Today’s Chapter is based on the book “J.C. Penney: The Man With A Thousand Partners: An Autobiography of J.C. Penney” by J.C. Penney.
James Cash Penney was an American businessman who founded the J.C. Penney department store chain in 1902 in Kemmerer, Wyoming. Initially named the “Golden Rule” store, his business philosophy centered on treating customers with respect and fairness, which helped him expand to nearly 1,700 stores by the time of his death. Penney’s innovative retail strategies included a cash-and-carry model and profit-sharing for employees, establishing a legacy of ethical business practices and community involvement.
Here’s what I have learned:
Partnership Model
“Show me the incentives, and I’ll show you the outcome.”
— Charlie Munger
As the title of his autobiography suggests, the concept of partnership and mutual benefit was a cornerstone of James Cash Penney’s business philosophy. This idea of shared ownership was inspired from his experience under his previous employers Mr. Callahan and Mr. Johnson. Penney explained that under their supervision, “They were building a partnership chain... After ‘trying him out’ in Longmont, he had sent him to open and manage the new store in Evanston, not as an employee, but as a partner with a share in the ownership of the new store.”
This idea of expanding stores through a partnership model became an important part of JC Penney’s success as a retail store chain. As he once said, “The J.C. Penney Company is not so much a chain of stores as it is a chain of men held together by an idea. Every manager has immediate jurisdiction over the store he operates as a responsible partner. We do not work for one another, we work with one another.”
This shift in business perspective—from focusing on making money to focusing on building people—became one of the defining features of Penney’s leadership style. He believed that by giving managers a financial stake in the stores they ran, they would be more motivated to work hard and make the business a success. This partnership model created a sense of ownership and responsibility among employees, which in turn led to the growth and success of the company.
"I have lived long enough to know that there would be no happiness for me in being known or remembered only as a rich man. The happiest title that was ever bestowed upon me, by which I mean the title that has given me most happiness is: 'The Man with a Thousand Partners.'"
— J.C. Penney
Penney’s partnership model was not just about creating successful stores; it was about creating successful people. By sharing ownership and responsibility, he built a network of managers who were invested in the long-term success of the company. This sense of mutual trust and cooperation was key to the growth of the J.C. Penney Company and became one of the most important lessons Penney shared with the world.
In fact, Penney understood that a business is not merely a collection of individuals working in isolation; it is a network of relationships built on shared goals and mutual support. He explains that “Increasingly the emphasis shifted from money to building the business. Money came to be seen as the by-product of building men as partners in the business of learning to serve the needs of our customers.”
This partnership model works due to the power of incentives that we have learned previously from Les Schwab. As Les Schwab once said, "I never could understand why more business people don't share with their employees. What nicer thing can they do with their profits? You can't take it with you. Naturally you should look out for your family, but you can always come out better for your family if you look out for your employees first."
This approach not only fosters loyalty but it also creates a culture of accountability and motivation. By sharing profits with his employees Schwab cultivates an environment where employees feel valued and recognized for their contributions. This sense of ownership translates into higher productivity and morale, which ultimately benefits the entire organization. As he once said, “I encourage you to share profits with your employees. I encourage you in every way possible to ‘Build People.’ This is good for America, it is good for you, and it is good for your employees.”
“If you make people under you successful, what happens to you? Aren't you also then successful?”
— Les Schwab
Here’s what Charlie Munger once said about the power of incentives during his infamous “Psychology of Human Misjudgment” speech:
“For instance, I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power.
One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. And the system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And, finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.”
— Charlie Munger
Golden Rule
“To the utmost of our ability we have made the Golden Rule our guide toward one another and toward our customers.”
— J.C. Penney
While partnerships were a cornerstone of J.C. Penney’s business, his approach to customer service and integrity was equally important. Penney believed that the relationship between a merchant and a customer was sacred and that a business could only succeed if it served the needs of its customers with honesty and integrity. He embraced the idea that a merchant’s primary responsibility was to act as the representative of the customer in the marketplace.
"There must always be this mutuality of interest between the merchant and the people who buy goods at his store. The first obligation of the retail merchant is to act as the representative of his customers in the markets of the world. It is his business to get the supplies his customers want in the most direct, the swiftest, and most economical line from the reservoirs of modern industrial production into the homes of his people."
— J.C. Penney
Penney’s commitment to customer service went beyond just selling products; it was about ensuring that customers received the best possible value for their money. He believed that a successful business was built on trust and that customers would return if they felt they were being treated fairly and honestly. This philosophy became the foundation of the J.C. Penney Company, as Penney once said, “There are few things I enjoy more than making a good sale, but the second sale to the same customer gives me a thousand times more satisfaction.”
As a matter of fact, Penney realized that the relationship between seller and buyer is reciprocal, hence why he first named his store “The Golden Rule”, based on the famous saying “Do unto others as you would have them do unto you.” As such, Penney understood that every interaction with customers is an opportunity to build lasting relationships rather than merely making sales. As such, he was dedicated to serve customers beyond the normal transactional relationship; he sought to understand their needs deeply. By prioritising customer insights over mere profit margins, Penney established J.C. Penney stores as trusted destinations for shoppers.
“To be the servant of those people who were my friends and my neighbors, to be their representative in the wholesale markets, to prosper as a by-product of enriching them—was not that a thing to live for?”
— J.C. Penney
For J.C. Penney, the Golden Rule became more than just a slogan; it was a guiding principle that informed every aspect of his business, from customer interactions to employee relations. As he once said, “[The Golden Rule Store] was more than a trade name for me. It became a rule to take to heart and to live by.” Penney understood that ethical behavior was not just morally right, but also good for business in the long run.
This is eerily similar to Isadore Sharp’s approach to business when building Four Seasons, particularly in the way he treated his employees. As we have previously learned, Sharp believed in the Golden Rule which states that one should treat others as they would like to be treated. He believed that treating employees well was the key to providing exceptional customer service, and therefore, he made it a priority for senior managers at Four Seasons to ensure that their employees were well-treated.
As a matter of fact, Sharp once told his general managers that “Our customer-front line relationship is crucial. Customers seldom see or talk to you. They interact almost solely with our front line, three to seven junior employees. If that contact disappoints the customers we want as lifetime patrons, they become ex-patrons. But when our employees remember them, greet them, know what they want and provide it quickly, they create a loyal customer whose referrals and long-term repeat business can often run well into six figures. That’s a cycle of success, dependent entirely on junior employees. “That’s going to be your managerial challenge: reaching our goal of being the best, down to the bottom of our pyramid—motivating our lowest-paid people to act on their own, to see themselves, not as routine functionaries, but as company facilitators creating our customer base.”
“Our competitive edge is service,” we told our new managers, “service delivered by frontline employees we expect you to develop.” This was a process, beginning with a goal. It was not one of the usual goals of management: increased sales, market share, profit, or growth, not even a goal of service quality. Our goal was to add continuously to the value customers put on our service, nothing else. “That means,” I emphasized in talking to our managers, “that your success depends upon the success of your employees. So your number-one priority can’t be what you as managers want. Your priority has to be, as far as possible, an environment and a structure that gives your employees what they want. “Your role, then, will be a leader, not a boss. Your job will be to bring out the best in all individuals and weld them into a winning team.”
— Isadore Sharp
Innovation
“Innovate or die, and there's no innovation if you operate out of fear of the new or untested.”
— Robert Iger
J.C. Penney was a man who understood the importance of innovation and experimentation in business. He realized early on that in order to stay competitive, his company would need to constantly evolve and adapt to changing market conditions. This willingness to experiment and try new things was another key factor in the success of the J.C. Penney Company.
Penney was never afraid to take risks, but he was also quick to abandon ideas that weren’t working. He once said, "It was a rule with me never to be bullheaded about a theory that didn’t work. The proof of a theory is in the carry-through. I never hesitated to break away from any scheme once it became clear that it was not effective."
This pragmatic approach to business allowed Penney to continuously improve and refine his business model. He saw innovation as a process of trial and error, and he encouraged his managers to take the same experimental approach in running their stores. Whether it was centralized buying or creating a network of warehouses to supply his stores more efficiently, Penney was always looking for ways to improve the way his business operated.
"The difference between science and accident or luck, is to know that trial-and-error is a process, to keep it under control, to give it direction toward a definite objective, and by untiring work to carry it through until that objective is attained."
— J.C. Penney
Penney’s focus on innovation was not just about improving efficiency; it was also about staying ahead of the competition. He understood that in order to remain successful, his company needed to be constantly searching for new ways to do business.
Penney once said that "I had learned that the vitality of a business depends upon the determination to find better ways of doing business through experiment. I had opened more stores than any of my associates, as was inevitable simply as a matter of time; I commanded more ready capital; I was not afraid to experiment. Indeed, I had come to feel that it was a part of my duty to search for and try out new ways of strengthening and developing the organization."
This spirit of innovation was one of the reasons the J.C. Penney Company was able to grow from a single store to a nationwide chain. This is especially true considering the fact that retail is an extremely competitive market with many competitors. Another entrepreneur who succeeded in retail through constant innovation and experimentation is Sol Price.
As a matter of fact, as we have seen previously, Sol Price is considered a legend in retailing due to his various innovations such as the Price Club’s wholesale concept that various entrepreneurs or existing retailers tried to copy. When asked about how he felt being the father of an industry, Price famously replied with “I should have worn a condom.”
Firstly, Price is known for the concept of “intelligent loss of sales”. As a matter of fact, he demonstrated that it was possible to do more sales with fewer merchandise items. While, at the time, it was conventional wisdom in retailing to stock as many items as possible, the “intelligent loss of sales” theory was based on the idea that customer demand is more sensitive to price and not selection.
Here’s how Sol’s son Robert Price explains the concept of the “intelligent loss of sales”:
“Sol's classic example at FedMart was 3-in-One Oil. The manufacturer produced the oil in three sizes. Most stores carried all three sizes of 3-in-One Oil even though the large 8-ounce size was a better value per ounce than the smaller sizes. FedMart carried just the 8-ounce size and did far more business with the one larger size than would have been possible with the three sizes combined. The explanation is that most people who need 3-in-One Oil will buy the 8-ounce size if that is all there is on the shelf.”
— Robert Price
Secondly, Price is well known for creating the Price Club concept which was conceived as a wholesale business selling merchandise to small, independent businesses. The idea was for business owners to “come to a large warehouse, select the products from steel rack displays, pay either by check or cash, and take the products back to their stores, restaurants, or offices.“
The major advantage to purchase at Price Club was obviously because the prices would be much more lower than traditional wholesalers who often offered extra services such as order taking and delivery. In Price’s mind, these extra convenient services would be offset by the fact that Price Club’s warehouse “would also serve as a storage facility for the various business owners so they would not have to buy and store large quantities of merchandise at their stores or offices.” This would be extremely helpful for small businesses to compete with the larger discount stores.
“By reducing merchandise acquisition costs for retailers and other businesses, everyone would win. Small businesses would pay less for their wholesale goods and supplies, retailers could charge lower prices—in turn improving their ability to compete against chain stores, especially the growing number of discount stores that were under-pricing small businesses.”
— Robert Price
Furthermore, Price Club also implemented a $25 membership fee that was used as an incentive for the member to purchase more in order to leverage the membership fee as a percent of purchases. Also, Robert Price mentions that the membership concept “helped reduce operating expenses for the business because the membership psychologically tied the member to Price Club and eliminated the need to advertise.”
Finally, Price Club were also one of the first companies to start in-store food sampling. In fact, it was initially used as a way to educate members about new in-store food products. While, some members of Price Club took advantage of this and would eat samples as a free lunch, it is clear that sampling increased sales both because members liked the products, and because of the psychology behind the “reciprocity rule”, the subconscious desire to reciprocate when receiving something for free.
To conclude, it is fair to say that J.C. Penney, just like Sol Price, succeeded in building an incredible retail stores chain due to his innovate ideas. In Penney’s case, he succeeded through ideas such as the concept of partnership and the theory of implementing a “Golden Rule” between the company and its customers.
Beyond the Book
Read "James Cash Penney and the Golden Rule" by Farnam Street
Read "The Power of Incentives: The Hidden Forces That Shape Behavior" by Farnam Street
Read "The Psychology of Human Misjudgment" by Charlie Munger
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