Toy World Case Study

Toy World Case

SWOT Analysis

Strengths

• Toy World has been profitable for nearly 20 years and is expected to continue growing.
• All runs begun were completed on the same day, so there was virtually no work in process at the end of the day.
• Additionally, shipments of orders were made as quickly as the order could be processed; thus, at the end of each month, production of products and total sales were usually equal.

Weaknesses

• Toy World did not have any stable, consistently profitable products since dollar sales of products had sometimes varied by 30-35% from one year to the next.
• Seasonal expansions and contraction of the work force resulted in recruiting difficulties and high training & quality control costs.
• Machinery stood idle for 7 ½ months and then was subjected to heavy use since not more than 25%-30% of manufacturing capacity was used at any time during this period.
• Accelerated production schedules during the peak season resulted in frequent setup changes on the machinery.
• Unavoidable confusion in scheduling runs occurred; short runs and frequent setup changes caused inefficiencies in assembly & packaging as workers encountered difficulty relearning their operations.
• Overtime wage premiums of about $225,000 reduced profits.
• Expanding operations had resulted in a slightly strained working capital position since the year-end cash balance of $200,000 in 1993 was the minimum necessary for the operations of the business.
• Collection period of 60 days is actually double their official quote of 30 days.

Opportunities

• If Toy World adopts a policy of level monthly production, it can eliminate overtime wage premiums of $225,000 and have additional direct labor savings of $265,000. This is a cut in variable costs, which is the only reasonable option the company has since it cannot raise prices as buyers would just go to its competitors with lower prices. Toy World does not have any leftover cash to spare to enter a new market, buy higher value inventory, or even patent its own new products. Also, it cannot cut the fixed prices or taxes, so the variable costs are the only things left in order to change the profit margin.

Threats

• Manufacturing plastic toys is a highly competitive business due to the large number of companies in the industry.
• Many products faced short lives and many companies failed due to design and price competition.
• There is a lack of sustainable comparative advantage and the market itself is contestable so anyone can enter the company’s place.

Porter Analysis

Threat of Entry by new competitors

• High threat of entry by new competitors due to the simplicity involved in manufacturing plastic toys and low capital requirements.
• This industry also faces the threat of imports from foreign competitors that are able to take advantage of low labor costs.

Intensity of Rivalry among existing competitors

• The plastic toy manufacturing industry is a highly competitive business since it is populated by a large number of companies.
• Design and price competition is fierce, which results in short product lives and a high rate of company failures.

Pressure from Substitute Products

• Products are easily substituted in this industry. If a manufacturing firm was lucky, they would be first to market with a popular new toy; however, it takes very little time for competitors to catch up and match the once unique product.
• For example, Toy World introduced an innovative line of action figure toys in 1991 which significantly inflated their profitability; however, the following year, Toy World’s value was well below what they had achieved the previous year due to similar products entering the market.

Bargaining Power of Buyers

• If Toy World were to not be in the industry anymore, then it would not really make a difference for the buyers as they can buy from all the other companies offering similar products.
• Buyers want the cheapest products, so when 11 companies make the same new product Toy World may have created, the buyers would rather go to the companies with the cheapest prices in the market.

Bargaining Power of Sellers

• Since this industry is highly competitive with a magnitude of manufacturers, the suppliers are not powerful enough to significantly influence prices.
• Mr. Hoffman even stated to Mr. McClintock that “purchase terms would not be affected by the rescheduling of purchases.” Thus, if level production were to be adopted by Toy World, the suppliers would not be powerful enough to charge more for their materials.

Forecast Balance Sheet - every other month (Jan, Mar, etc…) under level production - same amount of toys made each month