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Mattel toy recall: Lessons for business owners

Over the years, Mattel (NYSE: MAT) has built a portfolio of valuable toy brands -- Barbi, Barney, Dora and so on. In the highly competitive global economy, strong brands are extremely valuable. They act as a barrier to entry and allow for premium pricing.

Yet, brands are also vulnerable.

In the case of Mattel, the company has ordered a massive recall of 967,000 Fisher-Price toys manufactured in China because of high levels of lead in paint. There will be refunds as well.

It's a tough lesson for Mattel. And, I'm sure management will try to implement systems to prevent this from happening again.

But are there lessons for small businesses? Or are such issues (I think this case falls under a larger umbrella of environmental issues faced by businesses) mostly concerns for big companies?

Well, I think small business owners should pay attention. After all, Mattel has the resources to deal with a crisis. But, for a small business, the result of such a catastrophe is likely to be bankruptcy or a severe decline.

Some Lessons

First of all, it's a good idea to start understanding the environmental laws. Keep in mind that you may be liable even if you did not cause the problem. Basically, Congress has some strict regulatory requirements and may demand remediation – which can be costly and time consuming.

For example, let's suppose you buy a facility in an industrial location. Do you know what the prior owner did with chemicals? Were they disposed properly or dumped?

If you have reason to believe there could be environmental exposure, I suggest you get both a Phase I and Phase II Environmental Impact Report. This means hiring an expert to investigate the property – testing the soil, looking at the history of the facility, making sure the permits are up-to-date, and so on.

True, it can cost $10,000 or more. Then again, the liability for environmental problems can be much higher. And, the damage to your company's reputation could be incalculable.

Another piece of advice: Be cautious with outsourcing.

That was the issue with Mattel; that is, the company relied on China-based partners that failed to meet environmental standards.

Again, I suggest relying on an environmental expert, who can provide advice on who are trusted partners but can also implement systems to monitor the product quality. It's probably a good idea to have such a person on retainer.

Finally, it's a good idea to review your company's insurance policies. How are environmental liabilities handled? And, how does the policy handle outsourcing? What are the exclusions? What's really covered?

No doubt, all of this means higher expenses. But as the global economy becomes more intertwined -- and there is much more concern about environmental threats -- it's something even small businesses need to think about.

Tom Taulli is the author of various books, including the Complete M&A Handbook and the EDGAR-Online Guide to Decoding Financial Statements.

Click here for Mattel toy recall news

Julie Tilsner: What's under the tree this Christmas season? 'Made in USA' toys
Brian White: Recalled Mattel (MAT) toys found to have 180 times the lead limit
Peter Cohan: Is China hurting Disney's (DIS) reputation?
Sarah Gilbert: Mattel's third toy recall: Parents response ho-hum, could Barbie survive?
Zac Bissonnette: Toys 'R' Us joins the recall club -- and how you can capitalize
Michael Fowlkes: More children's products join the Chinese recall list
Beth Gaston Moon: Mattel (MAT): Looking into the latest recall
Michael Fowlkes: Chinese executive found hanged following Mattel (MAT) toy recalls
Hilary Kramer: Mattel, Inc. (MAT): Buy or sell after recall?

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Last updated: December 03, 2008: 01:04 AM

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