1

A Work Project, presented as part of the requirement for the Award of a Masters Degree

in Management from the Faculdade de Economia da Universidade Nova de Lisboa

Appendix

WP SME COMPETITIVENESS

INTERNATIONALIZATION STRATEGY OF SCIENCE4YOU, S.A. TO THE

BRAZILIAN MARKET

João Souto de Moura Quelhas da Silva, # 764

A Project carried out on the Management course, with the supervision of:

Professor Sónia Dahab

Professor Filipe Castro Soeiro

6th

January 2012

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Annex Index:

Company’s Results ………………………………………..…………………………….3

Industry Mapping………………………………………………………………………..3

Value Chain .……………………………………………………………………..……...4

Portuguese Competitive Assessment …............................................................................4

Porter 5 Forces …………………………………………………………………………..6

SWOT Analysis ……………………………………………………………………………8

World Toys Industry Data ……………………………………..………………………10

Country Overview …………………………………………………………………..…12

Brazilian Toys Fairs …………………………………………………...…………….…14

Brazilian Toy’s Industry Data………………………………………………………….16

Process of Transport of the Toys ………………………………....................................17

Description of Taxes to Pay …………………………………........................................18

4M Tool …………………………………………………………………......................19

Processes Matrix ………………………………………………………….....................21

Risk Analysis ……………………………………………………………......................22

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Annex 1: Company’s results:

Year Sales Volume (€) Net Profit (€)

2008 52.919,65 -16.854,19

2009 189.549,26 23.434,41

2010 245.028,96 22.494,55

2011 500.000 * -

*expected value

Source: primary data

Annex 2: Industry Mapping

Science4you

Distributors andCommercial

Agents

Legislation Suppliers

Partnerships

Final Consumer

DirectCompetitors

IndirectCompetitors

Science4you

Stores

Major Clients

OutsourcedServices

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Annex 3: Value Chain

Annex 4: Portuguese competitive assessment:

Regarding the Portuguese competition Science4you faces, the company is well

positioned in the market, and with more presence in the several Portuguese large

retailers than its competitors. In fact, the only important large retailer that it is not

commercializing Science4you toys is Sonae Group, since this retailer has the licensing

rights of the company’s competitor Discovery Channel. However, it is important to

mention that there are no studies about Portuguese toy’s industry, therefore this analysis

in based in my visit to large retailers

The innovations presented to the market by Science4you could raise the issue of

protection of intellectual property by the company. Nevertheless, for Science4you,

Patent registration is very expensive and it is not a safeguard in this market because

products are relatively simple and easily to be imitated with a small differentiation.

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Its biggest competitor is the multinational 4M, who is in Portugal for a long time

and also brings to the market quality products but does not have such variety in its

portfolio and practices prices slightly higher than Science4you. In fact, from all of its

competitors, as I mentioned above, Science4you presents the cheapest portfolio in the

market, and with its 72 products launched since 2008 is also the one with more launches

in Portugal.

In terms of appealing of the product, Science4you and 4M, as the ones with the

most innovative packaging, can be considered the manufacturers who have the higher

one since the quality perception made by consumers seems to be higher in these two

brands.

Concerning value brought with the launch of a new toy, Science4you presents

itself ahead of competition as well, mainly due to its museums tickets offerings that no

other toy manufacturer has, but also for be fair to consider that its pedagogical manuals

brought to the market a new way to complement education with toys.

Annex 5: Comparison of product’s characteristics:

Price Presence Variety Appeal Value

Science4you * *** *** ** ***

4M ** ** ** ** **

Discovery

channel

** * ** ** **

Clementoni ** ** ** ** **

Source: primary data

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Annex 6: Porter 5 Forces:

Power of Suppliers:

Science4you has several suppliers since each toy has its specificity. Therefore, it

is always dealing with different suppliers, to whom it makes relatively small requests

(for now). The fact that they are also small companies, and their low switching costs,

makes that their power over the company to be usually low.

All in all, we conclude that power of suppliers, mainly due to the suppliers’

competition and its low switching cost is lower over the company.

Conclusion: low power

Threat of New Entrants:

Regarding the possibility of new entrants in the market, I considerate it as a medium

level threat. There are two major concerns to deal with. First of all the attractive niche

market the company is implemented, that is not fully mature, may lead to the entrance

of new competitors, either from existing or new toys’ enterprises; secondly these

companies may enjoy economies of scale if they are able to cover the EU market.

However, new companies may face bureaucratic problems regarding safety regulations,

Science4you did not had many problems with EU regulations, but is still struggling to

get the Brazilian one.

Conclusion: Medium Threat

Threat of Substitutes:

We can consider as product’ substitutes of scientific toys the rest of the toy’s

industry. In that sense, we can consider that there is a huge amount of toys, from the age

of 5-14, who could replace the Science4You’ toys, which are only operating in a niche

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in the toys’ market; the size of the industry, associated with the low switching costs of

change one toy for another makes the threat of substitutes a high one.

Conclusion: High Threat

Power of Buyers:

Associated to what was said before, the very low switching costs of the product,

give power to final consumers and their decisions. This power is even more relevant in

the case of a small company like Science4You, who does not enjoy from economies of

scale neither from a good brand image strong enough to create trends over buyers. In

that sense, buyer’s decisions play a tremendous role in the company’s success or failure.

If we consider the large retailers buyers, the power of negotiation of a small toys’

company over worldwide retailers is obviously very low. So also in that area,

bargaining power of the company is not high. Regarding Sr. Brinquedo, the power of

negotiation is one the side of Science4you, however, since Sr. Brinquedo is one more

intermediary in the process of reaching the product to final consumer, the company

practices nearly the same margins that it does with the large retailers

Conclusion: High power

Industry’ Rivalry:

To conclude, we can admit that industry’ rivalry is high. We can characterize the

industry has one which its product (toys) switching costs is low; where despite the

relatively low competition present in the scientific niche, the company has in the

Chinese company 4M its most powerful competitor (annex X has the information about

the Portuguese market) the threat of substitute of traditional toys is very high. About

safety regulations, they can back off new entrants in the market-place and in that way

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protect the ones present in the market, but regarding EU territory, since the regulation is

the same to all member-states, the big manufacturers do not have many obstacles in

reaching Portuguese market once they have approved their products.

Conclusion: High

Annex 7: SWOT

Another important analysis to better understand the position of Science4you in

the market, comparing it with its competitors and check for opportunities and threats in

the marketplace to better plan a strategy is the SWOT analysis.

As Strengths the most important can be considered the product development

associated to each toy, as well as its thematic manuals and the high average toys

Science4You launches. Price versus quality ratio can also be considered a major

strength of the company, since it has always with great quality lower prices than the

competition. An also its partnerships with universities and museums are one of the

company’s major competitive advantage, since it allows the company to enhance

product’s value and give trust to the parents who buy the toy.

As opportunities the company has to find how to take the most out of the

benefits this industry can provide. I consider that there are such as the increasing

awareness of parents to the pedagogical advantages that a scientific toy can provide to

its children, which, combined with low prices can be a source of growth to the

company. Despite this increasing interest of parents by scientific toys, this niche market

is far from being fully explored either in Brazil or in Portugal, there are not many

competitors which can be seen by the company a chance to raise its market power.

Finally, the company as to continue to use the good relationship it has with a worldwide

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player like Fnac to be able to have a good support in each of its internationalization

processes as well as its high average of product innovations.

Regarding weaknesses of its internal environment, as a small company,

Science4you has the pitfall of not enjoying economies of scale, such as many others

competitors, and with that the company finds sometimes difficulties in match the

demand and many other advantages in terms of costs that bigger companies have.

The high dependence of retailers is also a company’s weakness. For being

dependent of this source of revenues, its bargaining (negotiation) power over the

retailers is low and forces the company to accept unfair deals.

In this industry it is very important, by selling product to children, it is very

important to create a brand awareness that makes parents to rely on the company in

terms of quality and remember when go shopping, that they already saw or heard

something about the product. Nowadays the company’s publicity is only made when it

is requested to give interviews and on facebook with posts company’s news every week.

In my opinion, it is not too much, and despite being a small company, the company

should increase its efforts on this topic.

In my opinion, the company faces some lack of organization regarding its

hierarchical structure and its product quality management. Regarding being a small

company, seems that the operations are very centralized in its CEO, who probably if

delegate some responsibilities the processes would flow easier; and its quality

management system that seems to be almost inexistent, since there is a real control of

the quality of goods supplied in the initial phase of the toy’s production.

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This industry presents some Threats as the extremely difficult economic

environment lived in the world, especially in the major market that the company wants

to internationalize, EU. With this crisis, demand and trade operations usually decrease,

and the search for the cheapest product is even more accurate, giving to the company

the challenge to face in this industry the power of the cheaper Chinese manufacturers.

Regarding other possible threats, I highlight the increasing competition in this

niche market. Science4you is facing a very different scenario nowadays than in 2008

since many players came into this market. Which bring us to a problem stated above

which is the higher brand awareness of the company’s who compete with Science4you

and all the disadvantages this brings to the company.

Annex 8: World Toys Industry revenues

Year $US Billions % of growth

1999 71.1 -

2000 69.5 -2.3

2001 74.4 7.1

2002 79.4 6.7

2003 84.3 6.2

2004 61.2 -27.4

2005 63.7 4.1

2006 67,0 5.2

2007 70.4 5.1

2008 72.1 2.4

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2009 74.0 2.6

Source: Abrinq

Annex 9: Top-10 markets 2009

Source: NPD Group

Annex 10: 2009 Toy’s Industry Revenues Worldwide

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Annex 11: Country Overview

Brazil is a democratic country governed through a presidential federal republic.

Its actual president (since 2011), Dilma Rousseff, was the first women to be conducted

to post, after 8 years of governance of Luiz Inácio Lula da Silva, and was elected by the

left wing party Partido Trabalhista. The parliament, lying in Brasília builds the majority

of the laws on federal level, while the states create some state laws.

With an emergent economy, member of the famous group BRIC, Brazil is

nowadays one of the most appealing countries to make business (either export or

implement operations) with. However, anticipating a scenario where national industries

are destroyed due to the presence of stronger economic players in the country, the

government mainly through taxes and bureaucracy is creating a somehow protective

economy to its home based industries

However, due to its protectionism, Brazil was already warned by World Trade

organization (WTO), from which the country is a member – an organization that fights

for free trade. The country is a member of other international organizations like

Mercosul, ONU, G-20 and IMF.

With the biggest economy of Latin America, and sixth worldwide, Brazil

became one of the most powerful nations in the last decade. The economic openness to

the rest of the world and the financial reform, known as Plano Real that brought a new

currency in the mid 90’s, gave to Brazil the economic stability necessary to register the

economic growth it did. All the sectors of the economy (primary, secondary, tertiary)

have been developed and benefiting from the boom of price of commodities that the

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country exports, as well the new discovery of oil deposits that made the country self-

sufficient in 2006. The country’s trade balance presented a small deficit. The

government and the central bank press a solid control over the economy, which justifies

the high interest rates and inflation.

Brazil nowadays is a country with 193.3 million of habitants (2010), from which

50 million are children (NPD) and 86.12% live in urban areas. The biggest states have

about the following population: São Paulo – 40 million; Minas Gerais: 20 million and

Rio de Janeiro – 16 million.

Besides the economic power and wealth be unequally distributed in Brazil, the

economic growth in Brazil has been also followed by social programs that allowed

many families to rise up their income and, apparently, with a general increase in income

and life quality of the poorest social classes. The country’s literacy rate, according to

UNICEF, is of 90%. Many other social indicators like Education Index - 67ºplace - and

infant mortality rate registered great progress in the last 20 years. Moreover, it also

decreased the percentage of children that does not go to school (IBGE).

As it was said previously, the size of the target for the toy’s industry is huge.

There is nowadays a boost middle class that pushes for the economy.

Between the periods of 2006-2009, according to a research made by IBGE, there was a

clear evolution in terms of income of the population. It can be concluded that social

classes with lower income, on average, increased their income, while the families who

have more than five times the minimum wage represented in 2009 8.05% (while in 2006

was off 9.25%). This shows that the Brazilian income per capita is nowadays more

equally divided.

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In terms of technological development and investment made in R&D, Brazil is

one of the most advanced countries in Latin America, however, still below the average

of OECD countries. Comparing to other countries present in the Global

Competitiveness Index 2011-2012 of the World Bank, Brazil presents a good firm-level

technology absorption, and a fine FDI and technology transfer (28º), from which its

main partners are U.S.A. and China. Its level of internet users is only of 40.7% and is

ranked in terms of innovation and sophistication factors with 3.5 out of 7.

Annex 12: Brazilian Toy’s Fairs

The presence in the toy’s fairs should be seen of major importance as part of the

marketing strategy developed by Science4you and its representative. Their attendance

can allow a more effective bet in the country and the increase of business opportunities,

since in these fairs the toys manufacturers present their portfolio for the upcoming year

and make business with all the other players of the industry. For that reason, it is a

good opportunity for the company (and its representative) increase brand awareness in

Latin America, network, and possibly get new distributors and clients for the whole

country and even be aware of the launches of its competitors. For the presence in these

fairs, the company has the financial support of QREN (NSRF)1 in 50.000€. However, it

is important to mention that this support is a loan that the company has three years to

payback. I decided that the company should be represented in two fairs that will take

place in April and August of 2012, in São Paulo. Regarding the fair Educar, I think that

it is only necessary to be the representative of Rio de Janeiro.

1 National Strategic Reference Framework – institution that manages the EU funds designated to its

member-states

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Feira Abrin: it is the biggest toy’s fair of Latin America (and third of the world). Every

year, the amount of business done increases and in 2011 was able to made revenues of

R$ 1700 million, which is 50% of the revenues expected for the industry in 2011. From

2010 to 2011 the growth was massive since in 2010 it was transacted R$ 1000 million

that was the equivalent to 30% of the total industry’s revenues. In the Abrin 2001,

16.000 players from the sector visited the fair that had the exposition of toys of 200

companies.

Educar- International Fair of Education: it is the biggest fair of education of Latin

America, focused on products and services directed to schools, this fair can be

important to develop the non-core business of the company in São Paulo that will be the

creation of an Science4you animation team. Hear, the company may be able to get

partnerships to enter in this business area and check for business opportunities to get

schools as one more client of its toys.

Feira Abrine – similar to Feira Abrin, but organized by the association of educational

toys (Abrine). It is targeted to the market’ segment of the industry that Science4you is

inserted and therefore can be seen as a way to increase brand awareness and networks

even further, after the first appearance on Abrin. It does not have as much business and

visitants as the Feira Abrin, but for the company has the advantage of having more

attention from who visits it and less competition.

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Annex 13: Brazilian toy’s industry revenues:

National Production Imports Total

source: Abrinq

Annex 14: Brazilian revenues per segment:

2006 2007 2008 2009 2010

Affective

development

23.0% 26.1% 32.7% 27.1% 30,0%

First age 16.0% 11.8% 4.4% 5.4% 5%

Technical

world

5.0% 6.5% 11.7% 14.7% 14.0%

Physical

activities

17.0% 10.0% 16.2% 13.6% 15.0%

Intellectual

activities

14.0% 16.2% 10.8% 10.6% 10.0%

Criativity 11.0% 12.1% 12.1% 12.8% 11.0%

Social

Relationships

14.0% 17.2% 12.1% 15.8% 15.0%

Total 100% 100% 100% 100% 100%

Source: Abrinq

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Annex 15: Sales/Distribution Channels:

2007 2008 2009

Magazines 18.0% 20.3% 19.6%

Self-service (supermarkets,

etc)

15.1% 15.9% 14.4%

Specialized 41.0% 38.8% 41.3%

Wholesalers 24.7 % 24.5% 23.3%

Others 1.2% 0.5% 1.1%

Total 100% 100% 100%

source: Abrinq

Annex 16: Process of transport the Toys

The toys would leave the Lisbon port and arrive to Rio de Janeiro about 20 days later.

Once there, they would become responsibility of the representative, who has to make

each lot be approved by the competent authority (DECEX), which will test the several

kind of toys that arrive (even if they were previously approved). For each kind of toy is

given a budget of how much will cost to the distributor to make the test and consequent

approval. So, the higher the number of toys shipped to Brazil at once, the less the cost

per unit this testing will represent. Sometimes they may be pretend to perform an

additional testing, for being a product related to children, but this extra test is usually

only made once for each kind product.

The value I advanced for the extra cost of licensing in the mode of entry ($R 1, 05) per

toy it is not completely accurate, because the value to pay for this test may vary, but

rather a prevision of the representative.

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On a first phase, the representative in Rio only wants to ask to Lisbon for 2000 toys,

500 of four kinds. However, with the possibility of increasingly demand, it is expected

that shipments can bring a higher number of products.

Regarding the transportation of the toys inside Brazil, the costs will be carried by the

retailers.

Annex 17: Description of the taxes to pay

Tax % per product

Import tax– II 35

Tax over industrialized

product – IPI

10

Tax of circulation of

products - ICMS

14% (12% in São Paulo)

Social Security -

COFINS

7.6

Program of Social

Integration - PIS

1.65

Total 68.25 (66.25)

Source: Primary data

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Annex 18: 4M - Money:

Descripton Annual Cost

Wage 550€*14

Plane Ticket Lisbon – Brazil + Living

Expenses (850+400)*2

Presence in toy’s fairs 2025€+

2695€+4500€

Wage 700€*13

Plane Tickets within Brazil + Living

Expenses 200€*10

Office in Rio de Janeiro 530€*12

Total 36880€

Science4you

Costs

Representative

Costs

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Annex 19: 4M Minute

Activity 1

month

2

month

3

month

4

month

5

month

6

month

7

month

8

month

9

month

10

month

11

month

12

month

3

years

1 Contact AICEP AND CEB

2

Acknowledging the Brazilian legislation

and import tariffs

3

Adapt toys to Brazilian safety

requirements

4 Get the InMetro safety certification

5 Participation in Fairs

6

Partnerships with universities and

museums

7

Adapt packaging and manuals to

Brazilian

8 Establish contact with large retailers

9 Find a commercial agent for S. Paulo

10 Search for Brazilian market trends

11 Add new products to the portfolio

12

Establish science4you store and

animation team

13 Consider implementation of operations

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Annex 20: Processes Matrix

Business

Processes

Cri

tica

l

Su

cces

s

Fact

ors

R&

D

Net

work

Pri

ce v

s

Qual

ity

Par

tner

ship

s Bra

nd

Aw

aren

ess

Tota

l of

impac

ts

Qual

ity o

f

the

pro

cess

es

(1-5

)

Spen

der

Pro

cess

Suppliers’

Relationships X X X 3 4 20%

Promotion X X X X 4 3 5%

Quality

Management X X X 3 2 10%

Search for

market

opportunities

X X X X X 5 4 20%

Non-core

business

activities

X X X 3 4 15%

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Annex 21: Risk Analysis

By choosing the path of having an independent distributor in Rio de Janeiro, that is

responsible for developing the internationalization strategy of the company,

Science4you does not have control over operations there, but has the advantage of the

low risk that is associated to it, since it only exports what the distributor asks for,

transferring in that way the threat of failure to him. However, it is advisable for the

company to have some control over the distributor like reporting rules about the on-

going operations; information about Brazilian clients; and motivational factors like the

increase of profit margins to the representative after being sold a certain number of

units. In that way the company is decreasing the risk of becoming too dependent of the

representative in Brazil.

However the company and the distributor face some risks in the strategy I designed:

The partnerships with museums and the certification by the university may not happen,

which would undervalue the toys comparing to the one that is commercialized in

Portugal.

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Concerning the agent chosen for carry the brand in São Paulo, there is always the risk

that he does not bear as it expected, which can damage the brand’s image. There is also

the risk of he does not have a good network developed in the target he is assigned to. To

fight against this possibility the company has to choose a company already well

established in the market, that preferably carries other successful brands.

About the portfolio chosen by the distributor to commercialize, there is the chance of

not selecting the right ones. The agent already told me he wants to enter in the market

with toys that does not exist yet in Brazil along with the Science4you top-sellers. A

choice that brings along the possibility of the products does not be well received by the

market. If that happens, the representative has to be constantly adapting its portfolio

with new toys that may attract the clients.

In a macroeconomic context, I identified two major risks for the company: the chance

that the Government implements even more disincentives to the importation of toys to

Brazil; the exchange rates between Euro and Real, knowing that it is preferable for the

company and the distributor that Euro depreciates over Real, so that the European

exports can become more competitive.

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Regarding operations, the risk that these are not fully optimized may have the

consequence of: the possibility that the toys does delay in the trip over the Atlantic,

which can cost money to the both parts; and, yet about delays, the chance that demand

may be higher than expected in some periods and in that sense the time of response in

Lisbon might not be the previously expected. To overcome these obstacles the company

has to have an effective human resources department to increase the number of

temporary employees whenever they are necessary.