Mattel's strategic alternatives for competing in electronic entertainment markets

Mattel faces an uncertain operating environment. An old-established company with a great family of brands, Mattel has a lot of strengths with which to improve its business. However, the company is facing increased competition both from other toy companies and from electronic entertainment alternatives. This paper highlights some of the challenges that Mattel faces and some of the alternatives for dealing with its problems. There are four major alternatives presented -- an aggressive option that sees the company embrace a high-volume, low-margin approach is the first. The second is a defensive option that sees the company seek new channels, reduce its international presence and focus on core brands. The third option is to maintain the status quo, recognizing that the company is generally successful. The fourth option is that the company can embrace electronic media, giving the company new revenue streams but without much increase in cost. It is recommended that the company focus on electronic media, but farm out production of the games/apps/educational programs to an experienced firm in the industry, rather than buying their way into the business like they did with Learning Center.

Table of Contents

Introduction/Background

SWOT Analysis

Identification of the Problem

Development of Strategic Alternatives

Evaluation of Strategic Alternatives

Recommendations

Implementation

10

Introduction/Background

Mattel is currently in a difficult position with respect to its market. Long a market leader with strong brand value, Mattel is now facing strong competition that is threatening its market share and profitability. Mattel has suffered a series of setbacks in the past ten years that have hurt its ability to compete, but has also enjoyed some successes during that time. The company is relatively new to these types of peaks and valleys in its business. That said, the nature of the customer is that they grow out of Mattel products, so the company has a need to continually be an innovator in order to attract young consumers. It is only in recent years that Mattel has struggled to do this, but this is because the competition is more intense than it has been in the past.

Mattel is presently in need of a strategy to build its core brands for the coming years. The company must design this strategy in line with its code of ethics, something that is especially important given that it markets to children and manufactures in the developing world. There are a number of different considerations -- the company has strong brands but has tight margins and faces intense competition. Success in the past decade has relied on back-end solutions such as improving efficiency in its distribution channels in order to please its biggest customers. This paper will discuss the situation now facing Mattel, develop a set of strategic alternatives from which the company can choose and then make a recommendation for the company to build the value of the company in the coming years.

SWOT Analysis

Mattel has a number of strengths that it can draw upon in order to improve its business prospects. The company has a strong portfolio of brands. Barbie was recently ranked as a Top 100 brand internationally, Fischer-Price is well-respected and Hot Wheels is a category-leading brand as well. Having a strong portfolio of brands that parents remember from their own childhood gives Mattel the ability to convince those parents to buy these products for their children. The Mattel and Fischer-Price brands are among the most trusted brands of toys, and this means that customers have few if any reservations about buying these products for their children.

Mattel generally has a very good reputation. The only major issue is the quasi-controversy surrounding the Barbie image, but the company has generally been able to distance itself from that and continue to improve Barbie sales. The company has generally passed audits of its overseas production facilities, and this has enhanced its reputation as well. Having a reputation for outstanding ethics is important when marketing products to children, and having a reputation as an ethical marketer of toys is essential to building the business.

Mattel also benefits from strong relationships within its distribution channels. The company's efforts under Eckert have resulted in strong relationships with retailers. This gives Mattel the ability to launch new products virtually at will, with the support of its major retail partners. Additionally, Mattel sells in most major countries in the world. This gives the company more options with respect to growing sales, by improving on its strong international distribution system.

There are also a number of weaknesses that Mattel suffers from. The first is a reliance on Target and Wal-Mart. While these retailers deliver high sales volumes to Mattel, they do so at low margins. This means that Mattel earns slim profits on these sales. As the company becomes more dependent on these retail channels, it has a harder time producing and marketing its toys at a profit. Another weakness relating to a lack of diversification is that the company's sales are around 50% Barbie. When the Barbie brand is struggling, as it is now, this affects the entire company. Even with many other strong brands, Mattel still relies on Barbie as its corporate breadwinner.

The other main weakness that Mattel has is that is loses customers regularly. It markets its products to young children, but has few answers for when those children grow out of Mattel products. For the most part, the company at that point is forced to cycle in new customers in the form of young children. Despite several attempts at cultivating an older target market, Mattel has generally struggled to attract teenagers, and its brands seem to have an image of being for children. Mattel must constantly rebuild its customer base and older customers leave the firm.

There are several threats that Mattel faces. The first of these is increased competition. For a long time, Mattel was able to manage competition on the strength of its brand recognition and constant brand additions. The company is now facing intense competition from Bratz, Hasbro and other products and this is hurting Mattel's sales. Worse, these new competitors are hurting the brand value of Mattel by creating a generation of children less interested in Mattel brands -- in the long run this will hurt Mattel's ability to grow. Changing technology is also a threat relating to competition. New technology is competing for children's entertainment -- video games and other devices are replacing traditional toys in general. Technological changes have eliminated entire industries before, something Mattel needs to keep in mind. Technology is a significant threat as well because Mattel is gun-shy with respect to leveraging technology. The company's experience with the Learning Center -- buying in at the high and then having no idea what to do with the property -- has the company lacking confidence with respect to leveraging all of the new technology that is otherwise competing with Mattel for children's attention.

There are other threats as well. Social norms represent a threat. The Barbie "controversy" may not be significant at present, but the company still must be careful that there are people who prefer to give Mattel negative publicity about the nature of the Barbie product. Additionally, there are threats to sales on account of social norms in a number of countries -- Malaysia, the Arab states and Russia to name a few. The company must be constantly aware of shifts in social norms in all of its markets, and ensure that it avoids creating controversy for itself with respect to how its products fit with social norms around the world and in the domestic market.

Despite the myriad threats, Mattel still has a number of different opportunities. There is always room for new products. Mattel built its business in the 1960s and 70s with constant product innovation. It can continue to grow today using the same strategy. As an example, the recently-introduced American Girl has experienced 10% growth in 2004 and 15% growth in 2005. One opportunity might be to introduce culture-appropriate dolls, such as dolls that conform to Muslim society, in order to gain access to those markets. Alternately, brand extensions can be used to create new products, leveraging the strong, familiar brand names that are the core of the company's business.

Another opportunity is with more international growth. The company has distribution channels in over 150 countries, and in many of these it will not have achieved its full market potential. Putting emphasis on foreign markets -- especially those that are growing the most rapidly and are the most receptive to Mattel products -- can help to improve the company's bottom line. Lastly, there is opportunity to make further back-end improvements. During the Eckert years, the company improved its profits with back-end efficiency initiatives. It should continue this process, especially taking a look at the different software options that exist today to help eliminate inefficiencies. The company needs to cut costs at every stage if it is to sell to companies like Wal-Mart and Target profitably.

Identification of Problem

The current external environment is challenging for Mattel. The company must set a strategy that addresses increased competition from electronics in addition to increase competition in toys. The company must address volatile oil costs. International markets remain both a huge source of opportunity and a challenge for Mattel. What the company needs is a comprehensive strategy that deals with all of these issues. Mattel is still profitable, but the trend is not favorable. There are two main approaches to formulating strategy -- use the company's strengths to take advantage of opportunities or address the company's weaknesses as a means of eliminating threats.

Evaluation of Strategic Alternatives

Mattel is operating from a position of strength. It is a leading brand in its industry and is respected by both consumers and retailers alike. The company's properties may be facing challenges, but Mattel's business and name are strong enough to face down these challenges. It is worth considering that if the company is operating from a position of strength, Mattel can take an aggressive approach. In light of the company's relative strength in its industry, alternative #2 (the defensive strategy) does not appear to be a good option.

The first option is mostly an aggressive version of the third option. If the company sticks with its core businesses, it can play it relatively safe or it can be aggressive in its pursuit of a cost leadership strategy. The current strategy has its risks -- the external environment is changing so the company's strategy should probably change as well. The first option allows for some of those changes to take place. The fourth option can be done in conjunction with the first option or on its own. The company's reluctance to get involved in electronic media is understandable given its history, but electronic media is one of the most serious forms of competition that Mattel faces. Games and applications for smartphones and computers utilizing Mattel's strong brands not only can enhance the company's image (if they are educational) but can allow the company to keep its brands in the consumer's eye. Combined with the first option, the fourth option is a very strong statement from Mattel that it wants to continue to be dominant, but the strategy has its risks. These include spreading management talent too thin to execute all ideas well, and a number of simultaneous initiatives could also be expensive as well, and there are long-term threats to Mattel's cash flow.

Recommendations

It is recommended that Mattel pursue the fourth option. There are a few reasons for this. The company needs to have a presence in electronic media, but has demonstrated that it does not know how to run such a business itself. It can, however, license properties in order to build a presence in electronic media. Mattel's existing businesses are going through a down cycle, but with each successive year comes a cycling of consumers as young children take an interest in toys and older children leave Mattel behind. There is no reason to panic about a down cycle -- the last ten years have had a number of cycles in Mattel's business. Choosing the first option is less desirable at this point because it commits the company to a specific marketing and operating strategy that is not entirely appropriate -- its brands have value and this is not entirely congruent with a cost leadership strategy.

Implementation

Given Mattel's failure in electronic media in the past, the company needs to be careful how it implements this strategy. The company needs to formulate its electronic media strategy on its own, but it can execute by licensing out its properties to developers of games and educational material. The properties are stronger than just about any brand in the industry, so there should not be a shortage of willing partners. By keeping development external, Mattel's management can continue to focus on its core brands and businesses, but the company will be able to build these new revenue streams as well. The cost to Mattel will be limited -- but it needs to choose its partners carefully. The right partner can make Mattel's initiative a huge money-maker, but the wrong one will prove to be a waste of time. Mattel, therefore, needs to choose among the industry leaders for its electronic venture.

While implementing the electronic strategy, Mattel management can continue to focus on the status quo. It can choose to shore up some weaknesses, attract new channel partners or focus on key emerging markets. These different options would represent incremental improvements in the business but would be congruent with management also focusing some attention in the electronic venture. It is important that the company avoid major strategic initiatives during the course of the electronic media launch because the traditionally conservative company does not appear to be capable of managing multiple major initiatives simultaneously.