In this assignment the LEGO Group are examined by using a PESTEL analysis (Turner, S., 2002,), Porter’s Five Forces framework and TOWS matrix, based on the information from the case study “The LEGO Group: working with strategy” by Anders Bille Jensen, University of Southern Denmark, and sources from internet.
Application of the PESTEL analysis:#1
CONTEXT| FINDINGS| POSITIVE IMPACTS| NEGATIVE IMPACTS| POLITICAL| Higher import tax in some countries, prevented LEGO to enter these markets before 1980’s.| Lego has to outsource its production line in those countries, it can lower the production cost, making the products to be more competitive with rivalries.| Difficult to control intellectual properties, and its supply chain. |
ECONOMIC| Outsourcing 80% of the products in the Eastern European countries and remain only 20% in its base in Billund.| Significantly reduce the production cost by outsourcing to developing countries as other direct competitors.| Possibly unwelcome by their devotees since the product is no longer produced by Danish labors. Meanwhile, supply chain and QC will become a setback to the group.| SOCIO-CULTURAL|
According to the market research in 1995, showed that children seem to mature earlier and demanding more from the toys.| Lego has to strive for strategic, innovative development rather than relying on the past success. (2)| There is no absolute key for successful strategic plans. Any major change of business decision will face the risk of total failure of the company.| TECHNOLOGICAL| In the past 25 years, the computer game has taken place in toy industries. The new generations has shifted their interested into digital gadgets from traditional toys.|
The company has developed a strategy in digital in 2009, with Warner Brothers. As an answer the growing demand in ‘new media’ age| It is difficult to seek for a balance in running the ‘old’ and ‘new’ business together. In the other word, the management must think as a Baby-Boomer and a Generation Y.| ENVIRONMENTAL| The consumers were hesitant to accept plastic products, when the company first producing Lego bricks. They preferred more traditional wooden rather than plastic ones.|
The plastic Lego bricks had proven to be one of the huge successful toy products in the century. It is durable and easy for mass production.| The active ingredient of plastic is a by-product of petroleum, which is a highly polluted industry in the World. On the other hand, wooden product can be obtained from renewable forests, a sustainable source compare with plastic.| LEGAL|
The interlocking principle of studs and tubes was patented on 28 January 1958.(1)| Lego have sold millions pieces of bricks in the past five decades, which proved that the patent is the main asset of the group.| The future design which based on this existing stud and tube interlocking system model is limited. And the patent will expire eventually.|
Application of the Porter’s Five Forces Analysis:
This following analysis is an extract based on the case study The LEGO Group: working with strategy. The LEGO Group has improved the company situation and historical success in 2008 and 2009, after a huge declined in 1999-2003. The following paragraphs will analysis the company with Porter’s Five Forces (Michael E. Porter, 1979) #2 to identify the strengths of the five different competitive drivers within this industry.
1. BARGAINING POWER OF SUPPLIERS
The main ingredient of LEGO bricks are plastic and colorants. The plastic (ABS) that used by LEGO is exclusively supplied by the German chemical company Bayer AG. Since the ABS is produced with petroleum and its by-products. Therefore the fluctuations in oil prices may directly affect the profits of LEGO. (3) Therefore, I think the threat is high in this stage since LEGO has little chance to bargain with oil companies and supplier.
Since 2008, LEGO has changed its strategy, to obtain licensed theme from filmmakers and book authors instead of developing products with their own designs. Although it has reached a huge success, however, the threats in this stage could be moderate to high because the supplier could raise the future license fee and even put them in auction or sell it to LEGO’s direct competitors.
2. BARGAINING POWER OF BUYERS
The bargaining power from buyers is high. The largest buyers of LEGO products are big retailers such as Wal-Mart or Toys”R”Us. Pressures putting on LEGO were significant from these companies due to their own problems. These chain retailers have the bargaining power on delivery times and retail price. That is, for instance, if LEGO does not supply the products efficiently during Christmas shopping season, these retailers could totally replace LEGO with other brands of toys on the shelves.
3.THREATS OF NEW ENTRANTS
Since the expiration of the last LEGO patent in 1989, the entry barrier to the market is almost disappeared. Although LEGO has superior popularity and strongest position in the construction toys market in the World.
There are always some overseas toymakers trying to copy the successful way of LEGO, manufacturing the much cheaper look-alike LEGO in Canada, Hong Kong and mainland China. As the crude prices slides after the financial crisis of 2008, it became easier for new copycat entrants to obtain resources. Therefore, I concluded that the threat of new entrants is moderate to high. (4)
There are numerous types substitutes available to occupy a child’s free time: from toys of all different brands, to cartoons and comic books, or snacks as comfort food, sport outfits and other digital entertainment options.
5. RIVALRY AMONG THE EXISTING PLAYERS
This brings the highest pressure to LEGO, since there is almost no switching cost and barrier for customer to choose for another brand of toys. The rivalries are included the traditional toys manufactured by such as Mattel and Hasbro, or electronic gadgets by Sony, Nintendo or any other computer games. According to the case study, children seem to mature earlier, get bored fast, they prefer to play with more exciting toys and switch to substitutes. However, the prices of substitutes are varied; it depends on the adult’s budget. (5)
Application of the TOWS Matrix:
WEAKNESSES AND THREATS (WT)
LEGO Group was in a critical condition in 2003, a survival strategy was launched by developing a popular theme Harry Porter and Star Wars in 2004, which could stand out from its competitors and also to answer the call of mature children.
WEAKNESSES AND OPPORTUNITIES (WO)
The changing of customers behaviors which leads the sales dropped in the mid 1990’s, and resulted in switching to other substitutes such as electronic gadgets and other brands of toys. The company were setting strategic plans to build 3-4 new LEGOLAND theme parks; launching licensed theme products based on its traditional plastic bricks. Another weakness at LEGO was the production costs in Denmark. Meanwhile the rivalry was producing toys in low-cost countries.
This is an opportunity for the company to outsource its production plant in Eastern European countries and Mexico. However, another problem have arisen for LEGO because it had no experience in remote management of overseas production line. LEGO has to cooperate with a Singapore company Flextronics to manage the Polish plant, in order to overcome this weakness.
STRENGTHS AND THREATS (ST)
The major strength of Lego group is the world renowned quality bricks manufactured in Denmark for half a century. And it is also became a threat to LEGO since the rivalries have outsourced to the developing countries. In order to minimize the threats of competition and the effects of the high production cost, Jorgen was reviewed the whole procurement process, including outsourcing and layoff in home country.
Another strategy for meeting competitive pressures was to invite its users to participate in product development, lower the cost in research and development, and also maintain an interaction between the company and consumers.
STRENGTHS AND OPPORTUNITIES (SO)
Finally, LEGO build on their strengths to take advantage of opportunities. These strengths, under the leadership of JorgenVig Knudstorp enabled the group to develop new product line that met market trends for cyber age consumers (the on-line game, official website to LEGO Universal), as well as the Hollywood blockbuster movies licensed theme products. The group will become more influential in the Hollywood and perhaps Bollywood.
The product development team of the group may also establish a workshop to create movie script with Lego’s ideas – the ideas of creativity, imagination, friendship and peace. A series of toy products may launch by the group follow by the movie released.
In another tactical move, I would suggest the company could sell license to domestic end-users to print their own bricks at home by LEGO 3-D printer kits.
These would allow the consumer to pay for loyalty fee to the group, and enable them to print out the missing parts or even the required amount of bricks for a whole set of finished models, or creating a customer-designed, a unique decoration elements, it could made more positive topics around the brand. Finally, users are sometimes quite ambitious to build their one of a kind model. I would suggest the group to arrange an International LEGO competition once a year as an exchange platform for LEGO lovers and also promote tourism industry in Denmark.
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Figure 1 Historical crude oil price from 1861 to 2009
Source: http://chartsbin.com/view/oau (retrieved on 2013-06-20) References: