Search Results for: innovation

Which Kind of Failure Are You?

Clay Christensen has compared the theory of disruptive innovation to a theory of nature: the theory of evolution. But among the many differences between disruption and evolution is that the advocates of disruption have an affinity for circular arguments. If an established company doesn’t disrupt, it will fail, and if it fails it must be because it didn’t disrupt. When a startup fails, that’s a success, since epidemic failure is a hallmark of disruptive innovation. (“Stop being afraid of failure and start embracing it,” the organizers of FailCon, an annual conference, implore, suggesting that, in the era of disruption, innovators face unprecedented challenges. For instance: maybe you made the wrong hires?) When an established company succeeds, that’s only because it hasn’t yet failed. And, when any of these things happen, all of them are only further evidence of disruption.

-From Jill Lepore’s 2014 critical look at the language of disruption and innovation, in The New Yorker.

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More on innovation in the Longreads Archive

Photo: chefcooke, flickr

The Problem With 'Fan Service' in Television

At PopMatters, Anita Felicelli discusses why TV shows get ruined when they’re written and produced with their fans in mind rather than for their own sake as pieces of creative work:

We know that television writers read fan responses on Twitter, that some of them read blogs and speculation. They know what fans want because fans are driven to respond and tell them through these media, and in turn , they may feel the need to pander to the audience. If the writers don’t fulfill fans’ desires, particularly in a season finalé, there’s a good chance these days that the audience won’t follow them to their next project.

Too often in America, fan service, not an inspiring piece of art, becomes the end goal of creative work. Fan service can produce gratifying work, sure, but catering to fans too much squelches innovation. And it may not inspire fans to create or even continue consuming a particular show at the same pace. Even though creating fan response is a major social value of creative works, fan service is a different beast. Veronica Mars (the movie) and the How I Met Your Mother series finalé offer prime examples of why focusing too literally on the satisfaction of fans’ expectations can produce fewer rewards than fans (and writers) might imagine.

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Screengrab from ‘How I Met Your Mother’

The Rise of Nintendo: A Story in 8 Bits

Longreads Pick

An account of Nintendo’s rise from a playing card manufacturer in 1889 to a video game industry giant in the ’80s and ’90s. Adapted from Console Wars, out this month:

After several decades of staggering success, Fusajiro Yamauchi retired in 1929 and was succeeded by his son-in-law Sekiryo Yamauchi, who ran Nintendo efficiently for nineteen years, but in 1948 he had a stroke and was forced to retire. With no male children, he offered Nintendo’s presidency to his grandson, Hiroshi, who was twenty-one and studying law at Waseda University. It didn’t take long for Hiroshi Yamauchi to make his presence known. He fired every manager that had been appointed by his grandfather and replaced them with young go-getters who he believed could usher Nintendo beyond its conservative past.

With innovation on his mind,Yamauchi branched out into a number of other, less lucrative endeavors, including an instant-rice company and a pay-by-the-hour “love hotel.” These disappointments led Yamauchi to the conclusion that Nintendo’s greatest asset was the meticulous distribution system that it had built over decades of selling playing cards. With such an intricate and expansive pipeline already in place, he narrowed his entrepreneurial scope to products that could be sold in toy and department stores and settled upon a new category called “videogames.”

Source: Grantland
Published: May 14, 2014
Length: 20 minutes (5,168 words)

The Truth About Google X

Longreads Pick

Space elevators, teleportation, hoverboards, and driverless cars: The top-secret Google X innovation lab opens up about what it does—and how it thinks.

If there’s a master plan behind X, it’s that a frictional arrangement of ragtag intellects is the best hope for creating products that can solve the world’s most intractable issues. Yet Google X, as Teller describes it, is an experiment in itself–an effort to reconfigure the process by which a corporate lab functions, in this case by taking incredible risks across a wide variety of technological domains, and by not hesitating to stray far from its parent company’s business. We don’t yet know if this will prove to be genius or folly. There’s actually no historical model, no ­precedent, for what these people are doing.

Source: Fast Company
Published: Apr 15, 2014
Length: 24 minutes (6,150 words)

How to Fail in Business While Really, Really Trying: The True Story of J.C. Penney

Jennifer Reingold | Fortune | March 2014 | 29 minutes (7,108 words)

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When you find a savior, you don’t quibble over details. So it was that J.C. Penney, the long-stagnating mid-tier department store chain, announced in June 2011 that it was hiring Ron Johnson, the man in charge of Apple’s wildly profitable retail stores and a Steve Jobs acolyte whose golden halo also included past triumphs as an executive at Target. The news sparked euphoria, but conspicuously absent from the media coverage was any mention of how Johnson planned to save this faltering retailer in a fading industry. That’s because there were no plans. His mandate could be reduced to a single word: change. What that entailed could be figured out later.

That fall Johnson began unveiling his planned strategy to Penney’s board, culminating in a big presentation on Dec. 7. By then CEO for just a month, Johnson laid out his vision of a more upscale, more youth-oriented Penney, weaned of its addiction to price promotions.

Johnson demonstrated that he’d learned a thing or two about stagecraft from his legendary former boss at Apple. He had commandeered a large basement studio at Penney’s Plano, Texas, headquarters and had workers construct two rooms. (Johnson wanted to go further and install floating stages in the company cafeteria, but the fire marshal nixed the plan.) After he had made his presentation, the new CEO brought the directors downstairs to deliver the coup de grâce in the form of a sound and light show. In the first room was the taped commotion of shouting voices and visual noise: a profusion of signage, coupons, offers, and clutter. This was the off-putting cacophony of J.C. Penney at that moment. Johnson then ushered the directors into the next room, which was white, tastefully austere, and had a celestial serenity: the new JCP.

Finally Johnson led the board members into the cafeteria, where 5,000 employees, who had been waiting on their feet for hours, greeted the group with a raucous ovation. Then it was party time. Officially the fete was intended to bid farewell to Johnson’s predecessor, Myron “Mike” Ullman III, but it felt more like an ecstatic celebration of the company’s rebirth. With nary a whisper of opposition, the 109-year-old retailer had decided to abandon not only its strategy of many decades but arguably its fundamental way of doing business.

Just 16 months later Johnson was out. Penney was hemorrhaging cash; it lost $1 billion during his one full year as CEO. Its shares were hurtling downward. The press had turned against him. One of the two investors who installed him had fled. As fast as they had once anointed Johnson a messiah, Penney’s directors turned their backs on him.

Since his departure the company has behaved as if Johnson’s entire tenure was a coup rather than a strategy blessed by the board. The retailer has renounced his philosophy, restored Johnson’s predecessor, Ullman, as CEO, and reverted to its old ways. If we’re heading for oblivion, the board seems to be saying, let’s at least try to get there slowly. Some observers think bankruptcy is a possibility, despite improved results of late (at least compared with the previous bloodletting).

This era has seen some truly epic corporate conflagrations. There was the precipitous collapse of Lehman Brothers, which came to symbolize the greed and corruption of Wall Street, and the multidecade decline and, finally, bankruptcy of General Motors, which seemed to embody the slow death of American manufacturing. But for its stomach-churning mix of earnest ambition, arrogance, hope, and delusion — along with a series of comic and tragic miscues — it’s hard to top J.C. Penney.

“I came in because they wanted to transform,” the former CEO told me before his fall. “It wasn’t just to compete or improve.” (Johnson was interviewed for this article but declined to be quoted beyond saying, “I do not want to interfere with Penney’s attempts to succeed.”) He and his team did indeed transform Penney — from a sleepy behemoth known for serving the needs of Middle America into something quite different: an ambitious wannabe startup that fancied itself cool, with a radical pricing and merchandising model that had never been pulled off before. The outcome was doubly disastrous: Penney alienated its traditional customers without attracting new ones.

Everyone understands that the Johnson revolution ended in catastrophe. But the full story has never been told. The reality, it turns out, is even worse than many people imagine — and in a few respects, very different. What follows is the story of what actually happened at J.C. Penney, based on months of interviews with 32 current and former executives and vendors and more than 20 investors, analysts, and competitors.

It’s a saga with a swirl of overlapping forces. It stars a charismatic leader bent on radical change and features a failed attempt to Apple-ize Penney, a mission that ended up being every bit as crazy as it sounds. There’s a board of directors who sometimes seemed more concerned with what they’d be served for dessert than with the fate of the company. Then there’s the mistake that cost the company $500 million — and the fact that Penney actually began retreating from its controversial pricing strategy even before Johnson left, raising the question of whether the company can even truly be said to have tried his approach. Throw in a hedge fund titan who always knew better — except when he didn’t. The result: Billions in revenue were vaporized, and more than 20,000 people — many of whom embraced the new Penney — lost their jobs, seeming to hasten the decline of American brick-and-mortar retailing. This is a tale with very few heroes.

Into the cube

They called it a “cleanse.” On Feb. 6, 2012, a clear, acrylic 10-by-10-foot cube was installed in the area between the two cafeterias in Penney’s headquarters. It was a three-dimensional version of the retailer’s new square logo. Johnson told staffers that he didn’t want to see the old logo anywhere in the building. He thought it would be a useful ritual to have employees discard symbols of the stodgy old Penney. In theory, the cube was a giant time capsule, and the old Penney would be buried (exactly where, nobody said). In reality, it was a stylized, transparent dumpster.

For the next week people lined up to shed the evidence of Penney’s century-old history. Into the cube went T-shirts, mugs, stationery, pens, and tote bags. A few people even dumped the Chairman’s Award, the highest honor in the company, a glass plaque bestowed by former chairman and CEO Ullman on his most valued employees. As staffers pitched their corporate junk, they were invited to select a few replacement items with the new logo in exchange. By the time the purge was complete, 9,000 pounds of detritus had filled the cube.

The transformation had started with a single phone call a bit more than a year before. At 4 p.m. on Oct. 7, 2010, the phone rang in the office of then-CEO Ullman. The screen flashed “Vornado,” the name of the $2.8 billion (revenues) REIT run by investor Steven Roth. Ullman, a veteran of takeover attempts at Macy’s, had noticed that Penney’s stock had jumped 10% in the 10 minutes before the call, to $32. He had a pretty good idea of what was going on. “Do you come in peace?” he asked Roth, with whom he had worked on a past deal. Responded Roth: “I’m your new best friend.” And there was a second best friend: Roth had teamed with Bill Ackman, the head of hedge fund Pershing Square Capital, to buy more than 26% of the company’s stock. They believed Penney could easily be a $60 stock — if, of course, some changes were made. Could they meet to talk?

Ullman had run Penney since 2004. He had had a fantastic start, driving the stock to an all-time high of $86 in 2007 on innovative ideas such as bringing cosmetics seller Sephora inside Penney in a “store within a store” and opening some outlets outside traditional, and declining, malls. But when the Great Recession hit, Penney’s core customer — the middle-class mom — suffered more than most. Even when competitors began to pull out of the decline, Penney lagged. One reason: Ullman’s massive deal with Ralph Lauren to launch American Living in 2008, a Polo-lite brand sold only at Penney. It failed, in part because Penney was not allowed to use Ralph Lauren’s name or the Polo logo.

Penney was clearly in need of rejuvenation. Revenues had dropped from $19.9 billion in 2006 to $17.2 billion in 2011, taking the stock price along with it. Rather than resist Ackman, a brash, aggressively charming billionaire who likes to make huge bets on big companies and doesn’t hesitate to wage proxy battles against those that rebuff him, Penney invited Ackman and Roth to join the board. “I said, ‘These are two of the smartest people in their industries in America,'” Ullman recalls. “Why wouldn’t we want them in the boardroom?”

In February 2011, Ackman and Roth attended their first board meeting. At dinner afterward, Ackman gave an emotional speech, hailing the company’s potential. Almost instantly, fate intervened. As Ullman’s driver pulled out of the parking lot after the meal, his car was sideswiped. Ullman, then 64, was knocked unconscious. He had multiple fractures where his skull attaches to his spine and spent 12 weeks in a neck brace. Even before that he had battled health issues. For years Ullman had suffered from nerve damage that makes it hard for him to walk (he moves around the offices by Segway). He had endured two major surgeries during his Penney’s tenure.

The accident intensified the board’s concern over Ullman’s health — as well as the undercurrent of dissatisfaction that the new directors felt with his leadership. As director Geraldine Laybourne told me in 2012, “You know you’ve done something wrong when you wake up and someone has bought 26.8% of your stock.”

There were no obvious successors at Penney. Ullman says he thought instantly of Ron Johnson, the Minneapolis native who had helped bring great design to Target before he was recruited by Apple to create its retail stores. Under Johnson they became the most profitable stores in the country, making him a star at what was then the hottest company on the planet. Ullman had called Johnson about a director position a few years back, but Johnson had rebuffed him. Now, however, with Steve Jobs ailing, a recruiter told Ullman that Johnson might be more amenable.

Beginning in March 2011, Johnson met with Ackman and Roth and separately with Ullman. Soon the conversation moved from a role as a director to the possibility of becoming the next CEO. Johnson, who started his career at Mervyn’s and had always loved the retail business, had been pondering the lack of innovation in department stores. He had a vision of a new type of store — a destination rather than simply a repository for product. Well-liked and relentlessly positive, Johnson, then 53, seemed to offer the kind of can-do Silicon Valley spirit that hadn’t been seen in the retail world since, well, Apple. “I just believed in the guy,” Ackman told me at the time. “I had a man crush on him.”

With Ackman as head cheerleader, Penney’s board offered Johnson the CEO position. When the announcement was made, on June 14, 2011, the retail world was astounded — and thrilled. Although Johnson wouldn’t start as CEO until Nov. 1 — he said the cancer-stricken Steve Jobs had asked him to stay longer — Penney’s stock rose 17% on the news. It was as if a triple-A team had just signed Babe Ruth.
When Johnson eventually unveiled his strategy, it centered on a few points. The biggest, perhaps, concerned Penney’s incessant price-slashing promotions — 590 in 2011 alone. The new JCP would have virtually none. There would be three prices for an item: the original price, which was far below the typical marked-up price; a month-long value price for certain items; and a twice-monthly “best” price for things that needed to move. No more clearance racks, no more mess, just an honest — or as a later slogan put it, “fair and square” — relationship between the customer and the store. In a retail world full of illusory market-share gains based on which retailer offered the lowest clearance prices, it felt like a welcome way to stop the madness.

The second component of his strategy was equally radical. Johnson wanted to remove the “department” from the department store, recasting each store as a collection of 100 separate boutiques, with a kind of town square in the center. The product mix would change too. The new JCP would feature a much higher percentage of branded merchandise — modern, higher-end, youth-oriented — compared with house brands. This was a very big move for Penney, which got 50% of its sales from its own brands and tended to display most of its products by classification (such as bath mats) rather than by collection (such as Martha Stewart).
The new strategy made sense if Penney could attract many top brands, which would lure consumers without the catnip of frequent sales. Clearly, the approach worked for iPhones. Would it work for mattress pads and pantyhose?

Johnson wasn’t going to wait around for an answer. When a director asked when he planned to test the notion, Johnson scoffed. Never mind that other retailers had tried such pricing only to see customers vanish. He had made his decision. After all, his hero, Jobs, disdained tests and instead relied on his gut. At the same time, Johnson didn’t seem particularly interested in how Penney operated, according to Ullman. The outgoing CEO noted in a regular update to the board that the new CEO had not asked a single question about how the business was currently running.

Meanwhile, there were hints that the board was not as focused as it could be.

Ackman had consistently complained about the chocolate-chip cookies served at Penney’s board meetings. Rather than soft, gooey orbs, Ackman grumbled, these were rock hard. To assuage him, say three people involved, Penney began ordering fresh-baked cookies delivered from local bakery Tiff’s Treats. Other Penney directors also expressed concern about the caliber of cuisine served at their meetings — so much so that on at least one occasion a senior executive personally sampled the food before it was served. (Ackman declined to comment on the company’s baked goods; Penney denies that an executive served as a food taster.)

The revolution begins

Johnson showed up in Plano on Nov. 1, 2011, ready to lead a transformation at the speed of light. By Jan. 25, 2012 — less than three months later — the new JCP would unveil its new look. A week later the new pricing strategy would be revealed. By the fall of 2012, hundreds of stores would be revamped. And by the end of 2015, if all went according to plan, the transformation would be complete. The timeline was beyond aggressive, but Johnson thought speed would be a great motivator and unifying force.

Johnson himself moved with alacrity. In his second week on the job, he met in San Francisco with Chip Bergh, the new CEO of Levi Strauss. Penney already sold the company’s jeans, but Johnson wanted Levi’s to open boutiques within Penney locations. He asked Bergh where his most innovative outlet was located, and Bergh said Tustin, in Orange County, Calif. “I’ve got a plane,” Johnson said, enthused. “Let’s go right now!” A few hours later Bergh led Penney’s CEO through the Tustin store. Johnson loved the layout, which included a “denim bar,” mobile checkout, and dedicated “fit specialists.” By the end of the day Johnson and Bergh had agreed to open 700 similar Levi’s boutiques inside Penneys in time for the back-to-school season in 2012 — less than a year later. Most of the cost would be borne by Penney.

Money seemed to be no object. It cost Penney some $120 million to build the Levi’s boutiques, according to one person involved. Johnson was also trumpeting a major new investment in Martha Stewart Living Omnimedia and an agreement to open Martha Stewart stores within Penney.

Meanwhile, Johnson was recruiting a team of high-priced all-stars from the outside. He’d hired Michael Francis, the head of marketing at Target, who was credited with bringing the low-end retailer its signature hip cachet. Francis became Penney’s president and head of both merchandising and marketing. Johnson plucked Apple alum Mike Kramer from apparel-maker Kellwood as COO, and Dan Walker, also an Apple veteran, as chief talent officer. Francis, Kramer, and Walker received a total of $24 million in cash signing bonuses, along with millions of stock options.

It was now Johnson’s show. The board had been stunned by the breadth of his planned transformation. But nobody insisted he slow down or test his theory that customers were sick of price confusion. He had a new team, an adoring board of directors, and a mission to reinvent his company.

Now it was time for his public debut at the official JCP launch party, which took place at New York City’s Pier 57 on Jan. 25 and 26, 2012. The cavernous shipping pier was bathed in white, with the new JCP logo omnipresent inside giant neon cubes. The lighting was perfect, the music appropriately ambient, the food top quality. A bevy of retail cognoscenti, including Martha Stewart, lent credibility. (She feted Johnson onstage, despite the fact that Macy’s had just sued her company, claiming that the new deal with Penney violated Stewart’s contract with Macy’s.) Calvin Klein, Mickey Drexler, Cindy Crawford, and Mary-Kate and Ashley Olsen were all in attendance.

Johnson presided with a beatific smile. Clad in a V-neck sweater over a button-down shirt, he waxed eloquent on the lessons he’d learned from Steve Jobs. Seemingly in perfect sync, Johnson and Francis — the two looked almost like brothers — rolled stylish, funny clips that featured Ellen DeGeneres, the company’s new spokesperson, and promised a world of fresh, compelling Americana. Fusty old J.C. Penney’s was no more. The company had rebranded itself with a sleek modern name — JCP — to match its new aesthetic. Ackman and other directors sat in the front section, beaming.

Many in the audience admired Johnson’s passion and nerve, even as they doubted that his plan could succeed. Johnson himself told me that day that J. Crew CEO Mickey Drexler had cautioned him, “Be very careful. You don’t have to be that bold. There’s only one Steve.” (Comments Drexler today: “I’m not sure that he heard me.”)
There was a fair amount of eye rolling in the audience. As Johnson talked about the “six Ps” driving the plan — product, place, presentation, price, promotion, and personality — Adrianne Shapira, then a Goldman Sachs analyst, said, “One ‘p’ that seems to be missing is people.” Kramer, the COO, added to the swagger with his refusal to provide sales projections because “we don’t want to cap what we think it could be.” Penney’s stock vaulted from $34 to $41 the next day.

Back in Plano, the employees were excited too. Many acknowledged that Penney needed an infusion of energy. On Feb. 1 an ebullient Johnson hosted a $3 million extravaganza to salute the company’s workers. Stages were constructed onsite, with four areas meant to conjure a particular season. In “winter,” set up in the cafeteria, there was a snowmaking machine. “Summer” boasted grass for a picnic, and “spring” had a wall of water. There were margarita bars, live bands, and caramel apples mounted on long poles. Hung on the walls were photographs of employees that had been taken at a welcome picnic on Johnson’s first day.

Still, the moment was fraught. The company had announced $900 million in planned cost cuts, and everybody knew that meant looming layoffs. Many of the people celebrated in photos would soon lose their jobs. Some of their images remained on the walls for months, ghostly reminders of the human costs of radical change.

The cool kids take over

The era of good feelings would be measured in nanoseconds. Indeed, the only thing speedier than Johnson’s planned changes was the velocity with which they unraveled. Inside Penney, the conflict started almost instantly. Johnson “wanted to do this as a mixed marriage,” says former COO Kramer. “He wanted to prove that we could do this with new people as well as the older management. But it was very clear that it was oil and water from day one.”

It was all well and good that Johnson wanted to, as he frequently proclaimed, run Penney like a startup. But it was a venerable company with 159,000 employees and 1,100 stores. It already had a culture, for better or worse.

The newcomers distanced themselves from the holdovers, starting with the fact that a cadre of new top executives refused to move to Dallas and instead jetted in weekly. The Ritz-Carlton, where Johnson and some of the most senior executives stayed, became an unofficial club and meeting spot for the people at the top. Johnson, Francis, and Walker each remained in other cities, and several created powerful satellite operations there; only Kramer moved to Dallas.

Those who were not part of this new team, with a few exceptions, found themselves out of the loop and, increasingly, out of a job. “You felt like you were back in high school with the cool kids and the noncool kids,” says one senior old-guard executive. “I felt slow, dumb, and weak.”

Many of the former Apple-ites looked to implement what they viewed as streamlined Silicon Valley ways. HR chief Walker eliminated performance reviews, which he saw as useless. That happened to make it that much easier to ax people, because all decision-making was up to the boss and there was no need to consult any performance-assessment data. Says Walker: “I abhor make-work HR bureaucracy that doesn’t really improve the capabilities of the people and the company.”

Johnson’s character shaped the tone of Penney’s transformation. As genial as he is — he is the quintessential cheerful Sunday-school teacher and kids’-little-league-coach kind of dad — he has the personality of a zealot. Johnson displays the sort of enthusiasm and unwavering commitment that inspires followers. (And he showed his belief in his own plan by investing $50 million in Penney warrants that would pay off only if the stock rose.) There were only two kinds of people in Johnson’s world — believers and skeptics. “I choose to inspire and create believers,” he told me at the time. “I don’t like negativity. Skepticism takes the oxygen out of innovation.”

Criticism, valid or otherwise, marked you as a skeptic. Executive vice president Steve Lawrence joined that category when he suggested that Johnson should conduct tests before eliminating price promotions from one day to the next. When a decision was made to reduce the top merchants from two to one at the end of February, it was Lawrence who was cut rather than Liz Sweney, who publicly supported the new plan.

Some 60 top performers from the old regime did have a chance to be part of the revolution via a new program called (naturally) the iTeam. The group brainstormed ways to improve the company and visited famous retailers like Selfridges and Printemps for inspiration. But when the firings began in April, many of the iTeam members were purged, causing a vacuum of talent who understood Penney’s business.

Employees who remained say the new leadership team seemed to have little respect — in some cases, they had outright contempt — for the holdover employees. Michael Fisher, the chief creative officer and another Apple veteran, lectured his team that they needed to learn more about fashion, according to two employees. Each, he said, should wear at least one piece of camouflage clothing every day, as he did. Fisher went so far as to deride the holdovers as DOPES, or dumb old Penney’s employees, according to six staffers. (Fisher declined to comment.) Some veterans retaliated by calling the new team the Bad Apples.

The contempt seemed to extend to customers. As JCP spent more and more on new collaborations with higher-end brands such as Vivienne Tam and Nanette Lepore, the company abandoned previous mainstay labels. Southpole, a clothing brand that appealed primarily to black and Hispanic customers, was dropped. The women’s line for St. John’s Bay, a drab private-label brand — but one that generated $1 billion in annual revenues — was eliminated.

Johnson was totally absorbed in his quest but, say numerous insiders, relatively removed from many specifics of how his team was forcing through the change. It’s hard enough for CEOs to get honest information when they ask for it, since nobody wants to displease the boss. But when you announce that you don’t want to hear skepticism, you’re doubly isolating yourself. In Johnson’s mind, everybody was behind him.

Ellen and the white picket fence

Johnson and his team knew that sales would slide in the short term. Penney had internally projected a 10% to 15% drop in same-store sales for the first quarter after the relaunch. But when the results were tallied in May 2012, they were dismaying: Stores open for at least a year had sold 19% less than in the previous year’s first quarter. Penney customers were bolting, with no sign of replacements, despite millions spent on new marketing that depicted white-picket-fence Americana with great prices and gorgeous products.

Instead of resonating, the ads sparked a firestorm. The company had named Ellen DeGeneres — a popular celebrity and an out and proud lesbian — as its spokesperson. A conservative group, One Million Moms, threatened a boycott.

“DeGeneres is not a true representation of the type of families that shop at their store,” the group claimed. “The majority of J.C. Penney shoppers will be offended and choose to no longer shop there.” The company was deluged with enraged letters after a Mother’s Day circular included a photograph of two moms. Johnson, who had supported the marketing as inclusive, began to fret.

When Johnson found out that a Father’s Day ad featuring two dads was also in the works, he decided the messaging had gone from inclusive to political. Too late, Francis told him. The photos had already been printed. Johnson went to the board, which supported going ahead with the ads. He then told Francis he wanted more say over marketing — much of which happened in Minneapolis, where Francis had built a large communications and advertising operation.

Quickly the mood shifted. “Do we need two cooks in the kitchen?” Francis asked. Within days of the meeting he was gone. DeGeneres stopped appearing in most Penney ads. (A source in her camp says the relationship ended amicably.) Says Francis: “I will forever be proud of the remarkable body of work, and I believe it delivered on the mandate.” Johnson himself decided to take on Francis’s duties. So hands-off in many realms, the CEO would become intensely hands-on when it came to marketing. “Ron read every single line of copy,” says Greg Clark, a former senior vice president in the marketing group. “He wrote half of it. He reviewed every single page, every single photograph.”

Internally the changes were hitting hard. The first round of layoffs had begun in April, with 19,000 employees losing their jobs over several months. Soon afterward, Johnson held a Q&A session. The mood was somber. People knew that the company’s results had been worse than expected, and they’d anticipated some cuts. Were more layoffs coming? Johnson remained unruffled. He joked that he had worn his Nikes “in case they chase me out of here.”

By May, less than four months after JCP’s gala launch, a few directors were already getting nervous. Debates over pricing policy began erupting. (On the plus side, the menu options at a board meeting that month — including New Mexican rubbed beef tenderloin with bourbon-ancho sauce and saffron poached sea bass — didn’t seem to rile the directors.) For the moment, they were boxed in. Johnson had warned that the transition would be painful, and the board had greenlighted his plan. There was little it could do at that point besides acquiesce.

Penney’s spending continued to mount. Johnson wanted to make checkout easy for customers by deploying Apple-style roving clerks who could take customer payments on iPads. To do that, Johnson spent millions to equip stores with Wi-Fi and mandated that every item have an RFID tag by early 2013. (As money grew scarce, the plan was shelved.) At Fortune’s Brainstorm Tech conference in July 2012, Johnson was calm and blithely confident, despite growing negative press and a stock price that had halved since the New York show. He reminded everyone that it had taken several years for the Apple retail stores to succeed.

Yet oddly for a former executive of a tech company, Johnson also made a crucial mistake relating to the Internet. He decided to separate JCP.com’s buying groups from the store buying groups — the way Apple did it — severing coordination between what was stocked for the website and what was available for stores. The dotcom decision-making team was based in Silicon Valley, while the store buyers were in Plano. As a result, a customer could no longer find, say, four colors of underpants in the women’s department and be confident that the four colors would also be available online. Ullman had consolidated the teams. All of a sudden the website found itself stripped of support and leadership. Johnson was focused on getting the right look and feel into the physical store. “The first thing is to fix the store,” he said at the time, though he added, “It doesn’t mean online isn’t an equally big opportunity.”

But by the quarter ending in October 2012, dotcom sales had plunged 37% compared with the previous year’s quarter. Just as the rest of the retail world was scrambling to boost mobile and online buying, the Silicon Valley executive was going in the other direction. Penney lost $500 million on that one decision, according to Ullman.

Other Johnson initiatives backfired. In his well-intentioned desire to build trust with customers, the CEO loosened Penney’s exchange policy, allowing customers to return merchandise — without a receipt — and receive cash. Almost instantly, some people began to abuse the policy, grabbing items off Penney’s shelves, bringing them to the register, and then trading them in for cash. At least one popular item was “returned” so frequently that its total sales turned negative for a time.

A second component of Johnson’s strategy — the headline-generating plans to put Martha Stewart stores inside Penney’s — also blew up. In August 2012, Macy’s followed through on its threat and sued Penney. Already Macy’s had managed to temporarily block the new stores. Stock speculators began licking their chops, with short interest that month hitting 40% of the total float.

Quietly, an even more fundamental part of Johnson’s strategy — the moratorium on sales promotions — began to be pared back. Between the rising resistance from the board and the terrible customer response, Johnson had gotten the message. He authorized a return to limited sales and promotions like free haircuts for kids, for example, which weren’t called sales but were certainly promotional. The word “clearance” began trickling back into use.

By Thanksgiving, Johnson — who had always said the transformation would take four years — had started to sound as if he were bargaining for more time. He claimed, on CBS This Morning, that Penney’s benchmark would come in February 2013. “It’s going to take a year to teach people how to respond to the new pricing,” he said. “We will return to growth next year.” He laughed off a question about the increasing pressure. “I’m trying to position JCP for the next 100 years,” he said, “not this year.”

The overthrow

Despite Johnson’s public optimism, the ground was quickly shifting beneath him. Penney’s board had begun splintering into two factions: a pro-Ackman “New York” contingent and a larger cohort led by chairman Tom Engibous, the former CEO of Texas Instruments. Johnson “is still the right man for the job,” Ackman proclaimed publicly. “We don’t walk away.” Still, he was so worried about JCP’s accelerating cash burn that he threatened the board that he would sell all his shares if he was not made the head of the finance committee. Ackman got the appointment — and hired investment bank Blackstone and AlixPartners, a firm best known for advising distressed companies, to explore ways to raise cash.

When 2012 results came out in February, they were atrocious. The company’s revenues had plunged by $4.3 billion, with same-store sales falling 25%. Penney recorded a $1 billion loss. The stock tumbled to $18 — less than half its value a year earlier, even as the overall stock market continued to surge. Cash fell from $1.5 billion to $930 million, and Standard & Poor’s cut the company’s debt rating to CCC+, deep in junk territory, based on concerns about Penney’s liquidity.
Johnson’s job was clearly in jeopardy. He offered to resign. But Engibous assured him of the board’s support.

Amid this turmoil the Martha Stewart case went to trial, and Johnson was forced to take the stand. He looked naive at best, arrogant at worst, as his emails revealed his belief that he could intimidate Macy’s CEO, Terry Lundgren. The best way to stop Macy’s from renewing its agreement with Martha Stewart, Johnson wrote to his team, “is to make our offensive so strong they simply pick up their toys and go home.” After the announcement, he gloated in an email to Ackman: “I’m inclined to let the press run and let [Lundgren] stew for a bit. The more this is seen as brilliant for JCP and Martha, the more he won’t want to interfere.”

The bad news was cresting. And almost simultaneously came the stiletto in Johnson’s back — from the very investor who had paved the way for Johnson’s accession. In March 2013, Penney director Steve Roth, the CEO of Vornado, suddenly sold 43% of his Penney shares at a loss of nearly $100 million. It was a long way from the email he wrote Johnson on Dec. 7, 2011: “Amazing to me how much you’ve gotten done in such a short time, not to mention the quality of the work and genius of the ideas.” Penney CFO Ken Hannah couldn’t make sense of it. “Steve was as supportive and as constructive in [the most recent] board meeting as he had ever been,” he explained at an investors’ conference. “There was not one indication coming out of that meeting that he was going to do anything with his position.”

Why did Roth bail out? The investor declined to be interviewed, but he was facing myriad pressures of his own. The CEO of Vornado had stepped down abruptly, and Roth, already the chairman, had re-assumed the position. Vornado’s shareholders were unhappy with the stock’s performance and questioned why the REIT had invested in retail companies at all. No matter the particulars, the message was clear: Roth had lost faith.

The noose was tightening around Johnson’s neck. Once again he offered to step down, and once again the board told him to stay. (The latter meeting occurred in Ackman’s conference room, which ironically is equipped with a vintage nuclear bomber’s ejector seat.)

In the midst of the turmoil, Johnson embarked on a family vacation in the South of France. When he returned, he got a call from Engibous, according to two executives. The chairman told Johnson that the board would, in fact, be accepting his resignation on Monday, April 8. Less than a year and a half after embracing Johnson’s vision, the board had renounced it. Penney quickly announced that Johnson was “stepping down.”

Most startling was the man chosen to replace him: Mike Ullman, the chief of the J.C. Penney that presumably had been left behind. Previously portrayed as infirm and on the point of retirement, Ullman was now Schwarzenegger on a Segway, back with a vengeance. Johnson never returned to the Plano office. Within weeks, all but one of his disciples were gone too.

The grand experiment was over — just as much of Johnson’s new merchandise was beginning to appear. On May 1, the company ran an apology ad for misleading the customer. “We learned a very simple thing,” an earnest female voice said, “to listen to you.” In June, Johnson’s baby — the renovated home department — finally opened, with quirky Jonathan Adler lamps, mod Conran tables, and Pantone sheets. It was gorgeous, but the items were far beyond the budget of the traditional Penney’s customer. It bombed.

With Penney stuck in limbo by the court case, the company’s Martha Stewart stores were reduced to displaying things that didn’t compete with Macy’s, such as a few party supplies and window treatments. And in what seemed like a cruel joke, a new billboard erected in Culver City, Calif., to announce the Michael Graves home collection featured a teakettle that, viewed from on its side, inexplicably evoked Adolf Hitler, moustache and all, his arm in Nazi salute. The topic “This kettle looks like Hitler” trended quickly on social media site Reddit. There was at least one upside. Unlike Graves’ other wares, the Hitler teakettle immediately sold out.

The unwinding

With Ullman back, it was only a matter of time before Ackman was gone. The investor initially resisted, demanding that the board quickly find a replacement for Ullman. When he was rebuffed, Ackman dispatched two caustic letters to the board, which found their way to the Wall Street Journal. “Sometimes being ‘disruptive’ is exactly what a company and board needs at a critical time,” he wrote. But by now the other directors were aligned. On Aug. 12, 2013, Ackman resigned from the board. He sold his Penney stake at a loss of $470 million.

For his part, Ullman took a giant eraser to just about every plan of Johnson’s. The new home store was jettisoned; by summer I saw 50% to 70% markdowns on newly introduced products. They ended up piled toward the back of stores. Many of the brands that were promised prominent placement found their wares tossed on clearance tables, prices slashed. That in itself caused headaches for Penney. One such brand, Bodum, sued for breach of contract in December. (Penney declined to comment.) Once again, customers’ mailboxes filled with “the noise” of multiple promotions.

Ullman began shoring up Penney’s finances, but not without a stumble: The company stated that it was “comfortable” with its liquidity — and then, only a few weeks later, announced an 84-million-share offering. (The news of the highly dilutive offering walloped Penney’s shares yet again.) The Securities and Exchange Commission briefly investigated Ullman’s U-turn before closing the inquiry with no action.

The company website, reintegrated with the stores, again became a major contributor and helped make up for still-anemic in-store sales. Finally, on Feb. 26, 2014, Penney reported its first glimmer of good news: increases in same-store sales for the first time in two years, up 2% over the prior year’s fourth quarter (which, let’s not forget, was down 32%).

Earnings, however, were even worse than the previous year. The company lost $1.4 billion. Still, Ullman has stabilized the business, slowed the sales skid, and hired a marketing executive who at least seems to be matching the products to customers’ desires. But if Penney has pulled back from the brink of extinction, it remains a long, long way from thriving.

Returning to the pre-Johnson status quo is not a solution. Brick-and-mortar retail remains in deep trouble. During the recent holiday season industrywide in-store traffic slumped by 6.5%, according to RetailNext, even as spending surged online.
Was Johnson’s plan doomed to fail? It’s easy to say virtually nothing would work. For starters, there are far too many stores in America. In early March alone, Radio Shack announced plans to close as many as 1,100 stores, and Staples said it would shutter 225, or 12% of its total. And there are no obvious giant candidates to take over the mall spaces, diminishing the value of real estate for companies like Penney.

Of course, much of Penney’s failure was self-inflicted: the bold attempt — blessed by an impulsive board — to wave a magic wand and make a deeply embedded culture disappear, not to mention the rejection of its own customers. Says one executive brought in by Johnson: “It’s akin to people who try to remodel a house when their family is living in it. What we did was try to remodel 80% of the house and, by the way, try to host Thanksgiving and Christmas and a wedding in the backyard.”

Some acolytes fiercely defend Johnson and maintain that his plans would have worked if given enough time. “I think the strategy was right on the money,” says former HR head Walker. “We’ll never know what the results would’ve been if we’d gotten to the point where the stores had been largely transformed. Then it becomes a different store. We don’t get to replay that.”

Indeed, several Johnson initiatives have paid off. The Levi’s stores have had healthy sales (as have similar Disney boutiques). Penney is also holding on to another Johnson favorite, Joe Fresh. And Penney’s wider aisles and polished concrete floors do make the stores look and feel more contemporary.

What Johnson hoped to do was laudable. He wanted to conjure the elusive magic that delights customers at Apple stores, or at a handful of brick-and-mortar retailers such as Burberry, H&M, Target, J. Crew, Lululemon, and a few others devoted to the art and design of the product and the space. Says analyst Brian Sozzi of Belus Capital Advisors: “I will give Johnson this: He did things too quickly, but at least he was trying to set up a company to thrive in terms of where the future of retail was going. He just didn’t go about it the right way.” It’s impossible to know whether Johnson’s reforms could have succeeded, but he does leave one legacy: Nobody will be attempting something similar for a very long time.

Reporter associates: Marty Jones and Susan Kramer

Originally published in Fortune, March 2014. Subscribe to the magazine here.

Photo: idovermani, Flickr

Can a Company Keep Innovating After the Founder Is Gone?

Marc Andreessen is obsessed with the idea that tech companies need to focus on innovation above all else. He believes that the “output” of technology companies isn’t products — at least not the way the “output” of Ford is cars. The “output” of tech companies, he says, is innovation.

Andreessen’s second theory of innovation is that the people who are the very best at it are the people who create successful technology companies — founders. They are the people who have a proven ability to develop a concept and bring it to fruition.

For this reason, Andreessen believes that tech companies should be run by their founders. The problem for eBay is that its founder, Pierre Omidyar, had no interest in running it. And John Donahoe, a talented manager, had the wisdom to know he was not the kind of visionary who could found an innovative tech company.

So he decided he was going to have to go after the next best thing. He was going to have to build a team of founders, or founder-types, and give them the run of the place. He, meanwhile, would operate as their in-house consultant (and boss).

Nicholas Carlson, in Business Insider, on the origins of a secretive eBay project, led by Jack Abraham, that helped the company reverse its fortunes. Read more from Carlson.

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Photo: nikonfans, Flickr

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This Is the Man Bill Gates Thinks You Absolutely Should Be Reading

Longreads Pick

The author of nearly three dozen books on the decline of manufacturing in America, and a future in which innovation can’t save us but reducing our consumption might:

Most innovation is not done by research institutes and national laboratories. It comes from manufacturing—from companies that want to extend their product reach, improve their costs, increase their returns. What’s very important is in-house research. Innovation usually arises from somebody taking a product already in production and making it better: better glass, better aluminum, a better chip. Innovation always starts with a product.

Look at LCD screens. Most of the advances are coming from big industrial conglomerates in Korea like Samsung or LG. The only good thing in the US is Gorilla Glass, because it’s Corning, and Corning spends $700 million a year on research.

Source: Wired
Published: Nov 26, 2013
Length: 7 minutes (1,807 words)

The Making of McKinsey: A Brief History of Management Consulting in America

Duff McDonald | The Firm, Simon & Schuster | 2013 | 12 minutes (3,000 words)

 

The American Century

In 1941 Time Inc. publisher Henry Luce coined the term “American Century” in a Life magazine editorial. He was describing the country’s global economic and political dominance leading up to World War II. But Luce was also correct in the literal sense: The American Century had actually started several decades before.

The building of the railroads and coincident spread of the telegraph in the United States in the middle and second half of the nineteenth century helped create the world’s first truly “mass” markets. If an executive had ambition, his company didn’t have to serve just local customers. It could serve an entire continent and beyond, if it had the wherewithal to get the organization and logistics right.

The economic historian Alfred Chandler documented the momentous changes in what came to be known as the Second Industrial Revolution in his seminal book Scale and Scope—the title of which referred to the simultaneous revolutions in both scale (in manufacture) and scope (in distribution) in American enterprise. Those twin revolutions transformed the United States from an agrarian society to an industrial powerhouse in the span of a single generation. In 1870 the nation accounted for 23 percent of the world’s industrial production. By 1913 that proportion had jumped to 36 percent, exceeding that of Great Britain.

By 1920, when only a third of homes in the country had electricity and only one in five had a flush toilet, the country’s business establishment was embarking on a course of radical, unprecedented expansion. This brought with it a dilemma that has preoccupied business leaders ever since: how to grow big while maintaining control over the enterprise. Moving from a single-product, owner-run enterprise into a complex and large-scale national one is a difficult task. First, you have to build production facilities massive enough to achieve the desired economies of scale. Second, you have to invest in a national marketing and distribution effort to ensure that sales have a chance of matching that scaled-up production. And third, you have to hire, train, and trust people to administer your business. Those people are called managers, and in the first half of the American Century, they were in very short supply.

The benefits to successful first-movers were gigantic. In industries where only one or two companies took the plunge early, they dominated their field for a very long time to come; this group includes well-known names like Heinz, Campbell Soup, and Westinghouse. A ten-year merger mania, from 1895 through 1904, also brought the creation of a number of corporate entities the likes of which the world had never seen—1,800 companies were crunched into 157 megacorporations, including stalwarts like U.S. Steel, American Cotton, National Biscuit, American Tobacco, General Electric, and AT&T.

The key business problem identified during this transition—and one that underwrote McKinsey’s success for several decades—was that a single, central office could no longer adequately administer such far-flung empires. Power had to be ceded to the extremities. The question was how. It was a quandary that beguiled some of the great thinkers of the time, including political scientist Max Weber, who argued that a systematic approach to marshaling resources through bureaucracy was a necessary and profound improvement over pure charismatic leadership.

In his book American Business, 1920–2000: How It Worked, Harvard professor Thomas McCraw pinpointed the issue: “In the running of a company of whatever size, the hardest thing to manage is usually this: the delicate balance between the necessity for centralized control and the equally strong need for employees to have enough autonomy to make maximum contributions to the company and derive satisfaction from their work. To put it another way, the problem is exactly where within the company to lodge the power to make different kinds of decisions.”

Companies such as DuPont, General Motors, and Sears Roebuck were the first to address this problem systematically. According to Chandler, DuPont sent an emissary to four other companies experiencing similar issues—the meatpackers Armour and Wilson and Company, International Harvester, and Westinghouse Electric—to ask what they were doing. And the answers were remarkably similar: The innovators moved from the centralized system to a multidivisional structure with product and geographic breakdowns. The concept left operating division chiefs with total control over everything except funding resources. Top managers took a more universal view of the business, monitoring the divisions and allocating capital accordingly.

The most successful companies of the era, such as General Electric, Standard Oil, and U.S. Steel, all employed some variant of this model. But by and large, they had developed these ideas on their own, a process of trial and error that was costly and time consuming. They would have much preferred hiring outside experts to help them with it, if only such experts existed. This was a huge commercial opportunity that called for an entirely new kind of service.

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Stepping into the Breach

Unwittingly, the federal government did its part to create the modern consulting business. Starting in the last part of the nineteenth century, Washington made periodic regulatory efforts to curb the power of big business, including the 1890 Sherman Antitrust Act, the Federal Trade Commission Act and Clayton Act of 1914, and the Glass-Steagall Act of 1933. The intended effect of these measures was to prevent corporations from colluding with one another to fix prices and otherwise manipulate the markets. The unintended effect, according to historian Christopher McKenna, was to accelerate the creation of an informal—but legal—way of sharing information among oligopolists. Who could do that? Consultants.

Regulatory efforts paid another rich benefit to the likes of McKinsey: Restricted from cutting backroom deals with each other, firms were thus obliged to actually compete, which meant they needed to make their operations more efficient. Here again, consultants were the answer.

But perhaps the circumstance that most aided the creation of the consulting industry was the entry of a new, key player into business itself. Empire builders with names like Carnegie, Duke, Ford, and Rockefeller had built huge, vertically integrated companies, but they had neither the time, the talent, nor the inclination to create and carry out management systems for those entities. These were the conquerors of capitalism, not its administrators. And yet, as Chandler pointed out, “their strategies of expansion, consolidation, and integration demanded structural changes and innovations at all levels of administration.”

Into the breach stepped a new economic actor who was neither capital nor labor: the professional manager. Gradually, he replaced the robber baron as the steward of American business. Alfred P. Sloan, the legendary president of General Motors, was the first nonowner to become truly famous for his managing skills. His decentralized, multidivisional management structure gave GM the agility to outmaneuver the more plodding Ford Motor Company and snatch the industry lead. Ford may have revolutionized manufacturing, but Sloan realized that the car-buying market had become big enough to be segmented into people who bought Buicks, Cadillacs, Chevrolets, Oldsmobiles, and Pontiacs. By the late 1920s, the car market was maturing, and people wanted choice. Sloan also gave them the ability to buy a car on credit—a groundbreaking idea at the time. Before the decade was over, GM had surpassed Ford as the market share leader, a position it didn’t relinquish until the 1980s.

Sloan and his ilk were perfect customers for McKinsey: Lacking the legitimization of actual ownership, professional managers felt great pressure to show they were using cutting-edge practices. And who better to bring those practices to their attention than consultants who were talking to everyone else? This was the beginning of a decades-long separation of ownership from control in corporate America, and the consultant was an able ally to the professional manager in this tug-of-war—an ally who wasn’t gunning for the manager’s job. Thus began the era of managerial capitalism.

For more than two centuries, economists had argued that companies operated in some sense at the mercy of Adam Smith’s “invisible hand” of the market. But the revolution in management thinking in the United States offered up an alternative idea: the “visible hand” of management, which made things happen, as opposed to merely responding to external market forces.

The academy helped move this ideology along. Before 1900, there was only one undergraduate business school in the country, the University of Pennsylvania’s Wharton School of Finance and Economy, founded in 1881 with a $100,000 donation from financier Joseph Wharton. The Tuck School of Business at Dartmouth followed in 1900. Over the next decade, pretty much every major institution started explicitly preparing its students for careers in management.

Although the rise of today’s industrial-farm-style MBA programs is really a postwar phenomenon, Harvard founded its Graduate School of Business Administration in 1908, with a second-year business policy course designed to give the student an integrative approach to addressing business problems, including accounting, operations, and finance. The purpose of the course, according to the school, was to give the student an ability to see those problems from the top management point of view. Much of James McKinsey’s academic writing centered on this very issue and later informed the practice of his firm.

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McKinsey’s Oeuvre

As a young academic, McKinsey was a prolific writer, if not an especially engaging one. His first four books were dry tomes on the nitty-gritty of accounting and taxes: Federal Incomes and Excess Profits Tax Laws (1918), Principles of Accounting (cowritten with A. C. Hodges, 1920), Bookkeeping and Accounting (1921), and Financial Management (1922). But with his fifth effort, he broadened his horizons significantly. Budgetary Control (1922)—the first definitive work on budgeting—turned accounting on its head, promoting it as an essential tool of managerial decision making. “Budgetary control involves the following,” McKinsey wrote. “1. The statement of the plans of all the departments of the business for a certain period of time in the form of estimates. 2. The coordination of these estimates into a well-balanced program for the business as a whole. 3. The preparation of reports showing a comparison between the actual and the estimated performance, and the revision of the original plans when these reports show that such a revision is necessary.”

It seems commonsensical, but McKinsey’s new way of looking at the use of the budgeting process sparked nothing short of a revolution. “No other mechanism of management of similar scope and complexity has ever been introduced so rapidly,” wrote one commentator just ten years later. “It is estimated that 80 percent of budgets installed in industry have been put in since 1922.”

Up to that point, budgeting was a one-way exercise: Accountants added up all of a firm’s expenses and then tossed in a sales projection almost as an afterthought. In McKinsey’s view, companies should start by developing their business plan, figure out how to achieve it, and then estimate the costs of doing so. In this new context, budgeting wasn’t just a ledger activity; it could also be used to identify excellence in performance (i.e., those who outperform their budget), to spot weaknesses (those who underperform), and to take corrective action. “[While] there are many who do not yet plan scientifically … ,” he wrote, “there are few who will deny the merits of the system.”

Two subsequent books fleshed out McKinsey’s ideas: 1924’s Managerial Accounting and Business Administration. The former taught students how accounting data could be used to solve business problems. Using the data of traditional recordkeeping, he suggested the possibility for much greater control over a company’s destiny, including the establishment of standard procedures (how things should be done and to whom information should be reported), financial standards (ways to judge operating efficiency), and operating standards (including nonfinancial measures, such as quality). To today’s business student, this kind of comprehensiveness seems obvious. But at the time, the idea of planning, directing, controlling, and improving decision making by means of regular and rigorous reporting of company results was novel. The latter book contained the seeds of McKinsey’s General Survey Outline—a thirty-page system for understanding a company in its entirety, from finances to organization to competitive positioning. It became part of his consultants’ toolkit sometime in the early 1930s.

It is hard to overestimate the impact of the General Survey Outline (GSO). It served as the foundation of his approach to understanding a company and provided novice consultants with a clear road map to do so themselves. The survey also shaped consultants’ thinking: The emphasis in the GSO was more on whymanagers did things, as opposed to how they did them. Using the GSO, consultants started every engagement by thinking of the outlook for the industry of their client, the place of the client in the industry, the effectiveness of management, the state of its finances, and favorable or unfavorable factors that might affect the future of the firm. No detail was too small to take note of, whether it was a study of all firm policies—including sales,production, purchasing, financial, and personnel—or an analysis of whether the layout of equipment in a company’s plant provided for the most efficient flow of the production operations. By the time the young consultant had completed the survey for his client, he knew the company and its business cold.

“You can see McKinsey’s intellectual development,” says John Neukom, who worked at McKinsey from 1934 to the early 1970s and wrote a brief memoir of his time at the firm. “He had lost interest in the details of accounting. By the time I arrived, he had lost interest in the budgetary procedure and was now excited and interested in analyzing companies and seeing how companies worked. He was clearly diagnosing the total problems of the company.” In a 1925 speech at a conference for financial executives in New York, McKinsey offered the kind of pointed insight for which he is remembered: “Usually, I find that the executive who says he does not believe in an organization chart does not want to prepare one because he does not wish other people to know that he had not yet thought through his organization properly. For the same reason many men are opposed to budgets. They are unwilling for anyone to see how little they have thought about what they are going to do in future periods.”

Armed with that insight—and the general philosophy that management can shape a company’s destiny—he decided to set up shop and sell it.

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Bastards Require No Diplomacy

In the mid-1920s, McKinsey began doing business under the banner of James O. McKinsey and Company, Accountants and Management Engineers, the progenitor of the modern-day McKinsey & Company. Strangely for a company that prides itself on getting the details right, the actual date of its founding is unknown—a firm training manual from 1937 suggests 1924, while John Neukom’s memoir says 1925. Whichever it was, McKinsey’s timing was excellent. The economy was booming, and the need for consulting services was seemingly endless.

It is worth noting that the word “consultant” was not in the name of his firm. Rather, the term “management engineers” reflected the prevailing ethos of the time: that science held the answers to most serious questions, and even human commerce could profit from the rigors of this kind of data-driven analysis. McKinsey’s standard working pads have always been crosshatched graph paper, another nod to engineering. The fact that McKinsey himself employed no actual engineers was beside the point.

Intellectual underpinnings aside, the firm’s real-world roots were in red meat. McKinsey’s first client was Armour & Company, one of the country’s largest meatpackers. The treasurer of Armour had read Budgetary Control and wanted McKinsey to help rethink the meatpacker’s approach to budgeting and planning.

The first partner McKinsey brought on board was A. Tom Kearney, who had been director of research at Swift & Company, another Chicago meatpacker. Kearney was a warmer, more congenial complement to McKinsey’s formal and pointed demeanor. Another early partner was William Hemphill, the same treasurer of Armour who had hired McKinsey in the first place.

McKinsey continued to teach at the University of Chicago for a time, but he eventually switched full-time to the firm. One reason he seems to have juggled so many responsibilities is that he didn’t waste time with niceties at the office. In Hal Higdon’s 1970 history of consulting, The Business Healers, one associate recalled him saying: “I have to be diplomatic with our clients. But I don’t have to be diplomatic with you bastards.”(Marvin Bower later modeled his own approach to constructive criticism after McKinsey’s tough love approach.)

McKinsey was blunt, but he was also a quick and agile thinker. He once diagnosed a client’s problems just by looking at the company’s letterhead. A Midwestern maker of air conditioners had stationery that announced “Industrial Air Conditioning Installations—Coast to Coast from Canada to Mexico.” In an era before salespeople traveled by airline, McKinsey observed that travel expenses were probably eating up the majority of the company’s profits and that employees should confine themselves to a radius of five hundred miles around Chicago. He was right.

Even the Depression couldn’t stop the growth of the firm. By 1930, McKinsey’s professional staff totaled fifteen. In 1931 he drafted the General Survey Outline, and the next year he opened a New York outpost in the offices of a defunct investment house at 52 Wall Street—six offices with a reception area. The New York–based consultants busied themselves working not only for local industrial companies but also for investment banks like Kuhn, Loeb & Co. In 1934, the Chicago office moved to the forty-first floor of the new Field Building on 135 South LaSalle. By the mid-1930s, McKinsey’s partners were charging $100 a day for their services—a giant figure, though nothing compared with the founder himself, who was billing five times that, the highest rate for a consultant in the country.

From The Firm by Duff McDonald. Copyright © 2013 by Duff McDonald. Reprinted by permission of Simon & Schuster, Inc.

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Illustration by Kjell Reigstad

Caught Up in the Cult Wars: Confessions of a New Religious Movement Researcher

Susan J. Palmer | University of Toronto Press | 2001 | 38 minutes (9,328 words)

The below article comes recommended by Longreads contributing editor Julia Wick, and we’d like to thank the author, Susan J. Palmer, for allowing us to share it with the Longreads community.  Read more…

The Monsanto Menace Takes Over

Longreads Pick

“Monsanto’s specialty is killing stuff.” A brief, outraged history of how the biotech giant took control of the world’s food supply, from pesticides to genetically modified crops. The promise was that GM crops would mean cheaper food around the world, but patents allowed the company to muscle out competitors, fend of regulators and steer the public away from questions about the environmental consequences:

“The first crack appeared in 1970, when Congress empowered the USDA to grant exclusive marketing rights to novel strains, with two exceptions: Farmers could replant the seeds if they chose, and patented varieties had to be provided to researchers.

“But that wasn’t enough. Corporations wanted more control, and they got it with a dramatic, landmark Supreme Court decision in 1980, which allowed the patenting of living organisms. The decision was intended to increase research and innovation. But it had the opposite effect, encouraging market concentration.”

Source: City Pages
Published: Jul 24, 2013
Length: 16 minutes (4,011 words)