ORGANIZATIONAL CHANGE IN STARBUCKS AND JC PENNEY

ORGANIZATIONAL CHANGE IN STARBUCKS AND JC PENNEY

 

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Organizational Change in Starbucks and JC Penney

Table of Contents

1. Executive Summary. 3
2. Introduction. 4
3. Literature Review.. 5
4. Case Studies. 7

History of Starbucks. 7

Starbucks Case Study. 8

History of JC Penney. 9

JC Penney Case Study. 9

5. Methodology and Analysis. 10
6. Conclusion. 13
7. Recommendations. 13

References. 15

 

 

 

1. Executive Summary

Corporate change is a process through which a company changes its leadership structure with the intention of renewing the firm’s operations, strategy and orientation. The dynamism in the modern world has made corporate change a necessity for companies all over the world. Failure to change could see a company locked out of some markets or even whole industries by advanced competitors. Scholars explain that corporate change is a renewal process that can help a company in many ways. In some cases, the change is reactionary while in others it is a precaution. However, the result is usually the most important aspect of the process. In some firms, change leads to growth and rejuvenation. In others the ambiguity and uncertainty of the change hampers operations.

JC Penney and Starbucks are two examples of companies that underwent corporate change. Both companies changed their CEOs resulting in contrasting fortunes. Starbucks were forced to change their leadership when the company’s growth stalled, while JC Penney sought to refresh their operations. In Starbucks, the experienced Howard Schultz helped the company regain its focus and revive its growth. Contrastingly, JC Penney’s change failed to work for them as the new CEO made widespread changes that forced the company into a decline.

A comparison of the contrasting fortunes that Starbucks and JC Penney faced shows how important corporate change is. The best course of action for JC Penney to take is to try to return to previous ways for operating. It is possible that the company will improve by appointing a person who has worked with it before as CEO. Contrastingly, Starbucks success makes it a good time for the firm to try to expand its business by venturing into new markets and introducing other products into its portfolio.

 

2. Introduction

Scholars estimate that seventy percent of change initiatives that major corporations and organizations undertake fail due to various issues. This is a major concern for the business universe considering the fact that change has become a necessity in the modern world. Constant changes in the target markets, fields of technology and other important arenas make it necessary for companies to modify their operations on a regular basis. Successful transformations normally help a company edge out its competitors and gain a significant advantage by embracing new technology or changing markets. Alternatively, a breakdown in the change process could leave a firm in a crisis. Accordingly, this paper is important because it addresses the process of change within corporations and helps identify the different issues that surround it. Through this analysis, it will be possible to understand the different factors that help make transitions within an organization successful. The analysis will also point out the main pitfalls that a company should avoid when trying to make changes within its internal structure or operations. Additionally, the use of two contrasting case studies (Starbucks and JC Penney) makes it even easier for a reader to understand the factors that the paper addresses by relating them to real-life situations.

In the modern business world, organizational change is important because most companies are operating in dynamic industries. Business environments have been evolving at a rapid rate since the mid-twentieth century. Factors such as globalization, pop culture, new technologies and politics have spurred this constant evolution. The effects of these changes have been profound. New technologies have resulted in the emergence of new markets and the disappearance of others. Politics have helped some industries access regions that were previously out of bounds making it possible for them to sell their products there and acquire raw materials at cheaper prices. Globalization has effectively brought the world closer together allowing entities from one end of the world to carry out their business within distant regions. This dynamism means that businesses must be willing to embrace change at all levels. This includes changes at the corporate levels, as sitting executives make way for new leaders who have ideas that suit the existing environment. Accordingly, the perception of change within business entities is now different from what it was a few decades ago as companies begin to understand that transformations are a necessity.

3. Literature Review

Corporate change is a necessity for business entity. Companies that fail to undertake necessary transformations often end up falling behind their competitors. Corporate change is a process in which businesses review and modify their management structure. Todnem (2005, p. 369) argues that change involves a constant renewal of “an organization’s direction, structure and capabilities to serve the ever-changing needs of external and internal customers”. Additionally, the process is always present within modern firms at all levels of a company. For some companies, corporate change is a strategy that the firm employs to achieve higher levels of success. Moran and Brightman (2003, p. 66) concur with Todnem, stating that corporate change is a continuous process that gives an organization a new orientation and shape. The authors add that changes in the world of business are now occurring at a rapid pace, making it essential for companies to find a way to incorporate the transformations into their operations. Moran and Brightman (2003, p. 67) raise several key issues concerning corporate change. One thing they note is that change is often nonlinear. For many organizations, changes in the corporate structure do not have clear goals. Instead, ambiguous targets guide the process. Moran and Brightman (2003, p. 67) also explain that change is normally a top-down and bottom-up process. Corporate change within an organization often precedes transformations within other areas and operations of the company. By changing the leadership, an organization installs a management that is supportive of the vision and goals of the process. Amagoh (2008, p.1) also considers corporate change to be a process that allows organizations to cope and survive in increasingly harsh business environments. Most companies normally carry out the change process as a way of gaining a competitive advantage over other players. With fresh leadership and new perspectives, a firm may be able to access the market in a manner that its competitors cannot.

Scholars identify various advantages and disadvantages of carrying out corporate change. One advantage of corporate change is that it gives companies a competitive advantage. By placing new leaders at the helm, a firm is able to come up with a new approach to its operations. Such a situation could give the firm an advantage over its competitors and make it possible for it to turn its fortunes around (Amagoh 2008, p. 1). In other cases, corporate change helps a company regain the public’s trust after a scandal or debacle. Economic crises such as the late 2000s global recession often result in a lot of public distrust in companies that were involved. Through corporate change, firms can show the stakeholders that they took appropriate action to deal with the parties responsible. Kim and Kim (2008, p. 49) give the example of POSCO , a Korean steel firm that was able to reverse its fortunes after the 1997 Korean collapse by changing its leadership structure. A third advantage of corporate change is that it helps a company modify its structure to fit the atmosphere in the industry. Benn, Dunphy and Griffiths (2006, p. 156) explain that corporate change can help a company transform itself to conform to prevailing market conditions. For instance, the current concerns about the environment have seen some companies appoint executives with ideas and attitudes that match the prevailing worries. One of the disadvantages of corporate change is the ambiguity and uncertainty that surrounds the process. Corley and Gioia (2004, p. 173) explain that changes in an organization often come with many unknowns. Some changes, such as those in the corporate section often affect the identity of the organization, an issue that causes many concerns for the clients and employees.

Corporate change is a process that many companies regularly go through. The results of the changes normally vary, with some firms benefitting from the transformations as others are affected negatively. One example of a company that underwent corporate changes is POSCO. The South Korean steel firm had to change its corporate structure after the 1997 Korean financial crisis so that it could regain the trust of its investors (Kim & Kim 2008, p. 49). Apple, INC is another example of a firm that underwent significant changes within its corporate section. After Steve Jobs return, the firm changed many of the sitting executives. The alterations to the board reverberated through the entire company and helped it turn its fortunes around to become one of the largest firms in the consumer electronic industry (Amagoh 2008, p. 7).

4. Case Studies

History of Starbucks

Starbucks is an American company that deals in retail coffee. The company started in Seattle in 1971 and has since grown to become the world’s leading coffee retailer. The company has over eighteen thousand stores in the world. These stores are located in South America, North America, Europe, Oceania, The Middle East and Europe. Through these stores, Starbucks provides its clients with a wide range of coffee products that are usually freshly roasted and blended. The company has built a strong reputation for being socially responsible through the way that it treats employees and clients. Through this reputation, Starbucks has developed its brand into a global force and has established itself as the biggest player in the world’s retail coffee industry.

Starbucks started in 1971 in Seattle. Three partners teamed up to open the first store with the intentions of selling coffee beans and equipment of a high quality. Starbucks’ expansion started in the 1980s when Howard Schultz joined the group. On a visit to Milan, Italy, Schultz became interested in the mochas and lattes that the coffee stores in the country were selling. He introduced the products to the company’s store in Seattle and they became popular with the clients and other city residents. The increasing popularity of the stores within Seattle allowed the firm to expand into the rest of the US and the world (Our heritage 2013). In 1992, Starbucks became one of the first companies in the world to remunerate its employees with stock options. This resulted in the public trading of the firm. Starbucks increasing success and expansion saw the value of its shares rise steadily through the 1990s. This growth stalled in the mid-2000s when the stores started reporting lower sales. This prompted the return of former CEO Howard Schultz in 2008.

Starbucks Case Study

Corporate change in the case of Starbucks revolves around the return of Howard Schultz as the firm’s CEO in 2008. Starbucks fortunes started to change in 2000 when Howard Schultz stepped down as the CEO of the firm. At the time, the company was expanding rapidly as it opened more stores in the United States and around the world. When Schultz resigned, Starbucks had 3500 stores, with new ones coming up. After Schultz’s departure, the firm replaced him with Orin Smith (who assumed the position between 2001 and 2005) and then Jim Donald. Neither of the CEOs, however, was able to match the standards that Schultz had set as Starbucks CEO (Groth 2011). The key problem for the firm was the rate at which it was expanding. Between 2001 and 2008, the firm opened ten thousand new stores around the world. While this expansion was helping Starbucks access larger markets, it was degrading the quality of the firm’s services and products. During the same period, the company’s shares started to plummet. Tellingly, one of the first actions that Schultz undertook as the new CEO was to reverse the expansion and close some of the stores that the company had opened. The company also redirected its attention towards improving its services as it retrained employees on the process of making essentials (Groth 2011). Through these and other changes, Schultz successfully revived Starbucks, as the company’s stock prices and annual revenues increased.

History of JC Penney

JC Penney is an American retail chain specializing in home furnishing and apparel. James Cash Penney and two business partners started the company in 1902 when he opened the first store in Wyoming. In 1909, Penney’s partners dissolved the partnership, leaving him as the sole proprietor of the firm. Under his stewardship, the store grew at a modest pace. In 1913, Penney and McManus incorporated the chain with the latter acting as a co-founder of the business. By the 1920s, the company had grown enough to start acquiring other interests. Rapid expansion ensued in the 1960s and 1970s (About us 2014). The company spread its reach to distant states in the US such as Hawaii and Alaska. In 1974, the recession stalled the growth and the company’s stock prices plummeted. The company rebounded in the 1980s continued to grow through the 1990s and early 2000s. A decline in the firm’s business in the late 2000s saw the board appoint Ron Johnson as CEO.

JC Penney Case Study

Ron Johnson became the CEO of JC Penney (JCP) towards the end of 2011. At the time of his appointment, the firm was about to face a crisis in the cotton industry that would affect production. As the CEO, Johnson carried out extensive changes in the firm’s pricing, marketing and leadership. The first change that Johnson instituted saw the firm introduce a different pricing structure for products. JCP would no longer offer nonstop sales, instead, the company was going to sell products with real prices that would also be the lowest in the market (Edward & Minato 2013). Ron Johnson also changed the way that the company would promote its products. The firm reduced the number of running promotions it had and fired its advertising agency. The third major change the Ron Johnson introduced saw JCP replace most of its leadership structure. Within a span of a year, Johnson fired most of the company’s top executives, ten percent of the corporate staff and thousands of supervisors in a bid to cut down on costs (Edward & Minato 2013).

Johnson’s changes wreaked havoc on JCP. The change in the pricing structure alienated many of the company’s clients, who preferred the promotions to standard pricing. This alienation benefitted competitors such as Macy’s that were still using the same pricing structure. The widespread corporate changes also had a negative effect on the firm due to a loss of experienced and trusted employees. These transformations had a profound impact on the firm’s finances as the company missed its sales expectations by a quarter of a billion dollars in the first quarter of 2012 (JC Penney Co Inc 2014).

5. Methodology and Analysis

Information on the strategies, performance and fortunes of the two companies was retrieved from secondary and primary sources. The key primary sources utilized in this analysis were the financial reports that the firms released. Using these financial statements, it was possible to map the sales and revenue of both JC Penney and Starbucks. This made it possible to develop close estimates of the companies’ performances over the past few years. The financial statements also made it possible to see how the change in CEOs affected the companies by showing how each leader transformed the company. Secondary sources helped to show how the corporate change affected the two companies by providing information on the strategies that each CEO applied within their firms. Secondary sources that provided this information were business magazines such as Business Insider. Scholarly journals also provided information on the issue of corporate and organizational change. The journal articles provided theoretical information on corporate change by showing the reasons why firms change leaders and the effects that such transformations have on a company.

A comparison of the Starbucks and JC Penny shows the different directions in which Howard Schultz and Ron Johnson led their firms during their tenures. Contrasting fortunes indicated in the companies’ financial statements imply that the Starbucks CEO was able to pull the firm out of its rut while Ron Johnson failed to improve JC Penney as the board expected him to. Between 2005 and 2008, Starbucks revenue rose slowly but failed to go beyond ten billion dollars. After Howard Schultz became the CEO, the revenue dropped by more than half a billion dollars. However, Schultz turnaround started in 2010 as the revenue started to rise consistently. Between 2010 and 2014, the revenue of the firm has increased by five billion dollars (Starbucks corp. 2014). Contrastingly, Ron Johnson’s position as the CEO of JCP coincided with a drop in the firm’s share value and revenue. The year before Johnson’s appointment had seen the firm’s revenue grow by a small margin. However, after Johnson’s first year in office, revenue had already decreased by a quarter of a billion dollars. This was followed by an even larger decrease as the revenue dropped five billion dollars in Johnson’s second year (JC Penney Co Inc 2014).

Graph indicating JC Penney’s revenue one year before Johnson’s tenure and in the subsequent years. Johnson became CEO in November 2011 (JC Penney Co Inc 2014).

Graph indicating Starbucks meager growth before Schultz’s second tenure and the rapid expansion after his return. Schultz returned to the helm in 2008 (Starbucks Corp 2014).

The main difference between Schultz and Johnson’s tenures is the strategy that they applied. Schultz used an approach that was oriented towards solving the problem. He identified the fact that the firm was growing too fast at the cost of quality and resolved the problem. Conversely, Johnson’s actions imply that he never identified the areas that the firm needed to improve. The failed pricing structure and promotion strategy alludes to a lack of proper research. Additionally, Johnson changed too much within the firm leading to a lot of uncertainty and ambiguity. The issues surrounding the two executives are all mentioned within the scholarly journals addressing corporate change. Schultz’s actions in Starbucks match the issues that scholars raised on corporate change as they explained that change could lead to a renewal in strategy that leads to success. Alternatively, Johnson’s widespread changes lead to uncertainty, an issue that Corley and Gioia (2004, p. 173) raised concerning corporate transformations.

6. Conclusion

Corporate change is an important aspect of any business organization in the modern world. Through the change, a company can renew its strategy, orientation and operations in a manner that allows it to achieve greater success. Scholars agree that change within organizations is a necessity, especially within the modern world. JC Penney and Starbucks are two companies that recently underwent corporate change. Starbucks returned Howard Schultz as the CEO following slow growth and JC Penney appointed Ron Johnson in a bid to spur the firm on. The actions and results of the two CEOs contrasted sharply. Johnson made widespread changes that alienated customers and lost the company experienced workers. Resultantly, the firm’s share prices and revenue plummeted. Alternatively, Schultz identified the key problem that was affecting Starbucks and moved towards resolving it. This saw the firm increase its revenue after a one-year decline. Through these occurrences, it becomes evident that corporate change could make or break a firm. Accordingly, it is important for firms to be prudent when appointing new CEOs or undertaking large changes.

7. Recommendations

The best course of action for JC Penney would be to bring its operations to their previous state before Johnson’s appointment. Though this action, the firm would understand the main areas that they need to improve and win back some loyal customers. The company should also consider appointing one of its former executives as a CEO to see if the appointee’s understanding of the firm will help him or her succeed in the position. For Starbucks, the firm’s success in the past few years means that the company can now consider expanding into new markets. This could mean opening stores in areas where there are none or providing products that cater for other consumers.

 

References

About us, 2014, JCPenney, viewed 11 June 2014, <http://ir.jcpenney.com/phoenix.zhtml?c=70528&p=irol-homeprofile>

Amagoh, F 2008, Perspectives on organizational change: Systems and complexity theories, The Innovation Journal: The Public Sector Innovation Journal, vol. 13, no. 3, pp. 1-14.

Benn, S, Dunphy, D & Griffiths, A 2006, Enabling change for corporate sustainability: An integrated perspective, Australian Journal of Environmental Management, vol. 13, pp. 156-165.

Corley, K G & Gioia, D A 2004, Identity ambiguity and change in the wake of a corporate spin-off, Administrative Science Quarterly, vol. 49, no. 2, pp. 173-208.

Edwards, J & Minato, C 2013, How ex-CEO Ron Johnson made JC Penney even worse, Business Insider, viewed 11 June 2014, <http://www.businessinsider.com/ron-johnson-disaster-timeline-apple-guru-failed-at-jcpenney-2013-4?op=1>

Groth, A 2011, 19 amazing ways CEO Howard Schultz saved Starbucks, Business Insider, viewed 11 June 2014, <http://www.businessinsider.com/howard-schultz-turned-starbucks-around-2011-6?op=1>

JC Penney Co Inc, 2014, MorningStar, viewed 11 June 2014, <http://financials.morningstar.com/income-statement/is.html?t=JCP>

Kim. E H & Kim, W 2008, Changes in Korean corporate governance: A response to crisis, Journal of Applied Corporate Finance, vol. 20, no. 1, pp. 47- 59.

Moran, J W & Brightman, B K 2003, Leading organizational change, Journal of Workplace Learning: Employee Counselling Today, vol. 12, no. 2, pp. 66-74.

Our Heritage, 2013, Starbucks, viewed 11 June 2014, <http://www.starbucks.com/about-us/our-heritage>

Starbucks Corp, 2014, GuruFocus, viewed 11 June 2014, <http://www.gurufocus.com/financials/SBUX#cs>

Todnem, R 2005, Organisational change management, Journal of Change Management, vol. 5, no. 4, pp. 369-380.