01 Mar 2004

Toy Story

The educational toy market teaches serious lessons about competition
by Susan Young


Last Christmas, many of the headlines spelled out trouble in toyland. FAO Schwarz sunk deeper into bankruptcy, KB Toys was having a hard time making ends meet (and filed Chapter 11 in January), and Toys “R” Us, which closed its Kids “R” Us and Imaginarium divisions, reported disappointing sales.

No one was surprised. On the retail side, the large discount chains — WalMart and Target in particular — had steadily taken market share from specialty toy stores, in some cases using toys as a loss leader to pull in traffic. The ripple effect could be seen on the manufacturing end, where smaller toy developers that couldn’t play by the discounters’ strict rules had fewer sales channels. With all the fun that toys bring to kids, the business is characterized by copycats, empty piggy banks, and aggressive competition that might make a player take her ball and go home. One of the few bright spots in the flat $20 billion U.S. toy industry, however, is educational toys.

The educational toy market is difficult to track. More a self-defined than official category, it likely approaches $3 billion in annual sales. Increasingly, toy manufacturers are championing the educational value of their products — and such cheerleading is literally paying off.

One company that has certainly ridden — and perhaps created — the wave of increased interest in the market is LeapFrog, the developer of the LeapPad system, a computerized device that straddles the parent-pleasing category of book and the kid-pleasing category of electronic toy. The LeapPad took the dusty, flash-card connotations out of the term “educational toy” and launched a new, highly successful product line of “smart toys.” LeapFrog did what no other new player in the toy industry had done: After launching in 1995, in seven years it became the third-biggest manufacturer of toys in the United States, right behind longtime industry giants Mattel and Hasbro.

The Bulletin recently spoke with three alumni who work for toy companies that develop products considered to be part of the educational toy market. These graduates described daunting challenges, but they each expressed a zealous commitment to their work and a heartfelt belief in their products.

Brand Recognition: Michael Moynihan

Michael T. Moynihan (MBA ’93) was reintroduced to LEGO as an adult when his job as a Cheerios brand manager took him to LEGO’s U.S. headquarters in Enfield, Connecticut, to discuss partnering on a promotion. “It was easily the coolest company visit I’d ever been on,” Moynihan says. When LEGO approached him about an opening in its marketing department, he didn’t hesitate. Eight years later, Moynihan is now director of marketing for the Americas.

Among the top players in the U.S. toy market, LEGO stands out because it is a privately held company that has been owned by the same Danish family since it was founded in 1932. Unlike most in this highly competitive group of toy makers, LEGO has the luxury of marketing just one brand, and it is a brand that resonates with children and parents — and even grandparents — alike. While the company has experienced significant volatility in recent years, LEGO has maintained its position in the top five toy brands for the last twenty years.

The educational market is nothing new to LEGO. It has always positioned itself as a fun toy that helps children develop, and it enjoys a healthy relationship with schools and educators throughout the world. About 90 percent of U.S. preschools and kindergartens use LEGO products. Its Learning Institute comprises an international collection of child development experts who guide product development. “This isn’t a group that just rubber stamps what we do,” explains Moynihan. “They are brutally honest with us.”

The philosophy at LEGO focuses on playful learning, and that philosophy has been honed in the last few years as consumers are clamoring for educational products. A key aspect of LEGO’s approach to the educational toy market centers on educating parents about the importance of play. “Play is undervalued,” explains Moynihan. “Children’s lives are so structured that they often don’t have time to simply play. Play is critical to how kids grow and develop.”

Because consumers already know and trust the LEGO name, the bulk of the company’s U.S. sales are through the larger chain stores. LEGO enjoys ample shelf space and huge displays at the retailers that have been thought of as the “big five” — Wal-Mart, Toys “R” Us, Target, Kmart, and KB Toys. It has set up its manufacturing channels to meet the strict schedules that these stores require. Still, Moynihan is discouraged by trends in the retail market. “Some of the smaller toy shops are really struggling, and that is bad news,” he says, noting that the independent shop owners “really care about the brand and are good ambassadors. They can explain the product and convey the value of it.” (See sidebar, page 36.)

Without these ambassadors, he observes, it is harder for people to see the educational value of LEGO products. “We focus on helping kids develop their imagination, not on teaching them to memorize information,” says Moynihan. “We’re not saying ABCs and 1-2-3s aren’t important, but we think that playful learning and other important nonacademic developmental skills are not being valued appropriately.”

This all plays out when LEGO designs its toys. Two of the key aspects that the company tries to incorporate into all of its products are “hands-on, minds-on” and ensuring that toys are appropriately challenging — not so hard that they alienate newcomers but not so simple that kids get bored with them. LEGO, committed to avoiding overt violence in its products, does not manufacture any militaryrelated toys.

For years LEGO considered its primary competition to be the other two big U.S. toy manufacturers, Hasbro and Mattel, neither of which has been a major player within the construction category. In the early 1990s, however, a Canadian company called Mega Bloks began to chip away at LEGO’s market share with its construction blocks, including a popular line of warrior play sets. “Their products are based on a building system very similar to ours,” explains Moynihan. “They’ve done a really good job of innovating and executing.” Moynihan takes a characteristically LEGO approach to the threat that Mega Bloks poses: “Healthy competition has provided a good wake-up call for us.”

Brain Power: Bill Furlong

In the mid-1990s, while working in the marketing department at Microsoft, William B. Furlong (MBA ’91) got a call from former colleague Richard Tait. The enthusiastic Tait was working on an idea for a game and wanted to run it by Furlong. When the pair met for breakfast at the Hi Spot Cafe in Seattle the next Saturday at 7 a.m., the bleary-eyed Furlong was surprised to learn that Tait was not developing a computer or Internet game, but a board game. It was a game that allowed a group of players with different skills — be it spelling, knowledge of trivia, whistling, molding clay, or acting — a variety of chances to excel. Furlong told Tait that on a scale of one to ten, he’d give the idea a six.

Tait and his partner, Whit Alexander, continued to refine the concept, inviting friends over to test and retest the game. The two colaunched the game, Cranium, in 1998 and found an unlikely initial partner — Starbucks — to help market and distribute it. Two more unconventional game distributors then joined in: Barnes & Noble and Amazon.com. In 2000, Tait approached Furlong again and showed him the organization’s vision statement that outlined the future of the company — after all, these folks were trained at Microsoft — and the development of a core brand of products. Furlong agreed to join Cranium’s six-person team with the title of Major Mojo, which in more conventional circles might be called director of sales and marketing.

Today, the Seattle-based game company employs sixty people and has expanded its reach far beyond its initial flagship adult game, mostly into younger markets. Each of Cranium’s seven games is designed to showcase a variety of skills among its players. “All players have a chance to shine,” explains Furlong, using Cranium’s refreshingly accessible corporate lingo. “So someone who can’t spell ‘receipt’ backwards might learn that she’s a genius at sculpting a banana split out of clay in sixty seconds.” Cranium has developed games for fifteen international markets and has sold some six million units in the United States alone.

A rule of thumb in the toy industry is that about half of all new board games fail in their first year; of those remaining, another half fail in their second year. Cranium has bucked the odds, winning the company accolades in the press, shelf space at major (and minor) retailers, and the Game of the Year awards at the American International Toy Fair, the industry’s annual trade show, in 2001 and 2002.

Like LEGO, Cranium is not a product that fits into a standard definition of educational, but it is one that caters to the different strengths of its players and encourages creative development. “For each of our games, we focus on three crucial ‘moments,’” explains Furlong. The situational moment involves when and where the game is played, the emotional moment looks at how the players feel, and the developmental moment — which is particularly important in the five games Cranium markets to kids and teens — centers on what the player will get out of the game. “We want players to develop interpersonal skills,” says Furlong. “We also want them to have fun.”

Fittingly, Cranium states its purpose as being “to lighten and enlighten people’s lives.” While Furlong believes that much of Cranium’s success centers on its founders’ due diligence, the high quality of Cranium products, and the company’s ability to break with sales and marketing conventions, he notes that the timing of the game’s launch — 1998 — had a lot to do with its popularity. At that time, he observes, “Internet alienation had begun to kick in. People were saying, ‘Hey, what happened to good, old-fashioned, sitting down, face-to-face, human interaction?’” What Cranium offered, says the former skeptic, was “human interaction on steroids.”

Cranium was launched during a lull in new entrants to the adult game market. Trivial Pursuit was sixteen years old, and Pictionary was eleven. In the six years since Cranium hit the market, however, interest in such games has increased. “I’d like for Cranium to single-handedly take credit for the resurgence in board games,” jokes Furlong, “but that’s probably a little presumptuous.” He does, however, believe that Cranium’s success has made an impact on the market. “We have developed a solid brand. Innovation breeds competition and imitation,” he says, noting that Hasbro (the owner of Parker Brothers) has come out with a number of new versions of Trivial Pursuit in the last five years.

Furlong thinks that Cranium has forced other game makers to focus on new ways to gain, or at least protect, market share, although Hasbro and Mattel continue to own about 80 percent of the games market. “We’re still a small percentage of the overall industry,” he says. “At the same time, Cranium is probably the hottest independent brand that’s hit the game world in the last twenty years. It’s a nice place to be.”

Smart Toys: Brooke Abercrombie

In 1997, Brooke L. Abercrombie (MBA ’93) was working for a leading educational software publisher outside of Los Angeles. New research on early brain development inspired her and the company’s chief technology officer’s interest in developing learning tools for young children. “We tried using CD-ROM software, but as soon as we saw an eleven- month-old spinning in an office chair in front of a computer, teething on the mouse, we realized that it wasn’t the right technology for the age range we wanted to target,” notes Abercrombie. The pair decided to adapt the technology to the child and founded a company called Neurosmith.

In many ways, Abercrombie was at the right place at the right time. The price of computer chips was plummeting, making it possible to deliver a lot of learning at an affordable price. After researching how children learn, experimenting with product development and design, and finding an appropriate manufacturer in China, in 1999 Neurosmith released its first product, Music Blocks, a toy that allows young children to create music simply by rotating and rearranging blocks. While retailers were uniformly impressed by the toy’s sound quality, they expressed doubt that consumers would be willing to spend $69.99 for five blocks. A few retailers agreed to carry Music Blocks, including FAO Schwarz, the now bankrupt specialty store that liquidated its assets in January.

Music Blocks became one of the surprise hits of the year, winning fourteen major awards, including Child magazine’s Toy of the Year as well as a nomination for the same title from the Toy Industry Association — the coveted T.O.T.Y. Award. The company had trouble filling orders from retailers that just months before were not interested in carrying the toy.

Like most of Neurosmith’s products, Music Blocks uses a cartridge system to allow users to change the musical content of the toy. “This was a very obvious design for us because we came from the computer software industry,” explains Abercrombie. “We wouldn’t re-create the computer monitor every time we introduced new software.”

By 2001, Neurosmith was a 25-person company with a reputation for creating high-quality products that appealed to both parents and children. Their prices were higher than other toys, but word of mouth — be it parents, kids, or the network of people who work in or own independent toy stores — helped spread the gospel of Neurosmith’s ability to combine fun with learning. Just as Neurosmith was hitting its stride, however, the recession struck, wreaking havoc on the independent specialty stores. “Four of our top five retailers went out of business in 2001,” explains Abercrombie.

With fewer and fewer specialty retailers to sell its products, Neurosmith decided it needed to reorient its strategy toward mass-market accounts in order to survive. “This isn’t a change you make overnight,” notes Abercrombie wryly. In addition to needing to design toys to hit much lower retail price points, the company had to reorganize its sales and distribution operations to service the needs of large mass accounts. After considerable restructuring in 2002, Neurosmith was delighted when Target agreed to distribute its products and launch them in the fall of 2003. “For a small company without an advertising budget to get four linear feet of shelf space at Target is a significant accomplishment,” says Abercrombie.

Yet Neurosmith faced new challenges in the mass market. “In 2003, we discovered, painfully, that being successful in the mass market requires not only good products at the right price, delivered on time — huge challenges in their own right — but also a substantial investment in marketing to build brand awareness,” says Abercrombie. Neurosmith competes in a category in which LeapFrog spends over $50 million a year on advertising. “That’s an order of magnitude more than Neurosmith’s entire revenues,” Abercrombie observes.

At press time, Neurosmith was in the process of restructuring again, as it lacks the scale and financial resources required to compete effectively in the mass market. While Abercrombie admits that if she doesn’t find a partner or a buyer soon, the company may be forced to shut its doors, she remains upbeat about her contribution to the toy industry. “We may not have been able to create a business with positive financial returns, but we have been incredibly successful at developing an award-winning line of toys that have shown consumers that toys can be excellent learning vehicles.”

Although Abercrombie is concerned about the future of the industry and its ability to invest in innovative new product development, she knows that “the more things change, the more they stay the same.” Recently, she overheard a few industry veterans recounting a time when toy makers were certain that the industry wouldn’t survive because a certain retailer was dominating the market. She felt somewhat uplifted as she joined the conversation and learned that the time frame being discussed was the 1970s and that the retailer was Sears.

Featured Alumni

Featured Alumni

Class of MBA 1993, Section G
Class of MBA 1991, Section F
Class of MBA 1993, Section C

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