1. Executive Summary
Ravensburger is a toy and publishing company from Ravensburger, Germany that operates primarily in the American and European market. To evaluate the feasibility of entering a new market, We will analyse the companies current resources and capability, analyse the foreign markets characteristics and economic and political situation, and finally propose an entry strategy to the new market.
Engaging in foreign investment will require resources and competencies to successfully enter a new market. The majority of Ravensburger’s toys are manufactured in Germany and the Czech Republic. In recent years Ravensburger has put a great focus on expanding their brand through acquisitions. Some of these include the American company WonderForge, that focuses on character-specific games and the Swedish company, BRIO who are well-known for their wooden toys. Ravensburger has continuously worked to share their products with other parts of the world, having an office in Hong Kong and shipping to countries such as Australia. The company has also shown interest in the American market, first establishing themselves there through a subsidiary and then through two acquisitions: WonderForge and their most recent one, ThinkFun in 2017.Through these acquisitions Ravensburger has demonstrated that they have the capabilities and the resources to expand.
By establishing themselves and expanding in North America, we would recommend an expansion to South America, more specifically Brazil. This would allow Ravensburger to place themselves as the first European country in the market. We also see this expansion as a worthwhile endeavour due to conclusive evidence that the economy has improved substantially, leading to an increase in GDP and a decrease in unemployment. We believe through an equity investment in Brazil, Ravensburger will be able to achieve a sustainable competitive advantage. This can be created by partnering with an existent company in Brazil who is already familiar with the cultural and political landscape and can share tacit knowledge on the industry as a whole with Ravensburger.
Engaging in the Brazilian foreign market will allow Ravensburger to grow as a company and and use it as an entryway for them to enter the South American market.
2. Introduction
Ravensburger been around for a long time and have established themselves as the European market leader in puzzles. The business is also quite prominent in the toy manufacturing business and publishes business with a focus on youth and children’s books. Additionally the company sells arts and crafts and science kits. This large variety of products allows them to connect with a large customer base and sets them apart from those competitors that specialize only on a specific division. Ravensburger has established a considerable global presence in countries such as the United States, Hong Kong, and Sweden. For the future of its global expansion, we will analyse a foreign market for possible entry. In this paper, we will cover Ravensburgers capabilities, and analyse a foreign market in regards to its market characteristics, its economic trends, and possible economic and political risks. Following is an account of considerations for entering the new market along with a foreign entry strategy for Ravensburger.
3. Ravensburger Resources and Capabilities
Ravensburger has an arsenal of resources that allow it to distinguish itself from its competitors in the same markets. Its history and developments cements itself as a classic toy company with consumers of all ages.
3
3.1 Resources
The company’s acquisitions such as the one of the Swedish company BRIO in 2015 or the most recent acquisition of ThinkFun in 2017, has helped Ravensburger to expand their customer base and add well-known brands to their family which continue to operate under their former name.
With regards to competitors in the industry, Ravensburger has plenty. The biggest to date are LEGO and Hasbro, both American companies adept in multiple submarkets in the toy industry. LEGO bases all their products around their flagship product of plastic construction toys and are active in film and television, video games, board games, books and magazines and Children’s clothing. In comparison to LEGO, Ravensburger does not have one consistent theme throughout their products as they are know for a large selection and the game designs of their acquisitions’ products compliment the overall assortment. Ravensburger also offers more STEM and Arts and Crafts related games which enables them to be associated with more educational games. Hasbro on the other hand focuses on toys and is the world market leader in board games. If we place these two companies in juxtaposition, it is clear that Ravensburger is active in markets that are yet to be explored such as STEM related games and youth and children’s books.
Ravensburger especially accentuates their desire to include everyone across four generations in their workforce: baby boomers, Generation X, Y and Z in their company, which gives them certain insight, competencies, and skills that other companies with an age demographic of between 30-50 year-olds might not have. 62% of the Ravensburger ‘family’ as they coin it, is female and half of the staff works abroad(Ravensburger Managing Board, 2018).
Ravensburger AG is the European market leader in puzzles, it is very well recognized in its origin-country, Germany. The blue logo is very well-known and is synonymous with success. Because of their position in the puzzle and game industry, the brand value is unique therefore rare, very costly and not easy to imitate due to economies of scale, and can exploit their position due to the value of their brand.
By acquiring a number of companies such as BRIO and WonderForge and keeping most of the creative team of the company, Ravensburger can take advantage of the certain set of skills such as BRIO’s knowledge in making wooden toys or WonderForge’s adeptness in creating character-specific board games. This can set them apart from their competitors as they can offer high-quality specialized products that employees have been adept in making. Additionally the companies that Ravensburger have acquired have created their own reputation and brand and by allowing them to keep their name, their loyal customers will continue to recognize the brand to company’s advantage.
3.2 CSR
Ravensburger as a renowned brand in Germany is well aware of the fact that its production and company operations have an impact on the environment. To give back to the society in a different way the company created the project “Seelenvogel”, translated soul bird, which offers immigrants a smoother transition into society through art forms such as workshops and films. The MNE was rewarded for its efforts by receiving a CSR award in the state it operates in Germany, Baden-Württemberg in 2018.
3.3 Global presence
Over the years Ravensburger AG has been able to establish itself as a worthy competitor worldwide in the toy and board games industry. We were able to observe that the company possess a big presence with eleven subsidiaries operating under the Ravensburger name in western Europe alone, one location in Asia and more recently in the United States. Through BRIO the company also expanded to a number of locations in Scandinavia, France and two locations in Japan. According to the database Orbis, Ravensburger owns 24 subsidiaries worldwide. Over the past years, Ravensburger AG has worked on grounding their position in the United States through acquisitions of ThinkFun and WonderForge, both companies that are very familiar with the ins and outs of the American market.
Ravensburger’s influence in Asia is quite small, as Ravensburger and BRIO both only have one location to account for in Hong Kong. The company also exports to Australia and South Africa, but the South American market is still untouched.
4. Foreign Market Analysis
In the following part we will discuss the economic and political landscape of Brazil. This will include the structure of formal and informal institutions, the economic trends in the past years and an overview of the political and macroeconomic situation within the country.
4.1 Brazilian Market
The possible new foreign market we advise Ravensburger to enter is the Brazilian market. The Brazilian market provides multiple opportunities that can be exploited due to an unpursued toy market by the European toy companies. Until now only local sellers and North American companies have situated their production in Brazil. Moreover, other companies only import toys in this country, without having engaged in foreign direct investment. The main reasons we suggest Ravensburger to enter Brazil through foreign direct investment is that no European company has ever engaged in FDI there, and in the last decade we have been able to observe a steady growth in the population. More and more families are having children which increases the number of potential customers for Ravensburger (Brazil: South America’s growth market, n.d.) Furthermore, Brazil is part of the top 10 widest toy markets in the world.
Figure 1: Brazilian Toy Industry Data
According to Figure 1, in addition to what has been stated before, not only the economy has been benefiting by the toy industry, but in the Brazilian toy industry ethics and social responsibility seems to be essential. In the past 27 years, no major accidents have occurred and the toy industry has not been involved in any conflicts with environmental agencies. Ravensburger, by entering the industry, would also show that it pursues markets where social responsibility is valued and appreciated. This could lead to a further strengthening of the brand.
4.2 Formal and Informal Institutions
When an MNE like Ravensburger needs to enter foreign markets, it needs to deal with formal and informal institutions which shape the business environment in every country. If a company is aware of rules, regulations, laws, and ethical requirements of a certain country, they might be able to exploit this information. This would give them a competitive advantage over companies that do not conduct research into this beforehand. As Brazil is one of the BRIC countries and is defined as an emerging economy. Its formal and informal institutions continuously change and adapt concurrently with the business environment, identifying Brazil as a “transition economy”.
In the past decade, Brazil has been more open towards FDI, thanks to a more liberal government that has been incrementing and favouring the entrance of multinationals from all over the world. Less restrictions and regulations have been imposed on foreign companies. Therefore, Ravensburger would not find any major regulatory obstacles in investing in Brazil, moreover tariff and non-tariff barriers have been diminished or completely eliminated. In the late 1990’s, Brazil’s Central Bank simplified the process for inflows and entrance of FDI (Da Motta Veiga, 2004). In addition to it, they started to lower administrative costs for investments. Throughout the 1990’s, a new entity (SIPRI) inside the Ministry of Foreign Affairs, was also set up to increase and promote FDI and technological know-how (Da Motta Veiga, 2004). In general, regarding formal institutions, Brazil has embodied an investment and market liberalization process which has started in the 1990’s and nowadays is improving and consolidating (Da Motta Veiga, 2004).
In 2017, Brazil has modified labour laws through a process called the Labour Reform (Muniz, n.d.). This reform amplifies the individual companies to negotiate the terms and conditions of the individual contracts. Even though the company is able to directly negotiate the contract with the worker, vacation periods, minimum hourly wages and working conditions have ameliorated (Muniz, n.d.). Therefore, we suggest Ravensburger to attentively look at the workers’ rights and duties to avoid any conflicts with trade unions and to avoid unnecessary strikes which could damage the company’s reputation and brand pureness. In general, most of the problems arise with political parties which are not able to communicate and interact with the institutions causing economic and social problems.
In Brazil, informal institutions are mainly present to get around formal institutions and avoid bureaucratic processes which increase the time length of formal procedures and operational duties. Their objectives are basically different from formal institutions. Most of the inefficiencies that are present in Brazil are due to corruption and weak rule of law. The importance of the informal institutions comes from the fact that companies have expensive bureaucratic procedures which compels companies to mostly work in the black economy. According to a study carried out by the World Bank, Brazil was ranked 150th out of 183 countries for ease of paying taxes (Estrin, & Prevezer, 2010). Therefore, most often, people will be paid in cash, tax-free. In order to reduce the presence of illegal business affairs, the Brazilian government should take into consideration a substantial decrease of taxes and reduction of bureaucratic procedures, which cost MNEs and companies a massive amount of capital.
When focusing on informal institutions, Ravensburger shouldn’t only take in consideration ethics, but also other factors such as culture and language. Brazil has a high context culture, which means people place importance on the connotation of phrases. Social relationships are very important, which is a characteristic that is reflected as well in the business environment. Ravensburger (if they will ever engage in FDI in Brazil), should take into account the social aspect of the working class. Employees wouldn’t like to have mere job relationships with each other, but also establish strong connections between them.. As the German culture differ greatly from the Brazilian one in this aspect, focusing more on the job and less on social relationships, Ravensburger may have focus on adapting to the new emphasis on relationships.
4.3 Brazil’s Economic Trends
Brazil’s economic data has been improving positively in the past years, even though they had political and social issues affecting productivity and business expansions, they have been implementing market-oriented reforms for GDP growth and poverty reduction.
Figure 2: Brazil GDP
Figure 3: Brazil GDP per capita
As we see from Figure 2 and 3, after the global economic crisis, we can observe a significant growth of the GDP. Although in 2015 and 2016, it has decreased again, the GDP is regaining its positive trend, adding up to a value of 2055.51$ billion, making it the eight economic power in the world. Values are represented in US dollars. In 2017, Brazil registered its public debt to be 78.4% of its GDP (World Bank-Trading Economics, n.d.). According to Trading Economics, they forecasted a growth of the GDP to 2100 billion US dollars by 2020 (World Bank-Trading Economics, n.d.). A similar growth is possible if public and private investments are made for job creation in the country.
Figure 4: Brazil’s Unemployment Rate
Figure 5: Brazil’s Inflation Rates
Brazil’s level of unemployment in the last months decreased substantially passing from a value of 13.1% in March to a value of 11.9% in September.as depicted in Figure 4. Even though unemployment levels which are around 12% are still quite high, there seems to be an inversion of the unemployment trend.
Inflation rates have been quite unstable in the last months reaching a value of 4.56% in October seen in Figure 5. Although this might seem a coincidence, it is observable that when unemployment level decreases inflation rates seem to be higher, when unemployment levels increase, inflation levels decrease. This can probably mean that when people have jobs and a salary they tend to spend more, making businesses decide to increase prices in times of lower unemployment then when unemployment is higher.
Another relevant economic trend to be considered is productivity. An increase of productivity would mean an increase in output with the same level of input. This country had and still has major problems with productivity which has affected other economic trends. A significant increase of productivity can occur only if major investments are made in infrastructure, labour costs and general business costs ( Productivity: A Key Issue for Fighting Poverty in Brazil, n.d.). The World Bank Director of Brazil, Martin Raiser specified that until there are high costs and limited competition, income and productivity growth can’t increase.
4.4 Political and Macroeconomic Situation
In the past years, mainly far-right movements have been arising because of unstable macroeconomic conditions in most countries. In Brazil, the last elections have been won by a far-right leader named Jair Bolsonaro. Differently from previous political parties, Bolsonaro would like to favour extreme economic liberalism, adapting to a neoliberal economy, where the market should be free and not forced under the state’s control. This could be an advantage for Ravensburger that could easily establish production there. He would like to focus his economic reforms on massive tax reductions and privatization of state-owned firms to reduce Brazil’s current public debt to favour private investments. The main products which favour the export are mainly agricultural such as sugar and coffee. Brazil is the world’s first exporter of these two products (Country Risk of Brazil: Economy, n.d.). Moreover, in 2017 car production increased significantly. In 2016, the country’s exports amounted to a value of 185,235,399.10$ and the imports to 137,552,002.47, creating a trade surplus of 47,683,396.64$ (Brazil Trade Statistics, n.d.). Due to social and political inefficiencies there are still wide income differences between different regions, which affects production and household spending and consumption.
Brazil’s current currency is called the Brazilian real. One Brazilian real amounts to 0,26 US dollars. This currency has been adopted in the 1994 and has never changed from then. The real floats freely in the market and its value is determined by the market. It is not pegged to any main currency. The exchange rates are very low compared to the main currencies such as the euro, the dollar or the pound. On one hand, the low value of the real, permits the country to increase exportation and attracts tourists in the country. Through a low-valued currency, Brazil is able to exploit the production and exports, which from 2017 it started growing again. It is generally cheaper (currency-wise) for foreign MNEs to invest in Brazil. Although this can favour the economy for a certain period of time, if the real doesn’t gain value, its imports of necessary resources can become very expensive and inflation can occur.
In general, the main macroeconomic and political risks a foreign investor can face when operating in Brazil are that they are a country which have a high vulnerability to commodity prices, they have high production costs and high taxations on gains and profits, they have unstable inflation and big fiscal deficits and lastly corruption and income inequality is what causes social and political instability in the country (Euler Hermes Global, n.d.). Although many complications, Brazil also has positive aspects, for example their international role in economic and political decision making is increasing, they have a diversified economy and an increasing middle class, they have low external debt and a high quantity of foreign exchange reserves, ultimately FDI inflows are increasing.
5. Foreign Entry Strategy
Brazil shows promise for Ravensburger to engage in FDI. A smooth entrance to the Brazilian market will require Ravensburger to analyze its options for choosing its foreign entry strategy carefully.
5.1 Critical Factors for Foreign Entry
The most critical factors for introducing our products to Brazil include having a sufficient demand for our products, having a growing market with a sustainable and profitable future, and understanding its market trends.
Brazil is the 5th most populous country in the world. Although its population growth has slowly declined over the past 15 years, 21.6% of its population is under the age of 15 who are an essential demographic Ravensburger tries to target (“Population Pyramids of the World”, 2018). With over 46 million children within this demographic, Brazil bolsters a strong demand for toys, puzzles, and games. Economic and social issues have slowed Brazil’s recent economy. However, forecasts predict Brazil’s economy to recover and increase overall. With unemployment rates declining and GDP growth pattern showing signs of increase, we can expect the purchasing power of Brazil to rise in the near future. Coupled with Brazil's large child demographic, Ravensburger can be sure consumers are willing to purchase its products.
Brazil’s current toy market experience different patterns than found in Ravensburger’s German markets. Understanding these trends is crucial for the success of Ravensburger’s foreign expansion. Currently, the toy market is dominated in sales by regional companies. “With the stronger positions of domestic players and the natural barriers for imported products,” (“Toy market Brazil”, n.d.) consumers in Brazil lean towards domestic products instead of international brands. Sales for toys and puzzles are popular for children from ages up to 12 years. Recent reports show that teenagers from the age of 12 and older and more interested in collecting than engaging with table games and puzzles. For Ravensburger to take advantage of this trend, it needs to emphasize products that are collectibles.
5.2 First- and Second-mover Advantages
International toy brands in Brazil still do not have a dominant presence in the market. Their current presence allows for conditions to reap first-mover advantages for Ravensburger. By entering the emerging market early, Ravensburger can secure key local suppliers and distributors. Strategically choosing suppliers and distributors will allow Ravensburger to establish entry barriers for other international brands that enter the market after Ravensburger. The demand for international brands enables Ravensburger to capture the market and build brand loyalty with its customers. If customers trust Ravensburger products are best for children, consumers will likely stick with Ravensburger products opposed to switching to other international toy brands who enter the market late.
Ravensburger can also decide to enter the market later to gain from second-mover advantages. The toy market is still developing in Brazil. The demand for specific product lines is still uncertain. If Ravensburger chooses to enter the market after other international brands enter the market, Ravensburger will be able to capitalize on the knowledge of the success and failures of these brands. This reduces the risk of entry.
5.3 Entry Mode to Brazil
Regional toy companies currently dominate the toy market in Brazil. The local brand names provide a valuable intangible resource. Ravensburger has several options for mode of entry. To take advantage of the current market share landscape, Ravensburger can enter with a full acquisition or partial acquisition. Going for a full acquisition will allow Ravensburger to enter the market more quickly to minimize the risk of late entry. A full acquisition, however, will require more upfront capital investment which increases investments risks and require more commitment. Also, full acquisitions are more politically sensitive. In a time of political sensitivity, a partial acquisition is more suitable. Going for a partial acquisition, Ravensburger can reduce the risk of entering a foreign market with uncertainty, while maintaining the resources and knowledge to operate in Brazil. This is crucial for Ravensburger as acquiring these resources will allow the transition to a new market to have fewer complications. Ravensburger can engage in a brownfield acquisition. This will enable Ravensburger to use its resources to improve the company to its global standard. A partial acquisition is more politically acceptable than a full acquisition as a partial acquisition maintains the local integrity of the company. Also, there is less capital investment required for Ravensburger reducing capital commitment. However, engaging in a partial acquisition risks integration complications.
The scale of entry that Ravensburger should engage is advised to be moderate. Entering the Brazilian market too aggressive is risky in its current state. Acquiring too many firms can send a negative political signal to consumers. Entering the market with too little investment will risk losing a strategic hold in the market. A moderate scale of entry will allow Ravensburger to control the risks from the foreign entry. Also, a modest scale of entry will take time to establish which will allow Ravensburger to establish its presence while Brazil continues to reach its forecast for positive economic growth.
6. Conclusion
To conclude, we suggest Ravensburger to enter the Brazilian market. The main reason why they should enter, is the increase of potential customers of Ravensburger’s products.
Ravensburger has the resources and capabilities to enter a new foreign market. The company already has a global presence in the United States and Europe, and entering the market in Brazil will allow Ravensburger the opportunity to expand further throughout South America in the future. In the past years, Brazil had some up and downs, although from 2017, their economy has been recovering and macroeconomic data like unemployment and GDP have been improving. Their political situation is usually quite unstable, nevertheless, after the elections of Jair Bolsonaro, Brazil will theoretically invert their state-led economy into a market-guided economy, attracting possible foreign investments, with the possibility of enhancing new job creation. Furthermore, to change from an emerging economy to a developed economy, they should invest mostly on the income and social disparity which has been growing significantly. The increase of income will certainly lead to an increase in births and household spending. To enter the Brazilian market smoothly, Ravensburger should enter through a brownfield partial acquisition to use its current resources in Brazil while exploiting the new resources from the local company. The scale of entry should be modest to control the risk of entry. The earlier Ravensburger enters, the more advantages it can gain from first-mover advantage.