Arty Kakreja

Case: LEGO
Q: No.1 Do an environmental scan for LEGO (PESTEL) and identify the relevant issues
which could affect LEGO?

PESTEL Analysis
In order to understand the organization in better manner the factors which will impact it
externally are mentioned below:
Political Factors LEGO being international organization gets affected by the political situations
in the countries wherever it has its presence. They are already present in Denmark and planning
to build a factory in China too, which will be ready for production. Since to be distributing its
products in more than 130 nations therefore the local political decisions of these nations will also
impact it. Some nations like US have regulations for promoting safer toys for kids, while some
countries are against the biased advertising and marketing of LEGO toys as just for boys which
are gender biased. Corporate taxes in Denmark are supposed to be reduced by 1% every year till
2016, so that the new tax to be 22%. Developing economies levy high import taxes.
Economic Factors Latest projection given by International Monetary Fund states that the
general world economy will see a growth in 2013 in both developed as well as developing
economies. This will create more public wealth and increased spending by public on toys and
games thus boosting LEGO sales.
Socio-cultural Factors Lower fertility rates across the nations due to more involvement of
women in the labour markets, increased standard of living and education has resulted in delayed
pregnancies , which in turn increases the spending power of families one educational toys.
Technological Factors Technology and new product development are of significant importance
for LEGO. Moreover the threat is from high access to Internet across the world, and smart
mobile technology which is very much popular in Smartphones and used by kids. The new 3D
printing technology used by LEGO can be easily imitated by its competitors.
Environmental Factors LEGO has always emphasized on corporate social responsibility and
has implemented several CSR initiatives to be ranked with the topmost companies regarding
renewable energy and work safety. LEGO products being made of plastic it has immense
pressure to make environment friendly toys.
Q: How would you present LEGO Board with a SWOT ANALYSIS?

Traditional children’s Toy

Strength Weaknesses
Well established company Premium prices
Product quality Easy to duplicate
Education and value of product Outstanding in Asia
 Opportunities Threat
Expansion Digital age
Move be in partnership Cheaper alternatives
Growing out of LEGO

Adult Mindstom
Strength Weaknesses
Strong launch and intial reactions Premium prices
Retaining existing customers Easy to duplicate
Obtaining a new customer base Outstanding in Asia
Opportunities Threat
Corporation with customers to improve Unfamiliar product
Expanding market share Competes with companies such as song,
Possible education tool Microsoft and Nintendo

Video Game
Strength Weaknesses
Loyal customer base Dependent on success of move
LEGO brance recognition

Opportunities Threat
Expansion Digital age
Move be in partnership Cheaper alternatives
Growing out of LEGO

Q: No.3 Do a porter’s analysis for LEGO? And your recommendations?

Porter’s Five Forces Analysis By using Five Forces Framework the competitive Forces in the
market would be understood and the origins of the profitability in industry can be found. This
framework will also help in anticipating and handling competition in future.
Threat of new entrance Low-high saturated market
High in 2004 competing against other toy
company
High and low in 2014 very high startup cost
to invest and develop toys from scratch
Bargaining power of supplier High and low
LEGO company have the freedom in
choosing manufacturing’s
Purchasing licensing rights of movies
causes the bargaining power of suppliers to
go up in 2014
Bargaining power of customers Low
 An individual customer cannot affect the
prices of the toys
Affected by economic condition
Threat of substitute High and low
In 2004 LEGO had a few competition for
brick toys
As of 2014 the threat of substitute in high
due to cheap imitations.
Intensity of rivalry High-
Competes against other companies that sell
similar LEGO bricks.
Competes against Mattel who are trying to
take LEGO’s market share

Threat of Entry Since new toys are continuously entering the market with big brand like Wal-
Mart and Target etc., therefore the threat of entry is higher. But LEGO being very famous
international brand it is tough for new entrants to imitate it in short-term.
Bargaining Power of Suppliers the primary suppliers of LEGO are the Chinese subcontractors
and there are huge numbers of these Chinese suppliers which supply to various other industries
too. Therefore the dependence level of LEGO is low. Moreover LEGO has most of its
production in-house, supply needs are not highly differentiated and potential suppliers are easily
available thus the switching cost for suppliers is low as well.
Bargaining Power of Buyers Since the products offered by LEGO are unique and cannot be
exchanged by the retailers with similar products and the buyers therefore cannot backward
integrate the production of LEGO toys. Due to differentiated products LEGO enjoys good
market position amongst the buyers therefore the bargaining power of buyers is moderate
because LEGO has good relationship with the retailers also.
Threat of Substitutes Since kids have started spending more time with digital products, but still
LEGO has been defying the trend and its sales are rising. LEGO has incorporated technology in
some of its products, therefore although the threat of substitutes is higher for the industry but for
LEGO it is comparatively lower.
Competitive Rivalry The major competitors for Lego are Mattel, Bandai NAMCO, Takara
Tomy, Hasbro, but the two main competitors of LEGO are Mattel and Hasbro. LEGO is way
ahead them but in near future they might catch its share in operating margins and beat it
therefore internal rivalry is high for LEGO.
Q: what are the key issue in LEGO Company?
Ans: The key problems that Lego faces are primarily external and internal issues.
Externally the market affects how Lego grows tremendously. Lego competes with the two big
name toy brands, Hasbro and Mattel. Both of these brands feature very popular toys such as
Transformers, Play-doh, and Monopoly for Hasbro, and Barbie, Hot Wheels and Fisher-Price for
Mattel. One of the main issues Lego has with their competitors is its lack of diversity among its
products. Lego initially started off with only a few shapes and five base colors. Kjeld was
eventually able to add a sixth color (green) when he was able to convince his father Godtfred the
brand needed the additional diversity to match its competitors. This need to add greater diversity
to its core Lego products eventually added to Lego’s downward spiral when it started reaching
over 3,560 shapes, 157 colors and 10,900 elements in their assortment. Each shape requires a
mold, and each mold cost 50,000 Euro on average or up to 300,000 Euro for complicated ones.
Knudstorp CEO of Lego, soon realized their push to meet their competitors in terms of diversity
wasn’t the solution for their Lego lineup, when he stated “You could be out of stock for a
product just because you miss one of its 675 pieces, which you did not make when you got the
forecast wrong”. While the lack of product management, and rapid unneeded growth amongst its
core Lego lineup was continuously digging Lego into even more debt, it soon encountered its
biggest external issue in the form of technology. Technology was a huge factor amongst the three
year old and up age segment. One of the main issues Lego had with breaking into the kid’s
technology market was how would they take their core value of “development, imagination and
creativity” and embed it into their toys. Lego was quick to realize that they along with parents
wanted to continue to drive learning through its toys. Unfortunately this became incredibly
difficult given the issues Lego faced with kids giving up “traditional toys earlier for video games
and online activities, childhood became shorter and adolescence longer”. This growing shift in
the market would soon prove to be one of their most difficult external issues. Lego eventually
started development of video games with a learning focus, which it found great success.
Some of the internal issues in summary were the lack of accountability throughout the
company, and a costing system which no one could figure out, Lego themselves had no idea
what the costs of doing business were. This is what led to Bali Padda Executive VP of Global
Supply Chain to state “I couldn’t understand how net production prices were determined or
which products were profitable; it took me six months to get a sense of our fill rate to our
customers”. This lack of accountability led to some of Lego’s biggest customers such as Wal-
Mart, for example, to ask upon their first meeting with Padda “Can you please tell me why I
shouldn’t put dog food on the shelves instead of Lego products?” Another internal issue Lego
faced as stated before is their lack of knowing which products were profitable and when to sell
them. This was a huge problem for Lego with its licensed products such as Lego Star Wars and
Lego Harry Potter. The problem with this was that Lego was unable to see that their licensed
products were its new bread and butter especially after they had evolved their standard Lego
lineup into a hemorrhaging problem. The main issue with the licensed products was the fact that
Lego in conjunction with their lack of accountability was unable to document their toy profits,
and when those toys were most popular. With a little help Lego could have identified that their
licensed toys, while producing huge profits, were only truly profitable for a short period
following the movies for which they were licensed after. Had Lego been able to identify this
trend and shifted production to its next licensed product, it would have had a much better shot at
sustaining an ongoing growth pattern. When analysis finally was done it was found that 28% of
Lego’s top line growth was primarily due to its licensed products for Star Wars and Harry Potter.

Q: What is the most important decision currently facing Kjeld Kirk Kirstiansen?
ANS: Ole Kirk Christiansen created LEGO which was popular in 1934 when there was no other
product similar available. However LEGO did not recognize the changing environment and the
changes to the needs and wants of consumers. One of the most important decisions facing Lego/
Kjeld Kirk Kirstiansen is deciding who its main market is and how to target that market, using
data to conduct a segmentation of the different needs and wants of that market and become the
leading toy seller again.
Q: In 2004, LEGO continued its entertainment promotional and product tie-ins with the
new Harry Potter and Spiderman movies. Do you think this was the right strategy?
Ans: With LEGO reporting a loss in 2003 and with evidence that the sales of Harry Potter play
sets going down, this was not the right strategic decision. Harry Potter movies go in and out of
fashion, they are only popular while the movies are popular. Choosing to stick to a product that
is popular all season would have been the better option for LEGO. This reflects the need to have
a strategy that will be successful in the long term, which will be a competitive advantage, rather
than fill its temporary demand.
An example is LEGO's Mindstorms Robotics Invention system which allows users to build
computer-controlled creatures. This fulfils LEGO's philosophy that the users of its product play
while learning because the users are controlling the creature they creative, which uses the child's
creative thinking rather having a action figure that has already been created and has limited use
in regards to improving the creative thinking of the child in terms of building and making the
product. Mega Bloks is a cost leader because they have increased profits through reducing cost
by using different quality of materials to make their products then LEGO, who uses a much
higher quality resources to make its products, which in turn will increase their cost, making their
products much higher in price than Mega Bloks. Therefore Mega Bloks gains a bigger market
share. Mega Bloks through research had found a niche, in which it is now the number one seller,
in the preschool market. They developed bricks that are larger and softer which makes them
easier and safer to play with according to parents. Mega Bloks introduced new line of bricks for
7 to 12 years of age which can be interchanged with LEGO bricks. LEGO before Mega Bloks
arrived was more differentiation focused on the narrow scope because it mainly targeted one
market. 7 to 12 year old. LEGO now focuses on differentiation on a broad scope by targeting
more than one market. For example the preschool market. LEGO is trying to be popular through
having movie action figures for example Harry Potter play sets which sales for this went down
whereas the Harry Potter movie was still popular. LEGO needs to focus more on long term
innovative products that way it can still keep its competitive advantage in the market place as
being the creator of toys that help develop learning and new skills. As the original LEGO bricks
did where children would make objects with the bricks which involves using the children's
creative thinking and imagination.
Q: Explain how the development of strategy at the LEGO Group reflects the key
characteristics of strategic management?
The long term direction of an organization. It aims to incorporate the latitude of the organizations
activities and subsequently increase their competitive advantage over their business rivals.
Strategy is also aimed at addressing change in the macro and micro environment and exploiting
resources to enhance the proficiencies of the company understanding the strategic position of the
company, analyzing strategic choices for the future and managing the process of strategy in
action. In the initial stages of its strategy, the LEGO group identified its current position within
the market as well as the evidence of competitors that were vying for market share. They
understood that in order to increase their competitive advantage the company needed to identify
and analyses competitors within the market. This would enable them to determine what their
long term plan would be with regard to change and innovation. LEGO then explored their
strategic choices by asking themselves a question: Should we concentrate only on what we are
doing now or should we develop fresh products and incorporate new innovations? By analyzing
their strategic choices, LEGO was able to highlight and implement strategic solutions for
continued growth and development of the company. Through this implementation of strategy
many changes were made that affected the scope of the business. Cost cutting and laying off of
staff were part of the change that was necessary to incorporate the strategy of the company.
LEGO managed the strategy by continuously reacting to the changes in the environment. Even
though some of their actions failed dismally, the focus on vital customers and innovation ensured
a progressive climb back to profitability, development and growth. Managing the strategy is key
to the long term success of the company.