Why J.C. Penney’s New Strategy Won’t Work

A few months ago I reported on a visit to J.C. Penney and commented on my disappointment with the look and feel of the store.   What I saw was CEO Ron Johnson’s new strategy.  The basis of this strategy is a return to the roots of the company through its “Fair and Square Every Day” philosophy.

The problem with this strategy is that it is, in the words of Wharton Professor George S. Day, an “inside-out” strategy instead of an “outside-in” approach.  In 2010, Day and Duke University (Fuqua School of Business) Professor Christine M. Moorman wrote a book entitled “Strategy from the Outside In: Profiting from Customer Value,” published by McGraw-Hill in conjunction with the American Marketing Association Foundation.

The book offers a paradigm-changing approach to marketing.  The conventional wisdom – or the ‘inside-out’ viewpoint – is that companies create their strategies by seeking to maximize the profitability that can be attained with their current resources.  On the other hand, the ‘outside-in’ approach focuses on creating and keeping customers by first putting yourself in your customer’s shoes and asking “What can we do to create what our customers need and want?”

The inside-out approach is particularly appealing in a recessionary economy when accountants start running companies.  Here you see the inside-out approach as companies seek to maximize resources to deliver the highest levels of profitability.  Unfortunately, this approach focuses on the firm’s capabilities and not the needs and wants of the customer and the marketplace.

This is precisely what J.C. Penney had done.  Prior to Johnson’s ascension to CEO, Penney had underachieved.  Its strategy was based on attractive pricing and discounting and although it was not financially as successful as it wanted to be, it had attracted a strong and loyal customer base.   If Johnson had adopted an outside-in approach, he would have tried to build on this customer base and find out what they wanted and expected from J.C. Penney.  In so doing, Penney’s might have created a focus on the needs of its constituency.  Instead Johnson threw the baby out with the bathwater and decided to reinvent the retail chain based on the company’s resources instead of what the customers were interested in.

This inside-out/outside-in dilemma unfortunately is replicated all over the place and can be blamed for many of the more recent marketing failures.  For example, it was an inside-out approach that nearly killed Netflix.  United Airlines and American Airlines are both victims of inside-out marketing while Southwest Airlines has steadfastly adhered to its outside-in philosophy.  United and American have gone through bankruptcy and have experienced huge losses in their customer bases while Southwest has emerged as the Americas’ No. 1 airline.  Both United and American decided unilaterally to charge for luggage while Southwest kept its customers – not operational needs – in mind with its “bags fly free” philosophy.

Unfortunately, during recessions, accountant types start running companies.  Their focus is the bottom line and not the customer.