Analysis of LEGO company

1. Tutor: Joe McGrath
Student Name: Vahit Eren OZER
Student Registration No: 17020ME
Word Count: 3222
INTERNATIONAL MARKETING
LEGO Group Case Study

2. 1
TABLE of CONTENTS
1. Overview………………………………………………………………………………..2
2. External and Internal Environment Analysis of the Lego Group……………….....2
2.1. External Analysis of The Lego Group………………………..............................2
2.1.1. Porter’s Five Forces………………………………………………………..2
2.2. Internal Environment Analysis…………………………………………………..4
2.3. Porter’s Diamond Model…………………………………………………….........6
3. International Challenges of The Lego Group……………………..............................7
3.1. Crisis and solutions……………………………………………………………….7
3.1.1. Transformation of Supply Chain Management………………………….7
3.1.2. Product development……………………………………………………....7
3.1.3. Distribution………………………………………………............................8
3.1.4. Production………………………………………………………………….8
3.2. Porter’s Value Chain………………………………………………………….…..9
4. Management of The Brand…………………………………………………………..10
4.1. Brand Positioning……………………………………………………………….10
4.2. Branding Strategy………………………………………………………………10
4.3. Encountered Challenges………………………………………..........................11
5. Future Analysis………………………………………………………………………..11
6. Recommended Solutions……………………………………………...........................11
7. References……………………………………………………………..........................12

3. 2
1. Overview
The story of LEGO begins in 1932 in Billund, a small seaside town in Denmark. Ole
Kirk Christiansen, who became a carpenter in those years, was influenced by the economic
crisis and started to produce miniature furniture as ornamental objects. Later, he developed
this idea and decided to produce wooden toys. In 1947, LEGO began to be produced as
plastic. LEGO Group has more than 18.000 employees. In 1949, the company began mass
production with plastic injection and molding machine. With this method, it has achieved
success worldwide.
Danish carpenter Christiansen got LEGO's patent in 1961. The motto of the LEGO
Group at the time was“det bedste er ikke for godt”. This motto means “only the best is good
enough”. They still use the same motto today. LEGO Group’s mission; inspire and develop the
builders of tomorrow. LEGO Group’s vision; investing the future of play. In addition, LEGO
won award of “Toy of the Century” twice and is currently sold in more than 140 countries.
2. External and Internal Environment Analysis of the LEGO Group
2.1.External Environmental Analysis:
2.1.1. Porter’s Five Forces Analysis:
Table.1 Porter’s Five Forces Model

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➢ Threat of New Entrants ( ↑ )
• A strong and extensive distribution network is required. If the company does
not have a strong distribution network, it will have to pay a lot of money to
move its products and in some cases the product will not reach the final
customers or store.
• High Capital: There is a high level of investment need to enter the market.
• When the LEGO Group enters the market, it will have to raise brand equity to
compete. It will focus on superior quality and differentiation in its products and
will provide confidence in brand values.
• Developed technologies: The LEGO Group has to develop the technology it
uses in its production and products, thus can becoming a competitive position.
• Geographical factor: Existing competitors in the market are thought to have a
good place to build factories and offer their products to customers, which in
turn poses a serious disadvantage for new companies to enter the market.
➢ Threat of Substitutes ( ↑ )
Mega Bloks, LEGO Group's biggest direct competitor,is the alternative to LEGO.Mega
Bloks has linked video games such as "HALO", which allows the company to gain more
market share and brand recognition in the game world.Prices are low compared to LEGO.
➢ Industry Rivalry ( ↑ )
The LEGO Group has a strong brand loyalty among its customers, the company also
offers high quality products.Parents have a positive attitude towards LEGO bricks because
they don't want their children to play with video games with weak educational background.But
any company that develops toys and video games can be seen as competitors.
➢ Bargaining Power of Buyers ( ↑↓ )
The customer's pressure is high because there are many alternative toys and substitute
products.And there are also a lot of ways of the consumer to buy a toy: they can buy directly
from LEGO, or from LEGO Group's stores, or from retailers like "Toys R Us" and "Walmart."
This provides an advantage when trying to find the right opportunities for customers.Walmart
and other retailers are pushing LEGO's products to get lower margin in order to get a cheaper
price and stay more competitive.

5. 4
➢ Bargaining Power of Suppliers ( ↑↓ )
This is a very important force when it comes to LEGO.This shows that a missing piece
will affect sales negatively.LEGO must establish good relations with suppliers in order to
avoid such a problem.
SIGN IMPACT
Threat of New Entrants HIGH NEGATIVE
Threat of Substitutes HIGH NEGATIVE
Industry Rivalry HIGH NEGATIVE
Bargaining Power of Buyers MODERATE MODERATE
Bargaining Power of Suppliers MODERATE MODERATE
Table.2 Analysis of Porter's 5 forces model for LEGO Group
2.2.Internal Environment Analysis:
In 2016, the LEGO Group passed Mattel and became a leader in the toy industry.
LEGO Group earns the highest revenue on its 85-year history in 2016; DKK 37.9 billion.
LEGO focuses on learning and progress through play. LEGO Group to continue to
compete, it produced sets suitable for these group in need: "LEGO Baby (0-3 years), LEGO
Duplo (0-6 years), LEGO Friends , etc.". Lately, they got lisances of the following products;
Star Wars, Sponge Bob Squarepants, Ben10, Spider Man, Batman, Harry Potter. Also games
and movies are created for various platforms. For example, the LEGO Group created the
Batman LEGO film with 80 million dollar budget and earned $ 310 million worldwide.
Another example is the LEGO film, which was created with $ 60 million budget and brought
in income $ 469 million.
The LEGO Ar-Studio application, a virtual reality program that is expected to be
released in the upcoming days, proves that LEGO is working to adapt to the changing world
and advanced technology. They provide customer support before and after sales with LEGO
Training Theory of Teaching, Face to Face courses, E-learning Programs on LEGO Group's
web page.

6. 5
The image of the LEGO brand was noticed that it was different in each market
segment. Customers in Europe and North America see LEGO as a creative and trusted brand.
On the other hand, Asian and Latin American consumers see LEGO as an innovative and
entertaining brand. LEGO's relieving image is both a customer satisfaction and a consideration
for the development of children, as well as the use of materials that will not affect the health of
children in production. LEGO Group ended its partnership with Shell in 2014.Therefore we
can understand that the LEGO Group care about the human health. In addition, as part of the
LEGO Group’s ambition to deliver a positive impact on the planet, the LEGO Group has
signed a partnership today with WWF (World Wildlife Fund) pledging to intensify their work
to improve performance on a range of environmental priorities.
Table.3.LEGO Group Facts 2016
Table.4 LEGO Group Financial Highlights 2016

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2.3.Porter’s Diamond Model:
Table.5 Porter’s Diamond Model
➢ Factor conditions: In countries where LEGO Group manufactures, supply chains, retail
networks and low-cost qualified labor force are important. The LEGO Group sustains
its competitive structure because it can easily access its raw materials and reach
qualified employees in the countries it manufactures.
➢ Demand conditions: LEGO Group has increased product demands through various
licensing agreements and has increased its competitive advantage in areas where
demand is high when products are being exported.
➢ Related and Support Industries: The same raw material suppliers in the same region are
entering the competition to supply raw materials to LEGO, and the price advantage
created by this competition reduces the production cost of LEGO.
➢ Firm Strategy,Structure and Rivalry: LEGO Group has to be always innovative
because of regional competition. In such cases, the LEGO Group is trying to get rid of
the Red Ocean and create differences to move to the Blue Ocean. Because of the bricks
are too focused by LEGO Group, it is difficult to create these differences in the
product.
➢ Government: The fact that laws provide competitive advantage to the local firm and
the political structure of the country in question has a negative impact on the LEGO
Group.

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➢ Chance: The growing demand for digital games along with the growing technology
and gaming industry has led to a decline in demand for LEGO Group bricks. Focusing
on physical toys, LEGO was adversely affected.
3. International Challenges of The LEGO Group
Revenue for the full year increased by 6.0 percent in DKK to DKK 37.9 billion
compared with DKK 35.8 billion for 2015 LEG, LEGO Group continues to expand despite the
increase in consumer electronics popularity.
3.1.Crisis and solutions
In 1998, LEGO had lost $ 375.4 thousand per day because of economic crisis. In 2004, sales
were down by 40% and radical changes were made. They began to focus on their core
products and customers when the new CEO came to the LEGO Group. LEGO Group was
focused on adults who make up 10% of their customers, except the children. Approximately
350 people were fired to reduce costs. LEGO also introduced new products specific to girls
known as "LEGO Friends".
Increased competition in LEGO's main product areas negatively affected LEGO. For example,
" Megabloks Company " in Canada. his company offers with large variety of toys at a very
competitive price. In addition, the increasing popularity of computer games has reduced the
demand for traditional toys. The extreme diversity of the product line, with LEGO turning to
more areas, was one of the negative factors that affected the LEGO Group.
LEGO Group's unproductive and inflexible supply chain was noticed shortly and focused on
the supply chain. Moreover, low quality customer service and product availability reduced the
company's franchise value. Ineffective and inflexible supply chain is a major challenge in
creating a powerful trading platform, so supply chain strategy must be agile.
3.1.1. Transformation of Supply Chain Management
The LEGO Group decided to optimize its supply chain in order to cope with the most
important crisis in the history of the company. LEGO noticed that it was behind retail giants
like Wal-Mart and Carrefour. The LEGO Group had begun to lose its competitive against
companies that are optimizing their costs and providing their customers with just in time
services.
3.1.2. Product development
The management realized that the costs of new products were high and profits were low.
Developers and designers didn't take into consideration production and supply chain issues in
their designs. As a result, the diversity of the various components and features and product
complexity negatively affected, LEGO sets became increasingly elaborate with thousands of
different figures.

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This costly ineffectiveness has caused problems such as large inventories. In addition, while
making large investments in large quantities of components and product molds, only 30
products accounted for 80 percent of the company's sales. For this reason, LEGO Group
decided to significantly reduce the number of components and features. This reduced costs in
the supply chain and created a better opportunity for production outsourcing. LEGO Group
reduced the number of suppliers by 80%.
3.1.3. Distribution
LEGO Group has 11 warehouses and distribution centers in high-cost countries such as
Denmark, France, Germany and Switzerland to serve the customers in 130 countries around
the world. In addition, LEGO Group employed 55 shipping providers for incoming and
outgoing products. In addition, the LEGO Group decided to close five distribution centers in
Europe and decided to establish a distribution center near Prague in Czech Republic due to the
low-cost qualified labor force.
These changes reduced the complexity of the supply chain, simplified inventory optimization,
and reduced average distances on the market. This has improved customer satisfaction and
significantly reduced overall logistics costs.
3.1.4. Production
The complexity of LEGO Group's production facilities and production operations had
caused the LEGO Group's challenges. This complexity has resulted with high costs and low
productivity.
One of the first steps was to create net production cycles for machines, instead of
producing any items at any time. This approach has helped to reduce fixed production
operations as well as expensive retooling too. In addition, the most important decision
regarding production operations was to outsource a large part of production to external
packaging and manufacturing service providers. One of the reasons was to reduce costs by
producing in low cost countries. Another reason is to reduce the number of subcontractors and
use scale economies, considering that LEGO produces about 24 billion bricks per year.
LEGO had significantly improved the documentation and standardization of business
processes. With standardization, the number of toy components, which was 12,000 in 2004,
decreased to 6,000 in 2008.

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3.2.Porter’s Value Chain
Table.6 Porter’s Value Chain
➢ Primary Activies
• Inbound Logistic: LEGO Group has about 80 main suppliers who provide raw
materials, parts and finished goods. This is advantageous for LEGO in terms of
material supply. But if LEGO becomes fully dependent on suppliers, this will
increase the bargaining power of suppliers and the pressure on LEGO Group.
• Operations: The toy materials of the LEGO Group fulfill all national and
international requirements. All LEGO play materials produced for the European
market carry the EU CE label. This sticker indicates that the LEGO Group
guarantees that the product fulfils the European Toy Safety Directive.
• Outbound Logistics: The LEGO Group is located in close proximity to retailers to
reduce inventory problems and facilitate distribution. This situation increases the
customer's accessibility to the product and profitability.
• Marketing & Sales: LEGO has made strong license agreements to increase its
recognition and sales rates (Harry Potter, Star Wars, Batman, etc.). Because LEGO
Group aims to entertain, to teach, to protect the environment and human health,
their products are of a high quality and therefore their products' prices are high.
LEGO's competitors such as Hasbro, Mattel and Mega Bloks are using this
opportunity.
• Service: LEGO Group aims at high quality and satisfaction in its products. To
achieve these goals, it attaches importance to product service and customer's ideas.
They make face-to-face interviews to learn customer ideas, and through some

11. 10
applications on the web, they get creative ideas from customers and shape
production and service according to customers' product demand interpretations.
➢ Support Activities:
• Firms Infrastructure: The LEGO Group's mission is "Inspire and develop the
builders of tomorrow." Its vision is "Inventing the future of play." To help
accomplish them, the company uses a growth strategy and an innovation strategy.
• Human Resources Management: The LEGO Group constantly strives to live up to
their motto, “Only the best is good enough” and for that reason our recruitment
process is thorough and extensive. And the LEGO Group rewards its employees
with training and various gifts. LEGO Group had given 14-carat gold bricks to its
employees who had worked with them for 25 years. And the LEGO Group has
created a program, it is called LEGO Spirit, which tells how LEGO employees
create LEGO values.
• Technology: LEGO Group is closely following the technology in order to keep up
with competition in the changing world and invests in R&D to not harm nature
with the products it produces.
• Procurement: With the products it receives from the suppliers, it provides the best
quality products that to the customers are promised. But in this case, we need to
pay attention to the bargaining power that suppliers have in their hands.
4. MANAGEMENT OF THE BRAND
The LEGO Group's international management orientations is geocentric. Following a
product-oriented strategy in the 1932-1964 period, in 1965, LEGO's brand strategy included
products focused on children and researched for different age and gender groups. Therefore,
the company launched the first sub-brand of LEGO Duplo for young children and after that
the more advanced LEGO Technic was introduced to older men.
4.1.Brand Positioning
Since its inception, LEGO has focused on the development of the brand beyond the
familiar logo brand in order to guarantee LEGO quality and authenticity and to revive LEGO
in order to achieve its mission of "inspiring and developing tomorrow's builders". LEGO
brand values; imagination, entertainment, creativity, learning, care and quality.
4.2.Branding Strategy
There was a "Balanced Brand Portfolio" where LEGO's product line was distributed at
different stages; which caused the company to gain a competitive advantage over other
companies.

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4.3.Encountered Challenges
LEGO when the patent on the bricks is over, faced the challenges of preserving the
uniqueness of the brand in 1989. The LEGO brand has faced competition with a few toy
manufacturers that produce plastic bricks similar to LEGO. Because of children progressed
rapidly toward digital platforms, experts observed that LEGO faced a challenge to keeping the
vision alive by creating toys against digital world's expectations.
5. FUTURE ANALYSIS
The LEGO Group enables customers to design their own products. This information is
also useful for designing the company's future goal.The LEGO Group says that its brick will
continue to be the foundation, but due to the challenges of the digital age, physical toys are a
downward trend for the next generation of children. Digital games can be moved anywhere,
but LEGO has a mobility problem. In general, LEGO has much less demand today than it did
20 years ago.
LEGO Group's focus on brick as its main product and its lack of diversity compared to
Hasbro, makes LEGO highly sensitive to changes in product perception. For example, if a new
product is created by a competitor, LEGO will feel this effect at a significant level, but Hasbro
can react more easily to market fluctuations.
In addition, there are three main threats that LEGO Group faces in the future, because
of focusing on brick as its main product;
• Walt Disney Company's acquisition of Marvel Entertainment and the threat of losing
license rights of LEGO.
• Losing the legal battle with giant brands and losing LEGO brick brand. LEGO, which
will remain unprotected, will lose strength when competing with others in brick sets.
• One of LEGO Group's most important competitors Hasbro created a new product. That
new product is called "Kre-O". For this reason, LEGO Group will face serious
competition in the brick market.
6. RECOMMENDED SOLUTIONS
LEGO can finance a contest in which participants from around the world can
participate. Sponsorships allow LEGO to promote its products and strengthen its core values
and philosophy and enable consumers to see them.
New attempt need to be begun to ensure continuous improvement and sustainable
growth in order to prevent future threats. We can list these attempt as follows;

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• More animation film characters should be presented.
• Produce products for low-income customers.
• The LEGO Group should be more active in social media.
• LEGO Group must focus its research on the consumers rather in order to be successful
in market research.
• LEGO can also benefit from the observation method when examining how consumers
interact with their products. This helps to identify new products of the LEGO Group.
• Increasing loyalty and participation.
• Work with various communities
• Win-win strategy must be guaranteed..
• LEGO offers a large number of apps for both Android and iOS smartphones and
tablets, but most of these games are not the same quality as LEGO's normal offers. For
this reason, the LEGO Group should invest to R&D.
• LEGO Group should choose segmentation strategy according to type of products and
services. If the LEGO Group want to easily identify customers, they will get the best
results with geographic and demographic segmentation.
• To ensure Long Term Growth that ;
- They should extend the demographics of customers.
- LEGO Group should ensure to make brand co-operation and to entry into new
markets.
- The LEGO Group must invest to brand new products
• Creativity can be provided on the move with mobile games. For this reason, a LEGO
brand game can be made and the brand can be introduced to more children. With the
free model of LEGO Group, consumers can start to profit by selling the animated
characters at the same time while playing the game.
• In addition, LEGO Group, which focuses on brick as its main product, may face with 3
threats in the future and these threats' solution proposals are as follows:
- Discuss with Disney about license rights.
- Develop new business beyond Disney (DC, TV Shows,Video Games).
- Expansion in emerging markets (China,India,Brazil,Asia).
References
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14. 13
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The_Lego_Group-adopting_a_strategic_approach- (Author: Anders Bille Jensen)
Global Marketing- A Decision-Oriented Approach – (Author: Svend Hollensen)
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