Memorandum
Will The Blocks that Built Lego Crumble, or Stay Together in the Future?
To: Niels B. Christiansen, CEO, Lego
From: Alex Kwok, Jiayi Fang, Shenlong Chen, Chang Zhu, Xue Ao, Ziyu Lu
Mondays 6:00pm - 8:30pm
Date: March 25, 2019
Executive Summary
Since 2004, LEGO’s has faced certain financial dilemmas, mainly because of low differentiation
between the rivals. The positioning of LEGO was to extend the business market by coming up
with new product R&D. If LEGO continues to lose market share, the low entry level would take
over more sales, decreasing the profit potential for Lego. This analysis explains LEGO’s current
situation with the corporation’s advantages and challenges, and also provides an implementation
plan. We suggest that Lego launch new products with lower costs to regain lost market share. In
order to save on costs, we also recommend that the corporation begin outsourcing the production
of its products to third-party manufacturers.
Company Overview
LEGO Group is a toy manufacturing, family-owned enterprise that was established in
1916 and began making products in 1932. Since then, the company specializes in the
manufacture and sale of toys that targeted children as primary customers. Initially, the company
was highly profitable but later suffered plummeting earnings on account of the shift in industry
trends and high costs of operation. The emergence of new trends in the market whereby children
had little time to play affected the company's sales directly. The advent of technology was
another challenge that the firm had to counter in the wake of emanating online games and trends
that utilized the new technical knowledge to provide leisure for children.
General Environment Analysis
To grasp a better understanding of the overall industry environment of the Lego
Corporation, an analysis of the toy industry for kids aged 3+ has been conducted, highlighting
main threats and foreign opportunities stemming from demographic, economic, political/legal,
social cultural and technological standpoints.
Starting at a demographic standpoint, birth rates across the United States as well as the
world have been declining. As a result, there are more and more families without children. Since
the 1950s, the global population is continually decreasing, leading to a smaller customer base for
Lego. Although sales within the toy industry have grown over the past year, the growth rate is
also expected to plateau due to stagnation. Drifting towards an economic standpoint, according
to the International Monetary Fund, the global economy will increase together which creates
more public wealth. With more public wealth, there is more disposable income, allowing
consumers to purchase products for their children. However, the Euro, one of the major markets,
is still under debt crisis, which can cause an adversely adverse effect on Lego’s sales.
In the political and legal sector, Lego is an international organization, so this company
has to face different political decisions at various locations across the globe. For example, the
United States has regulations for promoting safer toys for kids, and Lego has to follow those
regulations to ensure the safety of the children. Moving onto a socio-cultural aspect, there are
increasingly more women in the workforce. There is an inverse relationship between the number
of women in the workforce and childbirths. As more women increase to enter into traditional
workplaces dominated by men, birth rates inversely decrease. In order to combat an increasing
gender-neutral society, Lego has begun to market towards both genders, rather than catering to
just one specific gender. This eliminates gender bias and increases gender neutrality.
On a technological standpoint, digital games are taking over the market of traditional
toys. In order to attract customers and streamline their manufacturing process, Lego implemented
innovative manufacturing processes such as 3D printed toys. While Lego has based their entire
product line on physical toys, Lego struggles to enter into the video game category and diversify
their products. Shifting towards a more global perspective, Lego is one of the biggest toy
manufacturers, providing its products in more than 130 countries with approximately 10,000
employees worldwide. The critical markets that Lego deas with are Asia, Western Europe, and
North America. The growth rates in those areas are steadily increasing. However, there have
been market sales decreases in southern Europe. In addition, more and more people start to
prefer modern products for traditional products. So the sales of traditional toys decreased in 2011
in total which affected Lego’s global sales as well.
External Environment- Porter’s Five Forces
Based on Porter’s Five Forces, the competition is low within the building blocks toy
industry. Lego faces little to no competition due to their strong brand image that is synonymous
with the quality and durability of their products. However, there is high pressure stemming from
substitutes. Substitutes include anything from traditional children playtime activities to toys,
computer games, and smartphones. In traditional toy substitutes, there are the Mattel Corporation
and the Hasbro Corporations, which earned $5.1 and $3.0 billion in revenue respectively.
The Mattel Corporation has product lines such as Fisher-Price, Barbie, Hot Wheels, and
American Girl dolls. They are also quoted as the “favored creator of toys based on Disney and
Pixar Characters. Hasbro Corporation has product lines that include the Transformers series,
Monopoly, GI Joe, Play-Doh, and Playskool. With both corporations, there is more room for
diversity as the brand is not tied to the single functional use of their products, such as Lego’s
brand image is tied to the act of building on top of blocks. In the way of more modern-day
children’s playtime activities, more and more children are beginning to shift towards computerbased games. There is an absence of physical toys in the current market. Last year, toy sales fell
2%, from the $22 billion in the year prior (Ruff).
While there is high pressure within the substitutes portion of Porter’s Five Forces, there is
also high pressure coming from suppliers as well. Most of Lego’s products are made from
plastic. The polyethylene required to produce the plastic requires a huge amount of oil, which is
traditionally extremely difficult to bargain. The high pressure continues into the customer base,
where more and more of traditional retail space is moving towards an online market, resulting in
the consumer have a higher bargaining power due to their ease of accessibility of lower prices
through retailers such as Walmart, Amazon, and Target. Although there is little to no
competition within the Lego market space, the barrier to new market entrants is low. Lego’s
patents have expired, and the resources needed to produce the product itself are easily accessible
to anyone who would wish to enter into the market.
Internal Analysis
LEGO has taken significant steps to increase the sale of toys in the midst of decreasing
sales. LEGO is noted to have become the leading producer toys for all categories of children
including boys, girls, and gender neutral. The company has been the lead producer of such toys
with a market share of more than 60% where most of the children have had an interactional
experience with the brick toys (Digital initiative, 2017). The company growth is associated with
the CEO’s constant overseeing and individual decision making. The company is also trying to
focus on constant creativity for its brick products to keep with changes in trends. Some examples
include the corporation expanding into media with their Lego Movie franchise, as well as several
digital games centered around Legos.
VRIS analysis
Value: LEGO’s value is associated with a constant approach to coming up with new
products. This can be noted when the founder of Lego, Ole Kirk Kristiansen came up with new
products since he became the owner of the company. Since operations in LEGO were critically
evaluated throughout the hierarchical structure. The leader who is the owner had to confirm
anything regarding certain decisions. This brought about the strict nature instilled in product
designs (Andersen, & Ross, 2016).
Rareness: The brand loyalty associated with the bricks is one of the rare aspects with
regards to the LEGO Company. It is evident that since the company commenced the production
of such products, it has created a lasting influence on their target consumers. The company
ensured that toy products are an essential memory and implements essential life skills to the
users.
Imitability: Brick is one of the most critical products for LEGO since it has been
produced for a considerably longer time. The company invested a considerable amount in
coming up with brick designs. Although there has been a significant investment made in the
manufacturing process of the blocks, the patent has since then expired, thus allowing new
entrants into the market easily.
Substitute: Since LEGO has been in operation for a considerably longer time, the
possibility of a substitute coming into the market is minimal. The cost effects associated would
directly challenge any company attempting to make a market entry. LEGO has created a lasting
impression about its products at a lower cost.
Key Issue and Problem
The significant problems affecting LEGO is regarding the manufacturing costs. Since
operations associated with manufacturing have risen, the company faces higher costs to meet as
it manufactures its toy products (Mudambi, & Puck, 2016). When it comes to the unveiling of its
new toy products, LEGO is challenged since the new products have not gained a significant
market share to earn considerable profits. For this reason, the company would have to adjust its
operations to avoid increased production costs. Another issue is the reduction in products
popularity for LEGO products. This has negatively affected levels of sales in the market hence
resulting in a drop in sales. LEGO is also facing another issue with regards to children loyalty.
Since children are the primary target in the toy industry, these companies are competing to
produce toys that would catch the child's attention. Without such capability then the company
would be compelled to incur losses if it would not appeal to the target customers.
The other issue is the constant market trends within the toy market industry. It would be
challenging to consider the continuous changes to customer demands on products. This is the
most critical issue especially for LEGO Toy Company while it tries to ensure that its customers
remain loyal. Unfortunately, since the company faces critical challenges with regards to coming
up with new products to keep their customers around, they simply have to keep struggling with
other companies to win the available customers. Therefore the toy industry needs are constantly
changing hence subjecting the companies to loyalty issues. Children who are the major target
keep desiring new products that appeal to them. Once they have acquired a product, their desire
for similar products would drop hence impacting on the sales trends for the toy companies. This
hence places the toy companies in a critical position to keep inventing products with the aim of
meeting customers’ needs.
Available Strategic opinions
Firstly, LEGO should consider lower the cost of products, which LEGO could find some
manufacturer to produce its products. It will cut down the manufacturing cost if LEGO
outsources the manufacturing process. LEGO can find a manufacturer which is qualified with
LEGO’s standard. It will not destroy LEGO’s reputation; otherwise, this solution will make
LEGO more profitable in the long run.
Secondly, LEGO might target parents instead of children because parents afford the bills,
and generally speaking, most parents decide if they make a purchase or not. Compared to market
the shopping behavior of children, it is worthy of spending money studying parents at some
points. We have to admit that most children’s behavior is not mature to make purchases at
marketing. Even though some children may be interested in some new toys at toy’s marketing,
most children do not decide which one to buy. Otherwise, their parents do make final decisions
after all. Although some of LEGO’s competitors are doing some strategy to attract children
instead of parents, LEGO does not have to compete with other companies in this way.
Last, not the least, LEGO may discovery the certain educational toys with tech for kids,
then, more parents realize its differences from most toys at popular toy’s market, which could
arouse parents’ interests. Furthermore, LEGO may make their toys more creative than others and
their previous products. It is admitted that an increasing number of young parents are accepting
toys with tech and creativities, instead of older version ones. Afterward, they will make
purchases for their children, which is good for their children develop. Moreover, it is beneficial
for LEGO’s reputation, profits, and children.
Recommendations
Outsourcing production to another manufactory factory is highly recommended in
LEGO’s case because of the cost and continuously increasing the complexity of LEGO. LEGO’s
design is getting more and more complex because of the needs of customers and the standard of
products, which means that LEGO is facing an increase in cost. ‘Lego went from having 675
pieces in 2001 to having over 3,560 different shapes, 157 colors, and 10,900 elements in their
assortment (Rivkin 2013)’. For LEGO, it is essential to do a good job in every component’s
production, which determines the final quality of the LEGO set.
Otherwise, LEGO itself is not able to meet the needs of rising cost. To create each shape
Lego needs to design a mold which on average costs between 50,000 and 300,000 Euros (Rivkin
2013). It means that LEGO is struggling with the price. Compared to the cost of loss by LEGO
itself, outsourcing production is one of the best solutions. Another professional manufacture will
help LEGO to produce better products effectively, which lowers the cost and controls the
inventory well.
References
Mallari, Adrienne. “LEGO: A Marketing Analysis Presentation.” Jan.18, 2017.
Rivkin, Jan et al. "LEGO (A): The Crisis." Hbs.Edu, 2013,
http://www.hbs.edu/faculty/Pages/item.aspx?num=44124. Accessed May 17, 2017
Andersen, P., & Ross, J. W. (2016). Transforming the LEGO group for the digital economy.
Digital initiative, (2017). LEGO: The missing bricks in their global supply chain? Retrieved
from: https://rctom.hbs.org/submission/lego-the-missing-bricks-in-their-global-supply-chain/
Mudambi, R., & Puck, J. (2016). A global value chain analysis of the ‘regional strategy’
perspective. Journal of Management Studies, 53(6), 1076-1093.
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