The document provides a background on Lego and analyzes its business using various frameworks. It discusses how Lego started as a carpentry workshop and transitioned to plastic toys. It also covers Lego's expansion into media and licensing popular franchises. The analysis includes a PESTLE analysis of the political, economic, social, technological, environmental and legal factors impacting Lego. It also performs a Porter's Five Forces analysis of the competitive forces in the industry. Finally, it presents a SWOT analysis of Lego's strengths, weaknesses, opportunities and threats. The document concludes with recommendations for Lego to invest in technology to blend physical and digital play and maximize efficiency in its supply chain.

1. Group Case: Lego
Professor HoWook Shin
BPS 4305.002
Devyn Gonzales
Abdullah Tanveer
Christopher Thomas
Eliazar Saucedo
October 13, 2014
Background:

2. The Lego group as we know it today started off as a carpenter workshop back in 1916.
They were a company that provided services to build houses and furniture items for the rural
farming communities surrounding them. In 1932 the company started building wood toys and as
of 1947 moved onto making plastic versions. Today the company is known for their highly
creative learning and building toys all over the world. In the past couple of decades Lego has
moved into the media industry focusing on books, video games, TV shows, and now full length
movies. With this move came a larger audience to sell products to, however this idea was not
without its faults. The fear of expanding the brand image meant losing the core values of Lego,
“brand fragmentation presented dual challenges of maintaining a focus on the substance and
distinction of Lego heritage, while allowing for continuous innovation and expansion into new
business”. (Schultz 7) While designs might have become more intricate over the years, the basic
building block mentality resonates throughout the company. Creative, durable, and
interchangeable; Lego has proven that simplicity can sell.
It has not been an easy ride for Lego since they moved into the toy market in 1932. The
toy industry is dealing with a fast pace competitive market capable of changing with short notice.
Trends tend to follow fads going on in other industries such as movies and television shows.
With saying that Lego capitalizes when possible to stay up with current events. Movie tie-ins
with popular franchises like Disney’s Pirates, Pixar’s Toy story, Cars, and J.K. Rowling’s Harry
Potter all have seen higher sales in the years when the movies release. Constantly obtaining the
rights to using these franchises are proving beneficial to Lego when trying to gain competitive
advantages. Over the past years Lego has seen profits rise as seen in illustration 1 in a toy
industry with companies like Hasbro and Mattel right on their tail, feeding the intense

3. competition for market share (Toys and Games Industry Profile: Global, 23). Lego will need to
understand their weaknesses in order to better compensate for such competition.
PESTLE Analysis:
Political and legal: A key issue discussed in the case revolved around the high production costs
Lego faces. Majority of the toys sold in the United States are manufactured in China, where
subcontractors have taken responsibility to produce goods for the leading firms in the industry.
Due to these low wage rates in many countries on the Asian subcontinent, companies such as
Hasbro and Mattel pushed their manufacturing to the Far East during the 90’s (Rivkin, Thomke,
& Beyersdorfer 4). The management at Lego knew that cost reduction in such a competitive
industry is key and has also expanded its production facilities to countries such as China.
Although Spokesperson Roar Rude Trangbaek states “This [was] not a cost-cutting exercise [...]
It's a direct result of our strategy to have production close to the core markets” it sure helps
pushing labor in a country without strong wage laws such as Denmark (Hansegard & Burkitt).
Economic: During 2005-2009, the global toys and games industry grew at a compound annual
growth rate of 3.4 percent with total revenues of $66,301.3 million in 2009. The further growth is
expected within the upcoming years, however, exceeding growth levels of higher than 6.2
percent is unlikely but possible due to high demand in Asia. (Toys and Games Industry Profile:
Global 7). Focusing in on Lego, the firm faced a steady increase in revenues ranging from
$1,316.3 million in 2005 to $2,177.2 million in 2009 as represented by Illustration 1 (Toys and
Games Industry Profile: Global 23). With the growth in sales, Lego has also been able control its
costs as it saw an increase in profit margin from 2005 to 2009 from 7.2 percent to 18.9 percent
respectively as represented in illustration 2 (Toys and Games Industry Profile: Global 24). It is
important to note that despite making up the smallest portion of the revenues, sales within the

4. past few years in Asian countries such as India and China have soared by more than 50%
annually. Due to the improved wage and living conditions, there has become a growing interest
in educational toys (Hansegard & Burkitt). Combining the expected growth in the industry with
the increase in revenues and profit margin may just be what the Lego group needs to move up the
rankings in this competitive industry.
Social: Social tendencies such as fertility rates have shown to be directly correlated with the
success of the toy industry. When the birth rates in Western Europe and North America began to
decline in 90’s (1993-2003), the profit pool in the industry fell by 50 percent (Rivkin, Thomke,
& Beyersdorfer 3-4). Declining birth rates combined with variations in habits children display
and the amount of playing time they receive have been a real test for the toy industry. Results
from market research conducted in the 90’s showed that children had shorter attention spans and
preferred instant gratification as well as fashionable and electronic products (Rivkin, Thomke, &
Beyersdorfer 4). This has led to drastic changes in the industry as products have shorter product
cycles and increased competition with its electrical toy counterparts.
Technological: As mentioned above, the rise of technology serves as a major threat for not only
Lego, but the toy industry as a whole. With the developments of tablets and smartphones,
children have access to the endless possibilities the world wide web offers. Many app stores that
come standard on these devices contain numerous amount of games specifically designed for
children of all ages. Identifying threats on a production level, the introduction of 3D printers
could spell trouble for the industry as a whole. Many manufacturers do not have the physical
tools to produce variety of different patterns of blocks at the rate of production as firms such as
Lego, Mattel and Hasbro leaving them with a large portion of the industry profit pool.

5. Environmental: It may seem as if the environmental factors would be very limited in the toy
industry, however, when the slightest factors set you apart from the competition, being
environmentally sound can be key. Lego has shown it is committed to making a difference as
“The LEGO Group will reduce CO2 emissions by 10,000 tonnes in 2014. This is the estimated
impact of the global introduction of new, smaller LEGO® boxes (Vestberg).” President and CEO
Jørgen Vig Knudstorp believes “As a responsible company, we want to help preserve the forests,
their wildlife and all of their inhabitants to the benefit of the environment and future generations
(Vestberg).” This kind of dedication to being a company who is focused on more than its own
profits catches the eyes of many and leads to free marketing in many cases through press
releases.
Porter’s Five Forces:
Power of Supplier: The power of suppliers is a very important force when it comes to Lego.
This is illustrated by the fact that a single missing piece can potentially hold up the sale an entire
kit. Keeping this in mind it is easy to see that the suppliers could potentially hold Lego hostage
by refusing to produce products to obtain favorable terms in negotiations. This is not to say that
Lego is powerless as they do put a lot of effort into developing mutually beneficial relationships
with their suppliers to avoid potential issues. Furthermore, a supplier for Lego does hold some
moderate influence in the pricing of finished products due to the price of raw materials. Other
influential factors include global economic connections that could impede Lego’s ability to have
their raw materials delivered on time. These kinds of relationships are also essential when it
comes to power of suppliers.
Power of Buyer: While Lego does set their prices, a consumer has many routes they could take
to purchase the toy. One could buy directly from Lego online or in stores, or they can buy from

6. retailers such as Toys R us or Walmart. This gives them an advantage when trying to find the
right deals. Wal-Mart and other big box retailers push Lego to have smaller profit margins in
order to get the products at a cheaper price and remain competitive. Retailers place a massive
value on shelf space and are always doing everything possible to make sure that inventory is
being sold quickly, sometimes this means pushing for lower prices which may not align with
Lego’s intentions.This limits the ability for Lego to have power when selling as they must keep
up their market share. Consequentially, it means that the power of buyers is fairly moderate as
they have many routes to finding the right deal of a desired product.
Competitive Rivalry: The toy industry naturally promotes a strong competition. There is a finite
number of time that kids play with toys and at a certain age they may outgrow certain kinds of
toys altogether. Essentially, this means that companies are fighting for a share of that play time.
When it comes to direct competitors, there are few block building companies. However, any
company that develops a toy can be considered a competitor for the reasons stated above.
Furthermore, even video games can be considered a competitor as it takes up time that would
otherwise be given to play with their product. A direct rivalry to consider is Mega Bloks, a
Canadian toy company under the name of Mega Brands. This company has the same target
market as Lego and aim to compete head to head. The toys are very similar leading to a natural
competition between one another.
Threats of Substitution: Mega Bloks will be the biggest direct competitor to Lego. While they
are not as well known, the company has always been on the same toy isle. They focus on
building block toys very similar to those of Lego. In recent years Mega Bloks has incorporated
tie-ins with video games,such as HALO, that are enabling the company to gain more market
share and brand recognition in the toy world (De Groote). Their usage of exclusive licenses is

7. similar to Lego and they are rapidly becoming a bigger competitor. Another important distinction
is Mega Bloks price point which is much lower than Lego. Mega Bloks may be a more
convenient alternative for parents who want to buy toys for their kids as they are cheaper and
more easily replaceable. Parents may be of the opinion that their kids will only play with these
kinds of toys a few times, so there is no need to purchase a premium product like Lego bricks.
However, Lego employees would say,"what's more expensive, a toy that gets used once on
Christmas day and then gets discarded that costs $10, or a Lego set that costs $50 and that gets
passed down three generations or more?” (De Groote).
Threats of New Entry: The threat of new entry is high as many big toy companies like Hasbro
can move into their segment with little issue if they wanted to. To counter this Lego has to build
competitive advantages in price or differentiation. Since lego is a premium product they would
most likely focus on differentiating themselves through superior quality and rely on their brand
equity. It is important for Lego to emphasize this distinction so that they can persuade customers
that it is worth it to choose their product over a competitor’s offering. New entries in the form of
a brand new business are considered a low threat of entry. This is due to the scale and price point
that the emerging companies would have to compete at in order to stay competitive with the likes
of Lego and Mega Bloks. It is not feasible for a brand new competitor to compete on the same
scale as Lego, Hasbro, and Mattel. Any new companies would be fighting to gain a small piece
of market share and would be at a big disadvantage due to the aforementioned brands established
brand recognition and awareness. These factors make it extremely unlikely that any new entry
into the toy market would become a big enough threat to steal market share from Lego.
SWOT Analysis

8. Strengths: Lego has very high brand equity, that is to say many people understand the value that
is attached to the Lego brand, and therefore are willing to pay premium prices for their products
(Tyler). This means that they can price things at a more profitable rate compared to their
competitors. Lego promotes strong customer loyalty because it is a brand that many adults grew
up with and has a strong history of success. As one salesperson of Lego notes “everybody loves
Lego, whether they are adults or children. It is a truly multi generational toy” (Tyler).This
attachment to the brand itself makes customers have a good opinion of Lego, and more likely to
keep on purchasing their products. Another big strength is their utilization of exclusive licenses.
One example is the Lego Star Wars products mentioned in the case report. Their utilization of
these licenses provides them exclusives rights at creating related products and also provides
additional barriers to competitors (Fishman). Lego has established a strong position in the market
and is poised to remain a strong competitor because of their strong brand equity, customer
loyalty, and exclusive licenses.
Weaknesses: Their premium price can be viewed as a weakness as well because they price
themselves out of the consideration of some consumers (De Groote). Another weakness is their
focus on bricks as their main product. This lack of diversification compared to Hasbro leaves
Lego very susceptible to changes in the perception of their product. For example, if a brand new
flashier product is created by a competitor, Lego would feel the impact significantly because
they strongly specialize in this kind of product whereas Hasbro would be better prepared to react
to market fluctuations. Another point of weakness has been in coordinating production with
demand.This has been a contributing factor during their times of hardship as they had trouble
optimizing their supply chain management and often times were out of inventory of some of
their most popular products due to one or a few small pieces missing.

9. Opportunities: One of the biggest opportunities going forward is developing a strong presence
in growing markets like Asia, and India. They hold a strong market share in the United States but
building one in other countries would only cement their market leadership. Their strong brand
recognition and brand awareness would be beneficial when attempting to build a presence in
these developing countries. Further opportunities are present in their utilization of exclusive
licenses. They have had overwhelming success with these products and will look to continue to
capitalize on popular franchises like Star Wars, Marvel, Harry Potter and more (Fishman).
Diversifying into other types of products would provide them with stronger resistance to
fluctuations in the market and allow them to seize market share in other kinds of industries. They
already hold a 70 percent share in the construction toy market, but are not nearly as strong in
other markets (De Groote).
Threats: The overwhelming threat is technology in general. The new generation of children is
growing up with rapidly developing technology. This means that rather than playing with Lego
blocks, a lot of kids are playing games on smartphones, tablets, game consoles, or watching
television. In general there is much less demand for the type of product that Lego specializes in
today than say, twenty years ago. Technology provides almost limitless opportunities when it
comes to games or entertainment which is very hard to compare to Lego’s block products. The
price point is also a big issue because there are some Lego block products that retail at hundreds
of dollars, whereas you could pick up a quality tablet for the same price. When you weigh these
two options there are less and less consumers who would chose the Lego product over a tablet.
This however is not the only threat to Lego. Many other companies are offering cheaper
alternatives of blocks which only further cuts into Lego’s market share and profits.
Solutions:

10. Lego is at a really important point currently where they need to decide what kinds of
products they are going to branch out further into, including technology related things like apps,
games, and movies. The replacing of lego bricks with technology is an unwelcome trend for the
executives at Lego and one that needs to be reversed if Lego is to ascend to new heights of
success. Our recommendations include investing heavily into the technology sector through
research and development to develop an innovative way to blend the Lego brand and smart
phones and tablets. Currently Lego offers a high number of applications for both android and
apple smartphones and tablets however, most of these games are not of the same quality as the
usual offerings from Lego. One possibility is for Lego to follow the footsteps of nintendo’s
Amiibo products, which are a series of figures that interact with Nintendo’s game consoles
through Near Field Communications (NFC). The Amiibo figures allow data to be processed
across multiple platforms and also serve as collectible figures of cherished Nintendo characters.
With as popular as Lego is, they should be able to further promote the purchases of their brick
products if the figures allowed for some type of unlockable content in a smart phone game or
application. The success of this kind of idea would depend on the technology part of the equation
for Lego, as it would have to be something meaningful and entertaining. The marketing and
promotion would also be very important; the application or game aspect could serve as a
platform to promote brand awareness and alert customers of upcoming products or deals on
current products. Another focal point of our recommendation is Lego’s ability fully capitalize on
the demand of their most popular products. To achieve this they need to maximize efficiency in
their supply chain to avoid any lost sales or any delays in getting the product to the customer.
The market is always changing and Lego has to be innovative enough to capitalize on changes,
this means devoting resources to R&D and trying to stay ahead of the curve with their products.

11. Future opportunities will also present themselves through licensing deals, which Lego has done a
good job of taking advantage of. The continuation of these kinds of deals is in the best interest of
Lego as they capitalize on the popularity of other franchises by leveraging off of their brand
equity while also keeping the Lego brand fresh on the minds of consumers.
Summary:
Lego is a company that is shaped by the trends of the market. While they might change
designs or colors over the years in order to grab the attention of their buyers, there is something
still very simplistic about the brand and what is represents. Lego set out to build a toy that would
not only entertain, but educate those creative minds that fill their target audience. With any
growing company choices will have to be made. The choices in Lego’s case are illustrated by the
effects of intricacy over efficiency and overall quality determining the bottom line. While these
choices are not set in stone, they do shape what the company is today.

12. Exhibits:
Illustration 1: The Lego Group: key financials ($)
Illustration 2: The Lego Group: key financial ratios

13. Bibliography
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