Introduction
LEGO Group, a well-known family-owned firm, was started in 1932 by Ole Kirk Christiansen. It started with making wooden toys in Dutch province of Billund. The company continues to be handed over from one family son to another though it changed to making plastic brinks and toys. Its motto has been “Only the best is enough.” Since its launch, Lego continued to have relatively high sales and profitability until the rise of electronic entertainment that made its sales to grow sluggishly. It, therefore, increased innovation and diversified from historical core products, an attempt which failed. It also experimented with changing its corporate subsection Duplo to Explorer but also failed. In the end, it reverted back to Duplo since parents could not recognize the new brand.
The appointment of the new CEO Jorgen Vig Knudstorp in 2014 was meant to turn around the losses the company had been used to. He was a 36 years old rookie who was faced with a difficult decision on whether to lay emphasis on the traditional core products or introduce more product portfolios due to the technological advancement. The issue he has to deal with is turning the company more profitability through continuing with the company’s historical toys or introducing new product lines to replace them. In the end, the new CEO settled on a reduced product collection, tapering down the diverse constituents and reverting to the historical focus. LEGO Group became profitable under the new CEO.
Five forces affecting LEGO Group
Porter identified five main external forces that will have impacts on businesses. These forces include, level of rivalry, power of buys, treat of entrants and threats of entrants.
Up to 2004, LEGO Group occupied the strongest position in the construction of toys. Before then, the overall level of rivalry was relatively low. However, it is now faced with intensive competition from a broader market-oriented firms that have come up. There has been entry into toy market of large competitors from the electronic sector including Sega and Nintendo (Morgen 25).
For Lego, the power of the buyers continues to be somewhat high with little costs involved to switch amongst substitute toys and alternative products (Hansegard). Lego products are principally based on homogenous inputs including plastics as well as Chemicals and hence the power of supplier can be viewed as average. This may, however, change if Lego considers a shift into no-traditional of films and video games while it is expected to rise.
The threat of substitutes is viewed as the largest threat of the Lego group. It may be difficult to assess the market in which a company occupies but it’s not hard to see the effect of customers substituting between traditional toys to electronic forms of entertainment such as video games and television.
New entrants into both the traditional toys market and in the broader entertainment industry for children remained low before 2004 with only a significant few rivals entering the market. However, after 2004, there have been significantly high levels of capital investments and research by other large firms that pose a real challenge. However, in the short run, the threat of new entrants is low due to high costs which will act barriers to entry.
Strengths and weaknesses of LEGO Group
Lego’s strength lies in its long term historical brand that can be recognized and its ability to make use of innovative technology without necessarily going beyond the traditional core values of the business. Undeniably, the Lego brand still dominates in toys industry despite the emergence of alternative products in children entertainment such as video games. It is still the preferred brand in the toy market with its products being durable. It has had a strong association with innovation in design which makes it a recognizable brand with relatively lower prices. LEGO Group has a great product equity that permits it to set competitive prices relative to their rivals and hence retain advantage over them (Lipczynski et al. 218).
Despite the high profits and the strengths that LEGO Group holds, the narrowed product portfolio proposes new weaknesses. This will lead to a slowdown in future growth markets giving their competitors a competitive advantage.
LEGO’s Business Strategy
In the end, the new CEO settled on a reducing product collection, thinning down the varied components and then reverting to the historical focus. LEGO Group went profitable under the new CEO by implementing this new business strategy. It must reduce its costs of making toys so that prices remain relatively low than those of new entrants using technology and innovation which are two clear associations to its mission.
LEGO Competitive advantage
LEGO Group has a competitive advantage that results from a combination of Brand Equity, Pricing, visual merchandising and merchandise assortment. The company has historical brand equity with its unique products that are exceptional and provide customers with a great experience. LEGO Group has a historical success in the toy and children entertainment and this allows its customers to have a better understanding of its impressive brand experience.
The company creates products focused on American girl with fictitious historical biographies which are for education and play. The company is a market leader in fiction dolls and accessories for dolls that customers can purchase for their children. Most of LEGO’s products are still inclined to construction toys and consumers will continue to relate to them through video games. This is a merchandise assortment approach that has possibilities of being historically, futuristically and presently themed.
Its products remain relevant to its target market of 8-12 as it reflects on the diversity of the population it targets in the market. The competitive advantage is well imprinted in its mission statement that highly regards creativity and innovation and it constantly updates its popular products.
Recommendations to LEGO Group
Lego needs to now focus on improving its supply chain where it needs to focus more in outsourcing production from manufacturing firms and electronics companies closer to its markets. This will ensure than suppliers do not delay its production process through fixing prices while the business will continue meeting the demands of new consumers (Wilson et al., 191).
Lego’s will also be required to engage with stakeholders including customers and retailers with more aggression. This is to ensure that they understand the current trends and needs in the industry. LEGO will further need to improve its product range in order to face the emerging competition from video games that are more appealing to the younger children. They must, however, be themed around traditional products and appeals.
The company should focus on increasing its product portfolio to the global market this will help grow sales and engage wide stakeholders.
Reasons and Growth Projection
At the core of LEGO Group business orientation, it needs to be aware that there has been rising birth rates since the beginning of the millennium. This is expected to continue to rise in the coming years. It provides an opportunity for the business to grow its sales and engage with consumers. The customers in the parenting industry continues to grow and the focus now ought to move to creating values to the customers and retailers, operational excellence and how to reach the markets already reached (Barrows 100).
The products in the children entertainment are expected to remain highly priced due to high investments needed to develop them. This will continue to make traditional toys like those developed by LEGO more appealing in the long run. The market is expected to continue to be robust given that true toys are recommended by educationalists as they help children to develop mortar skills.
The cost of developing toys through manufacturing will continue to rise over the foreseeable years due to increase in the costs of manufacturing raw materials. However, this is expected to remain steady and the cost will in the long run be transferred to the customers. Engaging with the customers will ensure that they will have full value for their money when they have quality toys.
Financial performance implications
Legos will greatly reduce its costs involved in setting its own production sites in all the markets it operates in. Through outsourcing, it is expected that the company will reduced the operational costs of maintaining and hiring of staff to work in these sites. It will in turn grow profits and will reduce expenses making it more effective.
Work Cited
Barrows, Ed, and A. D Neely. Managing Performance In Turbulent Times. Hoboken, N.J.: Wiley, 2012. Print.
Hansegard, Jens. "Lego Shrugs Off Toy-Market Blues". WSJ. N.p., 2016. Web. 14 Apr. 2016.
Lipczynski, John et al. Industrial Organization: Competition, Strategy, Policy. Harlow, England: Prentice Hall/Financial Times, 2009. Print.
Morgen l, An analysis of some challenges facing LEGO Groups in the 1990’s. (1996) pp 17-28.
