Polly's sitting pretty, what of Mighty Max?

Chris Arnot reports on the tough decisions faced by the chief of Bluebird Toys as he tries to read children's minds

The place: Los Angeles. The scene: the boardroom of Mattel, one of four companies that dominate the toy industry. Enter Torquil Norman of Bluebird Toys, Swindon, England. He is an imposing figure of 6ft 7in with distinguished silver hair and twinkling eyes.

Executives crane forward as, with a dramatic gesture, Mr Norman whips away the handkerchief he has set in the middle of the boardroom table. Revealed beneath it is the product he wants them to take very seriously. It is a tiny doll, smaller than his thumb but immaculately dressed.

The executives exchange baffled glances. "What's important," says the Englishman, "is where she lives." And he produces a plastic compact that opens to reveal a doll's house in miniature.

The deal struck that day meant that Mattel would handle global distribution of Polly Pocket, which went on to become the world's second favourite girls' toy after Barbie. Bluebird kept the retail price comparatively low for a product of such intricate detail by having it manufactured in China. Mr Norman, who officially retired earlier this summer as non-executive chairman, used his genial charm to good effect. "But underneath he's as hard as nails," says his successor, approvingly. Chris Burgin, 46, has been running Bluebird as chief executive for more than two years. Before that he worked for Hasbro, the other big player from America, managing brands such as Trivial Pursuit and Action Man. "But I learnt more from Torquil in two years than I did in the previous 40," he says.

On the face of it they were unlikely business partners: a former public schoolboy with an aristocratic demeanour and a Yorkshireman from the back streets of Leeds who left his secondary modern at 16. Mr Burgin was the sort of kid who would get in to Headingley Test matches through a hole in the fence, collect a pass out, sell it outside and then repeat the operation.

His favourite toy was Baco, which enabled him to construct model houses far more luxurious than the one in which he lived. Today, he is well aware that the lifestyle he has worked so hard for is dependent on his ability to continue to spot what will appeal to children with more choice and disposable income than he could have dreamt of at their age. He is dealing with a fickle market. "If anything, boys are even more fickle than girls," he says. "Their moods can change when they see something on the telly or one of their mates has something they don't have."

Hence the threat to Mighty Max, a sort of Polly Pocket for boys. Taking the axe to Max is a difficult decision after three years of buoyant sales, but Mr Burgin knows he has to do it. "In the past a company like Bluebird would hang on in there and try to squeeze the last drops of turnover out of a product like that. But my background at Hasbro taught me that was counter-productive. You have to spend more and more money on advertising to keep it alive. It's like trying to push water uphill."

The trick with toys is to go with the flow. And for that a constant source of fresh ideas has to be tapped. Although Mr Burgin gives the impression of not being a man to suffer fools gladly, he is prepared to spend some time with eccentric figures who produce weird and wonderful inventions from tattered carrier bags or shoeboxes.

"Often it's something totally non-commercial," he says. "But there might be a germ of an idea in it which our research and development department can take forward. The inventing community see us as world players because of Polly Pocket. If the idea's good enough, we might buy it for a set fee. But I'd rather lock a good inventor into the company with a 5 per cent royalty deal. That way you keep their potential product development for the future."

Advertising takes up between 10 and 15 per cent of sales. Add to that the cost of tooling up for production and the price of failure can be extremely high. "Everybody who works in the toy business has had 'stiffs' one time or another. Market research helps to reduce the risk."

Relying on instinct is not enough. Nor can he consult his own teenage sons about toys they have long outgrown. Instead, Bluebird uses focus groups of 20 children in various parts of the country.

Spin-offs from television and film are no guarantee of success, but the exposure does increase the chances. Mattel has just granted Bluebird the licence to produce a portfolio based on Disney film characters in a deal that could be worth around $40m (pounds 26m).