Q1 Evaluate the external environment in which the LEGO Group operates in.
Conducting the external environment analysis will allow us to examine the opportunities and threats that the LEGO Group faced. We will go through the environment level using PESTEL framework followed by industry level using Porter’s Five Forces Framework.
1. PESTEL Analysis
PESTEL Analysis
Positive
Negative
Political
Economic
Highly seasonal
Presents uncertainty over sales
Geographical scope and market presence
Going into new market for higher growth
Stagnant and mature market
Social
Change in playing habits
Stop playing with traditional toys
Large female market
Diversify and take up more market share
Technological
Growth in electronic toys
Might impact
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The differentiation in invocation and quality products will also render new entrants difficult to enter the market. Although the access to distribution channel is low and the expected retaliation in terms of price wars will low due to the being established companies, the threat of new entrants is assess to be moderately.
b. Power of buyer
Buyer can have other alternatives buying from LEGO such as switching to Mega Bloks and the switching cost for them is low. Therefore the bargaining power of buyer is considered high.
c. Power of suppliers
We would consider the bargaining power of supplier to be low as the switching cost is low and materials used for making plastics and generally available and not scarce.
d. Intensity of Rivalry
LEGO group is ranked number three in the market and the fixed cost of the toy industry is high. The exit barrier for toy industry is also high as there might be no buyer since most things are going digital nowadays. Therefore, intensity of rivalry is high.
e. Threat of Substitute Products
The threat of substitute products is high as we can see that there are many other toys available from electronic toys to playing in digital world.
From using the Porter’s Five Forces framework, we can say that the industry faces threat from buyers, competitors and substitute products. Attention should be place on competitors and substitute products as they posed significant threat to the LEGO Group. We can see that competitors have been
To achieve its business strategies the LEGO has taken the help of the IT vendors IBM and SAP for the establishment of their IS making it possible to extend more quickly and add capacity and functionality as it was needed. Supporting massive expansion brings its own challenges, one of which is to ensure that the underlying systems can scale reliably and effectively. The main issues with the supply chain management, end customer feedbacks, product profit accountability, spread its market and the various unit functioning etc. had been addressed completely by the advent and the establishment of the efficient IS for the business.
Bargaining Power of Suppliers: The bargaining power of suppliers in the industry is low. There are numerous suppliers in this industry, and the large department stores have the ability to negotiate for the lowest prices. In addition, the switching costs are low, as the products are not highly differentiated. There are a large volume of purchases in the industry, allowing the department stores to exert even more power over the suppliers.
Bargaining power of buyers is medium-high because of the low switching costs and wider spectrum of similar products selling at competitive prices due to the influence of developing countries
The Lego Group tried to catch up the market trends during the period, but they ignored that the industry total profit pool decreased by 50% Between 1999 and 2003. It's naturally for players to reduce mass production and focus on core competency. However, the Lego Group invested significantly in expansion not only in brick-based product lines, but also beyond the brick. The expansion was not focusing on its core competency.
reviewed. This is analysed by putting the article in to a wider debate about strategy, then
LEGO, like most companies in the toy industry are fighting to stay profitable in this
There are many barriers to new organizations in the toy industry, making the threat of new entrants low. Lego and other big toy companies like Mattel benefit from economies of scale. An economy of scale is achieved by lower costs through large volume production (Textbook glossary). Economies of scale can occur in many departments within the organization including production, marketing, research and development, and finance. Some manufacturing of Lego products was shifted to Central Europe and Mexico in order to benefit from lower wages and to shorten product supply chains (p. 13 of case). The management of Lego additionally holds expertise on production, distribution and customer needs; which are absent in a new organization. To enter the toy sector a potential entrant needs to calculate the start of production at a level that will give a competitive position and production costs lower than the market.
Based on the case study Lego appears to be using the Focus strategy. Michael Porter proposed three generic strategies Cost Leadership, Differentiation and Focus. Focus is a strategy where organization focuses on specific niche markets; this may include a particular geographic region or particular segment of customers. Organizations which use this strategy develop their products after having a study of dynamics of the segment and unique needs of customer. Lego before the appointment of the new CEO appear to use the focus strategy as their top priority was always to focus on innovation and creativity with taking profits into consideration. Add to that the case study also mention that Lego used to create products that primarily targeted boys. After the appointment of new CEO Jorgen Vig Knudstorp the company appears to have changed its policy form Focus to Cost-Leadership. Cost-Leadership is a strategy where organizations focus on gaining competitive advantage by offering products and services at the lowest possible price. They achieve this by increasing profits by reducing production cost and other way is to increase market share by reducing the prices of products compared to the competitors. Knudstorp after taking charge of Lego changed their focus on reducing the production
The market greatly depends on how powerful buyers are in terms of their willingness to pay certain prices. The following determines the bargaining power of buyers
More young children prefer the game in Ipad video game and online game rather than traditional toys; therefore Toys R Us is facing on high threat of substitution.
Ever since LEGO started experiencing double digit annual sales growth, (by launching new toy games, branded theme parks, entering the video game sector, introducing mobile applications, introducing toys for girls, etc.) they realized they needed a model that was standardized, modular and scalable. Hence, allowing them to expand to new markets in a less amount of time. They already had a decently established market in USA and UK; they were looking for an expansion in other countries as well. This model had to tackle major issues like scalability challenges, employee
In 2002 and beginning of 2003 LEGO struggle with low sales and an increase in their inventory levels due to an intensification of their competitors, adapting their process as LEGO did in the beginning
The Lego Mindstorms series of kits contain software and hardware to create customizable, programmable robots. They include an intelligent brick computer that controls the system, a set of modular sensors and motors, and Lego parts from the Technic line to create the mechanical systems.
environment in the lead up to 2004. The essay will then go on to consider the position of the Lego group from
The LEGO Group is a privately held company based in Billund, Denmark. It was founded in 1932 by Ole Kirk Kristiansen, initially a small carpenter’s workshop (Lego Group, 2011). It has since grown into a modern, global enterprise that is now, in terms of sales, the world’s fourth-largest manufacturer of toys (Keynote, 2010). The LEGO Groups core product is a line of plastic, interconnecting building bricks, predominantly targeted at children aged 3-14 years, sold in over 130 Countries (Encyclopaedia of Consumer Brands, 1994). The LEGO Group operate globally in the Toys & Games sector, with the UK market valued at