All Bad Culture Stems From Unstable Profit

The original Borders bookstore was a magical sanctuary.

It was a cozy oasis of coffee, community & imagination in a desert of commercial strip mall stores.

Weary foot shoppers were invited in to grab a book, a brew & kick back on a soft couch. Once inside, people would get lost within the literary wonderland of over 100,000 titles.

And every employee they met along the way was like a wonderful character of literature - quirky, friendly & chock full of stories and recommendations of their favorite novels.

This intimate magic helped them become the 2nd largest bookstore chain in the world.

And then it all came crashing down.

In 2011, Borders declared bankruptcy. Analysts would say that Borders lost focus of who they were or that Amazon ate their business.

It actually started way earlier & was something far more critical:

They had an unstable profit center.

The 4 Stages of a Weak Profit Sauce Growth Company

Fast rising businesses often come with strong cultures.

Employees believe in the mission, relish in their uniqueness and love helping customers just like them. It creates a fiercely loyal group of missionaries & devotees.

And seeing this drive growth, these leaders constantly preach & protect their vibe.

This culture also becomes a force of nature in marketing the business & recruiting new followers. All in all, this Mary Poppins growth formula works brilliantly…

Until it doesn’t.

In fact, many follow the same predictable path upwards and then downwards. Here are the 4 stages.

Stage 1: Cocky Growth & Happy Times

Borders believed they were the Aladdin’s Cave of books. More books, more offerings, more square footage, higher the sales. It made sense to everyone.

So in 1992, they started aggressively expanding and added an astounding 130 new superstores in just 3 years.

Here’s a little secret:

Most businesses don’t know what drives their core value.

They think they do, but often it’s a more general & shallower understanding.

We sell this X with this differentiation factor Y to this group of people Z, rinse & repeat. 

And because leaders don’t truly grasp what the dragon heart of the business is, they fail to protect it.

Instead they feel overconfident in their strategy & double down on it. They spread into newer waters, hire more sailors & cast off heavier debt anchors.

And it works splendidly. All the top line numbers are ascending & everyone’s riled up for the rocket ship. Let’s goo!!!!

Stage 2: The First Culture Bumps

For Borders, things started to change in the late 90's.

People couldn’t put their finger on it but they felt it. The book recommendations were getting a little stale, the couches were fraying a bit & coworkers weren’t as chirpy as before.

But from the outside, things were getting better & better. Revenue was at an all-time high of $1.8B in 1998 & they had just gone international.

As growth speeds up, things starts to wobble.

Either the growth rate dips one quarter or the operational margin shrinks further than expected at end of year. People think it’s just expected turbulence on the way up & push on.

But since the business has deeper sunk costs & additional organizational layers, there’s more pressure & things move a little slower.

It’s at this moment that CEOs and their teams start changing.

They tighten the screws a little bit on their people, thinking it’s minor & temporary.

And the culture starts to feel the strains. People on the frontlines are a little dismayed by the changes but the foundation of goodwill in the company keeps everyone rallying.

No one really raises an issue because they’re flourishing, and growth covers all sins.

Stage 3: The Profit Chickens Come Home

By the mid 2000’s, Borders had lost its way.

Instead of presenting books that store employees loved, displays were paid for by publishers.

They replaced the idealistic literary geeks who cultivated a magical journey for customers with jaded middle managers whose only job was to keep costs in line.

And because they had so much square footage to fill up, they started stuffing it with DVD’s, boardgames & kitchen magnets.

Their profit chickens had finally come home to roost & it was ugly. Sales per square foot was dropping dramatically.

And while they were focused on cleaning this mess, they missed the internet.

Every business has its come to Jesus moment.

It usually happens when they have hit capacity in their niche market, they’ve dried their funding or when the market has evolved.

That’s when their fundamental flaws are exposed. And no matter what all the executive team tries, the tide keeps pulling them down.

That feeling of powerlessness makes good people act cruel.

Executives start acting from fear & self-preservation. They impose more controlling structures & short-term incentives. Soon their departments start getting poisoned with these fumes from the top.

Our stories create our structures, and our structures force our behavior.

Stage 4: A Sick Culture Devours Itself

By 2009, Borders was in free fall.

The culture’s corruption had been complete & it was driving people out in droves.

For instance, supervisors were told to start inspecting their employees’ bags at the end of their shifts.

Towards the end, they shut down their cafes and their employees were forced to hawk store credit cards to anyone who walked in.

Two years later, the company went bankrupt.

If people are forced to operate without trust, after a while they internalize it. And once that happens, the culture is set. There’s no coming back.

Much like a cancer, the sick culture will slowly start to devour its young.

Eventually, the lack of cash flow will put it out of its misery.

Conclusion

Don’t get me wrong, leaders definitely impact the culture & sometimes tough times do bring out the best in people.

But a great culture requires the same thing as a great childhood: a stable environment.

Often when good cultures go bad, the seed of its downfall lies in it’s shaky profit economics.

The more chaotic its growth engine is, the more it dissolves the trust & certainty required to build a high performing organization.

Companies don’t lose their soul because they make short-sighted choices.

They lose it because their rocky business models leave them no alternative.