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.
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$83.3 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...