Executive Summary

The iconic toy manufacturer LEGO was on the brink of collapse in the early 2000s. A combination of many factors contributed to the company’s gradual decline. In a bid to save the organization, the then serving CEO Kirk Kristiansen decided to quit the company and handed over the management responsibilities to Jørgen Knudstorp. Although many were skeptical about giving the new CEO such huge responsibilities, Kristiansen’s endorsement helped to solidify his position within the company. The new CEO created a small team and came up with a new strategic plan dubbed “Shared Vision,” a strategy aimed at stabilizing LEGO through a massive restructuring. The 7-year plan was purposed to reduce debt, improve sales, and stabilize the business.

The process of change was not without its fair share of challenges. Some long-serving employees had to be fired. In addition, the company closed a number of its production lines, again rendering hundreds of staff jobless. The company had to sell off many of its assets in a program geared towards reducing redundancy and returning the company to profitability. Within a few years, the company returned to profitability. This paper analyses the company’s journey in effecting that change. The company’s core competencies will be analyzed providing the areas that give LEGO its competitive advantage in the market. The corporate strategy undertaken by the company will also be analyzed to establish its strategic position currently in the market. Based on this analysis, recommendations will be provided on the best cause of action for the company.      

Core Competencies Mentioned in the Case

The core competencies that are seemingly evident from the case study are the LEGO brand, LEGO unique products, the LEGO value chain system, and the loyal clients, who have over the years formed the LEGO community. These are the main areas of focus that the new CEO promised to concentrate on and they happen to be the fundamental areas of strength that give the company an edge in the crowded toy marketplace. The LEGO brand is widely known as a household toy manufacturer, distinguished by its quality products that range in the thousands. Together with their elaborate supply chain network, which involves the loyal clients, they formed the foundation for the shared vision of the organization and molded the company’s decisions on innovation, manufacturing, and business portfolio. 

Other core competencies that were later added to the company by the new management team was the capacity to create, design, and commercializes exceptional products that developed consistent with the LEGO system of play. As such, new products comprised 60%-70% of the company’s annual sales. The company’s innovation processes also emerged as a core competence. How the whole innovation process was formulated gave the company extra competitiveness in the market. The prompt makes reference to how designers spent long periods observing consumers. In addition, designers used client panels for testing products, prototypes, concepts, and ideas. Designers also had access to recent research, which improved their competitiveness. Another addition to the fundamental core competencies for LEGO was the addition of the new operating system in 2004. This gave the company an edge in the market as it used new technology to address supply chain challenges within the whole value chain.

Identified Corporate Strategy in the Case

The new management team developed the new “Shared Vision” strategy to stabilize the organization through massive restructuring. The 7-year plan was purposed to reduce debt, improve sales, and stabilize the business. The Shared Vision strategy was long-term and as the new CEO told the company’s board, to survive and return to profitability, the organization had to create a long-term strategy. The new strategy had three phases: “Manage for cash” (2004-2005), “Manage for value” (2006-2008), and “Manage for growth” (2009+). “Manage for cash” (2004-2005) focused on safeguarding the survival of the organization and regaining control by concentrating on processes and products. The first phase also involved sealing all the income leakages unknown to the organization and streamlining production to only producing the core products that were profitable from the beginning. Managing for value and growth (2006+) involved putting the right management team in place to restore the good working relationships within the organization, and strengthening the systems already set in motion at the organization.

Five Forces Strategic Analysis

Threats of New Market Entrants – High

Globalization has enabled even small organizations to enter most global markets with ease. Today, there are no costs of market entry required unlike the traditional market setup, which required organizations to spend large sums to get a slice of the market. As such, new toys are entering the market at an alarming rate through platforms such as the Amazon selling platforms. Other big stores that are also going the Amazon way include Alibaba, and big chain stores such as Target, and Wal-Mart. The threat for new market entrants is quite high. Nevertheless, LEGO is an international brand that is currently benefitting from economies of scale. It will be difficult for new entrants to match the efficiency and product range of LEGO.

Bargaining Power of Suppliers – Low

After selling huge chunks of its assets during the restructuring period, LEGO turned to Chinese firms and contracted them for production. There are many such contractors in the market who prey on companies such as LEGO for these contracts. Their bargaining power as regards LEGO and toy production is low. A significant portion of the company’s products is still produced internally. This gives the company more leverage in matters production.

Bargaining Power of Buyers – Moderate

LEGO products are very unique. It is one aspect that gives the company the biggest competitive edge in the marketplace. Because of this uniqueness, it is nearly impossible for clients to switch to other products. Backward integration of LEGO toys is almost down to zero. As such, the company enjoys a superb position in the market. Clients switching to other products would not get the same line of products; only toys of a different brand and category. The excellent relationship between the company and retailers is also an added advantage. Clients will find it hard to leave a brand of LEGO quality for other competing brands.

Threats of Substitutes – High

Technology has threatened the toy business since the advent of the internet. Downloadable video games have threatened this line of business significantly. The threat of substitutes, therefore, exerts the biggest pressure on LEGO. Traditional games played physically such as chess, scrabble, and monopoly are being played online. Children are continuously being confined to indoor spaces thus significantly reducing LEGO’s sales. There is thus great competition from substitute products, which the company is addressing by incorporating new technologies into its product designs.

Competitive Rivalry – High

LEGO faces stiff competition from two toy production companies: Hasbro and Mattel. Nevertheless, there are other market players such as Takara Tomy and Bandai Namco. The internet has reformulated the traditional trade patterns, which means that companies can increase their market share through online sales. The competitive rivalry is high despite LEGO being ahead in terms of experience and market share. In the near future, the competitive rivalry will heighten owing to changes in the market dynamics.

VRIO Analysis

The VRIO Analysis is a tool excellent for the analysis of an organization’s resources. By understanding the true position of an organization and its competencies, it is possible to evaluate its competitive advantage. VRIO stands for Value, Rareness, Imitability, and Organization. With regards to Value, LEGO’s financial strength and production capabilities give immense value and competitive advantage in a crowded market. The company has modern production facilities, which increase efficiency, particularly in satisfying demand. The location of the company’s production lines also creates value, particularly those located in Europe. The Company’s innovative process is not only valuable but rare. LEGO’s products are not only renowned for their durability but also unique designs that are difficult to imitate. The company’s trademark is also a valuable resource, which further makes its product very difficult to imitate. 

The production process, which as aforementioned involves extensive research, gives the company a competitive advantage in the marketplace. It is not easy to imitate LEGO’s products. Doing so would not only be costly (in production) but also expensive to market. Another strength that separates the company from others in the market is its management. Part of the restructuring process involved changing the management team and installing a culture that would carry the ideals of the company to the future generations. The organizational resources at the company ensure that production is running smoothly devoid of any challenges.

Corporate Theory in the Case

The most applicable corporate theory, in this case, is the Dynamic Capabilities Theory. This is evident in the way the organization deploys its assets to satisfy market demand. The concept of dynamic capabilities was developed by David Teece and it denotes an organization’s capacity to reconfigure, build, and integrate external and internal competencies to highlight the fast-changing environments. In this regard, LEGO brought in a new management team and restructured the whole organization as outlined in the 7-year “Shared Vision” plan, which was purposed to reduce debt, improve sales, and stabilize the business. The company restructured by reducing redundancy through firing staff members that were unwanted at the time sold off assets that the company no-longer-needed and shifted production to contractors in China. A new management team was ushered in and with time, the company returned to profitability within a short time.

Recommendations

The toy market is changing rapidly thanks to every-day inventions that keep on emerging every day. As such, the business model of the company has to adapt to these changes or be locked out of the market that is equally evolving. The best thing that the company could do today is to commit resources to diversification. To remain safe in this globalized market, the company must diversify and think long term in terms of creating online-based products that will maintain profitability. Without diversification, the company runs the risk of holding on to an idea whose time for expiry is slowly approaching. Committing resources to R&D to find the next best toy-related technology would be a good place to start in this diversification process.

Questions

1. Given the nature of the toy market today, what strategic options are available to LEGO in regard to long-term sustainability of the business?
2. The company became profitable almost immediately after the commencement of the restructuring process. Part of that profit was obtained from the sale of the company’s assets. Looking back at the events that transpired, do you think the company could have become profitable that soon after emerging from the brink of collapse? Was the sale of these assets a strategy to earn the company good reputation in the market? Was there another way out of the challenges that befell the company other than closing shop and selling off some of its assets? 
3. How best can the company integrate sustainability in its production? Most toys are made of plastic in China; a country often accused of encouraging child labor in its factories. With many consumers increasingly becoming skeptical about the processes of production, how best can the company manage these issues going forward?  

Bibliography

Rivkin, Jan W., Stefan H. Thomke, and Daniela Beyersdorfer. “Lego (A): The crisis,” Harvard Business Review (2013).