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Problem Definition

The case, J. C. Penney’s “Fair and Square” Strategy, presented by Opek and Avery provided the description of the background, development, and implementation of JC Penney’s (JCP) new management strategy. The CEO of the company, Ron Johnson, was the main inspiratory and moving force of considerable changes in marketing and management of one of the biggest department store chains in the USA. Considerable changes such as new logo, store design, spokesperson, sales structure, and pricing strategy were introduced under his governance. Much attention should be paid to a new strategy of JC Penney named “Fair and Square.” It combines both everyday low pricing strategy (EDLP) and high-low pricing. No other department store chain has used the combination of these strategies till the present. Ron Johnson considered that improvements of JC Penney will attract more customers (especially youth) as well as increase market share and revenues of the company. Actually, there was some growth in the amount of customers during the first three months after the implementation of strategy. However, on the second quarter of 2012, the company faced considerable decay reflected on loss of more than $163 million, reduction of revenue on 19 percent and decrease in amount of customers on about 10 percent. JC Penney faced a problem of considerable loss of market positions, customers and revenues notwithstanding the implementation of innovative strategy.

Dilemma Facing the Company

JCP faced a dilemma whether to proceed the implementation of the new strategy “Fair and Square” or to cancel it and develop a new one. The issue should be based on determination whether the new strategy, “Fair and Square,” is really destructible for the organization, since it is inconspicuous to customers, or current difficulties are temporary, and the situation will become more beneficial in the future. All the parts of the strategy and obtained outcomes should be thoroughly analyzed in order to find a proper solution of this problem.

Core Value and Positioning Strategy

The core value of the company is providing customers with clear understanding of price formation on clothes. Penney’s does not want ’to play games’ with clients providing of different sales and coupons. It just intends to form a clear understanding that people can obtain a high-quality products on reasonable and low prices. Days with decreased prices on clothes are clearly defined (for example, the first and the third Friday of a month). Thus, the core value of a company is clearness and fairness.

The positioning strategy of JC Penney is that the company intended to be a reliable enterprise that provides modern and high-quality clothes on reasonable prices with clear and transparent strategy of price formation.

Target Market

The target market of Penney’s is represented by women, men, and children. Ron Johnson in his strategy, “Fair and Square,” pays more attention to attraction of youth. This was made increasing the amount of brand teen clothes from famous designers. JC Penney is oriented on middle class customers, which can afford to pay reasonable price on high-quality and modern clothes.

Competition

According to the article, J. C. Penney’s “Fair and Square” Strategy, the major competitors of JC Penney were two types of companies, namely oriented on lower end of the market (Walmart and Target) and oriented on upper end market (Macy’s and Nordstorm’s) in 2012. Companies such as Kohl’s Corporation, Sears Holdings Corporation are among other competitors.

Nowadays, the situation has changed. According to the information on the Bllomber.com, the market share on the department store industry is a little different. It is presented in Table 1.

Table 1. Current market share in department store industry

Company

Market share

Macy’s Inc.

22.20 %

Sears Holdings Corp.

18.30 %

Kohl’s Corp.

15.10 %

Nordstorm Inc.

9.7 %

J. C. Penney’s Co Inc.

9.4 %

Therefore, the closest competitors of Penney’s are Macy’s, Sears Holdings, Kohl’s, and Nordstorm.

4 P's: Analysis

The 4 P’s analysis of JC Penney will contain the analysis of proposed production, its price, and places and strategies of sale.

Penney’s proposes clothes for women, men, children, foot ware, jewelry, and home products. The quality of the goods is relatively high compared with the one of the closest competitors. Moreover, as aforementioned, JCP directed its strategy on attracting young customers by providing them fashionable clothes from popular designers and brands on affordable prices. However, by increasing orientation on youth, the company has lost preferences among older people and women. As it was mentioned in the case, JC Penney has lost a part of its market position because competitors offered cheaper products oriented on customers of middle age.

The company offered a reasonable (i.e. not too low and not too high) price for high-quality clothes presented in its stores. Initially, prices on apparel were lowered on about 40 percent. This reflects the policy of transparency of the company. In addition, Ron Johnson tried to eliminate high vulnerability of prices, namely he made them more stable. Below, it will be more thoroughly shown in description of the sale strategy.

Johnson also introduced changes in the places of sales, namely in department stores. The CEO of the company intended to make them attractive and interesting to people by changing an inner design every month, simulating special shop by regrouping of shelves, and creating numerous stores-within-a-store. In addition, other initiatives were introduced, which aimed to attract people’s attention by unusual events such as proposition of hot dogs and ice – cream, making free haircuts to scholars etc.

The “Fair and Square” undermines a combination of everyday-low pricing and high-low pricing strategies. The former sub-strategy is reflected in providing the consumers with low prices every day that is elimination of any sale periods, coupons etc. Thus, customers clearly understand that prices on apparel will not fluctuate. They do not worry about any possible sales periods and go shopping in any time they want. That is the reason this sub-strategy is oriented on low price sensitive customers. The high-low pricing sub–strategy undermines the presence of some kind of sale periods when prices on products are lowered (for example, the first and the third Friday of every month). On the one hand, it enables high price sensitive customers to pay less money for the clothes (it makes apparel more affordable). On the one hand, sale periods became predictable, planned, and expected.

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SWOT Analysis

Below, there will be provided a SWOT analysis of JC Penney’s strategy “Fair and Square.”

Table 2. SWOT analysis of JC Penney’s strategy “Fair and Square”

Location of Factor

Type of Factor

 

Favorable

Unfavorable

Internal

Strengths

Weaknesses

 

Proposing more youthful clothes

Loosing attention of older people (people of middle age) due to proposition of more youthful clothes

 

Offering more products for children and attracting them by proposing hot-dogs, ice creams etc.

Not using electronic sources for offering apparel to customers

 

Decreasing expenses on e–commerce (considering it less effective and efficient)

Predictable sales decrease an unexpected surprise and attractable effect on customers

 

Creating an image of high-quality brand (elimination of discounting of a brand by non-use of words such as “sales” and “clearance”)

Words “sales” and “clearance” are well recognized to customers. They create understanding that a commodity can be bought for considerably lower prices than in actually costs. Thus, absence of these words in the marketing campaign results in attraction of fewer amount of people

 

Establishing sales only in particular time periods (for example, the first and the third Friday of a month)

 
 

Making prices of goods transparent and clear

 
 

Introduction of new logo and changing the perception of the company from JC Penney to JCP.

 
 

Possibility to return clothes without a receipt

 

External

Opportunities

Threats

 

Attraction of youth’s attention

Proposition of cheaper apparel from competitors

 

Attraction consumers which intend to buy products for children

Offering considerable sales on clothes

 

Transparent prices created an image of reliable brand that attracts new consumers

Proposition of goods oriented on older people (people of middle age)

 

Predictable sales covers needs of both high-price sensitive and low-price sensitive customers, as the former clearly know the time of sales and can buy clothes by cheaper prices, and the later have a strong understanding that they can buy the same clothes for the same prices almost every day

Offering more clothes for women and men (these groups of customers have higher capacity than youth hence taking retail companies afloat)

 

Introduction of new logo attracts people’s attention and helps consider the company as a new one

Expanding market of e-shopping and attracting more customers due to growing e-commerce

 

Attracting more customers by an idea that they can return bought clothes without receipts

Competitors have widely recognized logos, which make them more familiar to customers

Analysis

Evaluate the overall effectiveness of the “Fair and Square” repositioning strategy

What metrics or indicators are pointing to a possible need to go back to heavy promotions and to admit “Fair and Square” was a mistake.

The effectiveness of the “Fair and Square” strategy can be measured by using indicators such as amount of customers, revenue and losses, or profits. As it was mentioned in the case, during the second quarter of 2012 (after six months of new strategy’s implementation), the company faced numerous issues. Figures provided in the case enable comparison of financial indicators for the first two quarters of 2011 and first two quarters of 2012. The outcomes of analysis are the decreasing of revenue on about 27 percent and decreasing of gross profit on about 41 percent.

In addition, an indicator such as net sales can be used. According to Report 10-K of the company for 2012, the net sales of women’s apparel decreased on 2 percent; the net sales of home commodities decreased on 3 percent; net sales of other types of commodities remains the same (family foot ware and jewelry).

It may seem that the amount of net sales faced minimal reduction. However, the changes resulted in significant loss of money and decrease in amount of customers. Thus, the aforementioned figures prove considerable ineffectiveness of the “Fair and Square” and imply that this strategy was partly or entirely wrong.

What metrics or indicators are pointing to a more positive direction that may indicate that “Fair and Square” will potentially succeed?

The “Fair and Square” strategy can also be measured by customers who were attracted by new strategy and amount of total net sales of different goods. Form 10-K of JC Penney demonstrated increase in sales of such positions as apparel for men (on 1 percent), women’s accessories (on 1 percent), and jewelry (on 3 percent). According to the information provided in the case, during the first two quarters of 2012, the amount of total operating expenses decreased on about 9.6 percent, and revenue earned from the products sold on clearance increased on 1 percent.

The above improvements are inconsistent compared to significant disadvantages and issues appeared after implementation of the “Fair and Square.”

Identify the key assumptions about JC Penney’s 5 C’s (customers, competitors, collaborators, context and company) that Johnson and his team are relying on that has led them to believe that the “Fair and Square” pricing can be a successful approach for JC Penney. How confident are you that these assumptions are correct?

Johnson and his team relied on targeting new customers, namely youth and children. They aimed to acquire new market segment not covered by JC Penney before. On the one hand, it is rather reasonable strategy because expansion of new segments leads to increase of customers, sales, and revenues. However, Johnson and his team did not strengthen current position of the company (women and men clothes) and JC Penney lost a lot of its customers.

In addition, the company was unable to stand against competition. Firstly, it has not obtained a strong proposition for either lower end market or upper end market. Its target population was a middle class customer. Therefore, it cannot increase its competing position compared to companies such as Walmart, Target, Macy’s, and Nordstorm’s. Moreover, as aforementioned, JC Penney lost a perception of considerable part of middle class customers (women and men), which crossed to company’s nearest competitors, in particular Macy’s. The competitive strategy of the company was weak.

Johnson and his team sought to develop long lasting relationships with brands, top designers, and suppliers. They intended to present high-quality and modern apparel to customers. I think this strategy was effective and beneficial because it attracted a huge amount of youth. However, managers should pay more attention to collaboration with companies which develop clothes for older people (people of middle age) for covering demand of this group of customers.

The context of “Fair and Square” realization was rather complicated. Firstly, before implementation of new strategy, the company faced considerable fall of revenues and loss of market positions. Both national and international competitors became stronger. They implemented more price reduction strategies. In this context, the “Fair and Square” seems innovative due to combination of EDLP and high-low pricing. However, Johnson missed that competitors, proposing different sales strategies, can provide cheaper products to customers.

The last assumption was the beliefs of company into new strategy. On the one hand, the “Fair and Square” was very popular among stakeholders because it was some kind of new wind in the existing worsening position of Penney’s. People hoped that new strategy would attract customers and increase revenue. They believed in Ron Johnson, in his experience and innovations, and in his unique introductions. Such support is extremely important for effective and efficient realization of any strategy. On the other hand, the “Fair and Square” brings odium of common sellers because JC Penney changed the way of payment of wages (payment of commissions for amount of sold production was abolished). Therefore, sellers did not intend to sale more production. They were disinterested as they realized that the new selling strategy would result in improper realization and decreasing of effectiveness and efficiency.

Repositioning with a new target market

Describe the type of customer Johnson is trying to appeal to with the “Fair and Square” brand repositioning

Johnson and his team try to appeal to young customers who keep up with fashions. They are searching for popular brands, new ideas, and unusual designs. In addition, JC Penney tries to attract customers which buy apparel to children of a school age. Children are attracted by ice-cream and presents. Their parents are attracted by free haircuts offered to children.

Why does Johnson want to attract the new target customer?

Johnson wants to attract new target customer in order to increase market position of the company as well as sales and revenues from apparel.

Also, compare and contrast between existing core customers and new target customer for JC Penney.

 

Existing Core Customers

New Target Customer

Demographics/  Psychographics

Men and women of middle age

Youth and children

Shopping Behavior

Some customers prefer to be confident concerning the transparency of prices while the others are waiting for great sales 

Customers intend to buy the most attractive and modern clothes as quickly as possible, but lack of money force them to wait for great sales.

Product Preferences

High-quality up-to-date and convenient apparel

Modern clothes of well-known brand and designers

A great number of different apparel

Service Preferences

High–quality services, much attention to customers

Unusual and attractive solutions (such as change of colors in shops every month)

Which type of customer delivers more value to JC Penney? Use simple CLV assessment to highlight the key differences between the two types of customers. Use qualitative rather than quantitative analysis to justify your answer here. No number calculations are required. Choose between High and Low to fill the table below. However, you NEED TO JUSTIFY WHY you chose high or low for each

 

Existing Customers

Potential New Customers

Annual Profit

High

Low

Customer Lifetime (in years)

High

Low

Acquisition Cost

High

Low

The annual profit of potential new customers (youth) is considerably lower. Notwithstanding the fact that young people are more likely to buy new clothes (as they keep up with a fashion), they seldom earn money (some of them ask their parents for money; the others work on low-paid jobs). Thus, their spending power is low. People of the middle age (existing customers) usually have working places and stable earnings. Consequently, they can afford to spend some sum of money on high-quality attractive clothes.

The customer’s lifetime of existing customers is considerably higher than the one of potential new customers. Youth are always searching for something new and more popular, for example, new brands, ideas, colors, etc. It tends to change its mind and perceptions easily. That is the reason, most probably, youth will be more likely to shift to another department store. People of middle age value the quality of production. Their perceptions are less vulnerable. Thus, the possibility that they will be wasting their time for searching of inaccurate benefits provided by other department stores is low. Consequently, the customer lifetime of existing customers is high.

The acquisition cost of goods of existing customers is higher because y the quality of proposed clothes is higher. People of middle age prefer apparel which can be usable for a long period of time. Some clothes are worn for years. The quality of the material and the price are high. At the same time, youth are searching for something modern and bright. They prefer to have three different bright T-shirts of low quality instead of one that can serve them for years. Thus, the acquisition cost for potential new customers is low.

Discuss the Pros and Cons of the following types of pricing strategies (PROVIDE AT LEAST 2 PROS AND 2 CONS FOR EACH)

Pricing Strategy

Pros

Cons

High-Low

Customers can buy clothes on considerably lower prices

People are waiting for sales periods and colleting coupons to buy the same clothes on lower prices (lower amount of immediate sales)

 

Department stores can sell more unclaimed and unsold good and obtain a great revenue

Vulnerability of prices, constant propositions of sales increase expenses of department stores (These expenses are not always covered by increased demand)

EDLP

Stability. Providing customers with understanding that the price on apparel will remain stable for the long period of time

Customers are unable to buy apparel on considerably lower prices

 

Elimination of company’s expenses on coupons, spontaneous sales campaigns etc.

Department store cannot respond on competitors’ considerable lowering of prices

Fair and Square

Customers have clear understanding of formation of the process and sales periods

Customers have no ability “to play games” with a department store, namely to buy the same clothes on considerably lower process (during the sales periods the price became lower but not considerably)

 

Customers consider that prices are transparent

Department store must spend some time on effective and efficient responding on actions of competitors (such as lowering process on similar production)

 

Ability to attract both high-price sensitive and low-price sensitive customers

 

Was it wise for Johnson to start the transformation of JC Penney with the radical shift in pricing? Shouldn’t price have been the last, not first, thing to change? Discuss in terms of Pros and Cons of leading with Price changes

I think that it was wise of Johnson to start the transformation of JC Penney with the radical shift of pricing. When he came on position of the CEO of the company, it struggled with competitors which worked according to both EDLP and high-low pricing strategies. JC Penney had to propose something new to customers in order to attract their attention and to strengthen its market position. Johnson offered transparent and clear prices, and his strategy attracted both high-price sensitive and low-price sensitive customers. However, he missed several important items. First, JC Penney was unable to stand against considerable lowering of prices by competitors during sales periods. The second issue is that Johnson did not use words “sales” and “clearance” which call customer’s attention and bring the understanding that clothes can be bought on considerable lower prices.

In your opinion, is Johnson a genius or a fool? Is he the right person for the job? In the case, the press calls him the ‘Steve Jobs of the retail industry’. Is this an apt description? What are the similarities and differences between Johnson and Steve Jobs?

I think Johnson is a genius. Certainly, he was a right person for this job because he created a new image of a department store, developed relationships with top brands and designers, tried to expand the market, and developed and implemented new strategy of JC Penney. I think his behavior is similar to the one of Steve Jobs because he sought to bring new innovative visions and ideas into retail industry. Johnson proposed high–quality and unique product in a different way. JC Penney under his management became attracting and interesting for customers. He eliminated sales which resulted in discounting of a brand. However, unlike Steve Jobs, Johnson made several mistakes, namely company’s strategy was directed on attracting new customers but not on holding existing ones. Steve Jobs and his company not only expand the market but also support the existing clients.

Recommendations

The problem of a considerable loss of market position, customers and revenue should be resolved by implementation of some changes into the strategy, “Fair and Square.” Firstly, the company should change target audience of its production. Proposed apparel can remain of the high quality, but it should be more oriented on middle-aged customers, which can take a retail company afloat. This group of people crossed to competitors. In addition, JC Penney should incorporate words such as “sales,” “coupons,” and “clearance” into the “Fair and Square” strategy as they attract customers and provide them with the understanding that apparel can be bought on lower price than it actually costs.

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