Analysis of Lego Group: Adopting a Strategic Approach - Case Study Example

ANALYSIS OF LEGO GROUP: ADOPTING A STRATEGIC APPROACH By Student’s Name Code + Course Name Professor’s Name University Cite, State Date Executive Summary Lego, Danish based company established in the year of 1932, is well-known for its top-notch production of famous toy- brands across the global toy market. The company’s early products constituted wooden pull toys, cars and toy-trucks but were later transformed into plastic based toys in the course of 1940’s including trucks that could both be taken apart and assembled. In the late 1940’s, the company adopted a distinctive building system of toys that was focused on interlocking bricks. This notion however, took a substantial time to be developed further and it was established and introduced by the son of the founder; Godtfred Kirk. The notion behind engaging and integrating end-users of the toys in product design and innovation helped develop the aspect of architectural innovation. This distinctive form of architectural innovation provided a product development platform that assisted with the designing and production of other mature products. As the production years progressed, the company formulated newer ways of conducting effective and efficient production processes. For instance, the company adopted a non-poisonous plastic technology in the generation of its toys. With this development, the company managed to avail over 50 components within the company’s toy system. By 1968, the company had opened a theme park that was used to portray miniature town models with other Lego based distinctive features. The company’s growth continued to be manifested going into the 20th century and this can be depicted with the numerous awards and rankings it managed to secure. For instance, the company had for one time garnered 4 out 10 distinguishable toy based awards. In respect to the market niche, the company is positioned at number 3 in terms of sales turnover and market share. However, going into the 1990’s, the company started to experience intensive financial challenges that ranged from alterations of the management leadership style; decentralized style, huge debt structures and stiff competition from such other toy manufacturing companies as Toys R Us and Wal-Mart Companies. These issues raised a concern over the manner for which the company could withstand and sustain the once enjoyed profitability. Due to these challenges, the company experienced deep losses as well as movement of senior personnel that left authority vacuum within the company’s operations. Strategic Analysis External Analysis: Market Based View Under market based view approach, it is established that a firm should be faced with external issues that will likely prevent its growth within the market for which it operates. Thus, it will likely experience issues related to such factors as the probability of monopolistic form of market conditions, where there are extensive barriers into entering a given market niche and its immediate bargaining power capacity (Barney,1986). Under this notion, The Lego Group faces stiff competition from other international brands operating within the toy sector. Such companies as the Toys R Us and Wal-mart have for a long period dictated a larger portion of market shares and within the United States of America; these competitors are almost showcasing the monopolistic type of operations. It is stipulated that most of the company’s income and sales revenue come from the Asian market where it enjoys a substantial market share (Barney, 1986). Significantly, there are now more new firms being introduced into the toy market as the market share is completely diminished. Some of the other larger competitors have embarked on mergers and acquisitions in order to build extensive market brands that are fairly compatible and top-notch in regards to the underlying technologies (Barney, 2002). It should also be understood that these companies offer online sales, for which Lego Group, has not been to exercise until recently (Tidd and Bessant, 2009). Despite enjoying a greater level of profits, the company is not placed at a fair position to engage in extensive sales and distribution especially in markets with huge potential as the North American market. It should be noted that most of the company’s revenue is enjoyed from both the Asian and the South American market, which have become stagnant given that they have matured (Tidd and Bessant, 2009). Notwithstanding, it has been established that the company is facing huge debt leverages that has the effect of lowering its immediate bargaining power; one of the MBV facet. The huge debt ratio is likely going to affect the firm’s future operations especially because it’s a privately owned firm and depends fully on its internal revenues for conducting future operations (Cooke, 2009). Internal Analysis and RBV (Resource Based View) It is ascertained that resource based view evaluates a firm inwardly in order to establish the resources that are easily available to the company for conducting further projects (Barney, 2002). It should be understood that a company’s resource varies from tangible to intangible assets that are closely knit within a firm’s capital structure. For the case of the Lego Group, the company’s introduction of a user panel that catapulted its architectural innovation can be seen as a positive resource for the firm’s future operations (Makhija, 2003). This program allowed end-users to contribute their ideas in regards to future designs of toys that were later used by the company to generate top-notch products that were easily identifiable by the customers. Another facet rests with the company’s intensive level of knowledge base that it used against its competitors in generating toys from non-poisonous plastic substances (Cooke, 2009). These resources are a distinctive feature within the competitive toy market since it is able to bring about immense economic benefits to Lego Group as opposed to its immediate competitors like Wal-mart (Cooke, 2009). Organizational Analysis and OBV (Organization Based View) Up until recently, the company managed a centralized form of management that was entirely focused on authorities from the family owners who dictated the manner for which operations were going to be conducted. This downplayed the major creativity amongst the extensive supportive management team within the firm (Cooke, 2009). This unique way of leadership seemed to have worked with the company given that it enjoyed extensive profitability levels for a substantial number of years. The leadership took a turn in the early 1990’s when the family manager agreed to decentralize the authority of the company to external Chief Operating Officers, who did more financial damage than good (Cooke, 2009). This change of organizational structure and culture for that case also transpired to massive exodus of top-senior officials of the company since they did not conform to the objectives of a decentralized leadership system (Makhija, 2003). The vacuum left as a result of the exodus led to intensive loses that was manifested in the resultant reduction of profits for many numbers of years before the company could now acclimatize to the new strategic approach that encouraged creativity (Makhija, 2003). International Analysis Being Danish based company; Lego Group enjoyed a substantial number of customers in Europe and also within the Asian and South American markets. However, the company lacked enough resources to break into the United States of America market where a huge potential rest untapped (Makhija, 2003). Most of the company’s international competitors like Wal-mart and Toys R Us already commands a substantial market within the US market. The need for breaking into the global market comes with the fact that the current Asian markets, where the company records about 10% of its sales revenue, has matured and thus, stalled leaving little or no room for probable expansion (Makhija, 2003). Japanese based toys firms have also penetrated the Asian market making it a challenge for the company to continue enjoying massive profits like it did in the course of the 19th century (Makhija, 2003). Identification of Key Strategic Issues i) Intensive Levels of Competition In a period lasting 50 plus years under which Lego has continued to sale plastic-based bricks meant that there was a possibility of being countered by immediate stiff competition. This was especially manifested whenever other small, medium and large companies entered the toy market in order to capitalize on Lego’s successes (Tidd and Bessant, 2009). Most of these companies entered the toy market and went ahead to generate plastic bricks that were vehemently compatible with Lego brick-based design. This indicated that the competitors could fix bricks together and thus, their products could easily be built from Lego-manufactured brick (Tidd and Bessant, 2009)s. For instance, in 1984, Tyco generated super blocks with a plastic designed interface that was completely identical to the ones produced by Lego Group. Subsequently, the company also went ahead to suppress Lego’s bricks by adopting an advertisement that directly attacked Lego’s products. Upon the expiry of the plastic bricks designed by Lego, it transpired to even more levels of competition as more firms joined the toy market (Tidd and Bessant, 2009). For instance, a Canadian based company that previously made huge plastic bricks that were not compatible with Lego’s shifted their productions into generation of smaller bricks that could fit easily with Lego’s bricks. Mega brand, out of this opportunity, enjoyed substantial levels of profits for more than 17 years where it recorded substantial levels of growth. This company posed competition challenge to Lego for a substantial number of years. In fact, the company enjoys 25% more market share within the North American toy market; an area where Lego has faced intensive entry barriers (Tidd and Bessant, 2009). ii) Transportation Challenges The recent relocation of Lego to Prague has not happened without having to transform its transportation network. Since the adoption of a single distribution hub would mean a great deal of issues in the course of delivery patterns hence forced the firm to affect some core alterations in its immediate carrier platform prior to the impending relocation (Tidd and Bessant, 2009). Up until that point, the company had utilized about 55 transportation providers for both local and international based shipments to its about 10 warehouses within Europe (Tidd and Bessant, 2009). These transportation providers were later shaken up to about 10 international based carriers that were meant to serve both the European and Asian markets as a whole. As far as this shake up was meant to extend services to each and every market, the company faced the challenge of ensuring that most if not all of its direct consumers could access the products without increasing their operations costs (Tidd and Bessant, 2009). Significantly, in relation to this fundamental challenge, Lego Group also faced challenges related to the alteration of its shipment scheduling in order to improve on its cargo consolidation processes. Probable Solution: The Lego Group entered into an agreement with DHL whereby they were able to generate a web-based transportation management system that was utilized in tendering loads onto potential providers, optimizing the underlying levels of loads and also, channeling the routes. This was made for purposes of ensuring that the company would at all times ensure that there was timely delivery of its commodities to the potential and existing consumers (Tidd and Bessant, 2009). It should be understood that both Lego and DHL took to formulating a distinctive solution in order to accomplish all of the objectives set in regards to the already existing packaged solutions. iii) The Out-Of-Date Supply Chain The outdated supply chain of the company posed an immediate challenge to its probability of gaining much needed improvements. In consequence, the company’s supply chain was about 10 years out of date and was intensively manifested with the poor customer relations and inadequate availability of its already popular products to the demanding markets. This poor handling of supply chain had initiated an eroding aspect to the company’s immediate fundamental markets in both in Europe and also, within the larger Asian market. Improvements on supply chain was given the first priority since managers believed that by doing so, it would create enough time to deal with other impeding challenges within the company. Also, most of the attention was directed towards this issue given that it could led to consequent alterations and improvements on additional activities of the firm as a whole (Tidd and Bessant, 2009). Given that the company had been established and operated in an era where supply chain management adopted the most of the simplistic traditional approaches, caused the firm to ignore such significant paradigm shifts that were already in practice by such other toy building companies like Wal-mart and Carrefour. It is worth mentioning that the Lego’s supply chain management, over a substantial period, deployed customized delivery services to the relatively smaller retailers that dominated the toy market in the 1950’s (Tidd and Bessant, 2009). Significantly, this customized supply chain management had taken its stride for over 6 decades until it was now outdated and ineffective. This could be manifested with the decrease in the profitability levels an aspect the company had continued to enjoy in previous decades. The supply chain management had failed altogether and with it also failed the profitability channels. It should be understood that Lego focused much on brand-building more than the need to improve on its supply chain management. This is despite the fact that such other companies as Wal-mart had already adopted sophisticated platforms for conducting business transactions that optimized most of the cost drivers in order to avail just-in time products to the already demanding customers. Going by the fact that the company had intended to rebuild its core profitability levels, it had to refashion most of its supply chain management structures. This meant keeping-off any form of inadequacies through aligning the significant section of its innovation strategies with the capacity of the underlying market and also, re-gearing in order to complete within the new technological market. It should be understood that achieving this objective was not an ordinary matter given that with the introduction of CEO Jorgen in mid-2000’s, the company had grown to approximately 7500 employees that worked in both factories and three distinctive packaging centers distributed across different foreign countries. This employee had a turnover of approximately 10,000 set permutations of its product packages (Grant, 1998). Notwithstanding, the company’s leadership had recognized that even though the transformation to a top-notch supply chain management would be an issue; it was deemed necessary given that it facilitates circulation of a company’s other systemic functionalities (Grant, 1998). Probable Solution to the Issue related to Ineffective Supply Chain Management; It should be understood that the immediate symptoms of a misrepresented supply chain management can be indeed deceptive. For instance, for Lego Group it had taken the management more than 7 decades before it could realize that their supply chain management was out-dated and malfunctioned for that matter. It should be mentioned that the issue was hard to establish since it grew within the company’s internal level of strength, which rested with the Lego exceptional innovation capabilities as well as its commitment to maintaining a distinctive quality brand for the numerous line of its products. Significantly, the company had for a long period relied on the two aforementioned strengths in order to come out of any possible financial crisis at hand. Thus, it was thought these strengths could also revive the company’s misaligned supply chain management. Despite the over-zealous to diversify the company production line, it continued to complicate the issue at hand. With the incorporation of Knudstorp as the new CEO of the company, it was made clear that the company needed out of the impending challenges (Grant, 1998). Despite the fact that the company had already diversified a lot and also, that there was unnecessary costs incurred while conducting unprofitable activities like production of electronic based products that was already marred with intense levels of competition within the market (Grant, 1998). However, all of the aforementioned aspects did not bore fruit and so, the company engaged in improving on its supply chain management. The process involved evaluating each and every facet of company development, sourcing, production and distribution processes. In respect to product development, the company perceived the need to improve on the already available plastic bricks that baby boomers had grown up with instead of focusing on developing new items that did not bring in substantial profits (Richard Ivey School of Business, 2009). In fact, product development involved diversifying the designs of the original products into multiple colored brands. At this stage, the stock-keeping units (SKU’s) of the company ensured little or no backlog was evident in the later stages of production (Richard Ivey School of Business, 2009). In respect to sourcing, improvement on supply chain management involved cutting down on the immediate number of suppliers that provided materials at irregular intervals hence causing a malfunction of the company’s procurement staff (Grant, 1998). In regards to manufacturing, improvements of the supply would involve eliminating haphazard mode of placing orders that distorted the capability of reliable demand functionality within its supply chain management (Oliver, Samakh and Heckmann, 2007). Future Strategic Options It should be understood that the universal toy sales revenue was placed at a value of more than $83 billion by 2010. One of the distinctive and fastest growing areas of operations rested with the production of sets that recorded nearly 13% within the same year. The future for generating toys is both construed by intense opportunities and setbacks as well. This involves increased control on licensing contracts, substantial loss of trademark protection policies as well as stiff competition from both existing and potential emerging firms. Following this line of reasoning, Lego’s management should devise effective ways of identifying potential markets where their respective lines of products can be diversified for that matter. This is in a bid to secure market dominance and thus, catapult its current financial position. Strategy Evaluation and Selection The company should adopt a complete strategy that is focused on maintaining a positive supply chain management. This is mainly because with improved supply chain structures, aspects related to competition, transportation and distribution challenges will be taken care of holistically (Oliver, Samakh and Heckmann, 2007). The adoption of a real-time supply chain management system will go in hand to develop trust and reliability of Lego’s product lines across the global markets. This can be conducted using such processes as sub-contracting. For instance, the recent contracting of DHL by the company to provide immediate transportation solution has helped to combat transportation and distribution challenges as plastic bricks can now reach consumers on time (Richard Ivey School of Business, 2009). Justification of Recommendations and Action Plan It should be noted that the supply chain of any given firm determines its profitability levels since it also determines the quantities of products that will be availed to the market. For instance, in the case of Lego, most of the products are sold in the second half of the year. Thus, an efficient supply chain management will ensure little or no backlogs are present to hinder effective and reliable distribution of products. References List Barney, J.B. 1986. Strategic factor markets: Expectations, luck and business strategy, Management Science, 32:1231-124. Barney JB. 2002. Gaining and sustaining competitive advantage. 2nd Ed. Prentice-Hall: Englewood Cliffs, NJ. Cooke, J. 2009. Lego’s game-changing move. Supply Chain Quarterly, 3.Retrieved on April 26, 2014 from http://www.supplychainquarterly.com/topics/Logistics/scq200903lego/ Grant, R, M.1998. Contemporary strategy analysis. Blackwell: Malden, MA. Makhija, M. 2003. Comparing the resource-based and market based views of the firm: Empirical evidence from Czech privatization, Strategic Management Journal, 24:433-451. Richard Ivey School of Business. 2009. The Lego Group: Building strategy. The University of Western Ontario. Retrieved on April 26, 2014 from http://www.zie.pg.gda.pl/aktualnosci?p_p_id=20&p_p_lifecycle=1&p_p_state=exclusive&p_p_mode=view&_20_struts_action=%2Fdocument_library%2Fget_file&_20_folderId=493801&_20_name=DLFE-7545.pdf Tidd, J and Bessant, J.2009. Managing innovation: Lego case study. Wiley Europe, Retrieved on April 26, 2014 from http://www.managing-innovation.com/case_studies/Lego.pdf Oliver, K, Samakh, E and Heckmann, P. 2007.Rebuilding Lego: Brick by brick, Strategy+ Business, Retrieved on April 26, 2014 from http://www.strategyand.pwc.com/media/uploads/RebuildingLego.pdf Read More