Assignment:
1) Please read the following articles and evaluate pricing strategy of Uber. The Price Is Right, or Uber Will Raise It
https://www.bloomberg.com/view/articles/2015-05-19/the-price-is-right-or-uber-will-raise-it
Uber Loses at Least $1.2 Billion in First Half of 2016
https://www.bloomberg.com/news/articles/2016-08-25/uber-loses-at-least-1-2-billion-infirst-half-of-2016
2) Please read the following articles and summarize and evaluate the company strategy of Amazon. Amazon’s Drone Strike
https://business.time.com/2013/12/02/amazons-drone-strike/
Amazon Wants to Ship Your Package Before You Buy
https://blogs.wsj.com/digits/2014/01/17/amazon-wants-to-ship-your-package-before-youbuy-it/
3) Please read the following two articles and summarize and evaluate the Amazon Prime Program. Every Day Is Prime Day at Amazon
https://www.bloomberg.com/gadfly/articles/2016-07-12/amazon-prime-day-join-todaybe-hooked-for-7-years
How Amazon Can Survive Peak Prime
https://www.bloomberg.com/gadfly/articles/2016-10-27/amazon-earnings-how-tosurvive-peak-prime
4) Please read the article “In Tuition Game, Popularity Rises with Price. The link is
https://www.nytimes.com/2006/12/12/education/12tuition.html?pagewanted=all&_r=0
Please evaluate Susan’s analysis and recommendation for tuition increases. Is the Law of Demand broken? Do you agree with Susan’s proposal? What would you suggest?
Introduction:
Ron Johnson was named the new CEO of JC Penney in June 2011 to try and turn the company around; in what the board of directors thought was a great administrative decision being Mr. Johnson had an impressive resume, so impressive they paid him almost $53 million to
join the company.
Mr. Johnson was most recently the Senior Vice President of retail operations at Apple. During his tenure at Apple he was responsible for implementing the idea of the multiple retail stores. As quoted in his Wikipedia biography, Johnson turned the “boring computer sales floor into a sleek playroom filled with gadgets.” The Apple stores achieved amazing growth with their annual sales exceeding a billion dollars in two years.
Johnson came on with an idea to re-brand the image of the retail giant and make JC Penney’s an elite brand, as Apple. This idea proved to be disastrous. His first step was to get rid of the “non-stop” promotions and move to three kinds of prices.
The multiple mailed fliers and coupons were also replaced with a monthly catalog resembling a magazine with very little mentioning of prices.
The store’s customers didn’t take to this idea as shown in their drop in sales. When asked about the decline in sales, Johnson stated the customers needed to be “educated” on the new marketing strategy. He said the previous method was “fake pricing” in that prices are inflated, then discounted.
Johnson’s new initiative of “over-hauling prices, re-designing store layouts and free haircuts” resulted in a steady drop in revenue. On April 8, 2013 Johnson was fired by the board of directors and replaced with Penney’s previous CEO, Mike Ullman, in hopes to expunge all
modifications made by Johnson. JC Penney issued a public apology in an ad that stated, “Come back to JC Penney. We heard you. Now we’d love to see you.”
Strategy/Pricing
At first, Ron Johnson’s vision sounds efficient. However, the more information obtained shows it wasn’t implemented correctly. At JC Penney’s, items are normally on some sort of sale and the company normally has some kind of coupon offering.
In today’s market, everyone wants to feel as if they have received a deal. Coupons and sales give buyers that exact feel. Johnson’s approach was to lower prices; however, remove coupons and sales from the company.
This is referred to as the “fair and square pricing”. Instead of inflating prices and offering coupons and sales, Johnson’s thought was to decrease prices and not offer promotional offerings because all that did was fool customers on the pricing strategy. For a company like JC Penney’s, their old pricing strategy worked better because we think customer’s feel like they’re getting a better bargain or more of a discount when using coupons.
Johnson needed to consider the customer base for JC Penney’s was not the exact same as with Apple. Forcing the customers to such a dramatic marketing & pricing strategy so quickly just was not going to work.
Not only did he revamp the pricing strategy of the company, he started changing brands and the layout of the store. Most companies have a particular brand they sell; for JC Penney, that was St. John’s Bay. Once Johnson became CEO, he did away with that brand and brought in
completely new styles and brands to attract a younger audience.
This led to loyal, long-term customers no longer wanting to shop at JC Penney because the clothes they like were no longer available. It is great to appeal to different types of customers, but you shouldn’t do away with current customer apparel.
There has to be a balance. Johnson should have had a better strategy for his vision. Instead of drastically changing core features of the company, he should have implemented it in a much slower way. By changing a few stores, he would have gotten to see the affects and evaluate the results prior to implementing the strategy to the entire company.
Understanding the firm’s resources and capabilities is number one in strategy development. Johnson failed to take the time to apply this to his method. Another aspect Johnson did not consider was the specific knowledge of the employees. The managers and employees of each store had direct interaction with customers.
While working closely with customers, workers obtained specific knowledge on the customers’ needs. It is important for employees to convert their existing knowledge about the production processes, transaction costs, and customer demand into ideas that can be implemented by the firm.
However, Johnson did not take into consideration the employees’ specific knowledge. He had the mindset that this type of strategy worked for Apple, so it has to work for JC Penney’s. Johnson found out the hard way that one strategy doesn’t fit all scenarios. Each must be taken case by case and analyzed to arrive at the
appropriate strategy.
Johnson seems to have a very centralized decision system. The organizational architecture did not have a balance. Johnson made all the decisions, while everyone else within the company had to implement them.
Organizational architecture is vital for helping with team capabilities. “A decentralized firm can respond more quickly and effectively to a new opportunity that requires rapid “front-line” decision making than can a firm with a more centralized decision-making structure” (Brickley, Smith, & Zimmerman, 2009, p. 261).
In the (Brickley, Smith, and Zimmerman, 2009, p. 245) it states, “Reducing consumer transaction costs also can increase value.” With Johnson’s strategy, consumers were made to feel the overall price of the products increased due to the reduction in coupons and sales. Also, the cost of the clothes increased due to brand changes. This goes completely against reducing transaction cost.
Johnson had good intentions. His reasoning in changing the price structure at JC Penney made sense; however, implementing it so drastically, was the down fall.
Consumers were confused and left going to other stores for their apparel. “Ultimately, both strategy and organizational architecture are key determinants of value” (Brickley, Smith, and Zimmerman, 2009, p. 272). Johnson may have had a good vision, but his strategy and organizational architecture weren’t what they needed to be to implement his ideas.
Production & Costs
We believe, Johnson, the former CEO of JC Penney’s, was misjudged by the observers in the situation. Society is constantly growing and expanding. Old customer, although very loyal to the company are gradually being replaced by new customers, having various preferences of
products all across the board.
In Johnson’s attempt to incorporate a different tradition, he saw theopportunity to branch out to new customers that would generally provide additional profit for the company.
As stated in the article, Johnson just made the mistake of moving too fast and allowing the old traditional of JC Penney’s to vanish completely without any thought of the current loyal customers and how the change being implemented would affect them. In our opinion, Johnson should have done more research and development before putting his plan into action.
Although it was a great plan, it seemed as though he didn’t question its success. We think that it would have been beneficial if Johnson would have taken the time to do surveys or talk to his regular customers about what he planned to do to receive feedback or give an explanation as to why he wanted to do what he did.
It was mentioned in the article, that Johnson didn’t even want to test the new product based on a product outside of the current product family he was now in charge of, that he had previously been part of launching. Speaking in terms of economics, Johnson failed to do a marginal analysis to discover what products should be maximized within the company.
True enough, he wanted to bring about new product and new young stylish customers but, you can’t ignore the essentials such as incremental cost and benefits. The text expands on the idea of how important incremental cost and benefits effect decision making for management in many firms today. Fixed cost, on the other hand don’t effect these decisions.
The company kept a general idea on what the numbers looked like due to the fact they produced the same products that targeted one audience within the market. Now with the idea of expanding its product variety, they have a whole new variation of products and market audience that they must find a way to cater to and value just as much.
Of course, new product brings about new customers, cost, profit and learning experiences. Economies of scope, as defined in the book, “exist when the cost of producing a set of products jointly within one firm is less than the cost of producing the products separately across independent firms” (Brickley, Smith, and Zimmerman, 2009, p. 164).
This is because producing multiple products can result in cost savings for many reasons. In leveraging its product development, distribution, and marketing systems, it was important to take the time to forecast potential sales both for the new product and the possibility of increase/decrease of current sales.
With that information, Johnson could have seen rather or not marginal revenue for all the products exceeded the marginal cost, which in return, would have given him a general idea on what effects producing and/or not producing certain products would have on the company as a whole.
Supply & Demand
With Johnson’s new vision, the coupons and sales were going to be reduced as well as an increase in prices of items due to better quality. As the law of demand states, individuals will purchase less of a good the higher the price becomes; hence, the negative slope.
Johnson should have taken the basic supply and demand curve into account. This would have caused the supply curve to shift to the right and the demand curve shift to the left. This indicates an increase in supply and a decrease in demand.
As a result to Johnson’s approach, a surplus is likely to have developed. The increase in the price of apparel would lead to a decrease in the amount sold, allowing a surplus to occur. When a surplus occurs, suppliers are likely to reduce prices to compete in hopes of selling their
product.
This is not a logical approach. In conclusion, Johnson could have implemented his vision in a slower manner, such as converting only a few stores to test this price experimentation. This would have allowed him tocalculate the price elasticities.
The demand elasticity measures the percentage change in quantity that is demanded when a percentage change is given in the price. The result would have been elastic; a small price increase will cause a decrease in revenue, as well as a price decrease will cause an increase in revenue. By collecting data, he could have analyzed consumer’s reactions to the implementation.
The elasticity of demand is normally higher when adequate substitutes are available. This being the clothing industry, many good substitutes are available. Also, by completing interviews, Johnson could have received vital information from customer surveys,questionnaires, and focus groups.
It’s seems as though Johnson’s theory was a good one however, it was executed too fast and too extreme. He could have changed things on a slower basis, which would have allowed customers to adapt. By completing the project in this manner, we believe Johnson would have had a great success and contribution to JC Penney.
References:
Brickley, James; Smith, Jerold; Zimmermann, Jerold. (2009). Managerial Economics and Organizational Architecture 5th Edition. New York: McGraw-Hill/Irwin.
Clifford, S. (2012, January 25). J.C. Penney to Revise Pricing Methods and Limit Promotions.
The New York Times, pp. B1. Retrieved from
https://www.nytimes.com/2012/01/26/business/jc-penneys-chief-ron-johnson-announcesplans-to-revamp-stores.html.
Clifford, S. (2013, May 16). J.C. Penney’s New Plan Is to Reuse Its old Plans. The New York Times, pp. B4. Retrieved from
https://www.nytimes.com/2013/05/17/business/beleaguered-jc-penney-posts-another-bigloss.html?_r=0.
Ron Johnson (n.d.). In Wikipedia. Retrieved October 5, 2013, from
https://en.wikipedia.org/wiki/Ron_Johnson_(businessman)