T HE EVOLUTION OF N ERF
Sumant Kawale, James Kanter, Bill O’Keefe, Rosanne
Palatucci, Parul Shah
11/11/2011
11/11/2011
The evolution of Nerf
Contents
Executive Summary ....................................................................................................................... 2
Brief Overview of Toy Industry ..................................................................................................... 4
Trends at Time of Nerf Release: Growth of Market & Safety Concerns ................................. 4
Competition in Toy Industry ..................................................................................................... 4
Volatility of Industry and Need for “Blockbuster” Products.................................................... 5
Impact of Nerf on Toy Market ................................................................................................... 6
Hasbro Evolution and Strategy ..................................................................................................... 6
Hasbro: The Beginning .............................................................................................................. 6
Becoming a Toy Giant ................................................................................................................ 7
Approach to Innovation .............................................................................................................. 7
Hasbro Strategy .......................................................................................................................... 8
Product Development ............................................................................................................. 9
Market Penetration ................................................................................................................ 9
Market Development .............................................................................................................. 9
Diversification ....................................................................................................................... 10
Strategy for the future .......................................................................................................... 10
Nerf: From Balls to Blasters ....................................................................................................... 10
Blasters: The Early Years ........................................................................................................ 11
Blasters: The Later Years ........................................................................................................ 12
Vortex: The Next Blaster Bet .................................................................................................. 13
Winning with Nerf .................................................................................................................... 13
Minimum Viable Footprint .................................................................................................. 13
Staged Expansion ................................................................................................................. 14
Ecosystem Carryover ............................................................................................................ 15
Nerf: Lessons Learned ................................................................................................................. 15
Owning the product is useful but limiting .............................................................................. 15
Make products for different age groups so boys can continue to upgrade ............................ 16
Hasbro’s Ecosystem...................................................................................................................... 17
Hasbro’s Supply Chain Risks & How They’ve Mitigated Them ............................................ 22
Conclusion .................................................................................................................................... 23
11/11/2011
EXECUTIVE SUMMARY
Since 1970, Hasbro’s Nerf has been one of the most recognizable brands in the toy industry.
Hasbro’s approach to innovation has allowed it to continue adapting Nerf products to meet
customer needs. Nerf has been transformed from a small, non-descript foam ball into a suite
of some of the most exciting toys in the marketplace. The company has established Nerf as
the leader in its ecosystem through shrewd marketing, ensuring all ecosystem members are
satisfied, and rolling out a staged expansion of products to a loyal customer base. Because of
these actions, Nerf has thrived in an industry characterized by dramatic shifts in customer
demand.
Similar to the music business, the toy industry relies on “blockbuster” products for its
success. Every year hundreds of new products are introduced with only a select few
achieving large commercial success. Even for those products that do achieve large sales,
success can be fleeting. The ever-changing preferences and fragile loyalties of young
children can lead a blockbuster toy to have precipitous drops in sales shortly after
introduction. It is not uncommon for a top selling toy to experience a 40 - 50% reduction in
popularity year-over-yeari.
Hasbro’s strategy and approach to innovation has helped Nerf avoid the sales drop
experienced by many other toys. Hasbro’s approach to innovation has revolved around
capitalizing on pop culture trends, particularly television tie-ins and American sentiment.
Hasbro employs a two-pronged growth strategy: 1) infusing new products into the brand
portfolio via serial acquisitions, and 2) re-imagining, re-inventing and reigniting its core
brands.
Nerf is a prime example of creating, capturing, and adding value. Hasbro has built
upon the popularity of Nerf to create additional value for the company and its partners. The
company has extended into clothes, video games, and other products to leverage the Nerf
brand. It also has rolled out Nerf products for all age groups. This has allowed Nerf to
create brand loyalty and continue selling products to its customers as they get older. As a
result of these actions, Hasbro has captured substantial value from the Nerf brand.
Hasbro has positioned Nerf as the leader in its ecosystem. Using a collaborative
approach with partners, Hasbro has established control over Nerf’s value chain. The
company has ensured that all members of Nerf’s ecosystem are satisfied. With suppliers,
11/11/2011
Nerf has developed a “rolling mix” of products that provides predictability in a business
characterized by long lead times and uncertain demand. With retailers, Hasbro has
developed exclusive product offerings and formed tight partnerships to share in forecasting
demand and marketing Nerf products. The company also has attracted new partners into
the ecosystem to create value out of the Nerf brand, such as its efforts with video game
manufacturers to adopt the Nerf product to that segment. Hasbro’s ability to establish Nerf
as the ecosystem leader is a large reason why Nerf has stayed relevant in a constantly
changing market.
Nerf has built off a simple pilot product to continue introducing new toys that
leverage the firm’s existing resources. During the initial product launch in 1970 as well as
subsequent launches in the following decades, the company introduced toys that represented
the minimum viable footprint to create value for customers. Hasbro then utilized this
foothold to roll out a staged expansion of its product offering and carry over resources from
prior ecosystems. Similar to Apple, the company also has been masterful in its approach to
marketing. Through its customer competitions, partnerships with professional sports tours,
and consistent launch dates, Hasbro has built an aura of excitement and innovation around
its annual product introductions. This approach to innovation has allowed Nerf to continue
delighting its customers while maximizing its existing resources.
Through its strategic approach to innovation, Hasbro has kept Nerf popular as other
toys have been abandoned by customers. The company has established Nerf as a leader in
its ecosystem and in the process has created value for Hasbro and its business partners.
Because of this, Nerf has been able to thrive in a highly volatile environment.
11/11/2011
BRIEF OVERVIEW OF TOY INDUSTRY
Trends at Time of Nerf Release: Growth of Market & Safety
Concerns
The toy market has grown considerably during Nerf’s lifetime. Since the mid1970s,
annual sales in the U.S. toy market have grown from $2.8B in 1976 to $22B in 2010ii. The
drivers of this growth have been demographic changes in the U.S. population as well as
product expansion. In the United States, the market experienced growth as baby boomers
began having their own children, women entered the workforce in greater numbers leading
to more disposable income, and the increased divorce rate led parents to purchase more toys
as they battled for children’s attention iii. In addition, entry into new product segments (such
as the sports market with Nerf) helped increase the overall size of the market.
In addition to the expanding size of the overall toy market, trends toward improved
toy safety benefitted Nerf during its initial introduction. During this time there was
increased demand for safer products, partly as a result of the passing of the 1969 Toy Safety
Act. Compared to harder balls, Nerf’s soft foam was a safer product for kids to play with
indoors as it limited the risk of breaking glass, lamps, and other items. Nerf played into this
growing trend in its advertising of the initial Nerf ball, highlighting it as the world’s “first
indoor ball” that would not break lamps and would keep children safe. This focus on product
safety in the toy industry benefitted Nerf and partially explains its early success (though
there briefly was concern about Nerf due to potential flammability)iv.
Competition in Toy Industry
Over the course of its lifetime, Nerf has seen many changes in competition within the
toy industry. At the time of its introduction in 1970, the industry was highly fragmented. A
number of small players competed with each other for market share. Shortly after Nerf’s
release, many toy companies were acquired by large conglomerates. Kenner, Fischer Price,
Parker Brothers, and others were absorbed by diversified firms such as Quaker Oats,
Rubbermaid, and General Millsv. In the last 20 years, there has been major consolidation in
the industry. Most diversified firms have shed themselves of the toy companies to focus on
their core businesses. Manufacturers such as Mattel and Hasbro who had remained
independent acquired many of their competitors during this stage, leading them to become
11/11/2011
the clear leaders in the toy industry. Today, these two companies are the dominant players
in the marketvi.
Volatility of Industry and Need for “Blockbuster” Products
The toy industry can be a volatile business. Similar to the movie industry, toy
companies rely on “blockbuster” products to produce a significant amount of their revenue.
Every year, hundreds of new toys are introduced to the market with only a few becoming
large commercial successes. As can be seen in the below table showing statistics from 1988,
for most companies a small number of products represent a large percentage of overall
revenue:
Company
# of Top Selling Products in
Top Toys as % of Total ’88
1988*
Revenue
Hasbro
4
20%
Mattel
2
57%
Tonka
5
29%
* Top selling products = products with estimated sales > $30M
Source: Maldowitz, L., et al.(Drexel Burnham Lambert Inc.) “Toy Industry – Industry
Report.” 1 December 1988.
Though some of these blockbuster toys sustain long stretches of high sales, many
more have enjoyed brief stints of success followed by precipitous falls from popularity. In an
industry that caters to the preferences of young children, top-selling toys can become
irrelevant very quickly. It is not uncommon for popular toys to lose the majority of their
sales in the course of one year, as children’s loyalties shift to other brands. Because of this
volatility, it is critical for companies to have a wide breadth of products in order to succeed in
the long run. This breadth provides the necessary product diversity to combat changes in
children’s preferencesvii.
Prior to the industry consolidation, most toy manufacturers did not have the breadth
of products to maintain long-term profitability given the volatility in customer preferences.
Smaller companies were at risk of going out of business if they did not produce consistent
stretches of blockbuster products. Even companies that had success with a popular toy(s)
11/11/2011
often did not have the diversity to achieve long-term success. Firms such as Coleco
(“Cabbage Patch Dolls”) and Worlds of Wonder (Teddy Ruxpin) were forced into bankruptcy
because of their inability to continue producing successful products viii.
Impact of Nerf on Toy Market
The initial introduction of Nerf helped toy manufacturers by further diversifying
their product lines which helped reduce volatility. Nerf represented a growth in the overall
market by expanding into the sports segment, rather than a pure substitution of its
competitors. With products such as the original Nerf ball and the Nerf football the brand
helped build out the children’s sports toy market for other manufacturers. Little Tikes,
Fischer Price, and other manufacturers have followed in Nerf’s footsteps and achieved
success with their own sports toys. As the Nerf product line expanded into new areas over
time, the “new” Nerf toys such as the dart gun and “blaster” became more direct
competitors/substitutes to the guns/weaponry segment of the traditional toy market.
Overall, the Nerf ball represented a complementary product for toy manufactures
and a substitute product for sporting goods manufacturers. The diversification into the
sports market benefitted the toy industry, while negatively impacting those who produced
“traditional” balls and other sporting goods. Combined with the consolidation in the
industry, this helped toy companies become better prepared to weather the volatility of the
industry due to changing consumer preferences.
HASBRO EVOLUTION AND STRATEGY
Successful toy companies do not just make toys; they manufacture popular culture.
Hasbro, Inc. certainly fits that description. From America's Action Hero to a plastic potato to
vehicles that transform into robots, Hasbro toys are instantly recognized around the world.
Hasbro: The Beginning
Hasbro was founded in Providence, Rhode Island, in 1923 by Polish brothers Henry,
Hilal, and Herman Hassenfeld. The brothers worked in the textile remnant business, selling
cloth leftovers used to make hat liners and pencil-box covers. After realizing the boxes’
popularity, The Hassenfelds began making them.
11/11/2011
During the late 1930s the Hassenfeld Brothers began to manufacture toys, an
extension of the company's line of school supplies. Initial offerings included medical sets for
junior nurses and doctors and modeling clay. During World War II Henry's younger son,
Merrill Hassenfeld, acted on a customer's suggestion to make and market a junior air-raid
warden kit, which came complete with flashlights and toy gas masks. By 1942, as demand
for school supplies tapered off, the company had become primarily a toy company, although it
continued its large, profitable pencil businessix.
Becoming a Toy Giant
After the war Merrill Hassenfeld began marketing a girls makeup kit after seeing his
four-year-old daughter play with candy as though it were lipstick and rouge. In 1952, the
company introduced its still-classic Mr. Potato Head, the first toy to be advertised on
television. In 1954 Hassenfeld became a major licensee for Disney characters. By 1960,
revenues hit $12 million, and Hassenfeld Brothers had become one of the largest private toy
companies in the nation.
Approach to Innovation
Hasbro’s toys became pop culture icons because they were largely based on pop
culture TV programs and trends. Their approach is twofold: 1) proactive capitalization of
popularity peaks in TV shows, and 2) necessary reaction to American sentiment and
macroeconomic factors.
Hassenfeld Brothers seemed to defy the fleeting trends of the toy business in the
early 1960s, when it introduced what would become one of its most famous and successful
product lines. The company conceived G.I. Joe when a licensing agent suggested a
merchandise tie-in with a television program about the U.S. Marine Corps called "The
Lieutenant." The company liked the idea of a military doll, but did not want to rely on a TV
show that might prove short-lived; so it created its own concept: a foot-high "action figure"
with articulated joints. In its first two years, G.I. Joe brought in between $35 and $40 million
and accounted for nearly two-thirds of the company's total sales.
Toward the end of the decade, Hasbro decided that it could no longer ignore the
public's growing disapproval of war toys, which was fueled by disillusionment with the
Vietnam War. In 1969 G.I. Joe, still the company's leading moneymaker, was repackaged in
a less militaristic "adventure" motif, with a different range of accessories.
11/11/2011
To offset the declining popularity of G.I. Joe, the company acquired Burt Claster
Enterprises, the television production company responsible for the popular "Romper Room"
show for preschoolers and an associated line of "Romper Room" toys.
The macro environment was thought to seal G.I. Joe’s fate for good when the rising
price of plastic, driven by crude oil prices, caused Hasbro to discontinue G.I. Joe in 1975
(later brought back to market). Yet the continuing success of "Romper Room" and its related
toy line proved to be a positive for Hasbro in the coming decades. The only successful new
product development activities in the 1980s were those that again capitalized on media pop
culture, such as product lines developed to tie-in with the movie Jurassic Park and the
popular children's television show Barney.
Hasbro Strategy
Hasbro has taken multiple approaches to growth throughout its history; some less
successful than others. The approaches can be categorized by applying a growth strategy
framework:
11/11/2011
Product Development
Product development for Hasbro can be analyzed in two buckets: new products that
Hasbro created early in its history that became its flagship products, including Mr. Potato
Head, G.I. Joe, and Transformers; and new products via acquisitions. From the 1980s to
present day, most new products came in the form of acquisitions such as Milton Bradley, and
Hasbro built its brand portfolio as a serial acquirer. Similarly to Hasbro, game company
Milton Bradley pioneered products through tie-ins to television shows, such as
Concentration.
When Alan Hassenfeld became chairman and CEO of Hasbro, he continued the
acquisition trend of the 1980s, as Hasbro acquired Tonka Corp. in 1991 for $486 million.
With the deal, Hasbro added not only the Tonka line of toy trucks but also Tonka's Parker
Brothers unit, the maker of Monopoly and Nerf. The Parker Brothers unit was merged into
Hasbro's already strong Milton Bradley division.
Market Penetration
Hasbro expanded with its existing brands through a strategy it maintains today: reimagining, re-inventing and reigniting its core brands. When Stephen Hassenfeld was CEO
and chairman of the board, Hasbro slashed its product line by one-third between 1978 and
1981, while its annual number of new products was cut by one-half. Hasbro refocused on
simpler toys, such as Mr. Potato Head, that were inexpensive to make, could be sold at lower
prices, and had longer life cycles. This conservative philosophy precluded Hasbro from
entering the hot new field of electronic games, as did the fact that it could not spare the cash
to develop such toys. The decision to stay out of the market was vindicated in the early
1980s, when the electronics boom turned bust and shook out many competitors but re-visited
in the late 90s with the increased popularity of video/online gaming.
Furthermore, the company has leveraged on the popularity of one product category to
enter into another category. For instance, the Transformers and G.I. Joe brands were
extended to motion pictures which further enhanced the sales of products. In addition, the
company has entered into a strategic relationship with Universal Pictures to produce at least
three motion pictures based on certain of Hasbro’s core brands, with the potential for
production of two additional pictures. By focusing on core brands, the company has
maintained a more consistent revenue stream and basis for future growth.
Market Development
Market Development came in the form of geographic expansion via developing
critical markets such as East Asia. Hasbro gained two distribution channels there in 1992
11/11/2011
by purchasing Nomura Toys Ltd., based in Japan, and buying a majority stake in Palmyra, a
Southeast Asian toy distributor. By 1995, Hasbro's international sales had reached $1.28
billion, which represented almost 45 percent of total salesx.
Diversification
Hasbro’s greatest missteps came through diversification efforts launched to
compensate for G.I. Joe’s declining popularity in the 70s. First, Hasbro opened a chain of
nursery schools franchised under the "Romper Room" name. The company hoped to take
advantage of President Richard M. Nixon's Family Assistance Plan, which subsidized day
care for working mothers. Running the preschools proved to be a very big mistake when kids
kept getting lost. Another ill-fated diversification move was Hasbro's line of Galloping
Gourmet cookware, based on a contemporary television cooking show of the same name. That
venture literally fell apart when termites ate salad bowls stacked in a warehouse.
Strategy for the future
Hasbro adopted a multipronged strategy for reinvigorating its performance as the
turn of the century approached. Today, its strategies include leveraging its well-known
brands in new ways; following a staged expansion approach, stepping up efforts to market
electronic versions of established games, particularly through the Hasbro Interactive
initiative; continuing to grow internationally; and bolstering new product development
primarily through media tie-ins and in entertainment with motion pictures, television, and
the internet.
NERF: FROM BALLS TO BLASTERS
Nerf began with a fairly simple value proposition: provide indoor sports play that
won’t damage anything. Its marketing included the promise that “you can’t hurt babies or
old people,” meaning that parents could allow kids to play ball in the house without worry.
This simple proposition led to incredible sales and spawned a generation’s worth of foam
products. The original goal of the inventor was to use the Nerf material for making soft rocks
and Milton Bradley changed it to making a soft ball.
In the 70s and 80s, Nerf created numerous products using its unique Non-Expanding
Recreational Foam technology. Some of the most popular items included the Nerf Hoop,
hung on many a closet or office door, and the Nerf football, an alternative for playing catch
with less risk of injury. The Nerf football was a hit because it was a different product than
the original Nerf ball. It had a harder exterior which enabled it to resemble a real football
and travel much further and faster than a foam ball would. Nerf established a reputation as
11/11/2011
a safer alternative to hardball sports, allowing younger kids to engage in the recreational
activities of older siblings. It also took advantage of a gap in the marketplace.
Sports had long been a connection between parents and kids, allowing for outdoor
play and bonding. Having a catch in the backyard was common for many, as was early entry
into Little League, AYSO, and Pop Warner. One constant worry for parents, however, was
the danger inherent in most sports. A simple game of catch can turn bloody with a misplaced
glove. A quick toss of the football can break a nosexi. With Nerf, Parker Brothers found an
opportunity to provide a similar experience in a safer environment. Kids loved the squishy,
interesting feel of the products and they enjoyed playing catch at a younger age. Parents
loved the security of knowing that kids could learn how to play sports without getting hurt.
Nerf found a unique place in the market, in that it was a safe version of sporting goods, while
also a sporting version of toys. This was a white space in between the two industries.
As is the case with many great innovations, however, Nerf’s successes spawned
imitators and new competitors. Many other “friendly” versions of sporting goods began to
enter the market, though Nerf maintained a quality brand equity advantage vs. others. The
Nerf team, however, continued to look for new and different ways to grow its offerings.
While safe sports had been a reliable winner, the brand stewards believed that additional
play patterns would allow Nerf to grow more rapidly. And so began the blaster era.
Blasters: The Early Years
In 1989, Parker Brothers launched the Blast-A-Ball, Nerf’s first ball blaster. The
Blast-A-Ball allowed kids to experience a new level of Nerf. To use it, you had to jam the ball
into the end of the barrel, pull back the handle and then push it forward as hard as you
could. The air pressure would the send the ball flying at high speeds. It was quite loud and
the sound of it was part of the surprise. Instead of having a basic experience with a football
or basketball, each with a specific purpose, kids were now able to bring role play and fantasy
to Nerf. Kids could extend their “cops and robbers” play with Nerf, adding depth to how kids
interacted with the brand.
Nerf further established its role-play intentions in 1991, with the advent of the Nerf
Bow and Arrow. This product offered the first departure from the “Nerf ball,” as it gave kids
the chance to fire arrows. With this new product, Nerf took a significant step in a new
direction; it left sports behind and asked kids to concentrate on outdoor role play. This was
also the first product produced under the Nerf name that could be considered a “weapon.”
11/11/2011
Nerf maintained its sports line, yet this new play pattern offered an additional revenue
stream and potential new customers.
They had to be careful during this time, however. Nerf’s roots still lay in its safe
indoor and outdoor sports products and it didn’t want to risk losing its core audience. In an
apparent attempt to mitigate this risk, and to appeal to a younger audience, the Nerf
“armory” products kept a cartoonish look. The early blasters were brightly-colored and
obviously fake. This allowed Nerf to maintain its friendliness to parents while allowing kids
to explore the world of guns and arrows.
Sales during this early period flourished. Perhaps driven by the additional revenue
stream, Nerf sales soared between 1991 and 1997. Hasbro had a proven winner on an
upward trajectory and it continued to iterate with new product offerings in the blaster
market.
Blasters: The Later Years
In the late 90s, Hasbro’s performance slipped significantly. By 2002, Hasbro was
trading at around $12 a share, down from a 1999 high of roughly $40 a sharexii. The Nerf
brand suffered along with the company, with sales dipping consistently between 1997 and
2003. The company continued to support innovation within the brand, yet there were no real
winners during this time. In 2004, however, Nerf changed the game again.
The N-Strike series entry was arguably the best Nerf launch since its inception as a
foam ball. The Nitefinder was the first major entry into the N-Strike, and it established
some interesting new precedents for the brand. The Nitefinder established the yellow and
orange color scheme for the N-Strike blasters and it offered a much more realistic look. Gone
were the days when Nerf focused on kid-friendly, cartoonish designs; instead, the new
blasters were ultra-realistic apart from their color scheme. Essentially, Nerf had assessed
the market for blasters and decided that realism was required for the new millennium’s
consumer.
The N-Strike line continued to produce more realism and higher performance.
Seemingly every new blaster out-performed the last in some way, with longer range, faster
11/11/2011
reloading, or more rapid fire. The Longshot (2006 launch) re-created a sniper rifle for Nerf
fans and the Vulcan (2008) was essentially a rapid-fire machine gun in toy form. These
sequential launches each added significant revenue to Hasbro, clearly showing that the
company’s belief in the high-end blasters was justified. Since 2003, Nerf sales have been
meteoric, based primarily on the N-Strike line of blastersxiii.
Vortex: The Next Blaster Bet
Despite the incredible success of the N-Strike line, Nerf has decided to extend its
product offering once again. While it plans to keep N-Strike as an incredibly profitable
revenue stream, Hasbro recently launched four new blasters in the Vortex line. This line
relies on disk ammunition rather than on darts. The disks fly farther and more accurately
than darts, allowing for higher levels of performance for increasingly demanding consumers.
The Vortex line also has a new look, with futuristic colors and lines designed to elicit feelings
that Vortex is the “next generation” of blasters.
Winning with Nerf
While Nerf has had its shares of ups and downs, it has been a clear winner for
Hasbro since its inception in 1970. This begs the question: how has Nerf lasted over forty
years in an industry known for its “one and done” successes and its fickle consumers? The
secret may very well lie in the way that Nerf has sequenced its success over the years.
As we saw in the Apple case, there are some fundamental ways in which a company
can create a viable, sustainable advantage in the marketplace. While Nerf is not as
technically advanced or as wildly profitable as Apple, it seems to have followed a similar
path to its current position of dominance. It relied on the three fundamental principles of
ecosystem construction: a Minimum Viable Footprint, Staged Expansion, and Ecosystem
Carryover.
Minimum Viable Footprint
Nerf started with a simple idea and a simple roll-out plan. It made a ball of foam
and put it in a box with some writing on it. Its value proposition was explicitly stated on the
box and the need was clear. The ecosystem didn’t require a lot of players, since Parker
Brothers manufactured the ball internally and only required retailers and distributors to sell
to the masses. It was the first mover in the sporting goods/toys space and it dominated with
its initial offering. This initial success was, in a sense, a “proof of concept” that allowed Nerf
to commercialize its foam technology in its simplest form. With 4 million balls sold in year
11/11/2011
one, Parker Brothers had established a customer base and a reputation for safe indoor sports
fun.
Staged Expansion
Whether by luck or design, Nerf has done tremendously well in this area. After the
success of the original Nerf ball, the company decided to wait two years before introducing
other sports products, such as the football and the Nerf Hoop. This allowed Parker Brothers
to solidify its relationships with consumers and with retailers, leveraging the success and
value of the original offering. By 1972, consumers trusted Nerf as a safe sports toy and
retailers wanted to carry Nerf brand toys.
The 1989 launch of the Blast-A-Ball was another wise tactical move in a staged
expansion. Assuming that the Nerf team saw the eventual opportunity for blasters, it was
wise to launch a blaster with balls instead of arrows. Since consumers were used to having
Nerf around the house as a ball, this product was merely a new “delivery device” for the tried
and true Nerf ball. The Blast-A-Ball introduced the concept for propelled Nerf products and
it taught consumers how to use a blaster. By the time of the Bow and Arrow launch,
consumers understood the fun of shooting foam and were more likely to pick up the bow and
arrow as a new offering. Had they launched first with the bow and arrow, Nerf may have
lost its consumer in translation. By waiting, the company allowed the concept to sink in and
it trained its consumers.
With N-Strike, Hasbro has done a masterful job of the staged expansion. Since 2003,
Hasbro has launched one “key performance driver” blaster per year. It has primed the
market to expect the product in early September and creates buzz around the eventual rollout date. Similar to Apple loyalists lining up for the latest iPhone, Nerf has kids that cannot
wait for the launch date of the new big blaster for the holiday season. Also, Hasbro has
primed its retailers to expect a huge promotion in early September and another “hot toy” for
the holiday season. This leads to added promotion from within the retailers, as they look to
capitalize on the big ticket items.
The other master-stroke of Hasbro’s deliberate roll-out of new innovations is that it
allows kids to build up their “arsenal” of Nerf products. Much like the iPod, newer versions
of Nerf blasters provide some added performance and/or features. This allows the consumer
to justify another Nerf purchase, as he needs to get his hands on the very latest in Nerf
technology. Between the product launch cycles, Hasbro also offers programs (like “Gear Up”)
to encourage consumers to buy more accessories, ammunition, etc. to get ready for the
11/11/2011
upcoming launch. This gives Nerf the opportunity to adopt a model previously used by
printer cartridges, wherein it can sell ammo and accessories separately. This keeps Nerf top
of mind and maintains excitement throughout the year.
Ecosystem Carryover
An important ecosystem carryover for Nerf throughout its history has been the loyal
customer. Nerf initially held the promise of safe fun for children and its products continued
to leverage that fundamental strength. As Nerf continued to innovate with its product line,
it carried with it that very promise; parents knew that Nerf was synonymous with safety and
were thus willing to expand their purchases to include “toy guns.”
Another key component of carryover was the all-important consumer. While Nerf was
purchased and endorsed by parents, toy sales are inherently driven by children’s desires
(especially during the holiday season). Nerf used each innovation to ramp up its aspirational
messaging to kids, beginning with Nerf sports products allowing younger siblings to get in on
the action of older brothers and sisters. In the later years, Nerf used that aspiration in new
and creative ways. Nerf’s marketing campaigns capitalized on aspiration by depicting
MUCH older boys using Nerf blasters to have fun. The typical packaging for a Nerf blaster
today shows a man in his early 20s firing the modern-looking weapon. TV and print ads also
show older boys in dramatically-lit, obstacle-laden shootouts, further cementing the cool
factor of Nerf.
A final key carryover for Nerf through the years has been the retailer. Wal-Mart,
Target, and Toys R Us are critical to the success of any new toy offering and Hasbro has
maintained strong relationships with those retailers. By producing consistently strong “hit”
products, Hasbro has ensured over 20 feet of exclusive shelf space in the toy aisle and huge
orders each year. Nerf’s innovations have built-in support with retailers and can therefore
ensure success year after year.
NERF: LESSONS LEARNED
Owning the product is useful but limiting
The simpler tangible products are the first step. When you role play combat, the first
thing you need is the gun. This is a very strong association. When your gun is Nerf, Hasbro
has an opportunity to equate playing combat games with the Nerf label. Creating association
is not enough though, it has to be backed by products which are offered for all things combat.
11/11/2011
Hasbro has been able to get into the market using a very simple proposition but in
the past few years they are moving to the next stage of association. Owning the activity has
allowed them to go from shooting soft foam darts/ pellets at each other to shooting water
guns at each other to shooting each other with lasers. No matter what you do if you are
fighting other kids in a combat activity Nerf has you covered.
Nerf now also has video games, which might have seemed unthinkable in 1989 when
they launched the Blast O Ball, but from 1989 to 2011 they have managed to transform their
association:
Foam
Balls
Guns with
foam balls
Guns
shooting
foam
bullets/
darts
Guns
shooting
water and
lasers
Guns used
anywhere
including
video
games
Figure 1 Nerf idea carryover over time
Make products for different age groups so boys can continue to
upgrade
Young boys get their first toy guns relatively early, say 2-3 years old. They will play
with the relatively low power guns early, maybe with bows and arrows. Nerf has designed
products for boys to use all the way from that early age to till the time they are in their
teens. The guns keep getting bigger and shoot projectiles faster. Nerf can almost be looked at
something kids want to play with till they are old enough to play sports like paintball. Even
after they are old enough to play paintball, they can play with Nerf guns as they cannot play
paintball every day.
11/11/2011
Figure 2 Blast O Ball
Figure 3 Original Nerf Ball print ad
HASBRO’S ECOSYSTEM
Hasbro works in a relatively small and direct, but powerful ecosystem. Traditionally,
the major players in the market are Hasbro, its suppliers (a third-party manufacturer it
outsources production to), toy fairs, the retailers, the parents and the end consumer: kids and
teenagers. Importantly, since the toy industry is a hits-based business, the reaction of the
not just the retailers but of the shoppers and consumers feeds back into Hasbro as they
determine what toys to develop for the next season. We can see this feedback loop in the
Hasbro ecosystem map:
11/11/2011
Retailers
Independent Toy
Stores
Third
Party
Suppliers
(Far East)
HASBRO
National Toy
Stores
(Toys ‘R’ Us)
National
Discount
Retailers
(Walmart, Target)
Shoppers
(parents,
relatives,
friends of
children,
teenagers)
Consumers
(kids,
teenagers)
Toy Fairs
However, Hasbro has taken actions to build up its supply chain. First, as we
discussed earlier in the paper, Hasbro has pursued an acquisition strategy over the years.
Essentially, these large toy companies that Hasbro buys up are supplying the company with
established toys, brands, and customer bases. This addition to the ecosystem can be
reflected as such:
11/11/2011
From a competition standpoint, the consolidation of the industry has helped Hasbro
in the market by giving it a stronger, larger portfolio of toys and less rival firms. Internally,
it boosts its R&D and marketing capabilities. But Hasbro hasn’t stopped there. In recent
years, Hasbro has acknowledged that it is in direct competition with electronics and video
games. Accordingly, Nerf has explored different avenues to get into the ecosystem. They
have concentrated on the Wii platform introduced by Nintendo. The Wii platform is different
from traditional video games because the controllers function as different things based on the
game you are playing. If you are playing baseball the Wii control is the bat. If you are
playing tennis it is a racquet. So by extension if you are playing a Nerf game the Wii
controller is a blaster.
Nerf has a partnership with Electronic Arts which releases Nerf branded games,
such as N-Strike and N-Strike Elite. They make controllers to be used with these games.
These Controllers in effect are just holders with slots in them to hold the Wii controllers.
However when playing the game, users get the full Nerf experience as they are holding Nerf
blasters and shooting each other with them. It is an attempt by Nerf to move to the video
gaming space while retaining as much of their brand equity and playing experience that
users have had playing with the real Nerf products.
11/11/2011
Nerf is also trying to leverage its heritage of making safe indoor sports play possible
in the new video game space especially the one opened up by the Wii. Nintendo had released
games such as Wii tennis and baseball at the same time as it introduced the console and
before games made by independent game makers (such as Electronic Arts) were available.
These games have come to define Wii even after more sophisticated games have arrived on
the market. Nerf’s strategy of safe indoor play translated perfectly here, especially as the Wii
controllers can lead to accidents when they slip out of your hand as you take a swing in
baseball or golf. Nerf has licensed other manufacturers to make attachments made of Nerf
material for games such as baseball, golf and tennis. These attachments aim to bring even
more realism into video game play as you are holding a baseball bat (albeit a Nerf baseball
bat) instead of a Wii controller. Especially useful is the Nerf steering wheel because who
wants to play a racing game holding a Wii controller alone when you have this instead:
Figure 4 Nerf Wheel attachment for the Wii
From products that increase realism in play and protect the (rather expensive) Wii
controller, Nerf has retained the protection piece and applied it to another Nintendo product,
the 3DS. The 3DS is a personal gaming system competing with products such as the PSP. It
is made of plastic is prone to damage when dropped. Nerf armor can protect the 3DS from
bumps and scrapes and makes your 3DS stand out from your friends’ 3DS, as it is available
in a variety of color combinations. Nerf can extend this in the future to protect other
expensive electronics that are marketed to kids.
11/11/2011
Figure 5 Nerf armor for the Nintendo DS
One of the effects of this partnership with video gaming companies is that is has
again allowed Hasbro to build up its ecosystem. It has made a competitor a complementor
and in doing so, protects the value of its products. For this reason, partnerships have become
increasingly important for Hasbro over the years, and the gaming is just one example:
.
Another important partnership that Hasbro has developed over the years was one
with its retailers. Consolidation in the retail industry and the growth of discount retailers
11/11/2011
such as Walmart and Target has transferred power away from the manufactures and to the
stores.
“Like many industries, changes in the retail channel have redefined the
toy supply chain. … The shifting channel structure an associated market
power also favors the industry leaders [Hasbro and Mattel]. Gaining
shelf space at Walmart requires more than a good toy concept.”xiv
One way Hasbro has tried to mitigate the power of the retailer is to work closely with
the major players as a partner. For example, Nerf developed a line of its N-Strike Nite
Finder products to be sold exclusively at Walmart: the Nerf “Whiteout Series.” This allows
Walmart to increase its sale and drive traffic to the store by offering an exclusive, and it also
incents Walmart to promote the Nerf brand. By strengthening its relationship with the
retailers, this alleviates some of Hasbro’s risk with coming up with hit toys – they can get
retailer “buy in” to a product months before production begins and guarantee shelf space for
their products.
Hasbro’s Supply Chain Risks & How They’ve Mitigated Them
Within Hasbro’s ecosystem, and more specifically within the supply chain from
Third-Party Manufacturer to Retailer, Hasbro faces a number of risks. First, most of
Hasbro’s toy manufacturing is outsourced to third-party manufacturers in the Far East.xv
This leads to a number of risk: reliable manufacturing capacity (necessity to keep multiple
vendors), long-lead times, currency fluctuations, disruptions from political or economic
turmoil.xvi Hasbro has taken specific steps on the operational and financial side to mitigate
these risks. From their 2010 Investor Day presentation, the company has:

“Secured appropriate shipping capacity to avoid any impact to our supply
chain this holiday season.

“Worked closely with retailers to ensure they have the products consumers
want on the shelves for the holidays

“Positioned to meet demand with a good supply of high quality, safe toys this
holiday season.”
But perhaps more interesting is how Hasbro’s overall strategy and its product
development itself has helped to mitigate these risks. In particular, the necessary long-lead
11/11/2011
time, puts immense pressure on accurate demand forecasting. If a toy unexpectedly becomes
a hit during the holiday season, there’s not the time to create additional supply to meet the
demand.
As an example, back in 1991, when Nerf launched its Bow ‘N’ Arrow product, it
was a surprise holiday hit, and retailers were under-stocked and lost considerable sales.
“...the Nerf Bow ‘N’ Arrow, [is] a gift that won’t be under thousands of
Christmas trees come Wednesday morning. But not for lack of interest.
The toy, a 30-inch plastic bow that comes with three 10-inch foam
arrows, is the runaway hit of the 1991 holiday season. But it hasn’t been
available in local store for more than two weeks. The problem was that
no one, including its maker, Parker Bros., anticipated the demand for
the toy.”xvii
In a “hits-based” industry, such as the toy industry, it is highly difficult to anticipate
what products will be major hits – but it helps if you know that the product you’re launching
already has a built-in consumer base, anxiously awaiting its arrival. As we discussed,
Hasbro has pursued a “Staged Expansion” strategy, released slightly different versions of
each Nerf product gradually, building up a base of consumers who engage with the product
and the brand. This allows Hasbro to better forecast the demand for future products, which
in turn allows them to better direct their suppliers to manufacturer a more accurate number
of toys. Retailers are happier because they have the level of inventory that they need, and do
not need to worry about shortages or surpluses. Essentially:
“Building such long-standing brand products requires a different supply
chain strategy. With the gradual ramp-up volume, developing
manufacturing partners who can deliver quality products over a longer
time horizon is important. With more time available, decisions can be
data-driven and distribution channels can be expanded slowly to fulfill
increasing demand. New and replacement products can be released
slowly with the goal of maintaining shelf space for the category and
stable visibility with the consumer. … Toy makers have learned that
introducing a new product based on a successful toy platform is
one of the most reliable techniques to reduce risk.”xviii
CONCLUSION
Nerf has maintained its success in a difficult market by utilizing many of the core
concepts we have discussed in class. Hasbro has strategically managed its relationships in
11/11/2011
Nerf’s ecosystem to ensure the benefits of partnering with Nerf outweigh the costs. This has
established Nerf as a leader in its ecosystem. Nerf’s product extensions into additional
categories also showcase its ability to add and capture value from the brand by entering
segments in which it had no presence previously. Finally, the Nerf ball and subsequent
launches are a brilliant example of releasing the minimum viable footprint and then
staggering product launches to capture additional value and leverage existing resources.
Because of these actions, Nerf has maintained its relevance in a constantly-changing
environment.
Maldowitz, L., et al.(Drexel Burnham Lambert Inc.) “Toy Industry – Industry Report.” 1
December 1988.
ii Sic & The NPD Group in conjunction with Toy Industry Association, Inc.
(www.toyassociation.org/AM/PDFs/Research/RollingData.pdf)
iii Led, D.R., et al (Drexel Burnham Lambert Inc.) “Hasbro Bradley, Inc. – Company Report.”
5 October 1984
iv “FDA Says ’71 Christmas Toys will be safer and more sophisticated than before.” The New
York Times. 7 November 1971. “FDA declares plastic toy called Nerf ball flammable, in
violation of ’69 Toy Safety Act.” The New York Times. 18 April 1971
v Maldowitz, L., et al.(Drexel Burnham Lambert Inc.) “Toy Industry – Industry Report.” 1
December 1988.
vi “Industry Profile: Toys & Games in the United States.” Datamonitor. June 2010
vii Maldowitz, L., et al.(Drexel Burnham Lambert Inc.) “Toy Industry – Industry Report.” 1
December 1988.
viii Sic.
ix Hasbro, Inc. Company History.
x Hasbro, Inc. Company Profile. DataMonitor. September 2011.
xi imdb.com: The Brady Bunch, “The Subject was Noses”
xii Morningstar stock quotes
xiii Internal sales data, Hasbro
xiv Johnson, Eric M. “Learning from Toys: Lessons in Managing Supply Chain Risk from the
Toy Industry.” California Management Review. Spring 2001.
xv Hasbro Investor Day Presentation 2010. investor.hasbro.com
xvi Johnson, Eric M. “Learning from Toys: Lessons in Managing Supply Chain Risk from the
Toy Industry.” California Management Review. Spring 2001.
xvii Stanton, Russ. “Demand for Nerf toy exhausts OC supply.” The Orange County Register.
24 December 1991.
xviii Sic.
i