Case Study 2: Dealing with Risk and Uncertainty: The Case of J. C Penney
Risk and Uncertainty: The Case of JC Penney
The filing of bankruptcy procedures by the once retail giant, JC Penney, marks the beginning of the end for the company, which has struggled to compete against other retailers in the brick and mortar sector as well as online companies for the better part of the past two decades. Indeed, the present challenges bedeviling the company, notably, the impact of the Covid-19 pandemic represent the inability of the company to anticipate and manage risks and uncertainties in the marketplace. The resultant effect has been the steady decline of the brick and mortar retail business, culminating in the May 2020 filing for bankruptcy. This failure in leadership, organizational culture, innovation, and the management of various risks that the company has faced could have been averted by the prudent reinvention of the company in light of its prevailing challenges. Indeed, the hardships brought on by the Covid 19 pandemic are symptomatic of the company’s failure to undertake risk management in times of uncertainties, which explains why it has been unable to generate profits for more than 10 years.
JC Penney’s Recent Actions
Within the last 6 months, JC Penney’s executives and lawyers have been busy filing bankruptcy procedures in a bid to cut losses and avoid incurring additional debts in view of their inability to respond effectively to risks and uncertainties. For the company, this marks the end of an era after being in existence for 118 years (Eades, Glazer & Eyal, 2017). Some of the activities undertaken by the company include the finalization of a deal with its creditors to reduce billions of debts, massive redundancies of employees, as well as the closure of its various stores across the United States. For the company, the filing for bankruptcy was exacerbated by the emergence of a global pandemic, especially when it was in the process of implementing a turn-around in its business operations. Notably, the implementation of curfews and stay at home orders by the government of the United States effectively led to the temporary closure of all its brick and mortar outlets. This closure hit the company hard since it is heavily invested in such outlets. In response, the company undertook to furlough its employees, particularly those employed as hourly store personnel.
Improving Risk Management
Conducting enterprise risk management is an essential skill and activity in any business organization that is keen on growing is brand recognition and competitive advantage. In fact, the company’s attempts to restructure its management team by appointing a vibrant CEO in 2018 helped mitigate the company’s losses. However, these steps were not enough as JC Penney has continually failed to identify its core clientele in the retail sector. Experts contend that when individuals engaged in the management of a company fail to identify and anticipate the salient risks and emerging challenges in an organization, they are likjley to commit managerial failures. For instance, the inability of BP to deal with issues of safety in its offshore oil operations eventually led to one pf the worst environmental crisis in the oil industry when the Deepwater Horizon oil well exploded off the Gulf of Mexico. Essentially therefore, managers must be in a position to evaluate, communicate, and address these risk factors as well as uncertainties. Admittedly, the company ought to treat risk management as an integral part of the business and not just as another issue regarding the compliance of the business with governmental rules. While such compliance is laudable, efforts must be proactively taken to forestall future mistakes and uncertainties by remaining alive to the need to internalize these rules into values that can then be used to shape the organizational culture of the business (Mahfouz, et al, 2017). Thus, JC Penney must recognize the need for creating a climate of dialogue over the probable and possible risks facing the company and the development of realistic and competitive policies with which to address them. For instance, the company’s inability to anticipate the challenges associated with brick and mortar business at the beginning of the 2nd Millennium paved the way for its isolation by customers, who increasingly saw additional value in shopping online. Indeed, companies such as Amazon have thrived at a time when JC Penney is filing for bankruptcy because it saw the need to respond to the risks associated with the disruption of consumer habits in a word defined by technological globalization.
The ability to understand the significance of strategic and external risks is the hallmark of risk management. While companies will assume certain levels of risks in order to gain or build a reputation or niche in the market, it must at the same time remain alive to the degree of risks they can tolerate (Holst & Hansen, 2017). For instance, while JC Penney could not have anticipated the impacts of COVID -19 on its business as well as the attendant government controls thereafter implemented, it could have at least planned for natural or political disasters. Instead, it was stuck knee-deep in debt and could thus not respond to the risks and uncertainties with bravery.
Adverse Selection Problem
In response to the challenges presented by the COVID 19 crisis to the company’s human resource base, JC Penney decided to furlough the majority of its workers. This presents an adverse selection problem since the company is not able to those most affected are the hourly store employees, whose future prospects if returning to work at the company are dim. This lack of adequate employees presents a problem for the company’s competitive advantage as it can effectively deal with customers in its stores- a situation that further complicates transactions and reduces revenues (Shen, Wang, Cao & Li, 2020). To minimize this problem, it is necessary for JC Penney to come up with modalities that can leverage the power of Web 2.0 platforms to attract a clientele that is increasingly shopping online. Indeed, there is likely to be additional jobs for these employees, who can be repurposed to handle online orders, packages, and deliveries, as well as customer care.
Moral hazard Problem
The decisions taken by JC Penney’s managerial teams over the years have left them unable to rapidly respond to risks and challenges in its once vast business empire. In particular, the decision to furlough employees has left many unsure of their job prospects and thus presents a moral hazard problem for the company. While furloughing has been used extensively by some companies during this COVID-19 crisis, other companies have been keen to seek alternative ways to gainfully engage their employees. For instance, some companies in the retail sector have shifted the majority of their employees to their online businesses,which has helped reduce the number of those personnel that are furloughed. Other businesses in the retrial sector are negotiating deals that can save their enterprises from imminent collapse. However, for JC Penney, the filing of bankruptcy means that it cannot effectively secure loan deals owing to its huge debt obligations. This leaves the company with little room for maneuver, thus choosing the option to furlough.
JC Penney’s Principal Agent Problem
JC Penney’s principal agent problem lies in the company’s various past CEOs, who have undertaken a series of policies and strategies that have proven ineffective in growing the company’s profitability. For these CEOs, the interests of the company were relegated to the periphery while their personal interests, choices, and strategies gained traction, thereby reducing the capacity of the company to effectively negotiate change and reinvigorate itself (Mende, 2019). For instance, the employment of former Apple retail boss in 2011 resulted in massive mistakes for the company as the company chief implemented strategies to attract wealthier customers. Some of the measures undertaken by this CEO include the change of logo and its style of advertising, which had the effect of disenfranchising customers used to the JC Penney shopping experience.
J.C. Penney is managed by a board of directors. The senior members of the Board are the Chairman of the Board and the chief executive officer. The Chairman of the Board duties include making polcies which are wide in nature and organizations, overseeing the Chief Executive and giving nod to company’s annual budgets.
The duties of the chief executive are to do is the executor, the organizations leader and the manager. He or she does duties as directed by the Board. Having other 9 directors, the company’s day to day operations are run by the chief executive officer. The organization has different departments such as the transformation, CIO and Digital, Merchandising, Finance, HR, communications, Legal, Product and Development, Stores, transformation. The legal department is tasked with giving of legal counsel about the running of the company. The departments have sub-departments which further specify how the organization engages with clients down the management ladder.
In responding to the challenges of the company’s organizational culture, it is suggested that the retailer considers adopting a corporate identity and management model that is based on consultation and dialogue as opposed to having an all-powerful CEO making decisions. Indeed, the company could adopt a model that focuses on cross-function a la the Google Model. In adopting a culture and structure that focuses on the maximizing of creativity and innovation as well as the anticipation of change, Google has been able to constantly monitor risks while responding to it using teams of highly adept personnel trained in cross-functional management.
JC Penney presents a case study in risk management and allows us to revisit the challenges that have led to the collapse of the once retail shopping giant. In the end, the study reveals that leadership and vision, as well as an understanding of strategy and external risks can be influential in driving a company to profitability or lead to its demise, as is the case with JC Penney.
Eades, K. M., Glazer, D., & Eyal, S. (2017). JC Penney Company. Darden Business Publishing Cases.
Holst, M., & Hansen, S. (2017). Competing for Survival: A Turnaround of Department Store JC Penney.
Mahfouz, A. Y., Joonas, K., Williams, D., Jia, R., & Arevalo, M. (2017). A Classic American Department Store's Resurgence to Glory: Using Social Media and Online Advertising Strategies to Generate Revenue. Southern Journal of Business and Ethics, 9, 180-192.
Mende, M. (2019). Retail Apocalypse or Golden Opportunity for Retail Frontline Management?. Journal of Retailing, 95(2), 84.
Shen, B., Wang, X., Cao, Y., & Li, Q. (2020). Financing decisions in supply chains with a capital‐constrained manufacturer: competition and risk. International Transactions in Operational Research, 27(5), 2422-2448.