3 Critical Questions1.What firms are the major competitors in this industry and what are their annual sales, market share and growth profile?2. Which of the five forces drive profitability in this industry? Why?3. What strategies have competitors in the industry been using and what has been their success with them?4. What are the relative strengths and weaknesses of competitors in the industry? Are there any strategic groups?5. Is there a threat of new competitors coming into the industry and what are the major entry barriers?6. Are there any substitute products for the industry and what are the advantages and disadvantages compared to the industry products?7. How much bargaining power do suppliers have in this industry and what is its impact on the firm and industry profits?8. Buyer power and impact?9. Describe the industry makeup in terms of Monopolistic, Oligolopolistic, many small players, or other.
6 Profitability - Porter’s Five Forces Threat of New EntrantsThe Bargaining Power of BuyersThe Bargaining Power of SuppliersThreat of SubstitutesThe Intensity of Rivalry among Competitors in an Industry
7 Profitability - Porter’s Five Forces Threat of New EntrantsThe competition in an industry will be the higher; the easier it is for other companies to enter this industry. In such a situation, new entrants could change major determinants of the market environment (examples would be; market shares, prices, customer loyalty) at any time. There is always a latent pressure for reaction and adjustment for existing players in this industry. The threat of new entries will depend on the extent to which there are barriers to entry. These are typicallyEconomies of scale (minimum size requirements for profitable operations)High initial investments and fixed costsCost advantages of existing players due to experience curve effects of operation with fully depreciated assetsBrand loyalty of customersProtected intellectual property like patents, licenses etcScarcity of important resources, qualified expert staffAccess to raw materials is controlled by existing playersDistribution channels are controlled by existing playersExisting players have close customer relations, from long-term service contractsHigh switching costs for customersLegislation and government action
8 Profitability - Porter’s Five Forces The Bargaining Power of BuyersSimilarly, the bargaining power of customers determines how much customers can impose pressure on margins and volumes. Buyers bargaining power is likely to be high when….Switching to an alternative product is relatively simple and is not related to high costsThey buy large volumes; there is a concentration of buyersThe supplying industry comprises a large number of small operatorsThe supplying industry operates with high fixed costsThe product is undifferentiated and can be replaces by substitutesCustomers have low margins and are price-sensitiveCustomers could produce the product themselvesThe product is not of strategically importance for the customerThe customer knows about the production costs of the productThere is the possibility for the customer integrating backwards
9 Profitability - Porter’s Five Forces The Bargaining Power of SuppliersThe term 'suppliers' comprises all sources for inputs that are needed in order to provide goods or services.Supplier bargaining power is likely to be high when:The market is dominated by a few large suppliersThere are no substitutes for the particular inputSupplier’s customers are fragmented - bargaining power is lowThe switching costs from one supplier to another are highSupplier integrating forwards to obtain higher prices /marginsThis threat is especially high when:The buying industry has a higher profitability than the supplying industryForward integration provides economies of scale for the supplierThe buying industry hinders the supplying industry in their developmentThe buying industry has low barriers to entryIn such situations, the buying industry often faces a high pressure on margins from their suppliers. The relationship to powerful suppliers can potentially reduce strategic options for the organization.
10 Profitability - Porter’s Five Forces Threat of SubstitutesA threat from substitutes exists if there are alternative products with lower prices of better performance parameters for the same purpose. They could potentially attract a significant proportion of market volume and hence reduce the potential sales volume for existing players. This category also relates to complementary products. Similarly to the threat of new entrants, the threat of substitutes is determined by factors that include:Brand loyalty of customersClose customer relationshipsSwitching costs for customersThe relative price for performance of substitutesCurrent trends
11 Profitability - Porter’s Five Forces The Intensity of Rivalry among Competitors in an IndustryThis force describes the intensity of competition between existing players (companies) in an industry. High competitive pressure results in pressure on prices, margins, and hence, on profitability for every single company in the industry.Competition between existing players is likely to be high whenThere are many players of about the same sizePlayers have similar strategiesMinimal differentiation between players and their products - minimum price competitionLow market growth rates (growth of a particular company is possible only at the expense of a competitor)Barriers for exit are high ( expensive and highly specialized equipment)
12 Effective StrategiesContinuous innovation in concept, design, manufacturing process and marketingCreating catchy twists on classic items to include: Barbie, Mickey Mouse etc.Building product associations with fads or movie charactersOutsourcing to maximize profits and minimize production costs
13 Strengths – Strategic Groups Specialized Marketing InitiativesProduct Differentiation - Unique Attributes, Features or DesignsLocation, Location, LocationQuality Control, DurabilityCompany Reputation
14 Weaknesses – Strategic Groups Commercials that Lack AppealUndifferentiated Products or ServicesPoor Quality ControlTarnished Reputation
15 Competition – Barriers to Entry Becoming the next “IT” ProductThere is a threat of new competitors entering the market. A startup company that has discovered the next “it” product, can easily corner the market before existing companies can react. This was the case in 2009 when the company Cepia invented “Zhu Zhu Pets.”Toy companies must therefore constantly research new products and improve and their existing products and procedures.A major entry barrier in the toy industry is customer loyalty. Firms such as “Playskool” and “LeapFrog” design products that can be individually tailored to the end user and updated with the use of the internet. These companies also offer their products in age group stages that allow the customer to grow with the products the company offers. This manner of built in customer loyalty is hard to break.
16 Substitutes – Pros and Cons While there will always be a market for "toys," there is a growing trend of toys being substituted for portable electronic devices such as I Pods, I Pads, and Kindles. While the toy industry has countered with similar "toy" or "kid" versions of the aforementioned products, the out of industry electronic products will not be outgrown like a child version I Pod will be. The advantage for the toy industry is once an "it" electronic product hits the market; it can be replicated without the financial strains of research and development and marketing that the host firm endured.
17 Supplier Bargaining Power Suppliers Have Little Bargaining PowerSuppliers Are EverywhereLow Wage, Low Environmental Control RegionsLow Cost To ProducePrice CompetitionMade in Taiwan
18 Buyer Power - ImpactThe buyer holds all the power in the toy industry. Toys are purchased with discretionary funds, they are not a necessity .Without the appeal of some aspect of the product, such as educational, creative, entertainment or some other factor the toy will not sell.The industry is very competitive so pricing must be kept in line with like kind products or the product must be unique in some fashion that the consumer will not mind spending a little more.The impact on the industry is they must be vigilant about research and development. Always on the lookout for emerging technology and trends and an eye toward what their competitors are up to.Works Cited"Toy Not A Child's Play Anymore, India." Gifts, Anniversary Gifts, Birthday Gifts, Christmas Gifts, Accessories Handbags, Magazine, Advertising Products, Promotion Items. Web. 21 May <http://www.giftsnaccessories.com/back-to-school/1897.htm>.
19 Industry Makeup – Monopolistic Competition The Toy Industry is/has all of the characteristics of monopolistic competition.Differentiation comes from branding, consumer loyalty, effective marketing campaigns and in some cases price.Many producers and consumersConsumers may perceive there are non-price substitutes among competitor’s products.Producers have a degree of control over price through manufacturing processes, technological advancements and cheap labor.Eventually profits break even because demand will decrease and average total cost will increase.