Mattel, Inc. is a publicly traded American multinational toy manufacturing company incorporated in the year 1948 in California, with its headquarters located in El Segundo, California. (Mattel, Inc., 2016) Mattel, Inc. is engaged in designing, manufacturing, and marketing of toys across the globe. The company markets a broad variety of toy products worldwide which are sold to its customers and directly to consumers. (Mattel, Inc.,2016) Mattel Inc. operates on an international level with a North America business segment which includes the U.S and Canada and an international division which includes Europe, Latin America, and the Asia Pacific. (Mattel, Inc.,2016) In the fiscal year 2016, the international segment accounted for gross sales of $2.5 billion. At the end of 2016, Mattel, Inc. the total number of persons employed by Mattel and its subsidiaries at any one time because of the seasonality of its manufacturing operation was approximately 32,000. (Mattel, Inc., 2016) In its consolidated statements of operations Mattel, Inc. reported annual net sales of 5.4 million dollars as of December 31, 2016. For fiscal years ended December 31, 2015, and 2014, the company reported 5.7 million in net sales and 6.0 million, respectively. (Mattel Inc.,2016) The company’s net sales have been decreasing substantially.
Mattel offers a broad array portfolio of brands and products grouped into four major brand categories. (Mattel Inc.,2016) There four brand categories are Mattel Girls and Boy Brands, Fisher-Price Brands, American Girl Brands, and Construction and Arts & Crafts Brands. (MarketLine, 2017) Mattel Girls & Boy Brands include Barbie fashion dolls and accessories, Monster High, Ever After High, Polly Pocket, and DC Super Hero Girl, Hot Wheels, Matchbox, CARS, DC Comics, WWE Wrestling, Minecraft, Max Steel, BOOMco, Toy Story and games, and puzzles. The Fisher-Price Brand Category includes Fisher-Price, Little People, BabyGear, Laugh & Learn, Imaginext, Thomas & Friends, Dora the Explorer, Mickey Mouse Clubhouse, and Disney Jake and the Never Land Pirates. The American Girl Brands category includes TrulyMe, Girl of the Year, BeForever, Bitty Baby, and WellieWishers. American Girl brand products are sold directly to consumers via catalog, website and retail stores and through specific retailers. The fourth brand category Construction and Arts & Crafts Brands includes MEGA BLOKS and RoseArt. It is important to note the North America segment markets and sells toys in the US and Canada through the Mattel Girls and Boys Brands, Fisher-Price Brands, and Construction and Arts & Crafts Brand categories. The international segment products are the same as those developed and marketed by the North America segment, although some products are specific for the particular international markets. (Mattel, Inc.,2016)
Determinants of Demand
Demand is the quantity of a good or service that consumers are willing and able to purchase during a specified period under a set of economic conditions. (Brickley, Smith, & Zimmerman, 2009, p.69) These conditions to be considered include the price of the good, prices and availability of related goods, income, and consumer tastes and preferences. (Brickley, Smith, & Zimmerman, 2009, p.107) The law of demand certainly impacts the demand for a product. The relationship between buyer’s demand for a product and the producer’s price for the product is the law of demand.
Price of the Good
The price is one of the main factors that impact the demand for the company’s products. Price affects the ability of the consumer to purchase Mattel’s products, and therefore demand is directly related to price changes. Mattel’s most powerful brand Barbie offers products ranging from 4.99- 250 dollars. Thus, if a purchaser would like to purchase a simple Barbie doll for their child, the price will be approximately $4.99. On the other hand, Mattel sells a Barbie Dreamhouse Gift set for roughly 200 dollars. (See Appendix A) Consumers continue to purchase Barbie brand dolls as Mattel continues to adapt its Barbie brand to current market trends. However, the demand for Barbie has declined as the traditional dolls are no longer in high demand as young consumers are changing their needs and leaning toward digital products. Consumer demand for Barbie Dolls has declined as children are no longer psyched about traditional toys. Last year at the end of the third quarter sales plunged 6% for this power brand, and this is a dangerous trend as kids continue to move towards utilizing digital products during leisure. (Wiener-Bronner,2017) Given the fallen demand for Mattel’s Barbie dolls, it is essential to recognize that Mattel has not offered maximum value for the money consumer were willing to pay for their products as their target audience prefer other more innovative products.
Complementary and Substitute Goods
The price of complement and substitute goods is an important determinant factor of demand. Substitutes are goods and services that can be used to fulfill a similar need or desire with a product different than the products offered by the firm. As the price of a firm’s products increases, the demand for substitute products increases. (Brickley, Smith, & Zimmerman, 2009, p.117) The simple fact that there are substitutes available for Mattel’s products impact the demand for Mattel’s products. In recent years there has been a trend of “children getting older younger” which simply means children are utilizing electronic products at a younger age and the toy industry has been suffering as a result of the trend. (MarketLine, 2015) Substitution is a serious threat, and it is important to recognize its impact on demand. Electronic games have been deteriorating toy sales in every age bracket as “children getting older younger.” Barbie dolls are threatened by electronic toys as substitutes where kids no longer enjoy traditional Barbie dolls as in the past. Complements is a good used together with the primary goods. The demand for a complement will increase when the demand for the good increases. (Brickley, Smith, & Zimmerman, 2009, p.117) In particular, to Barbie dolls products, there are complements. Such complements would be Barbie clothing sets, Barbie Dreamhouse and Barbie accessories. As the demand for Barbie doll increases, the demand for these complement goods will increase. However, as a result of children’s preferences shifting towards electronics products, Barbie brand sales have declined therefore, when the quantity demanded for Barbie dolls decreases, the demand for complement goods declines.
Consumer income is a significant factor in the demand for a firms’ products. A consumer’s income affects their ability to purchase products. The buyer’s current income allows them to make an informed decision whether to purchase the products. The products sold by the toy manufacturer would be considered normal goods whereby quantity demanded increases in response to an increase in income. (Brickley, Smith, & Zimmerman, 2009, p.119) For example, if there is more income during the holiday season to spend then the quantity demanded of Barbie dolls will increase. Mattel’s Barbie doll products are not inferior goods because their quantity demanded would not increase when income is decreasing. As income increases quantity demanded will increase and shifts the demand curve to the right. Income plays a significant role in the demand for products and has a real effect on the demand for products.
Tastes and Preferences
Humans have different preferences for specific products which result in assigning different values to particular goods. Each person has diverse tastes and preferences and occurs in each market formed by individual choices and group preferences. Changes in consumer trends and preferences have significantly impacted Mattel. The difference in preferences of children, who are more attracted to their parents’ gadgets like smart-phones, laptops, and tablets drive changes in the toy market. As a toy maker, Mattel is forced to adopt technology and integrate itself into their classic toys like their power brand Barbie. (Marketline, 2017) Children have become highly attracted to their parents’ gadgets, causing Mattel to experience declining sales and a decrease in demand for their traditional toys such as Barbie Dolls.
Mattel, Inc. purchases products from “unrelated entities that design, develop and manufacture products.” (Mattel, Inc.,2016) As a part of a continuing effort to reduce manufacturing costs, Mattel has concentrated production of its core product in company-owned facilities and uses third-party manufacturers for the production of non-core products. The locations of Mattel’s principal manufacturing facilities are in Canada, China, Malaysia, Mexico, and Thailand. (Mattel, Inc., 2016) Mattel bases its production schedules for toy products on customer order and forecast, taking into account results of market research, and current market information. (Mattel, Inc. 2016) The majority of Mattel’s raw materials are available from numerous suppliers but may be subject to fluctuations in price. Mattel buys materials from multiple suppliers, but these suppliers are nondisclosed. The locations of Mattel’s suppliers are primarily China and Mexico. The company currently purchases inputs such as plastic resins, zinc, chemicals, fabric, hair yarn, paper/cardboard, and packaging material. (Mattel 2007 GRI Report, 2007, p.19) The type of costs involved in the production of Mattel’s products includes raw materials, transportation, labor, and testing requirements and standards. (Mattel, Inc.,2016) One of the factors that impact the cost of production of the company’s products is the fluctuations in prices of the raw materials available from numerous suppliers. The fluctuations in prices of raw materials impact the cost of production because if the cost of raw materials increases, production costs increase reducing supply. Another factor affecting the cost of the production of the company’s products are the legislative and regulatory requirements. Changes in business conditions, including those resulting from the new government requirements, cause Mattel to revise its operating procedures and product requirements increasing costs of production for the firm. Changes in operating procedures and product requirements could result in delay delivery of products and rising costs of production. (Mattel, Inc., 2016)
Determinants of Supply
Supply is defined as the amount of some product that producers are willing and able to sell at a given price assuming other factors are held constant. (Brickley, Smith, & Zimmerman, p. 69) The supply curve is interpreted as a relationship of price to the amount of products businesses are willing to sell. (“Supply”) (See Appendix B) In this particular case, the main determinants of supply for this firm are price and availability of inputs and expectations of suppliers.
Price and Availability of Inputs
The main factors of production are land, labor, capital, and entrepreneurship. A change in availability and price of one of these factors of production impacts the supply curve. If the price of inputs increases, the cost of producing the good increases, an increase in the price of inputs leads to an inward shift in the supply curve. (“Factors Affecting Supply”,2006) In this case, Mattel sells toys and operates in the toy market. If there is a change in the production costs, such as in the price of the raw materials, their suppliers (undisclosed) will be the first to feel the changes in the price of raw materials. Mattel will have to spend more on raw materials as a result of an increase and will be provided the same amount of raw materials from their suppliers for a higher price. For example, one of their specific products Barbie dolls are made up of vinyl. (“Which Plastic Materials Are Used in Barbie Dolls”) If the price of vinyl would increase, it will impact the price of the Barbie Doll, and in turn, would affect the supply of Barbie Dolls. Barbie’s hair is made out of nylon and synthetic fiber. (“TOXIC TOYS: WHAT IS THAT NEW PLASTIC BARBIE SMELL”) If the prices of nylon and synthetic fiber increase, it will impact the price of the Barbie Doll and would impact the price of the Barbie dolls, impacting the supply of the product. The supply curve will shift inward causing a higher equilibrium price. (See Appendix C) Another critical factor of production to consider is labor. There are various countries such as Canada, China, Indonesia, Malaysia, Mexico, and Thailand that account for the firms principal manufacturing facilities. (Mattel, Inc., 2016) The company has outsourced their labor to countries primarily in Asia due to the higher labor wages in the United States; however, if labor costs increase, this will cause production costs to rise consequently, leading to a lower supply of Barbie dolls.
Expectations of Suppliers
The firm Mattel must choose the right products to sell during the right time of the year. For example, the company acknowledges from past historical trends that their sales are higher during the third and fourth quarter of the fiscal year due to children going back to school and the holiday seasons. (Mattel, Inc.,2016) If the manufacturers intend that the value of their product will increase in the future, they hold the option to hold on to their products until a later time. If the price is expected to rise in the future, manufacturers are willing to sell less now. As a result, the supply levels will decrease now due to a future expectation of higher prices in the future. In this particular case, honing in on toy future expectations are directly related to the consumer trend of “children getting older younger.” Children are no longer strictly interested in traditional Barbie dolls causing a decline in sales, and therefore the price of Barbie dolls is not expected to increase in the future. Prices of Mattel toys depends on consumer trends and preferences and how likely are these children to prefer toys over other electronic gadgets, tablets, etc. The toy market is expected to grow in the next few years with a compounded annual growth rate of 6.3% for 2015-2020 which is going to drive the market to a total value of 124.9 billion by the end of 2020. (MarketLine, 2017) However, the industry is highly competitive with toy suppliers becoming very competitive meaning that this will put downward pressure on prices in the future on Barbie dolls.
Given the fact that there are a few number of dominant firms in the toy industry. The number of firms in the market is few with a large concentration of consumers the toy market is an oligopoly. Along the fact that there are a few number of dominant firms the products offered by these firms such as Mattel and Hasbro offer nearly identical or slightly differentiated products. Many companies work with both toy suppliers at the same time, and licensing brands shift back and forth between both toy suppliers. (Brewer, 2016) Another vital factor to consider is the barriers to entry. The barriers to entry are considered relatively low due to the lack of sunk costs involved. The capital investment is limited to a certain extent; although toy manufacturing requires capital investment. (“Study on the competitiveness in the toy industry”,2013) Another quality of the toy market is the continuous and robust competition between the companies in the market to increase their market share. The companies in the market have an influence considered as moderate over market prices due to the similar products offered and the relative size of the firms. Prices drop when competition increases and when their products are lacking sales due to consumer trends and preferences.
Market Concentration and Barriers to Entry
In the toy market, there seems to be low market concentration. This low market concentration results in high competition in the market. Barriers to entry are low, and the toy market is highly competitive. (“Study on the competitiveness of the toy industry”, 2013) Barriers to entry are low as there is increasing competition from digital products causing slow market growth. In recent years with technology becoming an integral part of children’s lives, the lack of barriers to entry leads to increased competitive pressure in toy production. According to ECSIP Consortium “study on the competitiveness of the toy industry,” the Herfindahl-Hirschman Index, which is a measure of the level of concentration in the market indicates that in European countries, toy production has an HHI of below 1500, interpreted as lowly concentrated. (“Study on the competitiveness of the toy industry”, 2013) (See Appendix D) The most recent available data from the U.S Economic Census reflects this level of competition as well with an HHI of 745 for the 50 largest companies, indicating a low concentration and high competition. (U.S Economic Census, 2012) (See Appendix E) Overall, because the market concentration is low, and barriers to entry are low Mattel as a firm must learn to adapt to consumer trends and preferences and continue to innovate and used R to maintain a competitive position.
A business strategy is an essential key determinant of the success or failure of the business. A differentiation strategy characterizes Mattel’s business strategy. Mattel follows a differentiation strategy in the toy manufacturing industry by licensing with cartoon and various movie makers. The company offers Barbie dolls which are updated on a regular basis to reflect current trends. (“5.4 Differentiation”) The toy manufacturer strategizes on being a differentiator by ensuring that their products are unique and desirable for their target market which are mainly children. Although Mattel focuses on a differentiation strategy, it has lowered its costs by moving factories to other countries with lower production costs to maintain affordability for its products. Mattel possesses differential assets that position it to capitalize on future opportunities. The firm’s strategy for growth is to continue to build its power brand Barbie. The firm’s differentiation strategy focusing on licensing with well-known brands allows the company to add value to its business.
Impact of Market Structure on Business Strategy and Performance
Mattel, Inc. experiences oligopolistic competition which affects Mattel’s business strategy and performance. The toy supplier experiences oligopolistic competition due to the dominance in the toy supplier sector by both firms Mattel and Hasbro holding the highest market share. In the tight oligopoly, both firms produce toys which are slightly differentiated and therefore this causes Mattel to focus on a differentiation strategy to help it gain a competitive edge over its direct competitor. The company focuses on licensing with well-known movies and brands to help it maintain its competitive advantage and has also attempted to lower its production costs by outsourcing its labor to cheaper labor countries such as China. However, its performance has been impacted by the market structure and business strategy because its sales have been declining consecutively since fiscal year end 2014. From 2014-2015, sales declined by 5.3%, and from 2015-2016, sales decreased by 4.3%. (Mattel, Inc.,2016) On the other hand, Barbie sales increased from 2016 by 7%, and decreased by 10% from 2014-2015. Although Barbie sales have increased during the last fiscal year it does not represent a positive outlook for the company. This trend is a result of its business strategy, now that competition is very high due to changing consumer trends to digital products, Mattel must capitalize on differentiating not within its current products but by shifting to provide unique digital products instead of focusing on differentiating its traditional toys. As a result of high competition, Mattel must learn to adapt to the competition and focus on gaining a competitive edge. Mattel’s failure to adapt successfully to the changing consumer preferences profoundly impacts the firm’s declining performance.