Monday Mornings with Madison

BUSINESS LESSONS LEARNED FROM BORDERS

In September, 2006 (just five years ago), Borders – a 40-year-old company — was profitable and growing.  It was the number two book retailer in the U.S., selling cheap books at discount prices.  Borders’ competitive advantage in its heyday was that it stocked tens of thousands of titles in a single store when most independent bookstores could ill afford to stock a fraction of that.  Borders also had a superior inventory system that could optimize, and even predict, what books consumers nationwide were likely to buy.  Beyond the U.S., the Borders empire had grown to over 1,250 stores globally including the U.K., Ireland, Australia, New Zealand, Dubai, Oman and Malaysia.  

Yet, in the span of five short (but acutely painful) years, Borders went from behemoth to bankruptcy. Over 10,700 people lost their jobs.  How did that happen?  Was Borders just another casualty of the global economic meltdown?  While the economic downturn certainly hastened Borders’ demise, it was not the primary cause of death.  Other book store chains are doing well despite the economy.  Big box giants such as Walmart and Target have entered the book-sales space. This indicates the book-selling business is alive and well despite the economy.

Borders’ tragic demise is not a mystery.  Knowing why the company failed may not help former Borders employees, but perhaps some good can come from understanding what went wrong.  Lessons learned from Borders situation might keep other business owners, managers and entrepreneurs from making the same mistakes.  This post-mortem is done with the admission that hindsight is 20/20 and it’s easier to see the forest when not among the trees.

Borders was slow to innovate.

Borders’ biggest failing seems to have been the company’s inability or unwillingness to swiftly embrace the new digital world.  This failure was a double-whammy.  They waited too long to establish their Internet presence and also waited too long to embrace e-books.

From the start, Borders failed to develop a strong, distinct Internet presence.  Rather than go through the (difficult) learning curve of creating an e-commerce enterprise that would emerge as a strong complement to their stores, connect them to customers on the web, and build their online customer loyalty, Borders partnered with Amazon.com to sell books online.  In 2001, Amazon was a fledgling Internet upstart that used their partnership with Borders to control them and to create their own customer relationships.  Big mistake.  Borders gave up control, and eventually it was Amazon who developed its distinct electronic client base with Borders’ customers.  Borders didn’t establish its own e-commerce site until 2009.  It is hard to know why they took this passive stand.  Short-sightedness?  Laziness?  Complacency?  Steve Jobs, founder of Apple, once said “Sometimes when you innovate, you make mistakes. It is best to admit them quickly, and get on with improving your other innovations.”  It took Borders eight years to recognize this huge mistake.

Second, as e-books emerged on the market, Borders was extremely slow to recognize the opportunities tied to the development of a proprietary e-reader.  As Jason Jennings and Laurence Haughton put it in their book aptly titled “it’s not the BIG that eat the SMALL… it’s the FAST that eat the SLOW, “… quick thinking and fast action has replaced size as a competitive advantage.”  Amazon’s Kindle entered the market in 2007.  Barnes and Noble’s Nook premiered two years later in 2009.  Borders’ Kobo did not premiere until nearly the fourth quarter of 2010… about ten months before the company filed for bankruptcy protection.

Lessons: 

  1. Be nimble.
  2. Innovate early.  If you make mistakes, recognize them quickly and make corrections.
  3. Beware with whom you partner.  Your partner may eat your lunch.

Borders made poor marketing decisions.

It’s possible that Borders sluggishness may have been just a symptom of a bigger problem… a fundamental uncertainty about direction.  In the last decade, the book-selling business has changed and Borders seemed unsure of when, if or how to change with it.  Betting on Amazon was the equivalent of handing the keys to the shop to its biggest rival/threat.  Not foreseeing the rising demand of e-books was another huge miscalculation.  

There’s more.  Borders also made another serious marketing mistake when it invested heavily in the CD/DVD market just when that industry went digital.  In 2006, Borders generated $600 million in CD and DVD sales, which was 17% of its revenue.  As Borders invested more into music sales, Barnes & Noble saw the writing on the wall and went in the opposite direction.  The ability for people to download music and movies, and the advent of iTunes and Netflix made CD and DVD sales in bookstores obsolete.  By 2009, CD and DVD sales for Borders had fallen 28%.

Lesson: 
When making big changes to strategy, invest in market research to determine the best course of action. 

Borders changed people rather than approach.

When Borders started losing money, which it did every year after 2006 until it filed for bankruptcy in July, 2011, the company changed its leadership and management, not just its strategy and vision.  In a few short years, Borders made big corporate staff changes.

Firings began in January 2009 shortly after Borders saw 2008 holiday sales drop 11.7%. First to go was CEO George Jones.  Jones made about $4.6 million in salary, stock awards and severance pay during his last year at the helm of Borders, even though the company lost money that year and the year prior.  Jones was replaced by Wildridge Capital Management founder Ron Marshall as President and CEO. The company cited Marshall’s work in helping “drive a turnaround of $4 billion supermarket retailer Pathmark Stores Inc” as the reason he was hired.  As new CEO, Marshall received an employee inducement award and other incentives amounting to 2 million shares in stock options.  Marshall had no experience with book sales, e-commerce or technology.

Next, Mark Bierley was hired to replace 15-year Borders veteran Ed Wilhelm as CFO.  Borders also replaced its Chairman of the Board.  At that point, they fired Amazon and launched their own e-commerce website.  With no time to ramp up, Borders’ new leadership was forced to develop a completely new online vision and strategy.   Within six months, Borders also replaced over half of its Board of Directors.  Throughout 2009, Marshall proceeded to push out many other seasoned executives, many of whom had been with Borders for decades.  At the end of that tumultuous year, Borders’ 2009 holiday sales declined 14.7% over the previous year.  In January, 2010, Marshall resigned.  Another new CEO was appointed.  The ongoing turnover in leadership made the company seem shaky.  Such conditions certainly eroded investor confidence and repelled top talent.  Borders stock fell to below $1 per share. 

Lessons:

  1. Before changing leadership, assess if what needs to change is strategy or staff.  High turnover repels top talent and causes instability.
  2. When replacing leaders, ensure that the people hired know more about the business than the people fired.

Borders fundamentally failed to understand what its customers wanted.

The marketing and management decisions Borders made in the last 10 years reflects a fundamental ignorance of their customers’ needs or how to deliver value.  When Borders had to go head-to-head against big box giants Walmart and Target, it could not compete on price.  They also could not go head-to-head against Amazon who offered more titles online than Borders could ever hope to in any mega-store.  Having lost their competitive advantages, Borders need to find what their customers needed and what could set them apart – such as staff expertise about books, a comfortable book-shopping experience or the ability to provide specialty books for specific audiences.  They could not envision that customers might actually go to the store to browse and then go online to purchase.  A fundamental disconnect from their customers was Borders’ biggest mistake.

Lesson:
Remember the cardinal rule of business… know thy customer and continually find new ways to meet their needs.

Quote of the Week

“If you foul up, correct it fast. Delay only compounds mistakes.” Donald Rumsfeld

© 2011, Written by Keren Peters-Atkinson, CMO, Madison Commercial Real Estate Services. All rights reserved.

1 Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

WordPress Appliance - Powered by TurnKey Linux