Borders Group Inc. Case Study

Borders Group Inc. Professor: Simon Dekker Student: Yanhui Zheng Student ID: 021244231 Date: 02- -2010 Introduction Borders Group Inc. is one of leading and well-known retailers of books, CD, and other educational items. Its idea is “To create richer, more satisfying lives through knowledge and entertainment. ” In order to accomplish its mission, Borders provide additional services to make its customer enjoy spending in the store. Borders’ store is not just a bookstore that people go in, buy books, and leave.

More likely, it is a place that people can relax and learn knowledge at the same time.

Despite the stores throughout nationwide, Borders also has stores in Australia, Malaysia, New Zealand, Oman, Singapore, and United Arab Emirates, and in total approximate 600 stores. Its headquarter is located in Ann Arbor, Michigan. Borders Group Inc. ’s history can be traced by two brands: Borders and Waldenbooks. Lawernce Hoyt ran a rent library in 1933. Later in 1962, Hoyt opened first independent bookstore named Walden Book Store.

In 1971, an 800-square-foot used bookstore named Borders Book shop was opened. In 1984, Waldenbooks was purchased by Kmart Corporation, and in 1992 Kmart Corporation also merged Borders and named them as Borders-Walden Group. Three years later, it was renamed as Borders Group Inc. , and moved headquarter to Ann Arbor. Recent years, Borders can not compete with online sellers, especially Amazon. com. It starts to lose business, and has to close stores in order to cut its expenses. Now, it is close to bankruptcy, and is preparing the files. As-is Condition

According to Moneycentral. com, from 2001 to 2006, Border Group Inc. made approximate 100 million dollars every year. Later it started to lose money. In year 2009 and 2010, it boomingly lost 184. 7 and 110. 2 million dollars. Borders as a leading traditional bookstore, its experience is a live example that shows the industry life cycle for the tradition bookstore industry. Following char illustrates the whole process. Chart1: Traditional Bookstore Industry Life Cycle Combining the Borders’ financial statements, it shows that during maturity period, Borders made a lot profit.

Later on, because of the new technology, the way to sell books and other related items is changed. Compared with the online sales, the traditional bookstore is getting out of fashion, and the whole industry is going to the decline period, or even phase-out period. Within this period, Borders started to lose business, and now can not even operate normally. Borders can not disobey the industry life cycle, it has to close its business or follow the new technology. Actually, Borders has already taken some actions. News form internetretaler. om, on August 1, 2010, CEO Mike Edwards announced that Borders was trying to open an e-books store with 1. 5 million titles, and also provided 38 million loyalty program members incentives. The goal was that by this time next year, it would take 17 percentages of online market. Unfortunately, Borders did not recognize the potential of online sales at the first place. By the same time, its biggest online competitor Amazon has already taken 90% market share. Following char is used to illustrate the situation. Chart 2: The Impact of Speed to Market on Sales According to Moneycentral. om, in 2003 Amazon. com broke even and made 35. 28 million dollars of net income. After that it started to grow dramatically, by the end of 2010, the income went up to1,152 million dollars. Amazon took advantage of new technology, and made an early entrant to the new market. When the market was mutual, it already owned 90% market share before some other competitors realized the new trend, such as Borders, Apple and Google. (http://www. dailyfinance. com/) Due to late entrant, Borders is facing great challenge. To sum up, new technology forces traditional bookstores lose competitions.

On the other hand, Borders missed the early entrant, and it is very difficult for Borders to catch up. Analysis Despite its competitors, Borders itself already gets some problems. According to its last year’s financial statements, Borders’ metrics and trends is shown as following chart: Chart 3: Borders’ Metrics and Trends in 2010 Current Levels| Item| Metric Description| 1st Q| 2nd Q| 3rd Q| 4th Q| Measurement| 1| Total sales| 1,016,200| 547,200| 507,900| 475,600| Monetary ? | 2| COGS %| 75%| 80. 30%| 80. 90%| 84. 80%| Pecentage ^ | 3| Admin cost/sales| 21. 40%| 25. 0%| 26. 20%| 30. 30%| Pecentage ^ | 4| Net Income| 59,900| 64,100| 46,700| 74,400| Monetary ? | It is very clear that total sales are continuously decreasing each quarter. What is worse is that the costs are increasing boomingly. Only 1 year the cost of goods sold goes up by 10%, and operational activities costs also is increasing. Of cause, the profit is keep going down. Compared with Borders, Amazon is skyrocketing growing. Its sales went up from 3. 1 billion in 2001 to 34. 2 billion dollars in 2010, especial it grew by approximately 10 billion dollars in 2009.

The last three years analysis is showing in the following chart: Chart 4: 2008-2010 Amazon. com’s performances | 2008 | 2009 | 2010 | Total sales| 19,166,000 | 24,509,000 | 34,204,000 | COGS %| 77. 72%| 77. 43%| 77. 65%| Admin/sales| 17. 89%| 17. 96% | 22. 34% | Net income | 645,000   | 902,000   | 1,152,000   | Amazon did not only make more sales or profit, it also had obviouly lower cost of goods sold and admin/sales ratio. Most important thing is Amazon still growing while Borders already goes to the downturn and has to close stores in the reality.

The following is Borders’ “Causes and Effects” diagram. Chart 5: Borders’ Causes and Effects Diagram Compared to virtual bookstore, the physical bookstore needs more staff to maintain, and has to pay renting, utility, cleaning, and others. Therefore, it is too expensive to hold the traditional stores, especially when it can not make profit. Not like online sales that the customer just need to summit his/her credit card information, the customers have to stand in line to pay for the items. If customers choose to purchase online, they do not need to drive to store.

They only need a computer and internet. Without computer, smart phone, iPod, or other devices can access to internet also works. It also is easier to look for a book online. Compared to online sales, traditional bookstore has more process and other inconveniences before making a sale. In contract to online sellers, Borders’ employees have to do more in order to make a sale, while online sellers just need to take care of the delivery and customer support. Borders management team realizes the trend of online sale, but it is already late to take advantage of early entrant.

At the end, the products sold in bookstore usually are more expensive, and also Amazon has much more different items, not only educational stuff. In 2010, the management team did realize the value of online store, and tried to entry the online retail industry. Following is the Borders e-book transformational process. Chart 6: Borders’ e-Book Transformational Process Inputs eBooks 1. 5 million titles, customers Transformational process Outputs Make sales Amazon 90% market share; Apple and Google 38 million loyalty program members incensive Feedback Measurement Adjust

Borders planned to open a e-Books’ store with up to1. 5 million titles by 2011. In additional, the management team came out an intensive plan which Borders would give away 38 million dollar to its loyalty members. This plan will encourage some customer to go to Borders online store. However, Borders’ effort is greatly impact by the online retailers’ leader Amazon, which already takes 90% of e-Books market. Despite the huge market share of Amazon, Apple and Google are also working on online bookstore. According to Sarah Weinman, Amazon’ market share will drop to 35% by next 5 years. At the nd of 2010, due to Apple and Google, Amazon is likely to go down to 72%. However, Amazon’s e-Books’ revenue will be triple by 2015. This is has both good and side effect. The good news is Borders still can take market share from Amazon decreasing share. The bad news is Border still one step behind Apple and Google, its competitors also should include Apple and Google. Borders put its e-Books resource and customers’ relationship into input, plus its incentive effort. It is surely that Borders will get a lot customer to support its online store. However, its competitors, especially Amazon. om already takes over the market. Border still has long way before it can grow to certain level. Proposed improvement When new technology coming out, it always brings a lot challenge to the old industry. Sometimes, it replaces the whole industry. The other times, they can both survive. Just like radio, and TV. When they first came, people start to worry that there is no place for newspaper. Actually, they did challenge the newspaper industry, but later on new balance came out and newspaper still existed. Online retail bookstore is exactly same as the radio and TV.

It did bring a downturn to the traditional bookstore; for instance, Borders closed about 200 stores last year. It is irreversible that traditional book store are going to the decline period. However, there still is some place for traditional bookstore. Compared with Amazon, it is obvious that the reason for Borders to lose money is higher cost of goods sold and admin cost. Therefore, the key point for Borders physical bookstore to survive is to cut its cost of goods sold and admin cost. If Borders can not significantly cut the cost, its bookstores have to be closed. Chart 7: cost reduction process

The cost comes from two sources cost of goods sold (inventory) and admin cost. In order to cut the cost of goods old, the first step is to find cheaper supplier with satisfied quality. If customers accept the normal price, then try to find another source with cheaper price. If can not find any other cheaper supplier and this price already can make profit, it is OK to keep use the same supplier. If customers resist the price, offer a discount in order to make a sale within profitable arrangement. If the discount sale can not make profit, definitely go to find cheaper source, or ave to skip this product. The second part is to reduce the administrative cost. This cost is mainly from employees’ salary. One way is to cut the salary. Reasonable salary cut due to slow business is fine, but do not cut too much. If doing so, the employees are not going to appreciate with the cut (actually cutting salary never make employee happy), they can not perform their best. If they can not provide satisfied services, customer will not be happy to buy items from here. Another way is to fire some employees, retrain the remaining staff so they can take more duties.

If the cutting cost solution works, the customers can get cheaper products. For example, the cost of goods sold goes down to 75%, which is its first quarter rate and also lower the Amazon average level. Admin cost can be back to 21. 4%, which is lower than the Amazon’s. Therefore, profit margin is larger than Amazon’s margin. This also can provide a space for Borders to give some benefit back to its customer, such as discount sales, incentive plans, and so on. Base on the economic rule, price goes down, and demand will go up because customers are willing to buy more relative cheaper products.

More products are sold, and Borders is able to make profit. If the efforts on cutting cost still can not help Borders to make profit, Borders will have to close its stores in order to step away from keeping lose money. The other part of Borders operation, which is online store is much more important, it decides how far Borders can go. The major problem is the market share. As mentioned above, Amazon already takes 90% market share, Apple and Google also step into this industry, and Borders is left behind.

In order to catch up with Amazon or other competitors, Boreders has to continuously improve its products and services. The related elements for improvement are price, quality, delivery and customer support. Chart 8: Online sale improvement process Whether a business can exist or not is greatly up to marketing department or sales department. The first thing should be focused is to make sales. Try to sell at the normal price firstly, if the sales do not go well, then lower down the price try it one more time. This is very important to earn money.

Later on, purchasing the inventory becomes priority, it help a company to cut the cost. However, Borders can not just chase for cheaper resources, poor quality would lead customers to balk or return the products that they just bought, and this will cost more then just simply purchased high quality products. A biggest difference between physical store and online store is online store usually has to deliver items to the customers. The speed of delivery also is a key factor for online sales. If it is too slow, customer might look for another online retailer in order to get it sooner even with higher price.

Customers’ feedbacks are basic and critical facts for evaluating an organization’s operations. Management team should pay enough attention to customers’ feedback as well as employees’, in order to improve its operations. For instances, if customers complain quality is not good and delivery is slow, the organization has to improve them. Even customers do not complain, the organization still need to care about the improvement. Continuously improvement is the key to success. Borders losing business also is result from careless improvement. A huge part of online sales is customers’ support.

Because customers can not face to face communicate with the employees, it has to pay attention in order to satisfy customer. Despite the continuous improvement, to eliminate the wastes is another point to gain competitions. The most efficient way to do that is using lean production. Borders should pay attention to three parts: supply, transformational process and market. Borders can use enterprise resources planning (ERP) to organize its resource and operations to avoid big waste. This is key for Borders to gain competitions since it already behind the market. Conclusion

Due to new technology, the traditional bookstores are running out of fashion. Book store follows the industry life cycle; it already goes to the phase-out period. Online sales give customer more profit and conveniences. Borders closed stores are the price paid for the new innovation. However, there still is space for bookstore to survive. Compared to Amazon, Borders’ biggest problem is the high cost. There is only one way to help Borders’ stores to survive, which is to cut the cost. Borders has to process cost reduction procedure constantly, or else it needs to graduated close the stores.

New technology brings new opportunity. Borders continuous development depends on market the new industry, which is online bookstore. Due to its late entrant, Borders needs to do much more then earlier entrant competitors. The most important thing is to continuously improve its products and services. Any efforts that work for cutting cost must be done, such as lean production, which can help Borders to eliminate the wastes. To sum up, if an organization wants to develop for the long run, it has to constantly improve its operations, production and other related activities.

The technology makes it easy for all business to share information, but still people are the decision maker. People have to learn or train in order to catch up with the development of technology and society. Borders’ experience is the live example for being behind the technology. References About Us. (2010). Borders. com. Retrieved on Feb. 21, 2010 from http://www. borders. com/online/store/BGIView_bgiabouthistory Amazon. com, Inc. (2011). Finance. yahoo. com. Retrieved on Feb 21, 2010, from http://finance. yahoo. com/q? s=AMZN&ql=1. Amazon. com, Inc. (2011). Money. msn. com.

Retrieved on Feb 21, 2010, from http://investing. money. msn. com/investments/stock-price? Symbol=AMZN Brohan, M. (2010). Borders jumps into the e-books fray with a new online bookstore. Internetretailer. com. Retrieved on Feb. 21, 2010 from http://www. internetretailer. com/2010/08/01/borders-jumps-e-books-fray-new-online-bookstore Weinman, S. (2010). Amazon’s E-Book Market Share May Plummet: Great News for Amazon. Dailyfinance. com. Retrieved on Feb. 21, 2010, from http://www. dailyfinance. com/story/company-news/amazons-e-book-market-share-may-plummet-great-news-for-amazon/19361847/