Managing Controversy:

1. Managing Controversy: Chinese Manufacturing Problems Team Ho Chi Minh City John Busenbark, Aravon McCalla, Michael Behrns, Rajeev Singh

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. Managing the Controversy: Focused Solutions • Understand the “big-picture” solutions • Allows for smaller segments to be focused and executed with more precision

13. 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

14. 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