Teaching Notes
TOYS “R” US, AS OF OCTOBER, 2004

Case Uses & Objectives

The Toys “R” Us case can be used as an introductory case to accompany discussion of Chapter 1, as an overview of the many decisions and actions an organization has to undertake to sustain a competitive advantage. This case can be also used to augment discussions of strategic analysis, specifically both internal and external environmental analysis (Chapters 2 & 3 in Dess, Lumpkin & Eisner); and strategic formulation, at both the business strategy (Chapter 5), and corporate strategy (Chapter 6) level. The case is also useful to discuss integration of environmental analysis and strategy formulation in an e-business offering (Chapter 8).

In terms of environmental analysis, this case connects a discussion of external environmental forces and Porter’s five-force model, and how such forces affect the ability to sustain performance in an industry (referencing concepts covered in Chapter 2), as well as the changing effects of competitive forces when an e-business is added (Chapter 8). In terms of internal analysis of the firm, (referencing Chapter 3), the value-chain and resource-based VRIN analysis provides a case for how integration challenges across the value-chain activities could affect growth and performance, again with the option of discussing possible synergies due to the addition of an e-business model (Chapter 8).

As a business-level strategy case, (referencing concepts covered in Chapter 5), this case can be used to discuss the Porter’s generic strategies, the advantages and disadvantages of those strategies and to discuss the merits and demerits of a combination strategy, especially in the context of an e-business venture (Chapter 8). Students could also be encouraged to relate their understanding of the sources of competitive advantage that they identified using the internal analysis of the firm as a part of this discussion.

As a corporate-level strategy case, (using concepts from Chapter 6) this case can be used to discuss advantages and disadvantages of various strategies, in specific helping students to understand the many issues associated with the decision to horizontally diversify. After doing this case, students should have a greater sense of corporate strategy diversification issues including why firms diversify, how they can do it and how to analyze this strategy in terms of relatedness and potential synergies. Students could also be encouraged to relate their understanding of the sources of competition that they identified using the environmental analysis of the firm as a part of this discussion.

The case is written in a style that overviews the situation but intentionally avoids guiding students through any analytical framework or specific application question. In so doing, it provides the instructor with the latitude to adjust class discussion and thereby accommodate the abilities of a wide-range of students. Specifically, the instructor can invite students to reason through a situation where uncertainty exists and speculation may be required.

Synopsis

Toy “R” Us was founded in 1948 in Washington, D.C. as a baby furniture store. In 1957, after customers had been asking for toys for their growing babies, founder Charles Lazarus opened the first toy supermarket. At the time, this idea of specialty retailing and off-price positioning was revolutionary. Toys “R” Us subsequently became a public company in the late 1970s, and by early 2000 had become an $11 billion business.

During 2003, Toys ”R” Us and the rest of the specialty toy retailers took a huge bashing from Wal-Mart and other department stores that offered low prices on popular toys. Toys sales at toy stores dropped 7.7 percent from 2002, forcing several top stores, such as FAO Inc. and KB Toys, to file for bankruptcy. What had happened?

Since the 1980s, Toys “R” Us had set out to expand worldwide, adding stores in more than 27 countries, with expanded selections of