Where Do New Toys Come From?

QuintessentialBarbieSome toy brands are cash cows for their companies: Think Barbie and Hot Wheels (Mattel) or My Little Pony (Hasbro) or Lego. These toys have been popular for generations; new parents buy them for their children; they almost sell themselves. But after a few decades of growth, you reach market saturation (every girl who might have a Barbie already has one) and then, how do you grow your revenue? There are two ways that companies like Mattel traditionally grows their revenue:  

  • First, from licensing. They’re really good at making plush dolls of Disney movie characters. (Or I should say, good at designing them and outsourcing their manufacture to China). The licensing deals have pretty fixed profit margins, because a lot of companies can send a CAD design to their supplier in China.
  • Second, from acquiring already established brands. Mattel bought Fisher Price; they bought American Girl; after their Hot Wheels succeeded in the market, they were eventually able to buy their competitor Matchbox. (Where are the antitrust police when you really need them?) But acquisitions, like licensing, come with a pretty fixed (and limited) upside potential. Sure, maybe Mattel can do a somewhat better job of marketing and realizing value from an established brand, but to some extent that upside potential is built into the acquisition price.

A lot of other brand portfolio companies grow in the same two ways. And the growth potential, and the profit margins, are not great.  For real success, you need organic growth–you need to come up with successful new toy brands, in house, all by yourself. And this can be difficult for companies like Mattel and Hasbro, because they’re doing so well with existing brands and with licensing. Organic growth really isn’t in their DNA.

But the pressure is on for more organic growth in the toy industry. Today, it seems that “kids are rewarding toy companies that introduce original lines based on new characters” (according to the Wall Street Journal*). Mattel has a hit with its new Monster High dolls (now a $1 billion brand), and Activision Blizzard with its Skylander videogames, where players place a collectible toy on a small platform, thus spawning that character in the world of the videogame (now a $500 million brand in the U.S.). Organic growth requires innovation–completely new ideas that turn into successful, marketable products. And if your company is focused on brand acquisitions and licensing, you probably don’t do innovation very well. The challenge, then, is getting organic growth without disturbing the existing successful lines of business.

The traditional way to do this is to create a separate unit for innovation: a research & development lab, where creative designers spend all day dreaming up new toy ideas. You might put them in a different office building, so their creativity isn’t poisoned by your boring traditional office environment. Maybe you put in some beanbag chairs and let them walk around in their socks while they drink espresso made by the company barista. However, there’s a big problem with this approach: when R&D sends a great new idea over to the old office building, often no one knows what to do with it. This “hand-off” problem is well known, and there are tons of famous examples (Xerox PARC and the modern personal computer is one of the more famous).

In my book Group Genius, I recommend a different approach: Spread creativity throughout the organization, rather than locking it up in a separate building. Get everyone involved in new ideas and products. Build a collaborative culture where people are sharing their ideas constantly. When the whole organization is working on innovation, then the hand-off problem essentially fades away–because the people doing the innovating are the same people who will then have to make, package, and market the innovation.

*John Kell, “Originality helps build hit toy brands.” Wall Street Journal, Monday, Feb. 11, 2013, p. B2.