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No Place Left to Run: Out of Options, Borders Files for Bankruptcy

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Been to a Borders bookstore lately? If not, you better hurry. As part of its Chapter 11 bankruptcy filing this week, the book and magazine retailer announced that it will close more than 200 superstores nationwide by mid-April.

On second thought, you probably don't have to rush just yet. Unless you live in Wyoming, chances are there will still be a Borders store near you come May--possibly more than one. This is the byproduct of the organization's ill-advised decision a few years ago to open hundreds of new stores, many within walking distance of one another. Instead of strengthening Borders, the strategy left the company burdened with excessive retail space and inventory. In San Francisco, for example, there are two Borders superstores in and around historic Union Square. In less time than it takes to consume a coffee purchased in one store you could walk to the other to buy a magazine.

Convenient? Perhaps. Strategically competitive? Not exactly.

Borders, like Blockbuster and other struggling retailers, seems optimized for a bygone era. But its nemesis in bricks-and-mortar book sales, Barnes & Noble, is competitively positioned. Given that both sell the same books from the same publishers in similar retail environments, you might wonder why Borders is bleeding cash while Barnes & Noble is holding its own. The answer has everything to do with Borders' failure to react appropriately to two market transitions--first the shift to online book selling, then the embrace of electronic readers.

In each case, Borders failed to develop a new business model while trying to perfect its traditional one. Doing both helped Barnes & Noble hold its ground against Amazon.com, WalMart and others who compete effectively in book selling. Doing only one doomed Borders. Here's why.

As long ago as 2002, when Amazon.com posted its first profit, it was clear that retail book selling was a business under siege. Since then, thousands of independent booksellers across the nation have closed, many of which were longstanding fixtures in their communities. Think Kroch's and Brentano's of Chicago and Coliseum Books of New York. Most booksellers simply could not compete with the price and convenience of Amazon.com or the bigger, national chains. Now all brick-and-mortar book sellers are challenged, especially as the market transitions once more.

Last June marked a significant milestone in the book business. Then, Amazon.com, the world's largest book seller, announced that sales of books for its Kindle e-reader outnumbered those for hardcover books for the first time. It wasn't an unexpected achievement, but a noteworthy one nonetheless. It confirmed what prognosticators have predicted for a decade: sooner or later, the majority of all titles--from textbooks to cookbooks, fictional classics to political biographies--will be distributed in electronic format.

For Borders, this was a crushing blow. Unlike Barnes & Noble, which made steep investments in online books sales and digital technology, Borders did not plan adequately for the future. Take online book sales. More than a decade ago, Borders wasn't sure how to play in the online world. After toying with an e-commerce site, it outsourced online sales to Amazon. Talk about collaborating with the enemy. Not until 2008 did Borders recognize that online book-selling had to become a core competency of the company. Since then, Borders has struggled to catch-up. Today, online hardcopy sales generate less than 3 percent of revenue for the company--less than one-third of what Barnes & Noble derives from online sales.

When it comes to e-readers, Borders is even further behind. While it spun cycles mulling what to sell in its in-store canteens, Barnes & Noble made important strides developing a competitive e-reader. As of January 2011, Barnes & Noble has shipped more than 2 million Nooks, which represent one of fastest growing parts of Barnes & Nobles' business. As for Borders, it fumbled on its e-reader strategy. It decided against creating a me-too device, choosing instead to offer the Kobo, Velocity Micro Cruz and Franklin AnyBook devices from other companies. Unfortunately for it, none of these have become big sellers. If you order a cup of coffee at a Borders canteen today, chances are you'll see more customers with iPads or Nooks than Kobos.

In that moment, you can appreciate the wisdom of developing a new business model that will carry you in the future while simultaneously optimizing the existing business model that keeps your business aloft today. Doing both is simply good business. Doing one at the expense of the other is not.

Inder Sidhu is the Senior Vice President of Strategy & Planning for Worldwide Operations at Cisco, and the author of Doing Both: How Cisco Captures Today's Profits and Drives Tomorrow's Growth. Author proceeds from sales of Doing Both go to charity. Follow Inder on Twitter at @indersidhu.

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