1. Company Overview
Founded by Ole Kirk Kristiansen in 1932, LEGO (LEGO) is a family business that originally produced wooden toys. The company has moved on to create plastic construction toys and is now one of the top companies within the toy manufacturing industry. With the mission to “inspire and develop the builders of tomorrow”, LEGO is now constantly developing new toys, sets, and themes to ensure that their products would meet consumers’ satisfaction. However, LEGO had also gone through multiple financial losses. In 2004, the company was on the brink of collapsing. Newly appointed President and CEO, Jørgen Vig Knudstorp, was tasked with the challenge of rebuilding the company from the brink of collapse.
2. External Analysis
To determine the reasons that led LEGO to the brink of financial collapse, it will be essential to identify the external and internal issues which the company faced. Using Michael Porter’s five forces to analyze the toy industry, a deeper understanding of the external influences on LEGO can be achieved.
2.1 Bargaining Power of Buyers
In the toy manufacturing industry, toymakers bring their products to market via retail channels. These retail channels will then decide whether to stock their shelves based on the profit per square foot, margin, and product space requirements. This indicates that retailers such as Toys “R” Us, Walmart, and Target are influential as they purchase in large quantities and have direct access to consumers. In addition, retailers have the power to replace a company with competitors or new entrants if products are not to the retailer’s requirement. This can affect a company’s profitability in the long run and would signify that the bargaining power is high.
2.2 Bargaining Power of Suppliers
Legos are typically made of Acrylonitrile Butadiene Styrene (ABS) and need to be specially produced (Compound Interest, 2018). Many companies can produce ABS plastic, signifying that because there are so many suppliers, it would reduce the bargaining power of suppliers. Products that suppliers provide tend to be standardized and less differentiated, therefore results in low switching costs. The bargaining power of suppliers is not a significant force that caused the decline in LEGO.
2.3 Threat of New Entrants
With the rise in the trend of fad toys, and having new toys constantly entering the market, the threat of new entrants can be high. However, economies of scale are very hard to achieve in this industry. LEGO and many of its competitors who have been around for years, are now benefiting from the economies of scale. These major competitors are also well-known and have a strong brand reputation. It would be very hard for new entrants to compete in the short-term. Therefore, the threat of new entrants is not high and is not the cause of the decline for LEGO.
2.4 Threat of Substitutes
An indication of demand for substitutes is the increasing trend of fad toys and a decline in product life cycles. Changes in consumer behavior are also increasing the demand for substitutes as children are shifting their preferences for toys towards technology. These factors illustrate a high threat of substitute which poses a threat to LEGO.
2.5 Rivalry Among Existing Competitors
There are only a few conglomerates who dominate the industry are roughly of the same size, it can be a disadvantage for LEGO. The main competitors of LEGO include Mattel and Hasbro are also highly committed to their business and manufactures various types of toys whereas LEGO only has legos. Despite that, the company is still ahead of its main competitors mainly because of LEGO’s unique and innovative set of products. Rivalry among existing competitors does not impact the company.
3. Internal Analysis
Using Michael Porter’s Value Chain framework, a better understanding of the activities that the organization performance can be achieved. It evaluates which value each activity adds to the organization. In the value chain, there are primary and support activities within a company.
4. Core Competencies
Evaluating a firm’s resources can help pinpoint what are the core competencies a company has. Based on the VRIO framework, there are four criteria that a resource has to be for it to be considered as a core competency. The resource has to be valuable, rare, costly to imitate, and have a non-substitutable capability. Resources can be tangible, meaning that they are visible and can be observed and quantified. Intangible resources are resources that are embedded in the company and have accumulated over time. It is usually resources that are difficult for competitors to analyze and imitate as they have no physical attributes.
4.1 Organizational Resources
To have LEGO’s frontline managers to be more responsive to dynamic changes in the market, they were given more responsibility and tasks to be accountable for. This results in their organizational resources to be valuable, but not rare or costly to imitate.
4.2 Physical Resources
The company opened LEGOLAND in 1996 and shifted product development from Billund to countries such as Milan, London, and San Francisco. Some production was also transferred from the main factory to the Czech Republic, which can reduce production costs. By deciding to sell to consumers directly, LEGO started its own LEGO-owned retail stores. LEGO’s physical resources used to produce and distribute plastic bricks are valuable, rare, and are not costly to imitate except LEGOLAND. Therefore, it is just a competitive advantage but will bring in above-average returns.
4.3 Technological Resources
In 1989, LEGO’s patent expired and since then, many companies have created blocks with a similar concept as legos (Wood, 2013). However, LEGO continues to innovate and evolve their products, from plastic bricks to video games and even children’s wear. Therefore, the company’s resources are valuable. But because LEGO has its own products that require unique technology, their resources are deemed rare, costly to imitate, and have a non-substitutable capability. This resource is a sustained comparative advantage and brings in above-average returns.
4.4 Innovation Resources
LEGO has a strong culture of creativity. They are always coming up with innovative themes or sets to expand its product line, causing its innovation resources to be valuable and rare. By having studies on how to grow in untapped markets, the company is also trying to innovate products that are tailored to those markets, making it more expensive to imitate and non-substitutional. LEGO’s innovation meets the four criteria of the VRIO framework and is a sustainable competitive advantage for the company.
4.5 Reputational Resources
LEGO Group’s brand name is one of the most important commodities for the company. It is a world-renowned toy manufacturing brand known for producing legos. Their product’s design uniqueness and design capabilities helped the company in building a strong brand reputation. LEGO’s relationship with their suppliers and consumers are also positive which means that the company’s reputation meets the four criteria of the VRIO framework. Therefore, LEGO has a sustainable competitive advantage, implying an above-average return for the company.
5. Trade-Offs
Strategic positioning requires trade-offs. LEGO has multiple trade-offs with the goal of growing the business while at the same time ensuring that they provide the best products for their consumers.
5.1 Resource Investments
One of the company’s core competencies is its innovative resource. Being innovative is one of the factors which led to LEGO to achieve steady growth and profitability for the first 60 years. One of its profitable product was “DUPLO”, which are larger bricks catered towards children under five years old. In 2002, 25 years after DUPLO’s first release, the company invested its resources and reposition the product line. They tried to make the product more learning-focused and tried to market to mothers who emphasized on childhood development. However, it was unsuccessful, and its strategy was questioned by retailers and consumers.
Another example is the company’s heavy investment in innovating new product lines. From 218 lego shapes and five colors, it increased to 3,560 different shapes and 157 colors. This is at the cost of many things. Plastic molds required to make the different lego shapes were not cheap. To add on, management did not know which products were profitable as inventory was not well managed. Without one piece, an entire product set can be out of stock. Important customers were unsatisfied with the slow moving-inventory and stock-outs.
Supply chain management is very important in all businesses, especially for LEGO who was expanding rapidly across the globe. However, instead of focusing on developing the efficiency of their supply chain, the company ventured out into different businesses other than toy manufacturing and developed video game software as well as opening LEGOLAND. LEGO should have invested their resources into ensuring that their supply chain was well managed instead. If the supply chain was well managed, LEGO would not be on the brink of bankruptcy in 2004. LEGO invested in some lifestyle initiatives as well, including watches and publishing, which were all unsuccessful, resulting in it being cut back after 2000. By doing so, LEGO neglected its core business.
6. New Plan
Jørgen Vig Knudstorp, LEGO’s first non-family member CEO, was given the task to rescue the company from collapsing. He decided to look at how the company would function in the long term and needed to change some processes in the company. Below is a proposed plan on what Knudstorp could do to prevent LEGO from going bankrupt.
6.1 Focus on Core Business
With innovation being one of its core competencies, LEGO often introduces new products. The escalation in the number of bricks was not beneficial for LEGO’s supply chain, logistics, and storage as not all of them were bringing in profits. Knudstorp should streamline the company’s product lines. First, the company should reduce the number of bricks produced by eliminating those that are costly to produce and to make the products less complex. This would reduce the costs in production as more complex designs would require more expensive molds. In addition, LEGO should find out which products are actually generating profits and those that are not. This can significantly reduce the pressure on the company’s logistics and storage. Unprofitable video games should also be shut down to reduce costs.
6.2 Understanding Consumers
LEGO created so many products and many were unsuccessful because the company did not fully understand who their target audiences were. Instead, they made assumptions and innovated without doing much research to find out what their consumers really want or preferred. LEGO should start doing market research or have focus groups to find out what consumers want to see in their products.
6.3 Balancing Supply and Demand
Having so many different products and different types of blocks, it was hard for LEGO to balance its supply and demand. When the company tried to control costs during the years of its financial struggle, they ordered lesser molds, but it resulted in being unable to meet demand. This can only be fixed by managing and keeping track of the operations in the company. The company made a wrong choice of dismissing its head of production because by doing so, no one was supervising production costs and capacity. LEGO should hire heads of production to meet customer’s demands and control inventory.
7. Conclusion
From the external analysis, we can see that among the five forces in Michael Porter’s Five Forces Analysis, one of the most important forces that could be the cause of decline is the bargaining power of buyers and the threat of substitutes. Internally, it was from the severe escalation of products as well as the inefficiency of supply chain which caused LEGO’s huge financial loss in 2003. Although the company’s core competencies include its technological, innovation, and reputation resources, LEGO lost its focus and did not exploit what they did best. In terms of innovation, LEGO did invest a lot but in the wrong places, and without doing proper research if the products fit consumers’ needs and wants. To improve, LEGO needs to focus on their core competencies and should not be afraid to cease products or businesses that are unprofitable.
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