The essay is a strategic analysis for LEGO Group. LEGO Group is a famous toy company in the world, which established in Denmark. LEGO Brand is not only the familiar logo, but also the expectation. LEGO acts as a guarantee of quality and originality. LEGO’s core values are imagination, creativity, fun, learning, caring and quality. The essay will show strategic analysis by identifying the industry, analyzing general and industry environment, listing resources and capabilities, analyzing the company’s core competency, SWOT, current strategies. Then, giving the key issues. Finally, the essay will recommend the business-level strategy.
Identifying The Industry
Toy retail market increase 4 per cent per year in a moderate pace in 2010, but the demand for the specific fashion toy may surge or collapse rapidly. Thousands of toy manufacturers serve the global market, but the few lead industry. Mattel is the world’s leading toy manufacturer in revenue. LEGO is the world’s the third largest toy manufacturer. There are more and more toy manufactures in Asia because its labor is cheap and many subcontractors are ready to produce goods in behalf of their manufacture. Toy makers sell products through various retail channels, including chain stores, discount stores, independent toy specialists, department stores and online stores. There are three points, which need to pay attention to. Firstly, fad toys are more popular and the product life cycle decrease. Additional, children have more after-school activities. Finally, more kids choose online activities more than toys. The substitute product for toys is electronic games.
Analysis of the general environments
Generally, the word’s economy is still unoptimistic in the recent. Although European debt crisis has been lightened conditionally, its negative effect to global economy still last for a certain time. Labor cost is increasing. Because of multiple factors, the total cost of toy improves significantly, while its profit rate falling sharply.
“Multiculturalism” is source of innovation and creativity. LEGO design department has more than 100 designers from more than 10 countries, satellite support team scattered all over the continents. LEGO design team maintains deliberately the diversity of designers from a variety of educational and professional background. People with any qualifications and background has the potential to become a member of this great design team. LEGO takes part in many public welfare activities for children, for example, encouraging children to joining in environment protection. LEGO has good relationship and trust. LEGO CEO Knudstrop makes a psychoanalyst to train the management team to support the good relationship. The peak of LEGO sale is during the school holidays, especially in Christmas (Yi 2009).
LEGO’ come products are made by plastic and chemical resource, that the price of these is influenced by the price of international crude oil. For global market, Knudstrop said that Asia market would be the company’s largest strategic area in the future and LEGO was discussing the possibility of establishing production bases. LEGO Group has not shared a strong market position in BRIC. The market in BRIC will develop strongly in the future and LEGO Groups tries to invest in the markets. For outsourcing, LEGO chooses service provider Flextrinics, which has factories in Korea, Denmark, the USA and Switzerland.
In 1999, LEGO had the online shop. This decision help LEGO get more consumers. Bases on the most adept building blocks, Lego developed some braining games based on personal computer and the Internet, such as LEGO Loco, Bionicle, Lego Creator, etc. These innovations have satisfied consumer group growing in the virtual age. LEGO interact with consumers through Internet. In 2009, LEGO Children Clubs has members about 3.2 million and a dedicated website. Many adult fans of LEGO share experience, videos and pictures on the Internet.
Global political environment is stable in general in the current. International relation between main political powers in the world has gotten a balance after strong competition, which is relative stable. To creating a favorable atmosphere for economic development and encouraging a positive development of the toy industry, most countries seek a stable, peaceful and develop international environment.
Analysis of the industry Environment
Bargaining power of buyers
There are a few large buyers, which are large retail chains such as Kmart, Target and Big W in Australia. They buy products from many different brands. Buyers bargain for higher quality, lower price and great level of service.
Bargaining power of suppliers
For toy industry, there is no bargaining power of suppliers because there are many different suppliers in this industry.
Risk of new entrants
For toy industry, new companies are easy to entry the industry because toy industry has fewer berries. The products are similar, which is easy to copy. Toy industry does not need new firms to invest a lot and switching costs are low because most consumers so not have the loyalty. If the products are more attractive, consumers will buy, especially major target people are children. It is easy to access to distribution channels, but it is hard to cover the market because many retail ways about toys, including online stores, department stores and so on.
Threat of substitute products
Substitute products perform the similar function as toys, which are electronic games. As technology has improved rapidly, more children prefer to use iPod or iPad to play electronic games. Threat of substitute products is very high, which is very important.
Intensity of rivalry
For toy industry, there are many competitors. The rate of industry growth is slow, so companies try to use resources to expanding consumers effectively. Because product differentiation is lower, the switching cost is low. More companies enter the industry, which promoting competition.
To sum up, for toy industry, threat of new entrants is low, supplier power is low, buyer power is moderately high, threat of substitute products is very high and competition is very fierce.
It observes that the toy industry is still an attractive industry. There are nearly no barriers to entry the industry. As technology improves rapidly, new scientific research and manufacturing technology apply to the toy industry continually which due to more and more new toys with high technology. If new companies have wonderful ideas or design teams, it is easy to share the market. However intensity of rivalry is high, companies still can get consumer base by catering to the demand of consumers. Because buyer power is high, new entrants do not worry about their sale ways.
Analysis of Resources and Capabilities
Tangible resources refer to assets that can be observed and quantified, including financial resources, organizational resources, physical resources and technological resources. LEGO has total assets for 10972 million DKK in 2010, 871 million DKK in cash flows and 5473 million DKK in equity. LEGO has a strong operating system to deal with earlier supply chain problems. The company developed systems to evaluating all manufacturing cost as well. The optimization of complex operating model is successful, which helps LEGO save cost and time. Additionally, LEGO’s trademark is the significant resource.
Intangible resources are a superior source of capabilities and core competencies. Creativity is the ability to come up with ideas that is valuable. Staffs are important resource because they have employee experience and the ability of innovation. LEGO Group has the great reputation from excellence quality. LEGO has the fantastic relationship with suppliers and distributors, which can reduce unnecessary problem and makes operating system more successful. LEGO has huge loyal consumer bases,
LEGO has a fantastic innovating system. Developers have to follow strict process and use market research insights, which can satisfy the market demand and avoid design mistakes. In marketing area, LEGO has great connections with consumers. The company has a specific website for customer club, which interact with consumers by games, stories and activities. The club has the member about 320 million. In manufacturing areas, the company has competitive advantage, which is high automation technology. For supply chain management, the company’s production planning comes from sales incentives’ exact forecasts. In distribution areas, the company builds distribution channels in order to reducing the emphasis on the expansion of the distribution costs.
Innovating system is valuable, because this capability promotes the sales levels. The innovation must cover the fashion and make consumers satisfied. Each company knows this concept well, so it is not closely to imitate. The company informs customer preferences by interaction with customers and builds relationship with children and their parents, who are end users. The company also keeps in touch with retail consumers to ensuring that these links operate well, because they can provide a steady stream of information. This process needs long time and much money to build the relationship, so it is costly to imitate.
Lego building distribution channels in order to reducing the emphasis on the expansion of the distribution costs. Firstly, the company reduces the number of logistics providers to satisfying the flexibility and encouraging suppliers to competing. At the same time, the company assesses to economies of scale. Redesign the distribution system of the company has the ability to surpass rival. This is rare and valuable. To do this action, the company cost a lot, so it is costly to imitate. The high automation technology is rare and valuable, which reduces labor cost and producing time. This technology needs a long time to researching and developing, which is hard to imitate.
Closely after the changes of the times perhaps is the most significant feature of LEGO. In 2002, LEGO launches new products, a new Star Wars film, which is very popular. LEGO began to taking advantages of internet in designing and researching. Currently, LEGO has a large number of fans, including children and kids. The company pays more attention to reflection of consumers. The company expands the market in many countries.
The price is higher than other toys and the company does not have enough hypostatic stores to satisfy the consumers. Most LEGO products sell in department stores and retail stores. It is not convenience for consumers to purchase products. The high cost of manufacturing products.
LEGO products sale is concerned about seasons. The peak of sales in one year is during school holidays, especially Christmas (Yi 2009). The consumers are no concerned about ages. LEGO products are no age-limited toys and anyone can collect LEGO products. The Asia market has the great potential.
The substitute is the threat, which are online games. Online games affect the LEGO sales, however, LEGO has the solutions. For example, improve products to make it technological.
Analysis of current strategies
Currently, LEGO redesign the distribution channel to reducing the inflating distribution cost. As for this, LEGO closed 5 distribution centers in Denmark, France and Germany, establishes an only new distribution center in Czech, which is operated by DHL (walwenfanyi, 2012). Lego keep interacting with consumers to get more information the about market needs, which takes the strength of the company. Now the company develops computer games based on the LEGO products by cooperating with game firms. The company cooperates with film organizations to making movies as well (walwenfanyi, 2012). These cooperation has bee a part of LEGO Group that has long history. These actions take the strength and are the solutions to face threats. Articulation of key issues and/or problem
How to reduce the manufacturing cost?
Although LEGO Group grows up continually and rapidly, its consumers can not follow the increasing rate? What should the company do? How to expand the Asia market?
Cost leadership strategy
Cost leadership strategy forces on reducing cost to maintain competitive advantages and relative to standardized products. To achieving cost leadership, the company must strictly control costs in the management, will reduce costs as much as possible. Considered the Asia market, Cost leadership strategic is a good choice. There are more developing countries in Asia, so the life standard is lower than Europe. If LEGO can reduce the price, there are consumers will purchase goods. However, manufacture area is the weakness of the company and the company has redesigned the distribution channels. There are no more space to reducing the cost.
Differentiation strategy refers to a strategy to make their products and competitors’ products have obvious differences. The core of this strategy is to acquire some unique value to customers. For LEGO Group, this strategy’s benefits are that the firm’s innovation system that pays more attention to consumers demand can be appeared. LEGO’s consumers have brand loyalty and there are millions of fans in the LEGO Club. There are some risks about differentiation strategy. When the company enters the Asia market, the firm will face the lower-cost imitation.
Focus strategy gets the balance between cost leadership strategy and differentiation strategy. Firms can serve a specific segment of an industry more effectively than industry-wide competitors. This strategy fits the toy industry a lot, because the major target consumers of this industry are children. However, for LEGO, the focus strategy is hard to reach. The reason is that LEGO’s target consumers are no age-limited people, which is its strength.
In Conclusion, differentiation strategy is the best choice for LEGO Group. LEGO products were different from other products when it launched in the beginning. LEGO has the great brand loyalty, so that a differentiated product tends to reduce the chances for consumers to testing new products or other brands. Currently, the manufacturing cost is a problem. However, LEGO Group cannot use low cost instead of good quality. The firm can produce well-differentiated products to reduce consumer sensitivity to price increase. Using the better quality products to cover the high producing cost. The firm should use its strengths that are brand loyalty and innovation to expand the markets. The differentiation strategy also can defend against new entrants, because if new entrants want to share the market from LEGO, they must produce the same quality products at lower price, which is really difficult to reach.
The above paragraphs recommend differentiation strategy by analyzing the industry, general environment, industry environment and the company’s resources, capabilities, core competency, SWOT and current strategies. LEGO can use differentiation strategy as the solutions to current issues. Using the features of differentiation to taking strengths to covering weaknesses and getting up the opportunities and avoid threats.
Jan, WR, Stefan, HT & Daniela, B, 2012. ‘LEGO’, Harvard Business School [7 September 2014] Waiwenfanyi, LEGO competency analysis, 2013. Available from: < http://www.waiwenfanyi.com/fanyi-1492.html> [9 September 2014] Yi, FL 2009, “LEGO sales strategic plan”, Dongding. Available from: [9 September 2014]