Mattel Toys has been one of the largest manufacturers of children’s toys since the mid-20th century. They manufactured and distributed signature products, including the iconic Barbie and the Hot Wheels series. However, at the beginning of the 21st century, the company began to experience financial difficulties, as the profits from their brands began to decline significantly. As a result, Mattel Toys faced a dramatic financial decline due to shrinking cash flow and mounting debt. New CEO Bob Eckert implemented the Financial Realignment plan, which focused on reducing the company’s costs. He managed to stabilize the company’s financial position but probably limited its potential growth and development in the modern toy market.
When Bob Eckert was named CEO of Mattel Toys, the company was in deep decline. It was losing about $1 million a day, and its share price dropped from $46 in 1998 to $10 in 2000 (Moffeit, 2008, p. 1). The company’s operational cash flows have dropped significantly to one-tenth of the previous year’s amount, while debt is more than $1.7 billion – almost half of the capital invested (Moffeit, 2008, p. 3). Thus, the company’s position was deteriorating drastically, and its key products that formed the basis of profit became obsolete in the toy market.
To save Mattel Toys Eckert and his team proposed a Financial Realignment plan, which was aimed at generating significant cost savings in subsequent years. The first key element of this plan was the sale of The Learning Company, with which Mattek Toys had a merger in 1998. The software producer cost the company about $1 million a day, which required Ecket to sell it as soon as possible (Maffeit, 2008, p. 5). As a result, The Learning Company was sold to Gores Technology Group in 2000 for a share of future profits. Gores Technology Group managed to restructure the company making it more efficient.
Eckert sought to reduce the company’s costs and increase cash flow, which was also necessary to reduce debt. The next feature of the plan was cutting the dividend from $0.36 per share to $0.05 per share (Maffeit, 2008, p. 5). The final element of the original Financial Realignment plan was a reduction in capital investment. As a result, Eckert cut the company’s capital investment by 24% by the second half of 2000 (Maffeit, 2008, p. 5). These measures helped the CEO restore the current earnings of the company, increase cash flow and reduce costs. In order to cut costs even further, Eckert terminated unprofitable licensing and contracts, eliminated some product lines and hundreds of positions in US headquarters, as well as closed or consolidated some international offices.
In the following months, the Realignment Plan was supplemented by a number of organizational and structural changes. First of all, the last US manufacturing facility was closed in 2001, and all the production moved to Mexico, where two existing manufacturing facilities were consolidated for cost efficiency. In 2002, the company’s information technology strategy was implemented aimed at improving the use of sales and real-time operational data. Finally, in 2003 the company consolidated “boys and girls entertainment into Mattel Brands, separating American Girl Brands from the girls segment” (Maffeit, 2008, p. 6). This allowed for significant cost savings across the existing units. The realignment was considered completed in 2003 and resulted in $250 million in cost savings (Maffeit, 2008, p. 6). The main cost reductions were in costs of goods sold, as well as administrative and selling expenses, while the amount of spending on promotion and advertising remained the same. These measures allowed Eckert to increase shareholders’ dividends from the company’s shares again in 2003.
The main focus of the plan was to significantly reduce the company’s expenses in order to increase cash flows. The result of these steps was to reduce Mattel Toys’ significant debt. Eckert and his team have prioritized recovering the company’s current financial position. The plan they proposed did not directly address Mattel Toys’ future financial development strategy. The measures proposed by the CEO emphasized the need for a rapid increase in the company’s cash flows to restore a stable financial position, which meant a reduction in capital investment. Thus, the Financial Realignment plan was a set of urgent steps to restructure the company’s current financial operations.
The results of the plan were significant by 2004, although they fell short of shareholders’ expectations in the future. In particular, the reduction in operating and administrative expenses has allowed Mattel to maintain a cash reserve and capital structure, as well as annually invest in business growth. One of the most significant strengths of this plan is the reduction in operating costs that Eckert has been able to achieve through manufacturing optimization. The toy industry is highly competitive due to its short life cycle, significant production costs, and labor costs (Khajeheian, 2018). One of the persistent threats in this market is the possibility of using cheaper outsourced manufacturing, for example, in China (Khajeheian, 20181). This aspect makes it extremely unprofitable to produce toys in the US and other countries. After the implementation of the plan, Mattel Toys was left with only one manufacturing facility in Mexico to produce the company’s key brands. This decision will allow the company not only to maintain the quality of current products but also, if necessary, to produce new lines without the need for production realignment and additional costs.
Eckert’s plan restored the number of dividends that shareholders were able to receive. Gohar et al. (2021) emphasize that this aspect is probably the most significant for companies since the size of dividends has a positive effect on corporate value. This, in turn, is associated with an increase in profits and company efficiency. Moreover, the possibility of repurchasing shares will allow Mattel Toys to acquire additional sources of investment, which also has a positive effect on cash flows. This aspect is a significant strength of the implemented plan.
At the same time, given the company’s limited growth and development potential, shareholders probably cannot expect a significant increase in dividends, as well as an increase in the value of the company’s shares. This aspect is a weak point of the plan, as it also does not allow Mattel Toys to expect long-term stable growth but rather forces the company to rely on existing financial security. Mattel Toys’ share prices from 1997 to 2004 identified a significant drop in the company’s share price in 1999-2000, as well as a slight increase and stabilization in 2000-2004 after the implementation of the plan (Moffeit, 2008, p. 8). Eckert did not foresee the strategic development of the company, which could result in further growth. At the moment, after the implementation of the plan, the company has a stable cash flow and can pay off the debt but cannot increase profits.
Another strength of the implemented plan is the saving of promotional and advertising costs and the maintenance of capital investment. These aspects will allow the company to maintain the production and sale of the main products that provide most of the profit. However, as noted, the main brands that existed in Mattel Toys were already outdated by the time the plan was implemented, which required the company to create new products (Moffeit, 2008). Restructuring the company and cutting spending on supply chains, termination of licensing and contracts, as well as closing production lines can be a key weakness of the plan. These measures significantly limit the potential growth of the company by restraining its development resources. The implemented plan underlines the preservation of the current operations of the company and does not focus on its transformation. The significant downsizing of the company’s product line results in lower costs but also limits Mattel Toys’ market presence. Thus, the company needs to introduce new products and brands to maintain its position, given the nature of the toy industry.
Thus, the Financial Realignment plan proposed by Eckert and his team allowed the restoration of the cash flows of Mattel Toys. As a result of the implementation of its key elements, it was possible to significantly reduce the company’s expenses and avoid an increase in debt. Additionally, Eckert was able to stop the decline in the price of the company’s shares and stabilize them. At the same time, the plan does not provide for sustainable long-term development and potential growth of the company’s profits. With limited production costs and reduced investment, Mattel Toys is unable to develop and manufacture new product lines, putting it in a disadvantaged position. The company needs not only to optimize its operations but also to restructure the production line in order to remain relevant in today’s toy market.
References
Gohar, M. H., Dindarfarkoushi, P., Armoun, O., & Majd, F. H. (2021). Journal of Management and Accounting Studies, 9(1), 32-44. Web.
Khajeheian, D. (2018). Market analysis, strategy diagnosis and opportunity recognition in toy industry. International Journal of Entrepreneurship and Small Business, 33(2), 220-240. Web.
Moffeit, M. H. (2008). Mattel Toys (A): The Financial Realignment. Thunderbird School of Global Management.