HANNAH BATES: Welcome to HBR On Strategy, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business. They say that change takes time. But if you’re making changes to your business, how long should it take? Major strategy shifts need time to play out – customers are used to their habits, employees are used to doing things a certain way, and fine-tuning a plan takes time in the market. But what if you don’t have the luxury of waiting years to know if your strategy really is working? In this episode, we discuss a fictitious struggling retail chain and its attempt to attract younger customers and boost its declining revenue. The new CEO has just introduced a totally new strategy, but early results aren’t good. Now the Board is pressuring him to walk back his changes. The CEO is arguing that short term pain and losses may be necessary to unlock longer term profitability. But how long is too long? Harvard Business School senior lecturer Jill Avery is the author of this fictionalized case study, which is loosely based on Ron Johnson’s tenure at JC Penney. She joins Harvard Business Review editor Andy O’Connell and IdeaCast host Sarah Green to discuss what her case can teach all managers about how to make strategic decisions, big and small, and accurately assess their success. This episode originally aired on HBR IdeaCast in April 2015. Just a note — we recorded this by phone. While the audio quality isn’t great, the conversation is. I think you’ll enjoy it. Here it is.
SARAH GREEN: Welcome to the HBR IdeaCast from Harvard Business Review. I’m Sarah Green. Today we are experimenting with a bit of a different format. We are here with Harvard Business School’s Jill Avery to talk about a case study she published in HBR. And we’re also here with the editor of that case, Andy O’Connell. We will hear the case and then we’ll discuss the issues it raises. If you have any feedback on this format please send it to me on Twitter @skgreen. Jill, thank you so much for joining us today.
JILL AVERY: Thank you.
SARAH GREEN: And, Andy, it’s great to have you here.
ANDY O’CONNELL: Thanks. Great to be here.
SARAH GREEN: So, Jill I thought before we actually hear the story you could just tee up for us a little bit of some of the major themes in the case. What should we be listening for here?
JILL AVERY: Sure. I think one of the big issues in the case is how managers think about changing strategy, particularly with radical changes in strategy. It’s hard to know when it’s the right thing to do and how your customers will respond. In this case study this is particularly important because the manager is wondering how quickly or slowly he will see results from his change in the strategy. So it’s hard to know what success would look like and how long we should wait for it to occur.
SARAH GREEN: OK. Great. We will now hear the story of the case read for us by a familiar podcast voice to many of you, HBR editor, Alison Beard.
ALISON BEARD: Augustine Ray, the new presidente of the century old retailer Amelia drove an SUV full of teenagers into the Spanish city of Leon to show them the revolution first hand. Earlier he had been visiting close friends Camillo and Maria Vega in their home near the provincial capital. And had enthusiastically explained his plan to revamp Amelia’s merchandising strategy and redesign some of its stores.
The one in Leon was getting a complete makeover. An indoor plaza would provide space for young people to listen to music or watch movies. Stalls along radiating streets would offer merchandise selected to appeal to Spain’s youth culture. The Vega’s son and daughter had been intrigued. Amelia, they asked? That old place?
So Augustine had invited them and their friends for a sneak preview. Maria decided to come, too. The group’s arrival at the store, which was in the final stages of its renovation, caused quite a stir. Awestruck employees lined up to shake Augustine’s hand as the teenagers fanned out among the boxes of merchandise. Nearly all the company stores in Spain, France, and Italy had already been renovated to at least some degree. About 10%, including this one, were getting the full treatment. And most of those were already up and running. But I was just the first wave.
Every Amelia store was to be redone over the next four years. They seem to love it, Maria said watching the kids. Usually they turn up their noses at Amelia. They say it’s a store for old ladies. Sure, it’s a great layout and the clothes are beautiful, Augustine said. But what will really hook this generation over the long term, is this little detail.
He held up a square black price tag bearing 21 Euro in large type. And in smaller letters of the word diario. Every day. This is the revolution, he said. Realness. These kids represent a chance for retail to start over and get real. They’re young and idealistic and untainted by the money games that have been plaguing retail for too long. The ridiculous markups followed by sales and special promotions. The young, the old, all retail customers want straight talk. Hablar claro. And we’re going to give it to them. Hablar claro was the name of Augustine’s strategy for turning Amelia into the next Spanish retail miracle.
And it had initially thrilled investors. Results for the first full quarter of operation under the new strategy had been outstanding, but second quarter performance was disappointing. And Augustine knew the most recent results would show further deterioration. Customer traffic was down significantly. And same store revenue had dropped. When the results were made public in a few days the muted criticism that have begun a few months earlier might burst into demands that he change the strategy. But you can’t chicken out in the middle of a revolution, he thought.
A great new hope. Augustine’s first retailing success had been his reimagining of the show rooms of Hogar, a European home design company. But it was his stint as head of retailing at the fast fashion chain Zella that had made him a star. His initial focus had been operational efficiency. Next he turned to cutting edge style. He’d created in store teams a [SPANISH], great minds of fashion, to provide style tips and listen to shoppers’ ideas.
The teams were hailed as retailing’s first really new concept in decades. So it was considered a great coup when a Amelia’s board announced that Augustine had been recruited as the company’s next leader. His mandate was to radically reinvent an enterprise that seemed to have lost its way. Amelia, named for the mother of the chain’s founder, had acquired a matronly reputation over the decades.
It was where frugal middle-aged women shop for sensible clothing for themselves, their husbands, and their children. This didn’t exactly constitute a thriving market. Even worse Amelia’s customers had become conditioned to buying only when prices had been slashed. No deal, no purchase. So for years Amelia had competed aggressively on price, offering more and more sales and coupons.
We have to break people from their addiction to discounts, Augustine said to Maria. Then he asked, do you remember my aunt’s Tia Marta and Tia Theresa? Maria smiled. She and he husband had known Augustine since school days in [? Galecia. ?] And she remembered the aunts well. They would put on their matching hats and take the bus, and spend the day going into one store after another hunting for bargains, Augustine said. I still remember the junk they came home with. And why? Because some shop owner had made up a full price and then after much haggling dramatically slashed it to what it should have been in the first place.
Whereupon my aunts would gladly pay the so-called bargain price and then crow about their great victory. Mara laughed. It was a harmless form of recreation. Perhaps, but on a huge scale in today’s retail environment it’s not harmless. It’s mutual victimization. We victimize the customers by deceiving them. And then we try to get them to buy other things while they’re scooping up the discounts.
Meanwhile, they victimize us by forcing us to cater to their irrational need to find bargains. Do you know that in the year before I was hired Amelia spent more than 700 million euro to execute 590 different sales and promotions? The average discount we have to offer to get customers to buy has jumped from 38% to 60%.
It’s all part of the game, Augustine. Retail should not be a game. Hogar and Zella are the paradigms. They excel by being straight with customers. No gimmicks, no deception. That’s the ethos I’m bringing to Amelia.
But Amelia has such different customers from Zella, Maria said. Won’t they be upset? A few will, to which I say, fine. Be upset. Others will be relieved. Won’t you need customers to replace those who defect? Just look, Augustine said. The last of the teenagers had come out of the store chattering about what they’d seen inside. Them, Maria asked? Yes. Amelia will truly become a store for the whole family. Older customers will want to come here for value. Young adults will come here to be with their friends and buy hip new clothes. It will be a retail playground for them.
But this generation is so obsessed with the internet. I doubt they’ll ever set foot in stores again. We’re replicating the in store experience online, Augustine said. But I think physical stores will continue to be important. Buying clothes is a touch and feel experience. And young people will use social media to spread the word Amelia is a fun place to meet. OK, but what if they refuse to pay for the cool stuff?
They won’t refuse, he said. We’ll stay inexpensive. We offer everyday low prices, as they say in the states. Maria laughed again. I guess retailers are born optimists.
The reckoning. The most recent quarter’s results were every bit as bad as Augustine had expected. He studied the numbers during a visit from the board chairman Nico [? Malo ?] at his home. The loss had widened to 211 million euro. Same store revenue was down 19%. And customer traffic had dropped by 10%. The chances were remote that the holiday shopping season would provide much of a lift.
But it’s a four year plan, Augustine said. Not a one year plan. We need time for the changes to play out, for all the stores to be renovated, for customers to understand our pricing strategy. It can’t be a four year plan if the company doesn’t survive for four years, Nico replied. Augustine was startled. Nico had recruited him and always been his staunchest supporter.
Quietly he said, survival is the whole reason for the four year plan. We’re extricating Amelia from the death spiral of a shrinking customer base, deal obsessed customers, tired merchandise, and escalating price promotions. But customers don’t like the new approach, Nico said. They need to be educated, Augustine replied. If our new strategy has one weakness it’s in marketing execution. In fact, I’d like to start a new campaign. [SPANISH], figure it out. It will be aimed at educating people about our competitive everyday prices.
We have the data to back it up. A random bucket of items will show that overall Amelia is significantly cheaper than all its direct competitors. Plus we have a policy of price matching. Nico sighed. If the straight talk campaign isn’t working what makes you think figure it out will fare any better? You haven’t done any research on this.
He reminded Augustine that the board had agreed to run the previous campaign without testing it first. The directors had bought into his argument that the company needed to get out in front of customers rather than be led by them. Recent customer surveys show that people see Amelia as offering less value, Nico added. And to take advantage our competitors are offering sales every weekend and flooding the airwaves with advertising about their new low prices. Customers are responding. That’s why are numbers are so bad.
We’re starting a retail revolution, Augustine said. We knew we’d have to take a few arrows in the back. Nico spread out some papers on the glass coffee table. The board is proposing a modification of the new approach, he said. One that more closely addresses the expressed desires of our existing customers whom we cannot abandon.
First, he continued, we’ll give up the hablar claro idea. Customers seem to find it condescending. Second, we go back to our policy of best price weekends. Third, we show the list price for every item so that customers can compare with the discounted price. Fourth, we reintroduce the word sale and clearance into our marketing. Fifth, we go back to printing circulars and coupons. This will make it simpler for customers to understand our stores. It will show that we’re on their wavelength.
Nico slid the papers across the table toward Augustine. This isn’t a coup, he said. We still believe in you. We’re still behind your vision to cater to younger customers, to turn the stores into social hubs, and to be more transparent about pricing to a degree, but we know those changes will take awhile. And in the meantime we don’t want to alienate our base. He tapped the papers with his finger. You don’t have to follow this plan to the letter, he said. But the board feels your new strategy is to extreme.
Augustine looked at the plan. To him it represented a return to business as usual and a colossal failure of nerve. Question, should Augustine abandon his bold strategy?
SARAH GREEN: OK. So I just want to say clearly here what some listeners may have noticed, that there is a little bit of overlap here with a real life story, the story Rob Johnson’s tenure at JC Penney. And I’m just wondering, Andy, if maybe we could start with you here. Why do we fictionalize the case as it appears in the magazine?
ANDY O’CONNELL: Well, we fictionalize the case for a couple of reasons. One is because we want to end the story with a simple question. And most real life teaching cases don’t simply end with a simple question like that. So we like to do that. And we also like to fictionalize them partly so that we can bring in expert commentators, which we did in this case, to talk about the case and they can feel free to say whatever they want. We don’t have to worry about whether they might offend somebody they know in the company, or something like that. We just want them to be able to freely talk about the issues.
SARAH GREEN: OK. And, Jill, as Andy just said, in the classroom you’re dealing with the real life case study and as Andy just mentioned, there’s sort of a lot of other issues that come into real life examples, but when you’re talking about this type of retail dilemma as we’ve just heard about what are some of the issues that the student’s raise and how do you sort of think about guiding their thinking in the classroom?
JILL AVERY: So the nice thing about the JC Penney case is I think in today’s landscape the issues are still unfolding. So that question that Andy talked about is very much still alive in the real situation. Some of the things that we grapple with in the classroom are having a conversation about how difficult it is to change an existing brand, to do a brand makeover given that brands exist in the minds of consumers. And that meaning is sticky.So JC Penney really wants to rebrand itself, wants to be more relevant to a younger audience, but that’s challenging when they’re dealing with a brand that has been around for a long time and already has meanings that are different from that. One of the other things that comes up in the classroom is the meaning of price discounting and how it affects consumer behavior. This really goes to the heart of what the marketing challenge is. What is value to customers and how do customers determine what’s a good value and what’s a bad value? We see in both the JC Penney case and in the HBR mini case that how we price discount and how we price our products more generally affects company profitability. So it’s very important to get that right. And what we see in both of the cases is that customers are used to price discounting. They enjoy it. They expect it. And if we want to change that practice it’s almost like breaking a bad habit. It’s painful for both us and our customers. And there’s always a question of will our customers come with us in this new plan or will they rebel against it?
ANDY O’CONNELL: One of the really interesting issues that comes up in both the JC Penney case and in the one that we fictionalized is this issue of, in a sense, honoring price sensitive consumers, their approach to shopping. And it did seem as though JC Penney was trying to really push consumers away from being very price sensitive. And consumers responded very negatively. And are there are other ways of weaning consumers off of this sort of weekly or daily discounts, but still honoring their price sensitivity and continuing to play in the discount space?
JILL AVERY: I think it’s challenging because I think the retail industry has changed dramatically with the growth of e-commerce. And over the past 10 years, we’ve seen an explosion of discounting across all channels. We’ve done this to ourselves in the retailing channel. We’ve trained customers to wait for the discount, to look for the sale. So when we say that customers are unprofitable we have to take the blame for that partially ourselves. We’ve trained them to be that way. I think the retailers that are doing this well today are being very strategic and selective about their discounting. They’re deciding which segments of customers most need a discount to buy and then they’re only discounting merchandise, or they’re only discounting during certain time periods when they’re sure that they’re attracting a large portion of that segment. Discounting almost on a daily basis across all customer segments, as we saw in the JC Penney case, turned out to be a very unprofitable strategy for most retailers. It becomes a horse race to see who can discount down to the bottom.
SARAH GREEN: Well, it’s interesting here because in the story that we just heard you’ve got Augustine Ray and I see him a little bit as almost this sort of a different famous Spaniard. He’s almost a bit of a Don Quixote, sort of saying, I will single handedly retrain these customers to think differently. Is that a fool’s errand? I mean is that something one executive can really do?
JILL AVERY: Well, I think it’s a struggle that all executives have. Should we be driven by customer understanding? Should we ask the customer what he or she wants and then deliver that? And there’s a whole mantra within the management literature about pleasing the customer. And making sure that the customer is happy. There’s another side to this story where some manager say, do customers actually know what they want or is it our job as marketers to educate or to tell them? And you see a bit of the flavor of this argument in the HBR case, where managers feel that customers may be misguided in the way that they’re thinking and that there’s a new way to reorient them to something. It’s a risky strategy to think that you know more than your customers. And I think as it’s playing out in both the mini case and in JC Penney there is a potential reward to being right, but there’s also a huge risk to being wrong.
ANDY O’CONNELL: There’s also an implied issue in both the teaching case and the story about whether it really works to experiment, whether in a high stakes situation whether you really can go through with an experiment. This was a bold and risky experiment. And Ron Johnson lasted 17 months. So it raises questions about, can you really experiment in situations like this?
JILL AVERY: Yeah. I think in both these cases there was so much forward momentum on these plans and a big bet was made in both cases. Experimentation usually is testing something in a smaller format before rolling something out chain wide. And in both of these cases we see the managers going in full boar without dipping a toe in the water. And that could be seen as courageous, and a bold move, and something that’s radically going to shake up the culture of the retailer, but it also comes with much greater risks. So it’s not really in the spirit of experimentation. It’s kind of moving forward without having the market data to support you.
SARAH GREEN: Well, so not to put too fine a point on it, but just to really sort of dive in here, what should this executive have done differently? Our fictional executive?
JILL AVERY: Well, I think in both cases the managers could have taken a more testing or experimental approach. Testing in a few stores, rather than rolling out chain wide, or putting a short term test in place to see if some of the tweaks to the strategy were working before rolling out some of the major improvements. For instance, the price discounting could be tested over a short period of time rather than making a grand statement that, we will not discount anymore and this is the new pricing strategy for the retail stores.
SARAH GREEN: Well, and Andy, as part of working on this case you also gathered some feedback from some business people who work in retail now. What were their thoughts on this?
ANDY O’CONNELL: Well, I spoke to Sherry Rudolph. Actually Sherry Rudolph did a very, very insightful commentary on the case. She’s the vice president and chief marketing officer for of clothing discounter, Gabriel Brothers, which has stores in six states in the United States. And she agreed that if you have these door buster sales and these coupons that you’re just training your customers to sit back and wait until the sales are really low. But she said there’s other things you can do, [? Gabe’s ?] is very much, he chain is very much in the discount space. And for one thing they emphasize that they’re discounts are lower than every other retailer. However, they don’t do these spot sales. They don’t do sales in desperation. And they send all kinds of signals to their consumers about why it’s good to shop at [? Gabe’s ?] and now actually we have an interesting short piece coming up in the April issue of HBR, about how retailers signal to customers about whether they are a low price place. And there are all kinds of signals. One is the size of the store. A large store, a store that’s located out in a mall. A store that has kind of shoddy sort of cheap looking lighting, poor service. All these things are signals that companies send, whether inadvertently or not, to consumers that these are low price places, that they’ve cut the margins down to the bone. And in stores like Whole Foods, no matter how much they discount customers come in and they see the great service, and they see the nice lighting, and the nice displays, and it’s almost impossible to shake them from the belief that this is an expensive store. And so there was an interesting insight in there about signaling to consumers.
SARAH GREEN: So I guess I want to make sure that we do sort of come down definitively on what Augustine Ray should do next and what Amelia should do next because this will not be like the “Serial” of HBR. We will have closure. So given the realities, given the blunders that he has made, what should this fictional executive do differently and does the store have another option other than to fire him if he doesn’t do what they want?
JILL AVERY: I think this is where the fictional case really dovetails nicely with the real case from JC Penney. One thing that comes up when I teach this in the classroom is students debate whether Ron Johnson is misguided or whether he’s a true retailing genius. And we’re left with that question at the end of the discussion. The question in the mini cases is whether the strategy is flawed or whether we just haven’t given it enough time to take hold with customers. When we make a major strategy shift such as this it may take time to play out in the marketplace. Customers are sticky. They’re used to their old habits. They’re used to the way that they traditionally think about brands. And making major changes to a retailer like this may take time to play out. So what we have to think about is whether Ray has the luxury of time to see whether his experiment is working. He’s getting pressure from his board, as Ron Johnson certainly did. And this issue is placed in the bigger context of how much leeway do we have both financially and strategically to see our decisions play out over a multi period time, to see if they’re actually working.
SARAH GREEN: Well, and I guess that’s sort of raises the question as well. And I think I know what you’re going to say, but I’m going to ask it anyway. We sort of set this up as a yes or no question, but is there ever really a clear yes or no right answer to this kind of conundrum?
JILL AVERY: I tend not to think in yes or no answers, particularly in situations like this where the complexity of the marketplace, the complexity of competition with other retailers, and the complexity of customer behavior makes it difficult to give a definitive maxim, you must do this or you must not do that. I think that the contingency here is what the long term strategy of the firm is. This is a retailer in trouble as JC Penney was at the time of Ron Johnson’s tenure there. And radical change is probably necessary to turn these retailers around. So short term pain, short term losses may be necessary to be able to unlock longer term profitability. So I think there are contingencies where retailers can be successful without discounting. But those come with the right merchandise, the right brand, and the right other value added services that deliver true value to customers. And it’s going to take a long time to retrain existing customers, or to attract new customers to this type of business model.
SARAH GREEN: Well, retail continues to be a really interesting sector to watch transform. And I just want to thank both of you again for coming on today and talking about it with us.
JILL AVERY: Our pleasure.
ANDY O’CONNELL: Thanks very much.
HANNAH BATES: That was Harvard Business School senior lecturer Jill Avery and former Harvard Business Review editor Andy O’Connell – in conversation with Sarah Green on the HBR IdeaCast. We’ll be back next Wednesday with another hand-picked conversation about business strategy from the Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review. We’re a production of the Harvard Business Review – if you want more articles, case studies, books, and videos like this, find it all at HBR.org This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Adi Ignatius, Karen Player, Ramsey Khabbaz, Nicole Smith, Anne Bartholomew, and you – our listener. See you next week.