The Strange Case of Ron Johnson and JCPenney

What exactly just happened at JCPenney?

Background: In November 2011, JCPenney fired its CEO and poached the redoubtable Ron Johnson away from Apple. Ron Johnson, the genius behind the Apple Store, proposed a visionary idea for JCPenney, remaking “Penney’s” into a department store version of the Apple store. JCPenney would thrive because it has so many more locations than Apple, and such larger stores.

You see, Johnson’s plan was so exciting, and so obviously visionary, that he decided to remake the entire Penney’s chain in this new image, immediately. Every store. Now. No market testing. And the JCPenney Board let him do it.

For the year ended February 2, 2013, JCPenney’s revenues dropped to $12.985 billion, from $17.26 billion the prior year. That’s a drop of $4.4 billion dollars. For the same period, the company reported a $1.3 billion operating loss. And yet… Johnson managed to hang on for two more months past year end, getting fired on April 8.

My questions:

  1. Why did JCPenney’s board allow Johnson to bet all its chips on such a risky strategy? Why didn’t Penney’s test the new look in a few stores, fine tune it, and then roll it out into the rest of the chain?
  2. Why didn’t JCPenney’s board fire Johnson sooner?

Corporate greed is a deceptively obvious answer. However, the object of greed is to make money. Here, Johnson and his buddies lost money.

Another possibility is a culture of groupthink, where brilliant and successful people work together to create an unspeakable failure, like the Edsel, Ishtar, or Charlie Weis. What makes this unplausible in the case of JCPenney is that this plan failed from the outset, was continuously failing for well over a year, and, even after the results were in, the Board continued to support Johnson for another two months. It’s as if the Star Wars Holiday Special bombed on TV, and then, as if to add insult to injury, CBS and LucasFilm made a general release of the TV show in the theatres, to empty houses, for 16 months. Sure, groupthink leads to failure, but a group of yes-men working on a bad idea can only get so far.

A more likely possibility is that Johnson and the Board figured that time was running short. They had nothing to lose. JCPenney was getting squeezed between upscale department stores, inexpensive discount stores, and the internet. The company was headed for oblivion. Management might as well try a quick but risky plan that had the potential to pay off big time, and save the company. If the plan worked, they’d save the company. And if it failed, well, JC Penney was inevitably going to fail anyway. They will have done everyone a service by expediting the matter.

This theory partially explains why the board stood by Johnson for so long. It is also possible that, after the February results came out, the board had trouble finding a replacement for Johnson, a job akin to recruiting a new captain for the Titanic, after it hit the iceberg.  Ultimately, the board had to eat crow by rehiring the former CEO Mike Ullman.

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About Mark P. Holtzman

Chair of Accounting Department at Seton Hall University. PhD from The University of Texas at Austin. Worked at Deloitte's New York Office. BSBA from Hofstra University.

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