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Introduction
LEGO is a Danish company founded 87 years ago in 1932 and is owned by Ole Kirk Christiansen and has headquarters in Billund, Denmark (Lego, 2020; Forbes, 2019). The following literature comprehensively conducts a strategic analysis of LEGO company. The word “LEGO” has been driven from the Danish word “LEg GOdt”, which means “play well”. The company produces toys that mainly include interlocking toy bricks (Lego, 2020). The LEGO company became the world’s biggest toy company by revenue in the first half of the year 2015 (Wang, 2017). The company has 42 offices as of 2017 (Wang, 2017) and has a revenue of 36.4 billion, a net income of 8.1 billion as of 2018, and 17,534 employees currently working as of 2019 (Forbes, 2019). The LEGO Group has also built parks worldwide and has discovery centres known as Legoland and a LEGO Foundation (Lego, 2020).
Porter's Five forces model
Porter's five forces is an essential step in the strategic analysis of LEGO company as it highlights the competitive rivals a company bear in meantime.
The threat of New Entrants
The external macro factors influencing the threat of entry are socio-cultural, economic, and technological factors since the entrance of new, innovative. Advanced technological toys are being introduced into the market by Walmart, Target, and Toy “R” Us, posit a threat to LEGO. We have impacted the economy of LEGO in the past (Logue, 2014). Therefore, LEGO's threat of entering the market is more significant (Logue, 2014). Moreover, piracy is an issue since replicas of LEGO’s products have been sold at low cost by small firms, which is an additional threat (Constantinou, 2018). Moreover, innovation and trends in the media industry are advancing daily.
Home entertainment has impacted the company as it affected the company’s marketing, distribution cost, licensing costs, and legal cost. Due to these factors and the production of repetitive products, consumers' choices changed, resulting in form loss and a decrease in sales in 2017 (Scribner, 2018). The company has been following an innovative approach to fight its competitors and gain a competitive advantage. Innovation is the primary factor that causes and drives environmental changes in the company (Prakash, Dingus, and Siddiq, 2017). The company is in flux as innovation is not a constant factor as other factors, such as low-price and high-tech products, also posit threats to an organization.
Bargaining Power of Suppliers
The Chinese subcontractors are LEGO's primary suppliers and supply to other industries, which lowers their dependence on LEGO (Mellone et al., 2018). Moreover, Bayer AG is another supplier of LEGO that provides LEGO with plastic. Meanwhile, ABS is also considered the primary ingredient for LEGO (Constantinou, L., 2018). Therefore, the suppliers drive the changes in prices in the company as the prices of raw materials and oil prices can impact LEGO's profitability, which are economic factors of the company. Therefore, it can be deduced that supplier bargaining power is high and can threaten LEGO as suppliers can change their focus from LEGO to its rivals at anytime (Mellone et al., 2018). LEGO maintains the change in prices demanded by suppliers to retain the suppliers' product quality and budget (Logue, 2014). LEGO is in a state of flux as the demand for suppliers keeps changing from time to
Bargaining Power of Buyers
The repetitive production of the same type of bricks impacted buyers' bargaining power, which affected LEGO's economic factor to a greater extent (BBC News, 2018). Moreover, LEGO uses different retailers as its significant distributors for its products, making them the primary buyer. Retailers have changed the prices and delivery times which influenced the company in the past (Logue, 2014). Therefore, buyers' bargaining power has impacted the company's profitability (Mellone et al., 2018). The company has changed its pricing policies to maintain reasonable prices and retain customers to minimise this threat.
Moreover, the company has changed its promotional strategies to restrict its customers from buying from its rivals. The company decides its prices with each region according to statistics, currency exchange rates, and transportation costs. Taxes and local laws being the legal forces, also impact the prices for each region set by the company. The company does not influence these services, and hence the prices keep changing (Lego, 2020)
Threat of Substitutes
The socio-cultural and technological factors also impact the substitution factor as kids now have started using digital gadgets more, which has affected the company's sales (Constantinou, 2018). The company has started using technology and is producing technologically advanced products, which are the causes of driving technological change in the company (Prakash, Dingus, and Siddiq, 2017). However, the threat of substitutes always exists as standard technology to manufacture quality products will keep changing. Moreover, substitutes can be in the form of sports and extracurricular activities. Therefore, it can be asserted that threats of substitutes can stay moderate and not incline too high if the organization's approach is also inclined towards continuous development and technology.
Rivalry among Existing Competitors
As the strategic analysis of LEGO follows, it is also essential to highlight the pre-existing competitors. The major competitors for LEGO are Mattel, Bandai NAMCO, Hasbro, and Takara Tomy, which can impact the economic factor of LEGO due to low switching costs and producing more choices for consumers to select from a wide range of products (Constantinou, 2018). Moreover, Sony and Nintendo are digital competitors for the company. These factors became the causes and drove changes in LEGO, resulting in a low threat of competitors for LEGO as the company established a loyal consumer base and changed its pricing policy (Mellone et al., 2018). Moreover, the company has identified its value generation through competition (Constantinou, 2018). After analyzing Porter’s five forces, the lack of innovation is the most critical factor that has impacted the core activities of LEGO in the past.
Therefore, it can also be identified as a critical issue for the company that may intensively drop sales due to a lack of innovation and production of repetitive products. As a result of the lack of innovation, the company had to fire 8% of employees and shed 1400 jobs after facing a drop in revenue in 2017, i.e. for the first time in 13 years. The revenue fell by 5% in the first half of 2017—the revenue years (US $2.4 billion) DKK 37.9 billion from 2007 to 2016. The signs have been emerging since 2015 as the revenue slowed from 25% in the same year to 6% in 2016 ([email protected], 2017). This innovation factor requires greater attention from LEGO over other issues as it has impacted the sales and profitability of the company in the past and can impact it in the coming years.
Evaluation of LEGO’s ability to Sustain Advantage
LEGO is considered a global brand that has developed itself over the long term and is universally well-known (Andersen and Ross, 2016). However, the overproduction of products and the downsizing of employees have limited LEGO from gaining a competitive advantage in the toy market (El Sawy et al., 2016). Furthermore, LEGO can gain a competitive advantage in the toy market by creating innovative and elaborate products adhering to the current taste of children. Similarly, with the implementation of cost-saving restructuring in the organization, LEGO still possesses a wide range of LEGO brick colours and shapes, which are made available to consumers. Furthermore, LEGO also has special machines that manufacture certain LEGO bricks.
This enables the organization to decrease the cost and time required and increase the overall capacity of production (Wang, 2017). Therefore, using good quality raw materials and specialized equipment would enable LEGO to provide a variety of needs and demands of the consumers. By analyzing LEGO's significant resources, history, and brand prestige, it can be identified that the company is ahead of its competitors (Ringen, 2015). Therefore, being a professional organization in the toy industry and having an established position as a sustainable corporation has allowed LEGO to gain an advantage by acquiring consumers and a broad customer base Roos and Victor, 2018). Therefore, strategic analysis of LEGO may play a substantial role to sustain its advantage, the study applied the framework of value chain analysis and VRIO analysis.
Porter's Value Chain
The study applied the use of Porter's value chain as another tool for strategic analysis of LEGO because it identifies the internal activities in which the firm is engaged during the transformation of inputs into outputs. According to the study by Zamora (2016), the value chain analysis is a process in which an organization is encouraged to recognize and classify its support and primary activities, which provide value to the final product. Similarly, as per the study of Narvadez, Sarahadi, and Sobrevega (2017), the value chain analysis analyses the primary activities for reducing cost or escalating differentiation. Furthermore, the study by Purcell et al. (2017) also states that value chain analysis is an effective strategic tool that can be used to identify and analyze the internal activities of the organization. Therefore, the study applied value chain analysis to identify LEGO's most valuable and improved activities to gain a competitive advantage. Furthermore, the value chain analysis effectively analyses the organisation's competitive advantages and disadvantages. Similarly, Rosales et al. (2017) study highlight that organizations competing with differentiation and cost advantage are more likely to perform their activities better than their competitors.
Primary Activities
Inbound Logistics
The inbound logistics of LEGO are not expected to suffer from any blockage which might obstruct their production process. Furthermore, the raw materials of LEGO are also supplied by Bayer AG, a German chemical company that provides quality materials to the organization. Again, future raw materials can also be influenced because LEGO plans to use environmentally friendly products to ensure environmental sustainability (Elsted Hansen, 2016).
Operations
LEGO was having trouble meeting the demands of its production capabilities, causing difficulties in its operations. Therefore, to ensure smooth operations, LEGO ensured to use of the analytical approach from advanced IT and software packages. Furthermore, the company also adheres to the European Union's legislation, which ensures LEGO's credibility in maintaining its market position. Safety and quality standards are also a core focus in the operations of LEGO (Botoric, 2015).
Outbound Logistics
The outbound logistics of LEGO use the large hub centres, which are situated closer to the retailers that appropriately control inventory and create lesser shortages of stock. The retailers who placed their orders earlier are also provided with discounts from LEGO. Furthermore, LEGO works closely with its retailers to manage inventory (Cerezo-Narváez et al., 2019).
Marketing and Sales
The marketing sales of LEGO were negatively affected because of the innovation issues. However, the strategic partnership of LEGO with Warner Bros and Lucas Films provided assistance and key marketing to LEGO during the sales crisis. LEGO also uses the pricing strategy of selling the best goods at higher prices. However, the competitors of LEGO offer products at a much cheaper price (Elsted Hansen, 2016).
Service
LEGO provides various services to individuals and children across the globe by offering local community engagement in which the employees of LEGO volunteer to support needy children. LEGO also hosts initiatives such as building the change and RE: code for children for an interactive learning experience. LEGO has partnered with UNICEF to empower children through creativity and learning (Lego, 2020).
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Secondary Activities
Firm Infrastructure
Investigation of even the slightest activities is an essential part of the strategic analysis of LEGO. Due to the organisation's lower levels of innovation, LEGO's infrastructure was damaged. The organization reduced 10% of its employees because of decreased sales and the production of lesser innovative products. However, the effective management of the infrastructure activities allowed LEGO to regain competitive positioning in the market (Dobrynskaya and Kishilova, 2018).
Human Resource Management
Effective human resource management allowed LEGO to improve its workforce's motivation, skills, and commitment levels. The human resource department of LEGO was affected the most due to the issue caused in the company because the organization is dependent on the talent of its workforce (Dobrynskaya and Kishilova, 2018).
Technology Development
The LEGO crisis caused the organisation's development and improvement of technology. LEGO utilizes effective technology for its research and development to initiate innovation (Dobrynskaya and Kishilova, 2018).
Procurement
The procurement process of LEGO remained unaffected because of its partnership with different suppliers of raw materials, which optimized the inbound and outbound activities of the firm (Dobrynskaya and Kishilova, 2018).
VRIO Analysis of LEGO
The VRIO analysis of LEGO could be considered another tool of strategic analysis of LEGO which allows planning used by firms that enables them to make effective business decisions. According to the study by Knott (2015), the VRIO analysis is integral in determining the information regarding the organisation's competitive advantage. Furthermore, the study of Song and Sung (2015) also identifies that the VRIO is also effective because of internal analysis, which is used to recognize and assess the resources present in an organization. Furthermore, the VRIO analysis was effective for the study to evaluate the competitive advantage of LEGO.
By analyzing the table above, it is considered that the financial resources of LEGO are valuable and rare, which provides a competitive advantage to the organization. Furthermore, LEGO also has a sufficient number of world-class facilities near the retailers, which provide cheap production and value for the organization. However, the modern facilities of LEGO are not difficult to imitate and reduce the chances of competitive advantage. Furthermore, the trademark of LEGO serves as a valuable resource to the organization and is costly to imitate, which provides LEGO with a competitive advantage in the market.
This strategic analysis of LEGO may eventually help in effectively managing the resources of the company and, providing a distinct competitive advantage. The human resources, such as employees and management of LEGO, are the organisation's most important assets and are valuable for LEGO. The innovation and creativity in LEGO have faced challenges in the past. Therefore, LEGO has taken the necessary steps to improve its process of creativity. Furthermore, the brand image of LEGO has a world-class reputation which is costly to imitate and provides LEGO with a distinct competitive advantage.
Conclusion
This study is based on the strategic analysis of LEGO and identifies the problem which caused a decline in the sales of LEGO products. Therefore, the study conducts Porter’s five investigations which identified the key problem which caused a crisis in the sales of LEGO. Furthermore, Porter’s Five also analyzed the factors of PESTEL for the classification of problems that caused a downfall in the sales of LEGO. Moreover, Porter’s Five Analysis also identifies the issues that impact the organization’s strategy most. Similarly, the study evaluates LEGO’s ability to sustain advantage using the value chain and VRIO analysis.
Therefore, this section categorizes the crisis's effects on LEGO's activities. Similarly, the study also applies the SWOT/TOWS to identify LEGO's different strategies, strengths, weaknesses, opportunities, and threats. The LEGO Company adopted an effective pricing policy strategy, maintained its budget, and improved the quality of its products to deal with the lack of innovation in the company. Moreover, the company improved its operations, logistics (inbound and outbound), marketing, and services to increase its sales and profitability, which were majorly impacted due to a lack of innovation and sustaining competitive advantage. Furthermore, the LEGO Company has the financial, physical, technological, organizational, human, innovation and reputation resources to maintain and gain more competitive advantage in the competitive marketing environment.
If the management of LEGO wants to implement change and innovation effectively, it requires pure intentions along with a solid and relative level of detail about its competitors. Planned strategies should be implemented, and responses to unexpected issues and challenges should be effectively handled. Strategies for identifying strategic issues should be looked upon in a variety of manners to get detailed insights into the strategic issues. The detailed analysis will provide a clear view of strategic issues in various ways, providing solutions to adopt the higher innovative strategies. Moreover, it can improve the company's overall mission, vision, scope, purpose, and value and compete successfully in the market.
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References
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