LEGO Strategic Elements of Competitive Advantage

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1 LEGO Strategic Elements of Competitive Advantage Name: Feray Aytekin Degree: Master of Business Administration (M.B.A.) Subject: Global Marketing Prof. Dr. Şebnem Burnaz ISS 523E Istanbul,

2 Agenda Company Analysis Industry Analysis Fall and Rise of LEGO Strategic Decisions of the Company Licensing Agreements of the Company Porters Generic Strategies Framework Open Innovation 2

3 Company Background 1 3

4 Company Background Founded 1932 by Kirk Kristiansen Family-owned business based in Billund, Denmark The word LEGO is derived from the words leg godt, meaning play well in Danish Consists of colorful plastic bricks and an array of gears, mini figures and many other parts LEGO bricks can be mounted and connected in many ways to construct objects such as vehicles, buildings and robots LEGO incorporates educational features to develop key skills in young children and encourages goal oriented play and problem solving 4

5 Company Background (cont.) Specializes in construction toys, but has continued to diversify its business with expansion into video games and clothing as well as opening LEGO themeparks (LEGOLAND) Much of its growth comes from its very successful licensing strategy and marketing through film and television The licensing themes include Avatar, Batman, Cars, Harry Potter, Indiana Jones, Spider-Man, Star Wars, Toy Story and many others In 2014 LEGO became the world s largest toy company by market value surpassing Mattel Only the best is good enough 5

6 LEGO in Key Figures (2015) Turnover ,578 million 14,762 Sold in more than 140 D K K employees end of 2014 countries Highest product safety 0 product recalls for The 5th year running Net profit 2014 DKK 7,025 million 6

7 Toy Industry 2 7

8 Toy Industry Porter s Five Forces Threat Of New Substitute Products Or Services High Any other type of toy can become a substitute for LEGO Threat Of New Entrants Low Set up costs and established competition makes the market appear unappealing Rivalry Low Other similar LEGO products not on the same level Strong brand image Bargaining Power of Suppliers Medium Fixed sourcing program has strengthed its position with suppliers LEGO bricks are made of plastic Plastic produced with oil > Fluctuations in oil affect LEGO directly Bargainig Power of Buyers High Large retailers gained dominance over the retail market Chinese made toys cheaper Danish krone rose in price 8

9 Fall & Rise of LEGO 3 9

10 LEGO s Fall between 2002 to 2004 Sales dropped 30 percent in 2003 and 10 percent more in 2004 The LEGO Group executives estimated that the company was destroying 250,000 ($337,000) in value every day In 2004, Jorgen Vig Knudstorp became chief executive and diagnosted the problems of the company with a leadership team 10

11 LEGO s Fall (cont.) New products were delivering less and less profit The company designers were dreaming up new toys without factoring in the price of materials or the costs of production LEGO did not align this business strategy with its supply chain Just 30 products generated 80 percent of sales, while two-thirds of the company s 1,500-plus stock keeping units (SKUs) were items that were no longer manufactured LEGO s production sites were located in such high-cost countries as Denmark, Switzerland, and the United States Poor customer service and spotty availability of products were also problems in the company s franchise key markets 11

12 Strategic Decisions of the Company Knudstorp launched a restructing iniative known as shared vision The number of SKU s was reduced and the number of colors options was reduced by 50% The company also moved its U.S. plants to Mexico and Czech Republic in search of labor cost savings Focus on the company s retail customers (Toy R Us, Metro etc.) o Survey resulted that these customers did not require express product delivery and so they changed the orders to once-weekly deliveries Result: Improved customer service and lower costs From on-time deliveries increased by 62% to 92% LEGO was awarded in the category Logistics and Fulfilment by the European Supply Chain Excellence Award 12

13 Strategic Decisions (cont.) LEGO launched the Mindstorms a series of kits contain software and hardware to create customizable, programmable robots Over the years LEGO also formed alliances with Walt Disney Company and Lucasfilm The sales of licensed merchandise relating to popular Harry Potter and Star Wars movie franchises sold extremely well 13

14 Licensing Agreements What it would cost to buy the whole set Harry Potter, ,825 $ Batman, $ Indiana Jones, $ Pirates of the Car., $ Lord of the Rings., ,303 $ The Lone Ranger., $ Star Wars, ,762 $ Spiderman, $ Spongeb ob, $ Toy Story, $ The Hobbit, $ Mutant Turtles, $ Figure 1: Lego s Number of Sets in each Licensed Line (Source: Brickset, 2013) 14

15 Licensing Agreements (cont.) LEGO starts reporting licensing expenses Knudstorp becomes CEO and turns the company around Figure 2: Lego s Total Revenue and Costs of Licensing Deals (Source: Statista,2013 and Brickset, 2013) 15

16 Porter s Generic Strategies 4 16

17 Porter s Generic Strategies Source of Competitive Advantage Broad Cost Leadership Differentiaton Narrow Cost Focus Differentiaton Focus Source of Competitive Scope 17

18 Open Innovation Focus on open innovation Consumer focus -> key to unlocking new sources of competitive advantage Consumers play important roles in different innovation and value creation activities LEGO already started with open innovation in 2013 o In LEGO city consumers can design cities first digital and then order it to build it with LEGO blocks in their homes o Expanding the anniversary editions o Develop ideas of the customers and let them vote for the best ideas to identify good potential new products 18

19 References 5 19

20 References Brickset Lego s Number of Sets in each Licensed Line and Costs of Licensing Deals (2013): Brickset Goodley, Simon Lego Profits Boosted by Harry Potter Magic ( ): The Guardian Hansegard, Jens Lego Bucks Industry Trend With Profit Growth ( ): The Wall Street Journal Heckmann, Peter; Samakh, Edouard; Oliver, Keith Rebuilding Lego, Brick by Brick ( ): Strategy and Business Jessup, L.; Storrud-Barnes, S.; Reed R. How open innovation affects the drivers of competitive advantage: Trading the benefits of IP creation and ownership for free invention (2012): Emerald Insight Martinez, Marian Garcia Co-creation of Value by Open Innovation: Unlocking New Sources of Competitive Advantage (2013): Wiley Online Library 20

21 References Statista Revenue of the LEGO Group from 2003 to 2013 (2013): Statista The LEGO Group About Us (2015): LEGO Homepage The LEGO Group A Short Presentation 2015 (2015): LEGO Homepage The LEGO Group Annual Report 2014 (2014): LEGO Homepage Thielman, Sam How Lego Became the Most Valuable Toy Company in the World - A Bucketload of License Deals ( ): ADWEEK WARC Lego is Most Powerful Brand ( ): WARC c%20news&cid=n34330&id=3937a918-b a-8ed df4&q=lego&qr= 21

22 Thank You? 22