

Third, the “market” is to easy to get wrong. Is McDonald’s market share its share of hamburgers sold, its share of fast food hamburger restaurant sales, its share of fast food restaurant sales, its share of all restaurant sales or its share of all food and beverages sold?

Why pick one definition over the other? Should McDonald’s be bothered that you chose to buy a Coke at the vending machine in your office building instead of one its restaurants? Should they get into the office vending business in order to “capture” that market share?

I don’t think so.

Fourth, the market share paradigm turns the business world into a caricature of a “battle for control of the market”.  Company managers even try to act like that’s how it works as they bludgeon their troops to deliver results.

I think that’s an inaccurate and damaging representation of the business world.

Companies that gain profitable market share are those that provide products that clients value enough to buy at a price that more than covers the company’s costs.

Rather than a heartless battle for market share, the business world is really a trial-and-error lab that looks for ways to delight customers. Rather than Glengarry Glen Ross, it’s more like Starbucks.

Rather than gaining market share, businesses should be focused on pleasing customers and growing profits.

Growing profits is less like war and more like convincing a girl to go on a date. The secret to doing that is to give a girl what she wants. Figuring out what that is a trial-and-error process and can change at any time.

The “cheaper to keep a client than get a new one” myth

I’ve heard this repeated dozens of times to focus an organization on client retention.   The trouble is, it isn’t always true and if an organization focuses too much on client retention when it isn’t true, it can hurt.

Most organizations would love to have 100% client retention, except maybe non-profits whose goal is providing temporary help.

In the real world, no organizations have 100% client retention.  Even the best lose clients. Sometimes clients die, move or change what they value or just discover they want something different.

Good organizations will have client retention in the 70% – 85% range.  Organizations with less than 65% to 70% retention might have the opportunity improve retention, depending on the nature of the business.

But, at some point above 70% retention (and this varies depending on the type of organization and service, etc.) you reach a retention rate where you run into the law of diminishing returns.  To increase the retention by another 1%-point, for example, is costlier than bringing in new clients who value what you offer.

Let me illustrate with an example.

I use to use a small plumber for my home plumbing needs.  He was good and reasonable and good enough, in fact, that sometimes I had to wait a few days for him to come out. Once this proved to be a problem, because I had a leak that couldn’t wait a few days to fix.

I called another company and found they also did good work and I didn’t have to wait a few days.  They could have someone out within two hours.  That convenience advantage, along with their good work and reasonable prices, was enough to get me to switch.

However, my previous plumber still has plenty of work.  Losing me didn’t cost him much business.

For him to change his business to satisfy folks like me would cost him a lot.  He’d need to hire enough plumbers to cover the demand 24/7 and invest in more trucks and equipment. He’d need to hire schedulers and manage a larger workforce.

But, he’s happy with the business and profits he earns from his set of loyal clients, who don’t place as much value on how quickly the plumber arrives.  Perhaps his customers are builders and commercial accounts who can schedule work in advance, or simply people who can get by for a few days with a leak.

Even in a market that appears as homogeneous to outside observers as plumbing, there are some key things that differentiate the value proposition of what different plumbing companies offer and it is difficult for any one company to satisfy all these value differences.

For my previous plumber, it is cheaper to let me go to the competitor that offers what I value while spending his resources on finding another client who values what he offers.

That holds true until you reach a point where fewer and fewer customer value what you have to offer.  At that point, the market (i.e. customers) is sending you a signal that you need to change what you offer, or go out of business.

Admittedly, there’s a fine line and art between knowing when you need to just focus on finding clients that value what you offer and when you need to change.

Based on these thoughts I have a few recommendations for businesses.

First, don’t always assume that increasing retention is cheaper than finding new clients. It’s actually not very difficult to estimate the costs of each for any business.  Try it and see if you can compare the acquisition and incremental retention cost per client.

Second, if your retention is stable within a few percentage points, plus or minus, then that’s likely a sign that it’s just as effective to keep focus on both finding new clients and retention.  You should not favor one over the other.  You need both.

Third, be prepared for when retention does start to plummet.  Consumer preferences do change in unpredictable ways.  One way to prepare your organization for such changes is to run small experiments with various business model approaches and see which ones resonate. Also, keep and eye on what your competitors are doing differently and understand why that may or may not work for you.

I’ve seen too many organizations who only focus on their bread-and-butter value proposition and get caught by surprise when consumer preferences change.  That puts them in a dangerous position of throwing hail mary’s when preferences change rapidly. The chances of hail mary’s succeeding are less than the chances of small, unforced experiments.

I’ve also seen organizations who move too rapidly to change their business model even when it’s doing fine.  In the process, they often fundamentally lower the value proposition for existing clients.  New Coke is a good example.

Starbucks irked some of its faithful recently be introducing a light roast.  But, they didn’t repeat the mistake of New Coke, by replacing dark roast with light roast, they just added the new light roast to the existing product line.  Starbucks’ faithful will get over it, because they can still get the products they love and now more of their friends (the 40% of coffee drinkers who prefer lighter roasts) will come with them.

Fourth, develop a deep understanding of the value proposition your organization offers. Why do customers use your product or service?  Ask them and ask them again.  Don’t take their first answer as the real answer. There is probably four to ten reasons why they use you. Also, don’t just look for the answers you think are right. Some of the worst business strategy blunders come from folks who impose their own incorrect view of the value proposition on the organization.