Simplification is not without risks

Simplification is the antithesis of innovation; it is a strategy used to consolidate in preparation for growth. “When going into a simplification, it needs to be set its context, [which is] the need to restructure now so we can be stronger later on,” says Hunter. “Rather than getting on the bandwagon of continual cost cutting, it is a strategy of getting your house in order to be more competitive in the future. But if you don’t have a plan from the start for when you get there, it is too late to ask that question. You become commodity-driven.”

Downs has kept this principle in mind: “Now the cost base is in a good zone, we can grow out of this cost base, with brands and intellectual property that we own, and sell to more markets outside Australia,” he says. “At the moment, 10% of our sales are outside Australia. Hopefully by end of this financial year, it will be 20%. And with new brands launched in Australia, we expect modest growth.”

Funtastic’s own brands include the La Dee Da Dolls and Nano Speed cars.

Customers as well as profits can be sacrificed by a long period of cost cutting, Knowles says. “There are lots of examples: banks saying we don’t want a branch network, then saying, hang on! Our customers are not engaging with us, they don’t love us.

“Or the [American car company] Detroit, saying we build big cars and every year we screw our suppliers so we can make them cheaper. Our customers don’t want a big car, but think, it is cheaper so it will do. Then finally people say, I don’t want that and I am going to buy something else.

“Or there are retailers, like Myers and David Jones. Customers are saying if they’re going to come into the store, they want service, so if it isn’t there they’ll just go online.”

The decisions about what to cut are difficult and risky ones – in periods of growth, leaders can afford to allocate risk capital to invest in many different things. Only one needs to do well to pay for all the others. Knowles says: “It is easier to get it wrong in a shrinking organisation.”

For example, shrinking the base of suppliers can lead to an over-dependency on the few left.

Downs has two answers for this problem. One is to work with brands that are innovators – he names Mattel, Lego and Hambro. “If they can’t power our business with brands and innovation, they won’t be powering their own,” he says.

The other is to make more off its own toys. “We have always done single digit sales in proprietary toys, but today it is about a third of what we sell today. Ultimately we’d love to make more and own more of what we sell. If you are a distributor, there is another margin in the mix. If you have it yourself, it leads to higher profits.”

A final risk is losing intellectual capital in the process of job cuts, says Knowles. “The heads who have been in the organisation for a long time tend to be cast aside, and it is not easy to get back that knowledge with the new strategy. It is like manufacturing: if it dies, you can’t get it back.”

Leadership through tough times

Downs says he finds the fast moving “fashion” in the toy sector exciting. “Each day is different. And I have four kids of my own so I see the fruits of what I do every day.”

While demanding high performance, Downs says he tries to foster a “learning and development culture” by letting his team get on with business. “My key strengths are strategy and objectives, while giving the team the imprimatur to get on with the job.”