LEGO: Road to Success

The strategy and performance of LEGO® has seen many changes over the years it has been operating. This initially family-run business has gone through major fundamental changes which has allowed it to become one of the largest global toy manufacturers with high quality products and strong customer loyalty. Some key changes over time include changes of focus in strategic management, changes of top leadership figures, investments in LEGO® theme parks, advancement from physical products into digital gaming and movie franchises and the creation of strategic partnerships resulting in different product lines (Jensen 2013). As LEGO® went through several phases in its history, with a crisis period from 1999 to 2005, we aim at researching and clarifying why and how they reached the position they currently hold in the toy market.

A Short Company History

The LEGO® Group is a privately held company created in 1932 in Billund, Denmark, by Ole Kirk Christiansen. Their first products were wooden toys which were abandoned by Ole and his son Godtfred to focus on the introduction and development of plastic “Bricks”. Today LEGO® produce and sell a range of toys based on their main product “the Brick”, as well as video and online games. The LEGO® products focus on children's creativity and problem-solving development, as well as introducing new playing and learning techniques. In 2016, Lego was the top ranked major toy company in the world, based on revenue, ahead of companies such as Mattel and Namco Bandai (Brand Finance 2017). The company’s products are sold in more than 130 countries and in 2017 LEGO® employed around 16,500 people globally (Buglione et al. 2013). The company, together with its subsidiaries, operates in Europe, the Americas, Africa, Asia and Australia (Statista 2017a). LEGO® and Merlin Entertainments own six LEGO® theme parks worldwide. The LEGO® Group continues to expand its global presence, eventually reaching children in every country of the world.

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Financial Highlights of the LEGO Group from 1995 to 2018

LEGO® started as a small family business and achieved continuous financial growth from its inception in 1932 through the late 1990’s. From 1999 to 2005, the company was accumulating losses and came close to bankruptcy. Implementation of the strategies we will look at further resulted in LEGO® to reconsolidate its operations and not only become profitable again but at the same time to generate growth figures which resulted in it becoming the market leader in the global toy market in 2016. Today, LEGO® competes for its share of a total toy market of 89 billion U.S. dollars (Statista 2017b).

Strategic Leadership and LEGO®’s Strategic Drift in the Crisis Years

LEGO® is considered to have a transformational leadership style. This leadership style causes valuable and positive changes within the organisation and encourages employee involvement and innovation (Crawford 2005). The leadership style of LEGO® can be seen to change over the years from its initial family-run business to hiring people who are better equipped to the leadership roles needed for the business to keep progressing in an ever-changing digital world.

Strategic drift can be defined as a gradual deterioration of competitive action that results in the failure of an organisation to acknowledge and respond to changes in the business environment (Harris et al. 2009). The term strategic drift is used to describe a sense of cognitive sloth in the ability to meet the original objectives of an organization.

LEGO® went through strategic drifts over the course of many years. The suffered many fluctuations due to many categorical mistakes made from leadership styles to budgeting and changes to product development. When the crisis started in 2000, Kjeld, the last family member CEO, stepped down and an external COO was appointed (Jensen 2013). However, as the results did not improve significantly, Kjeld stepped back in, disrupting the plans instigated by the COO. At the end of 2004 however Kjeld removed himself again from the office and Jorgen Vig Knudstorp became the company’s CEO. Needless to say, that this chaotic change of leadership brought confusion not only inside the company but also to the then stagnant market. There was no clear focussed leadership. Jorgen understood this and acted in order to restore a viable management structure. When appointed, Jorgen Knudstorp went on a “discovery journey” in order to understand what exactly made LEGO® unique. He did this by visiting LEGO® retailers asking them about what was missing in the product and marketing mix. He knew that the understanding the psychology of learning by playing was crucial for the company; he went to M.I.T. for a reminder about how children learn. He also attended a Lego conference and liaised with the targeted adult fans. “They really inspired me to go back to the creative expression of the core product”, he says (McGregor 2017).

The drifts LEGO® experienced were also caused due to geographical scope and market presence with LEGO® being a mature provider in a stagnant industry that had to be re-vamped to attract new customer market segments. Compliance with local laws were also a strategic challenge to LEGO® as different laws regarding environmental issues and trading had different regulations. Maintaining high quality levels became a strategic drift, as when LEGO® outsourced its bricks to cheaper suppliers, the quality and level of production could not be maintained causing financial losses to the company (Jensen 2013).

The years 2000 to 2005 were very tumultuous for LEGO® and nearly brought the company to its knees.

LEGO – Strategy to Outperform the Competition and Solidify Its Market Position

LEGO® differentiates itself from the competition by designing and selling specialised sets and licensed with movies and firms such as Star Wars, Harry Potter, Toy Story, and more. LEGO® uses age-appropriate target marketing campaigns and has product lines specifically developed for boys, girls and adults; this includes the architecture studio set with over 1200 pieces and no instructions (Schultz and Hatch 2003). You can “Let your imagination guide your design” (LEGO Shop 2018). To evaluate LEGO®’s attractiveness as a company and assess its potential profitability LEGO® could use Porter’s 5 forces analysis. These 5 forces define the competitive environment and can erode the company’s profitability. Our analysis for LEGO® in its current state is shown below. Porter’s 5 forces analysis.

Threat of New Entrants

The LEGO® company was founded in 1932 and has been in operation for 87 years. It has a strong brand loyalty built over many years and is a known and family-trusted global toy industry. In 2018, LEGO® was one of the top ten most reputable companies in the world (Valet 2018).

Threat from new entrants to LEGO® is very low as toy production is a seasonal operation and a risky investment to get involved in. The technological base needed to produce high quality “Bricks” like the LEGO® ones can only be built at high cost and will need a long time to be optimised. In order for new entrants to be a threat they would have to create new innovative toys and strategies to displace LEGO®’s consumers. Threat of new entrants may come in the form of online-multiplayer digital games as LEGO®’s project ‘LEGO® Universe’ was unsuccessful with several postponements and lack of popularity amongst younger users (Schultz and Hatch 2003). However, LEGO® was successful with video games such as LEGO Star Wars and other movie franchises. This investment by LEGO® into the digital scene has increased the barriers of entry to new potential entrants wanting to move into this area allowing LEGO® keep better control over its place in the industry.

Rivalry Among Existing Competitors

LEGO® has a limited number of competitors, these include, Mattel, Hasbro, Playmobil, K’NEX, Cobi and others. Out of these, the largest competitor is the cooperation between Mattel and Mega Brands. Mattel and Mega Brands have formed a partnership to create a new set of toys called Mega Bloks, directly rivalling LEGO®’s toy designs and market segments (MEGA Brands Inc. 2012). They announced a multi-year global licensing partnership to develop construction toys based on the most iconic children’s brands Barbie and Hot Wheels (Mega Brands and Mattel 2012). Each of these products are fully customizable through the use of extra addition pieces. Although LEGO® has these competitors, it has not swayed the consumer loyalty it already has. This is because LEGO®’s construction toys are of extremely high quality, creative and educational to children, safe to use and sturdy in design. The partnership moves into electronic sectors such as Sega and Nintendo has allowed LEGO® to expand beyond just physical toy production and into wider areas increasing the barriers to entry from its competitors who may only focus on the non-digital sector of toy production (Milne 2015). The oligopolistic nature of the toy industry reveals that only a small number of producers are in it which reduces the chances of competitors being able to compete directly with LEGO® (Consortium 2013).

Bargaining Power of Suppliers

When LEGO® outsourced production of its bricks, market feedback, flexibility and fast adjustments in the supply chain were lost as the external sourcing partners could not cope with supply demands (Jensen 2013). This made them reconsider their strategy and approach to suppliers. As there are many potential suppliers, the suppliers have a low bargaining power. The materials for the production of the LEGO® bricks are fairly common and cheap. LEGO® ensures that the prices it gives suppliers matches the quality of the product the supplier has produced; this keeps initiative high to keep standards high and promotes strong business links. In general, LEGO® uses its high power of their brand to keep the bargaining power of their suppliers in check. However, the bargaining power of suppliers increases in the digital sector. This is because LEGO® outsources its investment ideas in the technology department by creating partnerships with these suppliers. They must cooperate with these companies and find compromises to any issues that may arise and abide to the contracts made with these companies. They are sharing knowledge work and any breach of contract or leak of intellectual property or information would cause major backlash to the LEGO® corporation.

Bargaining Power of Buyers

The bargaining power of buyers is considered relatively high for LEGO®. This is because consumer habits, markets and segments were changing over the years and technological innovation and continuous flow of new products was needed to keep consumers happy. LEGO® have tailored its products to its customers wants and ideas which has led to a better relationship between the organisation and the buyers. They also try to maintain reasonable prices for its goods and have yearly offers and promotions allowing families of all backgrounds enjoy the experience LEGO® toys have to offer (Schultz and Hatch 2003). This shows that the bargaining power of consumers is high as it influences LEGO®’s decisions in terms of price, availability and new product designs. The bargaining power also directly affects the profits made by LEGO®, so by adjusting to some of the needs outlined by consumers they can continue to make high profit margin levels and expand their consumer base.

Threat of Substitute Products or Services

Accumulated knowledge about plastics and production technologies has made it difficult for imitators to replicate the LEGO® Brick. Direct imitation and compatible bricks are therefore more of a threat to the brand, rather than direct sales threats (BBC News 2018). However, there is a high threat of substitutes as LEGO®’s patents and copyrights were unsuccessful to repel competitors in court (Eaton 2016). The high-quality products they produce minimises the likelihood of consumers not buying their products – reducing the loss of profits. Some substitutes to LEGO® may be on-line gaming, sports, hobbies and school for children making this a threat to the products and services supplied by LEGO®. However, one may argue that LEGO®’s products allow creative expansion and physical, visual and analytical education in design and engineering aspects. Most parents prefer their children to develop abilities through play, and as children may learn at a young age through using Lego blocks to approach tasks from a more analytical angle whilst become better thinkers, the parents will keep a close loyalty to the LEGO® brand.

This analysis shows that LEGO® has a unique position in the toy market. It does not have to worry too much about new entrants and its direct competitors are limited. Supply of primary materials is well controlled, while partnering with their customers has solidified LEGO®’s position and justified their premium price point. Substitute products are a possible threat but LEGO® has acknowledged this and build partnerships to adapt to the substitute markets demands.

LEGO - Internal Strategy Analysis and SWOT

The SWOT Analysis allows LEGO® to develop four types of internal strategies: SO (Strengths-Opportunities) strategies; WO (Weaknesses-Opportunities) strategies; ST (Strengths-Threats) strategies, WT (Weaknesses-Threats) strategies. The following matrix is a compact representation of the results from literature (Buglione et al. 2012)(LEGO 2017a)(Milne 2017)(BBC News 2018)(Helms and Nixon 2010).

Strenghts Weaknesses

• Strong brand name and recognition;
• No longer patent protected;
• Advanced technological knowledge;
• Small target group;
• Investments in capacity expansion;
• Digital developments: strong growth drivers;
• Single product: the “Brick”;
• Negative impact of operations on the environment;
• Massive market;
• Seasonal demand for the product;
• Licensing deals in other media;
• Premium price point compared to other producers;
• Efficient marketing;
• Large corporate structure;
• Brick 69 years in the market;
• Strong financials with sustainable growth.

Opportunities Treats

• Market expansion in emerging markets;
• Target group expansion;
• Existing and new competitors;
• Counterfeits and cheap imitations;
• Creativity tool expansion;
• Restricted product range;
• Legoland parks and Lego House;
• Increase in input prices;
• Streamline production process;
• Population decrease in some areas;
• Optimise distribution;
• Effects of a weak economy;
• Image tarnished due to patent fights with Tyco.

Based on the SWOT matrix, internal strategic plans can be developed by focussing on answering below questions. I do not expand on this topic due to word count limitation, but LEGO apparently successfully defined and implemented these strategies allowing it to come out of the crisis stronger and more streamlined as it had ever been before.

LEGO® – Strategy for Future Growth

Having faced many changes, LEGO® finally becoming profitable again in 2005. The mistake made by the company was the fact that it tried to grow by introducing product lines that LEGO® had no experience with. The major change made by Jorgen Vig Knudstorp as CEO was to refocus LEGO® onto its core business the “Brick”. Jorgen made major cost cutting decisions aimed at reducing the company’s debt and consolidate its financial position. In parallel he adopted a strategy in marketing and sales of partnering with the world’s largest retailers and including these retailers in LEGO®’s product planning; Jorgen used the myriad of intellectual marketing data he obtained from his retailers to steer LEGO® through the stormy waters of the Toy Industry expand (Hunt 2017). Refocussing on some prime directives also meant to restore the image of quality and durability of the core product while being innovative in order to align itself with the changes in the playing habits of their customers (O’Connell 2009).

Increasing market share was achieved by accepting the differences in their customers between genders, geographical locations and local cultures. Using ethnographic research allowed LEGO to develop gender specific toys for girls, a market niche they had neglected before (De Castella 2014).

Having restored a strong financial position, the marketing strategy is paying off for LEGO® as it was able to increase its market share in their existing markets while expanding in emerging markets such as China, South Amerika and Asia.

LEGO achieved their goal and became one of the world’s largest toy company because it understood that rather than fighting their competitors using a diversity of different toys to be the biggest, it needed to focus on one toy, the ”Brick” and produce a variety of different flavours by partnering with major forces in the multi-media industry and “be the best”, not the biggest (McGregor 2016).