The Strengths, Competencies, and Strategies of LEGO - Research Paper

Abstract

The purpose of the thesis is to identify the strengths, competencies, and strategies that the Danish toymaker company, LEGO, employs to sustain competitiveness in the toy and games industry through making simple traditional toy bricks. It is despite the fact that in a technology-based era children have become addicted to computers, iPads, and other technological gadgets from a very young age.

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LEGO for the past few years has gained the reputation of being the strongest brand in the toy market. LEGO had a 13% sales increase and a 15% profit increase as per performance results for the year 2014. Thus, the thesis is set to determine, how LEGO has sustained competitiveness to increase its sales and profits and how it has avoided substitution.

To achieve this, several strategic leavers were analyzed. The powers of competitors were analyzed, a PESTEL analysis in the areas of social and technological parts was determined, Porter’s five forces threats and substitutes were discussed, and an argument was presented about the firm’s value chain. Additionally, LEGO parent’s customers were analyzed as they make the buying decision and then the children. Lastly, the company capabilities through VRIO were argued and its Blue Ocean strategy was briefly discussed.

Indeed, the key to sustaining competitiveness in the technology-based era is the efficient production process, using CEO management power to optimize the production processes, applying advanced technological advantage, and utilizing global sale distribution and innovative and creative products. However, it was noted that the company needs to decrease its high product price due to the increasing competition from rival companies i.e. Hasbro, Mega Brands, and Mattel.

Key Words: Competitive, LEGO, Hasbro, Mattel, Mega Brands, Strategic, Technology.

Introduction

LEGO announced its annual results for 2014 on February 25, and it was another stellar year for the Danish toymaker. Sales grew 13%, and profits grew 15%. As great as that is, that’s actually a decline from their seven-year average. Since 2007, the company’s sales have been growing at an average rate of 20% and profits at 37% per year (Robertson2015).

Following the paragraph above from an article posted on the Robertson Innovation website and written by Robertson, one would wonder how a company could profit so much in the technology-based era despite the highly competitive market in the toy industry. In history, 15 years ago internet competitors first wave filled the online market and incumbents were able to respond to the incoming internet company threats. However, today internet competitors are advanced, and they are speedily scaling up and can accommodate your customer and zero in on your company segments of the value chain.

The technology era has led to an increase in competitiveness, due to the availability of algorithms for capabilities of processing and analyzing intelligence, accessible vast information, and the growth of mobile devices, which increases the accessibility of computing power. The advanced technological era has led to changes in competition structure, industries performance, and business conduct. Thus, one such company, LEGO, is stunningly profitable, without cutting prices. Their performance is high despite competitive toys in a toy store with identical bricks. Indeed, LEGO Company has mastered the strategy of innovation and the paper intends to investigate and argue the strategic analysis of the company, to determine how it has managed to sustain its competitiveness in the technology-based era.

Since 2008, the sales for LEGO Company have tripled and the profits have increased staggeringly by about 7100%. The company sells expensive bricks, where a pound costs over fifty dollars and it pays per pound for its ABS plastic raw material, at less than a dollar. The situation raises a series of questions about LEGO Group’s success. The questions include 1) how they managed to become a strong competitor for technological gadgets; 2) why they are still valuable and considered to be one of the most reliable brands in the world of technology; 3) why do people still buy LEGO if they can get iPad or computer which contains a greater amount of games and entertainments. And lastly, which strategic decisions were made to keep pace in the market and how does the LEGO Company manage to grab customers and keep such a high price.

Research Question

Following the introduction provided, our researcher question can be structured as: How does Lego sustain its competitiveness in a technology-based era, how do they perceive the threat and avoid substitution, and why are they still good at this.

Research Approach and Methodology

The paper research is based on the concept and point of view that is external and regarding prospective investors. The information used in this thesis is external information available to conduct the analysis. The research used external data collection, which is suitable as the prospective investors will have external information available to him or them to be employed. The research approach used is the actor’s approach which is interaction with individuals (Kuada 2010). Various theories models and frameworks have been used to ensure a complete and thorough competitiveness analysis of LEGO Company. The structures of the company will be analyzed regarding assets and processes within the LEGO industry to know the changes in the structures. The theories included in this methodology approach of the system include the VRIO framework used with the resource-based view (RBV), to analyze the LEGO group capabilities, we used a value chain framework for activities analysis to get a competitive advantage. Additionally, we used the PESTEL framework to analyze LEGO’s macroeconomic environment of social and technological and porters five forces to analyze the external environment of the organization of threats of substitutes, rivalry, and threats of new entrants. Competitors and customers analysis were employed through the use of the SOR model for customers to determine the psychological response and behavioral outcomes attached to a certain characteristic of the LEGO group products. The framework, theories, and models provide an economic competitiveness view of the LEGO Company and the industry in the technology-based era more than other frameworks by determining more accurately the internal and external environments, resources, weaknesses, and strengths of the company. The aspects of the framework structure will have a direct impact on the LEGO Company, where they will impact the finances of the company and its future direction.

Data Collection

The data collection method will be through analyzing secondary data obtained from i.e. journals, Euromonitor and Datamonitor websites reports, company website www.lego.com, books about toy technology, annual reports of LEGO group, a reliable articles from well-known authors. The data collection method is suitable, objective, and correct due to the nature of selected sources and to ensure the suitability of the methodology the thesis will take critical views at all times and employ a qualitative methodology (Creswell, 2013; Kothari and Garg 2014).

Limitations

LEGO is not a public traded company. Thus, most of its financial and strategic implication is less known. Due to the limited secondary sources and data concerning the company, the thesis will concentrate only on the scope of available strategic information. Additionally, finding a specific company to argue about LEGO’s competitiveness is hard due to its many subsidiaries, which offer a strategic set of parameters and operate in different markets, thus the paper will be analyzed worldwide. Additionally, the PESTEL framework used can be biased as it is dependent on individuals analyzing the environment and all environmental aspects are not covered. However, this thesis methodological approach I believe will provide sufficient analysis content and cover important aspects of the competitive environment, due to the clarity and skills expressed at the start of the thesis.

History of the Lego Company

In the year 1932 the LEGO toy company was founded by Ole Kirk Kristiansen (OKK) in Billund, Denmark (LEGO n.d.; LEGO 2005). The founder made wooden toys at the start and his motto was Only the best is good enough, used to this day and the company’s LEGO names were derived from combined letters LEG and GODT which means in Latin I assemble (Vang-Pedersen 2013, LEGO n.d.). LEGO to date abides by the principle and values it was first assigned to through always trying to improve and create toy products and the environment in which it is working. The company still thrives under Kristiansen’s motto The best is not good enough to create brick toys that are exemplary and innovative with the current technology.

LEGO first experimented with the use of toys of plastic in 1947 after a decade of using toys made of wood and launched its first building blocks of plastic in 1949 (Bak 2009; Van-Pedersen 2013). The plastic bricks were able to inspire imagination through children as they explored those different toys they can make with the plastic bricks. The company was later taken by Godtfred Kirk Kristiansen, son...