Maybe It Was Apple – James Kwak – The Baseline Scenario

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By James Kwak

A little over a year ago, iconic but fading department store J.C. Penney hired Ron Johnson as CEO. Johnson was head of retail operations at Apple—which, in case you didn’t know it, is just about the most successful retailer in the world by a bevy of metrics.

According  to today’s Wall Street Journal article, Johnson quickly eliminated coupons and most sales at J.C. Penney.

“Johnson bristled when a colleague suggested that he test his new no-discounts strategy at a few stores. . . . ‘We didn’t test at Apple,’ the executive recalled Mr. Johnson . . . saying.”

Well, yeah. Apple doesn’t discount because they sell stuff that people really, really want and that they can’t get anyplace else. And they don’t test because Steve Jobs refused to. At Penney? Sales have fallen by about 30 percent.

This doesn’t mean Johnson is stupid, or that he’s going to fail as CEO. Apparently he has partially reversed his early decision, which is a good sign. But it brings up a common feature of external CEO hires. Companies in a perceived crisis often look outside for a new leader, hoping for a superman (or -woman) who can singlehandedly turn around the organization. Not completely illogically, they tend to look for people at successful companies. “Make us more like X,” they pray. In Penney’s case, X = Apple.

There are two important questions they tend not to ask, however. First, was Apple successful because of Johnson, or was he just along for the ride? Yes, he was the main man behind the Apple Store (although, according to Walter Isaacson’s book, Steve Jobs was really the genius behind everything). But was the success of the Apple Store just a consequence of the success of the iPhone?

Second, even if Johnson was a major contributor to Apple’s success, how much of his abilities are transferable to and relevant to J.C. Penney? There’s a big difference between selling the most lusted-after products on the planet and selling commodities in second-rate malls. When someone has been successful in one context, how much information does that really give you about how he will perform in a new environment?

Maybe Johnson will turn out to be a great pick; it’s just too early to tell. But the general problem is undeniable. In the rush to anoint a charismatic savior, hiring committees, search firms, and boards substitute leaps of faith for cold rational inferences, fastening on the bits and pieces of a job candidate’s resume that play to their desire for a superman and overlooking the vast amount they just don’t know (see Rakesh Khurana for more). And this is one reason why external CEO hires tend, in the aggregate, to do worse than people promoted from within, who have the benefit of years of insider knowledge and precisely relevant expertise.

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