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The following text is an introduction.
The subsequent text presents a strategic analysis of the LEGO Group, a well-known Danish toy company. The LEGO Brand is not just symbolized by a recognizable logo but also signifies dedication to quality and innovation. The company's fundamental principles encompass imagination, creativity, enjoyment, education, compassion, and excellence. This essay aims to conduct an extensive strategic analysis that assesses the industry and examines both general and industry-specific environments. It will identify resources and capabilities, analyze the company's core competency, perform a SWOT analysis, and evaluate current strategies.
Additionally, this analysis will tackle significant issues and conclude with a recommendation for the business-level strategy.
Identifying The Industry
The toy retail market has been steadily growing at a rate of 4% per year since 2010, although the demand for certain fashion toys can vary rapidly. Despite there being thousands of toy manufacturers worldwide, only a few dominate the industry. Currently, Mattel is the leading toy manufacturer in terms of revenue, with LEGO holding the third position.
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The availability of inexpensive labor and subcontractors in Asia has led to an increase in toy manufacturers in that region. These manufacturers distribute their products through various retail channels including chain stores, discount stores, independent toy specialists, department stores, and online stores. In relation to the toy market, there are three important considerations to be made. Firstly, fad toys enjoy high popularity but have shorter product life cycles. Additionally, children nowadays engage in more after-school activities and show a growing preference for online activities over traditional toys.
Consequently, electronic games have emerged as substitute products for traditional toys.
Analyzing the general environments
The economic aspect
Despite some improvement in the European debt crisis, the overall state of the global economy remains pessimistic. The negative impact of this crisis on the global economy continues to persist, with rising labor costs resulting in a considerable increase in toy production expenses and a significant decline in its profit rate.
The topic of socio-cultural issues
The LEGO design department is composed of over 100 designers from more than 10 countries, drawing on their multiculturalism. Additionally, there is a satellite support team located across different continents. The intentional diversity within the design team encompasses individuals with various educational and professional backgrounds. Qualifications and background are not barriers to joining this esteemed design team. Alongside their design work, LEGO actively engages in numerous public welfare activities for children, including initiatives focused on promoting environmental protection. Building strong relationships and trust is also a priority for LEGO, as evidenced by CEO Knudstrop arranging for a psychoanalyst to provide training for the management team. It should be noted that LEGO experiences its peak sales during school holidays, especially Christmas (Yi 2009).
Global element
The products of LEGO are manufactured using plastic and chemical resources, which means their prices are affected by the international crude oil prices. CEO Knudstrop has stated that the Asia market is deemed to be LEGO's primary strategic region in the future, consequently the company is exploring the option of establishing production bases there. Despite not holding a significant market position in BRIC, LEGO Group intends to invest in these markets as they are expected to experience substantial growth. As for outsourcing, LEGO has selected service provider Flextrinics, who has manufacturing facilities in Korea, Denmark, the USA, and Switzerland.
Technology component
In 1999, LEGO launched its online shop, which was instrumental in attracting a larger customer base. Utilizing their expertise in building blocks, LEGO developed brain-boosting games for personal computers and the Internet, including LEGO Loco, Bionicle, Lego Creator, and more. These innovative offerings catered to the growing virtual age consumer group. Additionally, LEGO engaged with consumers through the Internet, resulting in the establishment of LEGO Children Clubs with approximately 3.2 million members and a dedicated website by 2009. Moreover, numerous adult LEGO enthusiasts actively shared their experiences, videos, and pictures online.
Political and legal factors
In the present, the global political environment is generally stable. The international relationships between the main political powers in the world have reached a balance after intense competition, resulting in a relatively stable situation. To promote economic development and support positive growth in the toy industry, most countries aim for a stable, peaceful, and developing international environment.
Analysis of the industry environment
Bargaining power of buyers
Well-known retail chains in Australia, such as Kmart, Target, and Big W, serve as major buyers. They acquire products from different brands and engage in negotiations to guarantee improved quality, reduced prices, and outstanding service.
Bargaining power of suppliers
In the toy industry, suppliers do not have any bargaining power due to the presence of a large number of different suppliers in this industry.
The risk is posed by the presence of new entrants.
The toy industry welcomes new companies because there are few obstacles and products can be easily copied. It doesn't require a lot of money or effort to enter the market, as consumers aren't very loyal to specific brands. The demand for toys, especially among children, is driven by how appealing the products are. Although it's easy to access distribution channels, it can be difficult to reach all potential customers because there are many retail options available such as online stores and department stores.
The risk of substitute products
Substitute products, such as electronic games, serve the same purpose as toys. With rapid technological advancements, children increasingly favor using iPods or iPads for playing electronic games. The high threat of substitute products holds significant importance.
The level of competition among firms
In the toy industry, there is fierce competition among numerous companies. The industry's growth rate is slow, prompting companies to concentrate on expanding their consumer base with limited resources. Because products are not significantly different from one another, customers can easily switch between brands without incurring high costs. As a result, more companies feel compelled to enter the industry and compete.
Overall, the toy industry faces low risk from new entrants and suppliers have limited bargaining power. However, buyers hold considerable influence and there is a significant threat of substitute products. Additionally, competition within the industry is intense.
The toy industry is appealing because of its ease of entry. Technological advancements consistently introduce new scientific research and manufacturing techniques, resulting in the development of more innovative and technologically advanced toys. This offers excellent prospects for new companies with exceptional ideas or design teams to enter the market. Despite fierce competition, companies can still attract customers by satisfying their demands. Additionally, the substantial buyer power enables new entrants to be unconcerned about their sales methods.
Analysis of Resources and Capabilities
Tangible resources
Tangible resources in a company are assets that can be physically observed and quantified. These resources include financial, organizational, physical, and technological resources. For example, in 2010, LEGO had an asset value of 10972 million DKK, cash flows of 871 million DKK, and equity of 5473 million DKK. To address supply chain issues, LEGO implemented a robust operating system and developed systems for evaluating manufacturing costs to optimize their complex model. This optimization has resulted in cost and time savings for the company. Another important resource for LEGO is their trademark.
Intangible resources
Intangible resources, such as creativity and employee experience, are paramount for developing capabilities and core competencies. The LEGO Group boasts a stellar reputation for its excellent quality products. Moreover, LEGO has cultivated superb relationships with both suppliers and distributors, leading to a smoother and more successful operating system. As a result, LEGO enjoys a vast and loyal consumer base.
Capabilities
LEGO utilizes an innovative system that is highly regarded. The developers are required to adhere to a strict process and utilize market research insights to meet market demand and prevent design errors. In terms of marketing, LEGO has a strong connection with consumers through a dedicated website for its customer club. This website engages consumers through games, stories, and activities, boasting a membership of approximately 320 million. In manufacturing, the company has an advantageous position due to its advanced automation technology. As for supply chain management, production planning is derived from accurate forecasts based on sales incentives. Furthermore, in distribution, LEGO establishes distribution channels to minimize the focus on expanding distribution costs.
Innovation is valuable as it boosts sales. It is essential for innovation to encompass fashion and meet customer satisfaction. This notion is well understood by all companies, making it difficult to imitate. Companies engage with customers to gather their preferences, establish relationships with both children and their parents (who are the end users). Additionally, companies stay connected with retail consumers to ensure smooth operations and gather a continuous flow of information. Building these relationships is a long and costly process, making imitation expensive.
Lego aims to minimize distribution costs by restructuring its distribution channels. This involves reducing the number of logistics providers and fostering competition among suppliers to ensure flexibility. Additionally, the company explores economies of scale to enhance its distribution system, giving it an edge over competitors. This strategic move requires substantial investment, making it difficult for others to imitate. Furthermore, Lego leverages high automation technology, which is both rare and valuable. This technology reduces labor costs and production time significantly. Developing and researching this technology is time-consuming and challenging to replicate.
SWOT Analysis
Strengths
LEGO has demonstrated its remarkable adaptability by closely monitoring the evolving trends. In 2002, they introduced a product range inspired by the beloved Star Wars films. Concurrently, LEGO acknowledged and harnessed the internet's potential for design and research endeavors. Consequently, they garnered a substantial following, particularly among children. Presently, LEGO concentrates on fulfilling consumer needs and extending their market reach across diverse nations.
Weaknesses
The cost of LEGO products is higher compared to other toys, and the company lacks sufficient physical stores to meet consumer demand. Most LEGO products are sold in department stores and retail outlets, which inconveniences consumers when purchasing their products. Moreover, the high manufacturing costs contribute to the overall price of the products.
Opportunities
LEGO products sale is influenced by seasons, with the highest sales occurring during school holidays, particularly Christmas (Yi 2009). Age is not a limiting factor for consumers, as LEGO products are suitable for individuals of all ages. Additionally, the Asia market presents great potential for LEGO.
Threats
Online games pose a substitute threat to LEGO sales. However, LEGO has solutions in place to address this issue, such as enhancing their products with technological features.
Analysis of current strategies
LEGO is currently redesigning their distribution channel in order to reduce the rising cost of distribution. This includes the closure of five distribution centers in Denmark, France, and Germany. Instead, they have established a new distribution center in the Czech Republic, which is operated by DHL (walwenfanyi, 2012). Additionally, LEGO is actively engaging with consumers to gather more information about market needs, which is a strong aspect of the company. They are now collaborating with game firms to develop computer games based on LEGO products. Furthermore, they are partnering with film organizations to produce movies (walwenfanyi, 2012). These collaborations have been a longstanding part of LEGO Group's history and serve as solutions to address threats. Thus, these actions leverage the company's strengths and tackle key issues or problems.
How can the manufacturing cost be reduced? Despite LEGO Group's consistent and rapid growth, its consumers are unable to keep up with the rising rates. What steps should the company take? How can it expand its presence in the Asian market?
Recommendations
The cost leadership strategy is focused on reducing costs to maintain a competitive advantage for standardized products. To achieve cost leadership, the company must carefully control expenses and minimize costs as much as possible. When considering the Asian market, opting for a cost leadership strategy is a wise decision. Asia has a larger number of developing countries with lower living standards compared to Europe. Therefore, if LEGO can lower its prices, there will be consumers who are willing to purchase their goods. However, the company faces challenges in its manufacturing area and has already redesigned its distribution channels. Unfortunately, there is no further room for reducing costs.
The differentiation strategy is a tactic that sets a company apart from its competitors.
The differentiation strategy is about making clear differences between a company's products and its competitors' products. The key to this strategy is providing customers with unique value. LEGO Group uses this strategy to create an innovative system that meets consumer demand. LEGO has loyal customers, as shown by the millions of fans in the LEGO Club. However, there are risks in using the differentiation strategy, such as facing cheaper imitations when entering the Asian market.
The focus strategy is the strategy that concentrates on a particular target market.
The focus strategy, which combines cost leadership and differentiation strategies, enables firms to effectively cater to a specific segment of an industry and outperform competitors. In the toy industry, this strategy is well-suited due to its main consumer base being children. However, LEGO encounters difficulties in implementing the focus strategy as its target consumers do not have age restrictions, which also acts as a strength for the company.
In conclusion, the LEGO Group benefits from implementing a differentiation strategy. From its inception, LEGO products have stood out among competitors. The company has built a strong brand loyalty, making it unlikely for consumers to experiment with alternative products or brands. Although there is currently a concern regarding manufacturing costs, the LEGO Group is committed to maintaining high-quality standards rather than resorting to low-cost options. The company can mitigate any potential price sensitivity by offering well-differentiated products. By leveraging its brand loyalty and innovative capabilities, the LEGO Group can expand into new markets. Moreover, a differentiation strategy acts as a barrier against new competitors. Any new entrants seeking to capture market share from LEGO would need to produce comparable quality products at lower prices, a challenging feat to accomplish.
Conclusion
The preceding paragraphs propose the implementation of a differentiation strategy by evaluating various aspects such as analyzing the industry, general environment, industry environment, and the company's resources, capabilities, core competency, SWOT analysis, and current strategies. LEGO can utilize a differentiation strategy as a means to address existing challenges. By leveraging the distinguishing characteristics of differentiation, LEGO can capitalize on its strengths to overcome weaknesses, seize opportunities, and mitigate threats.
Reference 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]
Strategic Analysis of LEGO Group: Industry, Environments, and Recommendations. (2016, May 01). Retrieved from https://studymoose.com/logo-case-study-essay
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