Analyzing Lego's Business Model: Impact of Smart Connected Products

This case study analyzes how Lego, the Danish toy manufacturer, has had to rethink its business model in response to the rise of smart connected products and technological advancements. The study highlights Lego's historical business model, focusing on its value proposition, key partners, and customer segments. It examines the opportunities and threats posed by smart connected products, particularly the decline in traditional toy demand and the increasing importance of online content and film franchises. The analysis uses Osterwalder and Pigneur's business model framework to illustrate Lego's key activities, resources, and revenue streams. The study concludes that Lego needs to adapt its business model by incorporating smart connected accessories into its products to remain competitive and meet evolving consumer preferences. Product differentiation and development are crucial for combating market competition. Desklib offers this case study and many other resources for students.

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BUSINESS MODEL
A case study of Lego Denmark
Name of the Student:
Name of the University:
Author Note:

BUSINESS MODEL 1
Introduction:
According to Chesbrough (2010), business models cannot be considered as a static
business approach but it is actually less durable and it is often found to change with the
changing technology. Considering the increasing impact of artificial intelligence and better
communication network, the business models are found to suffer from a worse situation.
Many companies have to re-think about their business model and re-design it in order to meet
the ever changing market situation and also to comply with the advancing technology.
The aim of this essay is to analyse the situation that lead to the toy manufacturing
company Lego, Denmark to re-think about its business model. It has been noted that in the
past few years the revenue of the company decreased by 5% because of the decreasing
demand of the toys over the globe (Foss & Saebi, 2017). However, in the market of United
States and Europe, the sales have been found to increase a bit. The major reason behind the
declining business can be easily regarded as the increasing impact of the technology and
development of the smart connected products.
Business model and disruption
In the view point of de Jong and van Dijk (2015), business model has been referred as
a plan that is focused on generating revenues and making a profit. The business model
actually defines and explains what particular products and services the particular business
plans in order to manufacture and market its products, how the planning is done for the
business calculating the expenses to be incurred in doing so. Disruption in the business is the
term used to refer to the innovative approach that a business proposes in order to create a new
market and increase the value of the products that it sells. According to Johnson, Christensen
and Kagermann (2008), disruption innovation has been termed as the most effective business
idea that creates the most influential impact on the business in the recent century.

BUSINESS MODEL 2
Business model of Lego:
The toy and play set manufacturer, Lego, aims at providing an innovative and
enjoyable experience through the toys that they manufacture. In the early days, the company
used to create wooden and simple toys for the children. With the evolution in time and
technology, Lego started manufacturing automatic toys as well and the company expanded
becoming one of the largest toy manufacturers in the world (Lego.com, 2018). Considering
the increased demand of the products, the company decided upon change in its business
model and pursued such paths that could easily leverage its brand names. In fact, it has also
been seen that Lego was associated with various television channels, theme parks, motion
pictures as well as video games (Lego.com, 2018). The target market of the toy manufacturer
has always been the children and thus the business model has been aimed to target the
children. Lego’s direct physical consumers are both the retailers and the online sellers
(Aversa & Haefkiger, 2016). The products are sold in chain stores, online stores, supermarket
and departmental stores and also in independent toy shops. US being the largest market for
the toy manufacturer, it has a long lasting relationship with the large retail chains like Wal-
Mart, Toys R US and Target to be specific. Considering the change in the pattern of
preferences and increasing demand of innovative products, this brand has also been found to
include a set of its own third party franchise in order to diversify its product portfolio (Zhang
et al., 2014).
Analysis of the opportunities and threats caused by advances of smart connected products
to the existing business model of Lego
Reading Zhang et al., (2014), it has been found that the advancement of the
information technology has revolutionised the business models of various products. The
mechanical, electrical or other such complex products are being connected with smart
connected products like sensors, data storage, microprocessors that actually benefitted the

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wireless connectivity (Tan et al., 2017). These features have definitely created an exponential
opportunity for new functionality.
Considering the increased impact of technology and innovation in every field, Lego
has been found to re-build its business model because the company has been found to reach
near bankruptcy. The company has been found to try to improve its business by adding new
toys to its list and focusing on the online content and film franchise. However, the approaches
made by the company did not result in effective outcome and that the company faced a high
level of bankruptcy in 2004 by considering the new ventures like the films and the new toy
lines (Aversa & Haefliger, 2016). The drastic changes in the business situation have resulted
in falling of the business first time in 13 years and thus, an approach to simply its business
operation. This situation eventually leaded to cutting of around 1,400 jobs that is almost 8%
of the entire work force of the company globally.

BUSINESS MODEL
Business model framework of Lego by Osterwalder and Pigneur:
Key Partners
 Customers
 Suppliers of raw
materials
 Distributers
 Sellers
 Re-sellers
 Wholesalers
 The resources like
plastics and other
manufacturing
products are acquired
from the partners
 Distributing and selling
the products is the key
activity that the
partners perform
Key Activities
 Re-designing of the
product is the primary
value proposition
required
 Distribution channels
include both inland and
overseas distribution of
products.
 Customer relationship is
maintained by various
communication medium
 Revenue is generated
with the increased sell
of products.
Value Proposition
 Durability and
innovative products is
the primary value that is
given to the consumers
 The customer problem of
innovative products is
solved
 The needs of recreational
activities and fun and
amusement are the
customer’s need that is
fulfilled.
Customer
Relationships
 Relationship with the
consumers by getting
feedback for improving
the business has to be
established
 At present only a one
way communication can
be seen
 With the changing
preferences in products,
it is important to
understand the present
demand of the
consumers.
 Maintaining customer
relationship might be
costly for the
organization
Customer Segments
 The major target group
is the children but the
buyers can be from any
age group
 People from all age and
all segments are
important

BUSINESS MODEL 1
Key Resources
 Financial as well as raw
materials are the
primary resource
required
 Distribution is carried
on by suppliers and
distributors
 Revenue is generated by
increased sale of
products
Channels
 Products are purchased
from retailers and
wholesalers
 The channels are
integrated by supply
chain activities
 Land transportation is
the most effective
 Consumers buy the
products from the
retailers
Cost Structure
 Manufacturing and transportation of the products
 The machineries are most expensive
 Designing the product is most expensive
Revenue Streams
 For the innovative and the design of the product, consumers pay a
good amount of money
 Currently playing for quality and design of the product
 Payment is made by direct purchasing
 Revenue stream contribute for 80% of overall revenue

BUSINESS MODEL
Business models as value proposition:
The changing nature of the products due to the advent of the smart connected products
has definitely disrupted the value chain proposition of the business as well. This made the
existing companies to re-think and design their business models as well as the products
because there has been a creation of completely new industry due to this nature of the product
manufacturing (Dong et al., 2015). This is turn has also resulted in a transformation of the
traditional business partners and the suppliers.
Business models as a set of capabilities and resources:
The challenges related to the increased demand of the consumers with respect to the
change in the demand and preferences can be overcome by the set of capabilities. The
engineers and the graphic designers at Lego have the capability of improving the business
model. In addition to this, the availability of the resources required for the manufacturing of
product is also required for the betterment of the business model (Zott, Amit & Massa, 2011).
By this means the company can be able to meet the demand of the market and fight against
the increasing competition in the market.
Conclusion & recommendations:
A detailed analysis of the impact of smart connected products on the business models
of an organisation has been carried on in this study. It has been found that the Lego, the toy
manufacturer failing at providing smart connected product has resulted in the decline of the
sales of the product. This is a clear indication that the company should be considering a
change in their current business model in order to support the changing preference of the
consumers. With the overall analysis, it can be easily recommended that Lego can easily
include the concept of smart connected accessories in its products. Thus, product

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differentiation and product development is the only means of fighting against the increased
competition in the market.

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