Mega Toys

Operating in a Monopsony.

MegaToys Inc. owns its growing business in the two major streams of products they offer (toys and costumes), to large and increasing orders from the biggest players on the market in the relevant fields, namely Wal-Mart and Party City. Having in mind that a business exists to be prosperous and profitable, Woos brothers are excited about the prospects that lie in front of the company because of the good partnership with the two companies that secure a large portion of the company’s revenue. In order to meet the demand in a cost-effective and timely manner, the company is expanding its production, imported inputs, and suppliers. Although the undisputable benefit of having the giant Wal-Mart as a partner, a question arises: will this dependability on one major source for revenue at some point become a disadvantage and threaten the business’ existence? This concern was raised by one of the brothers, Peter, who “wondered if it was good for Megatoys to become increasingly dependent on the retail giant.”

Are the Giants Saviors or Destroyers?

According to Michael Porter’s theory for generic strategy, the Woos are employing a mix of cost leadership strategy and differentiation strategy for a broad market. On one hand they rely on cost-cutting in order to satisfy Wal-Mart’s needs for cheap offerings for their product line. On the other hand they use differentiation by offering seasonable products and costumes.

The major problem is that Wal-Mart’s positioning to deliver products at a lowest price to its end-consumers and the power given by the volume allows them to force all their suppliers to cut costs and sell at tight profit-margins. If the brothers successfully close the new deal for Easter baskets, the generated revenue of the deal would represent more than a half of the annual revenue for 2008. This places them in the unfavorable position of being dependent with no market power operating in a highly competitive business sector.

The market power of the giant puts the suppliers in an inequality and the companies are left with no choice but to cut cost in order to survive. Additionally, in order to meet the demand for big volume the supplier have to expand its production, facilities, logistics, and operations which ultimate role is to lead to economies of scale. The above said is a major tool for reducing costs but what happens if Wal-Mart does not continue to place orders? The supplier is left with excess production and diseconomies of scales occurs bringing losses for the company. Moreover, this expansion and reinvested profit in building new plants and facilities limits the company to invest in R & D and to respond to the changes of the consumer behavior and market needs which is catastrophic for the future of MegaToys in the long run.

Major challenge of the partnership with Wal-Mart is that MegaToys