Strategic Approach and Performance of the LEGO Organizations
LEGO is a plastic toy manufacturing toy company that was founded in 1932 by Ole Kirk Christiansen. Its headquarters are in Billund, Denmark. The company specializes in interlocking toy bricks since 1949 (Jensen, 2013, 544-548). Before, most of their toys were made from wood. The toy bricks were reinvented in 1958 adding studs and tubes into them. Since its inception, the company has improved its products in line with changes in technology. Its innovative strategy has seen the development of new products like Lego technic. Also, the company develops new play themes such as LEGO Space and LEGO Castle (“Locations”). Its initial expansion was in the USA, Asia, and South America. Now, its globalization strategy has instigated the company to expand to Australia, Europe, and North America as well. This paper evaluates the strategic approach and performance of the LEGO Organizations.
LEGO is a family-run business. Though doing business with family can be challenging, LEGO has taken this to their advantage. Translating embedded values into the business culture is easy. In a family-run business, the management has a shared vision which is shared from its inception (Poza & Daugherty 2014, 1-26). Furthermore, a family company leaves a lasting legacy as the business knowledge, and success factors are passed from generation to generation and stay within the family. However, the major disadvantage is that during financial of crisis the company takes up the burden (Poutziouris, Smyrnios & Goel 2014, 1-6).
In any business, competition is inevitable. The same applies to the toy business where LEGO faces business rivalry from Bandai Namco who mainly develop video games and music, Fisher-Price that specializes in infant and children toys, Mattel, Hasbro, Nerf that produces form balls and plastic toy guns and Hot Wheels makers of toy cars among others (Bhasin 2018). In addition to competition from the toy manufacturers, the revolutionization of games and plays has introduced a new concern as computer games are becoming a significant threat to traditional toy companies (Mellahi & Frynas 2015, 69-72).
Strategic Analysis (SWOT)
SWOT analysis is a tool for assessing an organization`s strengths and weaknesses in the internal environment, and opportunities and threats in the external environment (Tidd and John 2009, 65-68. An excellent strategic approach should allow a company to enhance its strengths and suppress its weaknesses. Also, it should improve the ability of a firm to exploit its opportunities and avoid threats. SWOT analysis enables a company to examine factors that may affect a company’s operations and to align itself towards driving performance (Panagiotou 2003, 8-10). A company can use Porter`s five forces model to assess the factors that affect company positioning and competitive strength. The forces include “threats of new entrants, bargaining power of buyers, bargaining power of suppliers, the threat of substitutes and rivalry among competitors” (Roy 2011, 23-28).
One of the strengths of LEGO Company is its brand name. The company has built its reputation for decades and now it is one of the leading toy manufacturers globally. According to Michell, King, and Reast 2001 (415-425), there is a correlation between a brand name and performance of a company. Also, its products are of high quality and safe for use (Arlbjorn 2010, 67-69). Thus, customers have become loyal for generations. The firm is highly innovative as it changes most of its products every year. Hence, it continuously adapts to consumer needs (Arlbjorn 2010, 67-69).
Further, LEGO produces blocks with a difference, which can be used to construct many designs. Also., its many years of expertise and a team of committed and highly competent and committed employees are some of its core competencies. As a family company, LEGO has shared goals and vision as an advantage. Moreover, the organization has a strong financial position which supports its sustainable growth.
Its cost of operation is very high due to expensive material and investment in research to produce age appropriate and attractive toys. Thus, the toys from the LEGO company are expensive hence not affordable to many people (Bhasin, 2017). Moreover, not all children can play with their toys thus limiting their markets.
There is market potential for toy due to their role in developing cognitive, social and motor skills. Also, schools have enhanced focus on toys as a model of experimental learning. Thus, this is an advantage to LEGO. There is still an opportunity for further expansions to potential markets in countries like China and India (“Lego SWOT & PESTLE Analysis,” 2019). Also, LEGO has specialized in games for males neglecting female consumers. Therefore, the company could explore the girl market by partnering with famous girls themes and movies like Barbie, snow white, princess, superwoman among others. Further, The company has not marketed its LEGO architecture would be an opportunity to capture young builders.
Some customers prefer to get toys similar to LEGO`s that are cheaper. Some of these are counterfeit products purported to be LEGO`s. According to Hertwich (2005, 85-98), the price is a factor that leads consumers to substitute products. The duplicate products are of lower quality. Thus, the cartels affect LEGO’s brand name as well as sales. Moreover, the advancement of technology has led to the development of electronic toys. Many children especially the older ones are more engaged in electronic games as opposed to traditional toys, threatening the future market for LEGO`s toys. Guillaen & Garcaia-Canal (2010, 83-84) states that the rate of growth of electronic gadgets is 8% as compared to 3% for traditional toys.
Growth strategies are adopted by organizations to either expand to new markets or to introduce new products to already existing demand (Cohan 2017, 21-22). They place the company in a better position to the competitors in terms of revenue, profitability and market share. There are four types of growth strategy namely, market penetration, market expansion, product development and diversification (Campbell & Craig 2016, 105-108).
The primary approach used by LEGO is product development. The purpose of product development is to launch new products in response to customers need on existing markets (Kortler et al. 2013, 68-69). It is a costly venture as it entails investment in research and development of new products. LEGO has been known to introduce new products every other time to align itself with the market’s needs. The LEGO Movie is one of its inspirational areas from movie themes. For a company to make product development possible they need to embrace innovation (DeWit and, Meyer 2010, 260-264). To LEGO, innovation is one of its most robust operational and dynamic capabilities. According to Helfat and Winter (2011, 1243-1250), capacities facilitates a company`s ability to change in line with needs. It also serves as a competitive advantage as a company develops products that cannot be duplicated by the competitors (Chen, Lin and Chang 2009, 152-158). Examples of LEGO`s innovative products are “LEGO Space, LEGO Technic, LEGO Ninjago, LEGO Castle, LEGO Overwatch, LEGO Cowboy, and LEGO Friends” (“LEGO.com Products and Sets – This is a list of LEGO® themes “).
According to Porter, one of the types of competitive advantage is differentiation (Porter 2008). To stay ahead of competitors, LEGO develops different products in line with shifts in children, the variations of markets and segments, and technological innovations. It also creates alliances with film, clothing, and Games like Disney Princess, Spiderman, Powerpuff girls among others. According to Sarkar (2007, 101), LEGO`s “Bionicle” and “Harry Porter’ enabled children to identify with the themes which inspired loyalty. The strategy has been beneficial to the company as 60 % of their sales are attributable to product development (Jensen, 2013, 544-548). Their recent product offering Ninjago and LEGO friends have been instrumental to the company recent success. Therefore, differentiation as a source of competitive advantage allows a company to acquire a high market share (Grant, 2010, 35-38). Also, LEGO has alliances with film, clothing, and Games. LEGO has various product lines to cater to their diverse consumer groups for instance construction, boats, cars, building and aircraft which are grouped according to ages. The products age range include “1-2, 3-5, 6-8, 9-11 and 12 plus” (“LEGO.com Products and Sets – This is a list of LEGO® themes “).
Companies with strong leadership use this as an advantage over competitors (Weiss and Molinaro 2010). Leadership is a complex process, and only those with strong leadership skills can drive their organizations to greater heights. Some of the leadership skills include social intelligence, interpersonal skills, emotional intelligence, conflict management, confidence, prudence, and influence skills among others (Riggio, R.E., 2014). Since LEGO is a family owned, leadership has been passed on from generation to generation. There is an assumption that whichever family member that takes up command, they have the abilities to lead. However, according to Farlow (2012) leaders are made and not born through a process that demands an individual`s vision, passion, commitment, and determination. To become an effective leader, one also needs to integrate knowledge and experience in the area of competencies (Horwitch and Armacost 2002, 26-31).
Just like other companies, Lego suffered from strategy paradox in its implementation of the ten-year plan. Kjeld did not take the necessary initiative to ensure commitment to the strategy. The organizational change allows a company to transition to the desired state. However, if not well managed can cause disintegration in a company. Lego new plan introduced decentralized leadership. In decentralization, responsibilities in decision making are delegated to the middle-level managers from top management which empowers them and increases efficiency at the company (Malan & Smit 2001, 198). The less hierarchical structure allows employees to contribute with ideas.
Failure of Kjeld led To change in the organization by the introduction of traditional business with the appointment of Jorden Vig Knudstorp in late 2004 (Jensen, 2013, 544-548). In contrast to his leadership, the new CEO had excellent leadership skills despite his young age and used expert power to the advantage of the company. Thus, from 2005, the company became profitable and has now reduced its debt burden. Therefore, LEGO and other family-owned companies should reconsider their stand on family-lineage management since not everyone can be a leader without making efforts to learn the art.
Results from 2003 through 2012 have indicated increased growth. The parameters used were income, balance sheet, cash flow financial ratios and the number of employees has grown with the years. The move to strengthen the relationship with its distribution partners like “Toys are Us,” and Wal-Mart is yielding results. They also introduced online channels as well as LEGO brand retail stores which increased sales by 10% (Jensen, 2013, 544-548). As at 2018, June 30, the company’s performance was still strong in terms of “revenue (DKK 4.3 billion), operating profit (DKK 4.2 billion), net profit (DKK 3.0 billion) and cash flow from operating activities(DKK 4.1 billion)” (“The LEGO Group reports stable revenues for the first half of 2018”, 2018). According to the company, there was a decline from 2017 performance due to the US dollar weakening. However, the company had plans to stabilize the business to allow more long term investments.
Since it is a family company, it has sustained its performance due to a culture emanating from shared values that are embedded in their background. Organizational culture has an impact on the way employees relate and with the company`s systems in improving performance (Kim Jean Leeand Yu 2004, 340-359). This is also echoed by Kaplan (2013, 150) who believes that a unique culture serves as a differentiation factor among companies as they assist in displaying their image to the external environment. Peter Drucker quoted that “Culture eats strategy for breakfast” meaning company should not neglect leadership and organizational culture as it is essential in driving accomplishment of strategy (Solis 2014).
LEGO`s strategic positioning mainly involves the innovation of products. It has mastered the art of design, production, and manufacturing of toys. Furthermore, due to the mastery, LEGO has had zero recalls of products in the last few years. The company is also committed to safety and adherence to standards of production (“Safe and high-quality play,” 2015). Product recalls creates an additional cost to the business operation and reduces its profitability. Further, it affects the reputation of the company negative (Venanzi, and Fidanza, 2006). Thus, only a company that is effective and efficient in its production and supply chain can achieve this form of an advantage. Therefore, this is one of the success factors for Lego.
LEGO has a vast wealth of knowledge in the area of plastics, leadership and production technologies. Therefore, they can source for the best plastics to make quality products. Thus their products have superior gripping power, non-toxic, which are hard to imitate. Moreover, with good leadership to coordinate activities the company has experienced improved performance.
Family-owned companies bear the successes and failures of businesses. They always have to maintain a high capital base to handle operations in cases of losses (Poza & Daugherty 2014, 147). LEGO is no different and has had its share of debt management. During the time the company underwent a crisis, its operations were affected leading to downsizing of some of its units. Therefore, now that they have regained the ability to make profits, they have to strive to maintain that position, since failure would lead to the closure of the business to pay off the debt.
LEGO faces a challenge of predicting sales. Gilliland, Sglavo & Tashman (2016, 105) states that retailers have problems in forecasting sales for seasonal products. Also, LEGO continues to have a challenge in reducing the cost of production. As the company focuses on quality, outsourcing of products to reduce cost may not be an option. Therefore, their ability to respond to short term demands sometimes affected.
Toys from LEGO are pricey. Thus, not all people from all income brackets can afford. According to Sivagnanam & Srinivasan (2010, 35-40), the price of product, income, and prices of related goods are some of the determinants of demand. Therefore the market for Lego`s products is threatened by less costly substitutes. The market is also affected by demand electronic toys that are gaining preference, especially with older children. According to Boone & Kurtz (2009, 128-146), it is essential for a company to understand consumer behavior and respond accordingly. Blackwell, Miniard & Engel (2012, 302) stated that cultural shift has resulted in consumers using electronic games and systems to traditional toys. LEGO introduced LEGO Universe its online game, but it failed to kick off. Since LEGO has been unable to respond to the digital demand of its market, it is likely to experience strategy drift. LEGO could now pursue this avenue as its new strategy since the market for traditional toys is expected to reduce significantly with the world becoming digital.
LEGO still needs to penetrate more markets. The Asian and the African regions are places they could expand. However, expansion is likely to reduce its autonomy as a family-owned business. According to Plangger (2016, 25), only 4 % of family-owned American companies are involved in exporting their products, and there are moderate levels of involvement in international markets. The management of LEGO has to explore this option because though its current ownership acts as an advantage to a greater extent, it also hinders its growth. The markets in their comfort zones like the USA are quickly shrinking and slowing growth and profitability. According to Clegg, S. et al., (2011, 227-250) going global facilitates access to new markets. Thus, to remain competitive, LEGO needs to tap on the unexploited market.
LEGO is among the largest manufacturers of toys in the world. Since 2004, the company has restored its performance which it had lost. The reasons attributable to the success is the company structure and ownership, leadership, business knowledge of plastics and production and quality products. Also, it maintains good relations with its distribution partners and involves end users in the design of the products. Its competitive strategy is diversification, by which it aligns its products to the needs of consumers and trends in movie themes. However, the company faces a challenge of understanding the digital market which is crucial with the current global trends, where consumers have embraced technology in their everyday routines. Thus, LEGO needs to move from its comfort zone with its products and markets to increase demand and become more competitive.