INTL 4400 – Assignment 1

2012-2013
LEGO Group: Building Strategy
Professor: Kelly Lecouvie
Celeste Chan, Richard Guo

Table of Contents Executive Summary 1 Problem statement 2 ANALYSIS 2 External Analysis - Porter’s five FORCES: 2 Internal Analysis – Core Competency 4 Main Issues 4 ALTERNATIVES 5 Recommendation 7 Appendices 8 APPENDIX A – LEGO’s VALUE CHAIN 8 APPENDIX B – Core competencies & LEgo 9 APPENDIX C – FOUNDATION & DIRECTION OF LEGO 10

Problem statement
LEGO as a company has withstood many years of changing business environment, and has grown from creating wooden toys to interchangeable blocks, and eventually becoming an international symbol of innovation. It is again facing a changing environment, with its patents expired, its rising number of competitors, and facing losses in court as well as loss of market share to its competitors.
ANALYSIS
External Analysis - Porter’s five FORCES:
Bargaining power of suppliers: LEGO’s suppliers have low bargaining power. After Jorgen Vig Knudstorp took over as the director of strategic development, he was able to cut 80% of LEGO’s suppliers to improve efficiency. The technology needed to create LEGO’s bricks is not specialized, since the company has in house machines to create the blocks. From the above two points, it’s apparent that the bargaining power of suppliers is low, since their services are easily substitutable and disposable.
Bargaining power of customers: The bargaining power of customers is rated as high for LEGO, as their products are highly substitutable. Currently, many other toy companies such as Mega Bloks are selling similar products on the market. LEGO does attempt to differentiate by offering special themes such as Star Wars and Harry Potter, which sets their toys apart with those of other companies. However, this temporary competitive advantage is waning, as companies such as Kre-O are using movies such as Transformers to promote their toys. Kre-O’s pieces are also interchangeable with those of LEGO’s, which directly steals from LEGO’s market shares. The availability of substitute products significantly increases the bargaining power of customers.
Threat of new entrants: Since LEGO’s patent for its toy blocks expired, the threat of new entrants is quite high. LEGO does not have a highly distinguishable trademark, and lost its own “8 Studded Brick” design to Mega Bloks in a court battle. This makes it easier for other companies to enter the market with similar products as LEGO. On the other hand, one of LEGO’s core competencies is its unique brand, which has a longer history than any of its competitor’s brands. It also has an innovative system of capturing the creativity from online designers, and transforming them into actual LEGO sets. This system of fostering innovation is unmatched by other competitors, and creates a barrier to potential entrants.
Threat of substitute products: The threat of substitute products for LEGO is rated as high. When LEGO’s plastic brick design patent expired in 1988, companies such as Mega Bloks and Kre-O were able to begin creating similar toy blocks based on LEGO’s design. Kre-O even went as far as creating interchangeable blocks that can connect with LEGO blocks. This significantly decreases LEGO’s competitive advantage. Other substitute products were being created by Mattel and Hasbro. Although their toys were not plastic blocks, and not direct substitute products to LEGO, they are never the less in the toy market. These two toy companies have partnerships with entertainment entities such as Walt Disney and Marvel, which increases their economy of scale as well as marketing potentials. Their products’ marketing channels include partnerships and license agreements, much like LEGO has done in the past with Harry Potter and Star Wars, and could potentially steal LEGO’s market share in the toy market.
Competitive rivalry: Competitive rivalry for LEGO is considered high. Kre-O has begun to encroach on LEGO’s market through advertising its similar line of product through partnership with the movie: Transformers. Mega Bloks has already won one lawsuit against LEGO. Lastly Hasbro and Mattel are also signing licensing agreements with Disney and Marvel, which creates more competition for LEGO due to the increasing scale of their competitors’ operations.
Internal Analysis – Core Competency
When a company has a core competency, they integrate their key skills into developing a good or service through learning, coordination, and communication with the company’s different departments. The core competency is also unique and difficult in the imitation of the core competency and finally, it must be valuable by contributing to consumer benefit from a product/service developed from this competency. LEGO has been dedicated to maintaining its core competency as the brand with the ultimate imagination-building toy as stated in their mission: “Our ultimate purpose is to inspire and develop children to think creatively, reason systematically, and release the potential to shape their own future – experiencing the endless human possibility”. The CEO, Jorgen Vig Knudstorp ,has streamlined operations all throughout its value chain and has integrated their core competency in all operations. LEGO has developed huge customer followings through developing a community and building trust in parents. With a mission that emphasizes creativity and fostering child imagination, LEGO has profited from offering a toy that gives much more value to its consumers than simply entertainment.
Main Issues
Three main issues for the company were discovered; the first being LEGO’s reliance on patents. With the expiry of LEGO’s patents, Mega Bloks and Kre-O have had no difficulty in entering LEGO’s market. In addition, the increasing amount of competitors is another issue for LEGO. LEGO’s dominance in the toy market for the past 40 years has caused its main product to reach the maturity stage in its product life cycle. In a mature market with increasing amounts of competitors, LEGO will be either forced to compete on cost, or find new innovative ways to improve both its products and business model. Lastly, LEGO has not been nurturing core competencies or growing their original core competency (their brand). This has resulted in a more difficult expansion and growth of the company. While LEGO has prospered from its brand, over the years, the brand has been losing its strength as a core competency with the onset of other competitors who also have a specialized line of product.
ALTERNATIVES
With sales reaching DKK 16.014 billion, there are many routes that LEGO can take strategically. The following alternatives have been tailored to the needs of LEGO and will be evaluated through the criteria of consistency, consonance, advantage, feasibility, and risk.
Differentiation Strategy: In order to expand and adapt and become an industry leader, the company can utilize a differentiation strategy that seeks to essentially be unique and exceptional in its domain. Creating a LEGO educational program on a similar yet smaller scale than GE, IBM, and Microsoft would be extremely beneficial for the company’s growth. The LEGO School would be focused on developing architectural design skills (due to the building nature of the toy); it would be an initiative supportive of the company’s mission and it would allow for innovation within the company and to compete with other companies. In essence, the company would be creating a centre of excellence through partnerships with established educational institutes in which core competencies would be developed, children would be loyal to the company throughout childhood to adulthood and feasibility is high. LEGO would be able to differentiate itself through the development of new innovations and corporate social responsibility. However, the risk of this strategy is the high investment required to gain credibility for the educational program and the disadvantage in changing the image of LEGO from fun to overly serious.
Focus Strategy: Another strategy that LEGO can use is a strategy that focuses on a particular niche of consumers. It is in this sense that LEGO can further develop its infant market. While the company has already developed its DUPLO product, it has not combined education, entertainment, and technology together to appeal to the infant market. Such brands as Sesame Street, Dora the Explorer, are examples of brands that have been able to do so. Similarly, LEGO could do the same by creating educational television and tie in their baby LEGO products. While this would align with the company mission and allow for another platform to compete with the external market, there lies the risk of the idea being easily duplicated again by competitors and simply expanding but not doing something unique that would make consumers choose LEGO over already established brands that were named previously.
Cost Leadership Strategy: Because LEGO’s economies of scale are extremely high, it would be extremely feasible for LEGO to switch to a cost leadership strategy by matching competitor prices. While consumers would rejoice at lower prices, there are many disadvantages to this alternative. The lowering of prices can be very damaging for LEGO as the leader in its genre of toy as it could cheapen the high quality image that the company has. Not only that, but competing on price alone is not a sustainable strategy that would help the company develop. Adopting this strategy would only provide short-term advantages.
Recommendation
It would be in the company’s best interest to adopt the differentiation strategy. This alternative holds the most advantages for the company as it would increase the barriers of entry into LEGO’s block toy market. Most importantly, it would help the company build on its original core competency, its brand as a toy that encourages imagination and possibilities, as well as develop new core competencies through the education of its child consumers who have now grown up. As times change, LEGO will be able to use education as their sustainable advantage.
With the school’s target students being the child consumers of LEGO, the company will be developing their talent pool in which they would hire fresh recruits in order to boost their research & development, designs, marketing, and touch upon many activities of their existing value chain. Research & development is key for LEGO to continue being ahead of its competitors. By taking the initiative to utilize consumers with a passion for their products, their brand, their goals, it helps foster a culture of growth within the company whilst improving established processes. LEGO education will give foundation and direction for the company.
By partnering with schools, LEGO will be a constant in the lives of their consumers, their employees, and their community. Incorporating education and creating a LEGO school shows that the brand will grow with their consumer who starts with the product as early as an infant. Surely, this will differentiate LEGO from other toy companies who have imitated the company and only provide a form of entertainment. In the end, this centre of learning will support the existing core competency being LEGO’s brand and allow for sustainable growth.

Appendices
APPENDIX A – LEGO’s VALUE CHAIN
Primary Activities
Inbound Logistics * LEGO was able to cut down its suppliers by 80 percent from 11000 suppliers * Designers only use suppliers from this pool instead of choosing their own vendors
Operations
* LEGO’s production cycles are scheduled in which certain machines are assigned only specific types of bricks which has reduced the downtime and retooling of the machines * Designers increase the use of existing brick shapes and colors instead of creating new molds and colors
Outbound Logistics * LEGO uses large hub centres close to its retailers for better control over inventory and fewer stock shortages. * Discounts were offered to smaller retailers for placing orders early * LEGO would no longer ship cartons that were not full * Working closely with retailers for joint forecasting & inventory management
Marketing & Sales * The company has been working closely with retailers in the marketing of their products * Sales have been extremely high in 2010; DKK 16.014 billion; 7 LEGO sets/second around the world
Services
* LEGO’s products are easily accessible online, with quick efficient service for those who wish to purchase from the company online * The company has created a LEGO community through a LEGO magazine and online games
Support Activities
Firm Infrastructure * Jorgen Vig Knudstorp becomes CEO from being the director of strategic management * Has assembled a leadership team of senior executives and managers to analyze every part of the supply chain operations of the company * Company is focused on minimizing costs through efficiencies in their operations
Human Resource Management * Over 9000 employees employed by the company * Management promoted from within the company * Family-owned business * Corporate culture revolves around the company mission
Technological Development * Have introduced innovative sets for their child consumers * Have made their machines more specialized instead of all inclusive of all the different shapes in their molds * Have developed 2400 different brick shapes in 53 different colors
Procurement
* Used to have problems with designers utilizing their own vendors, however, now designers choose from a smaller pool * Management has taken responsibility in ensuring that designers use what the company already has in order to cut costs
APPENDIX B – Core competencies & LEgo

APPENDIX C – FOUNDATION & DIRECTION OF LEGO

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[ 1 ]. Paul Bigus, The LEGO Group: Building Strategy, (London Ontario: Ivey Publishing, 2011) p. 6
[ 2 ]. Please Refer to Appendix A
[ 3 ]. http://www.ge.com/foundation/developing_futures_in_education/index.jsp
[ 4 ]. Please Refer to Appendix B
[ 5 ]. Please refer to Appendix C