The Lego Group was founded in 1932 and has gone through hard times during the 1990s

and
2000s, however they are going on a growth trajectory following a turnaround in 2005. With the
high growth of the company, LEGO has a few issues and challenges in hand that require to be
resolve for the company to enhance their growth potential.

Q1.

Porter 5 Forces

Level of rivalry
The overall level of rivalry may be seen as relatively high.
Lego occupies a firm position in the market for construction toys, there are only a few rivals
competing in the same market. With Lego accumulated knowledge on plastic and production
technologies, they are able to stand out among other competitors with the focus on product
quality and innovation of their product. (O)
In the recent years Lego is diversifying and competing in boarder market of children's
entertainment to increase their growth in other regions, existing competitors such as SEGA and
NINTENDO who are already in the market will have the first mover advantage against them. (T)
With the success of Lego innovative brick concept, Mattel and Mega formed a partnership to
infiltrate the market to compete against Lego, with the innovating idea of integrating bricks with
traditional toys for both boys and girls. Companies in the traditional toy market are trying to
integrate their products with Lego bricks to make their toys seem more attractive to the children.
This will allow the companies to step into the same market as Lego, exploiting Lego brick to
enhance their sales. (T)

Bargaining Power of Buyers

The bargaining power of the buyer in the case of Lego is seen as relatively high.
This is due to the low switching costs between alternative toys and substitute products such as
video games and television. Buyers are able to switch to alternative toys without paying a fee
and with the technological advancement; video games are easily accessible to them. (T)

As an individual buyer, they are unable to cause significant influence on price of the toys. The
main buyers are from USA and Western European markets, which accounts for the high retail
sales. However sales are highly affected by the economy, with the declined growth of the
economy, the demand for toys would be affect as buyers are price sensitive and would save on
unnecessary spending, resulting in a decline in income for Lego. (T)
Buyers of Lego purchase the toys through retailers such as Wal-Mart or ToysRUs. These
retailers have the high bargaining power over lead times and price as they are the main channel
for end buyers. Therefore if Lego does not provide the toys at an attractive price or within the
stated timeframe, the retailers have the option to take Lego out of the shelves. (T)

Bargaining Power of Suppliers

The power of suppliers may be seen as average.
Due to the fact that plastic is commonly used in toys nowadays and available, there is an intense
competition within the suppliers to provide the ingredients at a competitive low cost. This allows
Lego to have an advantage over the suppliers as their products are mainly bricks manufactured
using plastics and chemicals. (O)
As Lego innovative product is the brick, there was no direct competition in the industry. This
created a low demand and supply relationship with the suppliers in which Lego has the
bargaining power of the suppliers as they are able to switch to other suppliers easily. (O)
In the recent years, Lego is trying to enter into non-traditional areas such films and games to gain
more market shares. As the area Lego is advancing into is unknown to them, cost of integration
is high as licencing of games and films in terms of intellectual property are costly and they might
not be able to challenge with other competitors in the industry. (T)

Threat of substitutes
The treat of substitute is relatively low.
Lego main target group is children and they get bored fast with toys and may switch to
traditional toys such as action figures and toy cars which are available at a relatively low price.

With traditional toys that are compatible with Lego bricks, parents will spend more on traditional
toys rather solely on Lego. (O, T)
As technology advances into the digital age, more products such as video games and electronics
are widely available in the market. These substitutes are easily available and accessible in the
market; there are a variety of them which caters to different groups of consumers. Therefore
consumers are able to substitute Lego with ease. (T)
However as these substitute such as IPAD are more expensive compared to traditional and
construction toys, parents are more reluctant to switch over to electronic and video games. (O)

Threat of New Entrants

The threat of new entrants is low.
Children entertainment that Lego is focusing in is a huge market. There are different categories
of toys which cater to the huge numbers of children all around the world. New entrants do not
have to compete directly with Lego for buyers and could focus on needs of other children. (T)
In order to enter into the market, a significantly level of capital investment is required for
research and development to ensure the safety of the toys provided. Initial investment of
machineries is also costly to produce the toys. These act as barriers to entry and thus restrict the
number of new entrants. (O)
Lego being a huge company and having knowledge on plastic and production put them ahead of
any new entrants entering the market. This will benefit Lego in terms of the economy of scale
where their production per unit will be more efficient and less costly. Lego brand identity will
also deter any new entrant from entering into the similar market as their unique and iconic
product is the first in the world. (O)
Sub Conclusion
Lego is in an attractive industry due to the fact that they have been in the industry for a long time
and with the accumulated knowledge through the years, they have the first mover advantage
against new entrants. Their brand name is well known for the companys focus on quality and
safety of toys for children, competitors are not able to compete easily in the same market. Their

source of ingredient plastic is easily available in the market and competition in the
manufacturing of plastic is high, therefore Lego do not have to worry about the cost of material
and they can seek for alternative easily.

PESTEL
Political
With big and upcoming countries like China and India potentially becoming the world biggest
consumer, many countries are signing trade agreement with them, resulting in a reduction of
trade barrier. This will likely to allow more companies to have more level playing field in world
trade and access to the market. The developing countries currency are mostly undervalued and
accompanied by the agreement, resources will be made available easily and at a cheaper cost
price.
Economic
With the economy of scales weighing in for major toy companies, they have been setting up their
factories for production in developing countries such as China. However as more companies are
shifting their production over, the key factors of cheap labour and undervalued currency is no
longer attractive as labour have become more demanding as the country grows. This has resulted
in a dip in profit for the industry and is becoming a major issue as companies will seek to keep
production cost as low as possible. Economic crisis has been an issue for some time as buyers
have less spending power; they tend to spend less on unnecessary stuff if possible which could
result in a drop of sale for the industry.
Social
With the technology advancing into the digital age, children are spending much more time online
and on social media as internet and mobile devices are made easily available in almost every
home. Parents are spending more on electronic and devices as they are able to utilise them when
their child is not using, thus attracting more parents to purchase items such as IPAD for their
child. This has resulted in children spending several hours on devices and internet such as
youtube which leaves no time for traditional toys and games.

Technological
Toys come and go quickly in the market. As technology advances into the digital age, toys are
being replaced by electronic and video games which have become part and parcel of childrens
childhood. This force the industry to be innovative and develop toys integrated with edge cutting
technology. However this will require vast resources for research and development which might
affect the companys growth. With the internet becoming an integral of everyday life, the
necessity of presenting themselves online allows the companies to bring them closer to their
customers. With the growing trend, the industry will have to set their presence both physically
and online in order to compete with others in the market.
Environmental
Most of the toys are made up of plastic which are non-biodegradable. In the recent years more
industry are going towards the green trend to save the environment. Costumers are more aware
and environmental friendly towards the product that they are using. This will open an
opportunity to the toy makers to move toward the trend with the concept of reducing waste and
optimizing their resources in the bid of being environmental friendly.
Legal
Safety standards have been a concern in many countries in the recent years. Safety issues of
industries in all areas have been neglected, resulting in the recall of products which could cause
serious injury and even death. These recalls do not only affect companies profit margin but also
severely damaged consumer confidence in the brand or industry. Consumers will be unlikely to
trust the company and would look for alternative in the same market. Another issue is copyright
and patents which has been fiercely debated among companies for the rights of ownership. As
companies owning patents will have the ultimate right, it is a huge advantage and will be able to
sustain the company for a few years until it runs out. Therefore companies are suing each other
to ensure that they have ownership of the copyright or patent.
Sub conclusion
As a result of PESTEL, there are some key threats to the industry. With technological
advancement, children can easily access internet and are spending more time online using

electronic devices, with lesser time to spend on toys and other leisure activities. Safety has also
become an issue which companies neglecting the safety standards which will potentially cause
harm or injury to consumer, causing them to think twice when purchasing certain brand.

Competitive Analysis
LEGO
Safety of product

Mattel

Mega Brands

N.A

N.A

N.A

N.A

Innovation
Quality

Sub conclusion
Competition in the industry is strong as Mattel and Mega Brands have kept up with the
innovation of Lego with the introduction of their own brick products. Lego might be doing better
due to their focus on the safety and quality of the product built on their knowledge of plastic
throughout the years. These factors will allow them to compete with their rivals however they
will have to differentiate themselves from the rival companies in order to have a higher market
share in the industry.

Q2)

Resources

Competency

S.C

Threshold/
Distinctive

Innovation
Organisation
management
Technology
Brand name
Financial
resources
Technology

Ability to foresee
and align with
changes

Ability to create
innovative
products

Effective leadership
to stay on track

Distinctive
Work with
films to
provide toys

One and only

brick theme
park in the
world

Stay ahead of
competition
Well known
throughout the
world

Ability to grow
and expand

Organisation
management

Understanding
focus of company

High tech
machineries

Effective supply
chain

Brand name

Good relationship
with distribution
partners

Ability to
maintain quality

Ability to align
expectation and
fine tune
production

More than
160 staff
dedicated to
development

Sustainable
competitive
advantage

Threshold
Competitive
disadvantage

A family
grown name

Well managed
funds to sustain
Accumulated
Knowledge of
plastic and product
technology

Imitators
unable to
achieve
similar
properties of
Lego products

Threshold
Providing a
safe
environment
for children
to play

Competitors
are not able
to produce
toys of same
quality

Organisation
focus on
quality

Temporary
competitive
advantage

Threshold
Enable good
relationship
with
retailers

Efficient
support to
ensure
production is

Competitive
parity

on time

Q3)
During the early 1950s, Lego strategic development was to focus on effective leadership,
innovative products and international growth. The company strategy was differentiation focus
which targeted and focused on children in their early childhood. Lego emphasis was creating
value through its unique and innovative brick product and first LEGOLAND theme park which
was made up entirely of LEGO bricks. This was proven highly effective as the company grows
from just 65 employees to 1000 in 1970, the company continue to do well and grow even during
the difficult economic environment in 1980s. With the strategy proven to be effective, it
expanded into new markets in America and Asia and hired 5000 employees in total.
However during mid 1990s after Kjeld took over as CEO, he decided to change the company
strategy due to the upcoming growth in electronic and playing habit. He decided that the
company should shift from differentiation focus to cost leadership and conglomerate
diversification, entering into alliance with partners into films, clothing and games. These
products did not have direct relationship to the existing business during the period which was the
toy industry. In order to diversify into other market, Kjeld decentralised organisation
management to run every division by itself and less dependent on him. However it was of low
effectiveness as profitability started to fall and eventually became losses. This was due to the fact
that Lego did not have the expertise in the other field during that period as their main field was
the toy industry and diversifying into other market requires additional cost. In addition, Kjeld
focus on expanding the company through diversification and neglected the company competitive
advantage which was innovation.
In 2004, Jorgen step in as the CEO and Lego focus into market penetration of the core business
with its existing products. The accumulated knowledge of plastic and production technology
allowed them to benefit from the scale of economy as they are able to reduce cost and become
more efficient in their supply chain. With the high level of rivalry within the market, market
penetration will ensure that Lego will be able to retain their share in the market and hope to
increase greater economies of scale and experience curve benefits. As Lego started to recover
from the loss, they align with changes in children playing habits and approximately 160
employees are dedicated to development and these shifted their corporate strategy direction to
market development and mass differentiation which does not only target children but teens and

adults, allowing them to create their own sets with bearing costs of differentiated products,
ensuring interest from users from all ages. However the strategy has not been very effective due
to the fact that they were unable to break into the digital scene with their LEGO Universe and
had to be withdrawn.
Overall Lego has learned from their mistake of conglomerate diversification and went back to
market penetration to retain and gain more shares from the market. This has allow their profit to
grow in the recent years and with the accumulated knowledge and experience, they moved on to
market development to gain interest from both new and old customers which has made Lego
competitive in the current toy industry.

Q4a)
Strength

Weakness

International well-known brand

Products for girls are lacking (K)

Knowledgeable on plastic and production

Not well developed in other children

technologies (K)

entertainment market

Understanding of focus of the company

Potential outsourcing near impossible

Innovative (K)

Dependent on external licensing rights

Effective leadership
Quality product
Opportunities

Threats

Huge market and potential growth in Asia (K)

Digital age and shifting of entertainment to

Low price sensitivity

Association with games and films to diversify
into non traditional toys

technological products (K)

Video games are easily accessible
Partnership of toy companies competing (K)
Economic crisis
Highly reliant on distributors for sale

Q4b)
Key issues
Lego has been trying to enter into the digital scene in the recent years. As it is the digital age,
Lego has to integrate themselves into the scene in order to gain more market shares. The
development did not succeed compared to other games which had sold in million therefore it is
an important milestone for Lego to be recognised in the digital scene.
Another issue for growth is the education unit, although the unit has grown in 2012, the sales is
unevenly distributed and this will likely to affect their positioning of brand in the world. This
uneven distribution shows that they are not known enough in some geographic areas and will
need to work on them.
Challenges
Lego has been growing in the past few years and in order to grow and expand they need to
ensure the same or higher level of innovation, building capacity and hiring more than 1000
employees. This is a different step for them as they have to comply with different laws in
different region which will prove to be complex for the group.
Stepping into the digital and media age, Lego products have been imitated by some companies
and causing threats to their branding indirectly as people mistake the imitations for Lego. They
have to also compete with other companies for market shares as more integrated products are
introduced into the market. Electronic products are becoming substitute for toys as people are
more technology savvy and children have grown fonder to playing on a tablet than traditional
toys.
Opportunities
Lego has been seen as construction toys that appeals to boys, therefore not appealing to girls.
Thus there is an open market for Lego to break into as they look to develop more products for
the girls. As Lego achieved a breakthrough with LEGO Friends, there is still a huge market in the
female market of the higher age group. Thus they will have to research and align themselves to
the other age group needs in order to capture the market.

Q5)
Recommendation
As the world steps into digital age, Lego should supplement their brick product with wide variety
of high technology play offering and integrate them into Lego products. This comes with
innovation and increases the creativity of builders not limited to only physical bricks. This will
expand Lego target group and not limit them to children. Lego should develop complimentary
innovative products that can strengthen be competitive even against the electronics industry.
Lego should always understand their strength in their bricks and remain faithful to the purpose of
providing a good, safe and educating entertainment for children. However it come with an
expense as it would require intensive resource on research and development and preferably lead
by a group of expertise on it.
With much of Asia unexplored market, Lego has limited knowledge in the region. In order to
expand their growth in the region, Lego could form an alliance with a well-known toy company
in the region. This will allow them to tap on the expertise of the company in the region and cater
to the needs of the customers. It will also allow Lego to integrate and innovate their products
with the company products to enhance customers playtime.
Lego products have a higher appeal to boys and girls are neglected in some areas. With Lego
trying to make a breakthrough with LEGO Friends, it has shown that there is a bigger group of
market which they have yet to explore. Lego would require a more intense research into the
female market, they should capitalise on their strength of listening to customers needs and
improvise on the current product range they have. To attract the attention of a broader girl
market, heavy marketing of products is required to capture their attention.
Intense competition and rivalry among the toy industry will require Lego to
be more responsive to changes in customers needs and wants. Lego could
implement marketing strategy to seek and build a closer relationship with
customers and enthusiasts. Although switching cost will increase due to the
marketing, this will value add to any existing customers as it will be a loss if
their customers seek to switch to another competitive product or substitute.
To improve this relationship with the customers, the company will need to

put in continuous effort to seek their attention, meet and align to their
needs. This will also benefit the company as they will be improvise and
innovate to align with any differences in markets and segments.