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