Lego's Dominance in the Market: A Study on Innovation, Competition and Strategy

Lego's exclusivity and innovativeness have enabled it to secure a strong hold in the market, but the question remains whether these attributes are enough to maintain its dominance amidst intense competition from large competitors like Mattel and Hasbro. The company has expanded globally through product innovation, licensing, and brand awareness. However, to capture markets in Western Europe and North America, Lego needs to adopt innovative approaches driven by technology. The company's strong brand identity and ability to sell products at a premium price despite imitation by competitors have contributed to its success. Despite this, Lego faces the threat of competition and must adopt competitive strategies like support services, better product features, and higher quality to maintain its operating margin.

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Contents
Introduction.................................................................................................................................................3
Identifying and Evaluating External Environment Features Influencing Lego Group...................................4
Economic Factors.....................................................................................................................................4
Social Factors...........................................................................................................................................5
Technological Factors..............................................................................................................................5
Environmental Factors.............................................................................................................................5
Legal Factors............................................................................................................................................6
Technological Environment.....................................................................................................................6
Out of Date Supply Chain........................................................................................................................7
Rivalry and Competition..........................................................................................................................8
Conclusion.................................................................................................................................................10
References.................................................................................................................................................11
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Introduction
The toy and games industry is very competitive in nature and there is an ever increasing threat of
new entrants. Apart from that, a number of factors greatly affect the manner in which Lego has
performed over the years. While it was a profitable company in the start, it gradually got hold of
the toys and games markets. However, the economic crisis across the globe caused it to suffer
from major losses. However, the crisis was not the only reason for the set back. Technologically
too, the products were very basic and could not retain the interest of the target market. Realizing
the threat of new entrants and the ever evolving technology, Lego must bring about important
changes in its business model. The following essay, attempts to analyze the main threats and
issues faced by the company.
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Identifying and Evaluating External Environment Features
Influencing Lego Group
PESTEL Analysis: To be able to understand the organization better, the factors which will
impact it externally are mentioned below:
Political Factors: Having a global presence, political situations in different countries affect the
company. They already have a presence in Denmark and are building a factory in China that
shall be ready for production by 2017 (Ritzau, 2013). Sincethe company’s products are
distributed to more than 130 nations worldwide, the local political decisions of these places can
affect the company greatly. In nations like the US there are regulations for promoting safer toys
while in other nations there are regulations against gender bias. These regulations affect the way
Lego promotes its products in these nations.
Economic Factors
While the debt crisis and the Eurozone crisis had a major effect of the sales of Lego, it showed
profit of DKK 9.2 billion against the profit of DKK 7.0 billion in 2014. This was much higher
than expected for the company. Their revenue growth was including the foreign exchange impact
was 19.3% year over year. This clearly demonstrates how the economic conditions can greatly
alter the company’s business. While the business was struggling during the economic crisis, it
started improving gradually as the economy got better. The industry has also suffered due to the
emergence of mobile gaming applications. More and more children are drawn towards these
electronic games and do not take interest in physical toys. However, Lego was able to turn
around this situation by getting on board new and exciting ventures and thus reporting profits.
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Social Factors
LEGO Group has collaborated with UNICEF to eliminate child labor and child abuse. Their
stance on these matters is clear and they are doing their bit to improve the condition. They have
pledged to be responsible in their business conduct since toys are what connect with children
globally. Being world leaders in this field, it is upon them to be socially responsible and support
child welfare issues. They have pledged UNICEF $8.2 million in order to help in child welfare
projects.
Technological Factors
Apart from the famous Lego block, the group has evolved itself further in order to keep up with
the changing technology. The group has collaborated with Texas Instruments to construct robots
that run on superior technology. Keeping up with the changing trends, the Company tied up with
Twentieth Century Fox Consumer Products in 2014 to produce construction set and minifigures
based on The Simpsons. Lego has been innovating continuously and have come up with new and
exciting as well as better toys that have gripped the industry worldwide.
Environmental Factors
Lego Group has taken 2 main actions in order to be environmental friendly; firstly they have
made efforts to reduce carbon emissions and secondly they use more responsible sourcing of
materials. They have made sure that the energy that is being used for manufacturing is 100%
renewable. Furthermore, the Company aims to achieve 2.5% efficiency is energy consumption.
All the printing and packaging material which is used is FSC-certified. Furthermore, it has also
signed an agreement with WWF to conduct all its operations in a manner that it is the interest of
the environment. Therefore, Lego group is an extremely environmentally responsible company.
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Legal Factors
One of the major issues that has plagued the company over the years is the presence of
counterfeit and copycat products in the market which are sold at subsidized rates. In fact, the
Company has even filed suits against a few companies. In another instance, an entire shipment of
counterfeit products was seized by Finnish authorities. Thus the company has to be careful and
ensure their designs aren’t imitated elsewhere.
When we look at the above PESTEL analysis, it becomes clear that all the mentioned factors can
greatly affect the organization and its capability to expand. Expanding on the above given
factors, a few factors have posed major challenges to the company and have impeded their
growth from time to time. Expanding on the same, an analysis has been detailed below.
Technological Environment
While evident that social problems in the toy markets cause adverse effects on the
competitiveness of Lego, technological advancement too has had a major effect on the brand and
its growth. The company in order to increase its competitive advantage in the market, has
adopted a number of technological measures. This can be ascribed to the fact that technology in
the game and toy industry is wide ranging and complex. Lego, while has strived to stay relevant
with the times, does not possess efficient technology and therefore relies on low-technology
products. Due to this, the features of all their products has remained basic in nature. Therefore,
the company not only needs to improve its products but also plan technologically driven
strategies so as to be able to differentiate their products from those of their competitors. By
adopting such technology, it can prove to be instrumental in not just streamlining production but
also increasing competition while lowering the cost.
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As mentioned in the PESTEL analysis above, in the toy and games industry, the biggest threat
that is being faced by companies, including Lego is the growing trend of modern entertainment
options for kids. The time a child spent playing is not being substituted by gadgets such as
computers, gaming consoles and tablets etc. Children are increasingly spending their time with
the digital devices. However, it is notable that the Company is coping with the change by
introducing Lego games which has a diversified portfolio for children to enjoy.
While there is major growth in technological devices, the fact remains that the parents are not too
willing to make the shift and have an affinity for the traditional Lego bricks over the gadgets.
This works in the favor of the company as it reinforces the importance of block-building for
young children in developing their motor skills. Lego has not just created a finished product but
an entire play system which keeps the children occupied for a long time.
Out of Date Supply Chain
The supply chain of Lego was out of date, with poor customer service and unavailability of
products. These caused the company’s franchise to be eaten away in all its key markets. Leaders
of the company needed to pay immediate attention to the supply chain as it would help to put in
motion a number of improvements which would in turn bring about the necessary changes in the
rest of the company.
Lego was founded in 1932 by Ole Kirk Christiansen; a time when supply chain management
simply meant moving boxes from one place to the other. The company had ignored the sea of
changes that retail giants like Wal-Mart bought about and thus they gained dominance. The
supply chain of the company was designed to provide custom delivery to smaller retailers which
were predominant in toy markets in 1953, when the Lego bricks gained a foothold. For 6
decades, this style of business proved to be effective, however this system started to fail
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eventually. In 90’s, when competitors were gearing for big-box stores, Lego focused itself on
brand building; despite the fact that its bricks had already been recognized all across the globe.
By the end of the decade, Lego had lost its ground to those companies that had more
sophistication in their operations. These were the companies that analyzed and optimized each
cost driver so as to provide in-time service to huge places. In order to build its profitability, there
was an urgent need to refashion all the aspects of its supply chain. This meant, eradicating
inadequacies and designing its innovation capacity in a manner that it aligns with the market
demand as well as competes with the new competitors. This wasn’t going to be easy for the
company, given that the employee count had increased substantially by 2004- a whopping 7,300
employees. The company leaders recognized the problem and set about bringing innovation to
their supply chain, thus ensuring that the company was able to overcome hurdles and move
forward; in tune with the changing technology and trends.
Rivalry and Competition
In the toys and games industry, famous companies such as Mattel and Hasbro have ben
traditional competitors of Lego. Lego is able to differentiate itself from the competitors in terms
of best quality production, exclusivity and innovativeness. However, the question remains, are
these attributes enough to secure a strong hold over the market? The rivalry is not only with
competitors who are sizeable in number as well as financial capabilities, but also with other
small competitors who are aiming to make it big in the industry. One of the biggest competitors
of Lego is Mattel who has joined hands with Mega Brands and the other one is Hasbro. These
companies are huge and thus the rivalry should decrease intensity. However, many other factors
make it a stiff competition, thus increasing intensity. This makes it easy for newer competitors to
penetrate the market thanks to high-level rivalry. According to Euromonitor (2012; Tansel 2015,)
when it comes to traditional games and toys manufacturing, Lego stands as the third biggest. In
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this market, a handful of firms have the largest shares; that includes Hasbro, Mattel and Lego.
Lego’s dominance in the brick toys has led to its global expansion. Furthermore, due to its strong
product innovation, there has been a strong growth. Introduction of new product line, the Lego
China and Lego Friends played a major role in its expansion (Tansel 2015). Higher sales were
achieved by utilizing their licensing in creating brand awareness relationship with Star Wars and
Batman. Their further expansion was evident by the introduction of Lego Batman video games,
Lego Star Wars line and Lego movies.
When looking at statistics, it is obvious that the Asia Pacific market is still expanding and was
not overtly hit by the crisis as much as Latin America and Eastern Europe was. However, they all
grew further after the crisis. A new approach is required to capture the markets in Western
Europe and North America. The approach should be driven by innovation, as explained in the
technological factors discussion. Lego and its competitors are competing in markets that are both
heterogeneous as well as homogenous. Brands hold no importance in homogenous markets,
however in they are crucial in heterogeneous markets and Lego has made use of differentiated
products along with the brand to gain a competitive edge and dominate the market.
Lego competitors though have managed to imitate and make similar products, but sell them at
lower price. However, since Lego has a strong brand identity, it is hailed as superior. While
consumers with lower income prefer the cheaper products, the competitors lose on the robustness
of the product in the longer run. This enables Lego to sell its products at a premium price. The
profit of DKK 9.2 billion as reflected by the annual report of Lego (2015), attracts more
competition into the market. Competitors looking at the profits, try to recreate the same products,
thus creating more competition and penetration threat. This causes a decrease in the operating
margin of Lego and it may decrease further as the competition grows. Therefore, in order to
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ensure that the competition does not lower its margin further, Lego needs to embrace competitive
strategies such as support services, better product features, higher quality, better delivery etc.
Conclusion
By revisiting the above narrative, it is apt to conclude that the two main issues that Lego has
faced and is still facing is the rapid changing technology and the threat of competition. Since the
world of science and technology is advancing at an alarming speed, it has become the need of the
hour for companies and manufacturers to evolve and advance accordingly, or else they may
become redundant. Lego recognized the urgency to evolve and has put efforts in changing
whenever there was a demand to do so. By evolving, it is also giving a tough time to its
competitors as they all may not possess the kind of technology. Hence, both these factors are
intertwined which Lego has to keep in account while it aims to grow further.
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References
Company Profile Lego A/s (Rep.). (2015). Marketline.
EUROMONITOR, 2012. Lego group in toys and games (world). Passport,
http://www.euromonitor.com/lego-group-in-toys-and-games/report
Rebuilding Lego, Brick by Brick. (n.d.). Retrieved December 29, 2016, from
http://www.strategy-business.com/article/07306?gko=99ab7
Ritzau (2013). Lego bygger fabrik i Kina. Retrieved December 29, 2016, from
http://borsen.dk/nyheder/virksomheder/artikel/1/254220/lego_bygger_fabrik_i_kina.html
?hl= TEVHTztMZWdv
TANSEL ,U., 2015. Lego tightens its grip on global construction toys. [online]. Euromonitor
International. Available at: http://blog.euromonitor.com/2015/02/lego-tightens-its-grip-
on-globalconstruction-toys.html [Accessed 29 December. 2016].
The Lego Group Annual Report 2015 (2015 ed., Rep.). (n.d.).
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