Case Study Analysis of the Lego Group

Case Study Analysis of the Lego Group

1. Introduction
   • Background and History

The LEGO Group, or LEGO, is a toy-manufacturing organization that has its headquarters in Billund, Denmark. It was created as a family organization in 1932 by Ole Kirk Christian and is now a dominant competitor within the global toy industry with an addition of strategic entertainment products (Mohanty, 2018). Initially, Lego started as a manufacturer of ironing boards, toys, stepladders, and stools. By 1949, LEGO had begun manufacturing the early version of the LEGO plastics, which became highly popular (Mohanty, 2018). This was a strategic step as plastic was a new material that had just been introduced to the market. According to Lauwert (2008), the brand has gained a wide market across the world due to the high differentiation of the market. The sustenance of its basic bricks with new figures and features has resulted in the diversification of play opportunities for children, which is in congruence with its mission of inspiring and developing “the builders of tomorrow” (Lego Group, 2018; Nelson and Matles, 2017). Recently, however, LEGO has increased its brand loyalty through its steps towards environmental conservation. This includes enhanced investments into the discovery of sustainable raw materials and funding societal groups whose focus is on environmental sustainability. Currently, The LEGO has over 600 stores worldwide (Nelson and Matles, 2017). The company was voted the world’s most valuable brand in 2018, with a price tag of $7.5 billion. LEGO’s 2018 revenue stood at DKK36.4 billion, with a net profit of 8.1 billion, which is a significant increase from 2017’s revenue of DKK7.6 billion (Lego Group, 2018). LEGO’s product lines include play themes, traditional bricks, licensed products, games, robots, and fun educational products. The products have given LEGO a dominant share of the global toy market, which stood at 4.8 percent in 2008 (Lego Group, 2018). This expansion in market share indicates that the company’s strategic initiatives, including innovation in product development, have been instrumental in enhancing competitive advantage in various markets.

Figure 1. LEGO: Most valuable brand (Brand Finance, 2019).

Over the years, LEGO has been able to maintain a prominent position within the market by basing its activities and operations on innovation. This is evident in its vision, which is ‘Inventing the future of play” (The Lego Group, 2018). For its business operations, Lego has had its focus on varying values, which include imagination, creativity, fun, learning, caring, and quality (Sommer, 2018). Hence, this report undertakes a critical analysis of LEGO’s corporate and business strategy in relation to its current external and competitive environments and evaluates the company’s approach to key organizational behavior and management issues. The report then outlines recommendations relating to LEGO’s approach to quality and ethical business practices as an effort towards enhancing the company’s current and future business success.

2. Corporate and Business Strategy
   • External Environment

LEGO’s macro-environment is characterized by factors that have a significant impact on its business performance, and which fall beyond management control. These factors reflect the market, both domestic and international, of the company’s products. As such, it is critical for LEGO to adopt an operational model that takes into account these factors to ensure they are not barriers to continued business success. Business strategists have identified various tools for analyzing and understanding organizations’ micro- and macro-environments, with PESTLE analysis being found efficacious in exploring the latter (Johnson, 2016). The term stands for political, economic, sociocultural, technological, legal, and environmental factors that a firm must contend with to register business success in its domestic and international market(s).

• Political factors

Political factors have a significant bearing in the success of a company as they determine the regulatory framework within which a firm has to execute its business practices. Today, LEGO has a market presence in over 130 countries around the world (Lego Group, 2018). The local political decisions of these countries profoundly shape the decision making framework of the company, which include meeting established corporate taxes, regulations on imports and exports, labor laws, and environmental laws, among others. Any violation of established rules and regulations would indicate noncompliance, which is a ground for sanctions and eventual business failure in the concerned market. Therefore, LEGO has to continuously align its corporate and business strategy to the political interests of its markets to ensure business sustainability and more stable performance. In Denmark, the government is seeking to raise the corporate tax for local companies, a decision that would increase LEGO’s corporate tax, thus impacting its net profit after tax (The Heritage Foundation, 2019). The Danish government invests highly in education and infrastructure, and this has a direct positive impact on the labor and product markets as there is the availability of qualified personnel and easy product distribution. LEGO banks its success, both at the corporate level and in the markets, on a cadre of a highly skilled workforce. This characteristic has seen the company attract high labor costs in its domestic and international markets, which hurt reported profits. The Danish government supports policies for collective bargaining, which raises the minimum wage rate for employees, which currently stands at DKK110 ($20 per hour) (The Heritage Foundation, 2019). LEGO has to comply with this requirement to avoid conflict with authorities, which might impair its reputation and brand equity.

In Western Europe and North America, the toy and games market is highly regulated. LEGO’s primary market is children, and it happens that a majority of governments have formulated strategic regulations to ensure the security and quality of products targeting this population (Euromonitor International, 2019). In the European Union (EU), safety regulations stipulated by the “Toy safety Directives” bind businesses operating in the toy and game market (Euromonitor International, 2019). Under this regulation, manufacturers and distributors of toys and other fun products targeted at children must document their compliance report. The report stipulates the measures the businesses have taken to comply with the toy safety directives. The EU requires all safe products to bear a CE marking (indicating conformity with health, safety, and environmental protection standards), company logo, name, and potential effects on users (Euromonitor International, 2019). Similarly, North America has strict toy and game regulations, which indicates the seriousness of the region in protecting children from unsafe fun products.

Currently, LEGO is in the process of establishing new production operations in China, although Denmark remains its primary manufacturing center. This move is expected to expose the company to the complex political environment of China. The current trade war between China and the United States and a slow or stagnant economic growth have seen the former begin to modify its commercial law. The political tension between China and the U.S. has created a lot of global uncertainty, which amplifies the business risk of foreign companies in China. Nonetheless, the Chinese government, in its efforts to attract foreign direct investment, has taken steps to create a favorable business environment for existing and incoming international companies (InterChina, 2018). Some of the benefits of the Chinese market for LEGO and others are the availability of cheap labor, efficient infrastructure, and high market demand. It is important to note that China has the largest population in the world, despite its birth control policy.

• Economic factors

In recent times, the global economy has experienced disruptions that have had adverse effects on individual countries and their populations. The International Monetary Fund (2018) announced strong economic prospects for Denmark. The potential growth in the gross domestic product (GDP) of the country will boost the vibrancy of business activities and increase business stability. The GDP of Denmark is DKK324.9 billion by 2017, which was a 2.2 percent increase from 2016 (The Heritage Foundation, 2019). The GDP expanded by 2.9 percent in 2018, showing a consistent trend of economic growth. The economy is projected to grow by at least 2.0 percent by 2020 (The Heritage Foundation, 2019). Additionally, the robust economic environment is characterized by a modern market with high government expenditure coupled with a trade surplus. The economy advocates for a secure business environment where consumption rates are high and the potential for growth remains high.

In the international market, the economic environment of a country has a significant impact on the operations of a foreign company. Increased global uncertainty has shifted consumer habits from consumption to saving in anticipation of tougher economic times. Factors in the global economic environment have created more awareness for consumer habits and triggered cautious consumption patterns to avoid a financial crisis. In the international toy market, LEGO offers premium fun products. As such, the increased uncertainty in the global market can reduce the intention of consumers to buy LEGO products as consumers turn to more cautionary money consumption habits. Currently, EU countries, which are the main markets for the company, are experiencing a lot of economic slowdowns and uncertainty due to Brexit. Moreover, the increased trade debt coupled with reduced aggregate demand in the region has led to a risky business environment for toy manufacturers. An economic slowdown in potential markets, such as China, has also put a lot of uncertainty for business operations and increased the liquidity and operational risks of foreign businesses by driving up interest rates and the cost of raw materials.

• Social-cultural
  

Across the world, multiple issues are changing the dynamics of the social and cultural environment within which businesses operate. Evidence suggests that the involvement of women in the labor market has led to lower fertility rates, while the increased standard of living and pursuit for higher education has resulted in delayed pregnancies (Chiarella, Flaschel, Groh, and Semmler, 2013). These factors have increased the spending power of families, and this is good news for businesses. Children are the primary market for LEGO. Increased economic uncertainty in major markets, including EU, US, and Asia, has led to reduced birth rates, which have the potential to reduce demand for the company products. The graph shows reduced birth rates as reported by the World Fertility Report:

Figure 2. Population growth (United Nations, 2014)

• Technological

Technology and new product development bear greater importance in the global toy industry. However, increased access to the Internet and smart mobile technology – which has seen a growth of children’s games applications (Apps) – are proving to be significant threats to the company. Although the company has invested heavily in innovation, such as 3D printing technology, some of these technological innovations are vulnerable to imitation in a similarly innovative toy and games business environment. In short, technological advances enhance the performance of businesses but also create market risks. With the current growth in new technologies across industries, companies have to be innovative in both product development and cost handling to create competitive advantages. LEGO has invested heavily in cutting edge technology, and this has made the production of cutting edge products simplified. For example, the company has developed the capability to operate multiple machines with few employees due to the automation of the manufacturing processes (Lego Group, 2018). Further, the company now employs the lean manufacturing principle as a building block to build and enhance competitive advantages in both the current and future markets. The company has reported that tolerance for error in production for the blocks is down to 1/100 mm, which attests to the highly technological equipment needed in production (Lego Group, 2018). The internet has become an integral part of most people’s lives, hence the necessity for competitors to be present on the web and use it to their advantage. LEGO now has a webshop where consumers can buy products online directly (Lego Group, 2018). Going forward, the company must explore how best to exploit opportunities in this space, even as children become constant Internet users via smartphones and kid tablets.

• Legal Factors

Just like any other industry, the global toy industry operates within a context of rules and regulations. Lego has battled an 11-year court battle that ended in 2010 after the European Court of Justice revoked the LEGO brick trademark (Farrell, 2010). Favorably, the revocation of the trademark did not cause a significant drop in the company’s sales. The company emphasizes on having its production processes conform to stipulated standards and laws. It has also ensured that all its products are licensed and are of high quality. The legal framework within which LEGO conducts its business in various countries is closely related to the political environment since it is the latter that creates laws and entities that enforce regulations.

• Environmental

Climate change has increased the rate at which countries focus on how citizens and corporations treat the environment. Across the world, countries have drafted policies that seek to protect the environment from harm, including requiring organizations to adopt environmentally-conscious production processes and waste disposal. To have success in this changing landscape, LEGO must ensure it manufactures products of high quality and minimal harm to the environment. LEGO’s sustainability framework, which has seen it partner with UNICEF and WWF, establishes the company’s roadmap for developing quality products and entrenching ethical business practices (Lemaitre and Leorat, 2019). This framework is essential given the criticisms that the company has faced due to carbon dioxide (CO₂) emissions.

• Industry and Competitive Analysis

A business cannot record sustainable success without taking note of the competition characterizing its product/service markets. Porter’s Five Forces Framework indicates the competitive forces in a market, and which determine profitability for involved players.

• The threat of New Entrants

Two factors characterize the international toy market and which are essential for LEGO to consider as they present moderate threat. Firstly, the toy product industry requires typically vast investments of time and money. All these serve as obstacles to entry in the industry, thus restricting the number of new entrants in the sector. Secondly, since new toys are continuously entering the market with big brands like Wal-Mart and Target, the threat of entry is significant. Therefore, the first factor represents a relatively low threat of new entrants on the broader entertainment market, giving LEGO a much stronger bargaining power over the majority of its competitors in the market. However, the second factor presents challenges for the company, which has to bank on innovation and pray that new entrants would not imitate its products in the short-term. In short, the threat of entry in the global toy market is moderate.

• Bargaining Power of Suppliers

The primary suppliers of LEGO are the Chinese subcontractors, who are multiple and who supply to numerous industries. Moreover, the company has most of its production in-house, its supply needs are not highly differentiated, and its potential suppliers are readily available. These factors mean the company can easily switch suppliers without significant adverse impacts. Collectively, the above factors indicate that the bargaining power of suppliers is low.

• Bargaining Power of Buyers

LEGO’s products are unique, meaning retailers can hardly find such products anywhere. Moreover, through product differentiation, the company enjoys a good market position in its markets. Besides, the company has managed to build and sustain a good relationship with retailers in its various markets. These three factors indicate the bargaining power of buyers to be moderate.

• Threat of substitutes

The proliferation of smart gadgets, including kid tablets, as well as the increased production of games apps, have led to an increased level of children’s interaction with digital products. In this environment, LEGO has invested in innovation to defy the trend and remain the dominant player in the global children’s fun market. With increased incorporation of technology in LEGO’s products, the threat of substitutes is comparatively lower, even though it is higher for the industry as a whole.

• Competitive rivalry

The level of competition is quite intense and strong for LEGO. While it is clear that the company enjoys a strong position in the industry, with relatively few giant competitors, it should be considered that they are taking part in a broader market of toy production, which also includes key players in the electronic sector, such as Sony and Nintendo, among others. The major competitors for LEGO are Mattel, Bandai NAMCO, Takara Tomy, Hasbro, but the two main competitors are Mattel and Hasbro (Brand Finance, 2019). Although LEGO is the dominant market leader, soon, these competitors might snatch a significant portion of its market share and operating margins. Therefore, the internal rivalry is high for LEGO.

1. LEGO’s Approach to Key Organizational Behavior and Management Issues

• Organizational Behavior
  • Corporate Culture

Well-Structured company culture is highly advantageous to each company as the level of engagement and participation of employees affects their motivation in the work environment. LEGO’s goal is to inspire and develop creative thinking in children, thus enhance their potential. Hence, the brand’s values underpin its corporate culture and reflect in most of its operations in Denmark and abroad. In the Lego Group culture, there exists the LEGO People Promise, which enables the execution of the corporate and business strategy, to extend brand success in the global toy market (Hernes and Schultz, 2017). Based on their website, four pillars foster the determination of the LEGO workforce. The Purpose Driven pillar seeks to enhance the experience of commitment to and achievement of responsibilities for the delivery of the brand’s mission. The Systematic Creativity pillar seeks to combine expertise and imaginative ideas to enhance the identification of solutions to existing and potential challenges. The Clutch Power pillar is based on fostering the feeling of belongingness in the workforce, which is essential in driving engagement and collaborations in the international LEGO community (Konzack, 2014). The last pillar is Action Ability and revolves around accountability and exploitation of individual talents, skills, and competences for the benefit of the brand. These brand values reflect Danish values of hard work, humility, and teamwork, a heritage that forms a significant part of LEGO’s corporate culture worldwide (Konzack, 2014). The company welcomes children to the workplace for events while also ensuring the implementation of safety policies for the digital play of the children. This indicates the level of dedication involved in the work culture as an expression of individuality and is necessary for the comprehension of the power of play. This has provided the company with the capability of connecting with children and adults through its product portfolio.

• Innovation

Increased competition across industries indicates the need for companies to enhance their innovation capabilities. The increase in substitutes for advanced technology within the industry has had an impact on the profitability of the brand.

Figure 3: The global toy market (Euromonitor International, 2019)

To stay ahead in the global children fun industry, LEGO aligns its operations with changes in children’s playing habits, takes note and responds appropriately to differences between markets and segments (such as cultures and needs for boys and girls), invests in technological innovation, and ensures a continuous flow of new products. Today, LEGO’s product portfolio includes both classic products and new launches, all of which reflect current and historical themes. This culture of innovation is evident in recent products, which include movies (“The Lego Movie,” “Lego Star Wars,” “Batman,” and “Lego Ninjago”), video games, and a YouTube channel that boasts of over five million subscribers, plus countless fan sites (Handley, L., 2018). For example, “Beyond The Brick” is a YouTube channel with over 280,000 subscribers and over 120 million views (Handley, L., 2018). The company has produced various versions of the Millennium Falcon product, with the latest and largest having been launched in October 2017.

Figure 4. LEGO’s 2017 Millennium Falcon (Handley, L., 2018)

Product innovation has paid off well for LEGO, with products like ‘Ninjago,’ ‘LEGO Friends,’ ‘LEGO Star Wars,’ and ‘LEGO City’ assortment pushing annual sales by over 60 percent. LEGO has a workforce of approximately 160 dedicated to new product development. The success of the company is partly due to the inclusion of users through open innovation processes. The company encourages users of all ages and across the world to add new models based on their own ideas. The product development staff then evaluates these proposals and ranks them in user panels from where the most promising ones are included in the assortment. For example, the LEGO Architecture line of products came about after a user showed interest in constructing famous buildings using LEGO products. The fact that LEGO won four out of 12 awards at the Toy Fair 2013 is a testament to its strong emphasis on innovation as a key driver of business success.

• Key Business Issues
  • Emphasis on the core business and improvement of the capital structure

LEGO is a privately owned business, meaning it finances its activities and service its debt. When the company was facing a debt crisis in its long journey to success, it divested part of the LEGOLAND parks to reduce the debt burden. Over time, the company has complemented these structural initiatives by rebirthing the traditional business. Overall, debt reduction, product innovation, and improved profitability have led the company to the top of the global toy industry and created a strong financial foundation. For example, its equity ratio has doubled since 2008.

• Focus on the brand and brick quality

Over the years, LEGO has focused on brand development and product quality to compensate for expiring patents.

Figure 5: Brand value (Brand Finance, 2019)

In this strategy, the company has invested in knowledge accumulation to orient its business towards plastic products and efficient production technologies. This emphasis has led to its bricks having a superior gripping power, even as the company becomes a leader using non-poisonous plastics. The advantage of this move is that imitators have been unable to duplicate LEGO’s range of toys. The company considers direct imitation and compatible bricks as serious threats to the brand than direct sales threats. However, finding a footing in the digital scene has been a challenge for the company. To enhance its competitive advantage and entrench its leadership in innovation, the company launched an online multi-player game called ‘LEGO Universe’ in 2010. This platform allows players to build and play together through the Internet. However, after proving to be unsuccessful, the company withdrew it from the market. Nonetheless, other LEGO games have successfully sold in millions. LEGO remains committed to providing products that enhance children’s options between physical and digital products.

This commitment has seen the company grow sales from DKK7 billion to DKK23 billion in 2005 and 2012, respectively. As such, focus on brand and product quality is an essential component of LEGO’s continued dominance in the global toy industry.

1. Strategic Recommendations

In the course of achieving its growth and global success, LEGO emphasized on quality and ethical values, and this has been the basis upon which the brand has established trust in its domestic and international markets. However, the company faced criticism for abusing customer trust and engaging in cynical marketing, as well as contributing to CO₂ emission (Lemaitre and Leorat, 2019). For LEGO to enhance its current and future business success, it must undertake strategic approaches.

Figure 6. LEGO’s CO₂ emission (Lemaitre and Leorat, 2019)

• Internal Diversification

LEGO should consider making its Engage to Reduce (E2R) program a non-profit consulting arm. Such a move would allow the company to have a separate entity that provides consulting services to its divisions and the industry at large on how to reduce CO₂ emissions in the supply chain. In alignment with its mission of “creating a better world for the builders of tomorrow,” the consulting arm would leverage LEGO’s knowledge base and experience to make the global toy industry supply chain environmental friendly (Sorensen, 2017). This move would significantly foster the company’s trust in the industry.

• Integration of Sustainability Initiatives into the Digital Strategy

LEGO has already created several sustainable initiatives that are focused on three aspects- the child, the society, and the planet. For each focus area, the company has developed its own form of leadership within the toy industry. On differentiation, the company can integrate its sustainability initiatives into its games. The product development team can achieve this by using digital platforms to recruit environmental advocates or disseminate information/knowledge about LEGO’s sustainability initiatives (Killian and McManus, 2015). This may include using its social media pages to increase the visibility of the Local Community Engagement (LCE) program.

1. Conclusion

LEGO has experienced significant growth since it was first founded as a traditional firm in Denmark. With a keen investment in innovation capabilities, the company has become the dominant player in the global toy industry, and its product portfolio is credible proof. Due to demands from the market and changes in consumer tastes and preferences, LEGO has faced increased scrutiny due to its approach to product design and alliance with partners lacking sustainable goals. Nonetheless, LEGO has developed several sustainable initiatives that have helped to increase trust between the company and its market. Based on its strategies, it is clear that LEGO’s people culture has significantly increased innovation in product development as well as engagement with consumers. To enhance its success in the market, LEGO can diversify internally and make its E2R sustainability program, a non-profit consulting firm, as well as integrate its sustainability initiatives into the digital strategy.

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