Marketing and Lego Essays

Marketing and Lego Essays Marketing and Lego Essay Marketing and Lego Essay Executive Summary Since LEGO Group’s (LEGO) inception in 1932, the world-famous toy maker overcame numerous challenging obstacles to become the leader in the building toy segment. By 2010, LEGO had witnessed all-time high annual sales of over US$3. 7 billion to become the fourth-largest toy manufacturer in the world. Upon analysis of LEGO’s strengths through Resource-Based View, LEGO holds few key competitive advantages attributed to their success: strong brand name and innovative culture. These traits are not imitable or easily substitutable. However, the competitive landscape has drastically increased in the building toy industry as analyzed with Porter’s Five Forces. Essentially, the deteriorating barriers to entry from loss of trademark protection, Disney’s acquisition of Marvel for greater control of entertainment licensing, and increased rivalry among existing firms from little product differentiation are the main drivers of high competition in the observed market. Therefore, in order to uphold the market leader position in the building toy market and ensure financial success in the years ahead, it is strongly believed that the combination of differentiation and first-mover strategy will best allow LEGO to capitalize on the opportunities available in this growing industry while mitigating the threats from the changes in the market. Although several viable alternatives are present in order to address the mentioned concerns, expanding to the adult market with specialized LEGO sets for hobby and professional purposes is the most suitable. By tapping into this huge demographic consisting of many previous LEGO users, LEGO will diversify its product lines, gain a new channel for revenue generation, protect its brand from competitors’ similar products and maintain high brand recognition from wider targets. Problem Statement The LEGO Group (LEGO) is facing new threats emerging in the toy industry from company acquisitions, intensifying competition in the building blocks segment and risk of brand dilution. Representing one of the fastest growing categories in the global toy sales of US$83. billion in 2010, building sets hold a great opportunity despite uncertainty if LEGO is to successfully develop a product expansion strategy that can maintain LEGO’s current market dominance, high brand value and achieve a financial success. Porter’s Five Forces (Appendix A) The threat of the existing toy companies expanding into the building blocks segment is fairly high due to the similar cost structure and operation requirements. LEGO’s biggest competitor MEGA Bloks proved that other companies could carve out a percentage of the building toy market. LEGO is dealing with two kinds of buyers: small retailers and larger chains. With more than two-thirds of LEGO’s revenue coming from the 200 large retailers, these buyers have fairly high bargaining power. The small stores do not have such bargaining power with LEGO considering their order sizes and revenue contribution. The bargaining power of the suppliers is assumed to be weak as the companies in this industry can freely select their suppliers. For instance, LEGO reduced 80% of its suppliers, showing the flexibility of choosing from wide range of suppliers and significant control over supply-related costs. On the other hand, the rivalry level in the industry and the building sets segment is high. The acquisition of Marvel by Disney placed a large amount of entertainment licensing under the control of Disney which indicates that licensing agreements that LEGO relies on to add values to its products will become more difficult to obtain. Lastly, the threat of substitutes for both toys and building blocks products is assumed to be high as parents will often encourage other activities for their children such as playing sports, exercising, or reading books instead of having them play inside. To conclude, it is strongly believed that the combination of differentiation and first-mover strategy will best allow LEGO to capitalize on the opportunities available in the growing industry while mitigating the threats from the changes in the market environment. SWOT Analysis (Appendix B) LEGO is a globally recognized brand with long history of producing creative and educational toys and has established significantly positive image to the consumers. Thus, LEGO can embrace its reputation and knowledge in the industry to further diversify its product offerings. LEGO has many loyal parent customers buying LEGO products for their children. It is important to understand that the consumers are not the buyers of the products. Once the active consumers of LEGO, the parents trust its products and LEGO is deeply rooted in their personal experience. However, new product lines that reflect the current popular children’s culture face the challenge of appealing to the children and answering strict demands of parents. Nonetheless, LEGO has weaknesses as well. Digital Design Program offering customized product offering with delivery can be assumed to be incurring extra costs since LEGO cannot leverage its economies of scale. LEGO’s loss of patent protection is also the weaknesses that other competitors exploit. As competitors introduce plastic brick products that are compatible with the LEGO brick designs, the consumers are misled into buying the products thinking that they are LEGO. As competition and licensing control intensify to threaten LEGO, the organization should avoid expensive/additional marketing and legal campaigns in the building blocks segment, and divert such resources to take advantage of the unexplored segments in the market. Value Chain Resource-Based View Analysis (Appendix C) While LEGO’s business activities create value and competitive advantages for the firm and its customers, they do so with varying degrees. First, among the primary activities, inbound and outbound logistics are assumed to be standard practices across the industry, contributing little towards competitive advantage. The operation systems offer LEGO a high level of competitiveness since LEGO’s corporate governance is rare and difficult for competitors to imitate. Lastly, marketing and sales strategy for LEGO are unique due to the exclusive nature of licensing agreement, its history and long-term effort of brand building. LEGO’s general and human capital management contribute to its competitive advantage by applying the expertise and knowledge accumulated over the decades, making it extremely difficult to imitate. Technology development and procurement activities at LEGO are assumed to be similar to the general and human capital management and they are relatively unique to LEGO due to its organizational culture history. In conclusion, LEGO’s management should continue creating added values in their products through the above activities, with significant focus on marketing and sales to further synergize with their strengths as indicated in SWOT analysis and operations systems, which include product designs, to expand their product lines into new market segments. Alternative 1: Expand product lines targeting girls As indicated in the SWOT analysis, the market coverage for girls in the building blocks is assumed to be fairly low at this point. LEGO can expand its product designs by obtaining the licensing agreements with entertainment companies that girls favor, as well as adopting new product designs for girls. For example, diversifying its Duplo product lines with themes, such as princesses from Disney cartoons that girls will prefer over boys, will allow LEGO to capture the potentially under-served market segment. By increasing their product lines with minimal design expansion, LEGO is effectively ‘creating’ a sub-segment within the industry and challenging other competitors, which are trying to compete in the traditional building sets segment. Essentially, LEGO is positioning itself as a segment leader once again and capturing a large portion of the end-users and customers. Nevertheless, there are several risks associated with the alternative: first is the market uncertainty. In other words, young girls may not be as interested as boys in building blocks products even with appealing themes. Therefore, thorough target segment research involving focus groups and interviews is recommended to mitigate this risk. Secondly, there is low barrier to entry in this sub category of end-users. The competitors are easily able to compete in this market segment, by designing similar products with themes that will be targeting girls instead of boys. This is possible because re-tooling of the equipment is not costly, as the machines are manufactured to be able to handle multiple designs. Lastly, the increased control over licensing agreement is another major concern: with the themes involving Disney characters, it will be very competitive to acquire licensing agreements, given the previous relationship Disney has with Mattel and Hasbro. Fortunately, this risk can be mitigated by creating themes that do not use the characters’ names or key features, thus avoiding any misjudgment or legal conflicts. Alternative 2: Expand product lines targeting adults/previous LEGO users Given LEGO’s long history of being in the toy business, it is correct to assume that the older generation, who are the parents of the children that LEGO targets, have had experience playing LEGO sets. This fact brings up two unique and strong bases for an inimitable business strategy: 1). By targeting the adults LEGO will increase the size of its potential market. Re-attracting the once loyal customers will not involve complicated new marketing strategies as they can be easily connected based on nostalgic elements. While the threat comes from commoditization of LEGO sets due to similar products being produced by LEGO’s competitors, the past user experience of playing with LEGO sets will never be able to be copied. 2). Furthermore, the distinction between children as consumers and parents as customers made it difficult for LEGO to align the interests and expectations of its two stakeholders. Product expansion into the adult market enables LEGO to focus only on the product development as adults will not necessarily look for traditional values (i. e. educational factors) that LEGO toys have. Fortunately, LEGO for adults will not be a pioneer project. Around the world, many LEGO fans have uploaded pictures of items creatively made by the fans themselves with LEGO pieces (APPENDIX D). LEGO for adults will reflect this on-going global trend and design specialized LEGO pieces for adult users. LEGO for adult users will be used for professional and hobby-related purposes. Engineers can use LEGO to design new bridges, buildings and landmarks while general hobbyists can build a new computer case, frame for pictures and small stools. While LEGO sets for children was considered a toy, LEGO for adults will be a whole new category allowing its users to create art, functional items and highly creative masterpieces to attach unique personal experience and irreplaceable values. Recommendation (Appendix D) Ultimately, it is recommended for LEGO management to undertake the second alternative, to redesign the existing LEGO pieces to be more functional and target the adults. Although other strategy is a viable option, in order to address the concern of competition from absence of patents, lack of product differentiation, and higher dependency on popular licensors, the aforementioned solution is the most suitable. By tapping into this huge demographic consisting of many previous LEGO users, LEGO will diversify its product lines, gain a new channel for revenue generation, protect its brand from competitors’ similar products and maintain high brand recognition from wider targets. LEGO building sets for adults will protect LEGO with a new patent and decades of established loyalty. The LEGO sets for adults will be sold online for two main reasons: 1). This new product line is in an unique product category that does not belong in either the traditional toy stores r the home hardware department. 2). Adults have the mean to purchase (i. e. credit cards) things sold online. Furthermore, the unclear future due to Disney’s purchase of Marvel will be neutralized with the concept of the LEGO sets for adults. While the association of popular pop culture in LEGO theme is important to appeal to children, adults will be more concerned with what they can make with the pieces. Therefore, these new LEGO pieces will be bigger, come in greater variety in shapes and allow more complicated technical flexibility and aesthetic brevity. Upon a glance, completed sets made with such pieces will fit well with other furniture and items in a typical household. LEGO can effectively leverage the current usage of LEGO sets by the professionals and hobbyists like the University of Cambridge and Nathan Sawaya to showcase how they use LEGO. Finally, it is highly likely that once the adults start purchasing and manipulating LEGO sets for their own use, they will opt to buy toys and the traditional LEGO sets from LEGO for their own children, establishing stronger and wider customer retention for many years to come.