Executive Summary

The company that we have chosen for our research is Borders Group Inc. The research
question relating to the topic extracted from the textbook (Lynch, 2012), Analyzing the External
Environment of a Firm is The failure of Borders to perform effective External /
Environmental Analysis. We chose this topic for our discussion because we believe that
analyzing the competitive environment is important and in strategy management, the
environment basically means the outside forces that impact the people outside the organization,
including competitors, customers, suppliers and other influential institutions such as local and
national government. Environmental analysis is therefore crucial to a company and may even
affect its going concern, just as in the case of Borders.
The aim of this assignment is to look at the strategic issues faced by Borders and perform
a Strategic Analysis comprising three Strategic Tools (SWOT, PESTLE and Porters Five Forces)
by conducting secondary research by utilizing the Internet and even library books. Thus, our indepth research about the strategic issues of Borders has helped us come up with appropriate
solutions that could have helped Borders understand and adapt to the changes in the External
Environment to remain competitive. As such, we would be covering the Five Ws and One H
technique to assist in finding the core problems and solutions of the ineffective strategies which
caused the downfall of Borders Group Inc.
As it is important to study the environment surrounding the organization to gain not just a
competitive advantage but Sustainable Competitive Advantage, an organization must be able to
learn from its mistakes in the past and move forward. As such, we will also look into the lessons
learned from the mistakes made by Borders in failing to analyze its External Environment
promptly and accurately.

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1.0 Introduction : Borders Group Inc

Borders Group Inc was founded in the early 1970s by Tom and Louis Borders, University
of Michigan graduates who developed an inventory tracking system that, by the standards of the
time, was as sophisticated as computers allowed (Osnos, 2011). An early innovator in controlling
inventory, there was expert staff at its Ann Arbor headquarters and store managers who believed
in the value of book-selling. At its peak, Borders superstores had all the attributes of good bookselling whereby it had extensive selections, browsing space, coffee bars, and outreach programs
to surrounding communities.
The Borders brothers decided not to stay in the book business, and in 1991 sold the small
chain and inventory systems to Kmart for $125 million. In retrospect, that was when the trouble
began. Kmart already owned Walden mall stores, which were an awkward commercial fit with
the Borders culture. Kmart itself was at the start of a downward spiral, and in 1995 Borders was
spun off in an IPO (Bosmon & Michael, 2011). Under the leadership of Leonard Riggio, Barnes
& Noble (B&N; a big competitor to Borders) was expanding too, and the competition seemed
tight. Then came along Amazon.com to sell books online.
The external environment at that point of time was influenced by globalization. The
Internet made it possible for companies to expand without even opening a physical store. Book
enthusiasts switched to eBooks and tablets were on the rise. It was also in the mid 1990s that
Amazon launched as an online book retailer (The Conversation, 2011). B&N was quick enough
to respond to the changes in the external environment, but guess what Borders did instead?
Instead of beginning to develop its own initiatives on the Internet, Borders went international,
building a substantial chain in the United Kingdom and opening physical stores as far away as
Singapore. Borders closed an eye on the external environment.
In this research, we will look into the various strategic mistakes made by Borders that
caused it to always be a step behind where they needed to be. The company listed $1.29 billion
in debt and $1.27 billion in assets in a filing in United States Bankruptcy Court in Manhattan.
The Group is now non-existent.

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2.0 Strategic Issues : 5W Analysis of Borders Strategic Mistakes

2.1 Strategic Issue 1 : Negligence of Digital Technology and Poor Management
During the period of mid-1990s (when), the book industry was transcending to the digital
age. E-books were becoming popular compared to paper books. Extracting one of the PESTELs
checklists, Borders failed to analyze its Technological future in the speed of change and adoption
of new technology in its business plan strategies. Instead of adapting to the markets changing
needs, it opted to neglect e-books completely, and thus, running away from the current wave
(what). The Amazon Kindle came out in November 2007. Barnes & Noble (B&N), its longstanding competitor, debuted its latest e-book system, known as Nook, which was sold in
Walmart and Best Buy. Apple's iPad came out as a direct result of the increase in popularity of ebooks (Lowrey, 2011). Other companies adapted to market changes. Borders just did not adapt
and this was a very big problem that affected its going concern.
But where did this problem take place? It started off in the UK and due to globalization,
this problem became widespread. Borders was now losing money from all over the world when
B&N was diversifying its source of revenue without even opening stores overseas.
The top managements (who) environmental scanning was poor because they failed to
discover the changes in the external environment clearly. This similar mistake was done by the
famous Nokia. Nokia, was at heart, a hardware company rather than a software company. Its
engineers were experts at building physical devices, but not the programs that make those
devices work. In the end, Nokia profoundly underestimated the importance of software to the
new age customers, including the apps that run on smartphones. Instead of catering to the needs
of modern day smartphone users, the top management of Nokia continued to market its phones
based on superior hardware designs without even implementing good software. It basically gave
the market a product Nokia thought is best for them, instead of giving the market what they want
(Gregory, 2011). Just like Nokia, Borders ran away from the current market trend.
Why was this a problem? Pushing a product to a market (selling physical books) instead
of giving the market what it wants (eBooks) will cause customers to be frustrated and as such,
loyal customers will look for another company that can meet their needs. This strategic mistake
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by Borders caused it to lose its customer loyalty which is crucial for a market leader. At that
moment, all of its competitors had already tried to make a change for their business strategies in
order to follow the rise of the new era. The competitors such as B&N, Walmart, Costco, and
other stronger retailers reset their outlook by launching their own online bookstores. Realizing
that Borders was going the wrong direction, B&N quickly took advantage of this strategic
mistake and launched www.Barnesandnoble.com within two years.
The top management of Borders was unable to identify and understand digital trends
(what). In fact, the top management of Borders was unable to use effective strategies to adapt to
the fresh web-based environment. They mistook the popularity of technology by venturing into
the sale of CDs and DVDs, a total strategic catastrophe! Peter Wahlstrom, an investment
researcher stated that Borders strategy showed that Borders was handing the keys over to a
direct competitor" and was making mistakes after mistakes (Noguchi, 2011).
2. 2 Strategic Issue 2 : Outsourcing Online Sales to Competitor, Amazon
After many years in the red (due to its decision to ignore the Internet), Borders rethinks its
strategy to go online. During the era of globalization and the age of the Internet, it was apparent
to everyone that book sales would increasingly be made online. Since 1995 and the founding of
Amazon.com, books have been sold over the Internet. It can be said that the environment and
marketplace changed and Borders was finally aware of this (Austen, 2011). The first strategic
mistake made by Borders is to outsource its online book operations to Amazon (from 2000 to
2008) instead of establishing its own web presence (what).
It was obvious that online sales would start making up its main source of revenue but
Borders choose to hand over their most important growth channel to a competitor. Why was this
a problem? Borders basically grew its competitor for eight years! Outsourcing its website to
Amazon.com had cut deeply into Borders profit and even goodwill (brand). In 2000 (when), it
wanted to create an online presence to finally follow the market trend. However, to avoid system
development costs, it decided to outsourcing Borders.com to the most efficient online
organization, Amazon.com, hoping that this partnership would be able to turn around Borders. In
the short-term, this saved a lot of money while in the long run, Borders' branding, multi-channel

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strategy, and customer base suffered worldwide (where) because we know that the internet is too
important (Clarke, 2011).
Borders strong brand empowered Amazon's e-commerce platform. It seemed that
Amazon anticipated a parasitic outcome through this partnership, as seen through its evident
success in making its brand publicly-known through Borders mistake, while at the same time,
earning high fees (from Borders) for this service. This shows that Borders managements poor
strategic decisions and ineffective strategic leadership (who) caused it to suffer net losses of
$344 million for 2008 and 2009. This is similar to the case of IBM in the 1980s whereby IBM
naively handed over crucial parts of the computer business to companies like Microsoft and
Intel which caused IBM to soon lose the early lead in both, PC hardware and software to small
companies like Microsoft and Intel (Sommer, 2011).
Strategic Issue 3: Overexpansion in Physical Stores Overseas with High Costs
In the late 90s (when), instead of keeping abreast with the current market changes and
fast-booming growth in technology, Borders decided to venture into the overseas book market.
So, what did Borders actually do? It hesitantly went overseas building chain stores in the United
Kingdom, Ireland, Australia, New Zealand and opening stores as far away as Singapore. The
focus on Borders business in the United States seemed to have been blurred by this global
expansion. Eventually, its international strategy failed (The Atlantic, 2011).
Why did this move stretch the company thin? They over expanded and caused costs to
escalate, further cutting into profits, said Michael Norris, senior analyst with Simba
Information, who provided research and advice to publishers. The stores tended to be too big and
expensive in terms of overhead. In the late 1990s, Fair Labor Practices Act in America were
revamped due to the increased number of Labour Unions. For example, federal minimum wage
rate increased from $5.15 per hour in 1997 to $6.55 per hour in July, 2008 and it kept going up to
$8.55 per hour in 2009 (Labour Law Center, n.d.). This caused labour costs to escalate as most of
Borders bookstores were reliant on labour. All over the world (where), minimum wage rates
increased gradually..
To top it all, inflation rate in America at that time was at 5.4% (highest till today). In the

midst of expansion, most parts of the world were hit by the financial crisis in the early 1990s and
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the Asian Crisis in the early 2000s (Duggan, 2011). These events caused expansion costs to
increase even more. Borders also noted that it had signed too many long term leases (in line with
its strategy to expand overseas), making it harder to shed unprofitable locations later. The vast
use of Debt Financing to finance its expansion also caused high interest expenses. The more
unprofitable it was, the more collateral was demanded by banks and this increased loan interest
rates (Jacobsen, n.d.). In the end, Borders could not even sustain its own expansion and the
decisions made were costly and seemed irreversible.
This seemed like a terrible time for Borders to be expanding but that was exactly what it
did! This shows that the management (who) of Borders clearly neglected the importance of the
PESTLE Analysis. In the end, Borders closed most of its stores and laid off tens of thousands of
its employees after a failed attempt to sell the company at an auction as part of the process (Even
other companies thought that saving Borders was a terrible idea!).

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