Strategic Management Journal Strat. Mgmt. J., 21: 1043–1059 (2000) SUPERSTORES AND THE EVOLUTION OF FIRM CAPABILITIES IN AMERICAN BOOKSELLING DANIEL M.G. RAFF* The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania, U.S.A. and National Bureau of Economic Research Cambridge, Massachusetts, U.S.A. This study considers the transformation of book retailing in America ca. 1970–95. The major transition was less modal sales venues shifting from Central Business Districts to suburban locations than the rise of extremely broadly merchandised ‘superstores’ and their supporting infrastructure. The paper documents two superficially similar but from a capabilities perspective quite different superstore business models, one identified with Borders and the other with Barnes & Noble. The two companies’ key capabilities originated and developed in distinctive ways, one oriented around the management of information and the other around scale. Complementarities and the persistence of core capabilities are striking features of the organi- zational histories, but so is—over a fairly extended period—evolutionary change. Copyright 2000 John Wiley & Sons, Ltd. INTRODUCTION force in retail bookselling. This proceeded in two phases. During the first, the stores of the chain Our images of the colonial America usually companies were of roughly the same size as those involve a relatively primitive economy with rela- of the independents. The principal nonorgani- tively low levels of per capita income, no facto- zational difference between the two was ries and generally low levels of technology in locational: the independents were predominantly the cities and towns, and much of the population sited in central business districts and the shopping engaged, in isolated places and for long and streets of towns, while the chain stores were terribly demanding hours, in agriculture. Yet the predominantly to be found in suburban and colonists were predominantly people of the word, regional malls. In the second phase, the chain and there was a flourishing trade in publishing stores became an order of magnitude larger than and bookselling from a very early date (Tebbel, the modal independent (on a wide variety of 1972). The book trade has been with us ever metrics) and began to seem in the breadth of since. their merchandising more like libraries than The distribution part of the industry has since shops. undergone tremendous change, not least in the The subject of this paper is the second of latter decades of the twentieth century. It was in these transitions: the emergence of the so-called that period that chain stores became a dominant superstores. The phenomenon is striking. In 1975, there were no bookstores with anything like these characteristics anywhere in the United States out- Key words: books; superstores; retailing; information; side of a few large cities and at most a handful competition; evolution of university towns. At the close of the century, *Correspondence to: Daniel M.G. Raff, The Wharton School, University of Pennsylvania, 2000 Steinberg Hall–Dietrich Hall they are a commonplace of the urban and sub- Philadelphia, PA 19104-6370, U.S.A. urban landscape. The natural interest of the book- Copyright 2000 John Wiley & Sons, Ltd. 1044 D. M. G. Raff selling business to academics entirely aside, one in understanding the issues of interest here. The might reasonably wonder when, how, and why evidentiary basis of the paper does not overlap this came about. This interest is only heightened with them. The paper is instead based on exten- by the diffusion in other lines of retail trade of sive interviewing among industry participants apparently similar formats (generically known as (both at the retail level and upstream of it), category-killers). This paper lays out the history personal investigation of many facilities (both of in books, with a focus on the evolution of the the focal firms and of specific competitors), and capabilities required to sustain the new formats a detailed reading of the trade press over the and operations. entire period. The retail interviewing included The paper takes the form of a clinical study. individuals who were principal actors (that is, There are no formal hypotheses and there are executives with operating responsibilities and certainly no formal tests. Rather, the paper fol- experience) in the focal firms both at the time of lows the early lifecourses of the only two firms the events in question and later and also principal that mattered quantitatively and attempts to actors in carefully selected competitor firms expose, in an intellectually disciplined way, the (some in their positions at the time of the events opportunities which were recognized, the chal- in question and all with close knowledge of the lenges which then presented themselves, and the events.) The focus of the interviews was on responses as they evolved. This may seem to business systems and on the circumstances of and represent more modest progress in knowledge thinking behind key strategic decisions. Relative than the usual positivist empirical work puts on to the widely read accounts, this is novel. offer. But the approach exposes issues and relationships which are obscure in the standard statistical data and may be worthy of thought. THE ORIGINS AND EARLY The heart of the paper is narrative, but narra- DEVELOPMENT OF BORDERS tives always have ideas in the background. The ideas in the background here are those of the Thomas and Louis Borders grew up in Louisville, resource-based view of the firm (Wernerfelt, Kentucky. Thomas went to college at Notre 1984; Barney, 1986, 1991; Peteraf, 1993) and of Dame, Louis to the University of Michigan. evolutionary economics (Nelson and Winter, Thomas went on to Michigan for an M.A. in 1982). Special attention is therefore paid to the English literature. Louis went east to MIT, con- processes by which firms conduct their busi- tinuing to study mathematics though shifting his nesses, to the influence these processes have on focus from the pure to the applied side. After a what makes particular firms differ in profitable brief period abroad, Thomas returned to Ann ways, and ultimately to the influences these com- Arbor. Louis dropped out of MIT and joined petitively valuable differences can exercise on the his brother. development trajectories of the firms in question. Life in Ann Arbor was dominated by the Uni- The basic finding is simple. There are two versity of Michigan—nearly half the town’s popu- major book superstore chains. The stores look lation was either employed by the university or superficially very similar. They are certainly very enrolled in it. The university was one of the two different, in many very similar ways, from the or three most prominent public universities in the format they displaced. But the commonalities United States. Its faculty numbered more than mask striking differences in approach, apparently 3000 and was famous for advanced research quite stable, rooted in the initial resources of the activities. The student body of nearly 25,000 two companies and the natural trajectories for studied at an undergraduate college and a breath- developing and exploiting the resources. takingly broad complement of graduate and pro- Because of the prominence of the firms the fessional schools. All of these people spent a paper focuses on, some of the developments dis- great deal of their time reading. A great deal of cussed below have been the subject of articles in what they read was books. Louisville had not widely read newspapers such as the New York been a great book town, but both Borders brothers Times and the Wall Street Journal and in various had from a young age developed a keen interest magazines. These accounts are generally well in books. It had only grown over time. Contem- written, but they are equally generally unhelpful plating what to do with their lives and where to Copyright 2000 John Wiley & Sons, Ltd. Strat. Mgmt. J., 21: 1043–1059 (2000) Book Superstores 1045 do it, it had seemed to the Borders brothers that whatever those might be. The brothers con- there might be a living to be made in Ann Arbor sciously refrained from focusing on a specific in the book trade. product segment such as academic books. The They started a used bookstore in the late 1960s. notion of offering no trade books seemed perverse That business is generally both frustrating and as well as condescending. Their basic idea dic- unexciting. It is frustrating because the good tated a much wider range than that. acquisitions sell quickly and the bad ones stay, Borders was hardly the first bookstore to focus just another volume on the shelf to the browsing on a very specific local customer base. Successful customer but an increasingly conspicuous mis- independent bookstores like Cody’s in Berkeley take, and an increasing burden on working capital, and the Seminary Co-op in Hyde Park have long to the bookseller. To do well, a used bookstore built their trade on an intimate knowledge of owner needs to be constantly replenishing the the wants of their communities. But the Borders good acquisitions, and to do that from Ann Arbor brothers pursued this strategy much more compre- in those days would have required a burdensome hensively and went far further with their amount of travel. At the high end, the business solutions. is about buying and selling collectible objects At the time, important features of many book- rather than texts the customer will enjoy actually stores’ operations did not seem to have been reading—a perversely unintellectual relationship organized to please or tempt the customers, still with the objects of sale, some thought. It is also less to maximize the ultimate profits. Consider a business in which the stock turns over perhaps the most salient example in Ann Arbor’s part of once a year on average.