While keeping their portfolio up to date with incremental enhancements, toy companies are constantly seeking the next big hit. As such, continual product innovation is a key to survival in this sector. So, there is huge focus on spotting the new trends and quickly launching high impact products into the market in order to capture significant share of the all-important Christmas market.

Faced with incessant competition from the likes of Sony and Microsoft, many toy companies have been making significant investment in new technologies that can be incorporated into the branded product mix. In an age when most kids in the target markets have an iPod and Facebook profile, the digital world is a primary focus. Alongside LEGO, both Mattel and Hasbro jumped on the electronics bandwagon a few years back and are now launching more and more technology enabled products.

As more and more sophisticated products emerge, an associated concern is the escalating price tags - and hence the susceptibility to declining consumer spending in the US, where retail sales of toys slipped 2% in 2007.

Licensing deals are also a major source of new products, especially in the action toys area, where some of the fees paid in recent years have been substantial. A few years back Hasbro, for example, paid $600m and a 20% royalty for rights to the second series of Star Wars movies. Now things have calmed down a bit with Mattel paying $20m and a 15% royalty for Harry Potter.

Another prominent area of attention for several companies is the emerging demographic of the ‘tween’ market of children between 7 and 14. As the lifespan of Barbie and similar products has become
shortened, new niches have been exploited by such products as the Build-A-Bear range.

Lastly, driven both by changing socio-economic demographics and cultural references, many Chinese companies who manufacture the majority of production are being encouraged to innovate themselves. Just as Lenovo and its ilk have done in other sectors, Chinese branded toys are looking to leverage domestic market scale and global capabilities to deliver top-selling products for next year.