This blog first appeared as Steve Wunker's piece for Harvard Business Review
By Steve Wunker
Faced with an eroding core business, most companies seem to do…nothing. In the media and entertainment industry, look at Blockbuster’s lackluster embrace of mail delivery and video streaming, newspapers’ mainly tepid moves into digital publishing, and television networks’ doubling-down on a small number of hot shows. A company in a turbulent industry often seems like a dairy farmer whose herd has been reduced to just one cow, whose only adaptation of his business plan is to milk that heifer extra-hard. The story cannot end happily.
Barnes & Noble (B&N), America’s largest bookseller, is bucking these trends. While its biggest traditional competitor, Borders, has ended up in bankruptcy, B&N is creating a credible growth plan in the midst of upheaval. In the first quarter of 2011, industry-wide book sales were down 2.5% from the same period in 2010. Print books are in decline but e-books are rocketing ahead, growing nearly 150% year-on-year. B&N is moving boldly into this future in four ways that hold lessons for any company facing a troubled core:
Competing with its legacy business: Rather than swim against the e-book tide, B&N has embraced the inevitable with its Nook readers. Other bricks and mortar booksellers have offered e-books online, and Borders licensed a reader of its own from an outside company called Kobo. But B&N is the only legacy retailer to create its own devices — and rather than offer a single reader as a defensive move, it took the offense with a frequently updated family of products that are promoted prominently in-store. The company has moved so aggressively into the reader space that its e-book market share has grown to 26%, and Consumer Reports has rated the latest Nook as (by a hair-thin margin) the best reader in the industry.
Focusing on target customers: The Kindles try to be versatile, toting around pdf documents from a user’s PC and allowing for easy text annotation. B&N’s Color Nook has more modest aims as a device focused tightly on reading, but it is a stand-out in how it handles glossy magazines and children’s books. In its functionality, design, and marketing, the device aims squarely for women who love to read. The more basic black and white model has been praised for its size, weight, and ultra-intuitive operation. B&N CEO William Lynch says it’s made “for Grandma.” While Amazon is rumored to be working on full-fledged tablet computers, B&N is carefully picking its shots. It has made a brave bet on customers who love reading yet have been under-addressed by its giant rival.
Experimenting relentlessly: B&N has long been in the vanguard of the bookselling industry. It was one of the first to discount bestsellers, publish its own titles, offer authors self-publishing options, create super-stores, and put coffee shops in its establishments. More recently, it has succeeded with selling toys and games. The company has also made its share of missteps, such as buying the mall-based bookstore chain B. Dalton whose shops have now been closed. In an industry stretching back centuries, it readily tries out new formulas and adjusts its approaches based on careful listening to marketplace reactions.
Staying humble about what can be known: While B&N has chosen a sensible target market of frequent readers, it does not pretend to know exactly how their habits will evolve. Any big retailer makes long-term financial forecasts to assess the viability of store sites, yet B&N understands that its projections must be exceptionally uncertain these days. It has typically taken 10-year leases on stores, but with over 100 store leases now up for renewal annually the company is negotiating short-term contracts that allow it to close stores quickly. Sometimes companies are lauded for making clear predictions about a hazy future, but the bravest and most honest forecast may be, “We just don’t know.” B&N is willing to incur higher lease costs in the near-term to provide it with much-needed flexibility over the medium-term.
An industry transitioning from physical products to virtual goods goes through about as jarring a change as can happen in business. Many companies don’t manage to make the leap. The jury is still out about whether B&N will succeed, but investors seem willing to believe; the company’s stock price has been retaining its value. If B&N can move so bravely, shouldn’t companies with the luxury of healthier core businesses chart their futures this capably too?