Coursework 1 – Individual

It is contentious to discuss who should operate a corporation and in whose interests. This
topic has typically been divided by defining the purpose and nature of businesses. Some argue that
firms should serve the public better by playing a responsible role toward a variety of constituents,
including creditors, employees, and customers [1]. There are two types of arguments in corporate
governance theory. One is the shareholder theory, which states that a company should concentrate
on maximizing shareholder wealth and secondly the philosophy of stakeholder management states
that a company should prioritize not only the interests of its shareholders but also those of its
customers, suppliers, and local communities [2]. This discussion will be further explained with
relevant situations and examples.

The widely held belief that a company’s main goal is to maximize profits is coming under
more and more scrutiny. The current situation does not simply call for increased profitability and
improved shareholder value to justify business organizations continued existence. This idea
typically works because it takes into account the interests of all parties involved in a project,
company, or organization. According to this notion, a company may have greater results and be
able to accomplish more ambitious goals with the aid of motivated and invested stakeholders. In
addition to profit maximization and the production of shareholder value, one can occasionally
apply the theory to ethical issues like responsibility to society, the environment, and the future [3].

This discussion will emphasize more towards the benefit of applying stakeholders’ theory
instead of shareholder by choosing a corporation as an example which is the famous Toys “R” Us.
Since 1948, Toys “R” Us has been a toy retailer in the United States. It is a well-known company
that has built a reputation over time. It places a strong emphasis on providing for the demands of
its clients and creating a customer experience that gives the business a competitive edge.
Additionally, it has a broad geographic and product diversity. On the other hand, it is now facing
complicated issue after declaring bankruptcy in September 2017 [4]. In 2005, a leveraged buyout
by a group of business, including KKR Group, Bain Capital and Vornado Realty Trust, Toys “R”
Us, Inc became a private company and left the stock market in 2005. Of the $6.6 billion purchase
price about $5.3 billion was paid with debt that the newly privatized corporation had to repay [5].
 While newer retailers like Target and Wal-Mart opened thousands of retail locations with
toy section in their brick-and-mortar stores, and rivals like Amazon.com started to expand in the
digital market. Toys “R” Us maintained its focus by increasing their network to over 1,110 stores
worldwide and joined the Fortune 500 club in terms of overall revenues. Nevertheless, despite
earning enough income to secure a place in Fortune 500, it continued to experience compounding
losses. This gives an impact by causing the company fallen dramatically due to management errors
in understanding the internet market, maintaining a sizable physical and mortar retail network, and
failing to manage its debts [4]. Target and Wal-Mart are the primary rivals at the moment. Due to
these two competitors increasing competitiveness from channel discounts and the decline in
demand, the company has suffered greatly as a result. Toys “R” Us filed for an Initial Public
Offering (IPO) in May 2010, but it quickly withdrew the filing owing to dwindling sales. Toys
“R” Us filed for bankruptcy in 2018 and disclosed plans to close 182 locations [5].

Figure 1 : The number of outlets located in entire globe

There are several causes can be observed on why Toys ‘R” Us a failure corporation is, by
applying the shareholder theory firstly will be insufficient cash flow. Toys “R” Us has made its
services and operations simpler and introduce online services to cut costs and gradually improve
the company’s financial statements. However, they misjudge the impact brought on by the shifting
makeup of the toy market and the broader state of the American and global economies. The variety
of entertainment created for kids has increased with video games becoming increasingly popular
with young people. Due to this, it was difficult for Toys “R” Us to compete on a global or national
level. As a result, the company’s toy sales revenue does not generate much cash flow [6].

Furthermore, Toys “R” Us started competing on price alone after losing the race in
technology and innovation which is a proof that the shareholder theory being applied by focusing
on the price value of the product instead of improving the product based on customer demands.
There will always be a cheaper alternative, therefore aiming for the lowest price is never the best
course of action [7]. Secondly, stagnant growth in profit which is a proof that Toys “R” Us and
Amazon signed a 10- year agreement on August 9th 2000 to work together to launch a cobranded
online store . Amazon would handle order fulfillment and customer service, and Toys “R” Us
would handle merchandising and inventory purchases. As a result of the agreement, Toys “R” Us
no longer felt the need to rely on Amazon’s skills for order fulfillment and customer support. Since
the Amazon collaboration ended in lawsuits. Toys “R” Us had been struggling to keep up [6].
 Moreover, the management of Toys R Us has management myopia. They continued to
think that Toys “R” Us was the epicenter of the toy business and that the company was impervious
to harm. The similar mentality led to the demise of other industry titans like Nokia and Kodak.
Employees who attempt to protect themselves from layoffs by withholding information from
senior management are said to have management myopia. When it is broken, trust can force
business to close their doors since it works both ways. Perhaps, Toys “R” Us, store personnel
falsified consumer surveys that were used by the company’s headquarters as a key performance
indicator [7].

In order to ensure the success of the Toys “R” Us , the corporation should applied more of
stakeholder theory rather than shareholder which as mentioned above , for example the company
should require assistance in leading the business through transitions by hearing customer’s
feedbacks and responses regarding the products that been sell , therefore, following the trend of
current generation with the toys that attracted the children’s attention and come up toys with
different design and creativity . The business needs fresh perspectives and fresh approaches to
take on its competitors. The corporation needs capital to finance any such initiatives in addition to
a workable strategy [6].

Recently, Toys “R” Us was acquired by the New York based brand management business
WHP Global, which has plans to create a global network and digital platform for the company.
The company expects Toys “R” Us to make a comeback in 2022. Although it may still be difficult
to compete with Amazon using digital platforms, the idea of merging business into bigger
department stores would have been a positive move, whereby toys can be purchased both in online
and physically at the stores nearby [6]. Hence this proves that the innovation and new approaches
idea following customer requirements which fall under stakeholder theory hold the purpose in
creating a blueprint of success in the company with gaining lot of revenue.
 In conclusion, Toys “R” Us had met failure under circumstances when it focuses only on
the sales profit, by neglecting the other assets that would really giving the advantage to run the
company more successfully as years passed. Shareholder theory was initially initiated by the
corporation to operate the business which proven the point where it met the downfall whereby
other corporation such as Wal-Mart or Target had benefited from this aspect. That is why
stakeholder theory came in handy because it doesn’t only look only in the profit whereby it shows
the importance of interest in the decision of customers, employees and local communities which
is a key structure a corporation can build by listening to the consumers of the product in order to
reach the expected goal in long term.

(1335 words)
REFERENCE LIST

[1] J. Hung, “Shareholder Primacy Theory vs. Stakeholder Theory,” SSRN Electronic Journal,
2020
[2] Y. Zhang, “The Analysis of Shareholder Theory and Stakeholder Theory,” IEEE Xplore, Oct.
01, 2011.
[3].Industrial Editor Name, Ed., “What Is Stakeholder Theory? (With Benefits and an
Example),” Indeed, Apr. 22, 2022. https://ca.indeed.com/career-advice/career-
development/stakeholder-theory (accessed Oct. 18, 2022).

[4] Bock and Neus, “Case Study : Toys ‘R’ Us,” ACCID, 2018, Accessed: Oct. 26, 2022.
[Online]. Available: https://accid.org/wp-content/uploads/2018/10/Toys-R-Us-Case.pdf
[5] “The Rise and Fall of Toys "R" Us: Why Market Leaders Need
Innovation,” www.linkedin.com. https://www.linkedin.com/pulse/rise-fall-toys-r-us-why-market-
leaders-need-innovation-don-sausa/

[6] L. Shenzhan, L. Xinran, and T. William, “The Study of Toys R Us’ LBO Failure,” 2022.

[7] B. MINDS, “The Downfall of Toys R Us — Don’t Blame Amazon!” Medium, Mar. 19, 2019.
https://brand-minds.medium.com/the-downfall-of-toys-r-us-dont-blame-amazon-c88856516383