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«Carolina Coelho Advisor: Prof. Nuno Guedes Dissertation submitted in partial fulfillment of requirements for the degree of MSc in Business ...»

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The toys could be purchased on the Grafix website as well as in several retailers like Toys’ r Us, Tesco, Primark, The Entertainer, Argos, Asda, The Works, play.com and LittleWoods.

Trends UK: was founded in 2012 and managed to become the UK’s number 1 science product supplier16. It incorporated brands like Trends Science, Discovery Channel, Haynes, Spyz, Wowwe, Monster High, Color Me Mine, Disney Frozen, Doodle Bear, Barbie and Glitza that provided experiences for children, boys and girls, related with science, art & craft and spy activities. Besides that, it also offered a category specialized in gadgets for adults and its products could be found in more than 30 countries.

Exhibit 20 – Trends UK retailers

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2. LITERATURE REVIEW

2.1. Internationalization Accordingly to Barringer, Bruce R. and Greening, Daniel W. (1998), internationalization “involves expanding a firm’s business from its original location to one or more additional geographic sites and is particularly well suited for firms that cannot expand in their present location but believe that their products or services may be appealing to consumers in other markets”. For Roemer, M. K. (2015), the meaning of internationalization includes everything that relates to international. One of the major growth factors in companies is its ability to expand geographically, especially for SMEs that have no longer growth opportunities in their locations (Jane W. Lu and Paul W. Beamish, 2001).

Moreover, a growing number of firms are expanding their businesses early in their life cycles (Zahra, Shaker A. ; Ireland, R. Duane ; Hitt, Michael A., 2002). Business managers have all interest in developing great projects for global market as a way of boosting corporate growth, improving competitive position, strengthening financial performance, ensuring the company survival in a longterm (Theodosiou, M., & Katsikeas, C. S., 2001). Firm’s geographical expansion comes with many advantages but also with great challenges. For small businesses it is even more difficult because the manager has to deal with an existing business and a start up at the same time (Barringer, Bruce R. & Greening, Daniel W., 1998), since new subsidiaries have similar challenges as start-ups: (1) they need to build relationships with stakeholders, (2) need to establish their legitimacy, and (3) need to recruit and train new employees for the new operations (Jane W. Lu and Paul W. Beamish, 2001).

On the other hand, geographical expansion allows subsidiaries to create and exploit knowledge facilitating a learning process and accomplish positive returns by developing its competences and resources, allowing the firm to grow (Zahra, Shaker A., Ireland, R. Duane ; Hitt, Michael A.,2002).

The notion of internationalization is evolving and becoming more important and complex, but at the same time it is losing its meaning, becoming a more confused and misunderstood concept (Knight, J., 2011).

Although many authors indicate that there is insufficient research on the subject of internationalization of small and medium companies, Morrison, Alison; Breen, John & Ali, Shameem (2003) defend that if a SME wants to internationalize it needs to join several factors such as “owner-manager ambitions, intentions, and competencies; internal organizational factors, regionspecific resources and infrastructure; and external relationships and network configurations”.

Moreover, a study conducted by Ibrahim, A. B. and Goodwin, J. R (1886) points out that the success of small businesses and its overall performance is determined according to its rate of return and the

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number of years in the market. That being said, a successful SME has a higher rate of return than its competitors, with the same size and business area, and has been in the market for five or more years. Also, Ibrahim et al (1886) enhance two more important success factors such as entrepreneurial behavior and management competencies. On the other hand, Morrison, A., Breen, J., & Ali, S. (2003) concluded that the inhibiting factors (i.e lack of ambition and vision, weak power position within the industry sector and markets, mature position in life-cycle, etc.) need to be taken into account when talking about small business growth.

2.1.1. Entry Barriers Every time a company decides to enter a market it is making an investment under uncertainty and the cost of this decision is sunk (Caves, R. E., & Porter, M. E., 1977). Previous studies advocate that entry barriers have a positive effect on the new entrant sales growth but also have negative effect on the new entrant profitability. Robinson K. C. & Phillips McDougall P. (2001) point out three

important barriers to entry that affect profitability, sales growth and shareholder wealth creation:

economies of scale, capital requirements and product differentiation. Most firms experience uncertainty when they decide to go abroad. The lack of knowledge about foreign markets and operations comprises a great barrier to the development of international operations. In order to reduce these issues, the Uppsala model states that the international involvement of a firm is made gradually through small steps: first it starts exporting via independent agents, second it establishes a sales subsidiary and finally it can begin producing in the host country (Johanson, J. and Vahlne, J. E., 1977). The other assumption of the model is related with the proximity of the countries: firms experience expansion first with nearby countries then they start to move further away (Barkema, H., Bell, J., & Pennings, J., 1996).





2.2. Toy Industry The toy industry has changed a lot over the years, video games are the big trend and fill the musthave list of parents and children. Furthermore, children’s purchasing power is growing. Toys are one of the world's oldest consumer products and the toy industry is a mature industry with a high concentration of manufacturers in the market, where the minor players have to compete on new product development since they lack the benefits of the big players such as economies of scale, brand recognition and the resources necessary to secure licensing agreements. Furthermore, this industry is also characterized by product innovation, short life cycles, fad-driven products and high cannibalization rates (Johnson, M. E., 2001). Furthermore, Calvert, S. L. (2008) points out two important trends affecting children as consumers: first their income and power to influence parent’s purchases has increased over the years, with youths of today shaping the buying patterns of their families and second, the increasing number of television channels and the technology development

29Science4you in the UK: a toy story

led to smaller viewers for each channel, generating “a media space just for children and children’s products”. Plus, children especially under eight don’t have cognitive skills to understand the persuasive power of television and online advertisement, making them an easy target for the firms.

The toy industry is an industry with intense competition particularly during the summer months when six blockbuster movies are expected to be released and during this period the industry experience shorter promotional windows and higher prices (Benezra, Karen, & Warner, Berhard, 1997). According to Richard Gottlieb (2009), the rules to have a successful strategy in the toy industry are include: spend more on R&D, engage in pre-marketing, replace the term ‘traditional toy’ and better understand today’s kids. Whereas, Johnson M. E. (2001) advocates that the two central challenges of this industry are managing supply and managing demand and in order to have success, companies need to figure it out how to manage the typical demand uncertainty and risks of the toy industry, for example: (1) reducing seasonality and new product adoption risk through licensing, (2) increase product life by matching product and channel strategies, (3) reduce seasonality by increasing number of channels and (4) smoothing demand and building longer life products through variety strategies.

Fisher (1997) makes the comparison between functional and innovative products, where he claims that the innovative products, including toys and clothing, have an unpredictable demand, a small product life (3 months to 1 year) and high product variety (often millions of variants per category).

Besides, toy demand has become recently extremely unpredictable and fashion driven which can lead to higher forecast errors and excessive inventory (Wong, Chee Yew, Arlbjorn, Jan Stentoft, Hvolby, Hans-Henrik, & Johansen, John, 2006). For example, Christmas is the toy industry’s principal period of the year with 40% of retail sales happening in December (Ben Carter, 2003). Moreover, there are five different types of uncertainty in fashion driven industries, first, the uncertainty about the rate of arrivals of customers to the store, second, the actual number of customers that arrive to the store during the season and their exact times of arrival, third, the statistical characterization of the maximal prices that customers are willing to pay for the product, fourth, the individual consumer’s purchase decisions based on the maximum prices they are willing to pay and fifth, the state of the market (Aviv, Yossi, & Pazgal, Amit, 2005).

2.2.1. Educational Toys Most of the science kits in the toy stores teach little science or don’t teach science at all; they only include the instructions to construct the toy, leaving out the explanation of the science related to the toy or behind its functioning (Silver, Marc, & Flynn, Mary Kathleen, 1994). Educational toys are more

30Science4you in the UK: a toy story

challenging than traditional toys. First, they work as a paradox in children minds: if they think a toy is supposed to be good for them, they don’t believe it can be fun. Second, they are more expensive and third its marketing is trickier. Learning toys stores can’t say “buy our wares to keep the kids quiet”, instead they have to say “buy our stuff to help get the kid into MIT” (La Franco, Robert, 1994). An example of a learning toy that succeeded in the UK was the LeaPad from US toy firm LeapFrog, which combines education and entertainment. Since its arrival in the UK in 2000, the traditional toy firms such as Fisher-Price and Lego were forced to re-evaluate their products and give greater importance to the use of technology (Ben Carter, 2003). Also, Toys r’ us started to give a lot more emphasis to educational toys, taking them from the back of the shelfs and putting them out in display (La Franco, Robert, 1994). Nevertheless, there are some authors that don’t agree with the distinction between educational toys and the rest of the toys. Goldstein, J. H. (1994) states in his book the opinion of Birgitta Almqvist which advocates that if there are educational toys, the other toys would be noneducational, which she claims being a false conclusion. Birgitta also disagrees with the assumption that a toy arouses the same reactions in every child.

2.2.2. Children vs Gender Francis, B. (2010) discovered that boys tend to have stereotypically gendered masculine choices whereas there is a far greater diversity in girl’s choices; some of them are considered androgynous choices since they are marketed for girls and boys. Moreover, in the category of educational toys, didactic information and developing construction and literacy skills can be identified in the boys’ choices. However the same characteristics are lacking in the girls choices (Table1. Favourite toys). A study conducted by Cooper, Lou. (2011) showed that girls between eight and eighteen years old consider mobile phones their most important piece of kit because it comprises several tasks such as internet searches, email, online chat, social networking and gaming.

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2.3. Pricing Price is often seen as a significant management tool in terms of strategy and tactic since it has a strong effect on product positioning, market segmentation, demand management and market share (Clark, T., Kotabe, M., & Rajaratnam, D., 1999). International pricing decisions are crucial for the business planning. It has a direct effect on the firm’s revenue and helps to establish a competitive advantage positon in the market, regardless of product or industry. Therefore, managers waste a lot of time taking into account a large variety of factors, such as internal and external factors. The first internal factor managers look at is the internal cost structure translated into the cost of production or marketing. Furthermore, factory capacity utilization, market contribution rate and international experience constitute important internal factors as well. Finally, Forman H. & Hunt J. M. (2005) concluded that the key external decision-making factors are switching costs, price sensitivity of customers and entry barriers. Some firms that go abroad also choose the strategy of international price standardization which depends on several determinants. Theodosiou M. & Katsikeas C. S.

(2001) suggest in their study that the level in which companies are willing to standardize their international prices depends on the similarity between the home country and the countries where their subsidiaries are installed, concerning consumer characteristics, economic conditions, legal environment and the stage of the product life cycle.

2.4. Competitive environment

2.4.1 Competitive Advantage International firms are strongly influenced by their home country in terms of international competitive performance. Before going abroad firms develop within a domestic context and the home country is crucial in shaping the “identity of the firm, the character of its top management, and its approach to strategy and organization, as well as having a continuing influence in determining the availability and qualities of the resources available to the firm” (Grant, R. M., 1991).



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