Lego Bricks And Legoland Strategic Decision Maker Marketing Essay

The key strategic decision makers at Lego are Jørgen Vig Knudstorp the CEO (Chief Executive Officer) and an executive board of directors consisted of five members, leaded by Niels Jacobsen as a chairman. Other board members include Vice President Bali Padda, Christian Iversen, Lisbeth Valther Pallesen and Mads Nipper have been participated in the strategic decision making process of Lego group. Besides this, Kjeld Kirk Kristiansen is member of the board who served Lego Group as CEO from 1974 to 2004.

1. Lego Macro Environment

1.1 Political

Politically, Euro-zone and Unites States are democratic nations with very stable and peaceful business environment. The government changing process in this zone does not cause any notable obstacle to business operations. However, legitimate constitutional crisis such as ‘hung parliament’ in United Kingdom has a high influence to worldwide economic markets, which sometimes engender economic uncertainty.

Most of the government of these nations where Lego operates have their own legislations to protect consumer interest and ensures a fair trading environment. Government imposed patent laws, copyright law, trademark protection, IPR (Intellectual Property Rights) and DMCA (Digital Millennium Copyright Act) to preserve a fair and competitive business environment. Though, some conflicting legislations (i.e. patent laws of Sweden) resulted in legal battle between competitors causing significant crisis and financial damage.

Government revenue generating source such as tax, VAT, excise duty and etc. are greatly in practice. The common problem in this zone is, new political government always revise the taxation system and its rates as a part of political agenda. For instance, in the beginning 2010, UK government did increase tax on consumer products by 2.5%, which was dropped consumer expanding behaviour for a while. Besides, even though UK is a part of European Union, it has a unique currency (sterling) which sometimes deflated by government to boost export over competitors in this zone, which jeopardize competitors. European nations and USA government are imposing much stricter regulations by implementing green taxation on industrials and putting pressure to improve industrial sustainability (William, 2007). Furthermore, politically imposed ban, for instance, in 2009 Directorate General of Foreign Trade (DGFT) of India banned imports of all Chinese toys into Indian market without any reason.

1.2 Economical

During the recession period, the consumer confidence to spending fell sharply across the globe. Unemployment rate has recently been rocketed breaking all previous record, further worsened the economic crisis. Recession created deficit of cash flow in the market. Potential investors from outside EEA are reluctant to stake in turbulent market, which sluggish to restoration process. Moreover, investors are withdrawing their money (i.e. property, stock, bonds are being sold) because of alarming debt crisis slumped euro currency, a four years low against dollars. Surprisingly, currency inflation against major trading currency comes as blessing for some company, which boost sales with a greater profit margin.

It has been forecasted euro-zone’s overall market will shrink next two years because of the soaring cumulative debt of EEA (European Economic Area) nations. Some nations are doing better than forecast USA and UK managed a positive GDP growth by 3.0% and 0.3% respectively (BEA, 2010; ONS, 2010). Because of a common currency used by all EU members, the economic stability highly depended among member country’s overall economic performance. Multi-national companies are sensitive to exchange rate fluctuation and sharp inflation of trading currencies.

Lego Bricks

Legoland

Political

Economical

Social

Technological

1.3 Social

According to a research of PPAS (Population Policy Acceptance Study) it is observed that birth rate is falling in Europe. There are many reasons behind this such as low fertility rate, desired number of children and family split. In Germany, 22% men and 15% women do not want any children (PPAS, 2003). Almost similar tendency can be observed in neighbouring Netherlands and Belgium. Fertility rate in this zone is between 1.6-1.9 per woman which is below the index needed for the replacement of generations. According to Eurostat’s baseline population projection, the number of young population between age 0 and 14 in European regions will continue to decline. It is estimated young population group will dropped to 66 million by the year of 2050 whereas it was 100 million in 1975 (Europa, 2007). However, according to OECD statistics, inflows of migrated foreign population are considerably increasing in euro-zone (OECD, n.d.). In addition, more people are travelling to Euro zone for holiday and leisure activities. It is observed a stronger economy always increase the inclination towards leisure activities.

Theme park visit is a useful gauge to measure leisure activities of particular nation. USA has more than 0.80 annual theme parks visit per head of the population; Europe and UK have 0.25 and 0.20 per head visit respectively (Camp, 2001). The socio-cultural trend is growing and has a positive impact on market.

1.4 Technological

Because of the proliferating growth of internet technology in the last decade, it’s become much easier for producers to interact with consumers in a better means through web portals, blogs, forum, email etc. Advancement in technology and automation may result in a job-cut or can put a company into a competitive market position.

Micro-chips are being designed and developed with lower R&D investment resulting low cost consumer products. The rate of technological diffusion can produce low cost substitutes or imitations which may prove an existing matured product obsolete. The excellence of sophistication in manufacturing industry, it’s become much easier to re-invent and expand equipments for leisure activities. State-of-art manufacturing machines are being introduced regularly, which help to achieve economies scale.

Using high-end computer technology, 3D virtual characters design and simulation became less painful task. Modern computer technology helps to produce lucrative advertising programs for various media channels.

2. Lego Competitive Environment

2.1 Competitive Rivalry

There are four major companies in the toy manufacturing industry holding majority of the toy market share. Mattel is the largest toy manufacturer in the world with 12% of total toy market share, followed by Hasbro, Bandai and Lego holds more than two-third of total market share.

There is price pressure from retailers on all major manufacturers to reduce the price made a price competitive rivalry. From the year 2003 to 2007, Mattel’s gross margin had been dropped about 4% due to pressure from retailers (Mattel wikiinvest, n.d.). Meanwhile, to gain temporary advantage, rivals often lower product price for example, when there is less demand or raising the price when there is a product shortage in the market. In most cases, a competitive selling price could be achieved by outsourcing manufacturing to third worlds. Mattel outsources more than 50% of its manufacturing with Chinese sub-contractors. Meanwhile, Lego transferred some of its production units to Eastern Europe from USA and Switzerland to minimize the manufacturing cost.

Generally, to grab the more market share all major toy companies including Lego continuously improving product differentiation. Every year they introduce new products in their portfolio to attract more customers. For example, lately, Mindstoarm, a robotic toy range by Lego, based on its traditional brick blocks completely dominated the market.

To dominate market with bigger share, larger companies occasionally acquire mid-size manufacturers. In 2008, Cranium Inc. was acquired by Hasbro (Hasbro WikiInvest, n.d.). Purup Electronics, a PostScript image setter company was acquired by Lego in 1991 to strengthen its image processing. In 2000, Lego acquires ‘Zowie Intertainment’, a designer and developer company to dominate the smart toy category by adding new flavour in its designs (Lego Press Release, 2000).

There is strong rivalry in toy branding. Lego have been facing enormous legal pressure with their toy patents. In 2005, German Appelate Court dismissed an accusation of manufacturing Lego-like bricks by Best-Lock(Europe) Ltd (Business wire, 2005). In almost all develop country Lego have been faced a fierce legal battle against competitor on Lego brick patent issues.

On the hand, leisure industry occasionally take over mid-size entertainment firms that they can provide better recreation efficiently, meanwhile it strengthen their vertical integration.

2.2 Barrier to Entry

Entrance of competitors as a front-line toy manufacturer is really complicated. Also, it is difficult to assess how established large manufacturers will react to share existing market with new entrant. In general, toy manufactures are required a very high economies of scale because of the cost per unit price of a toy is comparatively lower than other consumer products. To achieve MES (Minimum Efficient Scale), new entrant will be required to penetrate market up to certain level or will need to cover hastily certain demographics to stay profitable.

Almost all major toy brands have patented toy design and most toy characters (i.e. star wars, superman) have their licensing with respective owner. These licensing and patent issues made it very complex, also adds an expensive start-up cost for new entrant. Some companies have proprietary know-how manufacturing technology, which are results of long R&D investment and not easy to compete with. Now-a-days toy market has the touch of advance technology; toys are ranged from plastic to ultra sophisticated robotics. Such, advance product line not only needs sophisticated equipments to manufacture specialized micro-chips but also highly skill human resource.

Government create barriers to entry to new market by regulations and legislations. For instance, in UK, FTO (Fair Trading Office) ensures businesses are not being monopolized by single or by few manufacturers. To preserve mid-size firm’s interest, government regulation may restrict possible market expansion.

On the hand, typically amusement park or theme park requires a massive amount land acquisition. Government, local council or naturalist group may intercept in land acquisition process from various ethical point for instance, involvement of mass tree destruction to build a theme park.

2.3 Threat of Substitute

Among many, cheap imitation, online gaming, computer games and video games are common substitutes of toy. Even though, in most of developing countries copyright and patent exist but they are not in practice. It is almost impossible to enforce copyright or patent rights to stop illegal cheap imitation.

In an era of internet technology, free online gaming (i.e. BBC’s cbbc or nick.com etc.) or even paid children portals (i.e. moshimonsters.com) are real threat to toy market. Parents are finding it much cheaper or no cost at all to entertain their kids, while most of the portal uses method like ‘learning while playing’.

Handheld gaming devices (i.e. Nintendo, PSP etc.) are not yet a threat as substitute because their high retail price. However, as technology evolving rapidly such devices price will drop significantly in coming years and when almost all people will afford to buy, it may appear as an alternative to toys.

2.4 Supplier Power

Common raw materials in toy industry are oil, rubber, plastic and for processing labour market (human resource). In labour market supplier power is weak in toy industry as there are many competitive suppliers. Beside, major toy manufactures have vertical integration in their supply chain and continuously expanding their vertical integration by acquiring mid-sized suppliers. However, raw materials supplier such as oil company has dominating power over manufacturer as they have many alternative buyer. Even though, there are alternative oil suppliers, switching supplier may be costly depending on various factors such as geographic position of manufacturer, transportation cost, and export tax.

On the other hand, as leisure industries equipments are generally requires one of installation and buyer can easily switch between suppliers to choose from.

2.5 Buyer Power

Toy manufacturers direct buyers are retailers. Large retailers such as super-market chain often dominate on their suppliers. In 2007, for instance, three giant supermarket chain Wal-Mart, Target and Toys’R’US accounted 41% of total Mattel’s sales. Such enormous figure gave significant leverage over Mattel when negotiating price.

Furthermore, in the case online shop, end-users are directly buying from manufacturer. In this case buyers have freedom to switch between online retailers.

3. Lego Internal Environment

3.1 Lego Objectives

The main objective of Lego is to build healthy toys that develops children mind to face tomorrow’s challenges. The company has a vision to continue its core toy, Lego brick while continuously adding new and innovative challenges in its product range. Lego wants promote the idea of “Learning through play” means problem solving in a structured way that develops creative and imagination skills. Lego has a strategic plan to expand its sophisticated robotics toy range such as Mindstorms while they will continue production of high quality fun products based on Lego Bricks that children can use to explore and nurture their creative potentials.

In short term, tactical objectives, Lego focused to excel on customer’s value, better sales channels and improvement of operational excellence.

In addition, Lego wants to tie-up the relation much closer with its end-users, fans, retailers and suppliers.

On the other hand Legoland, a Lego style theme park that build on Lego bricks currently operating in Denmark, UK, USA and Germany. The Objectives of Legoland theme park is provide recreational place within Lego theme where interactive family fun and learning go hand in hand. Lego has a strategic plan already in action to expand Legoland into the Dubailand, Dubai and in Malaysia in near future.

3.2 Product Life Cycle

Both Lego bricks and Leisure Park are operating in mature market. Even in a mature market higher R&D invests is unlikely, though R&D may bring substantial product differentiation which eventually would extend maturity period.

Leisure Park

Decline

Growth

Maturity

Lego Toys

Introduction

Sales

Time

In near future market might me shrink because of falling birth rate, also toys market gradually may decline because of technological advancement, which may replace toys with some others substitutes as discussed earlier.

Leisure industry is a mature market and not likely not to fall over next few decades.

3.3 BCG Matrix

The BCG cash cows for Lego are Lego Bricks and Legoland theme park as they are operating in mature market with high market share. Lego Bricks has achieved competitive advantage in toy market and this cash cow has high profit and generating a lot of cash flow. Investment on this cash cow for efficiency and for product variation can increase further cash flow.

Legoland Discovery and Mindstoarms NXT are the BCG stars of Lego. Minstoarms NXT is the robotic toy division of Lego, which is operating in a fast growing market with major market share. Legoland Discovery is an extension of Legoland Park, are operating as a market leader. Further support and expansion covering more geographical location may convert it into a cash cow.

Legoland Discovery

Mindstorms NXT

STARS

High Market Share Low

Invest

PROBLEM CHILD

CASH COWS

DOGS

Low High

Market Growth

Prioritize

Kill

Lego Bricks

Legoland

Online Shop

Online community

Divest

Lego has a very low online toy market share. Also, the Lego online community are less connected. In today’s fast world, consumer’s online shopping habit is growing very fast. Lego needs take strategic plan and marketing plan to convert the online toy market into a BCG star; otherwise it may become a dog.

Currently, in Lego product range there is not any BCG dog.

3.4 SWOT Analysis of Lego

3.4.1 Strengths

Lego’ strengths are its brand name, its heritage of uniqueness, which has a feelings attached that are carried generation to generation. Most of the Lego concepts and products are patented and dominating the market by operating more than 130 countries worldwide. The USP (Unique selling proposition) of Lego bricks with lucrative slogans such as ‘learning through play’, ‘capture a creative imagination’ or simply ‘system of play’ grants a competitive edge over rivals. Approximately seven Lego sets are being sold each second. In addition, it has a fast growing Lego Club with more than 2.7 million members. Operating since 1932, Lego is highly experienced in toy market. Furthermore, Lego is licensed to use some of the world top comic brands such as Star Wars, Superman and etc.

On the other hand, Legoland, the theme park division is operating in growing market. Legoland building and theme structures are made of Lego bricks, which initiated a strong vertical integration.

3.4.2 Weaknesses

In comparison to rivals, Lego product portfolio is less diversified. Besides, Lego toy models are licensed with respective owner, which weaken creditability as in future they will be required to renew, while brand owner may ask higher royalty fees. The uniqueness of basic Lego bricks has been questioned in recent years and as a result Lego failed to renew few of their patents upon expiration. Operating in an open market where all rivals are targeting common consumer group that’s why consumer shifting between rivals is very common. Besides, Lego is depended on retailers (i.e. supermarket chain) for marketing their product, which gives retailer an advantage to bargain to fix selling price.

Meanwhile, theme park businesses are somewhat seasonal, for instance, summer break or Christmas. During off-season they always experience low visitors.

Strengths

Large market share

USP (Lego Bricks)

Long Experience

Covers large demographics

licensed with multiple brands

Weaknesses

Exposure to international market

Patent complexity

Operates on different currency

Less diversified portfolio

Depended on retail chain

Opportunities

Vertical integration in the leisure industry

Expansion to Asian toy market

Threats

Cheap Lego brick imitation

Online gaming

Handheld gaming devices

Falling birth rate

Table 03: SWOT analysis of Lego

3.4.3 Opportunities

Lego has an enormous opportunity to expand their market share by penetrating mega-market in China and India. Transferring manufacturing plants into third world may also save production cost significantly. E-marketing can also be used to promote products, in collaboration with specialist media partner such as YouTube.

Meanwhile, Legoland can be extended beyond European market. The idea of building home based on Lego bricks can be used in natural catastrophe to build temporary shelters in affected areas. Such practice will work as a brand ambassador and shall increase Lego’s market reputation.

3.4.4 Threats

Cheap imitation of Lego bricks is a real threat. In some country, it is really hard to enforce copyright or patent law. Because of the advancement in technology, online gaming already became very popular. Now-a-days kids are spending much time in front of a computer. Accessing such online gaming platforms are fairly cheap, mostly one-off payment or even sometimes it’s completely free. Besides, handheld electronic gaming devices such as Nintendo DS, PSP are being considered as a smart toy. Even though, their market share is growing slowly, they may appear as a real threat if they can manufacture cheap gaming devices.

“The Anarchist Cookbook of the nursery”, the Daily Telegraph criticized (FoxNews, 2007), a controversial instruction book “Forbidden Lego: Build the models your parents warned you against” published by two ex-Lego employees that teaches youngsters and kids how to build fun weapons with Lego bricks, hits the market in 2007 and eventually became Christmas bestseller (Firth, 2007) raised the concern of ethical and social responsibility. Such third party practice, mostly uncontrollable, may ruin Lego’s goodwill.

4. Lego Future Development

4.1 Ansoff’s Matrix for Lego

Attempting to penetrate deeper into existing market is always less risky. Lego may try alternative sales channel to increase sales volume. For instance, even though eBay mostly known for online auctioning, they provide specialized facility for manufacturer direct sales via their portal. Improving product quality can help to penetrate existing market. Lego can establish themselves as a mega online toy retailer. Increasing relation with buyers may increase market share. Both Lego and Legoland can be extended outside European and American market. Also, Lego can open own high street retail toy shop. In Legoland Park, interactive joy ride or so can be added as an addition.

Existing Product/Services

New Product/Services

Existing Market

New Market

Increase sales

Improve quality

Concentrate on online sales and promotion

Increase relation with retailers

Interactive instruments in theme park

Expand to Asian region

Forward diversification (opening Lego toy shop)

4.2 Recommendation

It is the right time to expand into mega-market such as China and India possibly with own manufacturing plant in these countries. It certainly will reduce the production cost because of low cost labour.