Framework for Assessing the UK Toy and Game Industry - Term Paper Example

?Assessing Foreign Markets Table of Contents Introduction 3 Problem ment 3 Framework for Assessing the UK Toy and Game Industry 4 Competition among Organization 4 Industry Growth 4 Concentration of Competitors 6 Risks of New Players 7 Costs 7 First-Mover Gain 7 Access to Channel of Distribution 8 Legal Barriers 9 Risk of Substitute Products 10 Comparative Cost and Performance 10 Enthusiasm of Customers to Shift 11 Sensitivity of Purchasers 11 Price Awareness 11 Comparative Negotiating Strength 12 Strength of Suppliers 12 Conclusion 13 14 Works Cited 15 Introduction The decision of entering into a foreign market depends on a variety of aspects. Risks in any country such as economic or political and attractiveness of markets is one of the most critical aspects which must be thought-out by any organization before entering into a foreign market. International competition drives companies to frequently depend on country-specific risk analysis tools as a vital part of strategic decision making. When organizations internationalize their business operations, they are confronted with numerous questions related to risk. Thus, evaluation of country risk is an essential element of market entry (Schmidt, B. B., “The Dynamics of M&A Strategy”). Similarly, organizations also desire to analyze the characteristics possessed by the foreign market and overall competitive condition of the local market. The market entry approaches must be developed on the basis of the market examination and a framework which can allow assessing the foreign market (Grant, R. M., “Contemporary Strategy Analysis”). Problem Statement The paper will describe the uses of a framework for penetrating in the retail toy segment of the United Kingdom. The company chosen for the paper is Mattel which is one of the biggest toy-producing companies internationally. The objective of the paper is to illustrate the opportunities served by the foreign market and measure the market efficiency for Mattel to launch its own retail outlet in the UK. Framework for Assessing the UK Toy and Game Industry In order to develop a framework, one needs to understand the vital aspects of business which are competitors, purchasers, suppliers, substitute products and market risks. Assessing these aspects can be beneficial to assist in developing an understanding of the competitive situation and the strengths of the competitive position in which Mattel desires to shift itself. With clear understanding of where its strengths are preserved, Mattel can take the advantages of its competencies to recover its condition of weakness and evade from taking risky strategies. Developing a framework is helpful for recognizing whether the products of Mattel have the ability to strengthen its foothold in the UK market. However, the framework must be quite instructive to identify the impression of competitors’ power, purchasers, suppliers and substitute products in the foreign market environment along with the market size, costs of entry, channel of distribution, and awareness of customers (Arnold, D., “Mirage of Global Markets: How Globalizing Companies Can Succeed as Markets Localize”). Competition among Organization The areas which will be covered under this topic are industry growth, concentration of competitors and level of differentiation in toy products. Industry Growth The toy market of the UK has numerous product groups with various opportunities and threats for foreign companies. The toy market segment comprises introduction of new technology into traditional toy-making process as a major drift (Euromonitor International, “United Kingdom - Entering the Toys Market”). The recent day phenomenon of business conditions can be observed to be partly ruled by strong competition from foreign toy producers which seek to gain bigger share in the local market. The demand of new toys at the production level has impacted by the fragile progress of disposable income of people in the UK. The low disposable income has decreased the spending power of customers and increased the sensitivity towards price. This situation is strongly influenced by the increasing competition from different departmental stores, supermarkets and retail stores (IBISWorld, “Industry Analysis & Industry Trends”). The total toy-producing and gaming market had to witness a decline in the year 2010 due to weak performance of the video game segment. In the meantime, the sales of traditional toys have increased considerably and recorded a robust development in 10 years. Although the economic recession is over, the anxiety over its stability still persists in the toy market. In the year 2010, the traditional toy and games segment experienced strong growth following the recession of 2009. While the economy partly recovered in the year 2010, uncertainties about its future prospects were yet persisting due to unemployment rate and low consumer confidence. In this type of market condition several customers have shifted towards purchasing pocket money toys at a cheaper rate. The tendency to diversify also helped to make collective toys to become more popular in the market of the UK. In the year 2011, the toy industry of the UK had created sales of almost ?2.96 billion. Above 384 million toys had been sold across the UK market which was primarily dominated by creating toy sets, outdoor products and dolls. The retail sales of toy had increased by 2% in 2010. Boys represent the higher portion of toy market sales (55%) and girls account for 45% of sales in toy market. Through managing the growth, the UK toy industry had proved its flexibility and strength to recover (Batchelor, “UK Toy Industry worth ?2.96bn”). Concentration of Competitors In the UK, the toy retailers have faced high competition from e-retail stores and other grocery stores. The grocery stores have eventually emerged as strong competitors for Mattel encouraging competitive barriers to enter the retail toy market. It is due to the reason that the grocery stores have allied with various non-grocery components such as toys, especially during significant holiday periods when prospect of sales is high. Additionally, the retailer giants such as Tesco and ASDA had also launched their own GameStop which had further aggravated the rivalry among organizations (Euromonitor, “Toys and Games in the United Kingdom”). Mattel is regarded as one of the biggest toy brands in the UK. It distributes the products internationally through other retail brands, and there are no retail stores of Mattel in the UK (Mattel, Inc., “Locations”). There are no direct competitors of the products marketed by Mattel in the UK, as the company serves only unique customer segments with extensively differentiated products. Mattel has the right to develop Barbie Dolls and Hot Wheels which cannot be produced by other competitors (Duran & Et. Al., “Hasbro Valuation Project”). Thus, it will be profitable for Mattel to develop its retail stores in the UK since there are various competitive advantages that can be attained by the company. Furthermore, Mattel will be able to target the less competitive niche product segment with greater options of innovations. However, Mattel can face rivalry from Dutch competitors as they also seek to enter in the toy-making and marketing industry of UK. Risks of New Players The risk of new players also tends to create an impact on the pricing of the organization within the industry influencing the simplicity of entry modes on its effectiveness. The aspects which decide the risk of new players and act as obstructions for organizations to enter into new market are majorly observed as the cost, first-mover gain, distribution network and legal obstacles. Costs The procurement cost along with research and development cost incurred to market product line is quite high in toy industry, due to the fact that organizations need to invest huge amount on fixed expenses to attain large sales quantity necessitating innovation as a major tool for differentiation. Apart from fixed costs, developing brand also requires investing money on advertisement. Contextually, it can be mentioned that the aggressive advertisement or promotional initiatives by the existing players often help to defend them and avert profit-seeking organizations from entering the market (Duran & Et. Al., “Hasbro Valuation Project”). First-Mover Gain The first mover gain plays a vital part in toy and gaming industry as the organization possesses almost complete control on the resources available facilitating the introduction of innovative or imminent products and preventing other new entrants. Thus, in most instances, the first mover organizations attempt to become one of the best brands in the market (Duran & Et. Al., “Hasbro Valuation Project”). The UK toy and game industry is witnessed to be structured with the domination of numerous international brands. Most of the major toy organizations in the UK allocate the products globally so that they can get advantages from higher economies of scale with respect to production cost and marketing cost. The retail toy sector of the UK is highly diversified with numerous kinds of stores (grocery retailers such as Tesco and ASDA, mixed retailers and toy retailers). There are only limited large toy retail chains in the UK which is described in the following table: Source: (Euromonitor International, “United Kingdom - Entering the Toys Market”). From the above table, it can be observed that there are few large toy retail organizations in the UK market. Opening new retail stores can be beneficial for Mattel helping to strengthen its foothold in the UK based toy market and subsequently serving its with greater opportunities in the international market. Access to Channel of Distribution There are varieties of traders and distributors of several toys which operate their business in the market of the UK. Majority of companies operating in the supply chain of the toy industry of UK are specialized in either sector of toys or games where several importers render significance to their owned brands simultaneously creating a stock of global brands through imports. Retailers in UK such as Hamleys and Toys “R” Us source the toy products directly from producers. Hence, the relocation of Mattel’s factories in the foreign market of UK shall provide it with the opportunity of minimising costs. As a result, Mattel will be able to decrease the prices of its products because they will not have to depend on large retailing organizations to sell the goods. Mattel had already invested huge amount in order to relocate few factories from Eastern Europe where rate of labor in cheap. Furthermore, with increased number of European Union (EU) nations and the open economy, there are numerous prospects available for Mattel as well as the distributors to succeed and to compete in the UK toy market (Euromonitor International, “United Kingdom - Entering the Toys Market”). Legal Barriers Although there are several legal barriers at the central, governmental and local level, these barriers become quite varied at the national and local level and may be a consequential barrier for new entrants in the industry. In the UK, the major legal regulations which must be maintained by toy manufacturing organizations are: Fulfill the safety necessities Provide the “Communaute Europeenne” (CE) marks in the toy products Convoyed by certain warning when essential (Internet Memory Foundation, “Toy Safety”) The toys should be safe for children to use and should not break other obligations of safety principles. Every EU nation has its own laws on toy products in order to increase and ensure safety for children. Thus, different laws can have a substantial impact on the practical barriers for Mattel in the UK. Risk of Substitute Products In case of toy products, the substitute items do not denote that they have similar outlook or satisfy the similar requirements of customers or perform the similar functions. In toy industry, a product which performs similar function relies on the price in order to define whether the threat of substitute is genuine. It is in this context that the enthusiasm of customers to shift between products and the comparative cost and performance of organization are crucial aspects to decide the risk of substitute products in the UK market (Duran & Et. Al., “Hasbro Valuation Project”). Comparative Cost and Performance In the toy industry, the cost of individual products developed by organizations is difficult to compare owing to the fact that the product line introduced to the market by each organization is comparatively varied in their nature. Although toy products might be comparable, it can be observed that effective marketing operations created by organizations intend to demand a premium value if the brand is prevalent. For instance, in doll category the major substitute products for “Barbie Dolls” of Mattel could be “Cabbage Patch Kids” or “Bratz” which also comes in the similar product group. Therefore, in this kind of product, organizations within the same business have a tendency to focus on differentiation and effective marketing activities in order to generate loyal customer segment. The other rivals might possess substitute products for brand such as Barbie Dolls at fewer costs; however, the challenge itself is tough in the presence of loyal customers (Duran & Et. Al., “Hasbro Valuation Project”). Enthusiasm of Customers to Shift The toy marketing organizations intend to market its products, especially for the kids segment which necessitates the generation of a deep interest in the minds of this customer segment. Although the enthusiasm of kids to switch from one toy product to the other is less, there is a certain possibility of switching products among actual purchasers of the toy products who are recognised to be the parents (Duran & Et. Al., “Hasbro Valuation Project”). Sensitivity of Purchasers The effectiveness of toy organizations is related with the sensitivity of purchasers who are involved with the industry. There are two major aspects which govern the purchasers’ sensitivity in the market which are price awareness of customers and comparative bargaining strength of customers. Price Awareness The increasing consumer awareness and experience to broadcasting and marketing can positively influence the toy market of the UK. The toy market is characterized by instabilities and it is strongly driven by holiday, seasonal sale and trends of customers. In the toy industry, the price awareness of customers is average and can vary according to season. The price awareness is also dependent on the differentiation of products. For instance, in case of Barbie Dolls of Mattel the product is differentiated with other dolls to a certain extent. It does not denote Barbie Dolls as a luxury product, but the customers are in weak position to find other substitutes of Barbie Dolls with respect to appearance and outlook. In case there is high demand for a particular toy product, organizations can easily put premium prices as bargaining power of customers will be less in that situation. Taking into account the switching cost and differentiation of toy products, the customers are quite less price sensitive in this market segment; however several customers can search and buy substitutes easily (Duran & Et. Al., “Hasbro Valuation Project”). Comparative Negotiating Strength The comparative negotiating power of toy market in the UK is low, because with the unique product lines of Mattel, it can enjoy the monopoly in conducting retail business in the UK toy market. However, the comparative bargaining strength could be high because, there are still certain substitutes that might be used in place of Mattel toys. Thus, ultimately, it can be supposed that the bargaining power of buyer in toy market of the UK is moderate (Duran & Et. Al., “Hasbro Valuation Project”). Strength of Suppliers In all industries, organizations need to manage the suppliers which impact on the performance of the organizations. Suppliers can become powerful only when there are few organizations and limited number of substitutes. In toy industry of UK, the cost awareness of suppliers is quite high because there are only limited major large toy retailer chains. Besides, toy companies such as Mattel are famous for certain specific products which are hard to imitate by other competitors (Duran & Et. Al., “Hasbro Valuation Project”). Hence, managing the suppliers is very significant for toy organizations in order to maintain the quality as well as price on which customers’ satisfaction depends. Thus, by applying the suggested framework, the opportunities served by the foreign market can be observed by the following table: Level of Competition Low Risk of New Player Low Risk of Substitute Product Moderate Sensitivity of Purchasers Moderate Strength of Suppliers High Conclusion The framework helps to determine the virtues of foreign business environment recognizing the competitive aspects that an organization can face while expanding its business. Through analyzing the market, it can be concluded that the barriers of new entrants in the toy industry of the UK are low. There are few legal barriers. However, organizations must have higher economies of scale in order to succeed in the industry. The risk of substitute products in this industry is moderate because there are differentiation products, proprietorship rights and effective marketing methods, but a few products are similar with respect to performance and utilities. The awareness of customers is also moderate but can be reduced if the demand of products is high. Mattel might have to face various challenges to penetrate the retail segment and instigate an independent outlet in the UK. Large retail chains source their products directly from other countries or from other manufacturing bases where production expenses are low. When opening a new outlet, the marketing and advertisement costs are almost predictable. Besides, a mutually beneficial understanding with its suppliers and Mattel will require the organisation to consider the expenses incurred and further provide in-store products for promotion. In case of providing direct distribution from storeroom to retail store, ethical considerations must also be rendered due significance. Furthermore, Mattel will also need to maintain good relationship with the suppliers as their bargaining power is quite high in the toy industry. Works Cited Arnold, Dvaid. Mirage of Global Markets: How Globalizing Companies Can Succeed as Markets Localize. FT Press, 2003. Batchelor, James. “UK Toy Industry worth ?2.96bn”. March 29, 2012. Intent Media, 2012. Duran, Diana. & Et. Al. “Hasbro Valuation Project”. March 29, 2012. Texas Tech University, 2008. Euromonitor International. “United Kingdom - Entering the Toys Market”. March 29, 2012. NL Agency, 2010. Euromonitor. “Toys and Games in the United Kingdom”. March 29, 2012. Country Report, 2011. Grant, Robert M. Contemporary Strategy Analysis Blackwell Publishing, 2005. Internet Memory Foundation. “Toy Safety”. March 29, 2012. Product Standards, 2010. IBISWorld. “Industry Analysis & Industry Trends”. March 29, 2012. Game & Toy Manufacturing Market Research Report, 2012. Mattel, Inc., “Locations”. April 03, 2012. Toy Store, 2009. Schmidt, B. B. The Dynamics of M&A Strategy Peter Lang, 2010. Read More