Mattel Final

Strategic Design Planning WorkshopInstitute of Design, Illinois Institute of Technology Spring 2006

Steve Babitch | Enric Gili Fort | Andy Kim | Pam Nyberg | Albert Wang

Mattel Strategic PlanThe Future of Play

Strategic Planning Workshop | Mattel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang �

Contents

Executive Summary

Project OverviewOpportunity StatementProject Description

Industry AnalysisIntroductionState of the IndustryMattel CompetitivenessCompetitor OverviewFinancial Performance Mattel and Direct Competitors Mattel and Gaming Software CompetitorsIndustry EvolutionKid Lifestyle TrendsTechnology and Play Category TrendsOpportunity exploration

Mattel AnalysisIntroductionFinancial PerformanceCore Competencies Innovation History Innovation Analysis Current Value Web Most Recent Digital Products Most Recent Experiential Efforts

User Research

Research Insights & Principles

Concept DevelopmentConcept Generation Concept Evaluation

System

Subsystems New Value Web Roadmap Risks & Uncertainties Conclusion

Appendix

Executive Summary


Executive Summary

Children are being exposed to technology at ever-younger ages, and as a result, they are becoming increasingly more interested in technology-based entertainment, including electronic, video, and online games. Currently, Mattel has a very limited presence in electronic entertainment. This shift in children’s entertainment preferences is accompanied by a trend toward “childhood compression,” meaning that children’s tastes are maturing more quickly than in the past. As such, Mattel’s target market is shrinking. Particularly worrisome to Mattel is the slow sales decline of Barbie products over the past several years. Barbie is Mattel’s largest, most profitable brand. Even though things seem especially dire for Mattel, there is hope.

By leveraging their existing competencies while acquiring new capabilities through internal development and partnerships, Mattel should be able to develop relevant products and services that positively reposition them in kids’ worlds. From an offering perspective, they should pursue a development strategy which includes the following six subsystems, listed in order from easiest to most difficult to implement:

• Traditional Toy/Game Enhancement• High-Tech Toy Development• Imaginative Exploration• Content Creation and Community• Mobile Networked Entertainment• Physical Activity Immersion

To successfully execute elements within these strategic sub-systems, Mattel must make some operational and strategic adjustments. Specifically, they must build their competency in content creation, while partnering with niche knowledge communities, to create a more balanced relationship between their content creation efforts and those of external content providers, like movie studios.

Given their limited experience in technology and software development, they must partner with firms who are experts in these areas to more quickly develop technology-infused products and services which provide richer play experiences. Simultaneously, they must strive to learn from these companies since the knowledge is critical to their future success.

Mattel must also establish a web-based dialogue channel with buyers and users which promotes interaction between them via networks, provides hardware and software upgrades, provides creation tools, and sells new products and services.

Project Overview


Opportunity Statement

NewMarket

ExistingMarket

ExistingCapability

NewCapability

The shift in children’s play from traditional toys and games to more compelling, technology-enhanced play experiences offers Mattel the opportunity to regain relevance in the United States through the development of innovative, tech-infused products and services.


Project Description

Children are being exposed to technology at ever-younger ages, and as a result, they are increasingly more interested in technology-based entertainment, including electronic, video, and online games. According to American Demographics, electronic games now account for two-thirds of the total toy market.1 Currently, Mattel has a very limited presence in electronic entertainment.

This shift in children’s entertainment preferences is accompanied by a trend toward “childhood compression,” meaning that children’s tastes are maturing more quickly than in the past. Whereas manufacturers of traditional toys and games used to target kids under 14, their attention is now focused on children under 10.2 As a result, Mattel’s target market is shrinking. Particularly worrisome to Mattel and another potential indicator of girls’ maturing tastes is the slow sales decline of Barbie products over the past several years. Barbie is Mattel’s largest, most profitable brand.

Given Mattel’s daunting challenges in this highly competitive environment, this plan was crafted to intend to identify possible strategic opportunities for the company, related to the development or acquisition of new technology-infused entertainment capabilities. These expanded capabilities will complement children’s interaction with related Mattel products, leverage existing play patterns, and encourage children’s personal development.

Using Institute of Design Innovation Planning methods, Mattel will be analyzed Mattel to identify their core competencies and innovation capabilities. Analysis of the children’s traditional toy and game industry, the electronic entertainment industry and children’s lifestyles will also be conducted, using primary and secondary research techniques. Insights will be extracted from the research, based on the use of comparative analytic tools. New concepts and opportunities will be generated which address the insights. Those concepts and opportunities will then be systematized to provide a rich array of innovative solutions which will help Mattel expand its offerings and retain its relevancy with children of all ages.

1 Raymond, J. �000. Kids Just Wanna Have Fun. In American Demographics �� : � 5� – �1.� Ibid.

Industry Analysis


Competing for children’s attention has become more challenging than ever before due to shifting market conditions, the changing lifestyle of children, and the influence of increasingly more powerful big box retailers.

According to a recent Kaiser Family Foundation survey, “Kids and Media @ the New Millennium” (Nov 1999), “half of all 4 to 6-year-olds have played video games, a quarter of them regularly. Game makers are aggressively marketing to children as young as 3, while researchers report what parents already know: that children as young as 8 and 9 are asking for adult toys, like cell phones and iPods, rather than stuffed animals or toy trucks.”1 This adoption of technology at younger ages is adversely impacting both traditional toy manufacturers and retailers.

Further complicating matters, children now spend 75% of their weekday in scheduled activities, as compared to 40% in 1981.2 This decrease in available playtime has driven kids to adopt sophisticated multi-tasking behaviors. Because they have less free time to play, children look for fun in any activity they pursue. This expectation has forced toy manufacturers to compete against all other forms of entertainment, including friends, TV, the Internet, and organized sports. As a result, the industry is shifting away from “toys” as they were traditionally defined toward “leisure products.”3

Retailers are also a powerful contributor to the success of a given toy. They determine the products they’ll stock, the cost they’ll pay, and the amount of shelf space each toy will receive.

Times are changing for the toy industry. In response to these monumental shifts, Mattel must quickly adapt or suffer shrinking sales and profitability at the hands of more technologically sophisticated play experiences.

Sources: 1 Raymond, Joan; “Kids just wanna have fun,” American Demographics; Feb �000; Vol��, �; p. 5�-�1.� Carey, Benedict; “Babes in a Grown-up Toyland,” The New York Times (Late Edition (East Coast)); New York, NY.: Nov �8, �00�; pg. �.1.3 Stanley, T.L. and Becky Ebenkamp; “In search of the magic formula,” Brandweek; Feb 1�, �000; Vol �1, �; p. �8-3�.

Introduction

Strategic Planning Workshop | Mattel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang 10

State of the Industry

Sales of traditional toys and games have been flat since 1�� (see graph below) while video game sales have been growing. In �005, toy and game sales dropped �% to $�1.3 billion while video game sales increased �% to $10.5 billion.

One significant reason for this market shift is childhood age compression. Kids today are growing up more quickly than in the past and are outgrowing toys as a faster rate. This phenomenon is illustrated in the graph below which highlights the decline in per capita spending for traditional toys among �-13 year olds, the Tween market. Since Tween purchasing power has increased over the years, it’s obvious that they’re choosing to spend their money in other categories.

$500

$400

$300

$200

$100

$0

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17

Age (years)Source: NPD

0

5

10

15

20

25

'96 '05'04'03'02'01'00'99'98'97

Traditional Toys and Games

Video Games

Sales ($B)

Year

Traditional Toy/Game Sales vs. Video Game Sales, 1996-2005

Per Capita Spending on Traditional Toys

2003

2000

Source: NPD


Mattel Competitiveness Across Age Groups

Mattel is the leading traditional toy manufacturer for kids ages <1 to 8, primarily due to the strength of their Fisher Price offerings. However, around the age of ten, Mattel loses considerable market share to other competitors and non-toy activities. Tweens in particular spend time using game consoles, DVD players, mp3 players, cell phones, the Internet, online games, and IM software. Clearly, Mattel must focus more seriously on providing technology-focused products and services that Tweens consider more relevant to them.

1 2 3 4 5 6 7 8 9 10 11 12 13<1

Market Share

Age ( Years )

Traditional Toy Market Share by Age, 2005

Mattel

Closest Competitors

Source: NPD

Strategic Planning Workshop | Mattel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang 1�

Hasbro HAS Toys and Games

Playskool, Tonka, Super Soaker, Milton Bradley, Parker Brothers (all popular board games), Tiger, Wizards of the Coast

Star Wars, Disney (master toy licensee and official toy and game company for theme parks), Nickelodeon, Sesame Street

BRATZ, GI Joe, LAZR Tag, Magic, ChatNow Communicators, Mr. Potato Head, Pokemon, Play-Doh, VCamNow (like Mattel’s Vidster), Easy Bake Oven, Tinkertoys

Entered video game market in 1��5 with the creation of Hasbro Interactive. Was very successful but sold the division to Infogames Entertainment SA in �000 and continue in video games through licensing with Infogames.

Leapfrog LF Educational Toys

FLY pen computer system

Jakks Pacific JAKK Toys and Leisure Products

World Wrestling Entertainment, Dragon Ball, Hello Kitty, Nick-Tivities, SpongeBob Squarepants, Dora the Explorer, Blue’s Clues

World Wrestling Entertainment video games for all gaming platforms (with THQ), popular tv video games, action figures

Radica Games RADA Handheld & Tabletop Electronic Games

Barbie, Microsoft, EA Sports, Sega Toys

XBOX controllers, Game Boy Advance accessories, �0Q, Bass Fishin, Play TV Baseball, Play TV Legends Genesis, Skannerz Commander

Brands

Key Licenses

Key Products

Facts

Competitor Overview

According to financial industry reports, Mattel’s direct competitors are considered to be Hasbro, Leapfrog, Jakks Pacific, and Radica Games.

Hasbro most closely resembles Mattel in that it’s primarily a traditional toy manufacturer who’s trying to expand beyond those offerings into electronic and gaming entertainment. As part of this strategy, they recently announced a partnership with G4, the gaming network on cable. In addition, they’ve been releasing lifestyle toys like ChatNow Communicators which resemble Nextel press-and-talk phones and VCamNow, a digital video camera for kids. Unlike Mattel’s competitive products, Hasbro’s devices provide functionality that more closely resembles the features provided in adult products, which kids appreciate.

Hasbro also produces edgier content like Magic and BRATZ dolls which have taken considerable market share from Mattel’s Barbie. Mattel responded with MyScene, but this offering was perceived as a less expensive Bratz knock off by some Tween girls.

At the other end of the spectrum, Leapfrog is primarily focused on educational toys. They currently struggle to create play entertainment that doesn’t feel like doing homework.

Jakks and Radica, on the other hand, are much more involved in play entertainment, specializing in electronics and gaming. Jakks develops video games for various gaming platforms and TV while Radica produces hand-held electronic games and gaming accessories.


Financial PerformanceMattel and Direct Competitors

As the financial chart below illustrates, traditional toy manufacturers including Mattel, Hasbro, and Leapfrog have experienced very little growth in their stock price over the past ten years. In stark contrast, Jakks Pacific and Radica Games have performed significantly better because of their level of participation in the electronic and video game market.

+1000%

+800%

+600%

+400%

+200%

+0%

1/02/200610 years

Radica GamesMattel LeapfrogHasbro

Stock Price Increase (%)

1�� 1�� 1��8 1�� 000 �001 �00� �003 �00� �005 �00�

Mattel Financial Performance compared with Direct Competitors


Offering Comparison

Mattel has a very limited presence in specialties that are becoming more popular with kids. Even Hasbro is beginning to expand into other more relevant arenas as mentioned above with their announcement of a partnership with G�.

Traditional Toys

Video / Online Gaming

Music

Movies/TV

Telecom

Health / Fitness

Hardware

Mattel Hasbro Electronic Arts

Vivendi International (Mattel Partner)

Sony Konami Microsoft

Games

Limited

Limited

Limited Games

soon

Co-Creation

Education


Financial PerformanceMattel and Gaming Software Competitors

Although Mattel might not consider companies who produce gaming software to be direct competitors, these firms are developing compelling entertainment experiences that draw kids away from traditional toys. The 10-year financial performance of THQ (a Mattel partner), Electronic Arts, Activision, and Take Two Interactive Software clearly shows that each has experienced considerable growth in stock price, compared to Mattel who’s demonstrated little to no growth. Privately held Vivendi International, another Mattel partner, is the world leader in MMOG’s, multimedia online games (e.g. World of Warcraft) as well as being a leader in the PC console and handheld market.

1/02/2006

+3,000%

+2,000%

+1,000%

0%

10 years

Activition Take TwoMattel Electronic ArtsTHQ

Stock Price Increase (%)

1�� 1�� 1��8 1�� 000 �001 �00� �003 �00� �005 �00�

Mattel Financial Performance compared with Gaming Software Competitors


Industry Evolution

Before toy trends and opportunities can be fully appreciated, the evolution of toy development must be understood. Five significant eras have been identified including Post War Optimism, Transformation, Licensing, Electronics, and Online Gaming.

The matrix reveals that the children’s toy/game industry has evolved from one with simple, physical toys that emulate adult life to one based on hardware and software technology platforms and rich, interactive content which support fantasy.

The number of dual income families has increased significantly while family size has decreased, allowing parents to direct more money toward each child. Children have fewer playmates in the household and therefore rely on the TV (and other more interactive media) for entertainment. With the advent of individualism and the Internet, kids have the ability to create content and share it with people they’ve never met.

Given their high level of media consumption, kids are actively targeted by advertisers and are influenced by the messages. With regard to retailers, small family-owned toy stores have been replaced by big box and online retailers because of selection, convenience, and price.

Era 1Post War Optimism1945-60

Key Toys/games

Leaders

Retailers

Family Identity

Play environment

Society Values

Communication

Technology

Context

Era 2Transformation1960-77

Era 3 Licensing1977-86

Era 4Electronic1986-97

Era 5 Online gaming 1997-Present

Doctor sets, Kitchen sets, dolls, toy tractors

Marx Toys, A.C.Gilbert Company

FAO Schwarz, Family owned toy stores

Fathers Knows Best

Home

Family values

Parent targeted ads

Metal and stamping machines

Adult world simulation

Etch-A-Sketch, Barbie, G.I. Joe, Cap Guns, Frisbee

Mattel, Hasbro, LEGO

Sears, Child’s World

Question traditional conventions

Suburb

Rebellious, challenging authority and traditional views

TV advertisements

Plastics

Kids imagination world

Star Wars, He-man, Strawberry Shortcake.

Disney, Kenner

Toys R’us

Super Moms

School and friends

Mass consumerism

Connection toys with children programming

Articulated toys

Media created imaginary world

NES, Trivial pursuit, Cabbage patch, mindstorm, tamagochi, american girl

Nintendo, sega, Sony, Selchow & righter, Miton Bradly, Lego

Toys R’us, Wal-Mart

Soccer moms

Screen

Individualism, media skepticism

Specialized media

Computer chip

Interactive environment

WoW, RPG, MMOG, virtual Pets

EA, Sony, Microsoft

Wal-Mart, on-line

Guilty parents

Anywhere

Co-creative experience

Internet and blogs, social networks

Mobile phones, networks and Internet

Immersive experience


Industry Evolution

Era 1Post War Optimism1945-60

Era 2Transformation1960-77

Era 3 Licensing1977-86

Era 4Electronic 1986-97

Era 5 Online gaming 1997-Present

Physical toy appearance clearly reflects the societal and aesthetic values of the age. During Post War Optimism, for example, the importance of traditional family and home is evident, whereas technology is clearly valued in the Online Gaming era.


Kids Lifestyle Trends

Kids are “getting older younger,” (e.g. age compression), so traditional toys become outdated more quickly.

Source: Toy Industry Information

Children are exposed to technology at younger ages - 20% of the active online population is ages 2-17. They also learn to express themselves with technology earlier.

Source: Nielsen Net Ratings

Kids only have 25% of their day available for free play so they maximize their time through multi-tasking.

Source: University of Michigan, The Panel Study on Income Dynamics, Child Development Supplement in American Demographics, May 1��.

20% of U.S. children are overweight, an epidemic according to the U.S. Surgeon General.

Source: National Institute of Health

Children have fewer siblings than they did 30 years ago, decreasing the number of kids’ conveniently located playmates.

Source: U.S. Census Bureau

30% of fourth graders are proficient in reading, and 32% are proficient in math at traditional public schools. Boys fare worse than girls, making education an increasingly important priority.

Source: National Center for Education Statistics, as compiled by the American Federation of Teachers, �00�.

Examining child-focused lifestyle trends reveals reasons for their increased interest in technology-based entertainment. Additionally, these trends highlight the need for solutions to the growing childhood obesity and educational performance problems.


Cocreation Fandom and consumer involvement in game development and adaptation positively influence a game’s success.

Technology and Play Category Trends

New interface devices The development of non-traditional game controllers is expanding the types of interactions players can have with games.

Revolution Controller

Trend Precursors

Lego Mindstorms Half life + Counter Strike The Sims

Nintendo DS stylus PS EyeToy

Designer Toys Movies Music

Lifestyle Lifestyle toys and action figures are becoming more popular.

Several major trends highlight opportunities to consider when developing future toys and games

Mixed Reality Games played in the physical world can be extended via electronic technology into the virtual world.

Human Pacman “Can you see me now”

Strategic Planning Workshop | Mattel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang �0

Opportunity Exploration

Position maps (or 2x2 maps) were generated to investigate different aspects of kids play experiences and play-oriented technology. The goal was to identify opportunity gaps that could suggest areas for future product and service development.

Map axes were selected based on child lifestyle trends and technology trends.

Position maps include the following dimensions:

- Mental/Physical Engagement vs. Level of Technology- Level of Technology vs. Level of Self-Authoring Provided- Number of Players vs. Level of Activity- Educational/Entertainment Play Goal vs. Level of Activity- Level of Mobility vs. Level of Activity


Opportunity Map

Mental Physical

High Tech

Low Tech

MMOGs / Sims

Video game / Consoles

Nintendo DS

iPod listeningLeapfrog

Lego Technic

Robosapiens

Lego Mindstorms

Laser Tags

Paintball

Dance Dance Revolution

Building Blocks

Books

Board Games

Card Games

LEGO

TV

Dolls

Dressing up

Arts & Crafts

Hot Wheels

Action FiguresNerf Toys

Tag

Phone Games

Puzzles

Opportunities for high tech products that provide kids with physical activity.

Mental/Physical Engagement vs. Level of Technology


Toys, games, and activities have been plotted on the map below, the speculation being that few activities combine physical activity with high technology. This map confirms our hypothesis. Games such as Dance Dance Revolution, laser tag, and paintball are examples of such toys, games, and experiences.

Strategic Planning Workshop | Mattel Strategic Plan | Babitch, Gili Fort, Kim, Nyberg & Wang ��

Kids are becoming empowered by creation tools

Level of Technology vs. Level of Self Authoring

Toys, games, and activities have been plotted on this map to investigate the level of self authoring provided. The conclusion here is that the majority of toys don’t promote self-authoring, but children seem to be drawn to self-authoring experiences such as Lego Mindstorms, simulation games, and photo websites such as Flickr.

Low Tech High Tech

High self-authoring

Low self-authoring

MMOGs / Sims


iPod listening

Laser Tags


Books

Board GamesCard Games

LEGO

TV

Dolls

Arts & Crafts

Hot Wheels

Action Figures

Tag

Puzzles

Dungeons and Dragons

Choose your own adventure

Magic

Sports equipment

Speak and Respond

Talk BackDolls & animals

Electronic instruments

Mindstorm Sims

MoviesBlogs

Photos (Flickr)

Handheld video games

Majority of the products don’t promote authorship and creativity

Opportunity Map


Number of Players vs. Level of Activity

Eyes action

Mix seat and active

Hands interacting

Moving

Exercising

Seating

Individual Group

Physical

Sedentary

MMOGs / Sims


iPod listening

Laser Tags


Books Board Games

Card Games

LEGO

TV

Dolls

Arts & Crafts Hot Wheels

Action Figures

Tag

Puzzles



Magic

Speak and Respond


Sims

Blogs

Photos (flickr)


Organized Sports

Yoyo

Ride bike

Making Movies

Hide’n seek

Electronic Instruments

Mindstorms

Shopping

Opportunities for providing experiences that bring screen-based sedentary activities together with physical ones

Toys, games, and activities were plotted on a map of level of physical activity versus level of individual or group activity. The number of toys in the upper right quadrant of the map is less populated; however, there are a variety of organized sports, which, if individually named, would increase the number of data points in that quadrant. Toys tend either to be physical in nature or sedentary, but not usually both. Dance Dance Revolution does combine physical with screen-based activity. The opportunity gap appears to include the combination of physical and sedentary activity - perhaps combining physical activity with electronic or screen-based activites would result in a more rich, immersive game experience.

Opportunity Map


Play Goal vs. Level of Activity

Toys, games, and activities were plotted based on level of physical activity and play goal achieved, ranging from educational to entertainment. An opportunity gap was noted in the physical activity/educational space, perhaps speaking to the trend in childhood obesity.

Educational Entertainment

Physical

Sedentary

MMOGs / Sims


iPod listening

Laser Tags


Books

Board Games

Card Games

LEGO

TV

Dolls

Arts & Crafts

Hot Wheels

Action Figures

Tag

Puzzles



Magic Speak and Respond


Blogs

Photos (flickr)


Organized Sports

Yoyo

Ride bike

Making Movies

Hide’n seek

Shopping

Lego TechnicElectronic instruments

Movies

Nintendo DSLeapfrog

Robosapiens

Lego Mindstorms

Paintball

Building Blocks

Dressing up

Nerf Toys

Phone Games

Sesame Street

Opportunities for delivering educational physical toys

Eyes action

Mix seat and active

Hands interacting

Moving

Exercising

Seating

Opportunity Map


Place of Play vs. Level of Activity

Eyes action

Mix seat and active

Hands interacting

Moving

Exercising

Seating

MMOGs / Sims

iPod listening

Board Games

TV

MoviesSesame Street

Mobile Anchored

Physical

Sedentary


Laser Tags


Blogs

Photos (flickr)


Lego Technic

Nintendo DS

Leapfrog

Robosapiens

Lego Mindstorms

Phone Games

Pacman

Eye Toy Karaoke

Opportunities to deliver electronic games that combine physical activities in a mobile environment

Can you see me now

Making Movies

Toys, games, and activities were mapped to investigate level of activity vs. level of mobility provided. Given that children spend time in many more locations (e.g. divorced parents’ homes, organized activities, friends’ homes, etc.) than they once did, the opportunity to combine physical activity with mobile, electronic experiences could be compelling.

Opportunity Map

Mattel Analysis


Introduction

Headquartered in El Segundo, California, Mattel Inc. has been designing, manufacturing, and marketing toy products for more than sixty years. Now employing more than �5,000 people in �� countries, its products include fashion dolls and accessories, vehicles and play sets, and games and puzzles. The company also publishes children’s books and magazines. Mattel sells its products to retailers in more than 150 nations, including discount and free-standing toy stores, chain stores, department stores, wholesalers, and retail outlets. Key global retailers include Toys R Us, Wal-Mart, Target, Carrefour, Argos, and Auchan. Mattel also sells its products directly, through agents and distributors, and through their web site.

Mattel’s reportable segments are separately managed business units and are divided on a geographic basis between domestic and international. The Domestic segment is further divided into Mattel Brands US, Fisher-Price Brands US and American Girl Brands. Historically, Mattel has been a leader in the children’s traditional toy and game industry worldwide. However, in recent years, the industry has witnessed a shift in children’s lifestyles and interests that is adversely affecting the company’s financial performance and expectations for future growth.

While American Girl and Fisher-Price have experienced annual sales growth, their success has been partially offset by Mattel Brands and the slow sales decline of Barbie, which dropped by 13% worldwide in �005.

“We continued to experience extensive cost pressures and sales declines in the Barbie brand, which offset much of the growth we experienced throughout the portfolio. “ Robert A. Eckert, chairman and CEO of Mattel

American Girl

Fisher-Price US

Mattel US

Year

‘02 ‘03 ‘04

0

Sales in millions

1000

2000

3000

Domestic Sales by Brand, 2002 - 2004


Mattel Brands US sales declined from $1.� billion in �00� to $1.5 billion in �00� with the domestic market representing 58% of worldwide sales. This is especially critical to address since the U.S. is considered a lead market and since ��% of kids globally live outside the U.S. and Europe.

Source: Mattel Annual Report

Revenue

Barbie World Gross Sales

1Q �Q 3Q �Q 1Q �Q 3Q �Q

2004 2005

1510

50-5

-10-15-20

%

In the first nine months of �005, cost pressures were also problematic and included:

• Product costs, such as oil-based resin• Recent strengthening of the Chinese yuan against the US dollar• Transportation costs, due to petroleum prices• Employee-related costs

In response, management has established six key company strategies:

• Improve execution of the existing toy business • Globalize the brands such as Barbie• Extend the brands into new areas• Catch new trends, create new brands and enter new categories• Develop people• Improve productivity, simplify processes and maintain customer service levels

Additionally, Mattel management has crafted four strategies to drive sales growth:

• Focus on core brands and core markets• Align more effectively with growing retail customers by building closer partnerships with customers worldwide• Invest in developing markets, expanding our presence in categories where Mattel doesn’t currently have an extensive presence and grow alternative sales channels• Pursue additional licensing agreements and strategic partnerships to extend the brand portfolio

Mattel Revenue and World Gross Barbie Sales year to year end sales


Valuation Ratio Mattel Industry Sector S&P 500

P/E Ratio (TTM) 1�.10 18.58 1�.�8 �1.��

P/E High - Last 5 Yrs. ��.�� 1.�1 33.�1 38.5�

P/E Low - Last 5 Yrs. 13.�0 13.�8 1�.�8 15.01

Growth Rates (%)

Sales (MRQ) vs. Qtr 1 Yr. Ago -0.�0 �.08 �.31 1�.��

Sales (TTM) vs. TTM 1 Yr. Ago 1.�� 5.�5 �.�� 15.�5

Sales - 5 Yr. Growth Rate �.55 �.53 �.51 �.�1

Profitability (%)

Gross Margin (TTM) �5.8� 3�.�8 30.35 �5.15

Gross Margin - 5 Yr. Avg ��.�� 38.�� .�� .��

EBITD Margin (TTM) 1�.83 18.�� 1�.�5 �1.�1

EBITD - 5 Yr. Avg 15.�� 1�.�� 10.�1 1�.�1

Operating Margin (TTM) 1�.83 1�.13 8.8� �0.�1

Operating Margin - 5 yr. Avg. 13.�� 1�.00 �.50 18.�5

Net Profit Margin (TTM) 8.05 10.�� 5.55 13.��

Net Profit Margin - 5 Yr. Avg. �.�1 8.81 �.3� 11.��

MRQ - Most Recent QuarterTTM - Trailing Twelve Months

Industry: Recreational ProductsSector: Consumer Cyclicals

Market Cap: �.01�BStock: 1�.3�EPS 1.03

Financial Performance

Kid lifestyle changes including age compression, increasing popularity of video games, and overall increase of activity choices are having a profound effect on the top and bottom line performance of Mattel.

When compared to its industry (Recreational Products), sector (Consumer Cyclicals), and the S&P 500, Mattel has underperformed financially. Mattel has a lower P/E ratio for the trailing twelve months compared to the Industry, Sector, and S&P 500. For the most recent quarter and trailing twelve months, Mattel’s sales have been lower than that of the Industry, Sector, and S&P 500. For the trailing twelve months, the Net Profit Margin of Mattel is below that of the Industry, Sector, and S&P 500 in sales.


Core Competencies

After examining Mattel’s corporate, product, and brand evolution over the past sixty years, including both successes and failures, five core competencies surfaced which can be leveraged in future product and service development:

• American Girl Experience Creation• Infant/Toddler Product Development• Strategic Partnerships• Brand Management• Market Intelligence

American Girl Experience Creation

Infant/Toddler Product Development

Strategic Partnerships

Brand Management

Market Intelligence

Brand Portfolio

Core Competencies

Company

Company

Brand

•Barbie•Hot Wheels•Magic 8 Ball•Rock‘em Sock’em Robots•UNO•Scene It?•Tyco R/C•Vidster•ello•My Scene•Polly Pocket•Disney Princesses•Max Steel

•Baby Playzone Kick & Whirl Carnival•Peek a Blocks•See ‘n Say•Little People•Learn through Music Plus•InteracTV DVD Based Learning System•Dress-up Adventure Dora•Brilliant Basics Snap-Lock Beads•Link-a-doos Take-Along Playquilt•ESPN Shot Block Basketball•Rescue Heroes•Pixter•View-Master

•Historical Characters•Jess: Girl of the Year•Just Like You Dolls•Bitty Baby•Bitty Twins•Home Party Kits•Bath and Body Care Products•Character Books

Product Portfolios


According to both analysts and insiders, Mattel has the necessary in-house skills and research technology to identify trends and new opportunities. The real issue, according to corporate insiders, is execution. In the past, when important information was provided, it wasn’t given the necessary priority, it was rejected as not being important, it was lost during personnel shifts, or it wasn’t applied correctly during execution.

Fortunately, Mattel has been especially successful in developing infant/toddler products under their Fisher Price brand, and they’ve done a fantastic job crafting a rich compelling experience for girls through American Girl. By leveraging the knowledge that exists in these two brands, their ability to manage power brands like Barbie would be further strengthened.

Not having focused on generating original content in years, Mattel has relied heavily on establishing strategic partnerships. Granted, licensing is especially crucial, given the appeal of multi-channel entertainment to kids, but Mattel might consider seeking more of a balance between licensing and original content creation.

Core Competencies


Innovation HistoryCompany / Competitors Comparison

Throughout its history, Mattel has had fewer, larger superhits, compared to its competitors. Rather than striking a balance between ongoing new product development and brand extension, they choose to focus heavily on extending their primary brands, leaving them without other established product lines to depend upon.

As illustrated in the chart below, Mattel’s stock price rose through the early to mid 1990’s, due to the sale of non-toy related ventures, licensing, and toy-related acquisitions. By the late 1990’s, Mattel’s stock price declined significantly because of the growing popularity of video and online gaming, a trend that continues to impact their profitability today. Also important to note is that all of their non-toy related acquisitions and internal development ventures have failed, a definite challenge as they look for ways to make themselves more relevant to today’s Tween market.

Stock

SuperhitsCompetitors

Superhits

Key Innovations

Successful Innovation

Unsuccessful Innovation

On Going Innovation

1950 1960 1970 1980 1990 2000

Competitors Superhits

-outside traditional toy industry-inside traditional toy industry

Mickey Mouse Club

Barbie Doll

Enter educational market

World of the Young acquisition strategy

Enter electronic games market

He-Man

Revives with Disney

Fisher-Price joins Mattel’s family

Cabbage Patch Dolls

Tickle Me Elmo

Mattel complete Learning Co. acquisition

Global Manufacturing Principles (GMP)

My Scene brand launches.

The Barbie Couture fashion line

License agreement with VUP and THQ

Nickelodeon Licensing Agreement.

American Girl (Pleasant Co. acquisition)

Joint venture with BANDI

Hot wheel

Mr. Potato Head

Play-Doh

Silly Putty

Etch-A-Sketch

Easy Bake OvenTwister

Star Wars action figuresTrivial Pursuit

Pictionary Pokemon

Furby

Sale of all non--toy related subsidiaries

Lineage

Sony PS2

Xbox

Sony PSP

Xbox360

LegoMindstorm

NXTNintendo

GameBoy


Innovation AnalysisDoblin Ten Types of Innovation


Mattel Innovation AnalysisTen Types of Innovation

Higher hit rates in multiple types of innovation lead to market leadership.

Decreased innovation rates over past 40 years results in slow growth and loss of marketshare.

Finance

Process

Offering

Delivery

Mick

ey M

ouse

Club

195

5

Barb

ie 1

959

Wor

ld of

Youn

g Acq

uisitio

n 19

68

Hot W

heels

196

8

Tickle

me E

lmo

199

5Glob

al M

fg. P

racti

ces

1997

Nickelo

deon

199

6

Cabb

age P

atch

1995

Ban D

ai Jo

int V

entur

e 19

86

Walt

-Disn

ey A

llianc

e 19

88

He-M

an 1

982

Fishe

r-Pric

e Acq

uistio

n. 1

993

Electr

onic

Games

197

7

Lear

ning

Compa

ny A

cquis

ition

1999

Amer

ican G

irl Ac

quisi

tion

1998

Vive

ndi a

nd TH

Q 2

001

My S

cene

200

2

Barb

ie Co

uture

Fash

ion 2

003

See ‘

n Say

196

8

BusinessModel

Networkingand Alliances

EnablingProcesses

CoreProcesses

ProductPerformance

ProductSystem

Service

Channel

Brand

CustomerExperience

Higher Innovation Rates 1955 to 1982 lead to market leadership

Product Innovation last 40 years primarily from acquisitions

Product Innovation first 30 years organic

Leverage American Girl innovation competency

How has Mattel innovated throughout its history?

Organic Innovation

Innovation through alliance or acquisition

Doblin’s 10 Types of Innovation identify ten distinct areas where companies can focus to develop innovative new offerings. Market leaders typically have strongholds in 3-4 innovation types, with new Business and Networking models offering the most bang for the buck and Product Performance offering the least value.

Higher innovation rates from 1955 to 1982 led Mattel to market leadership, with most of their offerings being developed in-house during that period. Once their development efforts slowed, they chose to acquire or partner with others to generate new ideas. This approach has resulted in slow growth and loss of market share over the past four decades.


Distributors

3rd party Retailers

eRetailersand Physical

3rd Party Manufacturers

ContentOwners

Raw Material Suppliers

RawMaterials

RawMaterials

$

$

$

$

$$

$

$

Toys

Toys

Toys

Toys

Toys

Toys and Retail experiences

LicensedContent

$204M

Walmart $1.0BToys R’Us $.8BTarget $.5B

-product sites-small eCommerce

-MyScene Clubs

Customers

KidsParents

$5B

Toys and experiences

Toys and experiences

Attention & Loyalty

Advertising $646M

Parts

MattelMattel

Manufacturing

Mattel Web Channel

AmericanGirl Place

$$$

Current Value Web

Mattel’s existing value web illustrates that they have vertically integrated operations, but this is only true for their Barbie and Hot Wheels brands. (Manufacturing for other branded products is outsourced.) This level of integration may actually be problematic since trying radically different approaches is challenging when plants aren’t designed with flexible manufacturing in mind.

Also important to note is the significant amount of money paid to content providers for licensed content. At this time, Mattel produces a very limited amount of original content, a potential opportunity area for them which could have significant financial benefits.

Although Mattel spent $646 million on advertising in 2005, they don’t seem to have enough direct contact with kids to build relationships with them. How can they become as relevant as Nickelodeon?

With regard to retailers, Mattel relies heavily on Wal-Mart, Toys R’ Us, and Target for widespread distribution. These big box retailers have tremendous purchasing power and can leverage significant control over the types of products sold through their channel and the cost of those products.


Most Recent Digital Products

AcceleRacers introduced in �005 through vehicles, sets, and collector cards, complemented by new Cartoon Network cartoon, micro-episodes, and activities.

Pixel Chix are 3D environments for LCD virtual friends. When the environments are hooked together, the LCD characters interact with each other. Introduced in �005.

Vidster Digital Video Camera comes with 3-step photo and video editing software. It holds �-8 minutes of video and has 3�0x��0 resolution.

Mattel continues its move into digital products with AcceleRacers, Pixel Chix, and Vidster.

AcceleRacers is an excellent example of a rich user experience. It provides engaging physical and digital products that encourage collecting and competition, while ensuring the content stays fresh.

Pixel Chix, a less rich user experience, combines physical and digital technology by placing an LCD “friend” in a physical environment. Digital “friends” can interact with each other, creating a sense of connection and community for girls.

The Vidster Digital Video Camera is a simplified video camera with editing software. It’s most appropriate for young children who want to make movies but aren’t able to operate mini-DV video cameras yet. (Older kids probably won’t be satisfied with the resolution level, limited zoom, and limited storage capacity based on feedback.1

Source: http://blogs.pcworld.com/archives/000��8.html


Most Recent Experiential Efforts

Mattel has been actively strengthening the reach of its power brands, Barbie, American Girl, and Hot Wheels, by creating more extensive experiences for kids and their parents. They’ve extended the brands into made-for-tv movies, DVD movies, live stage shows, and real world exhibits.

The Barbie and American Girl movies have proven to be highly successful while both brands’ stage shows continue their runs. The success of the Hot Wheels museum exhibit is more difficult to gauge, given its location with other museum exhibits.

American Girls Revue Live Musical

Barbie full-length movies on DVD

American Girls/WB made-for-tv movies

Barbie Live in Fairytopia, the brand’s first live touring stage show

Hot Wheels Hall of Fame exhibit at Peterson Automotive Museum

User Research


User ResearchTweens

Primary research in the form of internet surveys and observational research was conducted with kids, age 7-12, in an effort to understand the Tween market. Both the surveys and the observational research confirmed the trends found through secondary research.

Due to age compression, growing familiarity with technology, and the desire to create content, “toys” are seen as things that “little kids” play with.

To illustrate this situation, two survey questions and their respective answers are included below:

Q: What was the last cool thing that you were bought or given?

A: Playstation video games, a Coach case and lanyard for an I-Pod Shuffle, Nintendo DS, snowboard, skateboard, and a cool pair of earrings.

Q: What’s the next cool thing you’d like to buy or receive, without thinking about cost?

A: Sony PSP, NintendoSP with Nintendogs, In-home movie theatre, Playstation video game, I-Pod, Mini video camera, Xbox 360, and a good book.

New findings that surfaced during observational research include:

• Kids discovering new character content in obscure places on the web, in addition to finding content through mainstream media• Kids learning how to use new technology from each other, as well as from older kids and adults• Mastery being a form of currency, and kids striving to be perceived as experts• Kids interacting with technology wherever they go, using mobile gaming systems, portable DVD players, mp3 players, etc.• Importance of collecting and displaying physical objects or artistic creations

Observational Research

Mike9 years oldIthaca, NY, USA

Portable DVD, headsets and cd case

Creating short animation movies

Characters created and built

Sketch book

Jessee, Bob and Mark7,8 and 10 years oldChicago, IL, USA


Lisa8 years oldChicago, IL, USA



Research Insights & Principles

Insights

1. Video game sales are rising while traditional toy sales are flat.

�. Opportunities exist for toys which combine physical activity and at least one of the following:

- advanced technology- group play- sedentary gaming- educational opportunities- mobility (no set environment)

Principles

Identify a viable strategy(s) for Mattel that allows them to participate in the video/online game market while leveraging their core competencies.

Generate and develop play concepts/systems/experiences which combine physical activity with:

- advanced technology- group play- sedentary gaming- educational opportunities- mobility (no set environment)

Principles

Explore new technologies, and generate play concepts/systems which provide kids with unique content creation and sharing experiences.

Consider establishing an edgy sub-brand, distanced from Mattel, which develops more mature content for kids who have outgrown Mattel’s traditional products.

Look for opportunities to introduce additional play value through the incorporation of technology into existing products.

Insights

1. Technology has empowered children, giving them the ability to communicate, create, and share content with others remotely.

�. Kids are getting older younger so traditional toys are becoming outdated at a faster rate. To combat this trend, some traditional toy manufacturers are developing edgier products to appeal to the “older” market.

3. Kids are exposed to technology at younger ages, which means that it becomes more integral to all facets of their lives.

Industry

User

Based on extensive primary and secondary research, four categories of insights were identified: Industry, User, Technology, and Mattel. Leveraging these insights, design principles and recommendations were crafted to provide focus for the Concept Development phase.


�. Kids have very limited free time for play so they multi-task and look for fun when using any device they have.

5. The rate of childhood obesity continues to rise, increasing the importance of promoting fun physical activities.

�. Children’s performance in school is dropping, but kids are highly motivated to master fun things that other kids value.

�. Kids have fewer siblings, decreasing the number of physically available playmates, which is further reinforced by kids participation in instant messaging, emailing, blogging, etc.

Introduce games that can be played in varying lengths of time, to accommodate their hectic schedule.

(See Industry Principles)

Generate and develop play concepts/systems/experiences which disguise learning and emphasize fun.

Investigate and develop new approaches to remote group interaction and play.

Insights

1. Involving users in game development and adaptation inflluences the game’s success.

�. New types of controllers are expanding user interaction options with video games.

3. Games are being played in the physical world, using electronic technology to extend their functionality.

Principles

Provide opportunities for kids to participate in the development or evolution of online games or other media content.

Explore technologies that allow kids to become more immersed in play environments.

Investigate and incorporate technologies and concepts that allow physical toys to interact with virtual content.

Technology

Principles

(See Industry Principles)

(See User Principles)

Insights

1. Mattel has a very limited presence in specialties that are becoming more popular with kids.

�. Mattel is the leading toy manufacturer for kids <1 to 8 but quickly loses market share with kids who are older.

Mattel


3. Sales for American Girl and Fisher-Price are increasing while sales are declining for Mattel, with one primary reason being sales declines in Barbie.

�. Mattel has the necessary skills and technology to identify trends and opportunities. Ability to execute is the problem.

5. All non-toy related acquisitions and internal development ventures have failed.

�. Mattel focuses heavily on extending their primary brands, as opposed to expanding new product development efforts, leaving them without other established product lines to rely upon.

�. All of Mattel’s early innovations were developed internally, but they’ve relied heavily on acquisitions and licensing over the past �0 years.

8. Mattel’s offerings span a very limited number of innovation types.

(See User Principles)

Conduct an extensive audit to determine why Mattel has such difficulty capitalizing on trends and executing in non-toy industries.

Evaluate Mattel’s balance between management of existing brands and new product development. Recommend focus readjustment, as necessary.

Require that a certain percentage of content be developed internally so Mattel can drive more of its innovation efforts.

Look for opportunities to expand the number of innovation types addressed through Mattel’s efforts.

Concept Development


Concept Generation

From Design Principles to Themes to Concepts

The design principles which evolved from the research insights were clustered, and themes emerged. Six sets of axes were developed (see below) to address each theme, with every axis having an opposite pair of descriptors assigned.

Workshop

group

co-creation

physical

hi-tech

multichannel

anywhere

individual

low authoring

sedentary

low tech

single channel experience

fixed location

Candidate axes for a 2 by 2 matrix

ANYWHERE

PLAY+

HI-TECH

Images compiled to provide more context to workshop participants.

Rather than leveraging 2x2 matrices for concept generation, the team provided each brainstorming group with 3-4 attribute combinations, to help them generate a richer range of concepts. Determining theme combinations was done intuitively, with the goal being to pair themes that could have interesting or important relationships.

Group 1 Group 2 Group 3 Group 4

• Hi-tech• Anywhere• Physical Activity

• Physical activity • Traditional • Networked

• Physical/Virtual• Exploring Identity• Multimodal fun

• Play+ • Physical/virtual• Co-creation• Group Play

Group brainstorms concepts which involve the hi-tech, anywhere and physical activity themes.


Group dealing with these themes: play+, physical/virtual, cocreation and group play.

workshop theme coming up with ideas related to “physical”, “traditional” and “networked”

Process

The workshop session was divided into three parts. The first activity required teams to generate concepts, based on their set of assigned themes. The second activity encouraged teams to consider how their three most promising concepts could be delivered, from a brand and customer experience perspective. To convey how their offering might function, teams role played some aspect of their concept as the third activity.

•Product Performance

•Product System

•Service

How you design your core offerings

How you link and/or provide a platform for multiple products.

How you provide value to customers and consumers beyond and around your products

OFFERINGS

•Channel

•Brand

•Customer Experience

DELIVERY

How you get your offerings to market

How you communicate your offerings

How your customers feel when they interact with your company and its offerings

Concept Development (30 minutes)

During concept generation, participants were encouraged to combine the themes provided and to talk aloud. For inspiration, themed imagery was made available. This imagery suggested potential product and service-based offerings that could be used as springboards to more unique offerings. As concepts were sketched, they were numbered and posted on nearby walls. At the end of concept development, participants voted for their top three concepts, and those were used in the second exercise.

Concept Delivery Development (30 minutes)

For each of their top three concepts, the brainstorming teams generated concept delivery ideas related to channel, brand, and customer experience. These categories were inspired by Doblin’s 10 Types of Innovation. After generating delivery ideas for each concept, the team voted for the concept system they wanted to share with the class.

Role Play (20 minutes)

Each team crafted and delivered a “play” which demonstrated their concept and how elements of the system interacted.

Workshop participants representing their concept


Concept Evaluation

Following the Concept Generation workshop, brainstorming ideas were sorted into categories and category titles were assigned. Concept category titles were then entered into Excel, and each category was evaluated against all others using Insight Matrix, a proprietary tool developed at the Institute of Design. The tool was used to determine which categories were most closely related to one another. (This knowledge is helpful when assembling strategy components.)

On a separate spreadsheet (see below), the value of each concept category was evaluated using the Design Principles and Mattel business considerations as criteria. Each criterion was weighted based on its level of importance. Concept categories were then rated against the criteria, yielding weighted scores. Weighted averages were then calculated, highlighting the categories that were most important and most feasible for Mattel to explore.

Mattel Concept Scoring Matrix

Co

ncep

t C

ate

go

rie

s

Inm

ers

ive g

roup e

xperience

Vid

eo s

tory

telli

ng

Virtu

al agents

/pets

/toys

Hi-te

ch m

orp

hin

g

media

/music

/art

cocre

ation a

nd feedback

Colle

ction m

anagem

ent

Tra

ditio

nal &

technolo

gy

Incentive for

exerc

ise

Fashio

n a

nd c

ocre

ation

media

exchange a

nd p

aym

ent

physic

al activity/m

aste

ry

haptic feedback c

ontr

olle

rs

Scie

nce c

reation

Connecting p

eople

Learn

anyw

here

on the g

o

Fanta

sy a

nd a

spiration

Location b

ased a

nd p

hysic

al

indiv

idual physic

al in

mers

ion

Inm

ers

ive g

roup e

xperience

Vid

eo s

tory

telli

ng

Virtu

al agents

/pets

/toys

Hi-te

ch m

orp

hin

g

media

/music

/art

cocre

ation a

nd feedback

Colle

ction m

anagem

ent

Tra

ditio

nal &

technolo

gy

Incentive for

exerc

ise

Fashio

n a

nd c

ocre

ation

media

exchange a

nd p

aym

ent

physic

al activity/m

aste

ry

haptic feedback c

ontr

olle

rs

Scie

nce c

reation

Connecting p

eople

Learn

anyw

here

on the g

o

Fanta

sy a

nd a

spiration

Location b

ased a

nd p

hysic

al

indiv

idual physic

al in

mers

ion

Criteria Weights

Industry Identify a viable strategy(s) for Mattel

that allows them to participate in

the video/online game market while

leveraging their core competencies.

Enter Video-Game

market

4 2 0 2 2 2 0 0 4 2 2 4 4 2 2 2 2 4 4 8 0 8 8 8 0 0 16 8 8 16 16 8 8 8 8 16 16

Generate and develop play concepts/

systems/experiences which combine

physical activity with:

- advanced technology

- group play

- sedentary gaming

- educational opportunities

Physically engaging

experiences

5 4 2 0 0 2 2 4 4 0 0 4 4 0 0 2 0 4 4 20 10 0 0 10 10 20 20 0 0 20 20 0 0 10 0 20 20

User Explore new technologies, and generate

play concepts/systems which provide

kids with unique content creation and

sharing experiences.

Empower kids to

create and share

content 5 2 4 2 2 4 2 0 0 4 2 0 0 4 4 0 2 0 0 10 20 10 10 20 10 0 0 20 10 0 0 20 20 0 10 0 0

Consider establishing an edgy subbrand,

distanced from Mattel, which

develops more mature content for kids

who have outgrown Mattel’s traditional

products.

Subrand with

mature content

(Edgy products) 3 4 0 2 2 2 0 0 0 4 4 2 2 2 0 0 2 0 2 12 0 6 6 6 0 0 0 12 12 6 6 6 0 0 6 0 6

Look for opportunities to introduce

additional play value through the

incorporation of technology into

existing products.

Revamp traditional

toys and games

1 2 0 0 4 0 4 4 0 2 0 2 4 2 0 0 2 2 2 2 0 0 4 0 4 4 0 2 0 2 4 2 0 0 2 2 2

Introduce games that can be played

in varying lengths of time, to

accommodate their hectic schedule.

Time adpatable toys

2 0 2 4 2 4 4 2 0 2 2 0 0 0 4 2 0 2 0 0 4 8 4 8 8 4 0 4 4 0 0 0 8 4 0 4 0

Generate and develop play concepts/

systems/experiences which disguise

learning and emphasize fun.

Fun Learning

3 4 2 2 2 2 0 0 0 0 0 4 0 4 0 4 0 2 2 12 6 6 6 6 0 0 0 0 0 12 0 12 0 12 0 6 6

Investigate and develop new

approaches to remote group interaction

and play.

Networked games

4 2 0 4 0 2 2 0 2 4 4 2 2 2 4 4 2 4 4 8 0 16 0 8 8 0 8 16 16 8 8 8 16 16 8 16 16

Technology Explore technologies that allow kids

to become more immersed in play

environments.

Inmersive

technologies 3 4 0 0 0 0 0 0 2 0 2 2 4 0 0 0 2 2 4 12 0 0 0 0 0 0 6 0 6 6 12 0 0 0 6 6 12

Investigate and incorporate technologies

and concepts that allow physical toys to

interact with virtual content.

Advanced interfaces

4 4 2 4 4 4 2 2 4 2 2 4 4 0 2 2 0 2 4 16 8 16 16 16 8 8 16 8 8 16 16 0 8 8 0 8 16

Subtotal 28 12 20 18 22 16 12 16 20 18 24 24 16 16 16 12 22 26 Average weighted

score2.941 1.412 2.059 1.588 2.412 1.412 1.059 1.941 2.059 1.882 2.529 2.412 1.647 1.765 1.706 1.176 2.294 2.765

100 48 70 54 82 48 36 66 70 64 86 82 56 60 58 40 78 94

Core competencies 0 2 2 0 2 2 2 0 4 0 0 0 0 0 2 4 0 0

Ease of implementation 0 4 2 2 4 4 4 2 4 0 2 2 2 2 0 4 0 0

Uniqueness 4 0 2 4 0 2 0 2 0 2 2 0 0 2 0 0 4 0 Combined Score 4.275 3.412 4.059 3.588 4.412 4.078 3.059 3.275 4.725 2.549 3.863 3.078 2.314 3.098 2.373 3.843 3.627 2.765

Rank 3 10 5 8 2 4 12 11 1 16 6 14 18 13 17 7 9 15

1.33 2 2 2 2 2.67 2 1.33 2.67 0.67 1.33 0.67 0.67 1.33 0.67 2.67 1.33 0

Rank of concepts after weighting the votes.Concepts scored based on how much they support each design principle

System Development


System Overview

Having determined each concept category’s “roll-out” priority, based on ease of implementation and fit with core competencies, the concept categories were then deconstructed and reassembled into strategic sub-systems.

The complete system, which addresses future product and service innovation areas for Mattel is illustrated in the diagram below. On the following pages, each system sub-element is described in more detail.

Traditional Toy/Game Enhancement

High-Tech Toy Development

Imaginative Exploration

Content Creation and Community

Mobile Networked Entertainment

Physical Activity Immersion


Subsystem Components

Traditional Toy/Game Enhancement is comprised of two categories: Technology Extension and Collection Management Extension.

Technology Extension refers to traditional toys and games that have technology incorporated into them to extend their functionality. Examples might include a Frisbee with an integrated video camera, baseball cards with bar codes, or a Monopoly board game that emits electronic sound effects when players land on particular squares.

Collection Management Extension is a website that extends the play value of physical collections by giving kids the ability to manage their collections (e.g. Barbies, Hot Wheels cars, etc.) online. As an example, the website could help kids organize, swap, value, and potentially sell items in their collection. It could also highlight those toys that are limited editions, rare, sought by others, or new releases, as well as wish list items.


Collection Management Extension


High-Tech Toy Development is comprised of three toy categories with different levels of presence in the “real” world: Primarily Physical, Primarily Virtual, and Physical/Virtual.

Primarily Physical refers to stand-alone toys that are heavily dependent on electronics. Examples of this category would include a remote-controlled monster, an electronic guitar with pre-stored songs, or musical motion sensor bracelets which allow kids to create music by moving their arms and legs.

Primarily Virtual would include toys where the primary play value is on-screen, whether that be on a computer or hand-held device. Existing examples include Tamagotchis, Sony PSP games, and electronic diaries.

Physical/Virtual refers to high-tech toys or games that have a balanced presence in both the real and on-screen worlds. Existing examples in this category include Dance Dance Revolution, wireless motion-activated gear that kids wear to control on-screen super heroes, and Pokemon cards with barcodes that can either be used to play a card game or scanned into the computer for online competitions.

High-Tech Toy Development


Primarily Physical


Imaginative Exploration is comprised of three categories: Scientific Exploration, Fantasy and Aspirational Exploration, and Competition Forums.

Scientific Exploration refers to toys and games with science and learning as primary components. These toys or games could be high or low tech. Product examples might include engineering kits which allow kids to create various structures and then post them for web-based competitions. Kits with super-sized components could also be developed which allow kids to build and race vehicles, analogous to go-cart or radio-controlled vehicle racing. Concepts could be paired with a web service that encourages Tweens to work together, emphasizing teamwork to solve engineering problems.

Another concept example might include learning about animals by morphing two creatures together. Kids would learn about each animal and its characteristics while forming a new mutated species. Again, opportunities would exist for physical or virtual competitions.

Fantasy and Aspirational Exploration involves toys and games which allow kids to become someone they admire including rock stars, movie stars, athletes, or parents. Fantasy could also involve role-playing adventures, analogous to Dungeons and Dragons. Games might leverage technology to create both physical and virtual experiences which enrich the exploration.

Competition Forums could consist of in-person, organized contests as well as virtual competitions. As an example, they could take the form of actual races or rely on preference voting.

Imaginative Exploration


Scientific Exploration


Content Creation and Community is comprised of three categories: content creation, social networking, and exchange of content.

Content Creation refers to games or toys in which tweens develop original content. The desire to create their own content and share via blogs and other web-based outlets is becoming increasingly more popular. Types of content generated include movies, music, animated cartoons, art, fashion, etc. These types of activities empower kids to develop story lines themselves rather than having the story line provided by the toy or game.

Social Networking involves developing networks where Tweens can interact with each other based on common interests, values, or activities. Networks could include websites, wireless technology, or other near-term networking technologies. Examples in today’s world include Flickr and MySpace.

Content Exchange, closely related to social networking, refers to exchanging concepts, creations, or representations of common interests. For example, kids might share original music on Mattel’s music club website. They could also “beam” information, like a sound byte from their favorite music video, to each other.

Subsystem ComponentsContent Creation and Community

Content Creation

Exchange of Content


Two categories make up Mobile Networked Entertainment: Physically Active Networked Experiences and Enroute Networked Experiences.

Physically Active Networked Experiences includes toys and services that leverage GPS or positioning technology to provide entertainment that blurs the division between the digital and physical worlds. Examples include Tiger Telematics’ Gizmondo, Mopius’ RealReplay, and Your World Games’ The Shroud.

Enroute Networked Experiences includes wireless toys and services that allow kids to learn and play while on the move. A future device could combine a PDA like device with plant and animal imaging identification technology. After a real plant or animal is identified through an optical reader, in combination with imaging software, the device could then download related information from the web. Precursors include LeapFrog’s iQuest and Verizon’s XAPwords.

Subsystem ComponentsMobile Networked Entertainment

enroute


Three categories comprise Physical Activity Immersion: Immersive Play Experiences, Immersive Educational/Mastery Experiences, and Activity Incentives.

Immersive Play Experiences refers to collective and individual experiences supported by technology enabled environments. The experience is multi-sensory and interactive. A precursor is Lazer Maze. Current examples are Amusitronix arcades games and 5W!TS TOMB adventure.

Immersive Educational/Mastery Experiences refers to “smart” toys that assist kids in learning new skills. A “smart” drum set could show tweens how to provide the drum beat to their favorite songs. Examples of physical activity devices include golf analyzer gadgets and Konami’s Dance Dance Revolution.

Activity Incentives include services that encourage activity through the use of rewards or points. An activity incentive service could involve a tween exercising while also earning points that can be applied toward his or her online character. The more he or she exercises, the stronger his or her online character becomes.

Subsystem ComponentsPhysical Activity Immersion

Immersive Play Experiences


New Value Web

Technology Partners

ContentOwners

RawMaterials

Toys

Toys Toys and concepts

Mattel

Mattel Web Channel

Mattel RetailsService

Providers

Mattel Content Development

Distributors

LicensedContent

Content

CommunicationMedium and

Distribution Channel

CompleteShoppingExperience

Entertaining Experiences

BrandExperience

Web-based Offerings

Digitalupdates

3rd Party Retails and

eRetails

-Product Development-Mattel Manufacturing

Joint ventures-MIT media lab-Intel-Hi-Tech partners

Media based Content(Movies, Cartoons, Books )

ManufacturingPartners

Raw Material Suppliers

Manufacturingexpertise

Technology

Customers

KidsParents

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MattelServices

Offerings

Advertising Budget $

Digital toys and game extensions

To re-establish themselves as leaders in the creation of children’s play experiences, Mattel must make some operational and strategic adjustments, as illustrated in this new value web.

Specifically, Mattel must build their competency in content creation, while partnering with niche knowledge communities, to reduce their dependency on external content providers, like movie studios.

Given their limited experience in technology and software development, they must partner with firms who are experts in these areas to more quickly develop technology-infused products and services which provide richer play experiences. Simultaneously, they must strive to learn from these companies since the knowledge is critical to their future success.

Mattel must also establish a web-based dialogue channel with buyers and users which promotes interaction between them via networks, provides hardware and software upgrades, provides creation tools, and sells new products and services.

Finally, Mattel must become more active in providing entertainment experiences by partnering with companies like Disney and NASCAR, supporting activities with appealing products and services, and providing licensed and unlicensed content.


Strategy Roadmap

This implementation roadmap illustrates how Mattel should roll out three key strategy subsystem components over time. (The following pages delve into more detail on each program.) Traditional Toy Enhancement was chosen for development because of its relative ease to execute. Content Creation and Community was selected because of its importance to today’s kids. And Physical Activity Immersion was chosen because of its potential for engaging play in the future.Strategy Roadmaps

Extend products

Product portfolio audit

Manufacturing audit Online marketplace logistics audit

eBay, collector clubs, and technical manufacturing partnerships

Barbie and Hot Wheels collection management website, collector social network, andMattel sponsored collector conventions

Toy & game personalizerPortfolio audit dependentPortfolio audit dependent


Co-creation and Community

Develop future concepts and leveragelatest technologies

Invent new organically developed concepts

Collector cards, toy transporter, American Girl, and newsletter

Collection management website for other collectibles

Web development, socialnetworking, and design/technology strategy

Software engineering,electrical engineering and UI design

Online shopping capability

Web Consulting and IT Strategy partnerships

Adapt existing products

User research, design planning, and tweenresearch capabilities

Multimedia technology capability Innovation science and agent basedmodeling capabilities

Innovation center, American Girl, and tween focused cross, func. team

Leverage human talent or licensing technology from acquisitions and alliances across the organization

Create cross -functional teams dedicated to changesin industry trends

Develop industry/videogames leaders and academic partnerships

Continue to form media and video-gaming alliances.Develop alliance with tech toy leader. Developalliances with other educational institutions.


Concept site prototyping and development

Product development Extend products

Basic immersivetechnologies sourcing

Develop industry/videogames leaders and academic partnerships

Design services Extend incentive services

Cross functional productdevelopment teams

Product development

Develop rewards network

Cross functional virtualcenter team planning team

Create preliminarybusiness plan

Immersive technologiessourcing

Acquisitions/alliances

Collective immersion operations team

Refine and begin to scale

Year 1 Year 2 Year 3 Year 4 Year 5


Concepts

NewCapabilities

OrganizationalChanges

Partnerships

Concepts

NewCapabilities


Partnerships


Advanced immersive technologies sourcing

Concepts

NewCapabilities


Partnerships

Leverage human talent and technology from acquisitions across the company

NewCapabilities


Partnerships

CollectionManagement

TechnologyExtension

Immersive Educational/Mastery Experiences

Individual ImmersiveExperiences

ActivityIncentives

Collective Immersive Experience Concept





Stage 1 (0) Stage � (1 - � years) Stage 3 (� - 5years) Stage � (5+ years)

Concept: Technology Extension

(Dependent upon product portfolio audit)

(Dependent upon product portfolio audit)

(Dependent upon product portfolio audit)- Toy & Game Personalizer (allows kids to choose game piece sets, game board themes, etc.)

Concept:Collection Management Extension

- Collector cards (e.g. Barbie fashions, Hot Wheels car components, etc.) with barcodes

- Toy Transporter (reads barcodes and uploads items into collection)

- American Girl collection management website (charge for valuation)

- Online collector-oriented newsletters

- Barbie and Hot Wheels collection management websites (charge for valuation)

- Mattel collector social network- Mattel-sponsored collector conventions

- Collection management websites for other Mattel collectables

New Capabilities Web development, social networking, technology strategy

Software engineering, electrical engineering, UI design

Online shopping development

Organizational Activities Audit current product portfolio with design/technology/strategy consulting firm to determine which toy/game functionality can be extended with technology or expanded services.

Audit manufacturing processes, facilities, and suppliers with manufacturing consultant to determine level of prowess and opportunity for flexible manufacturing.

Identify and address Mattel online marketplace logistics

Partners Web development consulting firm(s), design/technology/strategy consulting firm, collector clubs

Ebay for trading/selling, collector clubs, technical manufacturing consultant

Ebay for trading/selling, collector clubs

Collector clubs

Competitors Collector clubs (newsletter), cell phone manufacturers (bar code reader), Hasbro

Collector clubs (message boards, conventions), Hasbro


Roadmap



Stage 1 (0-1 years) Stage � (1 - 3 years) Stage 3 (�+ years)

Concept Add co-creation features to existing product lines where applicable

Build out the capabilities of interactive websites such as American Girl and My Scene to include social networking and sharing of content such as stories, music, and fashion. Consider similar idea for tween boys

Build in capability for children to add to storylines of American Girl, My Scene, and other product lines

Bring new organically developed concepts to market with a focus on co-creation, social networking, and sharing

Develop future concepts based on latest user needs, trends, and technology

New Capabilities User-research and Design Planning capabilities.

Multimedia technology capability Innovation science capability

Agent-based modeling capability to predict future scenarios

Organizational Activities Leverage American Girl expertise throughout the organization. Learn from this success.

Leverage human talent or license technology from acquisitions or alliances.

Establish an innovation center part of which is focused on weak signal media trends

Partners Evaluate market and industry leaders to determine potential alliances and acquisitions to enter co-creation, sharing, and social networking spaces

Acquire or form an alliance with one of these players to build this capability

Form a relationship with MIT Media Lab or other similar cutting edge educational entity to learn from and develop expertise in-house

Continue to form alliances in areas such as media, video-gaming

Form an alliance with a technology-oriented educational toy leader

Develop talent recruiting relationships with world class educational institutions.

Competitors Flickr (Yahoo!), MySpace, Google, Microsoft Flickr (Yahoo!), MySpace, Google, Microsoft, Hasbro, Disney, Apple, Electronic Arts, Sony, Vivendi

Roadmap



Roadmap

Stage 1 (0-1 years) Stage � (� - 3 years) Stage 3 (�+ years)

Concept: Individual ImmersiveExperiences

Product development

Leverage existing brands including Barbie and HotWheels

Launch and begin to extend products

Incorporate additional brands

Leverage advanced immersive technologies

Concept: Immersive Educational/ Mastery Experience

Product development

Leverage existing internal educational expertise at Fisher Price and American Girl

Launch and begin to extend products

Develop music related products

Leverage advanced immersive technologies

Concept: Activity Incentives

Product development

Conduct research into possible incentives, i.e. online games, music, clothing

Launch and begin to extend incentive services

Concept:Group Immersive Experiences

Create preliminarybusiness plan

Single concept site: prototypingand development

Refine and begin to scale to other locations

New Capabilities Basic immersivetechnologies sourcing

Develop user research capabilities

Advanced immersive technologies sourcing

Organizational Activities Develop cross functional productdevelopment teams

Leverage human talent and technology from acquisitions across the company

Form cross functional virtual planning team

Partners Develop partnerships with industry/video game leaders and music-focused partners i.e. Philips, Intel, Vivendi, NCSoft

Develop academic partnerships, i.e. MIT Media Lab, Tisch, RCA

Develop rewards network, i.e Nike, Apple, etc.

Competitors Konami, LeapFrog, MMOGs, Dave & Bust-ers, W!TS,

Konami, MMOGs, Dave & Busters, W!TS,


Risks and Uncertainties

For Mattel, the risks involved with expanding their capabilities and pursuing this proposed strategic plan are sizeable and must be carefully evaluated before proceeding. However, the risk they incur by “staying the course” and continuing to focus on their existing core brands is much greater, given the changing lifestyles of kids and the loss of core brand market share. Specific risks and uncertainties associated with this strategic plan include the following:

• Video games are a lucrative market, but Mattel shouldn’t plan to compete with powerful incumbents like EA, Sony, or Microsoft, given their dominance in the field. Instead, Mattel must look for opportunities that allow them to tie physical objects to virtual content, thereby leveraging one of their core competencies. • Mattel does not have extensive talent or experience in fields like mobile technology, networking, web development, software programming, etc. In order to become a market leader in more tech-focused play entertainment, Mattel must either partner with skilled firms or acquire skilled firms as well as hiring talent to build these competencies.

• Mattel is currently perceived as being a “toy brand for kids.” As such, they may want to consider creating a sub-brand which allows them to develop more sophisticated or edgy entertainment without adversely affecting the Mattel name. (Kids might also consider the product more seriously if the Mattel name isn’t prominent.)

• Mattel must look for innovation opportunities beyond product development (refer to Doblin’s 10 Types of Innovation) to build a more defensible position in the industry. • Powerful incumbents exist in the video game space in the form of EA, Sony, and Microsoft. Therefore, they must distinguish their offerings from them rather than compete directly. (It should also be noted that compelling low tech experiences can be just as engaging as those incorporating advanced technology.)

• Mattel has had difficulty leveraging previous non-toy related acquisitions. They should investigate the cause for this and try to proactively prevent such issues in the future.

• It is unclear what the optimal balance of externally generated content vs. internally generated (organic) content should be. This is an area requiring further consideration.

• This strategic plan doesn’t focus specifically on improving processes. However, operational aspects of the business (e.g. manufacturing, outsourcing, supplier relationships, etc.) should be explored for optimization.

• The price of oil continues to rise with industry experts claiming there’s no end in sight. As such, contingency plans should be established to combat this uncertainty. In addition, potential substitute materials should be explored.


Conclusion

Although Mattel is currently being challenged by a shift in children’s lifestyle trends and the growth of increasingly more sophisticated play technology, there is hope. By leveraging their existing competencies while acquiring new capabilities through internal development and partnerships, they should be able to successfully develop relevant products and services for the Tween market, as well as for children of other ages.

Appendix


State of the Industry

Source: NPD

Sales by Category, 2004 - 2005

CATEGORY �00� �005 % Change % Change

Action Figures & Accessories $1.3B $1.3B �

Arts & Crafts $�.5B $�.�B -�

Building Sets $5��.8M $��5.�M 1�

Dolls $�.�B $�.�B -�

Games/Puzzles $�.�B $�.�B -�

Infant/Preschool $3.�B $3.1B -1

Learning & Exploration $3�1.�M $3��.0M 5

Outdoor & Sports Toys $�.8B $�.�B -3

Plush $1.5B $1.3B -15

Vehicles $�.0B $1.8B -8

All Other Toys $�.�B $�.5B -�

TOTAL TRADITIONAL TOY INDUSTRY $��.1B $�1.3B -�

Total Video Games $�.�B $10.5B �

Within the traditional toy industry only the categories Action Figures & Accessories, Building Sets, and Learning & Exploration increased between 2004 and 2005. After Video Games, Infant/Preschool and Outdoor & Sports Toys, and Dolls represent the three largest categories.

Documents

Mattel Final