1. Explain how the development of strategy at the LEGO Group reflects the key characteristics of strategic management. As a reminder, strategic management has three key characteristics: strategic position, strategic choices and strategy into action (Johnson, Scholes and Whittington, 2010. Exploring Strategy, 9th edition. Virginia Woolf and The Judicial Imagination. London : Prentice Hall Publishing. ) Let’s use the development of LEGO’s Strategy (1995 – 98) to explain how the development of strategy at the Group reflects the key characteristics above:
* Strategic position: three emerging trends in LEGO external environment influenced its strategy: (1) strong competition from existing companies (e. g. Mattel and Hasbro), (2) threats posed by new entrants offering advanced digital products (e. g. Sony and Nitendo) and (3) as a result of children maturing earlier, the age spam during which they play LEGO products was getting shorter. To mitigate these threats, LEGO made use of its strong position on its market in Denmark as well as its core strengths.
* Strategic choices: LEGO set ambitious goals to guide future strategic developments including brand recognition, increase in sales, international growth and strategic alliances. * Strategy into action: to implement the new strategy, LEGO introduced a new and more decentralised management style. As a result some old and senior managers left while new ones and more specialists were recruited. 2. What features of the external environment have influenced strategy development at the LEGO Group? The following features of the external
environment have influenced strategy development at the LEGO (ref. Poter’s five forces frameworks): * Threat of entry: companies such as Sony and Nitendo were entering the toys and games market with new offerings to the same group customers * Threat of substitutes: the development of new technology had seen the introduction of advanced electronic games * The power of buyers: giant retailers such as Wal-Mart wanted both more innovation and shorter delivery times and were putting intense pressure to force prices down.
Furthermore and as explained in point 1 above, children – as ultimate consumers of LEGO products – were maturing earlier leaving no choice to LEGO but to improve/upgrade its products and services offerings * The power of suppliers: although most toys were produced in China, LEGO had its production in high cost countries leading to high procurement costs. * Competitive rivalry: LEGO was facing strong competition from much bigger companies present in the local market such as Mattel and Hasbro 3. What were the alternative strategies facing the LEGO Group in 2004? Why do you think the LEGO Group followed the course that they did?
Despite the new strategy (1995 – 98), LEGO experienced its first ever deficit in 1998. The decline was mainly due to major fluctuations including the rapidly changing environment. In 2004, LEGO faced the following alternative strategies: * Moving into the digital gaming: with the strong competition from ‘digital’ companies, LEGO could have envisaged moving into the digital era in order to compete with these new companies. * Increase outsourcing: to cut its costs, LEGO could have outsourced a proportion of the product manufacturing to more companies but instead the group ended its outsourcing cooperation with Flextronics.
* Create own distribution channels: to avoid being victim of the ‘changing mood’ of powerful retailers such as Wal-Mart, LEGO could have created its own independent distribution channels. LEGO followed the course they did in order to focus on its core business (Lego bricks) while building on its core strengths (design, innovation, decentralised management etc. ). Furthermore moving into the digital gaming and/or creating its own distribution channels would have required huge capital investment in the eve of a financial crisis. The impact of these investments could have been disastrous for the future of LEGO.
4. Looking at the LEGO Group today how would you approach strategy development to ensure a successful development of the company in the future? Looking at LEGO Group today, future strategy development should focus more on the followings areas: * development of a platform for ‘digital LEGO bricks’ using 3D technology * Strategic alliances with film makers in order to design and launch new LOGO products during the launch of new films * Customers’ diversification through identifying and developing new target groups such as family gaming.