Learning from Mistakes What makes the study of strategic management so interesti

Question

Learning from Mistakes

What makes the study of strategic management so interesting? For one, struggling firms can become stars, while high flyers can become earthbound very rapidly. As colorfully noted by Arthur Martinez, Sears' former chairman: “Today's peacock is tomorrow's feather duster.” Consider, for example, the change in membership on the prestigious Fortune 500 list of the largest U.S. firms:

• Of the 500 companies that appeared on the first list in 1955, only 62, ranked by revenue, have appeared on the list every year since.

• Some of the most powerful companies on today's list—businesses like Intel, Apple, and Google—grew from nothing to great on the strength of new technologies, bumping venerable old companies off the list.

• Nearly 2,000 companies have appeared on the list since its inception, and most are long gone from it. Just making the list guarantees nothing about your ability to endure.

• Between 2009 and 2013, admittedly more volatile years than most, over one hundred companies—including Bear Stearns, Chrysler, Circuit City, Merrill Lynch, RadioShack, and Tribune—dropped off the 500.

Maintaining competitive success or even surviving over long periods of time is indeed very difficult for companies of any size. As John Donahue, CEO of eBay, notes, “Almost every company has hot moments. But only great companies achieve strong, sustainable performance over time. While it's fun to be hot; it's far more gratifying to create an enduring, sustainable business.”2 Next, we will look at Borders, a firm which after years of success went into a rapid decline that eventually led to its death.

In 1971, Louis and Tom Borders opened their first store in Ann Arbor, Michigan.3 The brothers, while students at the University of Michigan, created a then-revolutionary system to track sales and inventory—and for years executives called it the company's “secret sauce.” With their “Book Inventory System,” Borders could oversee the flow of a huge number of titles broken into thousands of different subject categories across multiple stores. As it grew, Borders provided the knowledge and feel of the independents with its distinctive architecture, comfortable chairs, and reading nooks. In addition, the stores carefully screened and trained employees, paying them relatively well along with a generous set of benefits. It seemed like a winning strategy—and it worked for quite a while. By the 1990s it, along with Barnes and Noble, controlled 40 percent of the retail book market. Borders' financials were impressive: between 2003 and 2005, sales increased 11 percent to nearly $4 billion and net income jumped 23 percent to $132 million. Unfortunately, 2005 was its last profitable year. By 2009 and 2010, Borders was well into the red, losing a combined $293 million. In February 2011 it filed for bankruptcy protection. Attempts at reorganization failed, it soon began its final liquidation of assets, and its last remaining stores closed their doors on September 18, 2011. What went wrong?

Sticking to what you know best can be dangerous. We've all heard the old adage: Focus on your “core competency” and don't get distracted by trends or flashy ideas. Borders became a multibillion dollar business because of its physical retail presence. However, this approach also led to its demise. Borders focused on its retail strategy in the 2000s, expanding aggressively in the United States and internationally—and taking on debt. It strove to improve the in-store experience for shoppers, added cafes, and experimented with new concepts. Such a strategy may have worked a few decades earlier, but while Borders was investing in physical real estate, shoppers were flocking to the Internet. Borders was left with a conflicted strategy: Declining sales forced it to close hundreds of stores (including its entire Waldenbooks chain), while it doubled down on other retail outlets.

Unfortunately, it treated the Internet like a passing trend instead of as a transformational phenomenon. The company outsourced its Web operation to Amazon—which obviously became a fierce rival. It waited until 2008 to develop its own Web strategy. Meanwhile, Amazon became the dominant player in online bookselling and e-books, introducing the Kindle e-reader. Its big brick-and-mortar rival, Barnes & Noble, a laggard itself, later introduced the popular Nook e-reader and invested heavily in its own website. Borders was clearly late to the party—by then it had taken on quite a bit of debt and had little to invest. In essence, it was forced to rely on third-party readers from Sony and Kobo, which made it impossible to distinguish its Web offerings.

During its last eleven years, Borders was led by six different CEOs. None were around long enough to make a lasting change or provide the vision that could maneuver the debt-laden company through a shifting landscape. To the end, it kept a traditional mindset—focusing on rivals with which it was most familiar. As the book industry continued to consolidate, this meant Barnes & Noble. However, discounters like Walmart and Target sell a ton of books—at big discounts—and their prices are usually matched by Amazon. Borders was faced with a dilemma: It could take the losses and match the discounters, or it could justify its higher prices by convincing customers that they'd enjoy a premium experience. Neither worked. As noted by Michael Souers, an analyst at Standard & Poor's: “They over-expanded and built up some debt on their balance sheet. Instead of leading and being innovative, they were certainly a follower.” A concluding note: Amazon continues to outdistance its rivals. Its sales have grown from $25 billion to $57 billion over the last three years. During the same period, Amazon's stock has soared over 100 percent, and its market capitalization stands at an impressive $121 billion as of mid-2013. Jeff Bezos, Amazon's founder and CEO, can boast a net worth of over $23.6 billion. In contrast, Borders is extinct.

Discussion Questions

1. What lessons can we learn from Borders' failure?

2. What was their most critical error? Why?

3. What could Best Buy, a firm now facing a powerful challenge from Amazon, learn from Borders?

Explanation / Answer

1. What lessons can we learn from Borders' failure?

It isn’t enough to keep doing what you are good at. You need to make sure that what you are good at is what the market requires. In Border’s case they kept on doing what they did well but the market was changing. The customers didn’t need what they were selling even though they were the best at it.

2. What was their most critical error? Why?

Not changing according to the times was the biggest mistake. The company didn’t track what the customer wanted and what they were getting in the market. They just blindly kept on doing what they were doing already. That’s never enough. Amazon has the famous quote that it follows religiously – “ your margin is my opportunity”.

3. What could Best Buy, a firm now facing a powerful challenge from Amazon, learn from Borders?

Best Buy has a significant customer base. They know what and how their customers use their products and services. They need to build on that and make sure they are available everywhere the customer wants them to be. They need to match Amazon’s service levels, very difficult to do this, while taking advantage of what they are better than Amazon at doing. They should keep their ear to the ground to keenly track the changes in customer behavior and change their offering to match this.

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