Improving Organizational Effectiveness at Toys “R” Us

Improving Organizational Effectiveness at Toys “R” Us

Table of Contents

Introduction 2

Problem Statement 2

Literature Review 3

Analysis 7

Solutions 9

Reflection 11

References 12

Introduction

The organization I have chosen to research that is of interest to me is Toys “R” Us.  Founded in 1948, Charles Lazarus opened a baby furniture store called Children’s Bargain Town in Washington, D.C.  After customer demand for toys increased, Lazarus restructured the organization to solely retail toys and renamed it Toys “R” Us.  By 1966, sales had reached $12 million. He sold his company to discounter Interstate Stores for $7.5 million, with the condition that he would retain control of the toy operation (Arnold, 2018). By 1974, Lazarus’ division had expanded to 47 stores and $130 million in annual sales, but the parent had filed for bankruptcy. From 1978 to 1983, earnings grew 40% annually, market share climbed to 12.5%, and the number of toy stores reached 169 (Arnold, 2018). The company opened two Kids “R” Us clothing stores in 1983, copying the toy stores’ discount formula. Toys “R” Us entered the Japanese market in 1991. In 1993, Toys “R” Us continued its international expansion before Lazarus stepped aside as CEO in 1994. The company opened its first franchise in Dubai, United Arab Emirates in 1995 (Arnold, 2018). By 1998, Babies “R” Us had become the largest US baby store chain. During its 70 year tenure, the company operated 880 stores in the U.S and more than 750 locations internationally.

Problem Statement

Toys “R” Us holds a special place in my heart as it was my favorite toy store as a child, a kid’s dream.  Naturally, when I learned that the world’s largest toy store would close or sell all of its U.S. stores, I was saddened.  Upon hearing the news, I initially assumed the decline of the organization was due to their inability to compete with big-box retailers like Wal-Mart and Amazon.  Other issues attributing to the company’s downfall are its massive amount of debt accrued dating back to the mid-2000’s, its junk bond status, and Amazon’s breach of contract to exclusively sell Toys “R” Us toys.  How could Toys “R” Us have reorganized to save their brick and mortar stores and remain competitive with merchants in an ever-changing retail industry? My research will examine what changes Toys “R” Us should have made and provide a solution on how to adapt and thrive in an industry where consumers’ preferences are continuously changing.

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I will focus on resolving these issues related to Terminal Course Objective A (Given an example of a dysfunctional organization that is highly diverse, evaluate how organizational theories and practices can improve the situation.) and Terminal Course Objective D (Given a team that is struggling to meet its objectives, examine the appropriate application of organizational behavior theories to become high-functioning.)

Literature Review

1. Determinants of Shopping Behavior of Urban Consumers. (Rajagopal, 2011)

 In this study, Rajagopal aimed to explore the influence of customer attractions in shopping malls and the route to shopping of urban shoppers.  The study also focused on analyzing retailing patterns in urban areas in reference to customer orientation strategies, product search behavior, and enhancing value for customers.  Rajagopal found that in urban shopping centers, multichannel retailing provided an attractive blend of old and new retailing formats for customers.  The author determined multichannel customers are the most valuable customers, and integrating multichannel platforms improves customer loyalty and retention.  Results of the study determined promotion- and quality-concerned customers and mall-oriented shoppers were more satisfied with store-based retail channels for purchase of goods, whereas price-conscious shoppers surveyed other channels, including alternate-store catalogues and Internet channels before making buying decisions.

2. Making Online Products More Tangible: The Effect of Product Presentation Formats on Product Evaluations. (Verhagen, T., Vonkeman, C., & van Dolen, W., 2016)

 The purpose of this study was to determine if product presentation would be a viable solution in overcoming the intangibility constraint of the online shopping channel.  The study compared three online product presentation tools (pictures, 360 spin rotation, and virtual mirror) as a means to increase product tangibility, and therefore product sales.  The results exhibited that online product presentation formats may increase product tangibility, and as a result, assist consumers make better, informed decisions on online purchases.  The results demonstrated that tangibility plays a major role in perceived diagnosticity, the feeling of experiencing relevant product information and being aided in online product evaluation.  It also showed online retailers that technologically advanced product presentation formats, like the virtual mirror, ensures an easier online product experience, positively impacting the online buying process.

3. Can Brick-and-Mortar Retailers Successfully Become Multichannel Retailers? (Agnihotri, 2015)

 This study focused on analyzing the critical success factors brick and mortar retailers must implement to successfully transition to multichannel retailers.  The author identified the following factors a company must incorporate in order to survive in the retailing industry:

• Sophisticated technology platform – user friendliness of the web assists customers by providing product information and displaying content to simplify the shopping experience. Product virtualization technology, such as 3-D images, allows customers to be entertained as well as informs prospective shoppers of product quality and suitability.
• Strategic networks with competitors – lead online retailers offer e-commerce services to third party retailers to increase online sales for a commission fee.  A perfect example of this is when Toys “R” Us used Amazon’s resources to sell its products.  Although the partnership did not go well for the toy store due to a breach in contact, it was still a great way to enhance overall sales.
• Optimal management inventory skills – the management of logistics through drop shipment, inventory holding via self-owned warehouses, and third-party warehouses will enable retailers in providing an effective product delivery system.

Agnihotri explained how these factors and the use of technology will help attract consumers and track consumer behavior, simultaneously. The author concluded that retailers such as Barnes & Noble and Toys “R” Us failed to integrate multichannel retailing strategies with physical store strategies and instead treated the channels as separate units, which led to their demise. 

4. Joint influence of online store attributes and offline operations on performance of multichannel retailers. (Byoungho, J., Park, J. Y., & Jiyoung, K., 2010)

  This study examined the synergetic influence between online and offline operations.  The authors found that multichannel retailers generated high profits by integrating online and offline distribution channels.  The authors proposed that e-satisfaction forms by the influence of online (basic and marketing-related attributes) and offline (firm reputation, consumer offline channel use, and consumer offline satisfaction) factors, which in turn increases e-loyalty.  Results of the study rendered three factors that significantly affected e-satisfaction: marketing-related online store attributes, firm reputation, and consumer offline satisfaction. Basic attributes were not found to substantially impact e-satisfaction.  The results confirmed Herzberg’s motivation-hygiene theory that motivators (marketing-related online store attributes such as merchandising, communication, and promotion) far outweigh hygiene factors (basic attributes such as web design and web security).  The study determined basic attributes are necessary for online transactions, but do not promote e-satisfaction.

5. E-Loyalty—Elusive Ideal or Competitive Edge? (Devaraj, S., Fan, M., & Kohli, R., 2003)

 In this article, the authors examined critical factors that affect online customer loyalty.  These critical factors that contribute to customer satisfaction are:

• The efficiency of the transaction in terms of: ease-of-use, the effort required to search for the best product and complete the purchase, and the time involved in making a purchase;
• The value of the product or service to the customer, reflected in a better price or quality, or both; and
• The nature of the interaction resulting from the design of the website.

Through a study conducted on 134 participants, it was found that online shopping provided a significant price advantage over conventional shopping, a platform that takes less time and is easy to use, and considerable monetary cost savings for shoppers.  It was also determined that in regards to the returns process, conventional stores provide a much simpler and acceptable method of returning products compared to that of online stores.  Based on results, the authors concluded that online shoppers display a high degree of channel loyalty, and web technologies that make the customer interaction a compelling experience reinforce their loyalty. The research suggests that the factors most valued by online customers are: information content, security, ability to remember repeat customers (customers do not wish to re-enter name, address, and payment information), and download times. This information may be useful for online stores as they devise strategies and designs to acquire a larger piece of the market.

6. Digital Communication Management: The World Is Going Digital. (Dua, 2017)

 In an environment where technology is constantly advancing, retailers must evolve with different ideas to compete with rivals and to increase customer loyalty.  The author discussed how important it is to remain media neutral, adopt all possible means of communication, and integrate multichannel retailing strategies in order to survive in a growing online retailing industry. 

Dua explains several tactics businesses should implement to positively impact consumers.  The author explained that customers are relating more with status quo brands over social media; therefore, building a community rather than focusing on number of followers and sharing trending contents is key in targeting consumers.  SMS marketing is a powerful way to get your message straight into people’s palm, providing companies with a web of prospective customers. Companies should also upload videos and ads, as a means for viewers to subscribe and share.  Businesses should implement paid per click marketing. With this tool, retailers pay internet publishers a specific price agreed upon when an ad is clicked.  These strategies provide an out of the box means to target their customers and to get real suggestions from the customers that will help render better services in the future and provide more opportunities to attract new consumers.

Analysis

 The accumulation of debt is the main cause of Toys “R” Us’ downfall.  Management was ineffective in remaining competitive with retail giants due to the massive amount of debt owed. 

In an effort to compete with potent competitors and the emerging e-toy industry in 2000, Toy “R” Us signed a 10 year contract with Amazon to give exclusive rights to sell Toys “R” Us products on its website (Hirsch, 2018).  This was huge as it was the first deal of its kind, and cost the toy company approximately $50 million a year.  Unfortunately, Amazon failed to provide the agreed upon exclusivity.  In spite of the deal, Amazon created a marketplace where it continued to sell other toy brands.  In 2004, Toys “R” Us sued Amazon to end the partnership due to the breach of contract.  This was a significant financial setback, as well as missed opportunity to develop an e-commerce presence.  During the fight to settle the lawsuit and secure a spot in the e-commerce world, big-box retailers discounted prices to reel in consumers who shopped at Toys “R” Us (Hirsch, 2018).  As a result, Toys “R” Us’ stock dramatically decreased.

During the mid-2000s, leveraged buyouts of retailers were at an all-time high.  In 2005, KKR, Bain and Vornado paid $6.6 billion total for Toys “R” Us, a purchase financed largely with debt, in hopes to go public and to use the proceeds to pay off the debt incurred (Hirsch, 2018).  The $6.6 billion purchase left it with $5.3 billion in debt secured by its assets and it never really recovered (Isidore, 2018).   Adversely, the debt obligations remained a significant issue and “impaired the company’s ability to invest in its future, CEO Dave Brandon stated (Durden, 2017).  Consequently, the company continued to deteriorate as it was not able to make the necessary investments and had even neglected the general upkeep and store conditions.

Simultaneously, the toy industry continuously changed.  Kids were no longer into traditional toys and, with the help of technology, were more interested in electronics such as computers, video games, and tablets. 

In 2017, Toys “R” Us enlisted the help of restructuring advisors to address the $400 million debt deadline that was quickly approaching.  In an effort to reorganize, the company tried to upgrade the in-store experience by creating Nerf target practice areas, and allowing consumers to fly drones in hopes that customer traffic and sales will increase.  The toy retailer also price-matched online holiday deals from Amazon and other e-commerce retailers to compete with competitors. These efforts simply were not enough, and were a little too late.

The toy store seriously considered filing bankruptcy, a move that isn’t normally alarming in the retail industry.  However, when toymakers became aware, they were deeply concerned and would not risk giving Toys “R” Us products it could not pay for (Hirsch, 2018). 

Within one week of the article’s publication, nearly 40 percent of its vendors refused to ship product without cash on delivery. Within three weeks, Toys R Us was forced to file bankruptcy without a plan to emerge and before the crucial holiday season (Hirsch, 2018).  Manufacturers limited their shipment to Toys “R” Us, crippling the retailer in the midst of the holiday season.  As a result, big-box retailers cut their prices, baiting in toy shoppers who chose discounts over the convenience of shopping at Toys “R” Us.  During the 2017 holiday season, Toys “R” Us’ earnings were $250 million below budget projections, further paralyzing the company.  The company predicted it would run out of cash in the U.S. by May 2018.

Solutions

Leaders at the company failed to continuously analyze the fluid retail industry to determine what transformations must take place in order to survive. My preferred solution that should have been implemented to resolve the aforementioned issues is to conduct a regular analysis of the industry, which would have provided insight on what was necessary for success.  Lazarus and his management team should have consulted industry analysts how the ever-changing industry influences Toys “R” Us.   The analysts should be both business and IT subject matter experts who can assist in developing a digital strategy that would transform the company into providing toys and electronics that can reach existing generations and generations to come.  This strategy should include technology that monitors consumer data in order to gain an accurate understanding of customer behavior and better accommodate customers.  The technology should also enable Toys “R” Us to partner with toymakers to design toys using cloud computing and artificial intelligence technologies.  This would create a competitive advantage over technology companies like Amazon who has little product differentiation.  A disadvantage would be that the virtualization software could pose security risks and compromise privacy such as recording children’s conversations and locations.  Despite the security concerns, it is my belief that the digital strategy would catapult Toys “R” Us back into the spot of the world’s largest chain toy store.

A second solution would be to reprice items often to set pricing standards in the industry and achieve increased profitability.  Repricing products will help increase sales by reacting instantly to competitor price changes and by minimizing the time consumers spend viewing products.  Some drawbacks are that if prices are manually changed, it can be very time consuming depending on the amount of inventory.  Additionally, if prices fail to change in real time in reaction to a competitor’s price change, there could be many missed opportunities.

A third solution would be to focus on providing staff with developmental tools that will assist in engaging customers and providing them with the best in-store experience.  It is essential to regularly equip staff with learning and professional development opportunities to promote organizational leadership.  Toys “R” Us was unable to prioritize employee development programs due to focusing on debt repayment. Neglecting to develop employees can lead to a decrease in employee satisfaction, productivity, and retention.  It also negatively impacts the overall feel of the store.  I can remember whenever I would go into a Toys “R” Us store, no matter the location, it always was a cold, warehouse environment and was difficult to find associates whenever assistance was needed.  This type of unpleasant shopping experience facilitated the decline of the retailer.

Reflection

The current closing of all Toys “R” Us stores in the U.S. has been tragic for any kid who became excited at the mere thought of going into Toys “R” Us, surrounded by a plethora of toys and even for moms who have shopped at the famous toy store for decades.  However, there are some lessons to gain from the decline.  Brick and mortar retailers must incorporate multichannel retailing strategies to influence customer satisfaction and customer loyalty.  Based on the continuous advancement of technology in the retail industry, retailers must incorporate digital technology strategies to compete with the other online businesses.  Digital transformation is imperative if a company will survive.  Retailers must constantly analyze the retail industry to determine strengths, weaknesses, threats, and opportunities. 

Recently, I have been considering founding my own business and this assignment has provided me with insight on how to alleviate possible issues that may arise when leading an organization.  It has also been in helpful in showing me why and how some of my favorite childhood stores such as Blockbuster, Barnes & Noble, and now Toys “R” Us failed to compete with big-box retailers. 

References

• Agnihotri, A. (2015). Can Brick-and-Mortar Retailers Successfully Become Multichannel Retailers?. Journal Of Marketing Channels, 22(1), 62-73.  doi:10.1080/1046669X.2015.978702
• Arnold, L. (2018, March 22). Toys R Us founder Charles Lazarus dies, a week after chain says it will close all stores. Retrieved April 4, 2018, from https://www.seattletimes.com/nation-world/toys-r-us-founder-charles-lazarus-dies-a-week-after-chain-says-it-will-close-all-stores/
• Byoungho, J., Park, J. Y., & Jiyoung, K. (2010). Joint influence of online store attributes and offline operations on performance of multichannel retailers. Behaviour & Information Technology, 29(1), 85-96. doi:10.1080/01449290701497202
• Devaraj, S., Fan, M., & Kohli, R. (2003). E-Loyalty—Elusive Ideal or Competitive Edge?. Communications Of The ACM, 46(9), 184-191.
• Dua, S. (2017). Digital Communication Management: The World Is Going Digital. International Journal Of Recent Research Aspects, 4(3), 50-53.
• Hirsch, L. (2018, March 16). Toys R Us built a kingdom and the world’s biggest toy store. Then, they lost it. Retrieved from https://www.cnbc.com/2019/01/26/toys-r-us-built-a-kingdom-and-the-worlds-biggest-toy-store-then-they-lost-it.html
• History. (n.d.). Retrieved March 18, 2018, from https://www.toysrusinc.com/about-us/history
• Isidore, C. (2018, March 15). Amazon didn’t kill Toys ‘R’ Us. Here’s what did. Retrieved March 18, 2018, from http://money.cnn.com/2018/03/15/news/companies/toys-r-us-closing-blame/index.html
• Rajagopal. (2011). Determinants of Shopping Behavior of Urban Consumers. Journal of International Consumer Marketing, 23(2), 83-104. doi:10.1080/08961530.2011.543051
• Verhagen, T., Vonkeman, C., & van Dolen, W. (2016). Making Online Products More Tangible: The Effect of Product Presentation Formats on Product Evaluations. Cyberpsychology, Behavior & Social Networking, 19(7), 460-464. doi:10.1089/cyber.2015.0520