Executive Summary

The company that we have chosen for our research is Borders Group Inc. The research question relating to the topic extracted from the textbook (Lynch, 2012), “Analyzing the External Environment of a Firm” is “The failure of Borders to perform effective External / Environmental Analysis”. We chose this topic for our discussion because we believe that analyzing the competitive environment is important and in strategy management, the environment basically means the outside forces that impact the people outside the organization, including competitors, customers, suppliers and other influential institutions such as local and national government. Environmental analysis is therefore crucial to a company and may even affect its going concern, just as in the case of Borders.

The aim of this assignment is to look at the strategic issues faced by Borders and perform a Strategic Analysis comprising three Strategic Tools (SWOT, PESTLE and Porter’s Five Forces) by conducting secondary research by utilizing the Internet and even library books. Thus, our in- depth research about the strategic issues of Borders has helped us come up with appropriate solutions that could have helped Borders understand and adapt to the changes in the External Environment to remain competitive. As such, we would be covering the Five Ws and One H technique to assist in finding the core problems and solutions of the ineffective strategies which caused the downfall of Borders Group Inc.

As it is important to study the environment surrounding the organization to gain not just a competitive advantage but Sustainable Competitive Advantage, an organization must be able to learn from its mistakes in the past and move forward. As such, we will also look into the lessons learned from the mistakes made by Borders in failing to analyze its External Environment promptly and accurately.

1 | P a g e 1.0 Introduction : Borders Group Inc

Borders Group Inc was founded in the early 1970s by Tom and Louis Borders, University of Michigan graduates who developed an inventory tracking system that, by the standards of the time, was as sophisticated as computers allowed (Osnos, 2011). An early innovator in controlling inventory, there was expert staff at its Ann Arbor headquarters and store managers who believed in the value of book-selling. At its peak, Borders superstores had all the attributes of good book- selling whereby it had extensive selections, browsing space, coffee bars, and outreach programs to surrounding communities.

The Borders brothers decided not to stay in the book business, and in 1991 sold the small chain and inventory systems to Kmart for $125 million. In retrospect, that was when the trouble began. Kmart already owned Walden mall stores, which were an awkward commercial fit with the Borders culture. Kmart itself was at the start of a downward spiral, and in 1995 Borders was spun off in an IPO (Bosmon & Michael, 2011). Under the leadership of Leonard Riggio, Barnes & Noble (B&N; a big competitor to Borders) was expanding too, and the competition seemed tight. Then came along Amazon.com to sell books online.

The external environment at that point of time was influenced by globalization. The Internet made it possible for companies to expand without even opening a physical store. Book enthusiasts switched to eBooks and tablets were on the rise. It was also in the mid 1990s that Amazon launched as an online book retailer (The Conversation, 2011). B&N was quick enough to respond to the changes in the external environment, but guess what Borders did instead? Instead of beginning to develop its own initiatives on the Internet, Borders went international, building a substantial chain in the United Kingdom and opening physical stores as far away as Singapore. Borders closed an eye on the external environment.

In this research, we will look into the various strategic mistakes made by Borders that caused it to always be a step behind where they needed to be. The company listed $1.29 billion in debt and $1.27 billion in assets in a filing in United States Bankruptcy Court in Manhattan. The Group is now non-existent.

2 | P a g e 2.0 Strategic Issues : 5W Analysis of Border’s Strategic Mistakes

2.1 Strategic Issue 1 : Negligence of Digital Technology and Poor Management

During the period of mid-1990s (when), the book industry was transcending to the digital age. E-books were becoming popular compared to paper books. Extracting one of the PESTEL’s checklists, Borders failed to analyze its Technological future in the speed of change and adoption of new technology in its business plan strategies. Instead of adapting to the market’s changing needs, it opted to neglect e-books completely, and thus, running away from the current wave (what). The Amazon Kindle came out in November 2007. Barnes & Noble (B&N), its long- standing competitor, debuted its latest e-book system, known as ‘Nook’, which was sold in Walmart and Best Buy. Apple's iPad came out as a direct result of the increase in popularity of e- books (Lowrey, 2011). Other companies adapted to market changes. Borders just did not adapt and this was a very big problem that affected its going concern.

But where did this problem take place? It started off in the UK and due to globalization, this problem became widespread. Borders was now losing money from all over the world when B&N was diversifying its source of revenue without even opening stores overseas.

The top management’s (who) environmental scanning was poor because they failed to discover the changes in the external environment clearly. This similar mistake was done by the famous Nokia. Nokia, was at heart, a hardware company rather than a software company. Its engineers were experts at building physical devices, but not the programs that make those devices work. In the end, Nokia profoundly underestimated the importance of software to the new age customers, including the apps that run on smartphones. Instead of catering to the needs of modern day smartphone users, the top management of Nokia continued to market its phones based on superior hardware designs without even implementing good software. It basically gave the market a product Nokia thought is best for them, instead of giving the market what they want (Gregory, 2011). Just like Nokia, Borders ran away from the current market trend.

Why was this a problem? Pushing a product to a market (selling physical books) instead of giving the market what it wants (eBooks) will cause customers to be frustrated and as such, loyal customers will look for another company that can meet their needs. This strategic mistake

3 | P a g e by Borders caused it to lose its customer loyalty which is crucial for a market leader. At that moment, all of its competitors had already tried to make a change for their business strategies in order to follow the rise of the new era. The competitors such as B&N, Walmart, Costco, and other stronger retailers reset their outlook by launching their own online bookstores. Realizing that Borders was going the wrong direction, B&N quickly took advantage of this strategic mistake and launched www.Barnesandnoble.com within two years.

The top management of Borders was unable to identify and understand digital trends (what). In fact, the top management of Borders was unable to use effective strategies to adapt to the fresh web-based environment. They mistook the popularity of technology by venturing into the sale of CDs and DVDs, a total strategic catastrophe! Peter Wahlstrom, an investment researcher stated that Borders’ strategy showed that Borders was “handing the keys over to a direct competitor" and was making “mistakes after mistakes” (Noguchi, 2011).

2. 2 Strategic Issue 2 : Outsourcing Online Sales to Competitor, Amazon

After many years in the red (due to its decision to ignore the Internet), Borders rethinks its strategy to go online. During the era of globalization and the age of the Internet, it was apparent to everyone that book sales would increasingly be made online. Since 1995 and the founding of Amazon.com, books have been sold over the Internet. It can be said that the environment and marketplace changed and Borders was finally aware of this (Austen, 2011). The first strategic mistake made by Borders is to outsource its online book operations to Amazon (from 2000 to 2008) instead of establishing its own web presence (what).

It was obvious that online sales would start making up its main source of revenue but Borders choose to hand over their most important growth channel to a competitor. Why was this a problem? Borders basically grew its competitor for eight years! Outsourcing its website to Amazon.com had cut deeply into Border’s profit and even goodwill (brand). In 2000 (when), it wanted to create an online presence to finally follow the market trend. However, to avoid system development costs, it decided to outsourcing Borders.com to the most efficient online organization, Amazon.com, hoping that this partnership would be able to turn around Borders. In the short-term, this saved a lot of money while in the long run, Borders' branding, multi-channel

4 | P a g e strategy, and customer base suffered worldwide (where) because we know that the internet is too important (Clarke, 2011).

Borders’ strong brand empowered Amazon's e-commerce platform. It seemed that Amazon anticipated a parasitic outcome through this partnership, as seen through its evident success in making its brand publicly-known through Borders’ mistake, while at the same time, earning high fees (from Borders) for this service. This shows that Borders’ management’s poor strategic decisions and ineffective strategic leadership (who) caused it to suffer net losses of $344 million for 2008 and 2009. This is similar to the case of IBM in the 1980s whereby IBM “naively” handed over crucial parts of the computer business to companies like Microsoft and Intel which caused IBM to soon lose the early lead in both, PC hardware and software to small companies like Microsoft and Intel (Sommer, 2011).

Strategic Issue 3: Overexpansion in Physical Stores Overseas with High Costs

In the late 90s (when), instead of keeping abreast with the current market changes and fast-booming growth in technology, Borders decided to venture into the overseas book market. So, what did Borders actually do? It hesitantly went overseas building chain stores in the United Kingdom, Ireland, Australia, New Zealand and opening stores as far away as Singapore. The focus on Borders’ business in the United States seemed to have been blurred by this global expansion. Eventually, its international strategy failed (The Atlantic, 2011).

Why did this move stretch the company thin? “They over expanded and caused costs to escalate, further cutting into profits,” said Michael Norris, senior analyst with Simba Information, who provided research and advice to publishers. The stores tended to be too big and expensive in terms of overhead. In the late 1990s, Fair Labor Practices Act in America were revamped due to the increased number of Labour Unions. For example, federal minimum wage rate increased from $5.15 per hour in 1997 to $6.55 per hour in July, 2008 and it kept going up to $8.55 per hour in 2009 (Labour Law Center, n.d.). This caused labour costs to escalate as most of Borders’ bookstores were reliant on labour. All over the world (where), minimum wage rates increased gradually..

To top it all, inflation rate in America at that time was at 5.4% (highest till today). In the midst of expansion, most parts of the world were hit by the financial crisis in the early 1990s and

5 | P a g e the Asian Crisis in the early 2000s (Duggan, 2011). These events caused expansion costs to increase even more. Borders also noted that it had signed too many long term leases (in line with its strategy to expand overseas), making it harder to shed unprofitable locations later. The vast use of Debt Financing to finance its expansion also caused high interest expenses. The more unprofitable it was, the more collateral was demanded by banks and this increased loan interest rates (Jacobsen, n.d.). In the end, Borders could not even sustain its own expansion and the decisions made were costly and seemed irreversible.

This seemed like a terrible time for Borders to be expanding but that was exactly what it did! This shows that the management (who) of Borders clearly neglected the importance of the PESTLE Analysis. In the end, Borders closed most of its stores and laid off tens of thousands of its employees after a failed attempt to sell the company at an auction as part of the process (Even other companies thought that saving Borders was a terrible idea!).

References

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Boris Groysberg, A. M. N. N., 2006. Are Leaders Portable. [Online] Available at: https://hbr.org/2006/05/are-leaders-portable [Accessed 29 June 2015].

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Center, L. L., n.d.. State Minimum Wage Rates. [Online] Available at: https://www.laborlawcenter.com/state-minimum-wage-rates/ [Accessed 27 June 2015].

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