LEGO: Porters Five Forces and PEST

LEGO: Porters Five Forces and PEST LEGO is one of the most popular toy brands due to the companys distinctive brand image, high-quality products and creative business climate. However, the present successful performance of the company went through a period of significant transformation. In the beginning of the 21st century the company experienced drastic net loss which was resulted by internal inefficiency and over-ambitious expansion targets. The transformation path of the company has not always been smooth and flawless as LEGO faced some substantial threats over the lengthy period of operation. In the beginning of the 21st century the company experienced significant tremors which were resulted by profitability deficit of 1.4 billion DKK. At present LEGO has introduced a number of innovative strategies to enhance its consumer insight, reinforce its creative dynamics and produce more market-relevant products. The company has been involved in a number of operations which include the work of external professionals and enthusiasts to attract greater creativity influx to the production of new products. Although LEGO has gone through a period of highly positive transformations, the company is still facing a number of environmental threats and operational risk. The introduction of the Mindstorms NXT product line made the company penetrate in a highly competitive market where innovative and experienced brands as SONY failed. On the other hand, the company is working with a number of external parties which implies a continuous risk and pressure on the companys intellectual property. Moreover, the coordination of external professionals is hard to be sustained in the long-term and also hard for the company to fit these professionals within the corporate culture. In this context, the present report is focused on analysing the strategic capabilities which LEGO possesses, exploring the external environment and identifying business opportunities and threats. The purpose of the report is to outline some strategic issues which the company needs to avoid or exploit and thus introduce recommendations to promote LEGOs profit sustainability in the long-term. The Environment The environment in which LEGO operates can be characterised as highly dynamic. The companys products have been played by some 300 million children and adults on annual basis. LEGO manufacturers more than 1 400 000 components every hour to fulfill sales of some 100 million products worldwide every year (The Voice of the Customer, 2001). Deriving from these findings, it can be suggested that LEGO manages a highly diverse and complex environment where efficient resource allocation is of paramount importance for profit sustainability. The internal complexity of the organisation can be recognised as one of the main source for the past net profit loss as the company could not realise its resource potential, many new concepts were never released to market and the focus on continuous expansion incurred substantial costs. This is the reason why, LEGOs EBIT margins were falling in period when the company achieved high sales growth (Figure 1) (Robertson and Crawford, 2008). LEGOs Revenue and EBIT comparison Figure 1 Apart from the complex internal climate, LEGO has been also operating in a challenging external environment which can be identified from the presented PEST analysis (Figure 2). Political Environmental LEGO needs to consider international emerging markets, such as China. However, the company would need to be knowledgeable and flexible with respect to responding to the specific political characteristics of the Chinese market, such as penetrating through state-owned enterprises and government equity within the venture. Moreover, the company needs to produce products which continuously comply with health and safety regulations and, therefore LEGO is constantly exposed to risk and regulatory pressure (The Voice of the Customer, 2001). The company is operating in a business climate where the global environmental sustainability is continuously growing in importance. This is the reason why, producing plastic products as a core product line is of substantial challenge for the companys corporate citizenship and responsiveness to environmental degradation (Tracey et al., 2005). Social Technological The company has been continuously challenged by the need to keep up with new emerging social trends and lifestyles of their consumers. New toy themes have been continuously released on the market, therefore continuous research and product development would be one of the most expensive operations of the organisation (Robinson and Crawford, 2008). LEGO has penetrated a highly competitive market with its Mindstorms NXT product range. The company is facing competitors, such as the popular robotic brand of WowWee. Moreover, this market requires significant product development costs and thus is likely to challenge the companys profitability. For example, brands as SONY, which has significantly more experience than LEGO in electronic products failed to realise its robotic ambitions (Allonrobots, 2009). LEGOs PEST analysis Figure 2 Strategic Capability The strategic capabilities of LEGO are explored and analysed through the use of the resource-based view theory. The resource-based view theory describes the strategic capability of organisations are based on their internal resources. In this respect, in order for a company to have high degree of strategic capability it needs to possess resources which are valuable, rare, in-imitable and non-substitutable (Colbert, 2004). In this respect, the following table adopts the resource-based view theory to evaluate the strategic capability of LEGO (Figure 3). Resource Characteristics LEGOs Strengths LEGOs Weaknesses Valuable One of the most valuable resources of LEGO is knowledge. The company has a well-developed team of engineers and designers and is also employing external professionals to enhance the industry knowledge and creativity of the team. LEGO is producing an extensive amount of new design and prototypes and only few ever reach the market. In this respect, the company may generate some valuable know-how and intellectual property but at the end appears to be wasted and not successfully utilised. Rare The resource which can be identified as rare is the brand image of LEGO. The company have distinctive brand image and product ranges. This is proved by the case study analysis which revealed that LEGOs reduction of product components ignited dissatisfaction among customers. Although LEGO possesses some rare resources and capabilities the company is facing some significant competition from other toy segments. Moreover, LEGOs Mindstorms NXT product line is competing with WowWee which have greater experience and know-how in this particular segment of the market. In-imitable LEGO is continuously producing new concepts and product lines and therefore it is hard for competitors to imitate them. Moreover, the company has been recently paying extensive attention to community responses to their product prototypes which has been enhancing the companys continuously enhanced insight on segment needs. On the other hand, LEGOs products can be easily imitated by competitors with respect to toy themes and components. However, as already recognised the company has distinctive brand image which differentiates the brand from possible copy cats. Non-substitutable LEGO possesses non-substitutable resources such as intellectual property, designing capabilities, know-how and industrial insight. The company is competing with a great number of toy brands which provide consumers with substitutions for LEGOs products. Moreover, the highly innovative Mindstorms NXT brand has product substitutions from competitors such as WowWee. LEGOs Resource-Based View Figure 3 In order for the author to further analyse the strategic capabilities of the company a Porters Five Forces model is implemented. It will reveal how the internal strategic capabilities of the company relate to the market context (Figure 4) (Porter, 1990). Risk of entry by Competitors Power of Suppliers Competitive Rivalry Power of Buyers Threat of Substitutes Porters Five Forces Figure 4 Deriving from Porters Five Forces model it can be concluded that LEGO is facing a number of strategic challenges. For example, the power of buyers is significantly high as the company needs to tailor product lines to specifically fit consumer segments needs and preferences. Although LEGO has greater power of external suppliers, the company still needs to develop solid collaboration with external partners within the supply-chain in order to increase operational efficiency and innovation (Robertson and Crawford, 2008; Afuah, 2003). In the context of new competitors penetrating the market, it can be suggested that the risk is comparatively higher than other industries. The toy industry does have any high barriers to entry as it does not require substantial investment and know-how to operate. This is the reason why, LEGO faces a number of substitution products form popular brands, such as: Playmobil; BRIO; ELC; Meccano Toys; Geomag; Hasbro; and Logiblocs (ToyShop UK, 2009). All these brands provide construction toys which use similar principles of build-to-play entertainment. However, it should be outlined that the company is facing other substitute toy products which are own-branded from popular names as Hamleys, ToysRUs and Disney (Doyoo, 2009). However, with respect to LEGOs new range of Mindstorms NXT product line the situation is different. There are very few competitors which can provide substitutes, such as WowWee (WowWee, 2009). This product line requires greater investment by companies to penetrate and is likely to increase production costs. This is the reason why. LEGO can develop and sustain advantage in the production of robotic products which are building by hardware and software. Moreover, the greatest competitor WowWee does not have such a diversified range of robotic products as LEGO but still WowWee provide robotic toys and technologies with greater functionality (WowWee, 2009). Business Opportunities and Challenges Based on the presented analysis, it can be concluded that LEGO can exploit a number of promising business opportunities. However, it should be also underlined that these opportunities hide substantial threat to the EBIT profitability of the organisation. In this context, one of the greatest business opportunities of LEGO is the companys focus on external professionals and enthusiasts in the product designing and engineering (Robertson and Crawford, 2008; Lego, 2009). On the one hand this results in influx of fresh idea and creativity due to the diverse range of participants but on the other hand it can result in a number of risks, such as: intellectual rights; outflow of knowledge; inability to fit external professionals to the organisational climate, etc. Another significant business opportunity which can be recognised is LEGOs development of the Mindstorms NXT product range through the use of external specialists and by involving consumers in a virtual collaborative platform (Robertson and Crawford, 2009). On the one hand, this is an emerging innovative market which has strong growth potential as it targets both young and adult segments. However, on the other hand, penetrating this market involves high amounts of investment and operational costs which may push profit margins down. Moreover, the greatest competitor of LEGO in the Mindstorms NXT range is WowWee which can be recognised to outperform LEGOs product by functionality, whereas LEGO is more focused on robotic entertainment (WowWee, 2009). This is the reason why, it can be suggested that WowWee is more likely to attract adult consumer segments and thus generate greater margins sales as adult consumers would be more willing to pay higher price for more functional products. Another challenge for LEGO, which can be directly produced by the product diversification of the company, is the negative impact this may have on LEGOs brand identity. As identified, the company has recognisable brand image and any drastic diversification may have negative impact on consumers perceptions (Robertson and Crawford, 2008). Moreover, LEGO is managing a wide range of product lines and there is not any identified synergetic relationship between them. This is not only challenging to LEGOs ability to optimise costs and enhance efficiency but has substantial impact on what actually the LEGO brands stand for. On the other hand, the numerous opportunities for new product development which LEGO can utilise can be proposed to increase supply-chain complexity. For example, the build-it-by-yourself service which LEGO provides to consumers to construct their own Mindstorms NXT robot may result in pressure within supply-chain operations and specifically inventory management. This virtual platform needs to be integrated with a highly sensitive back-end supply-chain system to indicate any changes in inventory levels. And this is a complex process that may predispose to errors and inefficiencies (Harrison and van Hoek, 2008). Finally, LEGO has the opportunity to continuously develop complementary products to increase profitability. The present case study identified the companys inability to successfully integrate complementary merchandise with the sale of its product lines and toy themes (Robertson and Crawford, 2008). This can be proposed to be a significant drawback as other market competitors provides diversified range of merchandise and other complementary accessories to enhance consumers experience and entertainment. Recommendations Based on the analysis of the external environment and strategic capabilities of LEGO, there are four strategic recommendations which can be made with respect to the companys segmentation strategy; supply-chain efficiency; financial profitability; and brand identity. 5.1 Segmentation LEGO needs to target new segments not only through demographic characteristics but also by identification of new consumer needs. For example, the company may focus on the adult segment by developing LEGO lines, such as LEGO Hobby (e.g. selling construction sets with innovative elements to be used for hobby purposes, such as: small models building of airplanes; ships; automobiles, etc). Moreover, the company may target professional segments such as architects to which components for models can be sold. In this respect, the present Lego Club can be diversified to fit the needs of adult consumers. An interesting theme in the Lego Club may be how parents can communicate with their children through Lego games. In other words, Lego can produce games to enhance parents-children communication and sharing of experience. Moreover, this is an opportunity for Lego to penetrate other family games markets and segments, and produce Lego games to compete with Monopoly, Scrabble, Pictionary, Cards, etc. Lego can also enhance customers loyalty through providing discounts existing customers who wish to return old Lego toys and purchase new ones. First, this would be an effective recycling strategy which Lego can adopt. Second, parents would have the incentive to return old toys but still continue purchasing new ones through discounting vouchers. Third, children would have the opportunity to play with all new Lego models throguh this discounting scheme, which will constantly promote their interest in the Lego brand. 5.2 Supply-chain efficiency The company has developed a Mindstorms NXT range which is a highly innovative and promising product line. However, LEGO should consider competitors threats seriously and thus develop supply-chain partnerships with organisations which have extensive experience in building electronic products. 5.3 Financial profitability Lego needs to focus on developing its merchandise range and complementary products to both enhance the entertainment experience and use additional source of profit. 5.4 Brand identity Lego should consider how the companys brand identity is changes with the introduction of new products. The company may focus on enhancing its corporate social responsibility by introducing product ranges with environmentally friendly components. This would not only have positive impact on the brand image of the company but is likely to target new segments (e.g. environmentally conscious consumers). In this respect, the company could focus on Green Marketing by donating some small amount of every purchase to environmental projects. Another interesting strategy for promoting the brand identity of the company may be also focused on socially responsible projects, such as donating a small amount of every purchase to the construction of hospitals, homes, schools and other public and private sector buildings in developing countries. In this context, the company can promote a campaign slogan, such as: Lego A Real World Constructor.