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Think of an industry where time to market and product turnover are vital; where most products have a very short life and are sold in brief, well-defined selling seasons; and where few products last for two seasons and many experience significant markdowns at the end of product life. Finally, add the fact that much of the manufacturing is in Southeast Asia, with long transit times and information lags between manufacturing and the target markets in Europe and North America. While these features could describe many high-tech products or fashion apparel, the subject here is toys.
Toys are one of the world's oldest consumer products. Over the past four decades, the toy industry has steadily matured from a cottage industry into a global market of over $50 billion. Excitement over Star Wars and Pokemon along with good showings from longtime favorites like Barbie helped the industry beat its typical 5% growth rate to propel 1999 U.S. sales well past $22 billion.' Yet with this relatively stable growth, investors know that the industry is far from tranquil.2 A year after their big success, action figures from Star Wars litter the bargain shelves of discount retailers and Pokemon struggles to hold children's imaginations. In their place, razor scooters and video games fill the 2001 musthave lists of parents and children-this is life in the toy business. Key features that have long characterized the toy business are its rapid change and uncertainty. Demand for fad-driven products can move from tepid to boiling overnight and then suddenly evaporate as the next hot product sweeps the market. Constant product innovation, short life cycles, and high cannibalization rates are typical. Supply chains that span the globe and include many emerging countries add currency and political risk that can disrupt supply and change cost structures with little notice. If these risks were not enough, sensitive product safety issues send many industry CEOs to bed with burning stomachs.
Confronted by a world of risk, some toy makers have evolved and thrived, bringing joy to the world's children while making handsome returns. Other not-so-fortunate companies have watched their stock suddenly plummet, have gone bankrupt, or have been acquired shortly after a big success turned to failure. For industries that face similar risks, there are lessons...