How Borders and Barnes & Noble Pursued Separate Paths to Profitability

Two years ago it appeared as though the Internet revolution had turned the bookselling business upside down. Leading the charge was Amazon, a company that did not exist six years ago, and which came out of nowhere to become, as it bragged, “earth’s biggest bookstore.” Now, however, the situation seems more complicated, and Amazon’s future appears uncertain (see: Can Amazon Survive?). At such a time, it is helpful to turn to history and examine the strategic actions and innovations of two other companies — Barnes & Noble and Borders — as they grappled with the challenges of the bookselling business. Wharton’s Daniel M. G. Raff does just that in a paper titled, “Superstores and the Evolution of Firm Capabilities in American Bookselling.”

Raff’s research shows that the road to profitability a company follows depends largely on its initial resources. The company’s strategic processes and innovations, meanwhile, reflect the opportunities and challenges it faces from the start. Raff explains that while Borders and Barnes & Noble might appear superficially similar, their business models have striking differences. He argues that these differences are “rooted in the initial resources of the two companies and the natural trajectories for developing and exploiting the resources.” Thus, while firms may ultimately converge towards profitability, the path which they follow to get there may be very different, depending on the nature of their origins.

As superstores, Borders and Barnes & Noble seem very much the same, particularly in contrast to the bookstores that littered America’s shopping malls from the 1970s on. Large and inviting, the superstores offered an overwhelmingly broad assortment of books as well as a venue at which readings and discussion groups could convene. Rather than an object of convenience in a mall, the bookstores became the destination where people were encouraged to stay, browse, read, and chat. However, these similarities are merely superficial. Raff writes that “the two chains represented quite different approaches to retailing and required quite different capabilities.”

In order to reveal how Borders and Barnes & Noble differed in strategy, Raff first traces their respective growth experiences from relatively modest beginnings. Two brothers from Louisville, Kentucky—Thomas and Louis—founded Borders. They opened their first bookstore near the campus of the University of Michigan in the town of Ann Arbor in 1971. The Borders brothers simply wanted to offer books of a broad variety, rather than selling only course-related material—an approach which contrasted those of the area booksellers at the time.

Barnes & Noble, on the other hand, outdates Borders by nearly 100 years. While Barnes & Noble, Inc. may have been founded in 1874, the man responsible for its recent transformation did not come along until 1971, when Leonard Riggio purchased Barnes & Noble for $1.2 million from Amtel, which had assumed ownership of the bookseller shortly after the death of John Barnes in 1969. After managing the NYU campus bookstore as a night school undergraduate, Riggio started his own bookselling business with an initial $5,000 investment in 1965.

Borders focused on offering the widest assortment of titles while Barnes & Noble focused on drawing customers by offering the lowest price. Raff asserts that the strategies of the two stores differed because of the differences in their initial capabilities.

Borders’ development began with a unique approach to selling books. “Bookstores’ operations did not seem to have been organized to please or tempt the customers, still less to maximize the ultimate profits,” Raff writes. “The Borders brothers thus wanted to work backwards from desired outcome towards operations, always keeping the perspective of the customer.”

The Borders brothers’ greatest innovation came in the form of a software program designed to manage the inventory of their store. What started as a card-based system designed simply to track inventory at a single store evolved into a sophisticated program that could forecast demand. Forecasting capability became the core of Borders’ business because it addressed every bookseller’s two ultimate constraints: buyer knowledge and decision-making capacity. For Borders, “anticipating demand remained the innovation of central importance,” Raff explains. “Choosing the right books to fill the shelves was integral for success,” because “shelf space was most valuable when its owner had a good idea of what to put on it.” In Borders’ case the ability to track inventory gave way to the ability to forecast demand, which ultimately led to efficient ordering processes. Borders leveraged their capabilities to achieve tremendous growth in a short time.

The Barnes & Noble superstores, rising from different origins, followed a different path of development and faced a different set of challenges. The core of the Barnes & Noble strategy was scale. By 1986, with the acquisition of B. Dalton, Dayton-Hudson’s national chain of bookstores, Riggio had the national network he craved. Some of the stores exceeded 40,000 sq. ft. and offered shopping carts on the way in. They were said to have “the spirit of a supermarket.”

By focusing on centralization and economies of scale in distribution infrastructure and administrative functions, “the company’s basic competitive thrust,” asserts Raff, “continued to be selling off-price books and discounting.” Discounts ranged from 40% to 90%. “If you paid full price, you didn’t get it at Barnes & Noble” was a motto.

Raff writes that Barnes & Noble stumbled upon a voracious appetite for information and for cheap books. The company found that the more it offered people such books, the more they wanted. Even with its large selection, Barnes & Noble lacked the sort of sophisticated software application that was responsible for Borders’ success. Instead of following the Borders approach of systematically picking the best books with which to stock their shelves, Barnes & Noble filled their stores with best-sellers and bargains that sold quickly.

The extraordinary growth paths of Borders and Barnes & Noble may have led to the same profitable destination, although they pursued different business models to get there. One used technology to offer the titles that best suited demand; the other offered the best deals on the grandest scale. Their stories show that profitability can be achieved through any number of means—depending on a company’s initial capabilities and its ability to build on them.

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