The Toy Industry - Trends and Future Outlook (Essay Sample)

Industry Analysis
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The Toy Industry - Trends and Future Outlook
The demand for interactive and intelligent toys (console and video games) will continue its growth at the expense of traditional toys and fuel the U.S. and global games and toys markets. Through an analysis of the industry’s economic overview, major challenges and potential solutions, this paper will present a trend that signifies perpetuation in growth of the toy industry in the U.S. and global markets as well. The paper will also address regulations and directives that are associated with the toy industry. The European Commission’s Directive of 2009 defines toys as those products that are intended or designed, either exclusively or not, for the purpose of use by children below 14 years of age (European Commission, 2010). The toy sector comprises those establishments that are elementarily engaged in manufacturing toys, dolls and games (Global Industry Analysts, 2013). Examples of products in the toy industry include chessboards, airplane models, electronic games and toys, handicraft supplies, kites, stuffed toys, children vehicles and tricycles. The possible substitutes for such products include homemade toys and board games, for instance, checkers and stuffed dolls.
Market Structure of the U.S. Toy Industry
The firms engaged in the U.S. toy industry fall into three major classifications: traditional toys, casino games (and accessories) and video games. At the beginning of 2008, there were 6,296 traditional toy manufacturers producing dolls, action figures, play sets, stuffed animals and related products (The Statistics Portal, 2013). In essence, the traditional toy market has remained stagnant. Its 2006 revenue was approximately $21.2 billion, which was a decline from the 2006 figure of $22.3 billion. On the other hand, the video game sector represents one of the most rapidly growing industries in the country. Its 2007 revenue of approximately $18.9 billion was 51.2 percent higher than that of 2006 (European Commission, 2010). On its part, the casino games segment has witnessed an increase in consumer preference towards electronic games like slot machines. Towards this end, the manufacturers of electronic games such as Sony Corporation, Activision (ATVI) and EA Sports have benefitted while the manufacturers of traditional games have suffered.
Analysis with the Industrial Organization Model
According to Schmalense et al. (2011), the industrial organization approach to competitive advantage hypothesizes that industry or external factors are more significant than the internal factors in a company for gaining competitive advantage. A proponent of this approach known as Michael Porter contended that different industry forces elementarily determine organizational performance. His Five-Forces Model is an example of an industrial organization model and promotes competitive positioning relative to five industry factors of threat of substitute products, degree of existing rivalry, threat of new entrants, suppliers’ bargaining power and buyers’ bargaining power.
Figure 1: Porter's Five Forces Model
Source: Adapted from to Schmalense et al. (2011)
Threat of substitute products
In the toy industry, there is considerable product differentiation, implying that there numerous product variants available for consumers (Osterwalder & Pigneur, 2013). When products are distinct, customers have less likelihood of finding comparable products that meet their needs. This factor attracts more manufacturers to the industry.
Degree of existing rivalry
The U.S. and global toy industry is large, which implies that manufacturers allover produce toys and games for consumption. According to The Statistics Portal, (2013), the global toys industry is expected to reach the $100 billion mark by the year 2015. Many firms have joined the video, computer games and console segments, as more adults join the fray. In the U.S. alone, there are over 6,000 manufacturers of toys and games.
Suppliers’ bargaining power
In the event there are many substitute inputs, the suppliers usually possess low bargaining power over the producers (Osterwalder & Pigneur, 2013). This emanates from the competition among the substitutes, for instance, plastic, wood, cloth and so on. In addition, there is high competition among the suppliers of inputs to manufacturing companies. This ensures quality of output that is enjoyed in turn by customers. This competition also implies there will be lower switching costs from one supplier to another. Suppliers will have less leverage as compared to the manufacturers.
Threat of new entrants
Given the high capital requirements for gaining entry into the industry, there is a barrier to entry (Osterwalder & Pigneur, 2013). This is significant because toy manufacturers have to invest a lot of money in order to achieve economies of scale. Existing companies use their size (in terms of revenue and brand strength) to deter new entrants. In the same breadth, the companies have already established robust distribution networks (for instance, Toys"R"Us) that imply newer entrants have to exert a lot of effort to compete effectively. The utilization of differentiated technology, as well as the funds required for research and development initiatives, is quite high.
Buyers’ bargaining power
According to Schmalensee et al., (2011), powerful buyers are able to exert pressure that pushes price downwards, or elevate the quality standards for the same price, which reduces industry profits. Because of the large number of customers in the toy industry, their bargaining power is low. In addition, given that buyers purchase only a small number of toys at a time, they possess considerably less bargaining power. However, the large number of companies implies that buyers can switch supply firms at low costs.
Literature Research
Economic overview
The U.S. toys industry has had a mixed performance in economic activity over the past decade. As per the Toy Industry Association’s survey of 2013, the U.S. toy industry is worth approximately $22 billion each year, a significant proportion of the total global revenue of $84.12 billion each year (Gaille, 2013). The product category that led in the U.S. market is the action figure group that accounts for an average of $1.39 billion. For more details, see table 1 in appendices. The same survey indicates that the American average spending on toys per child is higher than the rest of the globe. For instance, a child’s average expenditure on toys is $76 while it is $121, $13 and $1 for Europe, Asia/Oceania and Africa respectively. The U.S. accounts for 41 percent of the total toy sales across the globe. In terms of direct economic impact, the toy industry accounts for $75.03 billion, inclusive of business licenses and permits as well as exports to other nations (European Commission, 2010). Tax revenue from toy companies is approximately $11.54 billion.
Major Challenges Facing the U.S. Toy Industry
Among the most significant challenges facing the U.S. toy industry is the credit crunch that resulted from the recent global financial crisis. As outlined by the country’s largest toy manufacturer, Mattel, the credit crisis makes it difficult for consumers to acquire toys, and for some suppliers (especially those based in Asia) to make payments for raw materials utilized (Birchall, 2010). For this reason, the retailers are unwilling to take up large stocks that may not recoup the capital. For example, Wal-Mart, a leading retaile...