Managing Controversy:

Team Ho Chi Minh City

John Busenbark, Aravon McCalla, Michael Behrns, Rajeev Singh

Chinese Manufacturing Problems

Overview

• Manufacturer of toys, board games, and electronic games– Brands and Licenses: G.I. Joe, Nerf, Star Wars, Marvel, Magic:

The Gathering, Toy Story, Monopoly

• Market cap of $4.28b – American Firm on NASDAQ – Annual sales of about $4.2b

• Primary competitors– Mattel, Lego, Jakks Pacific, Disney

Competitive Strategy

• Develops internal brands and licenses other popular brands to create toys and games– Success relies primarily on brand recognition – especially with its licensed brands

like Star Wars, Marvel, and several others

• Manufactures most goods in China– Its business unit mix establishes about 58% of sales domestically,

39% internationally, and 3% through licensing

• Also operates a television network (HUB) and has recently ventured into browser-based video games– The new browser-based game activities are through partnerships

with firms like Zynga

General Model

• Almost all of Hasbro’s manufacturing done in low-cost Chinese environment

• Margins are fairly high domestically, but significantly lower internationally– International margins lower likely as a function of less brand

recognition, and thus, the toys don’t serve as much of a purpose beyond being a toy

• Entertainment and licensing generally developed digitally

Problem: Chinese Manufacturing

• Substantial problems in two specific areas– Both areas problems are materialized mostly through

worsened public perception and lower consumer confidence

• Area One: Labor Problems– Found in violation of paying abhorrently low wages,

facilitating unsafe conditions, and poor environmental impact

• Area Two: Recall Problems– While no specific recalls made, public confidence low in its

toys as a result of Mattel’s recalls

Capabilities Demanded

• Area One: Labor Problems– Must integrate more American expats to oversee plants– Must deal with human rights backlash from media– Must have free cash flow to invest in better operations

• Area Two: Recall Problems– Must regain confidence through stricter controls– Must approach media and begin to re-brand and

redevelop perception of industry– Must have managers who are willing to constrain the value

chain, as well as focus on the supply side of manufacturing

Challenges: Labor Problems

• Integrating new expats to oversee likely not well-accepted from Chinese plant owners

• Need to reinvest in Chinese plants will decrease short-term bottom line stock price

• Need to reconstruct operations and labor process in China will be costly

• Need to balance Chinese environmental interest with domestic interest and profits

Implications for Career: Labor Problems

• Will require a lot of cooperation and coordination with Chinese plant managers– If done incorrectly, can seriously damage reputation and career

• Will require discussions with Chinese government officials – Presents great opportunity to help establish better control systems in

China and advance career

• Will require a need to balance improving China with cost expectations from domestic corporate– If superiors see results with the cost constraints imposed, potential

career escalator– If superiors are unimpressed with difficult task, career will be seriously

hindered

Challenges: Recall Problems

• Increased pressure on value chain management to demonstrate quality to public

• Need to create media campaign to regain consumer confidence

• Need to re-construct relationships with licensers who may be afraid of projected public perception

• Need to divest unpopular lines in order to re-bolster “hot” brands

Implications for Career: Recall Problems

• Will require a complete understanding of the model and how to maximize value out of the value chain– Presents opportunity for upward mobility and increased sales

• Will require marketing savvy to help regain consumer trust– Presents an especially challenging situation that will likely result in great reward or

termination

• Will require tough decisions regarding employment in divested lines– Presents difficult to decisions to be made about personnel, ensuring the “right”

people are around to help make the “right” decisions

• Will require the ability to sustain and better-develop relationships with licensers– Presents a difficulty, but an opportunity to for future economies of scope benefits

and career upward mobility

Managing the Controversy

• The perception from the media and consumers is present in both problem areas of Chinese operations– In this respect, there is a double-controversy

• This is the most difficult task to correct and most focus should be on it– Understanding the consumer connection to the brand and

managing that is even more integral than the actual problem resolution

• Highest potential to create or derail executive career

Managing the Controversy: Focused Solutions

• Understand the “big-picture” solutions– Allows for smaller segments to be focused and

executed with more precision

Media and Public Concerns about human rights violations

Need to manage perceptions of human rights violations

Need to improve working conditions and operations

Public and licenser concern about potential recall

Need to manage public perception and explain situation

Need to redevelop and maintain good relationships with licensers

Preparation in the MBA

• Three distinct concentrations– Strategy (Global), Finance, Operations

• Ability to interact in setting that requires compromise• Ability to understand how Corporate and Competitive

strategies interact within Macro and Micro socio-economic environments

• Ability to understand the global context – Being cognizant of cultural differences and global impact of decisions

• Ability to following the financial impact of decisions – Understanding how changing operations or developing a new media

campaign affects the bottom line• Ability to understand how to improve operations without

drastically increasing costs

Puzzle Resolution

• Understanding how to effect change in global operations in cultures that don’t desire it

• Understanding how to identify key global problems and contain them before they expand

• Understanding how to manage dynamic between domestic and financial expectations with global impact