Are competitors really to blame for this toy company's downfall? Find out here!

Tuesday: Return Driven Strategy FROM THE DESK OF MILES EVERSON: One of the frameworks I find effective in managing my team at MBO Partners is Return Driven Strategy (RDS). Created by Professor Joel Litman and Dr. Mark L. Frigo, and explained in detail in their book, “Driven,” this pyramid-shaped framework has 11 tenets and 3 foundations that help businesses achieve wealth and value creation. In today’s article, we’ll focus on a business case study that’s relevant to RDS’ Tenet Two: Fulfill Otherwise Unmet Customer Needs. Continue reading to know the factors that led to this toy brand’s downfall. CEO, MBO Partners Chairman of the Advisory Board, The I Institute

Are competitors really to blame for this toy company's downfall? Find out here! “We are under significant pricing pressure from competitors.” According to Professor Joel Litman and Dr. Mark L. Frigo in the book, “Driven,” this commonly made statement is actually absurd. Why? They say in reality, pricing pressure comes from customers, not competitors. This means weaker-than-desired performance doesn’t come from an external competitive force; it comes from a company’s inability to fulfill its target market’s needs. Let’s use this toy brand’s case study as an example of this concept… Toys R Us is an international toy company founded by business executive Charles Lazarus in 1948. At its peak, the company was known as a “mighty retailer” and a “category killer” for being the top toy retailer in the US. … but the success of the brand didn’t last long. As years passed, the once mighty retailer struggled to keep up with changing trends in consumer behavior and childhood play. In 2018, the industry giant filed for Chapter 11 bankruptcy following years of declining returns and mounting debt. While the management team claimed intense pricing competition from mass retailers like Amazon, Walmart and Target as a huge contributing factor to Toys R Us’ woes, experts said the blame should be on the shoulders of management. According to them, the company went down because of its failure to innovate its business model, maximize the use of technology, and adapt to changing trends and consumer behavior. Here are some of the factors that turned the toy giant’s international success to ashes: Failure to Adapt and Innovate In the end, nostalgia didn’t save Toys R Us. When times were changing, the company stayed the same and therefore lost momentum. This became the brand’s disadvantage because its competitors were embracing new technologies and innovations to adapt to the changing preferences and buying habits of new generations. According to Mark Cohen, the former Director of Retail Studies at Columbia University’s Graduate School of Business: “Retailers today, especially in any kind of fashion or trend segment, have to progress. They have to morph, they have to modify. They have to present the changes in the marketplace and their customers’ behavior. Toys R Us has never been able to wrap their arms around the changes necessary, and this is the inevitable outcome.” Simply said, Toys R Us made no sustainable effort to present themselves more engagingly and attractively. The Amazon Deal In 2000, Toys R Us entered a 10-year partnership with Amazon. Under the agreement, the toy company would pay the e-commerce giant USD 50 million a year plus a percentage of sales to be Amazon’s exclusive seller of toys and other baby products. The partnership was a success, but it had serious consequences. First, the deal meant Toys R Us had no autonomous online presence—customers who tried to visit and buy toys from ToysRUs.com were directed to Amazon. Second, once Amazon saw how well the partnership worked, it started expanding its toy and baby categories. The e-commerce company also began allowing other merchants, including Toys R Us competitors, to sell products on the Amazon website. Because of this, Toys R Us sued Amazon and won, but the money won in court could not make up for the years the toy brand lost when it could’ve developed its own online presence and e-commerce strategy. … and when Toys R Us finally had its own e-commerce site, it was too late to make any difference and the site was ridden with technical errors that frustrated customers. Management Myopia This condition sets in when employees hide facts and figures from upper management to protect themselves from being laid off. In the case of Toys R Us, store employees manipulated customer surveys. The result? The management team suffered from management myopia. They continued to believe the brand was still at the center of the toy industry and nothing bad would happen to the company. Key Takeaway: When employees begin lying, it’s a sign that things aren’t going in the right direction. These points show that the downfall of Toys R Us had nothing to do with its competitors. The blame falls on the flaws of the business’ internal systems and operations, which led to an inability to fulfill unmet customer needs and maintain a robust profile. — Professor Litman and Dr. Frigo say for lower performing firms to improve their returns, they need to be empowered to focus and frame the right problems. This requires owning up to internal responsibilities and identifying the real source of competition. In the case study of Toys R Us, it wasn’t able to create a unique offering for fulfilling the real needs of consumers. The toy company only openly stated that its strategy included competing with the “broadest range of merchandise.” The problem? The strategy itself! In the age of the Internet, competing using the “broadest selection” card is best done through the World Wide Web. That’s what Toys R Us failed to realize and because of that, other e-commerce companies surpassed the status of the once beloved toy retailer in the industry. We hope you learned a lot from Toys R Us’ case study! Remember: An inaccurate view of competitive strategy can create a major gap in understanding how you and your brand can succeed. So, be aware of the real problem first… … put the blame in the right place… … and build a better business strategy. Keep in mind that believing your competition does something to you and your brand is the thinking that accompanies poor cash flows. It is not the competition that withholds cash flows from a business, but the customers and prospects. Hope you found this week’s insights interesting and helpful. Follow us on LinkedIn. Stay tuned for next Tuesday’s Return Driven Strategy! Efficiency is about getting the most out of your resources. Learn more about this useful and powerful career driven strategy in next week’s article!