Leading Teams

Three Leadership Lessons from Ron Johnson’s Debacle at J.C. Penney

April 11, 2013 By Nagesh Belludi Leave a Comment

Monday’s dismissal of J.C. Penney CEO Ron Johnson comes as no surprise.

In late 2011, J.C. Penney had hired Ron Johnson from Apple to revive the sagging fortunes of the storied retailer. He was deemed as a retailing genius who had proved himself by creating Target’s hip-yet-inexpensive cachet and then by leading Apple’s highly lucrative retail stores.

During his 17-month tenure, Ron Johnson had poured hundreds of millions into rapidly remaking the retailer. Mostly, his attempt at the high-stakes makeover of J.C. Penney hadn’t worked. Revenue deteriorated sharply, feedback from customers and employees was persistently negative, and the J.C. Penney share price declined by over 50%.

Lesson 1: Don’t disenfranchise your traditional customer base

Over the years, J.C. Penney’s economic moat had declined considerably. J.C. Penney lost customers to higher-end retailers and specialty stores who had started to offer better value at lower prices. At the other end, Wal-Mart and Target wooed price-sensitive customers with better-than-basic goods.

When retailing relatively undifferentiated merchandise, one of the key levers to revenue is discounts and promotions. Like other retailers, J.C. Penney had trained its customers to buy largely when its stores had a sale. Shoppers recognized that J.C. Penney’s tag prices were made-up to be marked down during sales events and were fixated on coupons, discounts, and promotions. Shoppers had come to regard of shopping at J.C. Penney as a treasure hunt for significantly marked-down merchandise.

Within weeks of joining J.C. Penney, Ron Johnson observed that three-quarters of everything sold had been discounted by at least 50% from list price. Instead of marking up the tag prices and then using deep discount sales to attract customers, he initiated a new “fair and square every day” pricing strategy. By offering good prices every day he attempted to change customer bahavior and dissuade them from waiting for markdowns. Further, by minimizing sales, promotions, and coupons, Ron Johnson eliminated the thrill of pursuing markdowns, a key characteristic of J.C. Penney’s conventional customer. When the pricing strategy flopped, Ron Johnson reinstated sales and coupons, and even brought back “fake prices.” The successive changes confused employees and customers. Additionally, J.C. Penney stopped carrying some traditional brands that many of its long-time customers had favored and injected trendy brands to appeal to younger customers. Ron Johnson’s team created exciting marketing and advertising that was seen as too edgy and further confused traditional customers.

Lesson 2: Don’t be so hubristic as to wager big on hunches without prototyping

At Apple, Steve Jobs frequently shunned extensive consumer research because he had the exceptional genius to introduce the right products, with the right features, at the right time. Drawing from his success at the helm of Apple stores, Ron Johnson was perhaps overconfident that he had all the right answers and could therefore forego the crucial feedback from employees and customers before embarking to “revolutionize retailing” by “teaching people how to shop on their terms” and “fundamentally disrupting the traditional retailing paradigm.”

The gravest error Ron Johnson made at J.C. Penney was not testing his new pricing strategy in a handful of stores. According to this WSJ article, when a colleague proposed a limited store-test of the new pricing strategy, Johnson allegedly responded, “We didn’t test at Apple.”

Clearly, what Ron Johnson thought of value was not what its customers saw as value. As a result, J.C. Penney overlooked the reality that, for its customers, pursuing discounted goods on sale was part of the fun of shopping at J.C. Penney. Ron Johnson set about to tear down an old business model before he had switched over to a new business model without prototyping.

Ron Johnson possibly had a compelling out-of-the-box vision for J.C. Penney. However, he did not stay closely connected to J.C. Penney’s customers and employees before the launch of a radical strategic change. It is challenging to be an effective leader when customers and employees don’t understand and buy major changes.

Incremental improvements to J.C. Penney’s merchandising strategy through extensive prototyping and measured makeover could have provided the opportunity to learn through trialing and encouraged ownership of the strategy by employees, especially those in customer-facing roles.

Lesson 3: Beware of the “Halo Bias” in rating leaders

We tend to attribute a manager/leader’s success to his apparent genius and we overlook the role of the context (team, product, industry, timing, and luck) in his success. Thus, we come to expect him to have the same success in a different context. We anticipate that the very tactics and devices that proved successful in the past would work for him in the new context. (See my earlier article on the halo and horns biases in rating people.)

Ron Johnson certainly proved his retailing genius by first creating Target’s hip-yet-inexpensive brand image and then, for ten years, by leading Apple’s highly lucrative retail stores where he most famously introduced the Genius Bar concept. Nevertheless, his experience with selling premium-priced products at full price all the time with no promotions at the Apple stores did not translate well to J.C. Penney’s undifferentiated merchandise and its customer base of bargain hunters.

In June 2011, J.C. Penney stock spiked by 17.5% when the company announced Ron Johnson’s appointment as CEO. Wall Street saw in him a proven leader with the silver bullet. Investors got overly optimistic that he would remake the embattled retailer and overlooked the fact that J.C. Penney lacked the brand image of Apple and its most-sought-after products. Alas, J.C. Penney stock slid by over 50% during Ron Johnson’s 17-month tenure. The golden boy of retail never hit his stride.

Leadership: Stay out of the kitchen if you can’t handle the heat

April 8, 2013 By Nagesh Belludi Leave a Comment

Not everybody is prepared to endure the demanding responsibilities of a leadership role:

It’s tough to challenge status quo and to pilot your organization forward into unfamiliar territory
It’s tough to be long-term oriented and to propose transformative ideas that may fall eventually short of expectations
It’s tough to see around the corner and to rely on gut intuitions to develop an “end state” vision
It’s tough to prioritize decisiveness over inclusivity and to take tough—and sometimes unpopular—decisions
It’s tough to resist the urge to settle and to avoid letting circumstances define your strategy
It’s tough to gain strong credibility and communicate the direction and priorities of your organization
It’s tough to face censure and be verbally graceful under fire
It’s tough to be decisive, to acknowledge setbacks, and to change course midstream, if required
It’s tough to rationalize seemingly irrational actions and to ask for resources
It’s tough to be tough-minded without being inflexible or insensitive
It’s tough to do the right thing while resisting the temptation to please your constituents
It’s tough to say no when you must; it’s tough to say yes when you can’t

If you cannot come to terms with the pressures of a leadership role, perhaps leadership may be the wrong kind of work for you.

It is acceptable to be an individual contributor; although you must still develop your leadership skills to succeed in any role in the modern organization.

The Duplicity of Corporate Diversity Initiatives

February 5, 2013 By Nagesh Belludi Leave a Comment

Corporate Diversity Initiatives Even after years of diversity initiatives in corporate America, “inclusion” is more about meeting the numbers on gender, race, and other obvious differences, and less about pursuing intellectual, ideological, pedagogical, and stylistic diversity within teams and organizations.

Overall, the workforce diversity initiatives have succeeded in deterring explicit discriminatory behavior and preventing employee lawsuits. However, to make the representation numbers look good, corporate diversity initiatives have largely resulted in exclusionary practices for the preferential hiring and promoting of underrepresented demographic groups, much to the chagrin of those who are more competent, yet arbitrarily overlooked because the latter belong to groups that are numerically “overrepresented”—reverse discrimination, indeed. For fear of reprisal, the shortchanged majority is reluctant to speak out against this veiled unfairness or to call attention to the dichotomy between the ideals and the practice of affirmative action in the workplace.

Even if nearly all corporate mission statements extol the virtues of “valuing differences,” managers stifle individuality down in the trenches. They are less willing to be receptive of distinctive viewpoints and seek to mold their employees to conform to the existing culture of the workplace and to comply with the existing ways of doing things. Compliant, acquiescent employees who look the part are promoted in preference to exceptional, questioning employees who bring truly different perspectives to the table. The nail that sticks its head up indeed gets hammered down.

Don’t be Friends with Your Employees

December 26, 2012 By Nagesh Belludi Leave a Comment

Be friendly with your employees, but don’t be friends with them.

To be effective, managers need to to be obliging when they can and tough when they must. The boss-employee relationship implies a power structure that makes managing friends quite challenging. It can be difficult to give objective performance feedback to your friends, convince them defer to your authority over them, or to decline requests for specific allowances without harming the friendship.

Few managers who’ve been promoted from within to manage their peers come out of the boss-employee relationship with their friendships intact.

If you decide to be friends with your employees, don’t do it at the expense of being a boss.

Performance Appraisal Systems “Don’t Meet Expectations”

November 26, 2012 By Nagesh Belludi Leave a Comment

Across the corporate world, the annual performance appraisal system has been reduced to a perfunctory exercise to “do what HR needs and check-the-box,” and produce paperwork to weed out the laggards and reduce liability against discrimination lawsuits. So much so that one company I know recently distributed copies of the book “Perfect Phrases for Performance Reviews” to hundreds of its managers to help “use relevant phrases and standardize the vocabulary” and “ease the whole process.”

Empirical evidence suggests that, taken as a whole, the annual performance appraisal system has failed to “meet expectations.” It produces no durable improvements in employee behavior and seldom assists the employees meaningfully with career development. Nor does it have a discernible impact on organizational development. Thanks to a system that is highly subjective and easy to game, this annual ritual has become a stressful exercise for managers and employees alike.

At many companies, performance appraisals center too much on filling out forms. The actual performance appraisal meetings tend to be uncomfortable encounters for both managers and employees. Much time during these meetings is devoted to disputing the self-evaluations of employees, summoning up their failings, and defending the employee rankings previously determined by a “consensus” process administered by HR. Besides, during the ranking process, managers tend to overstate the accomplishments of their own employees and put down other employees—after all, managers do not want to incriminate themselves and admit failure in managing employees as successfully as their managerial peers might assert.

Core to this problem is that most managers fail to understand that employee performance management is about establishing relationships and ensuring effective communication about how employees, managers, teams, and organizations can succeed and create enduring value.

Performance management should not be limited to just once a year during the annual performance appraisal. Helping employees to reflect on their performance and learn from their mistakes, and coaching them should be part of the everyday interactions between employees and their managers. This way, the employees can solicit feedback promptly, know where they stand, and make small ongoing improvements. The managers do not have to wait until the appraisal time and then make an extraordinary attempt to convince their employees to correct themselves. The constant communication can eliminate any surprises for both the manager and the employee during the formal performance appraisal exercise.

As part of this informal practice, the managers can keep a diary on employee performance. Recording significant and relevant examples of an employee’s performance (achievements and shortcomings) can help the managers write objective performance summaries. In addition to diminishing the recency bias, the awareness that a manager might write up opinions may persuade an employee to pay attention.

For now, HR can develop a “Performance Improvement Plan” to overhaul the performance appraisal system and truly help improve individual and organizational performance.

More Ideas for Career Success

Defend in Public, Reprimand in Private [Two-Minute Mentor #3]

November 19, 2012 By Nagesh Belludi Leave a Comment

When Richard Branson, founder and chairperson of the Virgin Group, was seven years old, he took some 50 pence in loose change from his father’s table and walked over to a candy store. The shopkeeper suspected Richard and wanted to call his mischief. The shopkeeper called Richard Branson’s father and asked him to come down to the store. The shopkeeper told the dad, “I assume your son has taken this, that you didn’t give it to him?” Richard Branson’s dad seemed irritated at this suggestion. He retorted back to the shopkeeper, “How dare you accuse him of stealing!” Although the senior Branson knew Richard had taken the 50 pence, he avoided humiliating his son in the open. Back home, Richard Branson admitted he had taken the coins from his dad and swore never to take money again without permission.

Idea for Impact

Most people are conscientious enough to recognize their mistakes. They do not want to be humiliated or shamed in the presence of peers and team members. Nor do not need their managers, parents, or other authority figures to ram mistakes down their throats.

When you think you can nail someone’s mistake in the open, take a breather and give a face-saving opportunity for the other. Avoid the temptation to put them down in public. In the privacy of one-on-one meetings, listen to their points of view, describe the impact of their ideas and behaviors, encourage them to reflect on their mistakes, and correct themselves.

When an Employee Threatens to Quit

November 12, 2012 By Nagesh Belludi 5 Comments

If an employee decides to use the threat of quitting to coerce your organization into fulfilling their demands, it’s time to take action.

Of course, it’s always important to listen to and consider employee requests, but when these requests escalate into persistent threats, it’s time to communicate firmly with the employee. Let them know that this type of behavior is unacceptable, and if they cannot accept the organization’s decision, they are free to leave.

Documentation is key in these situations to protect the organization from potential wrongful termination claims. It’s important to have a clear record of the events that led to the employee’s departure, including any attempts made to resolve the situation.

While a valuable employee may seem irreplaceable, it’s important to remember that no one is indispensable in an organization. That’s why succession plans are crucial to ensure that continuity and stability are maintained even in the face of employee turnover.

Giving in to an employee’s threats sets a dangerous precedent that can erode organizational control and encourage further bad behavior. It’s important to stand firm and reinforce the organization’s position, making it clear that threats and coercion will not be tolerated as means of achieving goals.

Why Mergers Tend to Fail

August 31, 2010 By Nagesh Belludi 1 Comment

Corporate mergers tend to fail because of conflicting corporate cultures

Many corporate mergers and acquisitions (M&As) fail to realize their wished-for synergies, and eventually fall short of producing value to the stakeholders. Some years ago, a KPMG survey estimated that 83 percent of all mergers fail to create value and half may actually destroy value.

M&As invariably produce disappointing results because of a variety of reasons. One of the principal reasons has to do with the failure of management to integrate successfully the operating cultures of the individual companies. During M&A deals, the due diligence processes tend to focus more on the corporate matters (market synergies, product or service offerings, financial projections, legal and regulatory matters, etc.) and overlook the organizational and cultural challenges.

Integrating Conflicting Corporate Cultures

Undoubtedly, the biggest barrier of post-merger integration is the conflicting corporate cultures of the individual companies. Management consultant Rick Maurer likens corporate mergers to the marriage of two single parents each with their own children—“just because mom and dad are so in love, they fail to see that the kids don’t get along.”

During a merger, two organizations with unique cultures cease to exist and a new organization is supposed to establish. The erstwhile individual organizations simply will not let go of the past and move on. In time, when the “stronger” partner tries to thrust its culture on the new combined organization, employees of the “weaker” partner resist change. This impairs cooperation among employees, as was case with AT&T’s unsuccessful acquisition of NCR in the early ’90s.

Forcing Employees to Mesh

If cultural differences are far apart, the merged companies often fail to compromise and stick to a middle ground. The ill-fated Daimler-Chrysler merger suffered immensely from differences in the engineering and corporate cultures of the supposedly equal partners, Daimler-Benz and Chrysler Corporation, as well from differences in the national cultures of Germany and the United States. Within years of the merger, the dominance of the Daimler culture did not go well with employees in the United States. In December 2001, DaimlerChrysler CEO Jürgen Schrempp exclaimed, “What happened to the dynamic, can-do cowboy culture I bought”

Conflicting corporate cultures between US Airways and America West Combining two individual cultures and intricate administrative processes is very difficult to execute and manage successfully. Forcing employees to mesh behind the scenes is often ineffective because differences in organizational cultures are indiscernible to the top management. Take, for example, the merger of the Phoenix-based America West and Washington, D.C area-based US Airways in 2005. Many years into the merger, US Airways’s managers spoke of the “east side” (referring to the former US Airways) and the “west side” (referring to America West.) The unions continued to squabble over pilot seniority. Even though the company obtained a single operating certificate, two distinct cultures functioned internally resulting in poor employee morale, unhappy customers, and unpredictable financial performance.

Retaining Key Talent

Sagging morale and employee disorientation about job insecurity, company structure, seniority, decision-making processes, and promotion and growth opportunities often constitute another barrier to successful post-merger integration. Employees of the “weaker” partner or the acquired company tend to distrust the management of the “stronger” partner or the acquiring company. Fears of layoffs and new power equations in the merged entities often result in the exodus of key talent from the acquired company.

Forcing employees to mesh » why mergers fail

Engaging the Rank-and-file

“Human due diligence is every bit as important as financial due diligence. Ultimately, every deal will succeed or fail based on the collective efforts of the individuals who make it up.”
* David Harding

The success or failure of a merger results not from what happens at the top management level, but from what happens at the rank-and-file level. The importance of engaging the rank-and-file employees in the merger process and retaining key talent during the initial transition period cannot be overstated.

Recommended Resources

Bain consultant David Harding offers insights into M&A best practices in his book, “Mastering the Merger: Four Critical Decisions That Make or Break the Deal”
Wally Bock illustrates the importance of integrating corporate cultures with case studies from Chevron + Gulf Oil and HP + EDS
Carol Hymowitz’s WSJ article “In Deal-Making, Keep People in Mind” lists cultural problems that plagued other mergers

25 Ways to Instantly Become a Better Boss

August 2, 2010 By Nagesh Belludi 2 Comments

Bad management is not usually a result of bosses not knowing what to do to manage better. Rather, it stems largely from bosses not putting conventional managerial skills into practice. Little wonder, then, that despite the billions that organizations pour into managerial training, instances of shoddy management abound.

Here are a few simple and specific actions you can take now to become an effective boss.

Smile more
Appreciate more, judge less
Compliment openly; critique and correct in private
Don’t worry about who gets credit; give credit where due
Give feedback now; don’t wait until the next performance review
Reiterate employees’ strengths and make them feel smarter
Get rid of busy work
Simplify work and encourage expediency
Establish deadlines and stick with them
Organize employees’ time and priorities
Explain what needs to be done and get out of the way
Avoid giving conflicting orders
Find the time to listen to your employees and follow-up
Recognize the small picture
Seek to understand what inhibits employee effectiveness
Give employees adequate latitude
Fix problems, not blames
Encourage mistakes; own up to your mistakes
Standup for your employees
Encourage participation in decision-making
Be tough-minded, not mean
Do not play favorites; discourage sucking up
Be accessible and friendly, yet consistent and objective
Earn respect; don’t demand deference
Attempt to influence by persuasion, not by wielding authority

The Halo and Horns Effects [Rating Errors]

April 30, 2010 By Nagesh Belludi 1 Comment

Preamble: We are often unaware of the many biases and prejudices that influence our social judgments. Psychologists call these “bias blind spots.” We can overcome many of these subliminal biases by teaching ourselves to be aware of them. This is the second in a series of articles on the common rating errors. See my earlier article on the recency bias.

Unconscious Judgments of an Investment Broker

A 2007 study highlights two of the most common unconscious social judgment biases. Prof. Emily Pronin of Princeton University showed study participants one of two pictures of the same man whom she introduced as an investment broker. One picture showed a suited man with a highly regarded Cornell degree and the other showed the man in casual clothing with a degree from a nondescript college. The professor asked her participants how much of a theoretical $1,000 they would invest in each. The participants rated the suited man as more competent: on average, he got $535 on without having his background checked. In contrast, the causal dresser received just $352. Not only were the participants more likely to have the second broker’s credentials verified —but also they did not consider him as trustworthy.

The Halo Effect

The “halo effect” captures what happens when a person who is judged positively based on one aspect is automatically judged positively on several others without much evidence. For instance, as a result of the halo effect,

attractive people are often judged as competent and sociable. Film stars and other celebrities are assumed pleasant and sharp-witted,
inexperienced interviewers tend to pay less attention to a candidate’s negative traits after discerning one or two positive traits in the first few minutes of a job interview,
charismatic professionals tend to get noticed and move up the corporate ladder faster, irrespective of their technical and leadership skills,
articulate speakers are likely to influence their audiences more even if their messages are poor in form and content.

Politicians, film and TV stars, sportspersons, celebrities and brand managers have learned to construct a halo effect and capitalize on their reputations. Apple’s iPod spawned positive impressions of other Apple products—the company took advantage of this halo effect and delivered excellent products in the iPhone and iPad. In another example, renowned fashion designers can set high prices for perfectly ordinary clothes.

Halo and Horns Effects in Social Judgment

The Horns Effect

The “horns” or “devil effect” is the concept by which a person who is judged negatively on one aspect is automatically judged negatively on several other aspects without much evidence. Clearly, this is the opposite of the halo effect.

For years, American car manufacturers have battled the mistaken public perception that cars made by Japanese companies are of significantly better quality. This misperception remains even when American car manufacturers use identical components from the same suppliers and assemble their cars using identical manufacturing processes. Even today, Japanese-brand cars resell for much higher prices than American-brand cars.

Call for Action

Reflect on your decision-making process to steer clear of biases. As human beings, we incessantly form opinions of people, objects, and events, both consciously and subconsciously. However, our judgment is rarely free of biases and our measures are not always comprehensive enough. Before reaching any important decision, be sure to collect all the relevant facts and reflect on whether your thought processes are free of the common biases.
Understand that perception is reality and be conscious of the image you are projecting. People judge the proverbial book by its cover. Your friends and family, workplace and society at large have a certain perception of who you are and what you can do, irrespective of the reality. As much as you would prefer to be evaluated based on who you actually are and what you can actually do, understand that your identity and prospects are based on others’ image of you. Do everything you can to connect people’s perception to the reality. Look and play your role. Begin by reading the seminal article on the topic of personal branding, “The Brand Called You,” written by renowned management author, Tom Peters.

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Leading Teams

Lesson 1: Don’t disenfranchise your traditional customer base

Lesson 2: Don’t be so hubristic as to wager big on hunches without prototyping

Lesson 3: Beware of the “Halo Bias” in rating leaders

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More Ideas for Career Success

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Idea for Impact

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Integrating Conflicting Corporate Cultures

Forcing Employees to Mesh

Retaining Key Talent

Engaging the Rank-and-file

Recommended Resources

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Unconscious Judgments of an Investment Broker

The Halo Effect

The Horns Effect

Call for Action

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