Operating in a Monopsony.
MegaToys Inc. owns its growing business in the two major streams of products they offer (toys and costumes), to large and increasing orders from the biggest players on the market in the relevant fields, namely Wal-Mart and Party City. Having in mind that a business exists to be prosperous and profitable, Woos brothers are excited about the prospects that lie in front of the company because of the good partnership with the two companies that secure a large portion of the company’s revenue. In order to meet the demand in a cost-effective and timely manner, the company is expanding its production, imported inputs, and suppliers. Although the undisputable benefit of having the giant Wal-Mart as a partner, a question arises: will this dependability on one major source for revenue at some point become a disadvantage and threaten the business’ existence? This concern was raised by one of the brothers, Peter, who “wondered if it was good for Megatoys to become increasingly dependent on the retail giant.”
Are the Giants Saviors or Destroyers?
According to Michael Porter’s theory for generic strategy, the Woos are employing a mix of cost leadership strategy for a broad market, differentiation strategy for a broad market and a niche market (costumes). On one hand they rely on cost-cutting in order to satisfy Wal-Mart’s needs for cheap offerings for their product line. On the other hand they use differentiation by offering seasonable products and costumes.
The major problem is that Wal-Mart’s positioning to deliver products at a lowest price to its end-consumers and the power given by the volume allows them to force all their suppliers to cut costs and sell at tight profit-margins. If the brothers successfully close the new deal for Easter baskets, the generated revenue of the deal would represent more than a half of the annual revenue for 2008. This places them in the unfavorable position of being dependent with no market power operating in a highly competitive business sector.
The market power of the giant puts the suppliers in an inequality and the companies are left with no choice but to cut cost in order to survive. Additionally, in order to meet the demand for big volume the supplier have to expand its production, facilities, logistics, and operations which ultimate role is to lead to economies of scale. The above said is a major tool for reducing costs but what happens if Wal-Mart does not continue to place orders? The supplier is left with excess production and diseconomies of scales occurs bringing losses for the company. Moreover, this expansion and reinvested profit in building new plants and facilities limits the company to invest in R & D and to respond to the changes of the consumer behavior and market needs which is catastrophic for the future of MegaToys in the long run.
Major challenge of the partnership with Wal-Mart is that MegaToys has to make sure that all the seasonable products are produced and delivered on time. Additionally, the process of acquiring and managing licenses for toys’ in demand production has become crucial for the company. Other downside of the partnership with Wal-Mart is that MegaToys heavily relies on the production of cheap seasonable products and traditional toys, however changes in the consumer preferences have moved towards technological toys, game software and more expensive individual solutions for kids that bring added value. This will play a negative role for the future of the company.
Porter’s 5 forces analysis in brief:
 Threat of new entrants – medium to high, due to well-developed distribution network, diversification of products, abundance of input suppliers (low cost, easy to buy, globalization). Patent rights might be an obstacle as well as safety issues and regulations.
 Threat of substitute products or services – high because of great intensity of rivalry as well as customers’ change in behavior and preferences (new trends).
 Bargaining power of customers (buyers) – high because of the great variety of substitute products in addition to products available at big discounts. Wal-Mart has great market power and can influence its suppliers hence push them to decrease prices.
 Bargaining power of suppliers – Medium to high because MegaToys offers products in big quantities in a timely manner and at low price.
 Intensity of competitive rivalry – high not only because there are many rivals on the toy market but also because there are many substitute products. Technological development also plays crucial role in the rivals’ offerings and product diversification.
Business as Usual vs. Innovation
Since MegaToys heavily rely on the Wal-Mart’s contract it is advisable to keep the giant’s partnership for the next cycle. Once they secure the order amounting $63 million they should start redesigning their strategy if they want to be competitive on the market. One way is to acquire a company for technological toys/games and develop new product line which will allow the company to meet the demand for such products and differentiate itself from the rivals. This will put the business strategy of the company in the analyzer class of Miles and Snow categorization.
Other option is to secure partnership with other major discounters on the market, such as Carrefour and Kmat. If they want to continue in the cost-leadership strategy they might explore other markets to import from besides China. As stated in the case doing business with China will become more and more expensive, thus options to switch to Vietnam or Pakistan might be a good decision. MegaToys has a competitive advantage by offering seasonable products, the greatest success being the Easter basket. Identifying other key Holidays and developing new offerings in that direction will increase company’s sustainability. Moreover, the company has the know-how and has built a very reliable system for control thus no huge investments are required.
The growing use of internet and growing number of people willing to order products online present another opportunity for growth to the company especially in the costumes’ business. The creation of online store will allow the company to achieve a global reach and will reduce the importance of the giant retailers.
It is time for redesigning the strategy – MegaToys must be ready for change in order to be successful in the future.