Section 1: Analyzing LEGO’s Business Environment 1.1 Two Major Trends in the General Environment Worth Considering 1.2.1 Technology
Development in technology affects how businesses are run in all aspects. The toys industry is no exception. The leading trend that is relevant in this case is the increase in leisure time spent on digital games as opposed to physical toys. Children are playing computer games at a younger age, eroding the share of their playtime that was once dominated by toys. 1.2.2 Demographics
In developed countries, aging population coupled with lowering birth rates are the primary driving forces for industry players going forward. I believe that this should provide implications on the future directions that LEGO should take. 1.2 External Environment – SWOT Analysis 1.3.3 Strengths and Opportunities
The LEGO brand itself is entrenched deeply within the building toys industry. This strength is especially valuable to certain sub-industries under the broader toys industry such as infants’ toys and serious gaming. LEGO is also a trusted brand in education and with parents. LEGO can leverage on this strong brand name to perhaps explore opportunities in non-traditional markets such as the silver industry. LEGO, being an established brand that the older generations are familiar with, can expand into these industries. In addition, the trend towards more playtimes spent on computer games opens up the digital market for LEGO as well. The culture of innovation and LEGO’s unique product offering – providing building blocks for players to create and invent is a valuable and complex strength embedded in its organizational culture that can be used to reliably gain a foothold in the digital games market. 1.3.4 Weaknesses and Threats
The consolidation of licenses under Disney, coupled with LEGO’s reliance on movie themes for a large chunk of its profits might ultimately erode LEGO’s margins. That is a relatively favorable scenario given two other worse scenarios – one of Disney giving further licensing to Mattel in the future and another of Disney retaining licenses altogether and entering as a new player into the building toys market with exclusive rights to make theme based toys product lines. Both are detrimental scenarios for LEGO.
In addition, the loss of patent on its brick designs means that LEGO’s traditional market will be carved up by imitators, brought forth even more strongly by the fact that these imitators are established brands themselves – who can easily come out with building bricks that are compatible with that of LEGO’s.
1.3 Competitive Environment – Porter’s Five Forces
1.3.1 Bargaining Power of Buyers – High
The individual bargaining power of buyers is low due to the large number of buyers who each have little financial influence on LEGO. However, taking the market as a whole, the ability to switch quickly to different substitutes of LEGO improves the buyers’ bargaining power as a whole. In addition, the bargaining powers of large retailers are high due to them being a main source of distribution for LEGO’s products. Combined, the buying power of buyer is thus high.
1.2.2 Bargaining Power of Suppliers – Moderate
On the front of manufacturing LEGO bricks, the company faces little power from suppliers given the large number of suppliers available. However, on the licensing front, the power of suppliers is high. Combined, the power of suppliers is thus moderate.
1.3.3 Threat of Substitutes – High
The building toys industry is subject to a larger shift toward electronic solutions, notably the computer games industry. The growing number of interactive games available online is slowly eating away the broader market for children’s playtime. Computer games are thus the biggest substitute to LEGO as well as other toy companies. There is however some salvation in the infant’s toys market since these are inimitable by computer games.
1.3.4 Threat of New Entrants – Moderate
Given the expiration of LEGO’s Patents, it is possible for existing toy manufacturers to enter the building toys market. However, given the high costs of initial capital requirement, government regulation on safety standards and the relatively established brand of LEGO, it is rather difficult for new entrants to enter the market in a scale large enough to pose a significant threat to LEGO in the short term. In the long term however, larger players who are not from the building toys industry may enter.
1.2.5 Degree of Rivalry – High
Given the expiration of LEGO’s patent on its building bricks, the LEGO concept can be and is readily copied everywhere. Such products will prove to be strong competitors of LEGO bricks given that their producers are established brands as well. LEGO also faces high competition from the online and digital gaming fronts. Combined, the degree of rivalry is high for LEGO.
Section 2: Strategy Recommendations
2.1 Overarching Strategy
From the three generic strategies of the positioning school used to overcome the five forces, I have chosen the differentiation strategy for LEGO to be the most appropriate overarching strategy to adopt. LEGO should build upon its strengths to tackle existing threats underway in the toys industry as well as to explore new markets revealed by external opportunities. The defining theme for LEGO is a very powerful value proposition. I have identified key markets where LEGO can leverage on this value proposition to further its competitive advantages. Following which, I will discuss how competitive advantages in these areas can themselves serve as ends in addressing some of LEGO’s threats.
2.2 Applying Differentiation Strategy to Achieve Industry-wide Recognition
2.2.1 The Internet, Digital Games and the Overall Tech Savvy Consumer Market
The key to LEGO’s entry into the gaming market to enter in a manner that is in line with its central philosophy. This concept is familiar to LEGO since the firm has been doing it successfully since its founding, albeit in the toys market. The digital gaming world is plagued by high developmental costs which spans across years just “to take a single shot” at the appetite of gamers – who are themselves prone to product switching. Thus, a more compatible approach is to enter the video games market by giving players the ability to build, transform and create their own virtual worlds. An example can be glimpsed from games like “MineCraft” and “Second-Life”, where players can build their own environments as well as create player-designed “games within the game”. The advantage of such a strategy stems from not setting constraints on individual creativity and thus leveraging on the players’ collective creativity to build a virtual world that meets players’ needs. Given that the LEGO brand is etched in the memories of many of the adults/teens who have moved into digital gaming, LEGO should become a formidable entrant into this new market, as long as it comes out with a way to revolutionize player involvement in defining virtual habitats and rules.
An alternative approach that may be more radical is to skip the platform gaming market altogether and focus on desktop/laptop replacement devices – mobile devices and tablets. The defining question here would be perhaps, “When digital wallpapers become reality, where will LEGO be?”
2.2.2 Corporations, Government and Education Entities, Healthcare and Related Industries.
LEGO’s strength in easily adapting its toys as educational products can be further leveraged to develop stronger ties with governments, schools and nursing organizations. This can be seen from history whereby LEGO have garnered the trusts of parents in providing non-violent content in its video games while preserving themes of adventure, and again when LEGO partnered the Danish government to teach children about road safety. Education and infant-product lines can be focused as areas to expand using this “trust” – something that cannot be imitated by competitors as it is highly path dependent. In addition, given the aging population, LEGO might want to explore if there can be opportunities in the palliative care sector, where LEGO’s product line can be split off into applying themselves in medical use or in physiotherapy of stroke patients, a market that increases in proportion with aging population.
2.3 Differentiation as a Starting Point in Mitigating Threats
2.3.1 Licensed Building Sets – Disney
In leveraging on its brand name and trust that it has accumulated over the years with educators and perhaps expanding into new markets characterized as societally desirable businesses, LEGO will build up networks with governments and other educational organizations that will become future competitive advantages that it can wager. Come 2017, given Disney’s make-or-buy decision, LEGO can prove itself to be a vessel through which Disney can tap on; using LEGO’s networks to enter industries where LEGO have a strong presence. This will decrease Disney’s bargaining power as a supplier of licenses. The same would apply if LEGO’s entry into the gaming market is successful.
2.3.2 Non-Licensed Building Sets – Erosion/Cannibalization from Digital Games
While margins for non-licensed building sets will become lower from competitors, by turning these building sets into home decorations and “replicas” of whatever players have created in the online world, the margins will become higher. LEGO is already integrated in this aspect since it has the capabilities to produce and assemble bricks needed for such replicas that other firms in the industry do not have.