The Resource-Based Theory of the Firm • 367

Return on assets (ROA)

12.00%

10.00%

ROA: High-profit firm

8.00%

6.00%

ROA: Low-profit firm

4.00%

2.00%

0.00%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Year

In the early 1980s, toy manufacturer Mattel neared bankruptcy. At the time, the maker of the Barbie doll and Hot Wheels cars faced annual profit shortfalls. Within a few years, Mattel would rule triumphant over the rest of the toy industry. Between 1988 and 1998, Mattel would grow by an astonishing 33 percent compounded annually.5 Mattel’s turnaround can be attributed to a change in strategy that maximized the value of its key strategic resources: its brands.

Founded in 1945, Mattel produced some of the most successful toy brands in history. Launched in 1959, Barbie would become an American icon. Hot Wheels (launched in 1968) proved to be similarly popular. By the 1970s, however, Mattel began to focus less on developing its brands. It adopted a “World of the Young” strategy and diversified into many non–toy businesses including Golden Books and the Ringling Brothers Circus. This strategy ultimately dispersed resources that could have been used to promote its “core” brands. Within each brand that it sold, Mattel offered a narrow array of product lines. The company missed revenue opportunities by selling only a few variations of its basic Barbie doll. Barbie’s accessories were limited only to clothing. Moreover, Mattel aimed to sell only one Barbie per child, while opting to make money on accessories sold after the sole doll’s purchase.

There were other problems. Mattel failed to capitalize on licensing deals for its brands. The company also failed to control inventories, receivables, and overall costs. The company faced bankruptcy by the early 1980s.

In the mid-1980s, Mattel changed course and adopted a “core-brands” strategy that allowed Barbie and Hot Wheels to regain their original luster. Under the leadership of brandmanager Jill Barad, Mattel expanded product lines and offered new accessories including play sets and electronic items. Barad also introduced Barbies with different stories, themes, and occupations, encouraging children to purchase more than one. Barbie and Hot Wheels

products were offered at several price points. At the same time, Mattel cut costs and improved financial controls.

Ultimately, Mattel’s profitability and improved fiscal management enabled the firm to acquire other toy corporations with which it hoped to find synergies. These companies included, most notably, Fisher-Price, which made toys for young children, and Tyco Toys, then America’s third largest toy company and maker of Tickle Me Elmo and Matchbox cars. (The merger of Matchbox and Hot Wheels also helped reduce competition in the metal car submarket.)

In adopting the core-brands strategy, Mattel recognized that its brands were superior resources that could be aggressively exploited. At the time it adopted this strategy, Barbie was one of the most recognizable brands in the world; Barbie regularly appeared in Interbrand’s list of the top 100 global brands. The value of the Barbie brand was especially high with young girls; Hot Wheels were almost equally popular with young boys. This popularity is difficult for other toy makers to replicate. Mattel’s decision to divest other holdings and focus on initiatives involving its flagship brands allowed the company to reap great rewards.

While it experienced great success in the 1990s, Mattel was plagued by earnings shortfalls in the late 1990s, which led to the demise of CEO Jill Barad (who served as CEO from 1997 to 2000). These difficulties can be partially attributed to Mattel’s ill-advised foray into software in 1998. Many criticized Mattel for paying too much for the Learning Company, an educational software firm that it acquired for $3.8 billion in 1998. Mattel was hard-pressed to find synergies with a software firm that had inherently weaker brands. Ironically, Mattel had gotten away from the focused strategy that made it so successful in the first place, and, ultimately, it paid the price.

As it attempted to recover from the illfated purchase of the Learning Company,

Mattel returned to a strategy built around the aggressive exploitation of its core brands. A key part of this strategy involves licensing arrangements with a variety of different companies, such as glasses-maker REM Eyewear, which sells a line of Barbie eyewear for young girls, and the Cartoon Network, which airs the Hot Wheels AcceleRacers made-for-TV movies. Still, Mattel has continued to struggle. Sales of

Barbie dolls declined from 2003 to 2005, due in part to a competing line of dolls known as Bratz, introduced in June 2001 by MGA Entertainment. Bratz dolls have much in common with Barbie, a bit too much perhaps. Mattel sued MGA for intellectual property infringement, and in 2008, a court agreed that the creator of Bratz designed the dolls while still employed at Mattel.

An example of resource mobility arose in a lawsuit involving American Airlines and Northwest Airlines. The case centered on an allegation that Northwest Airlines stole valuable information related to American’s yield management capabilities.

Yield management refers to a set of practices designed to maximize an airline’s yield— the dollars of revenue it collects per seat-mile it flies. Yield management techniques combine mathematical optimization models with forecasting techniques to help an airline determine fares, fix the number of seats it should sell in various fare categories, and adjust its inventory of seats in response to the changes in demand conditions. American Airlines has the most sophisticated yield management capabilities in the airline industry. At the time of the lawsuit in the early 1990s, American’s system was thought to have added $300 million to American’s annual revenues.

By contrast, Northwest’s yield management capabilities were below average. In the late 1980s, it hired a consultant to devise a mathematical model to underpin a new system. But management soon became skeptical of the consultant’s efforts. The system the consultant devised was estimated to cost $30 million, but its success was uncertain. In 1990, Northwest fired the consultant.

Northwest then tried to purchase a yield management system from American. However, in return for the system, American demanded Northwest’s operating right to fly between Chicago and Tokyo, a route whose market value was estimated at between $300 million and $500 million. Northwest refused to trade.

Instead, in the fall of 1990, Northwest hired John Garel, the chief of the yield management department at American. Garel then tried to lure American’s best yield managers to Northwest. Out of the 38 new yield management employees hired by Northwest in 1990, 17 came from American, often with generous raises of 50 to 100 percent.

Along with hiring many of American’s yield managers, Northwest also managed to acquire a diskette containing American’s “spill” tables, which are a key part of mathematical models used to plan the acquisition of new aircraft. Northwest had tried to purchase the spill tables along with American’s yield management system in 1990. American alleged that one of its former employees recruited by Northwest copied the diskette. Northwest also obtained internal American documents on how to improve a yield management system. One of the documents was entitled “Seminar on Demand Forecasting,” which Northwest used to vastly improve its system called AIMS. American alleged that its system contains five critical techniques, all of which Northwest copied. One Northwest yield manager characterized the revision as “a heart transplant of the AIMS system.”

In 1993, American sued Northwest in federal court. It sought to bar Northwest from using its revised yield management system and $50 million in damages. American also brought a suit against KLM, the Dutch airline that is Northwest’s international marketing partner. According to American, Northwest passed along the internal American documents to KLM.

This example illustrates that the resources that are the basis of competitive advantage can be highly mobile. This is especially true when those resources are talented individuals, but is also true when the resource is information, a technique, or a formula that can be written down and copied. It is also noteworthy that Northwest was unable to capture all of the extra value that it hoped to obtain by hiring the American yield managers. Some of it had to be shared with these individuals by paying them higher salaries. This highlights a general point about competitive markets. When a scarce resource is fully mobile and is as valuable to one firm as to another, the extra profit that the firms can earn from the resource will be competed away as they bid against one another to acquire it.