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Borders

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Lisa Kling lisa.kling@villanova.edu 610-688-0404
February 26, 2003

Table of Contents

Executive Summary 2

Introduction 3

Industry and Competitive Analysis 5

Company Situation Analysis 12

Company Value Net Analysis 15

Conclusion 17

Bibliography 18

Appendix 19

Executive Summary

Borders Bookstore is a major leader in the book retail industry, with a differentiated strategy focusing on customer experience and a category management system. New technological growth such as the “Title Sleuth” and e-commerce capabilities allow Borders to stay competitive. The book retail industry is affected by the recent decline of the USA economy, though Borders continues to make a profit. Globalization and technology are factors of the industry, as well as dealing with large amounts of inventory. The competition is fierce and aggressive, consisting of Barnes and Noble, Amazon, Books-A-Million, independent book sellers, Wal-Mart, Target, and Sam’s Club. Rivalry among competitors is amplified between Borders and Barnes and Noble. Other forces, such as substitutes, buyers, suppliers, of the industry environment range in strength. Comparing Borders and Barnes and Noble’s financial data shows that Borders appears to be gaining more profits and using equity more advantageously than the competitor. Yet, Borders must not lose sight of its own weaknesses and threats. Focusing on strengths and opportunities, while improving weaknesses is key for Borders’ success. The value net for Borders is another consideration for the company. Although customers are the number one priority, Borders must realize the effect its decisions have on the stakeholders. Borders seems to be leading the market, and should remain competitive if it can continue improving technology and its differentiation strategy. Management should use current strengths to improve weaknesses and capitalize on opportunities. More promotions for major suppliers will aid the supplier-buyer relationship. Borders should also capitalize on the e-commerce website as well as the wireless Internet access capabilities in each Borders store.
Introduction

Borders Group Incorporated Profile (as stated on the company’s website):

Borders Group, Inc., is a FORTUNE 500 company that trades on the New York Stock Exchange under the symbol BGP. The company is a leading global retailer of books, music, movies and other information and entertainment items. Headquartered in Ann Arbor, Michigan, Borders Group operates over 400 Borders Books and Music stores in the U.S., as well as 29 international Borders stores, approximately 800 Waldenbooks locations and 37 U.K.-based Books etc. stores. Online shopping is available through www.borders.com and www.waldenbooks.com teamed with Amazon.com. Borders Group employs more than 32,000 people worldwide and posted revenues of approximately $3.4 billion in 2001.
(http://investor.borders.com/ireye/ir_site.zhtml?ticker=BGP&script=2100&layout=8)

Borders Books Mission Statement (Appendix ?):

To be the best-loved provider of books, music, and other entertainment, educational, and informational products and services. To be the world leader in selection, service, innovation, ambiance, community involvement, and shareholder value. We recognize PEOPLE to be the cornerstone of the Borders experience by building internal and external relationships, one person at a time.

Borders Books’ strategic platform informs that the mission is “measured by increased dollars per transaction, increased multiple unit transactions, increased market share, growing comparable sales 2-3%, and growing earnings per share 10-15%” (Appendix ?). It is “achieved through a market position of dominating selection, differentiating customer service, a competitive experience, competitive access, and competitive pricing” (Appendix ?). Integrating market position and the company mission is integral for the success of Borders, as well as staying ahead of the competitors. Top competitors of Borders include Barnes and Nobles, Amazon, Books-A-Million, independent bookstores, Wal-Mart, Target, and Sam’s Club. Major business issues arise in Borders’ attempt in fulfilling the mission and goals, while staying competitive. For example, Borders must focus on improving weaknesses like geographic coverage and capitalizing on opportunities like the joint e-commerce website with Amazon. Therefore, evaluating current strategies, assessing the key success factors, and positively focusing future endeavors are necessary.
Industry and Competitive Analysis

The book retail industry ranges nationally as well as internationally. High capital costs are necessary to enter the market in order to attain all the books for inventory. However, the customer market is large due to the numerous amounts of book buyers in the world. Each year, more people become literate and the customer base grows larger. Technology has become a major factor in the past decade due to new innovations and the Internet. New tools and e-commerce has improved customer service and ease of transactions for both the companies and the customers. The recent decline of the United States economy is causing struggles for Borders and the entire industry, however, Borders is “acting accordingly to increase market share, customer service and cost control” (Pringle). Borders seems to continue growing in numbers of stores as well as remain competitive regarding its prices. Other driving forces of industry changes include growing popularity of the Internet and technological growth. Amazon’s technology brought the industry into cyberspace, a move that every big name book seller followed. Future Internet capabilities may spur new trends for the entire industry. Strategic industry trends are driving forces of the book retailer industry as well. Borders is counting on its category management system to push them into the future by creating a distinct and differentiated customer experience. Globalization is another factor that impacts the industry. Book retailers have to account for cultural as well as technological differences. Balancing national needs with international needs and attaining global leadership may cause change in the industry’s structure and business environment. The competitive five forces for the book retail industry as a whole include the substitutes of newspapers, magazines, Internet, television, and music. Many bookstores, like Borders, have minimized the threat of substitutes by selling CDs instead of competing with music store. The Internet poses a major threat, due to the amount of free reading and research material it hosts. Other substitutes of the industry do not seem to have much power over Borders, or any other bookstore due to the difference in nature. Buyers of the industry include basically anybody, teachers, students, parents, teenagers, artists, etc. Since the magnitude of the buying population is so large, and continues to grow, buyers do not have much bargaining power. However, due to wide amounts of free information on the Internet and low switching costs for buyers, they seem to be gaining influence and power over Borders and other bookstores. Buyers have discretion over whether they buy the products because they can always buy cheaper, used books, or choose not to buy the book. New entrants in the book retail industry do seem to be a threat, even though there are somewhat high costs of capital and resources needed to enter the market. They must be able to compete in selection, price, technological capabilities, and customer experience, which is not an easy feat for newcomers, though independent bookstores are successful in certain areas. In order to become a large book retailer a learning curve does come into effect in terms of organizational systems. Brand loyalty is not a major factor, in that the same book can purchased in several different bookstores. However, for buyers who prefer online purchasing, Amazon has much customer loyalty. New entrants must also be aware of copy write policies, which may discourage some. Publishers, authors, and musicians account for most of the suppliers for book retailers. The supplier bargaining power is minimized by the reputation of major bookstores and popularity of online purchasing. The demand for books outweighs the suppliers’ power because bookstores can purchase books from many different publishers and authors. Books are a commodity that can be provided by many sources. However, if the supplier is a major player in the industry, it will carry more power over the bookstore retailers. For example, J.K. Rowling, the author of the Harry Potter series, has a great deal a weight because of the popularity of the books. Borders’ top rivals are Barnes and Noble, Amazon, Books-A-Million, independent bookstores, Wal-Mart, Target, and Sam’s Club. These competitors force pressure on Borders in terms of technological and strategic capabilities. Since customer costs to switch brands is very low, rivalry among the competitors is high. High rivalry also stems from the numerous amounts of bookstores around the world, whether it be big name companies or small independent book sellers. A focused strategy and continual attention to technological advancements have made Borders able to compete with rivals like Amazon and Barnes and Nobles. The top competitor of Borders, in the book retail industry, is Barnes and Noble. The two companies hold the strongest positions, so they are in tight competition. The two are in the same “strategic group,” (Thompson, 100) meaning they have similar product line, services, geographical coverage, prices, quality ranges, distribution channels, and costs. Both companies incur a high cost due to the magnitude of inventory consisting of books, CDs, and book-related products (bookmarks, notebooks, writing utensils, etc.). Geographic coverage of the two stores are similar, although Barnes and Noble has over twice as many stores nation wide than Borders. Barnes and Noble has 896 bookstores, employing 37,000 people. Borders has 400 bookstores, employing 15,000 people. (Appendix ???) “Barnes & Noble.com is a leading online retailer of books, music, and DVD/video. Since opening its online store (www.bn.com) in March 1997, Barnes & Noble.com has attracted more than 13 million customers in 232 countries. Barnes & Noble.com’s online bookstore includes the largest in-stock selection of in-print book titles, with access to over 1 million titles for immediate delivery, supplemented by more than 20 million listings from its nationwide network of out-of-print, rare, and used book dealers. Barnes & Noble.com offers its customers fast delivery, easy and secure ordering, and rich editorial content” (www.barnesandnoble.com). The weakest industry positions consist of the independent bookstores and other book sellers that are unknown around the country. Borders must anticipate rivals’ future strategies to remain on top of industry growth and be competitive. Anticipating rivals’ next strategic moves is necessary to staying competitive. Some bookstores may try to copy technology or strategies from each other, so as to beat the competition. “[Borders] understands that [some rivals] are also using [the ‘Title Sleuth’ technology] now as well” (Pringle). Barnes and Noble has been teaming up with Starbucks in order to accommodate customers with coffee and pastries, which is in direct competition with Borders’ in-store coffee shops. In the future, competitors may follow the category management system that Borders uses, as well. Borders must continue to focus on its strategy of providing differentiated customer service and experience, aspects of the store that have “staying power” and are difficult to replicate. Borders’ top rival, Barnes and Noble, have many upcoming strategic moves planned and initiated. For example, “Barnes & Noble.com announced the creation of Barnes & Noble Digital, an electronic publishing imprint that will create a direct link between authors and their readers, give authors a greater share of the income from their works and lower retail prices in an effort to build the emerging market of eBooks” (www.barnesandnoble.com). Three other new initiatives are “Internet Service Counters powered by Barnes & Noble.com, enabling store customers to order any book or other product through Barnes & Noble.com at any Barnes & Noble store; a membership loyalty program, called Readers' Advantage, that offers additional discounts and benefits in Barnes & Noble stores and at Barnes & Noble.com for a $25 annual membership fee; and a customer returns program allowing Barnes & Noble.com customers to return books and music CDs purchased at Barnes & Noble.com to any Barnes & Noble store and receive merchandise store credits” (www.barnesandnoble.com). Barnes and Noble also teamed up with Yahoo! to increase marketing, and is also opening an online textbook store that will sell new and used textbooks. Key success factors that follow with Borders’ strategic platform and mission statement include both technological and strategic moves. Industrial technological and strategic trends are dynamic in nature, and therefore, Borders Books has been flexible and reacted appropriately. For example, the Internet has made it imperative to enable customers to buy, or at least browse, the merchandise over cyberspace. Borders teamed up with Amazon to create www.borders.com, a website that allows customers to buy books and CDs online. Teaming up with Amazon was a strategic and technological move to supply the best service to online customers. Although Borders is now working with a competitor, Amazon allows an advantage for Borders “as [Amazon] is the expert at providing on-line book purchasing” (Pringle). “Launched Aug. 1, 2001, the co-branded site gives customers an enhanced shopping experience featuring Amazon's personalization and 1-Click™ ordering, among other benefits. Through the alliance, Amazon.com handles inventory, fulfillment, customer service and general content” (www.borders.com). An advantage for both companies is that Amazon and Borders’ online customers have the option of picking up their purchases at any Borders store. Other technological advancements Borders’ benefits from is the “Title Sleuth.” It has made it easier to satisfy customers by simplifying the hunt for books in the stores. The computerized system adds to the differentiated customer service strategy. The Borders Visa Card is another success factor. Every time a customer uses the card, he/she earns points toward merchandise at Borders bookstores. Borders also has Business and Professional Services Cards in order to aid businesses in customization, ease of purchasing, and future discounts. Strategic trends, such as Wal-Mart and Target’s low cost leadership position, force Borders to maintain and constantly develop its differentiated position by emphasizing the customer service and experience. The category management system enables Borders to be flexible, organized, and meet customer needs efficiently and effectively. This type of management system allows Borders to dominate in the organization of its selection of books, CDs, and other such products. Customer service is another aspect of Borders’ differentiation in that the staff is well-trained, knowledgeable, and attentive. Employees help create the overall Borders customer experience. Furthermore, Borders’ in-store coffee shops encourage browsing, add comfort, and serve the customer. “Borders Group will install high-speed wireless service in cafes in all domestic Borders Books outlets by mid-2003, the company announced [October 10, 2002]” (Fleishman). Wireless Internet access not only differentiates customer service, but also enhances the customers’ experience. Future estimates for Borders include an approximated mean of 1.43 in earnings per share by the end of 2003. At the end of 2004, the mean is expected to increase to 1.55 in earnings per share. The long term growth rate is estimated to be about 13 in earnings per share. Barnes and Noble’s estimate in earnings per share is expected to be 1.57 in 2003 and 1.55 in 2004. The long term estimate is approximately 15.38. The top two competitors in the industry are expected to grow in the next two years, therefore the entire industry will most likely grow with them. The two companies will continue improving technological advancements and customer service in order to stay competitive and on top of the industry.
Company Situation Analysis

Overall, the Borders strategy appears to be keeping the company at the top of the market. The company makes more profit than Barnes and Noble, as well as manages its equity better. However, sales growth for Borders plummeted in the quarter ending 1/27/02, and has been slow to increase since then. The quarter ending 10/27/02 decreased from the quarter before it, yet Borders still manages to make a profit. (Appendix??? Income statement) Profit margins greatly differ between the two companies: Borders captured 3.31% profit margin compared to Barnes and Noble’s 1.54%. (Appendix???) By observing the companies’ return on equity, return on assets, quick ratios, and current ratios, one can see that Barnes and Noble’s equity is going to assets and not shareholders; while more of Borders’ equity is going to shareholders. (Appendix???snapshot) Therefore, it appears that Borders’ differentiation strategy is beating out Barnes and Noble’s strategy using the key success factors mentioned in the industry and competitive analysis. Borders possesses many strengths and opportunities, though, the company must realize and address the weakness and threat they face.
Borders’ strengths: Powerful strategic platform Recognized market leader High profit margin Strong brand name National and international geographic coverage “Title Sleuth” Category Management System Borders Cards Visa Business and Professional Services

Borders’ weaknesses: No measurable objectives in mission statement Less geographic coverage than Barnes and Noble Decreased profits in last quarter
Borders’ opportunities: Wireless Internet access in Borders Bookstores Advertisements on MapQuest’s driving directions website E-Commerce technology www.borders.com teamed with www.amazon.com Global market expansion

Borders’ threats: Barnes and Noble Popularity Innovations Amazon Popularity Innovations Current USA economic conditions New entrants Brick and mortar companies Online companies CD/DVD and literature technological advancements on the Internet * Sterling Publishing revoking supplies (Appendix???)

* Trends in the music and movie industry are heading towards technology allowing customers to pay for and download music and movies from the Internet. This technological advancement poses threats to the brick and mortar bookstores that also sell CDs. Companies may even go a step further and sell books and literature over the Internet. Lower costs are incurred due to the lack of inventory; customers merely download the information and pay for it using credit card, for example.

Borders’ strengths contribute to the company’s resources in that they have “staying power” and are difficult to duplicate. The differentiation strategy is defined by the customer experience and category management system. The trained and attentive employees with the category management system create an organized, helpful, and competitively superior customer experience. Borders prices directly compete with Barnes and Noble prices in that they are a bit lower and earn a lower price per earnings ratio. (Appendix ??? snapshot) There are significantly more Barnes and Noble stores which may contribute to the higher prices. Borders’ efficient category management system may also help with lowering costs and building revenue. Issues that Borders faces in terms of vulnerability to competitors is technological development and Internet capabilities. Borders has e-commerce capabilities, however, they must capitalize and constantly improve it to keep ahead in the industry. Borders must also realize the growing popularity of Amazon and Barnes and Noble as well as free literature on the Internet. Increasing profits is always a top priority, especially in the current USA economic slump; however, Borders must be creative and patient in dealing with the economic troubles.

Company Value Net Analysis

Buyers: Customers of Borders consist of anyone from teachers and students to parents. The market base of book buyers range far and wide; anyone who can read and afford books are targets.
Complementors:
Book shelves, lights, and any other book-related products qualify as complementors to Borders. Writing utensils (pens, highlighters, etc.) and notebooks are also complementors to any textbooks or educational books that Borders sells because people might take notes or mark certain passages. Glasses are indirectly complementors to books in that people who have trouble reading, might decide to buy glasses in order to enjoy their favorite books, or books that are mandatory for them to read (for school, work, etc.). CD players and computers are complements to the CDs that Borders sells. Coffee is a complementor in that some people enjoy drinking coffee or coffee products (espresso, cappuccino, etc.) while reading books.
Suppliers:
Publishers, authors, and musicians supply Borders with books and CDs.
Substitutes/Competitors:
The first six bullets are the direct competitors of Borders Bookstores, as mentioned in the industry and competitive analysis. The remainder of the listed points consists of substitutes for buying books or CDs at Borders. Instead of buying a child or friend a book, one may buy a board game or toy from a toy store or a movie/DVD. Newspapers and magazines are other alternatives to reading books, as well as surfing the Internet or watching television.
Conclusion
Borders is a major player in the book retail industry, and should remain competitive if it can continue improving technology and its differentiation strategy. Borders should capitalize on the e-commerce website as well as the wireless Internet access capabilities in each Borders store. Borders may even advance technology on the Internet to allow customers to download information for a price. Customer service will continue to improve with easy to use technology, like “Title Sleuth,” and advanced technology, like the e-commerce website. Allowing wireless Internet access in each Borders store will attract more customers, while urging them to buy more books, CDs, or any other book related products, because of increased time in the bookstore. Management should use current strengths to improve weaknesses and capitalize on opportunities. More promotions for major suppliers with aid the supplier-buyer relationship as well as encourage potential customers to browse the store. Continual advertising on MapQuest and television will also help increase awareness and brand name. Eventually, Borders managers should think of expanding nationally as well as internationally in order to increase the customer base. With further profits and use of equity, the management can fulfill the Borders strategic plan effectively and successfully.

Bibliography

Fleishman, Glenn. “Borders Will Install Wireless Service In Cafes.” New York Times, Friday, October 11, 2002. http://premium.news.yahoo.com/news?tmpl=story&u=/nytp/ 20021011/329843&.bail=http%3a%2f%2fpremium.news.yahoo.com%2frd%3fr%3d%22borders+books%22

Pringle, Sherry. Corporate Affairs/Investor Relations. Email correspondent. COOSAP@bordersgroupinc.com. 2/18/03.

Thompson, Arthur A and Strickland, Dr. A. J. Strategic Management: Concepts and Cases. McGraw-Hill/Irwin: New York, NY, 2001. 12th ed. Page 100.

Websites Visited http://www.bordersgroupinc.com http://www.barnesandnoble.com/ir/corpinfo/index.asp?userid=54GWFAT5P8

http://yahoo.marketguide.com/MGI/mg.asp?target=%2Fstocks%2Fcompanyinformation%2Fsnap&Ticker=BKS

http://yahoo.marketguide.com/MGI/mg.asp?target=%2Fstocks%2Fcompanyinformation%2Fsnap&Ticker=BGP http://yahoo.marketguide.com/MGI/mg.asp?target=%2Fstocks%2Fcompanyinformation%2Fearnings&Ticker=BGP http://yahoo.marketguide.com/MGI/mg.asp?target=%2Fstocks%2Fcompanyinformation%2Fearnings&Ticker=BKS

http://yahoo.marketguide.com/MGI/signdevt.asp?target=%2Fstocks%2Fcompanyinformation%2Fsigndevt&Ticker=BKS

Appendix A

Appendix B

Appendix C

Appendix D

Appendix E

Appendix F

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