Borders, Losing its Edge

The book store Borders and been closing its doors in many locations. Borders the once great bookstore thrived on the experience that it gave its customers, but the experience isn’t enough anymore. Besides the experience, Borders prided itself on its enormous inventory of books. Because of the collection of books, the bookstore needed large stores which incur huge overhead costs.

Borders has been making some bad investments in media and technology. It invested heavily in CDs, DVDs and stationary when the world was moving towards MP3s, Blurays, and electronic communication. Borders was also a late bloomer getting into the online book sales which has been hard to make up. In hindsight, the right choices are quite obvious.

With many of its locations closing, smaller ma and pa bookstores are supplying the demand for books now. Although this is quite unusual, experts believe that it is normal for the book industry.

In what situation do you think we would see the dissolution of Walmart? Armageddon?


Dr. Tufte said...

-1 on Locke for an uninformative link.

There's a deep point here (and I do a better job of covering this in my face-to-face classes — sorry about that).

Don't think of Borders (or any other retailer). Instead, think of it as a bunch of product lines each with its own market. Borders has some ability market power and ability to mark-up in each product line.

Many retailers — book stores, movie stores, music stores, hardware stores — make most of their profit from a few product lines. In this view, their overall viability is a lot more tenuous.

And how they address this isn't much better. The common strategies are: 1) stock a lot of inventory (of product lines that are already at zero economic profits), 2) stock a lot of complements (that are already at zero economic profits), and 3) try to bundle positive profit lines with the zero profit lines.

Casual observers tend to regard numbers 1 and 2 as strengths. They probably aren't. Number 3 can be a strength, but what competitors do is try to unravel your bundles ... and there goes your business model.

From this perspective, Wal-Mart is not that sensitive to the factors Locke notes. Wal-Mart is looking to make a little profit on many different product lines: this makes them much more operationally diversified than Borders.

Papa Smurf said...

In my opinion one of the most damaging things that Borders has done is not embrace the new technologies and trends that arose. It takes far too long to catch up on the technology when it is not embraced from the get go. The pace of which people run their lives is extremely fast, and the new technologies are a way to not slow down the consumers. One of the other severe problems that Borders has faced is that they are not diversified. I really like the Wal-Mart example used by Dr. Tufte. Two keys to success in almost any business are to embrace technology and to diversify products.

Dr. Tufte said...


Isn't the whole point of Borders that it wasn't diversified?

I think we tend to think of diversification as a management action, rather than as the product itself.

From a financial perspective, diversification is not something that managers should do. To me, this means they some or all of them may do it because they're dumb, but also that some or all of them may do it because that's what consumers want to buy.

So I wonder if Papa Smurf's view is really that Borders' problem was that it was ... Borders. I'm not saying this is wrong, but it surely is going down a different path than most pundits take.

Miz Ava said...

On February 16, 2011 Borders filed for Chapter 11 bankruptcy. In part I agree with Locke that Borders made a mistake by choosing outdated products, but I think Borders lost a much greater opportunity to meet demand by selling its e-commerce to Amazon.com in 2001. Borders was not able to compete in the boom of online sales. I argue that the long-term effects of selling the e-commerce rights had a greater negative effect on Borders' profitability than the large overhead costs. I do not consider Borders and Walmart comparable as the two companies have different target markets. I do not agree that the ma and pa bookstores have replaced the demand for books. The demand for books has shifted to a demand for e-books. This demand is supplied through Barnes & Noble and Amazon.com.

Dave Tufte said...


So are you claiming that Barnes & Noble and Amazon are in a market with positive economic profits that Borders couldn't get back into? This seems unlikely.

Alternatively, if that market does have positive economic profits, if Borders sold its share of that, shouldn't they have gotten a positive present value from that stream of future profits? If so, where'd the money go?

I'm not sure I'm right about any of this, but this is exactly the line of thinking you need to be pursuing in an MBA class.

Dave Tufte said...

Miz Ava: 50/50 (sorry ... I wrote the commenta few weeks back but included no score).