On October 22, toy maker Hasbro missed analysts estimates for quarterly revenue and profit. The sudden collapse of Toys ‘R’ Us appears to have had a significant impact on Hasbro, with sales down 12% in the third quarter. Toys ‘R’ Us represented a global sales channel for toy makers and its demise is forcing manufacturers to confront new complexities around how they sell their toys in a much more fragmented landscape.
Business Models Matter
It is not sufficient to just have great products. Innovation is the combination of great new ideas with sustainably profitable business models. Large companies often struggle with innovation when they miss this key point. They can spend a lot of time and resource inventing great new products on the assumption that their business model landscape will remain the same.
What we are learning is that this is no longer the case. The rapid pace of technological change is having a disruptive impact on all traditional industries. The key point to understand is that disruption is not just about technologies. It is also about what the adoption of those technologies implies at the business model level.
According to the Wall Street Journal, toy manufacturers can no longer rely on a global toy retailer like Toys ‘R’ Us placing large orders on a consistent basis. Instead, they have to operate in the market where they ship small quantities to various general merchandise retailers such as Target or Walmart, and smaller retailers such as drugstores. Even online retailers like Amazon demand small shipments and only order new products as sales come through.
Hasbro’s CEO Brian Goldner said that Hasbro had now added 10,000 new outlets for its products. Such complexity requires Hasbro to rethink its business model going forward.
A more important lesson from Hasbro’s struggle is that corporate leaders should not wait until there is a crisis before they start rethinking their business models. While it may be true that the demise of Toy ‘R’ Us was unexpected, it is still the job of contemporary business leaders to be preparing their companies for such eventualities. If they wait until there is a crisis, they will then have to innovate under the full glare and pressure of quarterly reports to the market.
In End of Competitive Advantage, Rita McGrath argues that there is no longer such as thing as a long-term competitive advantage. Instead, contemporary business leaders must manage their companies to move from advantage to advantage. This means that every company should have a portfolio of business models. This portfolio should contain business models that are currently successful, that the company is exploiting for growth, revenues and profits.
At the same time, the portfolio should also contain new business models that the company is exploring for future opportunities. Such a balanced portfolio allows the company to manage the decline of mature business models, by replacing lost revenues with new emerging business models. This is the best way to manage a company in an ever-changing business environment. This is how companies can move from advantage to advantage.
To be fair, Hasbro has been diversifying its portfolio of business models. Beyond manufacturing and selling toys, it has been licensing content to cartoon makers for years now. Hasbro has also started creating and distributing its own content by making animated films such as My Little Pony. All this was not able to save Hasbro from a revenue decline after the demise of Toys ‘R’ Us, but it is a step in the right direction.
It is important to conclude by emphasizing that the goal for contemporary companies is to have a portfolio of business models, not a portfolio of products all using the same business model. If you have diverse products that are all using the same business model, your entire portfolio is at risk if your business model gets disrupted. A balanced portfolio of business models is a better way to secure your company’s long-term future.