Tag Archives: Competitive strategy

Break Up The Techs!

You’ve heard the cry break up the banks, haven’t you? Politicians like Senator Elizabeth Warren of Massachusetts continue to press the argument that our global banks are too large, too diversified, and too complex to continue in their present forms.

If that’s what they assert about the global banks, though, what would they say about our global technology companies? Just last week, the telecommunications giant Verizon bought internet pioneer AOL for $4.4 billion. And at roughly the same time, Facebook announced its entry into the business of publishing original news stories.

Why are firms like General Electric and Citigroup shedding their non-core businesses and shrinking down to their core competencies, while others like Verizon and Facebook expand aggressively beyond their fundamental services? Most proponents of expansionary strategies offer the justification that seemingly unrelated businesses can be aggregated in order to recognize underlying synergies.

On the other hand, the potential for synergies was the driving force behind AOL’s ill-fated merger with Time Warner. That 2001 transaction, executed just ahead of the bursting of the millennium era technology bubble, is often judged to be one of the worst merger decisions in business history.

So how are firms to know when diversification is a sound strategy? And how are they to judge when it is a foolhardy one?

There’s never a foolproof way to know the answers to such questions with absolute certainty. Nevertheless, it’s easy to understand why Verizon believes that it can strengthen the revenue potential of its telecommunications backbone by integrating AOL’s online advertising function. And, likewise, it’s a cinch to envision Facebook expanding its online market share by leveraging its existing platform to publish news stories.

Conversely, it’s difficult to envision how GE’s ownership of NBC Television could have helped it sell more jet engines. And it’s hard to argue that Citigroup’s ownership of a Japanese retail bank network could have helped it expand in the United States.

So, at least in retrospect, we appear to be quite capable of differentiating between sound and foolhardy expansion strategies. Regrettably, though, it appears to be far more difficult to proactively foresee such results.

Technology Titans In Trouble

Something strange is happening to America’s titans of technology. At the precise moment when the economy is supposedly gaining strength, and at the very time when technology platforms are evolving in increasingly productive ways, many dominant firms are experiencing dramatic slow-downs (or even outright declines) in sales revenue.

Just last week, for instance, Amazon slashed its sales projections for the upcoming holiday season. Apple revealed that it was losing iTunes music volume to online streaming services. And IBM abandoned its $20 earnings per share “road map” target for 2015, while an analyst complained, “too much of its revenue comes from old-school business lines, and not from potential growth areas.”

But why are such admired firms suddenly struggling to attract customers? After all, IBM rescued itself from collapse by shifting from a hardware focus to a customer focus in the early 1990s. Amazon virtually invented the online sales industry in the late 1990s. And Apple’s iTunes, along with the iPod, revolutionized the music industry in the early 2000s.

All three firms, though, now appear to be struggling to maintain their competitive market positions. Amazon’s initial venture into mobile phones, for instance, flopped earlier this year. Apple is pinning its hopes on integrating its recently acquired Beats music streaming service with its own iTunes service. And IBM industry analysts are now referring to the firm’s predicament with expressions like “a sad national story.”

At first glance, these firms appear to be focused on different technology sectors. Nevertheless, they do seem to share a common problem. Namely, their customers are underwhelmed by their offerings, and they are taking their sales revenue elsewhere.

Unless these firms can rediscover the internal development capabilities that first drove them to prosperity, their days as industry titans may indeed be numbered.

JC Penney: A Leadership Mistake?

At the end of the 1956 baseball season in the United States, Brooklyn Dodger icon Jackie Robinson received some disconcerting news. In the twilight of his career, he had been traded to the cross town rival New York Giants, who sought his veteran leadership for a roster that included the very young future Hall of Famer Willie Mays.

Veteran leadership? For a rival team? Fuhgettaboutit! Robinson refused to report to the Giants and Major League Baseball voided the deal. Robinson himself retired from the game shortly thereafter.

Was Robinson excessively worried about his professional legacy, or did he understand that veteran leaders who switch teams rarely find success in their new positions? Unfortunately for American retailer JC Penney, Robinson is no longer available to provide them with advice regarding their leadership strategy.

A Small Slice of Americana

JC Penney, of course, is a venerable American department store chain. Although it has never earned the pedigree of Macy’s or achieved the size of Sears Roebuck, it can lay claim to its own slice of American retail history.

James Cash Penney was originally an employee in a small retail organization called Golden Rule. After purchasing a minority share in 1902, he bought out his partners five years later and took command of the chain that would be renamed JC Penney in 1913.

Although Penney lost his fortune during the Great Depression of the 1930s, he managed to keep his retail empire alive. In fact, Penney’s Des Moines store hired a young employee named Sam Walton in 1940, the entrepreneur who would later establish the Walmart chain.

JC Penney peaked in size in the early 1970s, when it briefly expanded to more than 2,000 retail sites. It now operates more than 1,000 stores across the United States.

An Apple Transplant

So who is the current leader of this venerable retail establishment icon? None other than Ron Johnson, a former corporate executive at Apple who was hired by Penney to bring a little pizzazz to its facilities.

And that’s precisely what Johnson brought to the Texas based retailer. He placed new emphasis on full, “hands on” customer service and in-store boutiques. He even abbreviated the brand itself to a crisp, concise jcp.

But then Johnson decided to eliminate Penney’s traditional reliance on frequent sales events, replacing them with a standard pricing policy for all merchandise. His Fair and Square pricing strategy emphasized non-discounted prices and infrequent sales.

Standard pricing, of course, is a classic Apple strategy; it supports the philosophy that sales events tend to cheapen the image of the brand over time. But by taking away the tradition of the frequent sales event from Penney’s core customer, Johnson drove many of them away. Indeed, sales volume has plummeted under Johnson’s command, and the prospects of the retailer are eroding quickly.

An Austerity Plan

Faced with intense criticism about Penney’s sales decline, Johnson is now retreating from his “limited sales event” policy. Instead, he is cautiously reinstating special sales events on a partial basis.

But should Penney adhere to Johnson’s limited-sales plan? After all, organizations in many different industries have moved away from sales driven marketing strategies. Many automobile companies, for instance, are no longer relying on large rebate campaigns. And most airlines are forsaking fare sale strategies, opting to increase ticket prices and ancillary service fees instead.

One can characterize Johnson’s sudden abandonment of sales events as an austerity themed plan, with austerity being imposed on the firm’s customer base. Is it possible, however, that Johnson selected an appropriate austerity strategy but served as an inappropriate leader for implementing it? Would a more familiar and recognizable leader, instead of an outsider, have been more palatable to Penney’s regular customers?

Home Grown Leadership

Anecdotal evidence seems to suggest that people tend to accept austerity solutions more readily when they are proposed by home grown leaders, and not by transplanted leaders with personal histories and loyalties to other organizations. The evidence extends beyond the business sector and throughout other sectors of human endeavor.

Consider the realm of politics, for instance. On the one hand, the Italian people recently rejected the European prescription of austerity that was imposed by interim leader Mario Monti. His political rivals attacked Monti’s credibility by suggesting that his brief leadership position was too “centric” (i.e. too focused) on German political needs.

On the other hand, the popular, home grown Icelandic government has presided over an economic rebound since the 2008 / 09 financial collapse. And in the business world, Apple itself presents a quintessential example of a firm that once tottered towards bankruptcy until its home grown founder returned to replace an outsider CEO.

So is it possible that Ron Johnson developed the right plan for Penney, but is the wrong leader to implement it? And if he isn’t the right leader, then who should replace him? Until Penney’s Board clarifies the nature of its leadership mistake, it may find itself unable to correct it.