Evaluating Lego’s Strategic Partnership with Tencent in China

This report evaluates Lego's decision to partner with Tencent in China, assessing the strategic rationale behind the move. The analysis explores the challenges Lego faced, including declining revenue and increased competition, and how the partnership with Tencent, a major player in the Chinese market, aimed to address these issues. The report examines the potential outcomes of the partnership, including the creation of online games and the expansion of Lego's reach in China, while also considering challenges like security concerns and competition from other toy and gaming companies. The report concludes with recommendations for a long-term partnership strategy, emphasizing security, unique value propositions, and addressing competition to ensure Lego's continued success in the Chinese market.

Running head: EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN
CHINA
EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
Name of the Student
Name of the University
Author Note

1EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
Executive Summary
The purpose of this paper is to assess the decision of Lego in partnering with the
multinational organization, Tencent of China. The paper evaluated and analysed the rationale
behind arriving at the partnership decision. The paper assessed the rationale behind entering
into the Chinese market with partnership and deduced that it was a significant and strategic
move by the company as Tencent could have been the indirect major competitor for Lego,
Tencent offers the secure and well established online platform and a wide reach to Lego,
which is a positive contribution in the declining profit of the Lego Group. However, the
potential challenges due to the partnership can be the security and safety concern of the
content games, the increasing global competition and the unique positioning by Tencent in
China. The proposed recommendations for a long-term relationship amongst the partners can
be, the focus on security, user needs, attributes and community involvement.

2EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
Table of Contents
Introduction................................................................................................................................3
Discussion..................................................................................................................................3
Challenges faced by Lego:.....................................................................................................4
Rationale behind strategizing partnership:.............................................................................5
Outcome of the decision:.......................................................................................................6
Recommendations......................................................................................................................7
Conclusion..................................................................................................................................8

3EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
List of Figure
Fig.1: Lego’s financial status from 2002 to 2017 (reflecting revenue and profit drop from
2016 to 2017...............................................................................................................................6
Fig. 2: Annual profit of Lego with its competitors:...................................................................8

4EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
Introduction
The arrangement of parties, which can be two businesses or people or governmental
bodies, agrees for facilitating cooperation to satisfy the mutual interest is known as a
partnership (Rothaermel 2017). In this report, the discussion of the partnership between Lego
and Tencent China will be presented. The Lego Group is a Denmark based company,
specializing in manufacturing plastic constructive toys or blocks for the product line, Lego.
The purpose of the paper is to assess the partnership decision of Lego with the Chinese
multinational company Tencent. Tencent Holdings Limited is an Internet-based organization
specializing in technology, entertainment and Artificial Intelligence. The partnership is
expected to combine the expertise and reach of both the well-established companies is
creating a unique and long-lasting value proposition. The partnership was announced and
marked in the year 2017. The strategic partnership was based on the aim and faith in creating
and addressing demand in the gaming market. The paper will identify the rationale behind the
partnership and evaluate the outcome. In this report, the assessment will lead to the
recommendation for partnership strategies or practices for the two companies. The paper will
be concluded by the summarizing the decision, present environment for the two partners with
the proposed recommendations.
Discussion
In the year 2017, the two giants, The Lego Group and Tencent partnered for creating
online games for the games market in China. The partnership is aimed at utilizing the
understanding about games of The Lego Group and the expertise of Internet interface and
portals of Tencent. The purpose of executing strategic partnership is to construct branded
online and video games with a unique social network specifically focussed on children.

5EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
The main motive behind the decision of the partnership was to respond to the
declining profit and potentiality of the Lego Group. Although, the company, The Lego Group
manufactures physical construction toys and blocks, but diversifying the offerings for
reaching a wider consumer base and improve the state of revenue growth (CNBC.com 2019).
Tencent was considered to be one of the most suitable options for Lego, as it is a
multinational company, a strong and established player in Asia with the offerings of online
video streaming and mobile gaming.
Challenges faced by Lego:
Before the decisions of a partnership, Lego was facing a downturn in its business
growth. Although, Lego maintained its position as a strongest and most valuable toy brand
but have experienced a declining brand value and revenue in the first quarter of the year 2017
(CNBC.com 2019). In the year 2017, Lego witnessed a declining profit by 3 percent, revenue
drop of 6 percent and a slip of brand value. Moreover, the company also struggled with
maintaining jobs, which led to the layoff of 1,400 jobs (CNBC.com 2019). The decision of
layoff was marked by the 5 percent drop in the mid-year revenue. In the year 2017, as shown
in Fig. 1, the Lego Group experienced a 5 percent decline in the revenue growth from 2016 to
2017. The net profit during 2017 reflected a decline in the net profit from 3.5 billion Danish
crowns (Theatlas.com 2019).

6EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
Fig.1: Lego’s financial status from 2002 to 2017 (reflecting revenue and profit drop from
2016 to 2017
(Source: Theatlas.com 2019)
Rationale behind the strategizing partnership:
The unexpected outcome of growing revenue in the regions like China and declining
revenue in the U.S. market contributed to ‘for’ of the partnership decision. The challenges
faced by the Lego Group majorly contributed to the decision of partnering with the toy
manufacturing giant of Asia. Asia is a huge market with the growing potentiality for the
gaming market (Berman 2016). The large population size and increasing demand for
innovative and online compatible games are increasing in Asian countries like China.
Entering into the market of the world highest population seemed attractive but needed major
support and push for addressing the arising demand (Berlie 2020). The decision of partnering
with one of the established company, focussed at creating services and products that are
based upon Internet or online medium was a well-thought off the idea for creating unique
value proposition (Törmer 2019). Along with the motive of responding to the declining

7EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
revenue, the high demand of the Chinese market has stimulated the final decision of the
partnership (CNBC.com 2019). In accordance with the reports of a news company, Reuters,
except in the regions of China, where Lego was witnessing a hungry market for construction
toy with the sales growth between 25 to 30 percent during 2016, the company was facing
challenges globally, in maintaining its revenue rate (Reuters.com 2019).
Outcome of the decision:
The motive of creating a ‘wide-ranging digital partnership’ for manufacturing online
gaming products for the children groups in China was facilitated by the implementation of the
partnership. The partnership was marked by the assurance of a wide-ranging secure approach
with the gaming platforms of China. With the support of Tencent, the toy manufacturing
company, Lego Group restricted the streaming of the online games on YouTube and other
social media platform by framing the games under the video services of Tencent (Steenkamp
2017). One of the biggest potential challenges expected by the Lego Group was the security
of the company’s content due to extending the content in the online platform. However, Lego
secured its digital content with the contribution of the partnership decision. In spite of the
strategic partnership, the toy manufacturing company, the Lego Group can experience
challenges in maintaining the safety and security of the potential imitation practices as well as
the challenge of ensuring security and unique positioning of the gaming content from other
services due to focus at children (KANARCHUK 2019). Another challenge for Lego can be
the increasing rate of competition, arriving for addressing the huge potential market. Alibaba
is an online e-commerce platform, selling everything and anything will be used by
competitors like Mattel, Barbie manufacturer. Although from Fig. 2, the market position of
Lego is reflected better than the competitors like Mattel and Hasbro with the support of
platforms like Alibaba and market size like Asia, they can present a tough competition.

8EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
Fig. 2: Annual profit of Lego with its competitors:
(Source: Theatlas.com 2019)
Recommendations
 Safety and security- The partnership must not just be aimed at selling volumes but
should invest in the assurance of security. Increasing online firewalls by Tencent can
protect the offered products from being copied and will contribute to the long-term
relationship with Lego. The firewalls will offer network and platform security by
controlling and monitoring the practices of illegal downloads and imitation based on
established security norms (David and David 2019). Moreover, the partnership needs
to ensure the safety of the content with respect to hacking and uploading unrelated
data, as the online games and content majorly target children of China.
 Unique value proposition- Even though partnering with a well-established company
like Tencent assists the Lego Group with the wide customer base or reach and with
the affordability of resource availability but the partnership should demonstrate a
unique value proposition through strategic positioning strategy, which will

9EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
differentiate the offering of the partnership with the existent services and products of
Tencent. The positioning strategy of the partnership venture should be a combination
of ‘positioning for target groups’ and ‘positioning based on product benefits’ for
satisfying the increasing demand.
 Competition- Although, partnership with one of the largest online games and the
streaming company can address the major competition but strategies, like
understanding the niche market (the exact target groups) and getting involved with the
local community, can respond to the competition.
Conclusion
Therefore, it can be concluded by the report that the partnership decision of Lego was
a rational decision and the long-term relationship will surely contribute to the Lego’s growth
in the international market. The main motives behind the partnerships were identified as the
declining revenue in the global markets when only the Chinese market reflected increasing
demand for construction toys. The partnership may face and is already facing challenges
regarding competitions from Barbie, security concerns and unique value proposition. The
proposed recommendations for the partnership can be the focus on building safety and
security from imitators and for the target group, children. The partnership should be focussed
on building a unique proposition by positioning based on benefits and user group.

10EVALUATING LEGO’S DECISION TO PARTNER WITH TENCENT IN CHINA
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