Going Out of Business (photo by Michael Clarke)

Much has been written about Borders in the last week since they announced their decision to liquidate, putting 10,700 people out of work and shuttering their remaining 399 stores.

The best analysis I’ve seen so far is from Annie Lowrey in Slate. While acknowledging the difficulties of running a bookstore in the current environment, Lowrey correctly puts the blame for the liquidation squarely where it belongs: Borders’ management.

Lowrey’s article is in response to the following statement from Borders Group President Mike Edwards:

We were all working hard towards a different outcome, but the headwinds we have been facing for quite some time, including the rapidly changing book industry, eReader revolution, and turbulent economy, have brought us to where we are now.

To be sure, the book business is in a challenging transition at the moment, with a global economic recession to boot. It’s not an easy time to run a chain bookstore. But to blame the market and e-readers for Borders’ demise is akin to blaming the rain, as opposed to the carpenter, for your leaky roof. Borders demise can, in fact, be traced to a small number of very bad decisions by its management:

  1. Outsourcing its online booksales to Amazon from 2000-08
  2. Failure to enter the e-book market fast enough
  3. Betting on the physical distribution (e.g., CDs) of music precisely as the music industry was switching to online distribution
  4. Overinvesting in physical stores with poor sales

In short, Borders’ failure can be attributed to fundamentally not understanding the digital marketplace and even more fundamentally to an inability to change its business strategy to fit an evolving environment.

To criticize Borders for outsourcing its online book sales to Amazon in 2000 (for eight years, mind you) is not a case of 20/20 hindsight. In 2000, it was obvious to anyone even remotely paying attention that book sales would increasingly be made online. (By 2000, scholarly and professional publishing had almost entirely made the shift not just to online sales but to actually distributing its most valuable content online.) Furthermore, it was obvious that online sales would, to an increasing extent, cannibalize sales at retail stores. So why would Borders choose to hand over their most important growth channel to a competitor?

Borders’ explanation at the time was that it sought to cut costs by eliminating its online store and focusing its technology investment in its in-store kiosks – in other words, a head-in-the-sand strategy that cut costs exactly when it should have been investing and taking what investment it was making and focusing it on its existing business strategy — which was already at that point clearly in trouble — rather than on capturing a new growth channel. There are times when efficiency rules the day and the company that can reduce its costs the furthest will be the most successful. Such a time was not 2000-08, when sales of books via online stores was growing by leaps and bounds.

Borders’ demise is first and foremost the result of their management’s inability to adapt to change – to identify market trends and to react in a meaningful way to those trends. While this is an extreme example, it provides lessons for any organization operating in a fast-paced, rapidly changing market.

Scholarly and professional publishers rapidly adopted to the web – arguably, the STM industry was among the very first market segments to move online en masse in the mid 1990s. That move was largely successful because of the professional audience, nearly all of whom were regular computer users with high speed data connections, and because of the portability of business models. Site licensing in particular allowed institutional users unfettered access without having to write a check for online information (a obstacle the consumer market has grappled with for over decade). And professional societies gained a powerful member benefit, with the payment mechanism the same as before — member dues.

As institutional budgets come under increasing pressure and print revenues continue their long decline, scholarly and professional publishers have reached an inflection point. New revenue growth will not come from traditional sources: journal licensing, membership dues, print advertising. These revenue sources will at best remain flat for the foreseeable future.

So where will growth come from?

A good quote comes from Jason Kilar, chief executive of Hulu:

History has shown that incumbents tend to fight trends that challenge established ways and, in the process, lose focus on what matters most: customers.

This holds true in STM and scholarly publishing as much as in other sectors. Growth will come from focusing on user-centric applications that meet real and immediate professional needs. Such products will be purchased by libraries (must-have applications, as defined by patron needs, will continue to be supported and truly exceptional applications will find growth opportunities to the detriment of less mission-critical resources), departments, and individuals. Such products will only succeed if they are driven by a fanatical dedication to the end-user’s needs. Successful growth strategies will focus on cultivating audiences, and addressing their professional information needs, across an evolving array of information formats. Those strategies that narrowly focus on particular information formats and organizational silos are likely to see slower growth and eventual decline.

Just don’t blame the rain.

Michael Clarke

Michael Clarke

Michael Clarke is President at Clarke & Company, a boutique consulting firm focusing on professional publishing and working at the intersection of content, technology, and business.

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Discussion

3 Thoughts on "Post-Mortem of a Book Empire — Borders, and the Mismanagement of the Future"

Borders also didn’t understand or value their mall division. When the two companies were brought together by Kmart, Waldens was the biggest bookseller in the nation with 1200 locations. But the key was Waldens had over 3-million “Preferred Readers” signed up that were loyal to them. These were readers in Romance, Mystery and Sci-Fi. The categories that would have made a great online (and now ebook) play.

Borders actually had their own online store before 2000 for about a year. I was shocked when they switched it over to Amazon. Seemed like such a stupid move even back then.

The problem is more basic than even as depicted here. I wrote the following reply in response to the e-mail message from Mike Edwards:

“It is indeed sad to see Borders depart from the scene, but have to say, as a former university press director, the blame is not all on external forces. The press I headed stopped doing business with Borders years ago, for reasons that are nicely summer up by our warehouse and order-fulfillment manager:

1. Price discrepancies. They would never update their database with
price changes and then would deduct the difference on their check when
we billed the correct price on the invoice. It got to the point where
we needed to send the order back to them to confirm the prices before
we generated an invoice.

2. Chargebacks — the biggest headache of all! When they would
return books they would be A) the incorrect books or B) damaged due to
poor packing. When we created a credit memo, we deducted the amounts
for the discrepancies, however, they would deduct the full amount of
the return on their payment to us. Of course, the amount of the
credit memo and the amount they deducted were different so we would
spend hours trying to reconcile the differences. Very few times did
they ever re-pay these amounts.

3. Poor customer service — never responded to our inquiries.

4. Always trying to leverage better discounts that were not
consistent within the industry (of course, this is against the law).

If you can’t serve your customers better than this, maybe you shouldn’t be in the business anyway.”

Not surprisingly, I didn’t get an answer back!

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