Creative strategy versus the "O" word

In this episode of The Strategy Maverick: competitive angst in Kohl’s department stores, creativity in competitive strategy, and how to make money.

Kohl’s department stores

Nathaniel Meyersohn wrote in CNN Business that Kohl’s looked pretty good in 2018: “Sales were growing, Kohl’s stock price was booming and new CEO Michelle Gass was earning widespread praise for her creative approach.” Then came March 2022. “The chain’s sales are lower than before the pandemic, despite strong consumer spending and as its rivals enjoy big gains. Activist investors are circling Kohl’s and demanding leadership changes. A sale of the company could be on the horizon.”

If you were on Kohl’s board, would you 1) stay the course or 2) make a change? (As I write in March 2022, Ms. Gass continues to serve as Kohl’s CEO.)

Another retail giant, J.C. Penney, was more than a century old when Brittain Ladd wrote in 2019 that it was in decline. Sales had dropped from $20.2 billion in 2007 to $17.8 billion in 2011. The JCP board wanted a change.

If you were on JCP’s board, would you 1) hire a CEO who promised to stick with the same old same old or 2) bring in someone ready to make changes?

You’d go for change, of course.?After all, there’s a word for expecting different results from the same old same old actions: insanity. (I’ll bet many readers attribute that notion to Albert Einstein. Wrong.) Activist investors at JCP brought in Ron Johnson, previously a superstar at Target and Apple Stores.

Mr. Johnson launched big, creative changes but JCP’s share price continued to fall and Johnson was fired after 16 months. JCP returned to its traditional ways, and its share price continued to fall. It filed for bankruptcy in 2020. Cold comfort: JCP didn’t sink alone. J.Crew, Neiman Marcus, and Stage Stores went down too at about the same time.

Kohl’s and JCP went for creativity. What went wrong?

What is a creative strategy?

Novel is not the same as creative. Segmenting a market by people with even and odd phone numbers would be novel, but it’s silly because there’s no reason to believe that even and odd phone numbers correlate with anything useful. By contrast, there is game-theory brilliance in the venerable, utterly simple “we will not be undersold”. Who cares if it’s novel?

I facilitated a business war game with managers who insisted they sold a commodity product that could not be differentiated. They planned to improve their productivity with proprietary technology, thus reducing their costs and enabling them to sell profitably at a lower price. Competitors didn’t have the technology and so they couldn’t afford to match the lower price, so the company would gain market share. Obviously a fine strategy, to the point that the highly experienced managers wondered why they were having a war game at all.

Then their own people, role-playing competitors, decided they couldn’t afford not to match the lower price.

Shaken, the managers went back to the drawing board. The product was still a commodity, but they figured out — in two hours — how to gain share by differentiating through better service.

It might not sound like earth-shattering creativity, but it was for them and their customers. They just needed two things: a process to get creative and the new boss who called for the war game.

No one is against creativity

No one is against creative competitive strategies. Quite the opposite, in fact. Minda Zetlin, writing in Inc., wrote that a study of 2,506 CEOs (by Bill Adams of Leadership Circle) showed that “the best [leaders] are creative rather than reactive”. “Creative” is a compliment. So why do many smart, educated, well-intentioned, well-incentivized managers, executives, and boards settle instead for one tepid tactic after another?

Maybe Ms. Gass and Mr. Johnson were too creative. Maybe they were not creative enough. I don’t know; I wasn’t in the room at Kohl’s or JCP. I do know that people make up, and passionately defend, plenty of after-the-fact stories. But “too creative or not creative enough” frames the problem too narrowly.

Let’s get creative about what else could explain the rough going at Kohl’s, JCP, and others. For example:

• Unrealistic expectations. Kohl’s revenue increased 23% last year, but it was still below pre-pandemic levels. Exactly how quickly should Kohl’s sales rebound?
• Risk aversion. Creativity means sticking your neck out: “we want you to take risks.” But beware the fine print: “… and we hold you accountable for results.”
• Conflicting goals. Investors want the stock to rise now, employees want secure careers, and customers want goods and deals. Investors are loudest.
• Profit pressure. When profit goes down, the obvious, natural reaction is to tighten budgets, but overtightening can starve a business.
• Ecosystem change. New competitors, substitutes, or technology can change industry dynamics (see Michael Porter’s Five Forces).
• Blurry vision. We have plenty of stories to tell but few tools to assess the potential risks and rewards of creative moves. No, Big Data isn’t the answer. More on that in my podcasts with Harvard Alumni Entrepreneurs and SCIP.

To be creative, beware the “O” word

Cutting costs, avoiding risk, great expectations, etc., can start a death spiral, but the problem is not in cutting costs, avoiding risk, or expecting greatness per se. The problem is in “obvious”. “Obvious” means we don’t have to think. “Obvious” means we don’t think. What is there to think about when the answer is obvious?

When we know the answer, thinking is a waste of time. Time is money, you know.

The most invisible, most insidious problem for creativity is the belief that we are already creative enough.

I’ve run many business war games and created many competitive-strategy simulators over my 45 years in competitive strategy. I’ve seen highly experienced management teams strut in, confident that their answer is obviously correct. I’ve seen them be stunned when they discovered for themselves that their answer was wrong. I know how it feels: I’ve tried, and failed, to predict the results of war games I facilitated and simulations I wrote. It’s a glorious feeling, because I learned.

Thinking is money.

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I’m Mark Chussil, Founder of Advanced Competitive Strategies, Inc. Thank you for reading my newsletter, which I publish roughly approximately every couple of weeks sometimes.

For many posts, links, and videos, see The ACS Strategy and War-Gaming Bibliography.