External+Analysis

You may want to use analytical tools such as Porter’s Five Forces and Macroenvironmental analysis. Exemplar questions may include:

 What key opportunities exist for this industry? Which company (or companies) is most likely to take advantage of these opportunities? Why?

 What key threats (in terms of new entrants, product life cycle, product obsolescence, substitute products, etc.) exist for this industry?

Porter's Five Forces Model 1.) Rivalry within the industry HIGH 2.) Threat of new entrants MEDIUM 3.) Bargaining power of buyers LOW 4.) Bargaining power of suppliers LOW 5.) Threat of substitutes VERY HIGH!

From third quarter results in 2009, Mattel recorded higher revenues than Hasbro, at $1.79 billion and $1.28 billion respectively. From looking at pure numbers alone, it seems Mattel has won the battle in selling toys, however, Mattel’s revenues have decreased 8% from last year while Hasbro’s revenues have decreased only 2% (THE MOTLEY FOOL.COM). Besides the two main players discussed, Hasbro and Mattel, companies in the toys and games industry include: Leapfrog Enterprises, JAKKS Pacific, Inc., and FortuNet, Inc. Firms in the toys and games industry produce a wide variety of products for consumers. The variety includes: action figures, collectibles, board games, electronic games, dolls, plush toys and educational toys.

To compete effectively in this industry, a firm must be innovative, and have the ability to be in touch with what children and parents desire. Since every company experiences toys and games that do not meet expectations, the firms in this industry have relied on licensed characters from television shows, movies, and books in order to exploit their greatest chance at success. Examples of these popular characters are: Star Wars, Sponge Bob, Transformers, and Harry Potter (http://industries.hoovers.com/consumer-products-manufacturers/toys-and-games/industry_description).

Demographic changes have influenced this industry because the age range of products has expanded. Parents are eager to start their child's learning process at an early age. Educational toys are being produced by the companies in the toys and games industry to introduce social development, learning of language and math skills and even a second language at an early age. The educational toys segment of the industry is flower amidst all the weeds in the garden; it is growing and is advancing near 3 billion dollars in annual sales (http://hbswk.hbs.edu/archive/4035.html). Since educational products for the infants and preschools are increasing in demand, all the big players in this industry are creating product lines - Mattel has Fisher Price and Hasbro has PlaySkool. LeapFrog is a unique company that came through the cracks to be one of the largest companies in the toys and games industry, behind Mattel and Hasbro. According to Harvard Business School, LeapFrog may have even created the craze for the educational product segment with the development of their LeapPad system which they term a smart toy.(Harvard Business School). Since learning is such a significant part in everyday life, parents are infatuated with the initiative of developing their child's learning skills and abilities as early as possible. Why not begin the learning stage at the earliest age possible, especially when the educational toys are attractive and fun for children.

Technology has played a large role in the toys and games industry because electronic toys are becoming more and more popular. Video games, internet gaming, and computer games are not considered a part of the toys and games industry and their large scale expansion and popularity have influenced this industry negatively. To fight off this negative impact, Hasbro has created "Family Game Night" which aims to bring families together for good old fashioned fun. "Hasbro challenges American families to pause from hectic schedules and take part in an evening of game play to reconnect and reenergize relationships" (Hasbro.com). Technological changes also have positively influenced the industry. Technological updates are revamping the toys we all know and love to create a new buzz about our favorite traditional games. Examples of such toys and games are: Monopoly Electronic Banking, Clue, Nerf game for the Wii, Scrabble, Risk mobile game and a number of Transformers toys.


 * Porter’s Five Forces Model is a helpful tool when analyzing the external environment in a given industry and can help managers with formulating strategies. The first force, risk of entry by potential competitors, is relatively mild in the toys and games industry because the industry is consolidated. The main players in the toys and games industry are: Mattel, Hasbro, JAKKS, and Leapfrog. These companies experience cost reductions due to economies of scale because they are able to purchase raw materials in bulk, and spread fixed costs over a large volume of products. Companies in the toys and game industry experience brand loyalty because their target market, children, love their characters; while they may not recognize the actual brand, children recognize products like Barbie, Transformers, Monopoly, which makes it difficult for companies to enter into the market. However, in very rare instances, a company may be able to enter into this market by taking advantage of an opportunity within the industry by exploiting it and fulfilling customers' needs. In particular, I am referring to LeapFrog which stunned the toys and games industry by developing educational products which acted as a catalyst for that segment of the industry. Overall, the risk of entry by potential competitors is low, on the other hand, in uncommon instances, the industry can be entered and modified when companies are not fulfilling customers' needs. **


 * The second force, rivalry among established companies is high due to the fact that the competitive structure of the toys and games industry is consolidated. When an industry is consolidated, it means the industry is large and dominated by only a small number of companies. Demand within an industry is another factor in concluding to the rivalry among established companies. When demand is high, market share can be spread out among all companies, but when industry demand is low, companies must compete and struggle for market share. **


 * The Bargaining Power of Buyers in the toys and games industry is low. The large retail stores like Toys R Us, Wal-Mart, Meijer, and Target are the buyers in this industry, not end consumers. The bargaining power of buyers is low because there are so many different channels of distribution for companies in the industry. For example, i **f Meijer refuses to carry a product due to the fact that Hasbro is charging a high price, Hasbro has the ability to keep the same price and charge it to every other retailer who desires the product. After all, end consumers (children and parents) demand specific products and if Meijer is not willing to carry them, end consumers have a variety of other retail stores to purchase from.

The Bargaining Power of Suppliers Since suppliers to the companies in the toys and games industry do not have a vital component, they do not have much bargaining power. The major materials used in products created by firms in the toys and games industry are plastic and paper. Since these materials can be obtained easily, one may think Hasbro would not feel pressure from suppliers, but the mere fact that Hasbro depends heavily on these materials means any price increase will be strongly felt by the company's bottom line.

The threat for substitute products in this industry is strong and apparent. Toys and games are goods used for entertainment purposes and the amount of different ways people entertain themselves is abundant! Instead of buying Barbie dolls, Scene It, Uno, and Marvel action figures, consumers may choose forms of entertainment such as playing outdoors, playing sports, going to the movie theatre, and completing jigsaw puzzles. Due to the fact that there are so many outlets and varieties of entertainment, besides toys and games, the threat for substitutes in this industry is high.

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