Spielwarenmesse: What to do when your toy company strategy needs a reset

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What to do when your toy company strategy needs a reset

from Steve Reece

Most toy companies are opportunistic versus strategic. The typical growth curve for new toy companies tends to start with the founder and their affinity for a particular idea or product type. From there those companies that manage to create ongoing success tend to grow via a combination of increasing the breadth of product range and deepening distribution. But every company will hit a brick wall in terms of growth at some point in their development

The journey of a toy company is quite different compared with the much more analytical and strategic moves by those in the world of tech start-ups. These tech companies must pitch for and secure significant funding to have any chance of success. As the type of company making such investments tend to be very analytical and strategic, tech start-ups will typically be very structured in their forward pathway.

While over analysis and strategizing can lead to paralysis and over pontification, many toy companies need more strategic planning, not less.

So when toy companies have logically gone as far with one plan as they can, typically they need to consider other alternatives to grow and compete in an ever-challenging toy market.

Here are three of the most usual strategy challenges and thoughts what to do when reaching the end of a strategic road:

1. Growth slowdown

Every company will hit a brick wall in terms of growth at some point in their development. For the first few years, even in some cases for the first decade or more, growth seems easy. A few more product lines each year, a few more retail accounts set up and a few more export markets entered. However, there are only so many retailers per market and each retailer only offers a finite number of listings based on available shelf space.

When companies encounter this growth brick wall, they have a number of options – including brand extensions into other age targets and categories with the same brands: either launching new (non-cannibalistic) brands in the same category or entering new categories or creating new products which open up alternative distribution. The right path will vary by company, but these are the key options.

Often smaller companies feel they have a lack of expertise or knowledge in new categories which can be perceived to be a significant risk. However, one or two new key staff members can bring with them all the knowledge needed to reduce the risk. So often company owners and management become prisoners of their own minds and self-imposed restrictions. To the degree that anyone can succeed in a new category or particular distribution channels, so can any company – if the decision makers can move beyond their own shortcomings.

2. Profitability pressures and loss making

This is a less positive challenge in the sense that loss making businesses often need trimming and pruning versus fertilising! You do sometimes get companies which have a certain level of overhead, whereby reducing the overhead considerably can begin a self-perpetuating downward cycle. Occasionally this type of company is better to try to grow top line sales thus covering existing overheads more easily and therefore delivering better bottom line.

For most companies however, a lack of profitability is usually caused by one of just a few factors – cost inflation, excessive staffing costs and numbers versus the size of business, bad inventory management, weak retail negotiations or product launch failures. Each one of these factors can lead to the ultimate downfall of a toy company. When a company is struggling to make a profit, management or owners often fail to adopt a sufficiently fundamental strategy to fix the problem.

Festering problems like ongoing lack of profitability are not going to get better without a change in strategy, as the saying goes “The definition of insanity is doing the same thing over and over again and expecting a different result.” Often a company facing an existential crisis and the owners or management are still following a business as usual strategy versus the more radical path needed. Clear that obsolete inventory to generate cash and reduce warehousing costs. If you have too many people versus what the business can afford, you have to swallow the bitter pill of letting some people go to protect the remaining jobs. Some ‘blood-letting’ is better than organisational suicide due to failing to deal with difficult reality!

3. Strategic focus on diversification and risk management

When you look at toy companies that cease trading, most commonly toy companies go bust because they were too reliant on one thing or too few things. That might include being over reliant on one or two retailers, one or two brands or products, one product category, one country etc.

Lack of risk diversification can be terminal because things change in business, companies cease trading, brands and products go out of vogue or get knocked off, retailers pull listings, countries have economic downturns etc.

In business strategy terms, the most important imperative is to build multiple success ‘pillars as soon as some degree of success is attained. Actually the saying ‘don’t put all your eggs in one basket’ applies here. Building multiple ‘baskets’ insures against problems with the key business area. Maybe you need to reorganise so you have two teams – core business and new business. This way you have people responsible for and focused on your existing cash cows and also your risk insurance and new business diversification strategy.

Toy companies overcoming the end of a strategic road are those whose new strategy includes not just short-term fire fighting tactics to get through the next sales cycle, but also include a reset in terms of risk diversification and the long-term sustainability of the business!


The opinions expressed in this article are those of the author and do not necessarily reflect the views of Spielwarenmesse eG.

 

Author of this article:

Steve Reece, CEO Kids Brand Insight

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