The Industry

The LEGO group is a manufacturer of play materials based in Billund, Denmark. An

Organization that dedicated to the development of children's creativity through playing and
learning. The industry that the LEGO group based on is the play materials for children.
Analysis of General Environment
The general environment is composed of six dimension that influences industry and the firms
within it. These are economical, socio-cultural, global, technological, political/legal and
demographic. As companies cannot directly control the general environment's segments, by
breaking down the analysis into four parts: scanning, monitoring, forecasting, the LEGO
group would then be able to identify its opportunities and threats in the general environment
that would affect their firm (Hanson et al 2014).
Demographic: Demography is concerned with the population's size, age groups, geographic
distribution, ethnic mix and income distribution usually analysed on a global basis as the
potential effects may be across countries' borders and the LEGO group compete with the
world markets (Hanson et al 2014). Markets include Eastern Europe, Asia, America and
Western Europe. LEGO's product focused on its target audience of (children under age 18).
However, there is large consumer base in the 30-and-over age range.
Socio-cultural: is concerned with society's attitudes and cultural values (Hanson et al 2014).
One such trend is the change of demand that shifted towards technology, either in a toy itself
or the form of toys coming with access codes to online worlds. However the birth rates in
LEGO's core markets Western Europe and North America declined, as did household
spending on toys. Total profit pool in the industry has "decreased by 50%" between 1993 and
2003. Another trend that has affected LEGO's sales is that many parts of the world, children
had more after-school activities and less unscheduled time to play than in the past.
Technological: Technological changes affect many parts of societies. These effects occur
primarily through new products, process, and materials (Hanson et al 2014). The changes in
technological trends in today's general environment include an increase in internet
accessibility, which has encouraged more online shopping, crowdsourcing and better ability
to B2C communication. The Internet has become a remarkable capability to provide

information easily, quickly and efficiently to an ever-increasing percentage of the world's

population (Hanson et al 2014).
Global: includes relevant new global markets, existing markets that are changing, important
international political events and critical cultural and institutional characteristics of global
markets (Hanson et al 2014). The stable growth and expansion, driven by LEGO's growing
pipeline have allowed the distribution of toys into Europe with "millions of young Eastern
Europeans eager to get their hands on Western products."
Economic: refers to nature and direction in which a firm competes or may compete in which
where there is a relatively stable economy with strong growth potential(Hanson et al 2014).
Toymakers manufacture in Asia whereby labour was inexpensive, and subcontractors stood
ready to purchase goods on their behalf. Outsourcing labours to China.
Analysis of Industry Environment
Compared with the general environment, the industry environment has a more direct effect on
the firm's strategic competitiveness and ability to earn above-average returns (Hanson et al
2014). The profits potential is a function of five forces which are: the threats posed by new
entrants, buyer power, supplier power, substitute products and intensity of rivalry among
competitors
Substitute Products: the toy industry faced with high competition. The impact of new
product introductions muted by rapid imitation and limited protection of intellectual property.
Low switching cost, making it easy for the consumer to switch products. An example of this
would be substituting from LEGO toys to MP3, iPods, and video games.
Buyer Power: The bargaining powers of customers and retailers such as Toys R Us, Target,
and Wal-Mart are high as they want to buy a product at the lowest possible price (Hanson et
al) and there's little switching cost especially the intense retail competition that had heated up
in recent years.
Supplier Power: the bargaining power of suppliers is low within the toy industry itself. Due
to the widespread and improved technology of plastic injection moulding machine, and
colouring has become very easily obtainable.

Threat of New Entrants: They toy industry has already been made up off many established
companies such as Mattel and Hasbro, hence making the new entrants medium. There are
many alternatives to the toy industry hence the threat of new entrants would be low.
Competitive Rivalry: Competition within the sector is very high as thousands of toymakers
served the world market, but increasingly led the industry. Companies such as Mattel with
Fischer-Price, Barbie, Hot Wheels and Hasbro with housed brands such as Transformers,
Monopoly, Playschool.
Based on the analysis of the five forces we can conclude that the industry LEGO is in is
unattractive concerning profit potential. This is because the industry has buyers have a strong
bargaining position as well as strong competitive threats from product substitutes. And
intense rivalry among competitors. These industry characteristics make it difficult for firms to
achieve strategic competitiveness and being able to return an attractive return (Hanson et al
2014). As an attractive industry would have high entry barriers, suppliers and buyers with
very little bargaining power and, very little competitive threats from product substitutes and
moderate rivalry intensity.
Internal Analysis
Analysing the firm's internal organisation requires that evaluators examine the company's
entire portfolio of resources and capabilities. Resources are the source of capabilities, which
leads to the development of core competencies (Hanson et al 2014).
Intangible resources
Intangible resources are assets that are rooted deeply in the firm's history and have
accumulated over time (Hanson et al 2014). Examples of intangible resources would be the
knowledge, trust between managers and employees, managerial capabilities, organisational
routines, scientific capabilities, the capacity, brand name, the firm's reputation for its good
and services. LEGO have a high reputational resource. LEGO's core brand name and identity
are consistent and world renowned brand across different parts of the world is making it one
of the firms major intangible resources LEGO Group have a "strong culture of creativity"
who favours the steady introduction of new product and themes based on the brick system.
LEGO have strong innovative resources and a substantial capacity to continuously innovate

where they "explore new opportunities" to "stretch their brand name". LEGO have valuable
human resources in which they can "incorporate learning through direct engagement with
customers" which achieves by working with the LEGO community in LEGO shops, at
LEGO-related events, or in exceptional ad-hoc projects.
Tangible resources
LEGO's Technological and physical resources account for its tangible resources, are assets
that can be observed and quantified (Hanson et al 2014). LEGO's "injection-moulding
machines product plastic elements in massive numbers". LEGO also has introduced family
theme parks in Billund, LEGOLAND Windsor in 1996
Capabilities
Capabilities are a combination of intangible and intangible resources (Hanson et al 2014).
They are based in developing, carrying and exchanging information and knowledge within
the firm's human capital which used to develop in specific functional areas (Hanson et al
2014). LEGO divide the business into two groups which are the markets and products group
and community, education, and direct group. The new structure allows the company to align
with the company's strategy to both continue its traditional model and leverage broader
community of customers and partners. LEGO has the capability to develop industrial
excellence and cutting-edge skills in material science and production technology. LEGO also
implemented a "Fitness Program" which included streamlining the manufacturing process,
reduce organisational layers, and increase responsibility and customer focus to build a more
responsive and global business system.
Core competencies
Rare?

Valuable?

Costly to

Nonsubstitutable?
Yes
Yes
Yes

Managements

No

Yes

imitate?
Yes

adaptability
Brand Image
Product design

Yes
No

Yes
Yes

Yes
Yes

and quality
Core competency is capabilities that are a competitive advantage for a firm over its rivals
(Hanson et al 2014). A core competency can only achieve if the four specific criteria of

sustainable competitive advantage that can are used to determined which capabilities are a
core competency. These criteria are that the capabilities are valuable, rare, costly to imitate,
and non-substitutable are core competencies (Hanson et al 2014). Capabilities that does not
satisfy all the four criteria is not considered a core competency.
Valuable capabilities allow the firm to exploit opportunities or neutralise threats in its
external environment (Hanson et al 2014). Rare capabilities are capabilities that other
competitors may not possess. It's valuable capabilities sources of competition and
competitive advantage is a result when firms can develop and exploit useful capabilities that
become core competencies, and that differ from other competitors (Hanson et al 2014). The
company's capabilities also need to be costly-to-imitate and non-substitutable for it to be a
core competency. Costly to imitate capabilities are capabilities that other firms cannot
(Hanson et al 2014) quickly develop such as LEGO's first use of plastic injection moulding.
Non-substitutable capabilities refer to the capabilities that do not have strategic equivalents
(Hanson et al 2014).
Managements' adaptability is not a core competence as it's not rare as most organization can
adapt accordingly to economic and the external environment but is structure and culture that
LEGO can introduce in its company that makes it valuable, costly to imitate and nonsubstitutable
Product design and quality of LEGO is not considered a core competency. It failed to satisfy
one of the four criteria, rare. It may is hard to imitate, and there is no substitute for the use of
plastic injection moulding which produces the high quality of products that Lego produces,
but the actual quality is not rare as firms can use different methods to generate high-quality
products.
Brand image is the result of a strong brand presence and a very effective way to grab need
consumer attention, especially towards the children. The fan base that LEGO brand have is a
core competency; this core competency can lead to a competitive advantage for the firm over
its rivals (Hanson et al 2014). It is valuable as it allows the companies to exploit opportunities
or threats in its external environment, possesses a capability that few of its competitors have
or if not none in this case (Hanson et al 2014). The adult fan base that gives meaningful
feedback and had the technical expertise necessary to solve design issues and innovate

designs are capabilities that firms cannot easily develop as it is costly to imitate (Hanson et al
2014). Non-substitutable as the result of the high intangible asset as the company has
significant product innovation and community which allows the platform for co-creation.
SWOT
STRENGTHS
- World renowned brand
- Global marketplace
- High quality product designs
- Strong customer relationship
- High fan base
- Adaptability to different markets
- Strong leadership
- Discipline and responsible
workforce
OPPORTUNITIES
- Increasing trend of technology
- Educational product lines
- Use of cheaper labour cost overseas
- Licensing product lines to popular
brands such as Disney

WEAKNESS
- High production costs
- No educational products for children
Over-diversified product line

THREATS
- Rivals such as Hasbro and Mattel
- Employees may lose job by
-

outsourcing
Electronic toys
Low fertility rates
Increased wants of educational
product lines for children

Analysis of current strategies

LEGO focussed on the engagement with fans. Employees of LEGO are to be more
responsive to customer feedback and increasing their internal and external communications
by eliminating unnecessary hierarchical and bureaucratic processes. By having a strong
customer relationship especially with the adult fan base comprising of teachers, students,
parents, engineers, and hobbyist it allows for meaningful feedback and technical expertise to
solve design issues and innovation allowing for co-creation within LEGO.
Over diversified product lines complicated the LEGO supply chain and severely affected the
company's profitability as some of the products were unsuccessful. They countered this by
streamlining the products, reduce organizational layers and increase responsibility and
customer focus to build a simple, more responsive global business system
The firm also has adopted technological trends like the use of the internet increased. LEGO
established an online shop in 1999 to sell directly to their consumer and having platforms

such as LEGO Factory as an engaging platform for co-creation. Since early adopters of new
technology often achieve higher markets shares and earn higher returns (Hanson et al 2014),
LEGO-inspired learning and led the development of new products and components which
contributed to the growth of the business.
LEGO reconnected with its consumers as they were "unnerved by the existence of fans over
the age of 30" they realize that they have tremendous talent, knowledge, and passion in the
community and some were more knowledgeable than LEGO's employee. LEGO made use of
its Adult Fans of Lego as it is considered a meaningful extension of the LEGO community
allowing for an engaging platform for co-creation. LEGO customers were not only users of
the product but also part of the LEGO company which contributed growth to the business.
LEGO followed the technological evolution their consumers can communicate through webbased communities such as YouTube, Wikis, Blogs, social media allowing them to share
information and allow to come up with innovative ideas collaboratively. LEGO leveraged its
"customers' involvement through seeking their opinions through web-based platforms."
Hence trying to reconnect with its consumers.
The LEGO Group entered the "video game industry in 1997 with "LEGO Island" a highly
competitive industry which is a threat to the industry as markets have shifted towards
electronics such as MP3s and video games. LEGO licensed many video games such as the
highly popular "LEGO Star Wars" into their product line which created succussed in the
video games line. The company also expanded into the entertainment sector such as online
gaming and board games. LEGO also successfully collaborated with Warner Brothers to
produce an "LEGO-branded online video game experiences" and a "LEGO Movie" which is a
computer animated comedy based on its LEGO products, mainly its characters. Resulting in
LEGO to increase its brand awareness, loyalty and increases its customer engagement.
Articulation of key issues and problems and recommendations
LEGO have a globally diverse market, incorporating new technology and consumer
preferences into the design of their products and having an adamant customer relationship
which is through their fan base. By exploiting the company's core competency in the
particular product market which is used to gain a competitive advantage in the toy industry
(Hanson et al 2014).

In the case, LEGO's one of its weakness is the loss of competitiveness in manufacturing and
supply chain management when competitors such as Hasbro started outsourcing. As a result,
the products are expensive, and the firm's cost increases due to labour and manufacturing cost
of their product. Recommended strategy that LEGO should take would be outsourcing their
manufacturing. LEGO would be able to reap lower wage costs across all of their production
processes as well as being geographically beneficial to other major markets. Toys sold in the
U.S are manufactured in China by outside contractors due to the cheap labour costs. China
has a large population which allows for mass market sale. However, such decisions cannot be
taken lightly, as it will risk losing thousands of jobs in Billund as production facilities. This
may take an effect on LEGO's local image; however, the benefits outweigh the consequences
by offering a more competitively priced product, increasing brand loyalty and the same time
boosting the local economy in emerging markets.
LEGO's primary business level strategy is to differentiate their products through their quality
product design, building their brand loyalty. They have done this by engaging thousands of
fans whose passion for LEGO led to some of the company's most creative and innovative
applications, which exceeded the company's imagination. A strong brand loyalty was used to
create and helped the rebirth of the LEGO corporate culture. LEGO empowers its strengths of
high brand loyalty and strong fan base to restructure its organizational culture and processes.
Threats that LEGO is facing is the substitute of products such as the introduction of MP3 and
video games systems and other competitors such as Mega Bloks that had entered the toy
market. Even as electronics was a threat, LEGO uses the internet and sources creativity and
uses customer feedback to produce products. They do this by maintaining the customer
relationship with The Adult Fans of LEGO online communities with their MINDSTORMS
product. The user-driven platform of creation, production and sharing lead to having
significant implication to reach for innovation. The use of brand loyalty, strong customer
relationship, adaptability of markets resulted in counter acting its threats of electronic
products.
LEGO in 1998, led an approach of product expansion and diversification added complexity
and became increasingly difficult to manage. "LEGO Group posted the first-ever annual loss
in its history." Previous management did not see the impact of the cost of an extra mould on
its design, manufacturing, servicing of retailers, forecasting and managing its inventory. In

turn, would lower its production costs and would be able to offer competitively priced
products. Costing and accountability systems should be implemented. Before Knudstorp
restructures its supply chain management "inventory costs were exploding, we had a lot of
write-offs and obsolescence" components had doubled "in 2004 we discovered that it had
more than doubled since 1994". LEGO's management acknowledged "substantial investment
in expanding the product portfolio and consequent cost increases had not produced desired
results" this means LEGO should restructure its supply chain management by removing its
unsuccessful product lines to simplify its production process and improve the discipline,
accountability and costing systems in its management
Another strategy the LEGO should expand into would be its educational sector by
maximising their target audience range. Children from the early ages as 2. due to the rising
demands of parents are more focussed on "their child's development" and products that are
more "learning-focused". LEGO can implement technology into their DUPLO range and
develops its toys to competitors such as Fischer-Price and Leapfrog. However, this may pose
a challenge to LEGO a supply chain management, and may have an effect on its brand
loyalty. LEGO's strategy in expanding its education programme through LEGO build and
their adult forums which would allow LEGO to incorporate their "culture of creativity" so as
not to lose its customer and brand loyalty but also ensuring a successful product development
for younger children.
LEGO Group would benefit from the efficiency in all the business processes. Hence
outsourcing their distribution should be outsourced. LEGO should shift their manufacturing
to central Europe and Mexico as this would allow the LEGO Group to shorten their supply
chain and hence "take advantage of decreased labour costs." With the increasing trends of
technology, their machines and production process should be highly automated for use in
their primary product lines. By also streamlining their product offering this would allow
lowering the cost of production by eliminating bricks that are not used efficiently. As some
"paints were more expensive than others and, in some cases, a new brick was created that was
unnecessary; an existing brick could have been used." When LEGO reduced their total
number of brick designs from "13,000 to 7,000" this discipline led to a "reduced overall cost
of operating the moulding machines by 30 percent." LEGO can increase their flexibility and
control in their supply chain management due to higher visibility in their manufacturing
process. This corporate-level strategy can help the firm diversify their operations into several

product markets (Hanson et al 2013), and its commodities making it a competitively priced
product which reduces imitation from competitors. By employing strategies that incur
switching costs to dissuade customer to switch to their competitor's product, brand or services
(Hanson et al 2014).