Understanding the Business Failure - Coursework Example

Executive Summary

Collapsing of a firm is not a random act, but rather a process that takes a considerable period before it is manifest. The action a firm takes plays a critical role in facilitating the process of business failure. In this paper, Border Group Inclusive will be used as an example of a firm that is experienced challenges and ending up closing its stores in the year 2011.

Border Groups Inclusive was a leading firm selling books, music and movies. It had gained reputation thus its sales volume were commendable. However, in the year 2006 its tragedy began which was reflected on the firm’s financial statements. Borders Group did not embrace technology to aid in its services instead concentrated on expansion program to increase the number of stores and this led to its downfall. Borders Group Inclusive officially closed its stores in 2011. Part of the reason for its decline can be linked to the short servicing of CEOs and then exiting. Possible turnaround strategies have been discussed that would have salvage Borders Group from collapsing.

1. Introduction

An economy of a nation is built by the sprouting of businesses; therefore, closing or falling of business is a setback towards the economy growth. According to (Diebold, 1982, p.5), companies have a responsibility to excel for the interest of various involved parties. This has placed firms in a compromising situation in an attempt to balance the conflicting interest of stakeholders (Diebold, 1982, p.6. A good example of a firm that is underwent challenges and finally closing its stores is Borders Group Inclusive. Borders Group Inclusive was a leading firm that sold books and movies in the United States. The firm was founded in the year 1971 and its headquarters was in Anna Arbor, Michigan. After serving the market for forty years it was time for her to hang its boots in the year 2011. It had grown business-wise and opened other stores in Australia and United Kingdom.

2. Case study for Analysis

In the year 2011, it was time for Borders Group Inclusive to wave and say goodbye to the books and movie market. Borders Group Inclusive being a leading firm that sold books and movies in the United States it was unfortunate, but it was a decision that had to be taken. The growing demand for online services has forced firms to move out of their comfort zone and address the needs by their clients (Shaw, 2003, p14). This case was different for those who sold books and movies, so was Borders Group Inclusive. According to (Shaw, 2003, p18), the tight schedule of clients had reduced the time available to conduct some shopping that requires visiting the physical store. Borders Group Inclusive interpreted the tight schedule with respect to proximity of its stores. Thus management embarked on a strategy of making Borders’ stores close to the clients. Increasing the number of stores was the approach the management took. This approach still did not bore the expectation of the management, as far as, sale was concerned. The approach was financed through loan which increased the cost of operations for the firm.

Borders Group Inclusive had not been responsive to the changes in the market and continued to offer its services only at her stores. Clients continued to purchase the books and movies from the stores, but the number of clients kept on declining (http://www.huffingtonpost.com/2011/09/15/what-happened-to-borders_n_965235.html n.p). Upon realizing, its wrong turn it contracted Amazon Company to sell its products using online platform. The idea was good on aiding customers access the books and movies conveniently. However, its calculation was the worst ever. This is because both Borders Group Inclusive and Amazon Company were competing companies. Therefore, in other words Amazon was the great beneficiary of this move by Borders Group Inclusive. It was until the year 2008, when Borders Group Inclusive decided to manage its own online platform for its clients and terminated the contract with Amazon. The idea was implemented too late, and Amazon Company had already created its reputation on selling books online and clients had gained confidence on them. In other words, the decision Borders Group Inclusive took led to the steady rise of its competitors. Using financial statements to prove the progress of these two firms during the contract this is observed: Borders Group Inclusive recorded the following profits/ loss $ 101,000,000, -$ 151,000,000, -$ 157,000,000, -$ 187,000,000, and -$ 109,000,000 for the year ending 2006, 2007, 2008, and 2009 respectively as shown on appendix A (http://www.wikinvest.com/stock/Borders_Group_(BGP)/Data/Income_Statement#Income_Statement n.p). That for Amazon Company was as follows, $ 190,000,000, $ 476,000,000, $ 645,000,000, and $ 902,000,000 for the year ending 2006, 2007, 2008, and 2009 respectively (http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual n.p) as shown on appendix B. These figures prove that Borders Groups Inclusive was the losing partner in that contract.

3. Multi-level Root Cause Analysis

The process of identifying the root cause of a problem can only be successful if the parties involved admit the existence of a problem (Okes, 2009, p.3). Therefore, after trying to open new stores to facilitate access of its stores, sales did not increase. Thus management accepted the fact that something was wrong and indeed a solution had to be taken. Now the key issue is how Borders Group Inclusive got to this point and ending up shutting down its stores. The Root Cause Analysis will aid in finding the sequence of events that got Borders Group Inclusive to close its stores and acquired by Barnes and Noble.

The first question that needs to be tackled is why Borders Group Inclusive had declined sales

Therefore, this question formulates the problem facing Borders Group Inclusive. Technology is developed to enhance the quality of life and therefore, how firms manipulate it will impact on sales volume. Upon its inception Borders Group Inclusive recorded considerable sales volume as reflected on the firm’s financial statements. During that period brick and mortar form of business transaction was preferred. According to (Appleby, 1994, P. 73), the change in the society with increased cost of living has pushed persons to have tight schedule. Existence of firms that were selling books, movies, and music using online platform was a relief to such customer base. Borders Group Inclusive being one of the giant firms in the books market started to experience decline in its sales. Therefore, the decline in sales volume is attributed to the failure of the firm to respond to the change in the society or rather disregarding the value associated with technology. Firms like Ebay upon its launch had proven that indeed online selling of products was possible. Clients purchased products using this platform and the use of physical stores was only possible if one had adequate time. It is debated that all consumers will go for what they prefer at the time of need and convenience is a major factor when making decision on preference (Hamel, 2007, P.83). Borders Group Inclusive had failed to enhance accessibility of its products, thus inconveniencing a section of its market. As a result the clients switched to other providers, thus a decline in the sales of its product and profits altogether.

The second question to be tackled is why Borders Group Inclusive resort to an expansion program

Interpretation of the management was that the declined sales volume was caused by the challenges of accessing the firm’s stores by the clients. As a counter measure for the problem, the firm resorted to an expansion strategy by increasing its number of stores (http://www.annarbor.com/business-review/borders-rise-and-fall-a-timeline-of-the-bookstore-chains-40-year-history/ n.p). At this period the firm was not in a position to support the expansion program; therefore, it was financed through loan. This decision of expansion and sourcing funds via loans was ill-advised because the main reason. According to (Naumann, & Stanford Alumni Association. 2000, p. 8), consumers dislike visiting brick and mortar form of business on the grounds that the cost of visiting stores compared to online purchase was incomparable. Therefore clients still held high confidence and trust on the online purchase. One should understand the products (books, music and movies) Borders Group Inclusive sold were easy to be described when posted online, thus the issue of wrong products delivered to the client is least expected. The expansion strategy was implemented and yet the expectation was not met. This proved to the management that indeed it had taken a wrong decision by heavily investing in opening new stores and sales still declining. In such circumstances (Burrow, & Kleindl, 2013, p.58) suggests that a firm should reconsider the steps it had taken before making a rush decision. After analyzing the steps it had taken, the management resorted on closing some of the newly opened stores were later closed to reduce the cost of operations.

The third question is why did Borders Group Inclusive resorted to contract Amazon Company to sell its products using online platform

It was clear to Borders Group Inclusive that indeed, its expansion program had failed to turnaround the progress of the firm. Online market had proven to be successful and Amazon Company had thrived in using the online platform. Therefore, the management of Borders Group Inclusive thought it was a nice idea to have Amazon Company to manage its online sales business. It should be noted that these firms are competing for the same market and for Borders Group Inclusive to make that decision was suicidal act that manifested in the year 2011, when it closed all its stores. Amazon was able to build its reputation through the contract and its profit increased. According to (Keough, 2008, p.174), businesses operating in the same industry always compete for the existing market and will never turn down an offer that will benefit the firm in winning the market. According to (Baird, Post, & Mahon, 1990, p.162), all the four key functions of management should be conducted from the central. However, the contract between Amazon and Borders Group gave Amazon an opportunity to perform all functions of management on behalf of Borders Group Inclusive. This was the case of with the contract between Amazon Company and Borders Group Inclusive. The online sales business for Borders Groups Inclusive was managed by Amazon for eight years before Borders Group took it back.

The fourth question is why Borders Group Inclusive did not manage its own online sales business.

The reputation Borders Group Inclusive had built over the years was sufficient for it to gain trust on online business. However, Borders Group resorted to contract Amazon to perform that function on its behalf. According to (Heizer, & Render 2001, p.49), outsourcing services are key strategy employed by firms to ensure it concentrates on its core activities. They further suggested that, it is prudent when outsourcing, a firm to avoid selecting a competitor to perform the task. This was contrary to the outsourcing procedures adopted by Borders Group Inclusive. The firm outsourced its core business to a competitor. According to (Papatheodorou, 2006, p.83), a healthy competition should ensure it benefits from the competition, as well as, transformation I the industry. The industry transformed by the competition, by books being sold digitally as opposed to the tradition way. One might ask why the firm took that decision. There are two approaches to this question; one approach is that the firm that it was not in a good position to manage an online business. Therefore, chose Amazon Company which had been in the online business for a considerable period to conduct online business. Another approach is that Borders Group Inclusive considered online sales business as a form of diversification of its operation. According to (Kenny, 2009, p.95), diversification leads to an increase in a firm income however, proper check on its impact to the future of the business needs to be considered. Borders Group considered income from the sales made by Amazon as extra revenue but failed to assess the future impact. Despite it contracting the online service it only recorded profits till the year 2006 and a series of losses was witnessed till its closure. It came to the senses of Border Groups that it should be running its online business and it took back 2008. Unfortunately, it could not compete with Amazon and other firms selling books online, thus continued facing losses.

The fifth question is why the management made decisions that were not effective and led to the collapse of Borders Group Inclusive

The success and failure of a firm depends on the decisions made by a firm (Hill, 2005, p146). Borders Group Inclusive made several decisions in attempt to salvage the firm from collapsing, unfortunately the decisions failed. The firm has changed the number of CEOs and the worst case was having four CEOs in a span of three years. This is the underlying reason why all these decisions were unable to turnaround the firm. A decision made or plans designed by a CEO can be effectively be implemented under the supervision of the CEO and in case of failure s/he might know how to turnaround. However, change of CEO will impact negatively the implementation process a key concern that led to the collapse of Borders Group Inclusive.

Figure 1.1

Figure 1.1 shows the decision of management and its impact

4. Turnaround and exit strategy for Borders Group Inclusive

It is indisputable that the decisions made by the management of Borders Group Inclusive formed the path that led to its collapse. However, this did not mean that Borders Groups Inclusive could not be turned around to save it from collapsing. According to (Vitale, Giglierano, & Pfoertsch, 2011, p.89), the decision regarding on whether the firm can bounce back after facing severe financial challenges depends on the shareholders and management agreement. At the same time the firm might decide the market if chances of bouncing back seem to be is slim.

Upon identification of the root cause of the problem that has caused the Borders Group inclusive to face series of financial challenges, two decision were possible to be made namely

Exit strategy and turnaround strategy.

Exit strategy:

• Liquidating the firm’s asset
• Selling the firm (acquisition by another firm)

Turnaround strategy:

• Issuing new shares of the firm
• Merging

4.1 Exit strategy

There are instances where a firm cannot bounce back regardless of how much effort is placed to aid in the process. Therefore, an exit strategy need to be developed to ensure a firm leaves the market without having tarnished its brand.

4.1.1 Selling the firm

Borders Group Inclusive could source for a firm that is in a better position and sell the firm to the acquirer. This process is referred to as acquisition. According to (Cooper, & Finkelstein, 2007, p.24), the process of selling a firm requires a negotiation between both parties because the interests of the shareholders need to be taken into account. Borders Group Inclusive value need to be done by experts to determine the true value of the firm.. Total liabilities associated with the firm need to be revealed in the process of acquisition. However, some firms do not reveal all financial information in anticipation to increase the value of the society. Borders Group Inclusive used this approach by being acquired by Barnes and Noble.

4.1.2 Liquidating the firm’s asset

In the event the acquisition process does not go through and the firm has to exit the market, then liquidation of the firm’s asset will be an alternative. According to (Hawkey, 2002, p.57), liquidation will help in the exit strategy by a firm’s assets are transformed into cash to settle obligations. Borders Group Inclusive would have to prepare a list of all its creditors and pay them off from the proceeds of selling the assets. Any unpaid salary and wages will be paid after creditor’s dues have been settled and whatever remains is distributed among the shareholders based on an individual number of shares.

4.2 Turnaround strategy

Borders Group Inclusive financial status at the time of its closure was weak for it to continue operating. However, the decision to close it was not called for, because the firm had the potential to turn around. According to (Lenahan, 1999, p.124), for a turnaround approach to be successful restructuring of the management structure is vital. This will eliminate chances of plans failing to meet the expectation due to change of management team as witnessed by the frequent change of CEOs at Borders Group Inclusive. In addition to that, the management needs to be responsive to changes in the market to avoid delay as it was witnessed on the adoption of online technology

4.2.1 Issuing new shares of the firm

The firm would have consulted its shareholders and discuss on a potential bail-out approach. The first approach would have been to request the shareholders to pump in more cash. The value for their share would have increased. The second approach would have been to increase the number of shares and sell it to the public. This approach would have lowered the value of an individual because of share dilution. (Milne, 1991, p.16) criticizes this move for firms that are facing financial challenges because it might lead to additional cost of issuing shares and yet the target funds not realized Also the firm can approach potential investor to pump cash to the firm to aid it in bouncing back. However, this approach will require the firm to prove to the investor the plan that it has developed to ensure it does not fall back again (Kaplan, 2000, p.91)

4.2.2 Merging

Failure to get potential investors and unwillingness of investors to pump in more cash is a possibility. The next action that would have been considered would have been merging Borders Group Inclusive with another firm that is stable. The process of merging a firm has to ensure the interests of the shareholders are taken into account as well as the existing employees. (Gaughan, 2005, P.183), elaborated that the merge should ensure the reputation of the firm involved is considered because a firm with a tarnished reputation is on its path to the “grave”. Borders Group Inclusive would have considered to merging with a firm like Barnes and Noble.

5. Conclusion

The business world is a delicate one that any approach or decision made has an effect to the business either positively or negatively. The challenges that faced Borders Group Inclusive were a result of decision that the management took. Failure to consider changes in the market when making decision is the path towards the collapse of firm. However such challenges are supposed to enhance future decision-making process of other organizations. If proper plan were designed then Borders Group Inclusive would not have exited the market.