Legos Ability to Gain Market Share - Essay Example

?Strategic management Executive Summary The essay tries to throw a light on the business of the famous toy company Lego that is famed all over the world for its excellent plastic toy bricks. The construction toy manufactured by Lego provides the opportunity of encouraging innovative thoughts in children. The essay implicitly explains the life cycle of the toy industry and itemise the ways by which the growth of this industry has helped in the business of Lego. It then concentrates in Lego’s global and regional strategies that have helped it to gain this position in the toy industry. After enumerating the internal and external business affairs of Lego, the essay emphasizes the drawbacks of the company and finds ways through which it may overcome its negativities. 1. Which stage of the industry life cycle is the Toy industry in? How has that affected Lego’s ability to gain market share? This is the period of globalization and liberalization when almost all the industries in the market are booming. International trade is at its zenith, when most of the business firms are enjoying the benefits of the growing market. Consumerism has become the catchphrase of the world economy in 21st century. Income levels of the developed economies are augmenting and the developing economies are emerging with high growth rates. At this stage per capita income levels of almost all the open economies in the world are improving. With the improvements in standard of living, the aggregate demand for luxuries and comforts has enhanced. Life cycle models are not only common to the living beings but also associate with industries. Even an industry begins, grows, becomes mature and finally collapse with time. This is not because an industry has life but because an industry’s existence depends on the consumers whose taste and preference changes with time. The toy industry is at its peak of life cycle, where more than thousand companies operate in the industry with high turnovers and revenues. In United States the industry generates high revenue of about $20 billion (Little & King Co., 2010). Top popular toy companies are Lego, Mattle, Hasbro etc. A big segment of the industry comprises of the game making companies like Sony, Microsoft and Nintendo. This industry manufactures a wide variety of toys like non-electric toys, children vehicles, preschool toys, stuffed animals, art & crafts, dolls etc. Toys are not only sources of entertainment for the children but also serve as basic academic tools to develop memory skills in them. Lego is a popular toy manufacturing company in Denmark, the headquarters of the company is in Billund. The company mainly engages in the manufacture of construction toys. The Lego bricks are generally colourful and can be used to make various types of toy cars or buildings. The growth of the toy industry has generated several positive externalities for Lego. The Lego group has exhibited unremitting growth since the last few years and the rates of growth have always been in double digits. The world’s best market for Lego bricks is U.S. Lego toys are marketed in more than 130 countries in the world. The company has a club of its loyal customers that comprises almost 4.2 million members. Today it can be hypothesized that on an average each individual in earth has approximately 80 Lego bricks to play with. Over the years more than 600 billion Lego elements have been manufactured (Lego, 2012). Figure 1: Lego House (Source: Lego, 2012) Producing bright and colourful bricks as toys, Lego have introduced a revolutionary change in the world of toys, where children may explore their creativity. The main driving force of the company is to encourage creative opportunities for all children.  “Our idea is to create a toy that prepares the child for life, appeals to the imagination and develops the creative urge and joy of creation that are the driving force in every human being”. The demand for Lego toys is increasing with time; accordingly the quantity of toy manufactured is also increasing. Figure 2: Experience Curve (Source: Authors Creation) The above experience curve shows the benefits in cost, the company is enjoying through economies of scale in production process. As the output manufactured by the company is increasing, the cost per unit is gradually falling. Thus, it can be stated that the rising level of economic surplus and the falling costs in production is the primary driving force for Lego Group (Westwood, 2005). 2. Describe Lego’s global and regional strategy. What is its current market position? How did it get here? The primary global strategy of the Lego Group is to suit more creativity in its output and make new inventions in its toys. The company believes that making their toys differentiated from the others toys in the market will augment their popularity and increase sales. The Lego group is the third largest toy making corporation in the world. The company has adopted large number of changes in its marketing strategies. The company is also introducing varied new models and elements of construction that makes consumers more attracted to buy such construction toys. The market for toys is highly competitive; the company has prepared bright and colourful official site that attracts the children. In the modern world, parents are busy in their daily exertions and they hardly have time to shop toys for children by visiting the shopping destinations. Online shopping industry is booming in almost all the economies of the world. At this juncture Lego group provides excellent showrooms for their colourful products in their official online selling sites. It has become easier for the company to reach a wider customer base by following the virtues of e-marketing. Excellent home delivery and after sales provisions is given to the young buyers of Lego products. Operating in more than 120 countries of the world, Lego group has built up relations with innumerable dealers and franchises. The company has made many contracts with the play schools of Denmark; these schools purchase Lego bricks in bulk. In order to analyse the market position of the company, the essay will enumerate the SWOT and Five Forces Industry Analysis of the Lego Group. SWOT Analysis Strength The primary strength of the company is its brand value and capacity to make new inventions. The company has successfully maintained its position in the market despite of the emerging substitutes like the video games. The company has an excellent design, IT, and low cost manufacturing system. Weaknesses The company faces the problem of its brand and product imitation. Intense competition in the industry involves high level of brand switching. The organization has lost certain shares of the market to the growing gaming companies. Opportunities Lego bricks are highly creative and can be used in the schools in construction competitions between the children. The company may use its resources to diversify its business segments. A greater number of branding exercises are introduced by the companies to reach the latest divisions. Threats The high competition persisting in the toy industry is the primary threat to the company. Video games, cartoons, outdoor games etc are the other types of entertainments that children may like to experience, substituting the Lego toys (Muller, 2005). Industry Five Force Analysis Substitutes (Very High) The biggest threat of Lego is the existence of potential substitutes in the market. Children can always go for outdoor sports events, video games etc for the purpose of playing. Children have a tendency to get bored with their hobbies, and in this way they may switch from Lego products to other paying tools. The switching cost involved is almost negligible in toy industry. As a result the company faces high volatility in its market demand. Bargaining Power of Customers (High) The bargaining power of the retailers’ is high for Lego. Big retailers like Wal-Mart take Lego toys for their large departmental outlets. If the company cannot maintain the terms and conditions imposed by such retailers then it may lose large quantity of demand placed by them. Bargaining Power of Suppliers (High) Lego bricks are made of plastic. These plastics are produced with oil. It is almost impossible for the company to bargain with the oil manufacturing companies. Thus, the fluctuating oil prices in the market directly affect the cost of manufacture for Lego. Potential Rivals (Low) Lego has a critical competitive advantage from its rivals in the market. The company has an established long ago and good brand value among the consumers. Parents, who have used Lego toys at their childhood, are less reluctant to offer the same to their children. New Entrants (High) There is less market entry barriers in the toy industry. In the financial crisis of 2008, the oil prices collapsed. As a result it was easier for the new entrants in the industry to gather resources and produce products that are almost similar to the Lego bricks. In this way Lego has gathered its position in the market. The company wins over the trust of its customers with its brand worth and product quality. The primary motto of the company is to enhance creativity and inventions for its success. In general the competition in the toy industry is intense. Intense competition in the toy industry has helped toy manufacturing companies to lower their market costs and made them loyal in delivering quality products. Little Tykes is a toy manufacturing company that shows high sales around the years. Mattel, Inc is the famous toy company introducing the fashion icon toy ‘Barbie’. Trends have been found that the girls have a greater intension to buy such dolls other than construction toys (Kapferer, 2012). 3. How should Lego continue to grow in the future? What is the optimal degree of vertical integration (along the value chain)? How much horizontal integration (diversification) is sustainable for the company? In the competitive market of toy industry, Lego should always innovate new strategies to tap growing markets in the Globe. It may focus on the five BRICS (Brazil, Russia, India, China and South Africa) that resemble the emerging economies with growing real income levels. The company should give importance to factors like time, place, cost, while marketing its product. It should try to promote more expensive packages to the rich potential markets and provide less pricy toys to the less prospective markets. The shops of Lego toys all across different market places are shopping destinations. The company may transform these outlets to playing hubs for children. The company may introduce a ‘try before you buy’ initiative. Children once getting the experience of playing with such toys will become potential buyers of the product. While making the issue analysis it is found that the primary challenge faced by the company is imitation of its products. It is easy for other companies to make plastic bricks like Lego. The troupe must also introduce more variations in its products (Webster, 1995). Vertical Integration Value Chain of Lego will help it to launch new products in the market (Handfield, 2011). Figure 3: Value Chain (Source: ACDI VOCA, 2013) The above diagram represents the optimal value chain for the Lego Group. Inbound Logistics The company should keep its cost of production low and outsource the items over which it does not have competitive advantage. The company should ponder over its core competences like its product design and sales strategies. Operations The company should expand their operations in the emerging economies. Like, the retail market of China is improving and may suffice large customers with potential disposable incomes for the Lego toys. Outbound Services The company must have strong control over its distributional networks. It should try to reduce its overhead costs and pay roll expenses. Marketing, sales and services The company should allocate large financial resources for its sales promotion and marketing services that would help it to win over a wide customer base. The company should also concentrate over e-business activities because such processes involve lower costs in marketing (Recklies, 2001). Horizontal Diversification Lego group produces primarily construction toys. It is empirically found that the boys have a greater inclination to play with such items. The company must diversify its product portfolio and manufacture items like stuffed toys and dolls. Recessionary trends are spreading all over in the economy and real worth of disposable income is falling. Price levels of all the necessities are increasing; at this situation the company must try to launch less expensive construction sets. 4. What options does the company have as far as international expansion? Which one(s) would you recommend and why? The Lego Group should try to think out-of-the-box in order to become the best toy manufacturer in the world. The products of the company should not only be variable in nature but should also be affordable for people different income levels. The company primarily targets the young customers between the age group 5 to 14 years (Pietrobelli, 2011). It should also tap middle aged people; engineers may initially use Lego bricks to set up the sample model for their constructions. The company has large financial resources; it may use these in certain corporate social responsibility schemes. It may introduce special donation schemes for the orphan children who lack financial capability to buy Lego toys. The company should try to use more eco friendly raw materials to produce its construction bricks. Plastic usage is not sustainable for the environment; consumers are now becoming more aware about environment protection. The constant use of plastic may be a threat for the company’s future (Rogers, 2001). Parents may not desire to buy plastic toys to their children to imbibe environmental protection awareness among them. Thus, it may be analyzed that apart from product diversification, Lego Group should try to use eco friendly inputs to produce its toys. This would surely help the organization to maintain its austerity in the long run (Dittmann, 2010). Recommendations Lego is a very famous established toy company and its plastic playing bricks are famous among the majority of young generations. However the company should constantly upgrade itself and try to serve strong competition to its rivals. The company should realize that individuals in the modern world are becoming more conscious about environment protection and preservation. Plastic usage is severely restricted by many eco-protection organizations. Lego should try to replace its plastic bricks with some kind of material that is less harmful to the environment. Moreover apart from only manufacturing construction bricks the company should try to incorporate more diversity in its toys. These two changes would surely help Lego improve its brand image and park more toy lovers in its aggregate consumer’s basket. Reference List ACDI VOCA, 2013. Value chains and Value Chain Analysis. [online] Available at: [Accessed 29 August 2013]. Dittmann, J. P., 2010. Developing a Supply Chain Strategy. [pdf] Available at < http://bus.utk.edu/supplychain/chain_lightning/oct_2010/documents/Supply_Chain_Strategy.pdf> [Accessed 29 August 2013]. Handfield, R., 2011. What is Supply Chain Management? [online] Available at [Accessed 29 August 2013]. Kapferer, J. N., 2012. The new strategic brand management: Advanced insights and strategic thinking. Delhi: Kogan Page Publishers. Lego, 2012. The LEGO Group. [pdf] Available at [Accessed 29 August 2013]. Little & King Co., 2010. The Transformational Toy Manufacturing Industry. [pdf] Available at [Accessed 29 August 2013]. Muller, A. K., 2005. Swot-analysis for Henkel's loctite. Munich: GRIN Verlag. Pietrobelli, C., 2011. Power Relationships along the Value Chain: Multinational Firms, Global Buyers, and Local Suppliers’ Performance. [pdf] Available at < http://www.merit.unu.edu/MEIDE/papers/2007/PIETROBELLI_SALIOLA_Power%20relationships%20along%20the%20value%20chain_multinational%20firms,%20global%20buyers,%20and%20local%20suppliers'%20perf.pdf> [Accessed 29 August 2013]. Recklies, D., 2001. The Value Chain. [pdf] Available at [Accessed 29 August 2013]. Rogers, S. C., 2001. Marketing strategies, tactics, and techniques: a handbook for practitioners. Connecticut: Greenwood Publishing Group. Webster, F. E., 1995. Industrial marketing strategy. New Jersey: John Wiley & Sons. Westwood, J., 2005. The marketing plan workbook. Delhi: Kogan Page Publishers. Read More