Introduction
Investors must evaluate the effectiveness of their strategies to ensure they do not waste time and resources on unnecessary expeditions. The need to develop management strategies pushes managers and other senior employees to invest in research and consultations to ensure they have the relevant knowledge about various approaches used to improve performance (David 2012).
It is necessary to explain that business strategies are not static; therefore, managers should continue to develop new approaches that will ensure the operations of their companies are relevant, acceptable and reward their factors of production. This discussion presents an analysis of a case study about how LEGO Group worked with strategy to influence its performance.
Company Background
The management of The Lego Group has never left the family of its founder Ole Kirk Christiansen. It was established in 1932 in Billund, Denmark and used to manufacture wooden toys, ironing boards, stools and stepladders. However, the demand and market for wooden toys surpassed those of other products and this forced this company to specialise in this line of production.
Today, it is the fifth largest company in the world that manufactures plastic and to some extend wooden toys. It has been managed by Ole Kirk Christiansen, Godtfred, Kjeld Kirk and Jorgen Vig Knudstorp. A report prepared in 2012 the revenue of this company was estimated to be 2.956 billion Euros. In addition, it had an operating capital of 1.001 billion and net income of 706 million Euros.
It has more than 10,000 employees working in different branches located in Germany, America, Malaysia and other countries. This company started facing financial difficulties in the 1970s and 1980s, when its future was threatened by strategic uncertainty and poor performance. It took this company more than a decade to restructure and regain its excellent performance and this highlights the need for it to evaluate important strategic management issues.
Features of Its External Environment
The LEGO Group has been influenced by various external environmental features that have shaped its management strategies. PESTEL, 5 Forces and strategic group models will be used to explain how this organisation has adopted different strategies in ensuring that it succeeds in developing an effective performance strategy.
PESTEL Analysis
This analysis examines the macro-economic factors that affected this company and led to the development of performance and management strategic plans (Schroeder and Goldstein 2010). These factors involve political, economic, social, technological, environmental and legal features that played significant roles in shaping the practices of The LEGO Group.
Political factors refer to organisational aspects that were influenced by the government and which affected its activities (Reeves 2012). Denmark offered conducive conditions for the activities of this company to thrive. The education system allowed this company to supply toys that were used to enhance learning in children. This promoted the popularity of this company and ensured its products fetched good prices in the local market.
Taxation policies did not affect its performance; therefore, it had ample time to concentrate on its activities without worrying about the levies imposed on its products by the government. However, environmental laws played minor roles in limiting consumers’ demand for plastic toys. The government required companies to use environment-friendly ways of production; therefore, this limited the popularity of plastic toys.
Political stability in Denmark helped this company to perform its duties without interference. Secondly, economic factors like inflation, exchange rates and the oil crisis were responsible for the slow growth of this company witnessed in the 1970s and 1980s. The economy of Denmark did not grow as it was anticipated by many investors and this means that companies like The LEGO Group were forced to reduce their recurrent expenses to cushion their capital against inflation.
This company registered poor sales before 2008 and this was orchestrated by a decline in the international economy. Most people concentrated on the need to reduce their budgets to cut their expenses. In addition, competitions from other companies like Mattel, Bandai-Namco, Hasbro, Tomy-Takara and MGA Entertainment forced this company to lower the costs of its toys.
This company experienced economic difficulties and this forced it to sack 1000 employees in 1999. Lastly, the exchange rate of the USS weakened and traded poorly against the Danish Krone. The social factors that affected the performance of this company include the resistance of customers from buying plastic toys. They were used to wooden toys because of their health concerns and long life. In addition, lifestyles were changing and children wanted toys that reflected current developments in the entertainment industry.
This forced this company to struggle to adopt themes and models that reflected trends in the entertainment industry’ for instance, the successful production and launch of Harry Porter and Star Wars led to an increase in demand for toys that portrayed the themes of these movies. However, lack of new movies in 2003 led to a slump in production and sales of this company.
Moreover, children were learning very first and thus they required sophisticated toys and this threatened the lifespan of the products of this company. In addition, this company faced barriers to entry because of changes in technology. The need to shift from wooden to plastic toys meant that it had to spend more money on the production and marketing of its products. However, this was not proportional to the demand for plastic toys because consumers did not receive the new products positively.
Even though, this company innovated new products it started most of its financial calendars with high inventories in the shops and this forced it to offer discounts or wait for retailers to finish old stocks. Parents with young children are the main clients of this company and this means that it has limited ability to retain its customers. Lastly, technological factors impacted negatively on the performance of this company during the 1970s and 1980s.
Consumers were reluctant to purchase plastic toys because of the need to preserve their traditional tastes. The company was at cross-roads because of the need to keep pace with the demands of modern technology that was adopted by its competitors. In addition, toys differ depending on the era and generation targeted. This forced this company to keep inventing new techniques and modify its products to reflect changes in technology.
Porter’s Five Forces
Michael E. Porter proposed five forces that are responsible for shaping the strategies used by a company in planning its management and production processes (Pynes 2013). He defined industries depending on their attractiveness and claims that pure competitions drive organisations to get normal profits. On the other hand, attractive organisations combine the five forces of Industrial Organisation Economics (IOE) to initiate change and ensure they generate profits.
The forces he identified include the bargaining power of suppliers and consumers, threats of new entrants and new products and competitive rivalry within an industry. These forces help companies to offer attractive services and products and generate higher profits than their competitors in the industry (Stevenson 2011). These forces have influenced the strategy development of the Lego Group in the following ways.
Threat of new entrants refers to competition offered by other companies that wish to invest in business activities (Rosenbaum 2013). The Lego Group specialises in the production of toys that have high demand in local and international markets. This means that this industry attracts investors from different spheres. New entrants reduce market for products and services because of increased supply. In addition, they lower the prices of products in the market to attract customers and this reduces the profits generated by a company.
Competition makes companies to struggle to acquire modern technology, give discounts and invest in marketing strategies to protect their brand names from copyright infringement and manipulation by their competitors. Even though, this company had established its brand name in the toy industry new entrants like Sony, Activision, Nintendo and Visual Arts were serious threats to the success of this company.
Their entrance in the toy industry had huge impacts because they used sophisticated technology and produced advanced electronic games for children. The demand for Lego’s products was reduced because this company was unable to immediately keep with the pace of new entrants in producing new and more exciting products.
Therefore, it was necessary for it to diversify the production of toys and formed partnerships with film, clothing and games companies. In addition, it started offering other entertainment activities like parks and social centres to market its products and diversify its risks.
In addition, the threat of substitute products or services started hitting this company when it invested in plastic toys. This move had serious consequences on this company even though it had long-term benefits. Other companies like Mattel and Hasbro had started producing plastic toys and did not have serious impacts in penetrating their markets.
However, this company was traditionally concerned with wooden products and this made it difficult for it to persuade its customers to buy its products. In addition, it had already saturated its market with wooden products and retailers were not ready to add new stock yet they had huge inventories of wooden toys. In addition, parks are frequented during holidays like Easter and Christmas and this means that this company had limited products and services.
Therefore, it had to develop products that would be used during other times of the year. Chase boards and other indoor games were introduced and this reduced competition from substitute product. In addition, it started to focus on family games and this supplemented its sales during low seasons. The high quality of the toys produced by this company is perhaps the only factor that enabled it to retain customers.
The bargaining power of customers affects the volume of services of goods a company produces. In addition, it determines the production and supply strategies organisations use to market their products. It is the ability of clients to ensure a company is put under pressure to produce quality, cheap, affordable and adequate products to satisfy their demands. The LEGO Group failed to implement a loyalty plan to ensure it reduced the power of its clients.
The need to reward loyal customers is a strategy employed by most companies to ensure their clients are loyal and have minimal influence on their production processes. For instance, the resistance of customers to buy plastic toys produced by this company shows their power in controlling the activities of this organisation.
This company had minimal bargaining leverage powers and this exposed it to financial uncertainties that saw it register different performance records within a short time. Buyers were not sensitive to the prices of toys, but they concentrated on the uniqueness of the products offered by all companies in this sector. Some clients preferred wooden toys because of their health advantages and durability. However, they were very few and this means that the process of adopting the production of plastic toys was inevitable.
In addition, the bargaining powers of suppliers bring long-term benefits to organisations (Zenger 2013). The need to reduce operation costs enabled it to sack 1000 workers, even though the impacts of this were not realised as soon as they were expected. In addition, this company realised the need to use professional skills to ensure its production met the demands of consumer and compete effectively with other similar investments.
For instance, this company decided to seek the services of experts and hired a Chief Operating Officer (COO). This helped it to develop a restructuring and cost cutting programme that reduced the number of its employees and the launch of Lego Star Wars products and opening of LEGOLAND in California.
Strategic Groups
This company used this strategy to reduce competition and diversify its products in the international and local market. Strategic groups are links and partnerships formed by companies that have similar activities or specialise in offering related services.
This company is ranked highly in the global production and sale of toys. However, this does not exclude it from competitive rivalry witnessed in this industry since the 1940s. It tries very hard to change its products and services to ensure consumers are offered the best value for their money.
For instance, it rebranded its product name from LEGO DUPLO to LEGO EXPLORER even though this step did not have positive impacts on its sales. In addition, it established a sustainable growth programme that included the opening of its own distribution shop in the U.S. in 2003. Moreover, it started inviting users to assist and participate in the development of its products.
The development of its digital strategy that led to the production and launch of its first online multiplayer game (LEGO Universe) had major positive impacts on its sales and enabled this company to attract new clients and develop trust in existing ones.
The partnership between the Lego Group and Warner Bros was welcome by investors and the public because it would promote diversity in the entertainment industry. However, transparency became a serious issue in this industry as other players like Tianjin Coko Toy, Best-Lock Construction Toys and Mega Blocks infringed on the patent rights of the Lego Group brick products.
Impacts of the Resources and Competencies
The Lego Group is a successful company because of its large capital base that enables this organisation to invest in different approaches to boost its performance. Even though, it faced financial difficulties in 2003 that led to huge losses. It has an operating capital of 1.001 billion Euros. This capital is adequate to enable this company to invest in modern technology, research, recruitment of professional staff and market its products.
New entrants do not have this amount of capital to compete with this company; therefore, the Lego Group’s foot is ahead of most of its competitors. In addition, it has experienced staff and recruits professional workers in its key departments to ensure it offers quality services to consumers. The toy industry is experiencing tremendous changes, especially because of the need to incorporate various technological aspects in its products.
This company has formed partnership with leading film producers like Warner Bros to ensure all latest movies are used to develop the themes of its parks. In addition, the company has invested in high cost countries and those that compete with China in political interests.
This is an effective strategy of ensuring that the market for its products is protected from cheap products from China. Manufacturing products through outsourcing is another strategy adopted by this company to reduce its production costs. For instance, the company signed an outsourcing agreement with Flextronics and this enabled it to manufacture 20% of its products in Billund; therefore, other processes to be done in regions like Eastern Europe that offer cheaper options.
Moreover, the management board did not fear to accommodate risks and thus it decided to order new equipment and increase production. Lastly, its foundation is based on the LEGO bricks and no matter what the global economy offers to this company it will not relent its quest to diversify its processes along this line.
Redundant and dynamic capabilities of this business enabled it to regain its success in producing, marketing and selling toys. The CEOs managed to learn the demands of its customers and at the same time use current technology in manufacturing its products. Some aspects of technology may reduce the impacts of new products on consumers, but this organisation ensured there were less drawbacks associated with changes in technology used to produce toys.
For instance, the procurement processes were reviewed and suppliers reduced to cut costs. Secondly, the company embraced partnership and outsourced some services like the production of some products from cheap locations to reduce operation costs. This enabled this company to sense opportunities and shape them to meet the demands of its clients.
For instance, the introduction of family games was a major boost that ensured this company manufactured products that would fetch high demand throughout the year. In addition, its employees learn very fast and adopt new strategies like the use of modern technology in communication, marketing and distribution of its products. The CEOs effectively coordinate, integrate and use strategic resources like capital, machines, technology and company’s rich history to improve the performance of this organisation.
The specialisation of the company’s employees, products and intellectual property provided energy and complemented the available financial assets. The combination of these assets ensured this company had a competitive advantage over other firms even if they offered cheap and a variety of products.
The distinctive characteristic of this company is marked by its structure and history. It has been led by the Christiansen family and only seeks expert management in issues that are beyond their abilities.
For example, the recruitment of the Chief Operating Officer in 1999 by Kjeld portrayed how this company had a unique way of outsourcing expert services in instances where its traditional managers were unable to offer quality services. In addition, it sought collaboration with other companies like Warner Bros, Flextronics and Wal-Mart to ensure its products penetrated into tough markets dominated by other giant toy producers.
The VRIN strategy employed by this company involved the identification of the key resources of this organisation. This includes the huge capital that helped the company to invest in research and innovative processes to ensure it produced quality products. The identification of the capabilities of this company is a key aspect that helped CEOs to plan and execute their strategies properly.
The need to combine the efforts of employees and company potentials enabled companies to rise every time they have financial difficulties (Williams 20110. 1999, was a period marked by financial difficulties that challenged the management and suitability of the operations of this organisation.
It was almost being declared bankrupt and sold to the Merlin Entertainment Group. In addition, the laying off of workers was a significant step towards developing effective cost reduction and sustainable programmes that would help this organisation to be on its feet once the financial crisis of 2007 subsided.
This company had strengths, weaknesses, opportunities and threats that played important roles in influencing the decisions of this organisation. First, its long standing tradition of producing wooden toys was a major strength that made it easy for this company to enter high cost markets.
In addition, the introduction of modern technology offered various opportunities for this organisation to develop diversify and improve its toys. However, it faced major threats from new entrants that had huge capital, experience and resources to invest in the international market. Conversely, its management system was decentralised and this was a major weakness before Jorgen introduced a decentralised form of leadership that allowed other employees to participate in key decision making.
Lastly, this company considers its products unique and its market sustainable. The demand for toys will never fade because people will continue to give birth and create new market for the products of this company. It is necessary to explain that this company aspired to maintain the value chain of its products to ensure it embraces a unique way of marketing. This will help it to compete effectively with similar companies and reduce confusion associated with brand names and qualities (Slack, Chambers and Johnston 2009).
Alternative Strategies
This company focuses on the internal mechanisms of generating capital and this is why it has limited abilities to expand and explore international markets. Therefore, it should consider other ways of generating additional capital through the following ways. First, it has a well established history and no financial institution can deny it loans to boost its working capital.
This is a simple way of ensuring the company has adequate funds to manage its activities and invest in technology, research and recruitment of professional workers (Martocchio 2012). Additional capital helps companies to explore investment opportunities in foreign markets.
It is not easy for a poor or newly established organisation to penetrate into new markets if it does not have the financial muscles necessary to manage the impacts of competition, inflation and the need to observe local conditions that allow investors to achieve their objectives. Moreover, the huge capital enabled this organisation to mitigate the effects of inflation and competition that causes huge inventories in retail outlets.
This strategy helped this organisation to manage various economic challenges that affected it in 1999 and 2003. Secondly, this company can merge with other similar organisations that are struggling to succeed in toy manufacturing. Mergers enable companies to boost their capital because it injects additional funds that will help strengthen their financial bases.
Moreover, it is necessary to explore the skills and abilities of different specialists from other companies because this enables companies to produce quality products and services. The need to equip employees with the relevant skills and knowledge regarding various operations highlight the importance of merging with companies that have experience, skills and knowledge that are relevant in this industry. It is necessary to explain that this company will reduce its operation costs if it merges with another company.
It will enjoy economies of scale and diversify its marketing strategies to promote its products. Different companies use different ways to market their products and this will be imported to this organisation if it decides to merge with such investments. The cost of purchasing modern equipment is very high and most organisations cannot afford to acquire new machines after every few years. This means that they must seek the assistance of other organisations so that they can reduce their expenses.
This means that merging with other organisations will ensure this company acquires modern technology without incurring huge expenses. In addition, it can acquire small firms to ensure it expands its ability to market toys in all regions. This is an effective way of minimising the influences of its competitors in international markets. Acquisitions enable organisations to get huge assets (physical, human and financial) that are available within a short time.
This enables companies to get already established investments and boost their performance. Moreover, it has to diversify its management and develop a decentralised strategy that will ensure all key employees play important roles in making the decisions of this company. Decentralisation of management will delegate responsibilities to workers and this will ensure every employee contributes his or her skills, experience and time to the success of this company.
Lastly, this company can outsource some of the services it has not attained professional experience in it. This includes web hosting, call centres and some roles of the human resource department. This will enable this company to get professional services from qualified and experienced services from other firms. In addition, it will reduce the costs of recruiting workers and ensure this company focuses on its core competencies.
Extent of LEGO’s Strategy Orientation
The Lego Group is a highly strategy oriented organisation and most of its plans seem to bear fruits and give it a head-start when competing with others. In addition, it failed and managed to rise in different occasions and has never been on its toes since it started its operations. The strategies executed by its current and last two CEOs continue to yield good results for this organisation and enable it to generate profits, diversify products and services and control the impacts of competition on its markets.
It is evident that this organisation has employed strategic management practices that ensure its practices reflect the demands of its consumers. The introduction of plastic toys was a major investment that was supposed to transform the performance of this organisation. However, this did not happen as it was expected and the company decided to focus on introducing new models and children parks to diversify its investments and cushion itself from imminent collapse.
References
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