4 Lessons From the Demise of Borders

The bookstore chain is going out of business because it failed to ask what could go wrong.

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There's a moment of passing sadness when familiar brands die, yet we're getting used to it. The turbulent economy of the last few years has claimed prominent names such as Circuit City, KB Toys, Hummer, Hollywood Video, Saturn, Mercury, and many others. An even greater number of well-known companies declared bankruptcy, shed debt, reorganized, and emerged from Chapter 11 to give it another try. Some will make it. Others will fail again.

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The Borders bookstore chain appears to be the latest casualty of an unforgiving and rapidly changing economy. Borders declared bankruptcy in February, after a long and irreversible financial slide. It hoped to attract a buyer willing to assume its debt and keep its 400 stores operating, but nobody's interested. So the 40-year-old company now plans to liquidate its assets, pay off creditors, and shutter its stores, leaving a fresh set of vacancies in a pockmarked retail landscape.

Book lovers are crestfallen, and many shoppers will find there's no longer a bookstore nearby. Bummer for them. But Borders isn't just a victim of a challenging economy. The company made some poor decisions over the last decade and failed to adapt to new ways consumers shop and read books. It clung to an outdated strategy way too long and reacted slowly as more nimble competitors took its business away. Borders' failure is a cautionary tale not just for other businesses, but for millions of workers who need to stay relevant if they intend to stay employed, earn promotions, and get ahead. Here are four lessons that many people can learn from the demise of Borders:

Sticking with what you know can be dangerous. There's an old adage in business: Focus on your "core competency" and don't get distracted by trends or flashy ideas. But that's not so advisable any more. Borders, for instance, became a billion-dollar business thanks to its physical retail presence. Yet sticking with that approach too long led to its undoing. During most of the 2000s, Borders focused on its retail strategy, investing money to improve the in-store experience for shoppers, add cafes, experiment with new concepts, and expand internationally. It might have worked a decade or two earlier, but Borders was investing in physical real estate at the same time that shoppers were flocking to the Internet. That left Borders with a muddled, conflicted strategy: Declining sales forced it to close hundreds of stores (including the entire Waldenbooks chain, which it owned) while doubling down on other retail outlets.

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Meanwhile, the company treated the Internet like a passing trend rather than a transformative phenomenon. The company outsourced its Web operation to Amazon—which obviously became a tough competitor—waiting until 2008 to develop a meaningful Web strategy of its own. Amazon, meanwhile, became the king of online bookselling, introducing the Kindle e-reader to claim key turf in the growing market for electronic books. The other big bookstore chain, Barnes & Noble, was a laggard itself, but it finally invested heavily in a website and introduced the popular Nook e-reader. By the time Borders came to the Web in earnest, it was mired in debt and running short of cash to invest. As a result, it relied on third-party e-readers from Sony and Kobo, with little to distinguish its Web offerings.

Borders might have survived if it continued to focus on its core competency as a retail bookseller, while developing new core competencies as an online merchant, and perhaps expanding into other online markets such as music. Borders realized this, but it came too late—when the company was too deeply in debt, and a vicious recession was just beginning. The takeaway for individuals and other companies is that being good at one thing often isn't enough these days. What's better is remaining good at one thing, while becoming good at something else—and making sure your entire skill set is something that's in demand.

Your competitors may not be who you think. Borders maintained a traditional mindset almost until the end, focusing on rivals it was familiar with. As the book industry consolidated over the last couple of decades, for the most part that meant Barnes & Noble. But discounters like Wal-Mart and Target now sell books, and deep price cuts (usually matched by Amazon) left Borders in a quandary: It could take a loss to match the discounts, or try to justify higher prices by convincing customers they'd enjoy a premium experience at Borders. Neither worked. Then Google started selling e-books in 2009, bringing yet another huge competitor with low prices into the market. Borders never saw it coming and was poorly equipped to compete.

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The Blockbuster movie chain made similar missteps, by investing heavily in its retail outlets, while dismissing the competitive threat posed by Netflix, Redbox, Hulu, Apple, and other sources of entertainment. It too declared bankruptcy, and is now struggling to stay in business. The obvious lesson is that upstarts can enter your business and quickly become formidable, especially if they have a technology advantage you don't. Arrogant companies make the errant assumption that a comfortable slice of market share is theirs to keep indefinitely. Successful ones operate with a healthy sense of fear, knowing that dominance is transitory and they can be knocked from their perch by a pipsqueak, if they get too complacent.

Debt can be deadly. One common thread among many corporate failures over the last three years is excessive debt. Five years ago, when money was easy to come by, this didn't seem like a problem. But companies that borrowed heavily to finance retail expansion or other projects quickly found themselves overextended when the recession hit, sales contracted, and there wasn't enough cash flow to keep up with debt payments. Borders' debt peaked at about $350 million, which turned out to be too much for a company that had less than $4 billion in annual revenue and lost money for five years in a row. It borrowed that money to finance overseas stores and other types of expansion but ended up selling stores instead when it began struggling to make debt payments. The inability to pay back its loans ultimately triggered the company's bankruptcy filing.

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Hardly anybody can take on excessive debt now, since banks are tight with money. But the bigger problem is a failure to anticipate what could go wrong. Like many other companies, Borders (and its lenders) never foresaw the rapid transformation of the book business or a sharp recession. Other companies have survived similar threats, however, and it's often because they war-game possible worst-case scenarios before taking risks. Everybody needs to find ways to grow and expand, which usually involves some degree of risk. Survivors have a fallback position if everything goes wrong.

Loyalty is never enough. To many of its customers, Borders was a beloved retailer that offered a respite from high-pressure sales tactics and tacky products. That's why its lounge-like stores are irreplaceable, in a way. But modern commerce is ruthless, and for every customer who will happily pay more because he or she is loyal to the brand or delighted by the product, five or 10 others will go with the lowest price or the greatest convenience. It's great to have a loyal following, but most consumers' first loyalty is to their own wallet or busy schedule. Honor that, and you'll get their business.

Twitter: @rickjnewman

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