The case of Penney CEO Ron Johnson: Managerial "genius" can't be rated without reference to context

Ousted JCPenney CEO Ron Johnson: Say, didn't this guy used to be a genius?

by Ken

On April 8, the AP's Anne D'Innocenzio reported:

J.C. Penney's board of directors has ousted CEO Ron Johnson after only 16 months on the job as a risky turnaround strategy backfired and led to massive losses and steep sales drops.

The department store chain said that it has rehired Johnson's predecessor Mike Ullman, 66, who was CEO of the department store chain for seven years until November 2011.

As D'Innocenzio reports the story, there wasn't any question about Penney's disastrous performance under Johnson's leadership. There was considerable surprise about the timing, though. Given Johnson's track record, it was widely assumed that he would be given more time to achieve the turnaround he was hired to do.

I'm just catching up with the story, because I'm just catching up with the "Financial Page" of James Surowiecki in the March 25 New Yorker, "The Turnaround Trap." Which is why magazines pile up in my apartment, including even those rare issues that I think I've read pretty thoroughly.

I'm always afraid I've missed something potentially special. And in issues I know perfectly well I've only skimmed, who knows what I've missed? (Trust me, you don't want to imagine -- and wouldn't have wanted to see -- what my life was like back when there were seven days a week's worth of New York Times-es piling up, until the inevitable periodic purge.)

It's especially odd that I missed Surowiecki's March 25 "Financial Page," because usually it's one of the early things I read in The New Yorker. I can only guess I was thrown off by this being the magazine's "Style Issue," which meant there were several long articles of astonishing triviality to tiptoe around. Intriguingly, this "Financial Page" may actually have been themed to fit in with the "Style Issue," dealing as it did with Ron Johnson's then-still-turbulent tenure at JCPenney.

Johnson's inaugural speech in January 2012 "was a much anticipated event," Surowiecki writes. And it was spectacular.

Penney was directionless and barely profitable, and Johnson was a retail superstar. He had helped make Target hip, pioneering partnerships with big-name designers like Michael Graves, and had then moved to Apple, where he orchestrated the creation of the Apple Store. Johnson's presentation did not disappoint. He made it clear that he wasn't going to just stabilize Penney; he was going to revolutionize it. Coupons and sales, which had become ubiquitous, were going to be replaced by what he called "fair and square pricing." The stores themselves would be radically redesigned, becoming curated showcases of mini shops, arranged by brand. J. C. Penney, Johnson said, would become "America’s favorite store."

Or maybe not.

Fourteen months later, J. C. Penney is America's favorite cautionary tale. Customers have abandoned the store en masse: over the past year, revenues have fallen by twenty-five per cent, and Penney lost almost a billion dollars, half a billion of it in the final quarter alone. The company's stock price, which jumped twenty-four per cent after Johnson announced his plans, has since fallen almost sixty per cent. Twenty-one thousand employees have lost their jobs. And Johnson has become the target of unrelenting criticism.

"Given Johnson’s track record," Surowiecki writes, "plenty of people are shocked by what's happened." But, he points out, "Hiring him was always a huge gamble," and he seems from the start to have totally misunderstood Penney's existing customers, for whom ferreting out those bargains was a crucial element of their relationship to the store, and the new Penney was rolled out without market research (which apparently "has always been anathema" at Apple) and "before the stores had been remodelled or filled with new merchandise," thereby "[driving] old customers away without giving new ones a reason to come in."

Columbia professor Mark Cohen, onetime CEO of Sears Canada, pointed out to Surowiecki that Johnson "had never been a C.E.O., never mounted or managed a turnaround, had limited fashion-apparel experience, and had no experience in the middle-market space." What's more, the people who were enthralled by Johnson's brilliance at Target and Apple somehow missed the fact that the situation facing him at Penney was a different beast entirely.

Johnson's champions assumed that, because he had done great work elsewhere, he would do great work at Penney. But the circumstances at Johnson's previous companies were radically different from those at Penney. Target was a thriving company that had already positioned itself as a trend-aware, fashionable store, so Johnson had plenty of support in the effort to make it cooler. And, while the Apple Store is a brilliant retail concept, its success was surely helped by the fact that it has been home to three of the best-selling consumer products ever.

Given the enormity of the challenge at Penny, Surowiecki ventures, "If Johnson isn't as good as he looked at Apple, he's probably not as bad as he looks at Penney.

The result, however, is that Johnson has --

become a living example of one of Warren Buffett's keenest observations: "When a manager with a reputation for brilliance tackles a business with a reputation for poor fundamental economics, it is the reputation of the business that remains intact."

I suspect that this is way more common than we acknowledge among that increasingly entrenched and overpaid class of superstar CEOs who continue to fail upward and slink off nursing their overflowing golden parachutes. Many of them may once have performed what looked like corporate feats of brilliance, but under circumstances that either were atypically favorable or didn't have all that much to do with them. But once they reach a certain corporate rank, it's no longer about job performance. It's about coddling wildly overinflated egos and locking in the pay packages to which they've come to feel entitled.

The assumption that Johnson would sweep to triumph at Penney's, Surowiecki writes, "probably reflects what psychologists call 'the fundamental attribution error' -- our tendency to ignore context and attribute an individual's success or failure solely to inherent qualities." There's a lesson there that seems to be little appreciated by the people who watch over our corporations: Context matters. That seems to me a large and powerful lesson to emege in a magazine issue so largely concerned with something as evanescent and trivial as "style."

And to think, I came this close to throwing that issue out of The New Yorker out without reading this piece.

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