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.

Boards Beware

Today’s Wall Street Journal article, about the firing of Penney’s chief Ron Johnson, identifies clearly Johnson’s main problem:

The board’s decision ends a brief and turbulent career in the corner office for Mr. Johnson. He arrived at Penney to great fanfare in November 2011, but lost the confidence of directors and investors after he rolled out an ambitious plan to reinvent Penney’s stores without following the usual retail practice of testing the changes first.

Mr. Johnson was unapologetic about his decision not to test his strategy. Asked earlier this year if he would do things differently given a chance to start over, he replied, “No, of course not.”

That’s dumb. Boards of Directors should not hire these pompous jack-asses. Tests allow companies to discover what consumers want and prefer and evolve the business to serve their preferences.

This should be a standard question asked in an interview for a CEO, what do you think of testing? If the candidate doesn’t believe in tests, boards should stay away from these candidates.

Why?

Because what consumers want is not always obvious — even to consumers. Very few business ideas pan out, because they fail to deliver value to consumers — even if they sound really good. Tests are hedges against being wrong. They allow a company to discover if a new thing does what it is supposed to — provide what customers are willing to pay for.

What customers want isn’t often obvious. Even customers can rarely truly tell you what they want. They think they can, but what they say very often doesn’t match how they really behave. Economists call this the difference between stated and revealed preferences.

This is the reason why it’s rare that CEOs can divine what their customers want. Trial and error is how customers find out what they want and trial and error is typically how businesses figure out what customers value. Cut out the trial, and you set yourself up for a gigantic error. Small errors are better. Johnson has what economist F.A. Hayek called the Fatal Conceit. 

At least, in this case, from the Journal article we find out that one activist shareholder was the main reason Penneys went with Johnson and, thankfully, that shareholder took a bath for his foolhardiness. Perhaps he will learn a valuable lesson that discovering what customers want, rather than having a conceited fool like Johnson tell them, is a more effective approach running a business.

Longer than I thought

It appears that Ron Johnson’s days at the helm of JC Penney may be over. I predicted this last July. Granted, I wasn’t going too far

out on a limb.

Ron Johnson was thought of as a retailing guru at Apple for leading Apple Stores. I think it has become clear that it was the Apple products that were the bigger factor in that success.

By the way, I own several Apple products. Not one did I purchase in an Apple store. In fact, now that I think about, I’ve spent as much time in Apple stores as I did in JC Penney after Johnson took over.

Overnight Failure

According to this article, JC Penney CEO Ron Johnson once told a packed house about JC Penney:

All it takes is courage. We can change a brand overnight.

The article, goes on to say that Johnson fell short of that. But, Johnson did change JCP overnight, just not for the better.

Johnson changed the value proposition such that whatever it was that appealed to the old JCP customers, only appeals to about 70% of them now.  In politics, that’d still be huge win. In business, that causes big losses.

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, sometimes so cleverly that few notice.

Even everyday low-price leader Walmart has “Rolbacks” in the main aisles, which are goods offered below their everyday low price.

Target, not necessarily known as a low-price leader, has a dollar and value 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 basic retailing.

In my opinion, that’s the key insight that escaped 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.