Picking up the Lego Pieces Legos Turnaround or Not - Case Study Example

Picking up the Lego pieces – Lego’s turnaround or not? Question On Diversification and what is next for Lego? According to the Economist (2006), diversification was the proper expression to describe the corporate strategy Lego’s management attempted to pursue during its 2004 crisis. Faced with a rather accurate reading of its market (shrinking), its product portfolio (easily imitated by competitors), its corporate size (smaller than its global competitors), and its profits (downward due to decreasing revenues and increasing costs), the management chose to enter new markets by offering new products while keeping its naïve attitude towards profitability (of a secondary nature). The result was a disaster. Lego adopted the diversification strategy of expanding its market to include girls and older boys and selling new and unrelated products like clothes, watches, video games and theme parks to these new markets. Like other companies that went beyond their core competence – in Lego’s case, making toys for 5-9 year-old boys – Lego failed miserably and lost money because market share spiraled downwards as it sold lesser products to lesser customers and incurred higher costs. The CEO hired in 2004, Jorgen Vig Knudstorp, changed the corporate strategy to one of focus and product differentiation. While Lego continued to expand its market to include older age groups, differentiation is not the same as diversification, and in this sense the Economist article was not entirely correct when it claimed “bits of the diversification strategy remained.” Lego continued to offer the same focused brand of “play for all” experience – Lego comes from the Danish leg godt which means “play well” – to a larger market and aligned the rest of the company to be profitably right-sized for it. Lego’s next steps delivered positive results and showed it could “diversify” into computer based games for an older age group, staying focused and pragmatic while building on its traditional brick-based products (Watts). Its blockbuster Bionicle and Mindstorm product lines led to profitable product extensions like Star Wars and Harry Potter, capitalizing on film tie-ins, and extended market reach to more countries, especially to emerging China and Japan, acknowledged to be Lego’s top market in Asia for construction category toys (McGinn; Lego Website). Question 2: On Asia, cheap products, and Lego’s main strengths Cheaper products made in Asia and sold by Tyco under the Super Block brand eroded Lego’s market share in the 1980s. While Lego enjoys first mover advantage and continues to be number one in the construction category toy market, competitors are fighting a marketing war based on a cost advantage strategy and continue to threaten Lego’s market share. The expiration of its patent in Canada became an opportunity for a competitor to move in and sell similarly designed bricks. Lego sued and appealed and lost both times (Lexis-Nexis). Lego is fighting back on two fronts of the marketing war. On the price front, Lego is cutting its costs by outsourcing manufacturing to Flextronics factories in the low-cost environments of the Czech Republic and Hungary (Kersnar). On the product front, Lego is pushing its focus and differentiation strategies to stay one step ahead of its competitors. Lego is mounting the marketing war on the second front by exploiting its brand value, Lego’s key strength, without committing the same mistake of extending its brand name to non-toy products that only confused retailers and customers. While its brand continues to score highly in different cultures, a recent market survey showed that the brand is valued differently. Europeans and North Americans put value and trust in Lego’s reliable creativity, while Asians and Latin Americans perceived Lego’s products as more innovative and fun. Lego reconciled these two perceptions by defining its brand essence as “stimulating creativity.” These key findings have proven to be the foundations for its recent successes (Hatch, Schultz and Olins 191-202). Question 3: On Pricing Strategy Lego’s current strategy has two components identified by the present management team as crucial in achieving the goals of its turnaround: market its toys as premium quality products and not to compete on the basis of low prices. It would be consistent with its current strategy to adopt a competitive pricing strategy across different geographical markets where Lego products are slightly higher than competing products. Such a pricing strategy signals Lego’s higher quality and reinforces the trust that buyers of its products – the parents of the children who play with Lego toys – have invested in the brand. Coupled with Lego’s continuing efforts to cut costs, such a competitive pricing strategy would increase profits and market share while continuing to build and sustain brand value. Georgiades at Dow Jones reported a pricing problem in Canada in 2008 when Lego refused to bring down the price of its products as requested by Wal-Mart Canada due to the appreciation of the Canadian Dollar. The issue was resolved and settled without Lego lowering prices. Question 4: Methods to Increase Customer Involvement CEO Knudstorp acknowledged that involving the customer – both the parents and the kid – was a breakthrough insight in the turnaround effort. Realizing that Lego was “about many more things than just a set of bricks and a box” and helping “everyday people getting incremental new ideas”, the company encouraged collaboration and allowed users to order building kits based on their own virtual designs (Rockwood). Such a strategy combined a pragmatic and efficient method of mass customization by the customers themselves where parents and children worked together to come up with toy designs using the children’s creativity and sharing these unique designs with other customers. Lego thus transformed itself into a platform company, Ante of Business Week reported, not only in the sense that it outsourced its production activities but also in the sense that it focused on sharing ideas of toy designs using basic platforms, for example, the Lego Factory and Bionicle product lines, instead of designing complex toys on its own. Lego has a user-friendly section at its corporate website called Lifelong Play with nine sub-sites that target specific market segments and involve each segment in mass customization. The site promises “something for all ages and stages of development…kindergarten toddlers, schoolchildren and teenagers to young-at-heart adults.” The Lego Factory site encourages customers to build toys with virtual bricks and design their own models. Lego Education suggests uses for classroom teaching in schools. Lego Parents give “information about child development at different ages and advises on which Lego products are best suited for a child of a particular age. There are also ideas for play activities, articles on Lego Group research on children’s play patterns, and debate pages where visitors are welcome to participate.” Aside from the Lego website that allows millions of kids to “design” toys, the company uses film tie-ins to exploit the emotional attachment of children to popular characters in films like the Harry Potter, Star Wars, Batman, and Indiana Jones series. Another successful method is the annual Brickfest where customers show their designs to other children. Through these methods, Lego is building a loyal community of fans that is growing and becoming more innovative and creative as designs and ideas are shared, resulting in higher sales for Lego in the face of declining sales for the global toy industry (Annual Report). Lego targeted what are called AFOLs, or adult fans of Lego, who spend up to $2,000 a year on Lego bricks to construct and create “toys” for grown-ups and use these for different purposes. Compared to children with their limited budgets, these AFOLs grew up with Lego and continue to be rabidly loyal fans (Seaton). Question 5: Solving Channel Conflict The so-called channel conflict involves Lego selling its products over different distribution channels: its own website (Lego Webshop), toy shops (thousands of them), specialty toy retailers (Toys R’ Us) and supermarkets (Wal-Mart). Lego’s supply chain was a mess: thousands of stores that generated a third of its revenues demanded the same attention as the 200 larger store chains that accounted for the other two-thirds, its distribution center order fulfillment system was chaotic, and it had a multiple-tier inventory system with local centers. The result? It was difficult to position the right product in the right distribution center, contributing to missed sales and high inventory levels (Oliver, Samakh and Heckmann 1-7). The classic case study by Oliver, Samakh and Heckmann showed the steps Lego took to solve its channel conflict by revamping its supply chain management by taking the following steps: First, it moved its distribution channels closer to customers, cutting the number of logistic providers from 26 to 4, enough to ensure resilience, gain greater economies of scale and encourage competition among suppliers. Second, Lego redesigned its entire distribution system. It phased out five distribution centers and created a single new center in the Czech Republic, operated by DHL. This simplified inventory tracking and reduced stock shortages and brought Lego closer to its largest markets by decreasing average distances to large population centers. Third, Lego’s marketing team acted like consumer packaged-goods manufacturers and worked closely with the largest retailers to conduct joint forecasting, inventory management, and product customization. Big retail chains that made up the bulk of Lego’s market received marketing support. Lego also adopted a pricing strategy that gave discounts for early orders and refused orders of less-than-full cartons that it used to fulfill even if doing so was not profitable. Fourth, Lego’s marketing team invited its largest customers to participate in product development, making clients happier and allowing Lego to enjoy a deeper level of insight into buyer behavior based on the retailers’ strong forecasting and replenishment technologies. Since the bulk of Lego’s sales are through retailers and not its own Webshop, it was acceptable for retailers to let Lego keep its web presence. Besides, Lego drives foot traffic to retailers by making it clear that its products are available through retailers, giving details on locations based on the customer’s location (see Lego.com website). Redesigning Lego’s distribution channels along the lines of a Cluetrain strategy was a win-win situation for all: listen to your customers, embrace them, build a networked community around them, and let them contribute to success instead of stopping them from doing harm (Seaton). Question 6: IMC for a New Lego Product: Digital Electronics Digital Blue recently announced a partnership with Lego to launch in Summer 2009 a line of fully functional electronic gadgets – mp3 players, cameras and alarm clocks – at price points ranging from $19.99 to $59.99. Lego’s electronics products are aimed at the pre-teen or tween market of boys and girls between the ages 8 and 13, but expects the products to be a hit with adults and older teens. A photo of a possible product (the product designs have not yet been released) is shown in the Appendix. The Integrated Marketing Communication Plan outlined below is aimed at boosting sales to the teen and adult markets. Lego gadgets must combine the classic play feel of its products with the more serious concerns of the wide age group for all genders ages 13 and above. Lego can follow the Apple iTunes model that has built a large community of loyal users by selling cheap, fun, and functional gadgets and raking in the revenues from content. A cheaper and more lucrative strategy is to tie-in with Apple’s iTunes store, or to create its own LegoTunes store, for downloadable songs and videos through the following marketing methods: Website: Lego already has a well-designed website that could be linked to a download portal like iTunes and that could be expanded to link with social networking sites like Facebook where users can exchange digital content such as photos, videos and music. The website has to be ready for e-commerce and must be available 24/7 for global access. Lego must exploit to the hilt its growing community of fans, especially the adults who find the gadgets very affordable. Advertising: A combination of print, online and television spots must show users of Lego gadgets having fun while doing “more serious” stuff like school or office work, documenting family and social events, and sharing the fun with friends. The tag line “Lego puts fun back into life” or something catchy and easy to remember would build awareness and recall. Marketing Collateral: Design materials that will define the brand and provide buyers with a unique emotional experience. Brochures, contests, and inclusion at the annual Brickfests are powerful tools to improve brand positioning. How about a gadget that can be an mp3 player, digital or video camera, and a watch or alarm clock either all at once or one at a time? Online marketing: The teen and adult markets are mostly online, as Lego knows too well. It must link its website and on-line advertising, opt-in email marketing, and so on to other sites like search engines, photography forums, travel sites, and teen movie sites through product placement deals. Presence at musical concerts would also boost product awareness and sales. Budgets and Pricing: Lego must differentiate its digital products from disposable ones (too cheap) and Apple products (upscale). It can do so by consulting its retailers and marketers. Lego’s turnaround, revitalized by more pragmatic marketing, seems to be the real thing! Appendix [Source: Baird] Works Cited “Digital Blue Joins Forces with Lego Systems, Inc. to Create a Colorful New Line of Electronic Gear for Youth.” 9 January 2009 Press Release. Digital Blue Website. http://digiblue.com/press/press_releases/2009/010909.html. “Lego Group Annual Report 2008.” Lego.com Website. 22 April 2009. http://cache.lego.com/upload/contentTemplating/LEGOAboutUs-PressReleases/otherfiles/downloadF7A616C11EDF554703D451946115EB1A.pdf. “Lego Lifelong Play.” Lego.com Website. 22 April 2009. http://www.lego.com/eng/info/default.asp?page=lifelong. “Lego Parents.” Lego.com Website. 22 April 2009. http://www.lego.com/eng/info/default.asp?page=parents. “Lego’s Turnaround.” 26 October 2006. Economist. 20 April 2009. http://www.economist.com/displayStory.cfm?Story_ID=E1_RDRPDTP. “Strong growth in the Lego Group.” February 23, 2009 Press Release. Lego Corporate Website. 21 April 2009. http://www.lego.com/eng/info/default.asp?page=pressdetail&contentid=101988&countrycode=2057&yearcode=&archive=false. Ante, Spencer E. “For Lego, an Online Lifeline?” 23 August 2005. Business Week Special Report: Tech and Toys. 22 April 2009. http://www.businessweek.com/technology/content/aug2005/tc20050823_5549_tc_216.htm. Baird, Derek E. “Lego to Launch Line of Youth Electronics.” 21 January 2009. Barking Robot Blog. 23 April 2009. http://www.debaird.net/blendededunet/2009/01/lego-to-launch-line-of-youth-electronics.html. Georgiades, Andy. “Wal-Mart Canada Resolves Lego Pricing Spat, Fixes Conflict.” 14 February 2008. Dow Jones Newswires. 21 April 2009. http://thewritingonthewal.net/?p=3421. Hatch, Mary Jo, Majken Schultz and Wally (FRW) Olins. Taking Brand Initiative: How Companies Can Align Strategy, Culture, and Identity Through Corporate Branding. New York: Jossey-Bass, 2008. Kersnar, Janet. “Trouble in Toyland.” 9 March 2007. CFO Europe Magazine. http://www.cfo.com/article.cfm/8813961/c_2984364/?f=archives. Lexis-Nexis Canada. “Digest: Kirkbi AG v. Ritvik Holdings Inc. [2005] S.C.J. No. 66, 2005 SCC 65, Court File No. 29956.” Supreme Court of Canada, 17 November 2005 (47 pp.). 22 April 2009. http://lexisnexis.ca/ql/en/recent/scc_detail.html?decision_id=324. Locke, Christopher, Rick Levine, Doc Searls and David Weinberger. The Cluetrain Manifesto: The End of Business as Usual. New York: Basic Books, 2001. The Cluetrain Manifesto is a set of 95 theses that defined the networked marketplace. McGinn, Daniel. “Building an Empire One Brick at a Time.” 2007 Web Exclusive. Newsweek.com. 20 April 2009. http://www.newsweek.com/id/35471. Oliver, Keith, Edouard Samakh and Peter Heckmann. “Rebuilding Lego, Brick by Brick.” Strategy+Business, Autumn 2007, p. 1-7. Rockwood, Kate. “Fast Company 50: #41 – Lego.” Feb 11, 2009. Fast Company Magazine. 21 April 2009. http://www.fastcompany.com/fast50_09/profile/list/lego. Seaton, Michael. “How Lego Built A New Model Around the Cluetrain.” 11 December 2008. The Client Side Blog. 22 April 2009. http://www.theclientsideblog.com/archives/brands-branding/how-lego-built-a-new-model-aro/. Watts, Robert. “The good brick who rebuilt Lego.” 11 December 2005. Telegraph.co.uk. 20 April 2009. http://www.telegraph.co.uk/finance/migrationtemp/2952516/The-good-brick-who-rebuilt-Lego.html. Read More