Question 1 Explain how the development of strategy at the LEGO Group reflect the key characteristics of strategic management outlined in section 1.2 and in the model in Figure 1.4? “Strategy is the long-term direction of an organization” (Johnson, Whittington and Scholes, 2011, p.3). The LEGO Group started with the manufacture of stepladders, ironing boards, stools and wooden toys and has grown into one of the top five toy makers in the world (Johnson, Whittington and Scholes, 2011).
The growth of the company demonstrates the three horizons framework (Johnson, Whittington and Scholes, 2011) for businesses, as can be seen throughout the history of the company, if referenced from a specific point in time.
Corporate level strategy directed the company into the manufacture of the now famous plastic LEGO brick, the development of LEGOLAND, the international growth of the company and more recently, LEGO’s entrance into the digital media age via LEGO Universe (Johnson, Whittington and Scholes, 2011).
Business level strategy is reflected in the development and introduction of innovative products like LEGO TECHNIC, LEGO Castle, LEGO DUPLO and many other classic and topical play themes to compete in the competitive toy market (Johnson, Whittington and Scholes, 2011). Operational strategies have driven the introduction and re-organization of management, changes to the LEGO Group’s relationship with retailers and a review of the procurement processes and outsourcing strategies of the company (Johnson, Whittington and Scholes, 2011).
The development of strategy at the LEGO Group reflects the exploring strategy model of understanding the strategic position of the company, assessing strategic choices for the future and managing the strategy into action. On many occasions, the outcome of strategic choices did not meet the desired results, but this only emphasizes the non-linear nature of strategy (Johnson, Whittington and Scholes, 2011).
Question 2 What features of the external environment have influenced strategy development at the LEGO Group?
Strategy development at the LEGO group has been influenced mainly by the economic, social and technological impact of a rapidly evolving society, and thus, business environment.
Oil price crises in the 1970s and 1980s resulted in a severe economic slow down in industrialized countries. From 1995 – 1998, the LEGO Group continued to face strong competition from bigger toy manufacturers like Mattell and Hasbro. Market share of the toy industry became more competitive when new competitors like Sony, Nintendo, Activision and Visual Arts entered the industry, offering more advanced electronic games.
Market research showed that children seemed to mature earlier, thus, reducing the age span during which children play with LEGO products. During the period 1999 – 2003, the LEGO Group faced a rapidly changing environment. LEGO sales are interlinked with the success of blockbuster movies through licensing partners in the movie industry. Thus, in a year with no major movie release, sales are drastically affected.
During this period, exchange rate fluctuations of the Danish Krone (DKK) against the US$ increased pressure on the companies financial structure. From 2005 - 2009, pressure from major retailers for more innovation and shorter delivery times and the fact that LEGO sales are highly seasonal, put pressure on the LEGO Group to develop strategies to streamline it’s operations in order to meet customer demand, reduce costs and improve the capital structure of the company (Johnson, Whittington and Scholes, 2011).
Question 3. What resources and competences of the Lego Group have enabled them to regain their successful position in the global toy market?
After many layoffs, shifting priorities and changes at senior management level, the LEGO Group needed a new, stable direction for the organization. Due to heavy financial losses and a weak capital structure affecting investment opportunities, the Lego Group had to look within to find a path forward (Johnson, Whittington and Scholes, 2011).
The company had remained a family run firm for most of it`s history and by Kjeld reinforcing his responsibility as CEO, it sent a clear signal that the family was behind the company. By divesting in LEGOLAND parks, writing-off other assets and simplifying the corporate structure, this allowed the LEGO Group to focus on it`s core business. Attention was directed towards resolving distribution problems and getting closer to retailers in order to understand their sales to end customers.
Focus was placed on cutting costs and the entire procurement process was revised, resulting in fewer suppliers and significant cost reductions. Supply chain management philosophy changed from outsourced management, to in-house management. This strategy allowed for flexibility and the ability to react to short-term changes in customer demand as a priority over cost (Johnson, Whittington and Scholes, 2011).
“Research shows that play and the use of toys like LEGO can aid a child`s development immensely. It helps with basic spatial awareness and colour recognition, but also stimulates a child`s creative and imaginative thinking” (Block Toys, 2011). However, a rapidly evolving society, leaning more towards electronic games, means that the timeless concept of the LEGO brick must be updated at all times. By using topical themes generated by blockbuster movies and innovation through user participation in the development phase, the Lego Group has recognized the importance of customer responsiveness (Johnson, Whittington and Scholes, 2011).
To counter the global economic crisis of 2008 – 2009, the board boldly decided to invest in new equipment to increase production. The LEGO Group enjoyed the biggest growth rate since 1981, however, more importantly, profit in 2008 was more than triple that of 2002 – with the same sales level (Johnson, Whittington and Scholes, 2011).
Question 4. What were the alternative strategies facing the Lego Group in 2004? Why do you think the Lego Group followed the course that they did? Alternative strategies included the possible sale of the company. With most toy companies using China to reduce manufacturing costs, the LEGO Group had most of its production in high cost countries. Management was concerned whether the LEGO Group could compete (Johnson, Whittington and Scholes, 2011).
After many layoffs, shifting priorities and changes at senior management level, the LEGO Group had a problem with `corporate memory` and needed a new, stable direction for the organization. Due to heavy financial losses and a weak capital structure affecting investment opportunities, the Lego Group had to look within to find a path forward. By reinforcing his CEO responsibility and supporting the company with a loan, Kjeld sent out a clear message that the family was behind the company (Johnson, Whittington and Scholes, 2011).
Question 5. Looking at the LEGO Group today, how would you approach strategy development to ensure a successful development of the company in the future?
The researcher would study horizon 1 businesses and identify how to extend and defend core business by developing strategy for each of the three main levels within the organization, i.e. corporate level, business level and operational level. The exploring strategy model would then be used to understand the current strategic position of the organization, assess strategic choices for the future and create a process to manage the strategy into action. The same process would then be followed for horizon 2 and horizon 3 businesses.
a.) JOHNSON, G, WHITTINGTON, R, and SCHOLES, K. 2011. Exploring strategy: Text & Cases. 9th ed. London: Financial Times Prentice Hall. b.) Block Toys, 2011. Lego: Putting the building blocks in place early with your child`s development. [online] Available at: http://www.blocktoys.co.uk/lego-putting-the-building-blocks-in-place-early-with-your-childs-development-732 [Accessed 2nd March 2012].