Amazon v. Borders Borders Group filed for bankruptcy protection in early 2011 (Wahba, 2011) and began liquidating its assets in July of the same year (Khouri, 2011). The company was founded in 1971 and operated an expanding network of stores until 1992 when the group was bought by Kmart and later merged with Waldenbooks. The combined entity was spun off with an IPO in 1995. Flush with capital, by 1997 the company announced an ambitious plan to grow the chain rapidly. In launched its online site in 1998, three years after Amazon entered the business. In 1999, the company made an ill-advised purchase of a toy retailer that hurt its liquidity and was forced to seek options to recapitalize. It signed a deal with Amazon to run the Borders e-commerce site. The company continued to have problems in the late 2000s, including another liquidity crisis, job reductions and it finally gets back into e-commerce in a serious way with a new site and an e-book store. The company's fortunes rebounded temporarily but by early 2011 the company was once again losing money and having cash flow problems (Wahba, 2011). In retail, if December does not set you up well for the winter, your company is going to be in trouble, and that was the case for Borders as its long-running problems came to a head and it was forced to declare bankruptcy. Throughout this time, Borders was focused strictly on the U.S. market, had sporadic Internet presence (thus limited channel distribution) and maintained a limited product line.

Amazon.com was founded in 1995 and quickly gained first-mover advantage in online book and movie retailing. Even though the company was not profitable, the business was growing. When the mass market began to see the business potential of the Internet, Amazon went public in 1997. Flush with capital, the company began to expand both its product lines and its geographical scope. By 1999, the company had expanded into multiple product lines and continued to invest in staking out a dominant market share in many segments of online retailing (Funding Universe, n.d). The company turned a profit for the first time in 2001 and never really looked back. Today Amazon is the world's largest online retailer, with many geographic divisions and a wide-ranging product line that goes far beyond books and movies.

2. Amazon has always been an Internet company. It opened its site in the early days of the Internet, at a point in time when the concept of Internet retailing was unheard of. The company had to learn through trial and error about the best practices of operating such a business. Yet, with no bricks-and-mortar operations to serve as either a cushion or distraction, Amazon was forced to innovate and excel in the online space in order to survive. The company had enough early successes to attract a steady stream of investors to keep it afloat until it finally turned a profit. This contrasts with the approach that Borders took. After its IPO, the company continued to focus on building out its book stores. It bought a toy store company as well, to increase its bricks-and-mortar presence. The company was so focused on building out its traditional businesses -- perhaps with visions of being the bookstore category killer -- that it was late to move into the online space. Even when it did make the move, it did not take that part of the business seriously. Investment of time and money was relatively low and the Borders website was always a follower. The company then did a flip flop and back again, first partnering with Amazon to run its site and then attempting to build its site back again, many years after it had already ceded dominance in the space to Amazon. Borders never established itself as a serious online book retailer.

3. There are three key reasons for Amazon's success in its first 5-6 years. The first was that the company was innovative. It was a pioneer in online retailing in general, but more...

Without this constant improvement, Amazon may have been eclipsed a long time ago. The second key success factor was finding investors to fuel expansion. The company was able to gather venture capital on account of its innovation and market leadership. This in turn kept the company afloat until the IPO. There was capital from the IPO and by then the market for Internet stocks was huge. The company could easily tap the capital markets if more money was needed, buying it enough time to invest in expansion at a point when it was not yet profitable. The third reason for the company's success was its expansion. Amazon kept expanding into new product lines and geographic segments. This increased the customer base, and it worked to keep competitors out of its segments.
4. Borders ended up in Chapter 11 for a couple of reasons. The first is that the company's financial management was poor. After the IPO, it spent its money on a toy company in a deal that went nowhere fast. The second is that once the balance sheet was damaged, Borders did not have the money to invest in building a better business, either online or off. As a consequence, the company rapidly fell behind online. The third reason that Borders ended up in Chapter 11 is that a significant share of book-buying moved from offline to online. As Borders had a weak presence online, this hurt the company's revenue by essentially taking business out of its stores and sending it to Amazon. With declining revenues, an emphasis on the wrong part of the bookselling business and sloppy financial management, Borders' financial condition slowly deteriorated to the point where Chapter 11 was the only option.

5. Amazon's management adapted well to changes in the external environment. It anticipated the success of Internet retailing. Amazon was also proactive in leveraging its first mover advantage to build out market share before the market matured. This strategy continues to serve it well today, when its nearest competitor is Wal-Mart.com. Amazon would never have been able to battle Wal-Mart if it had not had the foresight to build out its business aggressively in the late 1990s. Borders, in contrast, did a terrible job in responding to changing market conditions. The company did not see the potential offered by the Internet and as a result continued to invest in building out its bookstores. Borders also failed to see that Amazon was a major competitor, and really did not take any steps to either defend against it, or to insulate itself from it by diversifying into other businesses. In essence, Amazon was visionary and proactive while Borders was reactionary.

6. In order to enjoy flexibility in decision-making, the company must build that flexibility into the organization in general, beginning with the key inputs such as organizational culture and the sources of financing. Management must have a flexible mindset, something Borders did not have. Beyond that, the company needs to have money, again something Borders did not have after 1999. Hitt, Keats and DeMarie (1998) outline what an organization does need -- strategic leadership, dynamic core competencies, human capital development, innovative outlook with respect to new technologies and flexible organizational structures. When we look at Borders, leadership was a weakness, the company did not have dynamic core competencies and there was no real human capital development. At Amazon, the leaders were visionaries. The core competencies were in merchandising and technological innovation, the latter being very dynamic and the organizational structure was flexible and built for growth.

We can see that when the conditions for flexibility exist, the company is more likely to be flexible. Leadership is a critical element. At Borders, the…