Nook It

This is a sad piece. I typically try to keep emotions out of strategy but I feel bad for this company. It arranged a marriage between a new business and an old one, and it ran against what I’d call irreconcilable differences.

Companies in declining industries can get desperate, especially when they’re accustomed to market-leader status. They get beaten down by Wall Street, shareholders, and columnists. Sometimes they bolt way out of their comfort zone instead of trying to tune up the old business, scale down expectations, and ride peacefully into the horizon, making a lot of money in the process for shareholders.

In itself, venturing boldly into a new area when the old one is in decline is entrepreneurial vision at its best. Unless, of course, the new business is so far from the old business’ comfort zone — i.e., expertise, technology, infrastructure, etc. — that it’s like trying to cross a chasm in two steps. This is the case of Barnes & Noble. As USA Today reports, Barnes and Noble’s CEO, William Lynch, the one who led B&N into the e-commerce age with Nook, resigned on July 8, 2013. The reason is that the e-reader market is highly competitive (red, bloody ocean for sure) and Nook has been losing its shirt.

At the beginning, Nook looked like a great move. Praised by analysts for its bold move into hardware manufacturing, Lynch was a hero. On August 30, 2011, Forbes declared the venture a success (“B&N’s Nook bet paying off” said the headline). Lynch forecasted $1.8 billion in Nook hardware and content sales for 2012. The stock price soared. In November 2012, Microsoft paid $300 million for a 17.6% stake in Nook which put the value of the business at $1.7 billion.

Yet in April 2013, Nook’s fiscal fourth-quarter loss worsened to $177 million, more than double the $77 million loss a year earlier. Sales came to only $108 million, a drop of 34%. Chairman and Founder Leonardo Riggio told the board that he wanted to buy the stores and the website, but not the Nook unit. What happened?

Competition happened.

Incompatible devices typically lead to convergence to a few (think iOS and Android). But Nook was second to market, a pioneering product right on the heels of Amazon’s Kindle; it didn’t fail because it was tardy or lousy. Yet Kindle prospered while Nook floundered. Nook didn’t live up to management’s expectations and predictions but timing and technology aren’t why.

I do not claim there is one clear reason Nook-the-business fell short, but I do suggest it had little to do with Nook-the-product. More likely the problem was with irreconcilable differences. B&N had a history of brick and mortar stores selling paper and ink, commitments to inventory and leases, and the culture of a market leader in running anchor stores in shopping malls. Management must have been ambivalent about Nook, if not outright schizophrenic. It was not just cannibalization: successful companies cannibalize themselves with new products all the time. Instead, is it possible the new product was so foreign to B&N’s history and expertise, so utterly different from its large asset base, knowledge of customers and so on, that it proved to be too much? B&N didn’t only have to learn a new business; they had to unlearn an old business. Amazon was the opposite: no inventory, no fixed assets, enormous understanding of customers who buy online, and, not least, much more able to invest in its product. Amazon’s competitive advantage was the easier transition more so than a superior product.

Riggio’s offer (a kind of divorce settlement?) suggests that for companies in declining markets, revisiting their model is not all about fancy new substitutes but turning around the old model. There are still enough paper-readers out there to make it worthwhile. And the in-house corner coffee shops must be very profitable. Starbucks might be a more reasonable partner than electronics.

Update: As we prepared to publish, Mr. Riggio announced he is dropping his bid for Barnes & Noble. Can a private-equity turn-around outfit’s bid be just around the corner? Calling the Truly Mad Men!

About the author  ⁄ Ben Gilad

BENJAMIN GILAD, PhD, is founder and president of the Academy of Com­petitive Intelligence, Inc., and with Mark Chussil, a cofounder and partner of Sync Strategy. He is a former associate professor of strategy at Rutgers University’s School of Management, and a pioneer in the field of competi­tive intelligence and war gaming. He has published seven books and more than 90 articles in academic and practitioners’ publications on the topics of behavioral economics, competitive intelligence, and business war gaming.

He has been running war games for Fortune 500 companies since the 1980s and teaching a course on war gaming as part of Fuld-Gilad-Herring Acad­emy of CI which grants CIP certification in the field of CI. The Strategic and Competitive Intelligence Professionals society awarded him its highest Meritorious Award in 1996.

He earned his PhD in economics at New York University, MBA at the University of Central Mis­souri, and BA at Tel Aviv University.

2 Comments

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    October 31, 2013

    I am reminded, inescapably, of the 300 books and articles in the canonical literature on “core competenticies”. But this is not what your article really provoked. Instead, it seems inescapable that the management culture’s concenr over stockholder “interests” collided with the change in market conditions. Did investors want B&N to be the pre-eminent company/innovator in a declining industry? Or did they just want a container called B&N to continue getting filled up with more cash than the next container over would hold? I think B&N got hurt because it spent a year competitng with its investors.

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