Global Corporate Strategy
LEGO by John Ashcroft & Company
This individual assignment will be assessed by means of a 3,000 maximum words report. The assignment has been designed to allow you to develop and use your knowledge and skills in understanding key strategic issues relating to LEGO. You will be required to apply the strategic concepts and analytical techniques studied in this module. All the learning outcomes below will be assessed:
The assignment will be internally moderated by: Dr Augustus Ernest Osseo-Asare
If your centre supports Turnitin or alternitively, SafeAssign by Blackboard, a copy of your Turnitin or SafeAssign originality report must be submitted in conjunction with your assignment.
Your task is to carry out a critical analysis and evaluation of the strategies adopted by LEGO, using the information provided and other materials researched. You will be expected to select and apply appropriate theories, techniques and models studied during the module whilst having regard to the practical aspects of strategy development.
Your assignment should be presented in a business report format and should be within the range 3,000 maximum words (excluding executive summary/abstract, references and relevant appendices). The report should include a title page and abstract and be fully and consistently referenced, using Harvard Referencing style.
It is recommended that you research information additional to the case study to support your arguments. This may be obtained from a diverse range of sources and you are encouraged to research the issues in whichever way you deem appropriate.
In the event of failing this individual assignment, normal referral / deferral procedures will apply. This assignment carries a weighting of 100%. The assessment will focus on the level of ANALYSIS carried out. That is, the application of THEORETICAL CONCEPTS studied in the module to the ‘practical’ case study presented. In other words, you should proceed beyond a DESCRIPTION of the company and its actions. You should be analysing ‘why’ rather then describing ‘what’. The assignment will be assessed and moderated by two members of staff in accordance with the marks allocated to each of the questions detailed below. 10% of the marks are set aside for the ‘presentation’ criteria.
Evaluation of data
“We are on a burning platform, losing money with negative cash flow and a real risk of debt default which could lead to a break up of the company”. Fact finding is the first step to problem solving. That would require a back to basics review and assessment”.
Using the information in the case study, and relevant data/information from company annual reports, websites and related journals critically evaluate the nature of the competitive landscape faced by LEGO from its most relevant competitors. Discuss the extent to which you believe that industry dynamics had a significant impact on LEGO’s profitability during the period 1997 to 2006.
In the late 90s, LEGO’s market share had begun to decline. Kids were playing more with video games, and other toys, and LEGO wasn’t cool anymore. They decided that they had to disrupt themselves, before someone else did. Lego appointed turnaround specialist, Poul Plougmann, as the new CEO in October 1998. Plougmann launched a number of initiatives to achieve disruptive innovation at LEGO, but ultimately was not able to achieve a successful turnaround, and was replaced in January 2004 by Jørgen Vig Knudstorp, who succeeded where Plougmann had failed.
Using your understanding of sustaining innovation and disruptive innovation, critically analyse and compare the innovation strategies adopted by both CEOs. How did LEGO address the challenges of recruiting and retaining a skilful workforce?
[30 % marks]
“When we design and engineer our toys, we strive to make them safe for children. We look to reduce their environmental impact and build them in facilities that adhere to high standards. We are committed to strong ethical and environmental performance both within our company and in our communities”, Mattel Citizenship website.
“It is at the very heart of our company to always strive to do better. We aspire to give children the best play experiences, to be the best partner to work with, to be the best workplace for our employees, and to be the best company for society”, Lego owner, Kjeld Kirk Kristiansen, 2015
Carry out a comparative analysis of the CSR strategies adopted by both Mattel and Lego.
[20 % marks]
In 2015, LEGO enjoyed an astounding growth of 25% in revenue ($5.2b) and 31% in net profits ($1.3b). Mattel sales dropped by 5% but they still retained the number one spot with $5.7b in revenue whereas Hasbro came in third with $4.45b in revenue. In 2016, Mattel and Hasbro (both US-based corporations) were rumoured to have discussions about a possible merger to take on LEGO though it is highly unlikely to happen.
As a strategic business consultant, what strategies would you recommend and what would be your advice to LEGO management to move forward and to take over the number one spot in the toy industry.
[10 % marks]
Note: 10% marks is allocated for overall presentation
LEGO’s Global Corporate Strategy
Lego started initially in the small township of Denmark, and with the passing of years it grew into biggest conglomerate spreading their branches and factories in the entire globe. It gives employment to thousands of civilians and exports their toys to more than 130 countries.
Their toys and other products have gone huge changes over a span of eighty years; however, they retained their foundation which is LEGO brick. The unique characteristic of their building blocks is their interlocking principle along its tubes. This exclusive feature gives them unlimited prospects to build different structures using those blocks. Its matter of setting that lets the creative imagination of a child-free and innovativeness develops through play. It is kind of trying to make the future generation more inventive, artistic and develop their skills from a tender age.
Due to the stiff competition and introduction of new technologies led to the fall in market shares of Lego. The company changed its global policies and made their toys more adaptive to the current generation, thereby regaining the trust of their loyal patrons. Introduction of green toys could make them popular among concerned parents.
In the small town of Denmark, called Billund LEGO opened their first workshop. The company started as a carpenters shop, gradually became one of the giant conglomerates in the world. It established their loyalty and brand in the world of the toy industry. In the Danish language the name implies to "play well". The organization from its initial days itself focused on children and their amusement. However, their innovations always proved to the parents that the business head wanted to develop the cognitive skills of the youngsters, through the games invented by the company.
The venture capital manufactured building bricks for the future generation. The youngsters could be engineering the structure or building way they want to. This aided in improvising their creative skills and logical thinking. With time, Lego furnished the features of their bricks by modifying the colours, outlines, structures, dimensions and sizes. However, they retained the basic form of their blocks, which made Lego inimitable and irreplaceable in the harsh competition of the toy manufacturing world.
A recent report by Dixon (2014), highlighted that the organization have planned to bring forth new toys designed for visually challenged kids, using braille technology. This indicates that the multinational wants to do greater good to society, rather than only concentrating its business to financial benefits. The organization went through tough times in a matter of finance and falling market shares owing to the competition and new technology. The primary intention of this study is to elucidate the biography of the company, especially the reasons for its fall in the market and the strategies taken up to reenter and recapture the market.
2.0 Lego- The Toy Manufacturing Giant
LEGO group of companies have been founded by Ole Kirk Kristiansen and currently owned by Kjeld Kirk Kristiansen. It’s a family owned corporation, the ownership gets transferred within the family. It has been branded twice as "Toy of the Century". The following sections will elucidate the different aspects of LEGO and the toy industrial sector.
According to Shaftoe (2019), toy manufacturing trade is very stable but faces fiery competition from the new entrants and digital plays. The factors of success and stability in this arena are very dynamic and change quite rapidly. The advent of digital media, gaming merchandises and combination of analogue toys with digital technology has revolutionized the toy manufacturing world. Technologies are refining at a thundering speed, and along with its evolution, games are re-engineered to match the changing demands. The prime threat to traditional games comes from the volatility of technology and its effect on the toys.
Due to early exposure to various technological gadgets, youngsters are maturing at an early age, which is shifting their interest to higher level video games and digital toys. Shifting in demographic factor is another cause of change in the market position of the old-fashioned gaming world. Shaftoe (2019), emphasized that the average age of the first time mothers have risen from 21 years to 25.1 years from 1970 to 2008. Moreover, the birth rate in different parts of the world has declined drastically. Most of the families are going, one single child. With the change in such demographic factors, the amount of cash available with the parents is higher than the previous generations (PYMNTS, 2018). Further with the growth in the economic sector, the parents are having more amount of disposable income, which they are splurging on their kids in buying the costly digital gadgets. These devices not only provide amusement games, nonetheless offer various other sources of entertainment. This inclination towards digital platforms is massively upsetting the traditional sector of the games (Howarth, 2017).
The toy manufacturing sector is very lucrative and thereby attracting a large number of business tycoon to invest and explore the dynamics of the business. Lego from the time of its inception faced intense competition from the rivals. However, owing to their unique ideas, innovative toys and loyal patrons, the company always threatened the position of other conglomerates in the same domain. According to the annual report of Lego (2019a), Hasbro, Bandai Namco and Mattel are leading rivals of the organization. All these three opponents are American based business units.
Bhasin, (2019) reveals the other players of the competition. Fisher Price was established in 1930 and manufactured toys for the infants. It is the third largest production unit of the toy industry on the Earth. This conglomerate used plastic as their main element to producing the toys and their top brand comprise of rescue heroes, Dora the Explorer, Charter telephone and many more.
Barbie is one more rival of Lego. This was founded in 1959, inspired by the German doll and specializes in making dolls for girls. They keep on bringing new models of Barbie to the market and hold top-five status in the industry. Nerf wars started in 1969 by Nasbo, concentrated on sports toys which consist of sports balls made up of foam. The factory also sold Nerf blasters a toy gun that attracted the young boys as it achieved to shoot at a range up till 60 feet. Nerf managed to stay in competition due to its easily brought in changes in their principle with the variation in demand of time and customers (Bhasin, 2019).
Bhasin, (2019) stated that Hot wheels, my little pony as well as mobile suit Gundam are the other players of this dynamic global industry.
Figure 1: Top competitors of Lego
(Source: Bhasin, 2019)
Porter designed a stratagem to aid the companies in assessing their and industrial factors that will have a significant impact on their profitability index. This strategy reflected upon five major completion drivers of any industry.
Buyer Power: The buyer power is relatively high for the consumers of the toy industry. Irrespective of a wide variety of product offerings to choose from, the consumers can have a preference for digital and touch toys. The introduction of gaming consoles could further enhance the competition. Therefore it is obvious the consumers' choice may differ according, thus shifting towards competitor brands.
Danger from the substitute goods: Lego faces a huge challenge from the substitute games from their rivals. Replacements have low switching costs and many times, it brings in new features for the consumers. Therefore, substitutes pose the greatest threat to the company to lose its market base. With the entry of digital games and video games in the market, the traditional toy manufacturing unit faced a critical setback in their sales and operations. Further to worsen the situation, the Chinese game industry launched its toys at much cheaper prices. The abundance of counterfeit goods also adversely impacted the sales and profit of Lego. In addition to these, parents and schools are emphasizing their young ones to spend time over outdoor games to maintain their physical fitness (Lego, 2019a).
The risk from new competitors: Lego patent expired in 1989. This reduced the entry barrier for the newcomers to the industry. With the expiration of the patent, few companies are producing counterfeit toys just like Lego, and the patrons are getting such toys at much less price in the market. Mainly organizations from Hong Kong, China and Canada are indulging in such activities (Lego, 2019a). Capital required to set up business in this arena is huge. Moreover, the administrative policies about licensing and procuring of raw materials are strict worldwide. However, the hold over distribution channel by the small entries is strong. Henceforth the dangers Lego is facing from newcomers are moderate to high (Lego, 2019a).
Negotiating command of suppliers: Negotiating power of suppliers is quite high, and the company has little scope to negotiate. The prime elements Lego uses to manufacture their toys comprise colourants and plastic. The organization procures its raw materials exclusively from a German based MNC Bayer AG. The plastic material used for their toys is ABS. This synthetic polymer is manufactured from petroleum and their by-products. With the fluctuation in oil prices, the cost of raw materials is highly affected, and their profit keeps on fluctuating. To maintain its quality, the company cannot switch the supplier easily, thereby lowering the chances of negotiation (FORBES, 2013).
Nevertheless, Lego can acquire other raw materials from different vendors, and as the number of vendors is more than the clients, the organization enjoys the benefits of bargaining (Handley, 2018).Dickering control of buyers: The major buyers of Lego toys are Toy"R" Us and Walmart. As the numbers of purchasers are less than manufacturers, these retailers put tremendous pressure on Lego on their pricing and delivery timing (Lego, 2019a).
Competitive competition between the existing players: Owing to large setup cost very few international brands are present in this volatile sector. This act as an advantage for Lego as the number of existing competitors is less in number (Handley, 2018).
In early 1900 the corporate faced multiple setbacks in the form of falling of sales, counterfeit products, losing the loyal clients, the introduction of new technical gadgets and reduction in net profitability index. Various such seismic factors pounded the toy manufacturing giant, forcing the business hub to change the policies and operation process drastically. The entire business was founded on the principle of learning through innovation. De Wit and Meyer, (2010) stated that innovation could be brought in by two approaches either disruptive or sustaining. Sustaining innovation technique does not introduce new rather improvises the current scenario. Disruptive innovation tends to discontinue the ole setup and craves to generate fresh segment from the existing one.
Plougmann when hired as new CEO of the conglomerate to turn the situation acquired some drastic strategies to revive the profit. The CEO massively reduced the workforce, embraced in-house cost-cutting techniques and made efforts to internationalize the toys. The man disrupted the existing system and introduced new characters in the gaming world, named Jack Stone. The philosophy adopted to turn the sales into profit was disruptive innovation stratagem. Nonetheless, this methodology backfired as the newly formed inventory became hard to manage along with the unpredictable forecasts (Howarth, 2017).
Later on, as the company failed to achieve the target under Plougmann, Knudstorp took over as CEO. This man was very clear about the situation on the table and transparently stated that the fortune of the MNC could not be changed fortnightly. The failure in earlier incidences led to adopt the sustaining strategies by Knudstorp. Cash flow was managed meticulously, and complexities associated with the products were reduced. In addition to these, the focus was brought to maintain the quality of toys that existed as core merchandises of the company. Moreover, to win back the consumer base, Knudstorp started reconnecting with the patrons, spending time with their kids to understand their demands comprehensively (Starvish, 2013).
As the organization was on the verge of shutdown, workers grew impatient and unstable. Primarily every employee needs job security, and when the future of the business was dark, the staff grew increasingly insecure. To make the matter worse, when Plougmann took charge of the organization, many workers were laid off. Knudstorp turnaround the policies implemented by his predecessor, by hiring the skilled workforce. Without workers, no business runs its operations.
Conglomerates have started facing a new challenge in retaining their trained employees and keeping them engaged in the job on hand. Lego itself being one of the innovative powers, launched a new gaming technique to hire talented pool as well as keeping them focused on the jobs. The new technique launched is gamification. Currently, this method is utilized by many MNCs to recruit their staff. Gamification uses the virtual platform of games to connect to employees. It allows the employees to assess the capability of the individuals through the performance at games (Larsen, 2010).
Figure 2: Gamification effect on employees
(Source: Larsen, 2010)
According to Lego, (2019b) it aims at succeeding together with its employees. This motto of the organization helps in connecting employees with the company goals and winning their loyalty. Further, Knudstorp allowed student working as interns or part-time employees to do their job from their place of residence at their flexibility. The company do not interfere with the way the job is done, providing the employees' freedom at work and to develop their creativity. Bednarz, (2016) also stated that the organization provides Mac to work on as the students are hired mainly habituated to work on Mac throughout their life. Knudstorp tried to build a strong and loyal platform of their employees to improve the long term health of Lego.
Corporate social responsibilities make the conglomerate more responsible towards the society, stakeholders, employees, customers and the ecosystem. Every business has some adverse effect on our ecology. Ludema and Johnson (2015), discussed that an intersection could be achieved between the business and welfare of civilization. CSR programs should be aligned with the virtues of the core business processes and goals to achieve greater success. CSR activities focus on economic development of the area, ethical responsibility, philanthropic responsibilities and legal obligations.
CSR events do not depend solely on company policies rather it is vastly affected by the location of the organization, culture of the state, educational levels of its citizens, common norms and beliefs, local legislation and history of the nation. Therefore the CSR practices are quite varied across the different geographical terrains. Lego and Mattel, both of them are toy manufacturing companies located in two different nations. Lego is founded in Denmark, while Mattel is an American nation (Ludema, and Johnson, 2018).
Lego claimed that the energy used for manufacturing the Lego toys and bricks are renewable. The company uses wind power to generate energy consumption. It also introduced LEGO@Life for empowering the kids to play online. This is a social networking site developed by Lego for safe game playing. The company claimed to create a sustainable environment by saving natural resources for the upcoming generation. To reduce the usage of non-renewable sources, the Lego group implemented measures to decrease carbon dioxide emissions from their factories, recycle the waste products and use eco-friendly materials (Lego, 2019c).
The communication style of both competitors is quite different when it comes to their CSR programs. Lego announces their CSR happenings quite comprehensively and in minute details over their digital media and their own website. Even the MNC opens links for their CSR events over the digital platforms, for others to have access over it. Nevertheless, Mattel completely keeps their CSR functions restricted to their annual reports of CSR. This conglomerate uses digital platform and their website to discuss the CSR actions briefly. The precise course of actions is divulged through the Mattel website (Larsen, 2010). Both Mattel and Lego adopted similar social considerations and ecological safety measures, even though they are situated in different states. International CSR activities up taken by two conglomerates for environment safety are the same (Ludema, and Johnson, 2018).
Variation in the CSR activities is the result of three overlapping forces, primarily the national conditions, international context and the global market scenario (De Wit and Meyer, 2014). In this incident, the national context includes the situation prevailing in Denmark and the United States. Roles, responsibility and interference level from the administration of both the nations are completely different. The government in Denmark is influenced by their historical culture. The administration in Europe actively and strongly participates into the cultural and state events. Administration highly regulates the state affairs than America, which believes in the freestyle of living. Therefore Mattel being an American unit has more control over their CSR events rather than Denmark based Lego.
Figure 2: Three forces affecting CSR program
(Source: Larsen, 2010)
Though the number of international level big players in the toy manufacturing industry is less, yet Lego is facing intense competition from Mattel and Hasbro. Both these American multinationals are arch rivals themselves, but recent news has emerged that the conglomerates have planned mergers to overtake Lego as part of their global expansion strategy. However, there is no such news of the merger. Lego can take advantage of the situation and form a merger with any one of the above-mentioned brands for gaining competitive advantage. To overcome such threat, Lego is continuously updated their policies and products to float on the market. The organization forecasted that customers are increasingly inclining towards the use of green toys, which is considered to be eco-friendly thereby safe for their children. In addition to these, parents are favouring the games that develop not only creativity in their children, apart from that it should impart educational information. Parents want the overall development of their child, for which they are ready to pay a bit higher prices than using traditional toys only for amusement purpose (Delventhal, 2018). Lego aims to bring eco-friendly products to the market by 2030, but critics state that they should bring such changes anytime sooner.
With the use of miniatures in movies and science flicks, the toy industry is again gaining popularity among the youngsters. Lego introduced cult characters, Lego Ninjago and Lego Batsman in their motion movies. Hasbro used this exclusive idea and associated with transformers films to advertise their superman. Advertising through motion pictures has proved to be very successful for the toy industry (Shellshear, 2018). However, the company can collaborate with the apparel and fashion industry to sell merchandise products on offers. For instance, if a customer does shopping for $90, then he could get certain Lego toys at just $0.99. They need to settle their pricing with the apparel brands and by applying this technology could enhance their consumer base.
Further in future, it should consider in differentiating their products more, in a manner that connects with the modern generation who are deprived of a normal childhood. Just like launching toys for Blind children, Lego should aim at developing games also for mentally retarded kids and other physically challenged youngsters. Social media is the newest tool for promotion used by traders. It has a huge impact on the audience and can reach millions of people worldwide within a short span of time (Lynch, 2006). Therefore, the toy giant should utilize this medium to expand their reach globally. Differentiation and segmentation of the market is an age-old approach, however, remains very much in use even today for the commercial success. Lego must keep on identifying the changes in the psychology of kids and redistribute the market arena to target accordingly and specifically. Global competition is a never-ending practice, which paves path for inventing new concepts to stay alive in the international market, thereby expanding their market territory.
Owning to strengthening inclination of such digital gaming toys, traditional toy industry lost their market shares. Further, it faced stiff competition from international brands like Mattel and Hasbro. To reenter the market arena, the company changed its CEO Plougmann and then Knudstorp. Approaches taken up by Plougmann failed miserably as the CEO adopted harsh measures from disrupting traditional toys, to retrenchment of employees. However, Knudstorp adapted slow down methodology to retrieve the company's growth. This man focused on developing quality toys keeping the safety standards of CSR in mind and minimize the complexities associated with the organization. Further workers were taken into consideration, and flexibility to work was provided. Many CSR activities were taken up to connect back to the world. Though Mattel and Lego are in different nations, yet their concerns about the environment are similar. To cope with the global competition and carve their own niche, Lego needs to prioritize upon green and educational toys for their patrons.