Lego Case

Problem Statement: As a manager of The Lego Group I think the main problem that Lego faces is maintaining its competitive advantage and growth in the complex toy industry. Lego must identify a clear expansion plan to respond to the external (business) threats such as intense competition and new product innovations, changes in the toy industry with mergers and acquisitions and legal battles as well as maintain efficient internal operations in terms of supply chain and logistics in order to keep up their market dominance in the industry which is currently at stake.

Company History: Lego first started off during the great depression in 1932 manufacturing children’s toys using the highest quality material and workmanship to always produce top quality products – true to its motto ‘only the best is good enough’ (Refer to Exhibit 2 for strengths). His toys were designed to last through years of play which ensures durability of the product.

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Two years later the name Lego came into being meaning ‘play well’ in Danish and also ‘I put together’ in Latin. The company had the ‘pioneering advantage’ according to exhibit 2.

Ten years later the entire workshop burned down however, Kristiansen rebuilt the factory and remade all his lost designs from memory. At the end of World War I, Lego purchased an expensive plastic injection moulding machine and one of the first plastic toys’ a fish shaped baby’s rattle was created which was a tremendous success and thereafter Lego quickly expanded its business operations and produced over 200 varieties of plastic and wooden toys. Using this new technology the just plastic Lego bricks named Automatic Branding Bricks were created. In 1953, it was changed to Lego Bricks.

Godfred one of Kristiansen’s sons took over and came up with an idea to design a new structured system of toy products using the Lego Brick to create the Lego ‘system of play’. The whole purpose of the Lego system of play was to “create a toy that prepares the child for life which appeals to the imagination and develops the creative urge and joy of creation that are the driving force in every human being”. January 28, 1958 was a landmark in the history of Lego as the new brick design was patented. In the 1960’s Lego experienced phenomenal success expanding sales to many European countries as well as new markets in the U. S.

It also introduced building instructions as the standard feature for each set. In 1968, it introduced a new brick called DUPLO for children under 5. In the 1970’s it had grown to over 2500 employees and new innovative sets involving doll houses and furniture were created. It introduced Lego Technie series which created mechanical moving parts. In 1979 it changed leadership again. In the 1980’s it celebrated its 50th anniversary and the company continued to expand operations launching an educational line for schools as well and a DUPLO baby series.

Lego bricks were combined with technology and a light and sound series was introduced.

In the 1990’s Lego became one of the top ten largest toy manufacturers and employed over 7000 people and included over 1000 injection molding machines in five Lego factories. The use of television helped to build a familiar Lego maniac slogan. It launched its official website and soon after expanded into a new business area with the release of the first Lego computer game. It also diversified its product line by launching new creative play themes such as Lego western, Lego adventurers, ice planet and star wars which was one of Lego’s most profitable product line.

In the years 2000 and beyond other popular licensed rights were obtained for new products like Harry Potter, Batman etc.

With successful acquisitions of many licensed rights Lego partnered with video game design companies for both computers and video game consoles. The speciality was that at a time when video games were seen as too violent and inappropriate for children Lego provided non-violent video games with content that parents could trust. It also expanded beyond traditional video games to develop a virtual online Lego universe in 2010.

Analysis of problems: According to exhibit 1, the porters five forces analysis clearly shows that competition is a main concern that Lego is facing. This is due to the very high degree of rivalry among competitors.

Lego’s plastic brick design patent expired in 1988 which is one of the underlying reason for a high threat of new entrants as seen in exhibit 1. This lowered the barriers of entry and competition increased in the toy market. For example, Fisher Price introduced a plastic construction toy called construx which was a similar concept to Lego’s bricks. These companies hoped to capitalize on Lego’s success.

Several companies introduced such plastic toys that were compatible with Lego brick design.

Also, identical products were introduced by the company Tyco such as Super Blocks. They advertised their better price compared to Lego. New competition from Hasbro will also put Lego in a highly volatile situation as their product Kre-O will be compatible with Lego bricks and was based on themes such as transformers which was a new product in the industry. With the acquisition of Disney and Marvel a large amount of entertainment licensing was controlled by one organization and licensing costs seem to be high with a recurring cost of royalties.

These costs can discourage a new entrant to enter the market and increases the barrier to entry according to exhibit 1 it shows that the threat of new entrants is moderate. Lego also had to deal with a legal battle with Mega bricks which resulted in a major loss for the company since they lost the lawsuit. This proves that the product can be easily copied which poses a huge threat for Lego and they need to find strategies to avoid such problems in the future. Previously, Lego faced some internal problems with supply chain operations. They were not efficient in their cost saving and production.

This made them incur a lot of costs and wastage of product. The management intervened and implemented some changes in their logistics and production. Although the management made some effective decisions which increased the inventory turnover by 12% in 2006, it is essential to keep these costs low to be profitable in competition. Alternatives: Based on the problems discussed in the above section these are some alternatives that can be adapted by Lego to sustain their market dominance. Alternative 1: Lego can expand into new markets such as China and India where their presence is not currently established.

According to the case, they are established in the United States, Canada, Japan and Australia. They can build upon the success and the brand reputation that they currently have and tap into these markets. They can also set up manufacturing in these countries where labor costs are significantly lower. This increases operational efficiency and helps Lego become a cost leader. However, this also means that Lego should decrease their prices which are considered high in the industry while expanding into these markets.

Lego should focus on their traditional products which communicate their core values to customers and revise their product selection so it aligns with the brand image.

Alternative 2: Lego can develop new product lines and invest in acquiring more licenses to protect themselves from being copied by competitors. They can make use of customer inputs to identify needs and create new products that cater to the target market of Lego (children). They must keep in mind the core values of Lego products that are supposed to encourage creativity and imagination for children while creating new products.

Alternative 3: Lego can partner with the major upcoming competitor Hasbro whose products are already compatible with Lego bricks. This eliminates the huge threat of competition and this strategic alliance can provide a win-win situation for both companies and they can effectively market the theme based toy building products for which Hasbro has a license.

Alternative 4: Maintain status quo Recommendation: Based on the alternatives I recommend for Lego alternative 1 which is to expand into new markets such as China and India and revise their product selection.

Lego has expanded their product lines extensively, so adding new product lines to the existing ones does not solve the situation at hand. Instead they should look into their core values and make sure their products align with the mission of the company. Lego’s mission was to inspire and develop children to think creatively, reason systematically and release the potential to shape their own future. This should not be diluted in products or geographical expansions. They should re-brand their current product selection to reflect their core values and venture into new markets to seek growth.

Action Plan: In order to successfully implement the recommendation Lego could follow a few steps: -They should adjust their products based on the company values -They should research the market conditions in China and India and identify their competitors -They could consider partnering with local competitors to make their entry into the market easier -They could customize their products based on preferences by taking into account customer feedback. This can be done in the current markets as well as the new markets -Communicate their core values to customers They could focus on creating ” unique” products which cannot be replicated easily -They could appoint managers with exceptional innovative and creative abilities Time Line of events: In order to execute this two- fold recommendation. Lego should first focus on their product selection and communicate their brand values internally (to employees) and externally (to customers). Their highlight product which is the building set that aligns with their core values should be promoted effectively. Their theme based sets such as Lego Iceplant could be discontinued as new competition has risen from Hasbro has licensed new themes.

The product revisions and communication could be done in one year. Once the products are all aligned to the company’s core values the research and initial phases of the expansion plan could be done in one and half years. They can first set up in China since they have a presence in Japan. Based on that after one year of operations in China they can set base in India. Conclusion: In conclusion, based on the above recommendations I believe that revising the product selection to match the core values and brand image of the company could help Lego focus on differentiating their product and maintain their competitive advantage.

Lego has an established brand reputation with their mission to encourage creative thinking among children.

All their products should communicate this core value and their traditional toy company image. Also, for the future with its revised product selection they could expand into new markets such as China and India where there could be less competition compared to what they are currently facing. If there is a lot of competition in these countries they could try to partner with local companies to avoid competition.

This course of action should strengthen Lego’s position in the toy industry and help them resist the competitors. However, these recommendations are not the final solution for a company like Lego.

They must constantly evaluate market conditions and internal operations to be efficient and find strategies to respond to external threats. Appendix Exhibit 1 Porter’s five forces: BARGAINING POWER OF BUYERS (HIGH) -Customers can find alternative products One customer of Lego could be a store such as Toys R us and they have the power to keep or remove Lego products on their shelves which is impact Lego’s sales a lot THREAT OF NEW ENTRANTS(moderate) -Low barriers to entry -Lego patents expired -Easy to copy -Easily available resources -Licensing is under one Organization with the Acquisition of Disney And Marvel -High costs to license a product And recurring royalty fees may Put off new entrants to enter the Market BARGAINING POWER OF SUPPLIERS (HIGH) Lego’s products are made with plastic and the prices are usually fixed by Lego and it is hard to negotiate THREAT OF SUBSTITUTES (VERY HIGH) – -The nature of the product makes the threat of substitutes very high -Children can switch to other toys very easily. -A Better toy is readily available in the market INTENSITY OF RIVALRY (VERY HIGH) – The competition is high in the industry and is increasing – Other companies are trying to come up with better products and/or superior products that exceed the functionality and quality of Lego

Exhibit 2 SWOT analysis: Strengths-Huge presence in the market -Second largest toy maker in the world -‘pioneer advantage’, they started in 1932 so they have the first mover advantage – Unique product -Online presence Weaknesses-Highly priced -Inefficient internal processes in production and supply chain Opportunities-To expand into new markets -To develop their product line Threats-Competition threats from various companies with better products and licensed themes -Children can change their mind very easily and move on to other products