The Lego group: building strategy

Problem Statement: The Lego Group has been making toys successfully for 80 years and has grown to having close to 3.16 B USD in sales for the 2010 year. They specialize in toy building sets, a sector of the market that has seen 13% growth in 2010 and is forecasted to grow further. However, the Lego Group is at a cross-road in their business plan and requires a strategic plan going forward. Currently, the company needs to look at its existing partnerships with Disney after Disney’s significant mergers and acquisitions in the past year.

Lego is regarding Disney’s purchase of Hasbro and Mattel as a threat to their market share of the toy building block sets due to potentially losing kids who want to buy themed sets based on Marvel comics. Meanwhile, the Lego Group is straying from its core competency and is developing video games. Furthermore, the Lego Group is not retaining a majority of its cash flows and therefore is not following a corporate structure designed for growth.

Strengths & Weaknesses of The Lego Group, Market Opportunities and Threats

Strengths: Lego Group •Incredible brand equity (quality, history, loyal following) and called ‘toy of the century’. Lego has global growth potential •Recent (2005) overhaul of supply chain has increased efficiency and resulted in a huge cost savings. Lego is leaner and profitable •Major market share at 9:1 vs. their closest competitor, Mega Bloks indicates leadership in the toy building sets market (Lego 3.16 B vs. Mega Bloks at 0.368 B in2010 note: conversion factor 1 DKK = 0.1925001925 USD)

Weaknesses: Lego Group •Dividends of DKK 1,500 million were paid in May 2010, corresponding to DKK 7.3 million in average per share. Expected dividend for 2011 is DKK 2,500 million. Lego is paying the Kristiansen family too much money. •Had slipped into financial trouble early in the 2000 decade and was not aware of costing and expenditures. •Core competencies are in question with the concentration on video games. Is Lego a toy company or a video game maker?

Market Opportunities •Lego Digital Designer had more potential with users of the online site for them to design Lego’s next success story •Two major competitors in the toy industry, Mattel and Hasbro are under new ownership with Disney. Opportunities to expand on existing partnership with Disney using Lego’s brand equity and proven success with Star Wars and Pirates of Carribean •13% overall growth in building sets over previous year, one of the fastest growing segments of the toy market.

Market Threats •Loss of trademark protection could equate to lower barriers to entry of cloner type competitors like MEGA Bloks •Unified competitors Mattel and Hasbro are bought by Disney and now have potential access to large capital budget for expansion •Kre-O set to launch in 2011 as a direct rival for the Lego Group. The owner, Hasbro, is the world’s second largest toy maker as of 2010 and can get behind the success of Kre-O

Recommendations: The first recommendation to the Lego group would be to curb the dividend payouts and reinvest the cash flows from the Lego Group back to the company. Growth is the product of a firm’s retention ratio and the firm’s return on retained earnings. Therefore without retained earnings, there cannot be growth at the Lego Corp. A second recommendation for the Lego Group would be to remove itself entirely from designing video games and focus on producing popular constructive toys for children and adults.

Lego’s strength is exists in its brand equity and in its unwavering mission to develop children. Video games are fun and are a growing market for children but Lego is not an expert in this field and should move back to its core competencies. Thirdly, opportunities for its existing partnerships with Disney should be re-examined for potential growth given Disney’s acquisition of Mattel and Hasbro.

Implementation: The dividend payment reflects the strategy behind the capital structure where the LEGO Group is the operational company and any surplus liquidity is distributed to the Kristiansen Family and it is expected to be significantly bigger in 2011. Lego’s CEO, Knudstorp, and his team of senior executive managers can address the dividend issue with the board/owners and argue that the money is needed to grow the company.

Cutting the dividend of a private company does not have any effect on their perceived public image and brand equity. Implementation should be immediate. Video games are very complex and have developed immensely in the last thirty years. Lego Group is not a specialized company for video games and should therefore remove its interest in developing their online Lego Universe.

It is imperative that the www.LEGO.com site be interactive and engaging as well as serve to promote their customer project designing feature which has proven successful. However, having a paid membership high end video game does not fit with the core image of Lego being a building toy manufacturer with a vision to develop children. Lego Universe should be scrapped as soon as possible and efforts should be directed to promoting successful lines of building toys. Disney has recently purchased two of Lego’s main competitors, Mattel and Hasbro, who are the first and second leading toy sellers respectively.

Hasbro’s deal with Marvel comics is now effectively Disney’s deal with Marvel comics. Lego has an existing partnership with Disney and should be capitalizing on Tom Stagg’s goal to pursue third-party licensing agreements with respect to toy production. Lego will argue that its main strength is its brand equity and its biggest successes have come from Star Wars and DC comics (Batman and Spider Man) themed sets. Lego will argue that it has established itself as the global market leader in theme based construction toys.

Lego’s nearest competitor, Mega Bloks, which has been dogging them as a clone for twenty years has a mere 1/9th of Lego’s market share. By selling itself as the industry leader and with its superior brand equity, Lego stands as the top market ally for Disney and will have to pitch its ideas for an extended and greater partnership in the very near future. The best method of approaching Disney is to create a group of sales staff from existing managers in the Lego Group who have been instrumental in the rollout of successful themed packages.

The objective of the group should be to assemble and bolster the strength and tremendous successes of the Lego themed packages and market their product to Disney in an aggressive manner. Waiting for Disney to approach them would be a mistake and Lego needs to be proactive in seeking out a solid partnership.