Turnaround Business Strategy: A Thin Line Between Failure and Success

Turnaround Business Strategy: A Thin Line Between Failure and Success
March 23, 2022 Omnibus

The tale of JCPenney could be a successful retail turnaround example.

It has everything. A venerable retailer with over a hundred years of tradition. Big trouble. And someone daring to tackle it. A hero manager – an Apple guru even. A transformation vision. A brand promise. A turnaround strategy built around A big hairy Audacious goal: “JCPenney will become US Favourite Store.” Also, a dramatic turn.

Still, this tale is a cautionary one. Warning business innovators of the dangers. Especially, the ones who change business models under time pressure (and show me someone who doesn’t?).

The case has been well documented. Two insightful and well-researched articles are quoted in the footnotes. But there is a perspective, we’ll try to add to the debate:

  1. WHY the turnaround retail strategy failed
  2. Suggesting HOW – an alternative way of leading bold turnaround retail strategies

But first, let’s digest a little context.

— A NEW CEO, PROVEN GROWTH RECORDS

It starts as a classic story of a venerable company. A charismatic founder. Revenue growth. Long tradition. More generations of customers. Glory years: back in the 1970s and 1980s.

Then enters the internet. Some disruptive competitors. Some dubious decisions. Some mishaps. As always. And a heavy blow of the financial crisis. The revenues dropped from 19,9 bn $ (2007) to 17,7 bn (2011).

A business model is struggling, stores are underperforming, customers leaving, and the company is stagnating.

In the fall of 2011, a new CEO was appointed.

Not anyone. A star CEO. A former Apple guy, a disciple of Steve Jobs – Ron Johnson. With premium accolades: his pedigree was built on leading Apple retail stores in a period of high growth.

— A RAPID TURNAROUND OF MAJOR SCOPE  

Stakeholders demanded what the new CEO soon provided: Change.

According to the impressively researched article by Jennifer Reingold, less than a month after the official inauguration, the new strategy was delivered.
Reingold: “Johnson laid out his vision of a more upscale, more youth-oriented Penney, weaned off its addiction to price promotions.”

It was very fast. Very audacious.

Johnson promised: “JC Penney will become US Favourite Store!”

The reaction of the company representatives? “No whisper of opposition,” describes Reingold. Sure. Who would oppose a retail guru, festooned by the supreme Apple Store accolades?

The presentation of the turnaround plan was unprecedented. The party was huge. Calvin Klein came.

The stock market reacted. The stock value jumped up.

— 16 MONTHS LATER

16 months later Johnson was fired. Brittain Ladd in Observer clinically lists the facts: “At the end of Johnson’s first year as CEO, same-store sales fell 25 percent resulting in a $4.3 billion decrease in revenue. The company recorded a $1 billion loss and the stock fell to $18.”

The headline of his article is more expressive and uses the vocabulary of a newspaper criminal account: “Ron Johnson Killed J.C.Penney …”

— WHAT HAPPENED IN-BETWEEN?

Accounts vary, but all emphasize the scope of the change.

CNN Wire stated: »Penney changed its advertisements, its logo, its store designs, and its pricing model, all attempts to make the retailer more palatable to wealthier shoppers.«

Certainly not humble improvements. It’s the action of trying to challenge the fundamentals of the old business model. Pressing all the key variables of retail (assortment, merchandising, pricing, coupon promotions, positioning, customer experience …). Pressing them at once. A radical turnaround strategy.

The clear goal was to magnetize the flow of new customers. It seems reasonable to assume the new CEO was willingly sacrificing part of the existing core customers. Trading lower-income wallets for more affluent ones. Following the Apple trail.

Makes sense. On paper.

— THE REALITY CHECK 

But the final judgment in retail comes from customers – in the real environment. Customers in stores. They are the reality check.

And what happened? A huge amount of the core customers went away. New customers didn’t show up. In one year, the same-store revenues dropped 25%. The plan failed.

Which is not really the news. It happens in business daily. 95% of new ideas fail. The rest is the golden opportunity. Something an entrepreneurial spirit will always strive for.

Why JCPenney’s case is the news is the scale of the failure.

— THE SCALE OF FAILURE

What drew my attention is the way the new CEO and his team rolled out the large-scale turnaround strategy.

In short: It was very fast & full-scale. All at once. All in. No testing. Skipping any feedback on a smaller scale. Investing in expensive store redesigns and huge opening ceremonies. Grandness in every possible way.

And to get the scope of the leap taken – or call it sheer recklessness – we should highlight two additional things:

a) We are not talking about yet another startup experiment here.

This is a traditional retailer, with rich history, developed company culture (see: Reingold), many employees, and a deteriorating but still valuable brand that attracted generations of customers.

b) The transformation is not a small improvement. It’s an overhaul, changing the fundamentals of a brand and its business. Not only attracting some new customers but turning the customer base inside out. A grand turnaround.

The all-or-nothing approach is suitable for aspiring startups with few customers, and therefore nothing to lose (except fund money).

But a grand experiment in the traditional retail organization? Attacking all the embedded values at once? With no graduality?

Grand experiment taken with all-or-nothing approach in a traditional organization?

That’s a perfect mismatch.

I should dare to introduce a psychological interpretation here.

Because the field provides us with a common term for describing someone who has a) an inflated sense of their importance, b) a deep need for excessive attention and admiration, c) troubled relationships, and d) a lack of empathy for others.

The diagnosis is called narcissism. A disorder in which people have an inflated opinion of themselves.

And in our case, all the conditions for such business narcissism are met.

Of course, the context matters – within the Apple ecosystem the same may be called “daring vision” – transplant it to JC Penney and we have “first-class narcissism.”

No magic wand and no business guru could assure general success without practical validations. Which come from customers. Not in focus groups but in retail stores. Period.

— TESTING A FULL SET OF CHANGED RETAIL VARIABLES AT ONCE

In physical retail, the ultimate check of a new store design with a full set of changed key retail variables – like pricing model, different assortment, new promotional policies, … – is a PILOT STORE.

A 25% drop in a pilot store is bad news. It tells you something is wrong with the plan. Something doesn’t work. You should diagnose the reason, then change it.

A 25% drop in a chain of 1000 stores on top of a huge investment is a catastrophe. There’s no backup button like in virtual reality. It’s irreversible. It tells you there is only one way – out. At least, for those who can get out.

— BUT: BUSINESS TRANSFORMATION NEEDS SPEED. AND, WE DON’T HAVE TIME!

And, then I hear my clients’ voices and maybe yours as well: It will take us, what, 3 months to implement a new store design in a pilot store? And then another 3 months to check it? What if we don’t have time for that?

It’s not an easy one. Believe me, I’ve been pondering these questions a lot. They are creeping around always when I consult or make innovation-inducing workshops leading to new store designs.

How fast should we transform and rebrand? Are we thorough enough? And again: are we fast enough?

The stakes are high, the pressure could be enormous.

The digital times further escalate the expectations as the disruptors increased the need for innovation speed. We couldn’t escape the fact: These are the times when Elon Musk is the leading hero. And His Paypal peer Peter Thiel puts exponential growth as a supreme condition of success. And online propelled Jeff Bezos right to the top of the Retailia empire. Did we mention Ron Johnson who achieved record growth back in Apple?

Still: as much respect the Musks, the Jobs’, the Thiels, and the Bezos’ deserve for their success, their examples could easily deceive our minds. Striving to grow, superfast, to innovate at once and full-scale, we nurture our narcissism instead of honestly looking at our projects in the mirror – getting feedback, accepting it, and then making improvements. And, exactly in this early reality check lies the power of a pilot store.

A little footnote here: see how quietly the exponential hero Amazon expands its Fresh grocery format in the physical world: in select cities, step by step, wave by wave … from 2018 only coming up to 44 Fresh and 28 Go stores.

— FASTER ROLL – OUT

On the other side: yes, it’s possible to do the new strategy roll-out quicker. On the condition, we do it selectively.

How? As you prepare for a retail test, you always discover some flaws in the current system that could be improved. Sure brainers. Small, viable improvements. Say, cleaner shopping carts, easier navigation, and improvements in store layouts.

After each pilot project stage, a list of viable changes can be made and transferred to the whole network.

The trouble is: the clients barely want to hear about such improvements.

They need a turnaround, not cleaner shopping carts. But it is these small details against which customers measure retailers’ credibility. Also, solving these unsexy pain points prepares a springboard for bigger changes.

You’ve got to learn how to walk before you run fast.

Anyway, the pressure to roll out faster is always present. In the retail environment, it might be enormous. But just never, never make a full roll-out on an innovation that changes all the fundamentals of a previous business model.

You might be on the right track, and you probably are, but some necessary adjustments will draw a thin line between failure and success. The rule is Testing > Checking > Improving > Expanding. (One exemption: Steve Jobs. Oh, yes, another one who succeeded with the full roll-out: Lenin. Not an exemption: the rest of us, including Jobs’ disciples like Ron Johnson)

Remember, a step in the wrong direction might be made super fast – but it is still a wrong one.

When a mistake is done in a pilot environment, it is reversible. It is irreversible after you trample the business fundamentals already, and your customers have left for good.

It’s also easier to accept failure in experiment format than later when hundreds of thousands, sometimes millions of € are invested into a project.

— KEY TAKEAWAY FOR A BOLD TURNAROUND LEADER

Time pressure and overblown egos inflated by public hype might push innovations over the cliff. Then downfall is inevitable. But we can learn from this and try to play better.

Turnaround strategies (closely related to innovations) are always a walk on a thin rope. We need to be bold, but not narcissistic.

Change in a traditional organization is different than a change in a freshly-born startup. Business fundamentals couldn’t be overthrown overnight.

Anyway, our plans need a reality check before getting full-scale. Innovations, rebranding, full set of and bold changes of a fundamental model, should be done in stages, step by step.

The steps should be fast & decisive, but there is a difference between:
– fast or hurried
– decisive or arrogant
And especially, there is a difference between being bold or narcissistic.

The line is thin, the risk must be taken. But facing feedback in the early stages is a necessary step for success. Otherwise, inflated egos could turn turnaround strategy into wishful thinking. And the results of denying reality can easily resemble catastrophe. They shouldn’t.

 

— THE END

Footnotes

Two articles that provide great insights into the case:

– Jennifer Reingold, “How to Fail in Business, While Really, Really Trying.” Fortune International, March 20, 2014.

– Brittain Ladd, “Ron Johnson Killed J.C. Penney—But He Has Become One of the Brightest Minds in Retail.” Observer. June 10, 2019.

Please contribute a feedback. 

Maybe you:

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