Environment Analysis of Toy Industry

Doing business in the worlds toy industry today, is anything but plain sailing, with the toy industry as a whole generating $21.47 Billion in 2009 and $21.65 Billion in 2008 (Riley, 2010) This producing a fiercely competitive market, but a market that is very open to new entrants,right throughout the industry. The market is also growing year on year with birth rates rising throughout the world, with the U.K. Birth rate growing this year (2014) by 13%.

Risk of entry

The barrier of entry to the Toy industry is very low, this given new and up and coming entrepreneurs and companies a chance of success in this very fast paced and fiercely competitive market, to create products to capture the attentions of children and adults alike. The market environment has also pushes many well known brands to invest a major part of their budgets on research and development, allowing them to introduce new products continuously. Many well known brands such as as Hasbro, Mattel, BanDia and many other companies also invest huge amounts of money to compete for licensing of products connected to characters from TV shows, Films and video games,to expand their market share.

Power of the Buyers

The toy industry is very concentrated, this leaving manufacturers I a very weak bargaining position with its customer, for example fives stores including Wall-mart and Toys “R” Us make up 54% or Hasbro’s net Revenue in 2009. (Hasbro inc., 2009) Target, Wall-mart and Toys”R” Us also had 43 % of Net Sales of Mattel, (Datamonitor, 2007)these both figures being massive amounts of products and given these companies power on pricing. The rise in online activity had also gave the manufacturer a door to sell direct to customer, but most of the large manufacturers still use the traditional route through supply chain.

Power of the Suppliers

The materials used within the production of 1UpToys products, for example plastics, paper, cardboard, computer chips and cables, are available from a wide range of suppliers , but are susceptible to market related pricing, (e.g., copper for wiring, plastics etc.) some of which are controlled by legislation due to the chemical compounds (like Phthalates and BPA) Which could incur higher taxation brackets and could be subject to government legislation.

Threat of substitute product

The threat of substitutes are growing with the continuous growth in demand, with children at a very young age having access to high technological gadgets and platforms

This has driven toy companies to incorporate more technology within their products, as toy companies are now in direct competition not only with other toy products but also with traditionally non toy products such as, Tablets, computers, smart phones and even Mp3,s offering gaming within their technological platforms. The risk from these platforms is very high and is on the increase, as with prices continue to drop on cell phones and technological other gadgets, children are adopting to them earlier in their lives, with these devices offering gaming and entertainment at a very low cost and on occasions no cost at all to download.

The phenomenon of these technological devices has added extra pressure to the toy industry as a whole , to create toys with enough bells and whistles to compete with these digital device alternatives, with the cost of traditional toys significantly much higher to invent and manufacturer in comparison to the digital format. As a result to this the profit margins of the more traditional product is significantly lower, adding to the need to sell more units per product to make profit in today’s toy market.

Another major factor for the toy industry is that children at different ages have shifted preferences. Young children are expecting more stimulation from their playthings than before to capture and hold their attention. Hasbro calls this phenomenon of kids “Getting older, younger.” This threatens everyone in the toy industry because the window toys and games have to make their way into children’s lives keeps shrinking. The toy industry also relies heavy on the intellectual properties of any given toy business, which they may not be able to protect from countries with loose copyright laws and regulations.

This may not be a problem throughout the E.U and the United States, but is very rampant within emerging economies, for example China where products such as, DVD’s, Action Figures and nearly every other product thinking able can be copied and reproduced at a fraction of the retail price though piracy, which is a huge problem for the toy industry and a great threat to any companies looking to soften their domestic revenue losses by expanding to China or any other emerging economy.

Competitive Rivalry in the Industry

The Completive rivalry in the toy industry is fierce and diluted with numerous alternatives popping up everyday, with new platforms arising contentiously within this business sector, with companies and new toy products fighting for the limited shelf space, within all the same stores throughout the retailing world, with companies using all the resources possible to gain the competitive advantage over their competitors.

This competitiveness has seen all toy companies jockeying for position and has over all lowered companies profit margins, as they compete with pricing with each other, using lower pricing strategies and offering exclusives and unique features to their customer base, at a cost to them.

There is also fierce competition within the supply chain, with most toy
companies have the majority of its manufacturing done in China, it can only stock as much shelf space as there is available space on large cargo container ships., with many companies fighting for the space, especially just before the holiday season, the price per TEU (twenty-foot equivalent unit) may go up in these peak seasons and shipping costs are also very vulnerable to changes in fuel pricing, which is forever on the rise.

SLEPT Analysis (see appendix 2),we can look at the (Macro) external environment for the toy industry.

Social Environment

The social environment of today’s toy customer base is increasingly becoming more technically driven, with children and “tweens” spending more and more of their time on the internet and social media platforms, as accessibility to these high speed internet and mobile devices enter more homes everyday. A study released in January 2010 by the Henry J. Kaiser Family Foundation found that young people, aged 8-18, spent seven and a half hours seven days a week consuming media (Music, videos, blogs, social media, etc.) While consuming, they are also multitasking. So they can fit almost eleven hours of media into that seven and a half hours (Rideout, Foehr, & Roberts, 2010) and this is growing year on year, with easier accessibility and reduced cost to online access.

This has rising to in 2013 and said to be having serious consequences , with kids ages 8 to 18 spending on average 44.5 hours per week in front of screens, with parents being increasingly concerned that screen time is robbing them of real world experiences. Nearly 23% of youth report that they feel “addicted to video games” (31% of males, 13% of females.) These are the results of a new study of 1,178 U.S. children and teens (ages 8 to 18) conducted by Harris Interactive (2007) that documents a national prevalence rate of pathological video game use.

Dr. Douglas Gentile, Director of the Media Research Lab at Iowa State University reports, “Almost one out of every ten youth gamers shows enough symptoms of damage to their school, family, and psychological functioning to merit serious concern.”

The industry could be more drawn to the needs of the consumer and promote games and toys that cross over online and offline platforms,and also incorporate a educational value or the use of learning a musical instrument or techniques involved in doing so.

Legal Environment

There are increasingly tight rules and regulations about the materials that need to go into toy construction in order to make them safer and more resistant to fire hazards. This has had the impact of raising costs on production within the industry, but these regulations can vary in different countries, but are generally set the same throughout the EU, with safety at the forefront of production.

The Toy industry has to be very careful to follow these regulations, especially when out sourcing to places such as China who have generally a loose safety standards and could have serious consequences to any company importing products from theses areas. Loose safety standards in Chinese factories caused the massive toy recall of 2007 which over 10 million toys that contained unsafe levels of lead and small magnets which, if swallowed, could cause serious injury or death. This recall cost not only millions of dollars but severely damaged the costumer confidence. A problem like this looms over every toy company that uses manufacturing plants in China.

The Legal environment of the toy industry is also continuously protecting and fighting for its copyright on its products. This can be very complicated and confusing for example both Mattel and Hasbro have the rights to the board game Scrabble (Hasbro has rights in North America, Mattel has them everywhere else.) Two India based brothers and programmers created free to play version of Scrabble on Facebook called Scrabulous. At the height of its popularity, Scrabulous attracted a half million players a day. Mattel and Hasbro both sued the Argawalla brothers and forced them to remove the game from Facebook.

Hasbro then made a slow and clunky official version bemoaned by fans of Scrabulous.The official version now draws 90,000 players daily. Instead of working with the creators of the knock-off and bringing the game into the fold of officially licensed content, Mattel and Hasbro caused resentment and hard feelings in customers on the world’s most popular social network. These actions of putting a substitute cheap version of the game, could have a negative impact on your customer base, especially in the public eye, on a network like facebook that has billions of users and potential customers.

Economic Environment

The manufacturing of products for the toy industy for any years has mainly relied on Chinese manufactering, due to the combination of cheap labor and undervalued currency has been a very attractive recipe for keeping production costs as low as possible. This arrangement might be very profitable to the toy industry, but does make them very susceptible to problems within in China itself.

In recent times with the up and coming working classes of Chinese people are demanding more pay and benefits, some that we in the UK take for granted on a daily basis (health and safety, Severance pay, etc.) in the working environment. These demands can have explosive affects, with the toy company Hasbro feeling the full effects. In November, 2008,a worker riot broke out at a Hasbro factory in Dongguan, China (Foreman, 2008). 80 senior migrant workers, who felt they were being jilted by management on their severance pay, quickly organized a mob of 500 people that overturned a police car, stormed the factory offices, and damaged computers.

Political Environment

The politiacl envirment is more driven towrds trade restriction within China and Chinese currency develpoments, as most of toy trade is manufactoered within its counry. This has been mentioned by the US in recent times, with the Chinise undervalued currency being a target by plolicy makers within the US. Recently, the U.S. House of Representatives Speaker Nancy Pelosi brought up the possibility of a new China currency bill that would give the “… the [Obama] administration leverage in its bilateral andmultilateral negotiations with the Chinese government so that U.S. businesses and workers have a more level playing field in world trade.” No one really knows how much this would affect export prices from China, but it is an issue that should remain onthe radar.

Technological Enviroment

The Technological Environment of the toy industry is very highly paced ,with toy fads coming and going within the toy market continiusly. Toy companies need to innovate and keep moving forward with demand and try to create the next big toy breakthrough.

The toy customer in today’s market are mostly looking for intractability within the game, with many offering these platforms, such as Wii, Xbox, Playstation for example, using various platforms do so, even smaller toys such as Furbbie and tamagotchiis being very popular in their time, selling millions of units in their day or Fad as its known.

This fast moving technological environment relies on getting product to the market first and is very prone to company espionages fast moving technological environment relies on getting product to the market first and is very prone to company espionage, which is wide spread throughout the toy industry.