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Simplexity Management: A Case Study of J.C. Penney

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“Penney to Tweak Message, but Not Its Strategy”―this was the headline of a recent Wall Street Journal article in which CEO, Ron Johnson, blamed the ineffective marketing message for the continued drop in sales.

The closest link to sales is marketing, so it is easy to pass the ultimate blame of Penney’s failed efforts to marketing. From my perspective, it’s not really marketing that failed Penney, it’s a lack of clear understanding of Simplexity, i.e., simplicity-complexity dynamics. For example, Penney’s marketing message “fair and square” is simple and compelling. We live in a world where consumers are inundated with a flood of retail promotions featuring me-too products with complex pricing gimmicks in terms of sales, discounts, rebates, coupons, markdowns, clearance, fine prints, hidden fees and the list goes on. Penney’s “fair and square” message was a much-needed and desired change, at least philosophically. What Penney understood and executed (almost perfectly) is the simplicity side of the equation. They failed to fully understand and execute the complexity side of the equation. In my “Complex Enterprise White Paper,” I discussed the seven “Ps” of complexity, i.e., Periphery, Planning, People, Processes, Products, Projects and Pricing (see the graphic below).

Please refer to the “Complex Enterprise White Paper” for an explanation of each “P,” the dynamic interplay among them and the strategic challenges in optimal execution of complexity across the enterprise value chain. Again, I think Penney executed fairly well in all dimensions of complexity except one: “People.” The “Complex Enterprise White Paper” defines the People aspect of complexity as complex behaviors and relationships among people (i.e., customers, suppliers, employees) due to a highly iterative and collaborative engagement model.

For Penney, the root cause of the issue is complexity of the consumer behavior. As consumers, our minds and hearts are hardwired to “deals.” We derive great pleasure in spending endless hours looking for the best deals on things that we may not even need in the first place. Finding and closing the best deal is at the heart of how we define our experience with a retailer. The harder and more complex the “deals” experience, the more gratifying it is for us as consumers. This defies common sense and wisdom, but we as consumers are irrational fools, the victims of our own success and system.

All of this was scientifically proven seven years ago by behavioral economists Xavier Gabaix and co-author David Laibson in their landmark research paper on “shrouding.” Shrouding simply means hiding real prices and manipulating them to play with consumers’ “deal-centric” mindsets. To me, shrouding really equates to three things: 1) Complexity (both for retailers and consumers), 2) Confusion (for consumers) and 3) Cheating (rampant in the industry). Despite all of the negativity associated with shrouding, Gabaix and Laibson’s research concluded that it’s a win-win practice that’s fully embraced by both retailers and consumers. The explosive growth of daily deal sites from Groupon to LivingSocial further amplifies the shrouding. So key takeaway is that shrouding is here to stay and any deviation from it will be severely punished by the markets.

This is really depressing outcome considering the fact that Penny tried to be a good citizen promoting transparency over everything else. Their heroic efforts were instantly rewarded with disappointing sales and poor loyalty by the very same consumers they tried to serve ethically. There is definitely some hope left and Penny can leverage these early setbacks to become more determined and focused in achieving their goals. Independent of what drives change i.e., their strategy or marketing, they will have to master complexity across the board. Whether they can really change, transform and impact the consumer behavior, only time will tell. But for now, CEO Ron Johnson and his leadership team needs to read and internalize the following three documents right away. They are:


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