Case The LeGO® Group

The LEGO® Group is a family business founded in 1932, making wooden toys in the city of Billund, Denmark. In 1958, Godtfred
Kirk Christiansen, son of the company founder Ole Kirk Christiansen, created the LEGO© brick, widely praised and acclaimed as
the “Toy of the Century,” by both Fortune magazine and the British Association of Toy Retailers (LEGO, Annual Report, 2011).
Today, LEGO is Europe’s largest and the world’s second-largest toy manufacturer in terms of sales volume. It had a turnover of
€2,511 million in 2012 and employed more than 9,000 worldwide. LEGO’s sales during the first half of 2013 increased by 13
percent with its strongest growth in Asia. The company has been a pioneer in breaking convention at the cost of failing and almost
going bankrupt by 2003, with its adventurous forays and building what it believed was a diverse portfolio that boasted of video and
other games, apparel, and
theme parks. Riding high on the success of its Harry Potter and Star Wars-themed series, LEGO’s road to self-realization was in
understanding that the brick was at its core.
The diversification was a direct response to developments and challenges in the industry. In the 1990s, the segment for
construction toys was shrinking. The competition for kids’ time and their parents’ money was getting sharper. LEGO is part of the
market called “edutainment,” including products with the ability to entertain and educate at the same time. First of all, computer
games “stole” a lot of potential LEGO users. Little virtual playgrounds and computer games like SimCity or Civilization soon
presented themselves as a threat to traditional toymakers like LEGO. Who needed toy bricks, with the deluge of computers and
other simulation games flooding the market?
Simultaneously, the power of retailers grew. Especially in the United States, the buyers of LEGO products were reduced to only a
few companies like Toys“R” Us, Walmart, and Kmart. LEGO’s business model was very dependent on retailers, who now started
demanding larger discounts and specially adjusted products. LEGO was caught in a dilemma, between the decision to adopt a
flexible price strategy that would cater to lower budgets or to continue with its existing price structures that promised standardized
products across the board. To protect its brand in the market, LEGO wanted customers to be able to buy the same products at
almost the same price everywhere. If these customers knew that there was only one price and quality level for a certain LEGO
product, they would see the company as a lot more trustworthy, as opposed to a situation where all LEGO products were available
at a low cost and, possibly, low-quality at some retailers. The company’s CEO reached out to LEGO’s fanbase who responded
with threats to leave their favorite brand if it steered from quality in an attempt to offer their toys for cheaper prices. It was decided
that LEGO’s overall reputation for reliability was best left untouched with its promise of upholding a single high standard for its
corresponding quality and price; conversely, LEGO’s consumer image would have suffered had it compromised over price.
To become more independent, the company slowly began to look for different platforms and new ways of selling its existing
products and building on innovation from within. The internet provided that opportunity. In the early 2000s, LEGO launched
LEGO Direct, which was the successor of the not-so-successful LEGO World Shop. With LEGO Direct, it became possible for
customers to invent or assemble their own LEGO (virtual) constructions on their personal computers like in video games. When
finished, they could order the specific LEGO products required for their dream constructions. This option gave the company some
valuable advantages: They became more independent of the retailers and enjoyed a direct communication channel with their
customers on their Web site, where they could quickly realize new demands from their consumers. LEGO.com has been very
successful and has had over a million visitors per month, with the average visitor staying for 8–9 minutes.
Moreover, LEGO is the only major traditional toy maker that targeted the adult market and has a strong following in the Adult
Fans of Legos or AFOL communities worldwide. LEGO’s Architecture Series directly targets this market of adult Lego fans, a
solid example of LEGO’s attempts to return to its core strength. Seoul’s Sungnyemun gate and Tokyo’s Imperial Hotel featured in
LEGO’s Architecture series, further establish the company’s hunger for new markets across not just age segments but also
different geographies. More recently, LEGO adapted an existing dinosaur set and repackaged it as a commemorative Year of the
Snake special edition, sold only in China.
Meanwhile, the global toy industry has been growing at a Compound Annual Growth Rate (CAGR) of 2.9 percent from 2008 to
2012, while the global economy has grown by only 2.6 percent. The industry growth is not equally divided; neither by region, nor
by country.
While some countries, especially emerging markets, are experiencing relevant growth such as France, Germany, Australia, Brazil,
and China, others like USA and Canada are experiencing negative growth in their market shares. To reach its global customer
base, LEGO currently has offices in 29 countries. Because its products don’t need local adaptation, the company has reduced its
office base over time. The company only needs to accommodate the products to local laws, which can be done initially for each
product line in a centralized setting. Initially, LEGO moved many production sites to international locations, to lower its costs as
with the Czech Republic and Mexico plants, and also the outsourcing of production of Flextronics to Poland.
Over the past two decades, LEGO has made several production location decisions, with its underlying purpose being the
accumulation of cost savings. However, this time a growing demand and an effort to reduce lead time between order and delivery
are the main drivers behind the company’s decision to invest hundreds of millions of euros in the new in-region manufacturing
facilities in China. According to the global research firm Companies and Markets, by 2016, the Asia-Pacific region is expected to
become the world’s largest toy market. In the words of LEGO’s spokesperson Roar Rude Trangbaek, the strategy was to shift
production closer to its core markets. Factories in the Asia-Pacific region would thus, not supply to Europe or North America. The
stated goal is for the LEGO factory in China to be able to supply 70 to 80 percent of the LEGO bricks sold in Asia in 2017.
Although Asia is LEGO’s smallest market, contributing less than 10 percent of its revenue, annual sales in the region have peaked
by more than 50 percent as millions of Asian consumers are buying educational toys amidst improved wage scenarios and better
living standards. In the first half of 2013, the company experienced their strongest performance in Asia with consumer sales
growing by about 35 percent. In fact, LEGO’s CEO Jørgen Vig Knudstorp, expects higher growth rates in Asia. LEGO’s revenue
of nearly two billion dollars in the first half of 2013—compared with $1.43 billion for Hasbro, its close competitor— was boosted
heavily by its growth of seventy per cent in China. China has become the world’s second-largest toy market. It is predicted that the
Asia-Pacific region will overtake North America as the largest regional toy market in 2014. The LEGO group also aims for the
European, African and the Middle Eastern region, Asian, and American markets to contribute equally to sales and fuel further
expansions.
The decision to choose China as the destination for setting up their production facility might have raised eyebrows within the
industry. Previously, toy makers faced continuous struggles in China, where parents would rather see their children reading books
than playing. In fact, playing has often been considered a dirty word in a culture where formal education is prioritized. However,
many toy companies are already discovering that they can influence Chinese parents by positioning their toys as ‘educational
items.’
In this regard, LEGO has already struck a chord with affluent Chinese parents, with toys that are being branded as educational
tools to help children with developing dexterity and creativity. In an initiative to make itself known to the Chinese public, LEGO is
spearheading several projects including mobilizing a group of students from Tsinghua University to build a low-cost atomic force
microscope with LEGO’s 3D parts and electronics.
A challenging issue for LEGO in China is consumers get lured by similar products by other manufacturers who build identical
looking LEGO bricks, commonly known as “LEGO clones.” Already swamped in a history of court battles over its copyright,
LEGO is presently also locked in a legal spat with Hong Kong’s Best-Lock Construction Toys, accused of ripping off LEGO’s
signature mini-figures. Although LEGO has been relatively successful in its copyright battles so far, several copies and clones
abound in the market either claiming to be LEGO products or stating compatibility/association with the world’s leading toy bricks.
Blocks marketed by Chinese companies Ligao and Banbao are often direct copies of LEGO designs.
One potential strategy to keep these pirates at bay is to increase LEGO’s already high manufacturing standards as most Chinese
toy factories are focused on producing and exporting low-cost inferior products rather than high-quality ones for domestic
consumption. LEGO has invested in creating customized products for Chinese or Asian markets. Judging by precedent, this is a
risky strategy to adopt, with products destined to share the fate of the highly local but now defunct ‘Orient Expedition’ set which
did not sustain the popularity or subscription it was pegged to capture.
LEGO painstakingly researched comparatively new markets in the Asia-Pacific that it wants to turn into a stronghold and came up
with two brand new ranges of toys. LEGO Legends of China, with plenty of models and buildable figures of warriors and beasts;
and the more controversial LEGO friends, targeted at young girls. LEGO has achieved a complete turnaround in the span of a few
years and stands to gain from a host of company decisions that include maintaining its focus on the brick, creatively building on its
patents and storywriters to bolster its theme of unlimited play, and more crucially, shifting part
of its production facility to China.

Questions
1. LEGO has placed an emerging country such as China ahead of the developed economies of Japan and South Korea in its
location decision. Discuss the pros and cons of this strategy.

 Pros:
o Market Potential: China's rapidly growing consumer market, with annual sales growth of 35% in the first
half of 2013, presents significant opportunities for LEGO to expand its customer base and increase sales.
o Cost Efficiency: LEGO can benefit from lower production costs in China compared to Japan and South
Korea, potentially enhancing its profitability.
o Strategic Location: Establishing manufacturing facilities in China allows LEGO to serve the Asia-Pacific
market more efficiently, by supplying 70-80% of LEGO bricks sold in Asia by 2017.
 Cons:
o Quality Concerns: Historically, China has faced challenges with product quality and counterfeit products,
posing risks for LEGO in maintaining the quality and authenticity of its products.
o Regulatory Risks: China's regulatory environment may pose challenges or uncertainties for LEGO's
operations, impacting factors such as intellectual property protection and market access.
 o Intense Competition: China's toy market is highly competitive, with domestic and international rivals vying
for market share, increasing the pressure on LEGO to differentiate its offerings and capture consumer
interest.

2. LEGO’s product portfolio is quite large. Discuss the advantages and disadvantages of product concentration versus
diversification in such a context.

Product Concentration:

 Advantages:
o LEGO's focus on its core product, the brick, reinforces its brand identity and customer loyalty, as evidenced by
its strong following in the Adult Fans of Legos (AFOL) communities worldwide.
o Streamlining operations around a single product line may result in cost efficiencies and simplified marketing
efforts.
 Disadvantages:
o Overreliance on a single product line increases vulnerability to market fluctuations or changes in consumer
preferences, potentially impacting LEGO's revenue and profitability.
o Limited diversification may constrain LEGO's ability to tap into new market segments or address evolving
consumer needs.

Diversification:

 Advantages:
o Diversifying into new product categories or markets provides LEGO with opportunities for revenue growth and
risk mitigation, reducing dependence on a single product line.
o Expanding product offerings can attract new customer segments and enhance LEGO's resilience to market shifts
and economic downturns.
 Disadvantages:
o Managing a diverse portfolio of products may increase complexity and resource requirements for product
development, marketing, and distribution.
o Dilution of LEGO's brand identity and core values may occur if diversification leads to consumer confusion or
brand dilution.

3. LEGO is a latecomer in the Chinese market. Discuss how it may overcome this barrier to achieve the expected rates of sales
growth.

 Localized Marketing: Tailoring marketing strategies and product offerings to align with Chinese consumer preferences
and cultural values, as demonstrated by LEGO's introduction of the Legends of China and LEGO Friends product lines.
 Partnerships and Alliances: Collaborating with local partners, influencers, or educational institutions, such as mobilizing
students from Tsinghua University for educational projects, to gain credibility and accelerate market penetration.
 Innovation and Adaptation: Introducing innovative products or experiences customized for the Chinese market,
addressing specific preferences or needs of Chinese consumers, such as educational toys targeting dexterity and
creativity.
 Brand Building: Investing in brand awareness initiatives, promotional activities, and customer engagement programs to
establish LEGO as a reputable and desirable brand in China, leveraging its reputation for quality and creativity.

4. LEGO is heavily investing in the Chinese consumer first. Discuss the pros and cons of this strategy.

 Pros:
o Market Leadership: Early investment in the Chinese market allows LEGO to establish a strong presence and
capture market share ahead of competitors, positioning itself as a leader in the rapidly growing Chinese toy
market.
o Revenue Growth: Targeting the Chinese consumer base can drive significant revenue growth for LEGO,
especially considering China's strong sales performance, with a growth of seventy percent in 2013.
o Brand Building: Heavy investment in the Chinese consumer demonstrates LEGO's commitment to the market
and reinforces its brand image as a global player catering to diverse consumer segments.
 Cons:
 o Risk Exposure: Overreliance on the Chinese market for revenue growth increases LEGO's vulnerability to
market risks, regulatory uncertainties, and economic fluctuations specific to China.
o Resource Allocation: Heavy investment in China may divert resources and attention away from other strategic
priorities or geographic markets, limiting LEGO's overall growth potential and global expansion efforts.
o Competitive Challenges: Intensified competition in the Chinese market may lead to pricing pressures, margin
erosion, and heightened marketing expenses, impacting LEGO's profitability and market positioning.

5. China is considered the land of knock-offs and imitation products. What are the measures major multinationals could take to
stem the spread of clones or pirated products, in their decision to locate to China

 Stricter Intellectual Property Enforcement: Collaborating with Chinese authorities to strengthen intellectual property laws,
enforce regulations, and crack down on counterfeiters, as evidenced by LEGO's history of legal battles over copyright
infringement.
 Brand Protection Initiatives: Implementing robust brand protection measures, such as trademark registration, anti-
counterfeiting technologies, and legal action against infringing parties, to safeguard LEGO's brand integrity and
reputation.
 Consumer Education Campaigns: Educating Chinese consumers about the risks and consequences of purchasing
counterfeit or pirated products, promoting the value of authentic LEGO products, and raising awareness about LEGO's
anti-counterfeiting efforts.
 Supply Chain Transparency: Enhancing supply chain management practices to ensure transparency, traceability, and
accountability throughout the manufacturing and distribution process, reducing the risk of counterfeit products infiltrating
the market.
 Collaboration with Industry Partners: Collaborating with industry associations, trade organizations, and other stakeholders
to collectively address the issue of counterfeiting and piracy in the Chinese market, sharing best practices and resources to
combat illicit trade activities.