Lego strategic analysis

Introduction:

This essay will consider firstly the position of Lego in relation to both the constraints of the internal and external environment in the lead up to 2004. The essay will then go on to consider the position of the Lego group from 2005 onwards paying particular attention to how the company has reacted to adapt its internal resources in order to meet the needs of the external environment.

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The Lego group up to 2004:

In 2004 the Lego group was under the leadership of CEO Kjeld Kirk Kristiansen, the company faced a large number of problems including posting a loss for the year of DKK 1,800m despite a group turnover of DKK 6,295m. As a result Kristiansen stepped down from the chiromancy and deposited a further DKK 800,000 of personal funds into the company. Despite these headline figures the problems facing the Lego group in 2004 many be considered has having a longer history than the single year of such great losses and be routed in both problems in the internal and external environment.

Five Forces Analysis

Porter (2004) outlines five forces which have an impact upon a business coming from the external environment and include the following elements which will now be considered individually:

• Level of rivalry
• Power of buyers
• Power of suppliers
• Threat of substitutes
• Threat of entrants

Level of rivalry

The overall level of rivalry may be seen as relatively intense for the Lego group in the run up until the end of 2004. Whilst Lego occupies a strong position in the market for construction toys with relatively few rivals one must consider that Lego is now competing in boarder market of children’s entertainment which in the lead up to 2004 began in include large incumbents from the electronics sector such as Sega and Nintendo.

Power of buys

The power of the buyer in the case of Lego may be seen as relatively high with low switching costs between alternative toys and even substitute products such as video games and television.

Power of suppliers

The power of suppliers may be seen as average, Lego’s products on the whole may be seen as largely based upon standardised inputs such as plastics and chemicals. There is the consideration that were Lego chooses to move into non-traditional areas such as sets associated with films or games the power of suppliers will increase as a key input becomes that of licences which is a form of intellectual property.

Threat of substitutes

This may be seen as the largest threat to the Lego group in the run up to the end of 2004. Although it is difficult to define what market a company occupies (Grant 2008, Porter 2004) for the purpose of considering the impact of substitution one must consider Lego to be a provider of children’s entertainment. In this case the threat from substitutes are rather high given that consumers may substitute between alternative traditional toys such as action figures or toy cars through to electronic products such as video games and television.

Threat of new entrants

The threat of new entrants into both the smaller traditional toys market and the wider children’s entrainments market may be seen as relatively low in the run up until 2004 largely for similar reasons. In order to enter these markets there is the requirement for significantly high levels of investment in both the form of capital investments and research and development costs both of which act as barriers to entry and thus restrict the number of new entrants (Porter 2004).

SWOT analysis

A key tool in considering the overall strategic fit is that of a SWOT analysis, a SWOT analysis considers both a company’s internal elements (Strengths and Weaknesses) and attempts to considers how these factors fit against the external elements of Opportunities and Threats (Lynch 2008).

Strengths

Lego’s key strengths may be seen as coming from both its brand recognition and its ability to use innovative technology without moving away from the company’s core values. Whilst there are many other competitors in the toy or children’s entertainment market Lego remains the brand of choice in the field of construction toys despite the fall of other long term historical brand such as Meccano (V&A 2010) and the rise of alternative substitute products such as video games (BBC News 2004). As the case study indicates despite the traditional nature of the Lego offering the company has a strong association with contemporary IT, design and manufacturing systems which help to make the product both more durable as well as helping to reduce manufacturing costs thus making the field of technology as key strength for the business.

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Weaknesses

Lego’s key weakness in the run up to 2004 may be seen as two fold. Firstly the company has failed in a key area of the understanding of marketing in regard to understanding the needs of their customers which may be seen as the focal point of the marketing concept (Brassington and Pettitt 2007). This can be clearly seen in the role out of the Explorer range, in this case the company designed a product which failed to appeal to those who were not buying Lego products but subsequently didn’t meet the needs of those who were buying the current Lego products. The second weakness of the Lego group in the run up to the changes at the end of 2004 may be seen as the lack of ability to translate key corporate strengths and innovations into implemented strategies. Such considerations are demonstrated by Lego’s initial development of such innovative actions such as programmable parts for its Technic range as far back as 1986 but a contradictory failure to react to further developments in manufacturing processes such as CAM and CAD or product developments such as those associated with video games until much later.

Opportunities and Threats

The opportunities and threats to Lego in the run up until the end of 2004 may be seen as indivisibly linked representing a threat or opportunity based upon Lego’s reaction to the element hence they will be considered together.

The largest threat to Lego may be seen as the changing nature of the market in the run up until 2004. Whilst Lego has remained the market leader in construction toys there must be the consideration that for a large part there has been a decline in the overall market for traditional toys has children have increasingly substituted to alternative forms of entrainments largely in the electronics sector. Despite the threat to Lego’s core product offering in this trend in the run up to 2004 there was also a significant opportunity for Lego to use such threats as opportunities to generate spine of sales in the form of Lego sets associated with games and films as well as the development of non-traditional Lego products presenting Lego with the opportunity to diversify (Johnson et al 2008). Previous to 2004 Lego had already made some diversifications into the areas of direct retails with its Lego stores and the opening of its “Lego Land” amusement parks, this however represented at the time a considerable opportunity for further development.

The Lego group 2005 and beyond:

This section will now consider the position of Lego from 2005 onwards and as such will attempt to consider how Lego has adapted to the issues highlighted as facing the company in the run up to and including 2004. In the first instance one should consider that at the start of 2005 Lego started with a new CEO and by the end of the year posted a profit of DKK 214 a figure which has since risen in 2008 to DKK 1,352.

Structure:

In the first instance the structure of the Lego group may be seen as changing significantly since 2004. The first change for the company’s structure may be seen as beginning with the appointment of a new CEO an action which may be seen as both a large pragmatic change for any organisation but also a significant one from a symbolic perspective (Mullins 2009). Such a change has allowed Lego to re-define its operations allowing the company to move into new diversified markets such as the use of the Lego brand in relation to computer games and the production of traditional sets which are related to television and cinematic spin offs.

Other structural changes relate to the companies operations, operations in counties with relatively high labour costs such as Europe and the US have been outsourced to companies in Singapore and Mexico respectively. In addition the company’s operations in the Czech Republic whilst remaining under the ownership of the Lego group have been put under the day to day management of the companies joint venture partner Flextronics. These structural changes which have taken place within Lego’s operational function have allowed the company to make significant savings in labour costs. Despite these advantages there must also be the consideration that there are some draw backs. In outsourcing production there is the consideration that Lego will lose some of the control it had over its operations previously (Slack 2009), this is a key consideration for Lego as the success of the company and its brand has previously relied on a high association with good quality, something which may be damaged if outsourcing is not managed correctly.

HR:

The company’s HR policy may be seen as a true test of the organisations wider values against a back drop of changing economic conditions. On the one hand the company’s policies may be seen as facilitation an organisation which values organisational learning and development through the medium of its staff. Such considerations can be seen in the specific deployment of such policies of continuous improvement which is a key contributor to the company’s high standards for product quality. Despite this following such heavy losses in 2004 Lego made significant reductions of staff from 5,604 in 2004 to a low of 4,199 in 2007 a figure which has since recovered dramatically to 5,388 in 2008. As such the company may be seen as demonstrating that whilst its organisational values are key to its success reductions will be made to adapt to market conditions were necessary. Another contradiction that one may consider is that the company in the case study maintains that it will meet the legal requirements as a minimum in relation to its operations. This raises two concerns in the first case there is the consideration that all companies should in theory meet these minimum standards in any case and so this doesn’t really form a policy so much as a statement of the obvious. In the second instance Lego in recent years has outsourced a considerable amount of its operations to areas such as the Far East were HR standards are often much lower (Hutchings 2001). One may consider that in these cases if Lego only aims to meet minimum standards then the policies outlined in earlier paragraphs represent an attempt to present the company in a positive light to consumers rather than attempt to create a genuine learning organisation.

Culture/Values:

Despite the changes which have been made since 2004 one may consider that such changes have not been at the expense of the company’s wider culture and corporate values. In the lead up until 2004 the Lego group may be seen as largely having a corporate cultured built around offering a high quality differentiated product (Jobber 2007) in which the experience of the child as an end user is the key consideration. Despite branching out into alternative products Lego has maintained its commitment to product quality and key concepts such as not promoting war related themes in its product portfolio. From a innovation perspective one may see that Lego previous to 2004 had the technical abilities associated with an innovative culture however in more recent years one may see that the company has been much more successful at moving such innovations from the ideas stage into the implemented strategy stage.

IT/Innovation:

One of Lego’s key strategies since the restructuring of the company at the end of 2004 has been the company’s attitude towards IT and innovation. In adapting to the new business environment Lego may be seen as adopting two key strategies in relation to innovation and technology. Firstly the company has used new forms of technology for internal manufacturing processes. Such innovations include the use of computer modelling and computer aided design and have allowed the company to speed up the design process as well as well as maintain the company’s values in relation to quality and manufacturing tolerances which contribute to the consumer experience.

Secondly the company has used IT and innovation in diversifying its product ranges, such innovations have seen adaptations of Lego’s traditional lines to incorporate more electronic features through to the outright diversification into new product areas such as computer games based upon a Lego theme or using the Lego brand. Such diversifications may be seen as providing a key hedge against the risk which is inherent in operating with a lower level of diversification (De Witt and Meyer 2004). From a strategic perspective this also shows the recognition on the behalf of Lego executives of the need to compete in a wider market than merely that of traditional children’s toys. As such the element of innovation may be seen as one of the most important elements in the turnaround of the company’s fortunes since the end of 2004.

Conclusions:

Having considered the research there are a number of conclusions that may be drawn. Firstly in considering Lego’s potion previous to 2005 one could argue that the company had a strong set of internal resources but had failed to respond to changing external considerations in the market. The result of such a lack of strategic fit ultimately put the company in a relatively weak financial position generating substantial losses in 2004. Following the appointment of a new chairman in 2005 the company has successfully turned its fortunes around seeing that the key strengths of the company in the form of brand, technological innovation and corporate values have been used to create a strategic fit which matches the challenges of the contemporary business environment. One may take the view that whilst Lego will face significant challenges in the future due to the continuing nature of changes in the market the company has not adapted its structure and processes so as to be able to deal with such challenges successfully in the future.