Lego Strategic Management Case Study

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On the societal front, the Group has been providing a safe working environment for its 17,294 employees, adhering to stringent safety measures and successfully reduced the number of injuries per one million man hours among from 1.7 in 2014 to 1.4 in 2015, the lowest rate ever achieved by the Group.[10] Besides ensuring safety, the Group also focuses on bringing diversity to its employee base. In 2015, the Group achieved gender balance in its workforce by having 43% females.[11]

3.0 External Analysis

- PEST Analysis

Political Factors:

Being a multinational company, the Group’s activities are affected by the political situation in the countries it is operating in. In the United States of America, where the Group derives the bulk of its revenue, there are regulations for promoting safe toys for kids, such as the permitted plastic content in the toys, reporting procedure for choking, and hazard warning for small components. The Group has to respond swiftly to any changes in these regulations to quickly abide by the rules. In some countries, there has been criticism against the advertisements of the Group’s products claiming that they were aimed primarily at boys and that the Group’s product line is gender biased. The Group swiftly quelled the criticism by developing LEGO Friends, a new product line specifically targeted at girls.

LEGO has production facilities in Denmark, Hungary, Mexico and Czech Republic and its factory, which is located in China is expected to be ready for production by 2017. Product distribution to other countries tend to be affected by the political decisions in these countries where production facilities are located. Another concern would be the high import taxes imposed by many of the developing nations where it is exporting the products to. The Group has not been negatively impacted by political changes so far.

Economic Factors:

Global economic slowdown impacts the Group’s sales, especially in Europe, due to the debt crisis. As projected by Organization for Economic Cooperation and Development (OECD), there will be a high growth in the disposable income of the middle class in developing countries and this particular segment will potentially have the greatest growth potential for a typical toy manufacturer. On the other hand, the demand for similar toys in developed economy is decreasing or is almost flat.

Socio-cultural Factors:

Increase in standard of living, education quality and participation of women in labor market has resulted in increased discretionary spending. These attributes to the increase in disposable income available for the consumers and hence augments the share of income consumers can afford to spend on toys. Since most of the LEGO toys are made of plastic, there is a pressure on LEGO to produce environment friendly products. Although LEGO couldn’t contribute much in this regards, it has been actively contributing in many other social initiatives like work safety, labor standards and human rights. These contributions created an overall positive impact on LEGO’s brand image.

Technological factors:

Due to high competition in toy industry, it is important to respond swiftly to the changes in the market trends. Being in the toy industry, the use of latest technology in the development of new products has been of vital importance for LEGO. The company was able to attract the attention of the market with its frequent introduction of better and technologically sophisticated toys. Technological advancements in the gaming industry has posed a threat to the LEGO products. The availability of electronic devices like tablets and smartphones, which provide convenient platforms to engage children in games and activities is posing a threat to the sales of the LEGO products.

- Porter’s Five Forces Analysis

Bargaining power of suppliers:

The main raw material for LEGO products is a chemical called Acrylonitrile Butadiene Styrene (ABS) which is provided by Lanxess AG, a subsidiary of Bayer AG. It is the exclusive supplier of this raw material for LEGO. Although there are other suppliers for ABS in the industry, they may not be able to provide the same quality of ABS as Lanxess AG does. Since the Group depends only on one supplier for its main raw material, the bargaining power of supplier is quite high, which is a threat to the company. The Group’s investment in Sustainable Material Centre may help to ameliorate this situation, if the research and development proves to be successful.[pic 5]

Level of Threat: High

Bargaining power of buyers:

While consumers are the end buyers for the products, they buy through big retailers, such as Walmart and Toys“R”Us. These retailers have some bargaining power over the manufacturer as they have the final say on whether to carry LEGO products in their stores. The Group reduced its dependency on large retailers by setting up retail stores around the world and online store. The end consumers in developing countries are price sensitive but with the production facility opening in China in 2017, the cost to build LEGO products will go down. Also, loyal customers of LEGO products will prioritize the quality over price.

Level of Threat: Medium

Threat of entry:

There is a high barrier to entry in the toy industry for new entrants. Major players in the industry benefit from economies of scale and have cost advantage over the new entrants. In addition, established names like LEGO, Mattel and Hasbro have manufacturing plants in low-wage countries which give them a production cost advantage over the new entrants who may be forced to produce and sell in the same geographical location due to the limitation of resources. Existing companies may potentially retaliate by adopting aggressive and predatory pricing strategies. The potential entrant’s inability to achieve sizable economies of scale relative to that of the incumbent makes it an attractive industry for LEGO to be in. LEGO’s tie-ups with cartoon and movie franchises, including Star Wars, Toy Story, Indiana Jones, Prince of Persia, Pirates of the Caribbean and Harry Potter, permit it to be the licensed manufacturer of goods based on these cartoons and movies. A new entrant would struggle to compete for high profile franchises. Children's preferences change with time as