________________________________________________________________________________________________________________
HBS Professor Timothy Luehrman and HBS MBA Heide Abelli prepared this case solely as a basis for class discussion and not as an
endorsement, a source of primary data, or an illustration of effective or ineffective management. This case, though based on real events, is
fictionalized, and any resemblance to actual persons or entities is coincidental. There are occasional references to actual companies in the
narration.
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TIMOTHY LUEHRMAN
HEIDE ABELLI
New Heritage Doll Company:
Capital Budgeting
In mid-September of 2010, Emily Harris, vice president of New Heritage Doll Company’s
production division, was weighing project proposals for the company’s upcoming capital budgeting
meetings in October. Two proposals stood out based on their potential to strengthen the division’s
innovative product lines and drive future growth. However, due to constraints on financial and
managerial resources, Harris knew it was possible that the firm’s capital budgeting committee would
decline to approve both projects. She also knew that New Heritage’s licensing and retail divisions
would promote compelling projects of their own. Consequently, Harris had to be prepared to
recommend one of her projects over the other.
The Doll Industry
Revenues in the U.S. toy and game industry totaled $42 billion in 2008 and were projected to
increase by 4.6% per year to $52.5 billion by 2013. The market was divided into two broad segments:
video games (48%) and traditional toys and games (52%). The second segment was further divided
into infant/preschool toys (14.5%), dolls (14.1%), outdoor & sports toys (12.3%), and other toys &
games (59.1%) including arts and crafts, plush toys, action figures, vehicles, and youth electronics.
The U.S. market for toys and games was dominated by large global enterprises that enjoyed
economies of scale in design, production, and distribution. Revenues were highly seasonal; the
largest selling season in the United States coincided with the winter holiday period.
Within the toy and game segment, U.S. retail sales of dolls totaled $3.1 billion in 2008 and were
projected to grow by 3% per year to $3.6 billion by 2013. The doll category included large, soft, and
mini dolls, as well as doll clothing and other accessories. The phenomenon of “age compression”—
the tendency of younger children to acquire dolls that had traditionally been designed for older
girls—reduced growth in the “baby-doll” sub-segment. Competition among doll producers was
vigorous, as a small number of large producers targeted similar demographics and marketed their
dolls through the same media. Lasting franchise value for a branded line of dolls was rare; the
enormous success of Barbie® dolls was an obvious exception. More recently and on a much smaller
scale, New Heritage also had created a durable franchise for its line of heirloom dolls. But the
popularity of most doll lines waned after a few years.
4212
SEPTEMBER 15, 2010
This document is authorized for use only in Julieta Sarralde’s Finanzas I_Og 1,2,3 at ITAM Mexico from Nov 2019 to Dec 2019.
4212 | New Heritage Doll Company: Capital Budgeting
New Heritage Dolls
The New Heritage Doll Company was founded in 1985 by Ingrid Beckwith, a retired psychologist
specializing in child development and the grandmother of two young girls. Dr. Beckwith believed
the dolls produced by the major toy companies did little to develop girls’ imagination or foster a
positive self-image, so she created a line of dolls with unique storylines and wholesome themes. Dr.
Beckwith’s dolls struck a chord among mothers and grandmothers who also rejected the dated,
clichéd images portrayed by the popular dolls of the day.
By 2009, New Heritage had grown to 450 employees and generated approximately $245 million of
revenue1 and $27 million of operating profit from three divisions: production, retailing, and licensing.
The production division, discussed further below, designed and produced dolls and doll accessories.
The retailing division offered a unique “intergenerational experience” for grandmothers, mothers,
and daughters, centered upon the character histories and storylines of the company’s dolls and
delivered through an online website (42%), a mail-order paper catalog (33%), and a network of retail
stores (25%). In fiscal 2009, the retailing division generated roughly $190 million of revenue and $4.8
million of operating profit. The licensing division was started in 1998, and represented the
company’s newest and most profitable division. It sought to extend the New Heritage brand and
capitalize on high levels of customer loyalty by selectively licensing the company’s doll characters
and themes to a variety of media that reached the firm’s target demographic of toddler to pre-teen
girls. In fiscal year 2009 the licensing division generated $24.5 million of revenue and $14.5 million in
operating profit.
New Heritage’s Production Division
