Yahoo Finance published an article today from Investopedia by Mark Riddix titled “Business on the brink: Change or fail?”  Of the five companies profiled, the only one that evokes a twinge of sadness for me is Borders Books (the others are Blockbuster, Rite-Aid, Palm, and trucking company YRC).

When I was an undergraduate at the University of Michigan, the original Borders (in a single location) was the bookstore that professors of English literature seemed to favor.  Borders was like any other independent college bookstore–perhaps a little more quaint than Follet’s or Ulrich’s–the main competitors at the time (Ulrich’s is still in business at the same location at the corner of East and South University, opposite the “engine arch”).  So, how did Borders make the quantum leap from a fairly sleepy and small repository to a big national chain, and from there to the edge of bankruptcy?

About a year after Borders opened its first store in Rochester, New York, the local chapter of the American Marketing Association gave the company its “marketer of the year” award.  Borders’ vice president of marketing came out to receive the award, and in his acceptance talk, told the audience the story of Borders’ success.  The company’s growth came out of a technological innovation–a computerized inventory system that gave Borders the ability to carry many more titles than the typical bricks and mortal bookseller, although that was not the original goal of the system.  As I recall the story, the owner of Borders asked his brother, who happened to be a computer geek, to write a program for inventory management, and this new capability was a sort of unintended consequence.  I also recall that, before realizing the potential of this capability, Borders thought about selling the software to other independent booksellers.  That would have been a much smaller business than Borders became.

In effect, this system allowed Borders to become the first “long tail” bookseller by reducing the costs of going deeper into each book category so that Borders could afford to make less popular titles available to customers.  And Borders’ stores were great places to hang out and browse and consult a staff comprised of “people who love to read.”

It would be easy to place the blame for Borders’ troubles solely on Amazon.com.  There’s no denying that Amazon has some key competitive advantages (not least of which has been an ability to avoid having to add sales tax to its prices in many states).  But online shopping is not a perfect substitute for the bricks and mortar retail experience.  Amazon has made steady progress in closing the gap.  The “look inside” feature was a great addition, and the recommendations help to make up for not having a shelf of different titles to browse through, but there are times when you just want to pick up and hold a book in the store.

I see signs when I shop at Borders that the company has cut back a bit on the “brand promise” in selection, staffing, and service.  There are still great things about Borders, and I like being able to order a book online and pick it up in the store, thus not incurring shipping charges but I’ve come to prefer the browsing experience at my local Barnes and Noble store.

Ultimately, companies face bankruptcy when they have too much debt coming due relative to cash flow.  How they get to that point varies, but for bricks and mortar retailers being too aggressive in expanding the number of locations is a common route.  Borders had some other missteps along the way, including a period of ownership by K-Mart and major stumbles when it first tried to sell books online.

Of the five companies Riddix lists, three–Borders, Blockbuster and Palm–are victims in part of shifting consumer demand and new business models (Netflix and Redbox in the case of Blockbuster and Blackberry and a myriad of smart phones and services for Palm).  The Blockbuster type of video rental business is pretty much obsolete, and Palm was eclipsed by competing operating systems such as Blackberry and Windows mobile that were easy to use and gave people the functions they most wanted.  But I think there’s a future for the bricks and mortar bookstore.  I hope Borders manages to stay afloat long enough to re-invent itself.

I think the lesson to be learned from Borders–and from many other failed or failing companies–is that you must relentlessly examine your business model, your value proposition, and your core assumptions about what consumers want.  In my experience, one reason that demand shifts to new business models is that firms don’t really know what outcomes their customers are trying to achieve when they purchase their products or services.  That opens the door for someone else to come in and do a better job of enabling those outcomes.

Copyright 2010 by David G. Bakken.  All rights reserved.

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