Toys R Us Japan Case Solution

1. Was Japan an attractive market for Toys R Us? Do you think there were any cultural obstacles to product acceptance, strong competitors?

Japan was considered to be a highly viable market for the company due to a number of reasons. The expansion of Japan’s market resulted in the boom of manufacturing industry of the country and it directly reflected into the disposable income of the customers. The toy market expanded due to an increase in the customer demand in the country. Japanese families started to concentrate more on their children as compared to other luxuries. The factor of high expenditure on low aged group amounted to the boom in the toy industry of Japan. Eventually, it became the largest market for children’s toys after the United States of America. As the market situation of the country seemed to be promising for toy manufacturers, it also created entry issues for the manufacturers outside Japan. The market was wholly based upon products manufactured by local manufacturers, and multinationals were highly discouraged to enter the market and increase competition with their competitive prices. The main reason of this closed market was a system of price setting between the manufacturers and sellers. There was a commitment to buy sell the toys at manufacture stated price, with a guarantee of unsold product return from the manufacturer. A kinship based market was hard to occupy, thus preventing many foreign companies to divert from investing into Japan. The competitors included two prominent names of the toy industry, Chiyaoda and Marutomi. Foresaid companies were considered to be the market leaders in the toy industry of Japan.

2. What were the entry barriers into Japan? Any culturally based barriers, in terms of how to do business?

The market of Japan was quite different from that of US, because of the fact that it was purely based upon domestic buying and selling of products without the interference of foreign manufacturers. Products were bought and sold through a network of domestic shops in the market, which resulted in making Japan a shop oriented market. This kind of market boosted retail business, especially for toys, and made Japanese market stand in the line of US market. The cultural resistance was a result of a closed network between manufacturers and shop owners, and a cultural attachment with the system of small scale shops in the market. A number of employment options were created due to this system, and Japanese population had accepted it by all means.

Keiretsu is a Japanese word meaning a group of related companies. Keiretsu shops were popular, and a number of families had their living through these shops. The big names of Japan such as Toshiba and Matsushita, different companies falling under the same category, made the Keiretsu network strong with their sole dealership partnerships. This mode of selling was based upon customer satisfaction rather than price differential because the price of products remained almost the same throughout the Keiretsu network.

Rules and regulations made the market conditions for new entrants difficult. In addition to the closed network, regulations played their part in hindering foreign companies from entering the market of Japan. The ministry concerned with international trade protected the small sellers by implementing a regulation making it difficult for large sellers to operate without the consent of small shop owners.

3. How did Toys R Us manage to cross the entry barriers into Japan? What alternative modes of entry could have been tried?

Japanese retail market has been one of the strongest markets among developed countries, and foreign players were highly discouraged to enter the local market due to a number of cultural and ethnic reasons. In 1980's, the strong network began showing some weak spots, resulting in the start of foreign entrance into the local retail market. The first and foremost step in this process was the popularity of convenience grocery retail stores. The concept behind successful retail outlets was to modify the system of inventory information used at the back of the company. Closed inventory system based on the latest technology available resulted in fast operations of the stores and increased profitability as compared to the stores without it. In 1990, Japanese legislation system started to move towards a less stringent set of rules for foreign companies. The government admitted the flaws and weak points of the retail system in the country, which was resulting in low efficiency and less competition among the retailers. High price factor was also a matter is a discussion for the legislative authorities. Hence there was a propensity of a lesser amount of time for registration of foreign retailers, and the store timings were also being improved for them. Policy makers of Japan and US planned for a better state of trade between them. A closed economy of Japan was not only creating a problem for the US, but also for the Japanese domestic retailers. Toys R Us benefited from the change in rules and regulations and managed to expand its network in Japan at an appropriate time. It could have, however, formed an alliance/ partnership with a Japanese company stand in the local retail industry of the country.

4. What were problems in transferring Toys R Us competitive advantages to a foreign market? Why did Toys R Us internalize the firm specific advantages rather than license another retailer abroad?

Competitive advantage is the positive edge of a particular company over the rest of the market players in the same industry. It helps the company to classify itself as the top most priority of the customers, and customer loyalty results in the increase of long term profitability. Toys R Us had a unique style of business, unlike its competitors. The company offered a wide range of products, a vast network of distribution and the brand was strong enough to create loyalty among the customers. It needed to transfer its capabilities to a whole new market, with a different structure altogether. One of the major problems in Japan was the fear of local toy shop owners that Toy R Us will eliminate the business of the small shops. As these shops bought from the wholesaler, and Toys R Us bought from the manufacturer, clearly the latter had a strong competitive advantage in terms of the price of products. The close network of small shops relied on the regulatory authorities for their protection against foreign competition and resisted foreign intervention to their full potential. Licensing could harm the competitive advantage of Toys R Us by a nominal size as the other partner would do business in traditional Japanese way, which was not the goal of Toys R Us. Hence internalization was necessary for the sustainability of market leadership in the Japanese retail industry.