Strategic Management at Lego - Case Study Example

?Running Head: Lego Case Study – Strategic Management Lego Case Study – Strategic Management [Institute’s Lego Case Study – Strategic Management Evaluating Lego’s strategies during 1995-2009 Introduction to Lego The word Lego comes from the Danish words “Leg Godt” which have the meaning of play well. The company claims that its products are being sold in more than 130 countries all over the world. It was in the year 1932, when Ole Kirk Kristiansen founded the company and today, after 80 years, the grandson of Kristiansen family is the head of the company. In the 80-year history of the company, the last fifteen years or so have been one of happenings periods in the history of company. From its peak in the mid 90s to a serious slump in the late 1990s and early 2000s and then from that to a period of recovery and dominance, the period of 1995-2009 has many stories to tell for Lego (Ireland, Hoskisson & Hitt, pp. 85-89, 2008). Problems for the company started somewhere in the 1990s but they did not made the headlines or even got the attention of the top management of the company till 1998 when the company incurred its first loss on its income statement in its entire history. Lego got back on the track of making profits during 2001 and 2002 but that was primarily because of the deals with Harry Potter franchise and when no Harry Potter movie was released during 2003, the company’s sales decreased by 26 percent and 20 percent in the subsequent year (The Lego Group, 2012). Furthermore, the company posted a record loss of over 240 million US dollars and rumors started in the market that Mattel would soon takeover Lego (Lewis, pp. 21-23, 2011). There were many reasons behind the declining market share of the company. First, the toy industry was going through a similar revolution and competitive outburst as of the airline industry. Many competitors with low cost and claiming to be high quality, entered into the market to disrupt the equilibrium. For example, a Canadian toy company, Megabloks was instrumental in removing Lego toys from many shelves because not only it was of lower price to attract the customers but also even the retailers were paid with higher profit margins. Second, many of the customers of the company that were young boys were being more attracted to computer games and video games during that time thus decreasing the sales even further. Third, Lego’s main operations were in Denmark, which was high cost economy with long supply chains and many supplies. In fact, it at one point in time, Lego had more suppliers than Boeing had to build aircrafts (Ireland, Hoskisson & Hitt, pp. 85-89, 2008). Strategies In order to understand the strategies used by Lego during the period of 1995-2009, we will have to divide the period between two sub-periods of 1998-2003 and 2004-2009 since the company shifted its strategy during the period. First period (1998-2003) During the first period of 1998-2003 and even before that, Lego was following an aggressive policy of product development. Lego was constantly trying to improve its existing products with bringing new variations. The mindset of the company’s strategists was that by providing more product variations, they would force the customers to spend more and new variations would bring more and new customers into the loop (Bender, pp. 55, 2010). In fact, it appeared that somehow Lego was trapped in the product orientation, one of the five marketing orientations. In it, the prime focus and expectation of the company was on improving the current products, bringing more colour, designs and variations hoping that would make the customers stay and even become ready to pay a premium for Lego’s products (Ireland, Hoskisson & Hitt, pp. 85-89, 2008). Secondly, this was a period where Lego engaged in many strategic partners with Harry Potter, Disney and other franchises in an attempt to co-brand their products. In fact, this was the prime reason why Lego was able to show some profit during these years (The Lego Group, 2012). Second Period (2004-2005) When the top management of the company realized that Lego is in some deep trouble, the company switched to a strategy of retrenchment and divesture. The family had to inject a sum of over 178 million US dollars into the company in order to ensure that company could survive through this tough time. The firm laid back more than 3500 workers out of its full time workforce of over 8500 workers in 2004. Furthermore, the company also announced that it would soon cut down half of the 2400 jobs from Billund, which is the Home of Lego. In order to gain some cost advantage, the production was moved to Mexico and Eastern Europe from high cost countries such as Denmark and Switzerland and many of the theme parks and assets of the company in Australia, United States, and South Korea were sold off in an effort to generate some quick cash (Lewis, pp. 21-23, 2011). At the same time, Lego decreased its stock options from 13000 to almost 6500 in an attempt to revert to its roots and avoid the production, storage and other related costs with holding too many options. Furthermore, rather than delivering its products daily, Lego decided that it will not deliver the products to its customers on a weekly basis which allowed the company to spread its costs with each delivery over a larger base (Singh, pp. 238-239, 2008). Furthermore, as mentioned earlier that outsourcing also became a strategy for the company and it outsourced most of its operations to low cost countries. This was done to reap two important advantages. First, this would allow Lego to decrease its costs and become more competitive in front of the low cost competitors. Second, it hoped that by getting the exposure in those low cost developing markets, it would start selling its products in those markets as well (Bender, pp. 55, 2010). Lately, Lego has also been following the strategy of market development under which it has been trying to expand aggressively into new markets such as that of US, Eastern Europe, Brazil, Mexico, China, and India. A couple of decades back, Lego did not have any presence in the United States, in the recent years; it has been successful in increasing its market share to almost five percent in the largest toy market of the world (Lewis, pp. 21-23, 2011). Performance indicators to measure Lego’s success Many different ways and tools could be used to measure and evaluate the performance of the company. First, the financial figures and financial ratios are the most frequently used tool by companies, investors and top management because being financially sound is always the bottom line. For example, according to the figures for the year 2010, revenues for Lego Group were more than 16 billion DKK and profits remained at 3.718 billion DKK. This a revenue growth of over 37 percent and profit grew by over 68 percent in the year 2010 as compared to the last year. Lego now employs over 8365 people as their full time employees, which is almost double the figure of 2007. Furthermore, in terms of ratios, the operating and net profit margin of Lego increased from 24.9 and 18.9 percent in 2009 to 31.1 and 23.2 percent in 2010 respectively. Moreover, when the return on invested capital of the company was 139.5 percent in the year 2009, it increased to 161.9 percent. In addition, the return of equity 82 percent in 2009 increased to almost 85 percent in the year 2010 (The Lego Group, 2011). Therefore, this might indicate that Lego’s performance may be rated as good or even excellent. The second important criterion could be of market share. Market share is the percentage of sales that the company has been able to make relative to the total industry sales. Market share indicates that how well the company is performing relative to the competitors and to what an extent the company has been able to outclass them. The global market share of Lego, according to the statistics of 2010 is over 4.6 percent putting Lego in the third place in the list of toy manufacturers’ right after Mattel and Hasbro. Keeping in mind the performance of the competitors, another similar approach of measuring performance would be compare it relative to that of the industry (The Lego Group, 2011). The company might want to compare and contrast all the financial ratios and others developments against the industry averages. Third, another effective performance indicator, which could only be uncovered through market research and having a look at the data regarding customers, would be of level of customer satisfaction and customer retention. Gone are the days when firms had the opportunity to follow the production or selling orientation, and today it is all about the marketing orientation where “customers is always right”. Therefore, satisfying customers and retaining them is the key to having long-term growth and sustainable business. Satisfied customers not only help customers by getting ready to pay premium for company’s products but they constantly engage in word of mouth advertising that ends up broadening the customer base. Therefore, through interviews, focus groups and questionnaires, the company might select a sample to explore the satisfaction level of customers (Lewis, pp. 21-23, 2011). References Bender, Jonathan. 2010. LEGO: A Love Story. John Wiley and Sons. Ireland, R. Duane., Hoskisson, Robert E., & Hitt, Michael A. 2008. Understanding Business Strategy: Concepts and Cases. Cengage Learning. Lewis, Laurie K. 2011. Organizational Change: Creating Change through Strategic Communication. John Wiley & Sons. Singh, Manikant. 2008. Strategic Management and Competitive Advantage. Global India Publications. The Lego Group. 2011. Annual Report – 2010. Retrieved on January 08, 2012. Retrieved from http://cache.lego.com/upload/contentTemplating/AboutUsFactsAndFiguresContent/otherfiles/downloadE994290D230BFB0E2A914F4DC3B6531C.pdf The Lego Group. 2012. Lego Timeline 2000-2009. Retrieved on January 08, 2012. Retrieved from http://aboutus.lego.com/en-us/factsfigures/timeline2000.aspx Read More