MKT 351 Marketing Management Decisions

Case Study: LEGOs turnaround

Dr. Werner Jackstdt Endowed Chair

of Sales & Services Marketing

Prof. Dr. Florian Kraus

University of Mannheim
Fall term 2014

by
Philippine Bouvard

(1476944)

Wen Gao

(1479170)

Yingtong Gao

(1478586)

Kevin Garca Del Amor

(1478202)

Mara Garca Recalde

(1482322)

Elisa Gasp

(1478257)

Kirklynn Gates

(1449203)
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LEGOs turnaround

Table of contents
1.

Introduction to the LEGO Group...............................................................................................1

2.

Current position analysis.............................................................................................................2

2.1 Marketing Mix (4Ps) Analysis....................................................................................................2
2.2 Target customer analysis.............................................................................................................3
2.3. SWOT Analysis...........................................................................................................................3
2.3.1. Strengths..................................................................................................... 3
2.3.2. Weaknesses.................................................................................................. 4
2.3.3. Opportunities............................................................................................... 4
2.3.4. Threats....................................................................................................... 4
2.4 BCG Matrix.................................................................................................................................5

3.

Product decisions: expanding the product mix..........................................................................6

3.1 Product variation.........................................................................................................................6
3.2 Product differentiation................................................................................................................6
3.3 Product diversification.................................................................................................................6

4.

LEGOs strategy...........................................................................................................................7
4.1 Product differentiation................................................................................................................7
4.1.1 Horizontal and vertical differentiation.................................................................7
4.1.2 Tie in with popular culture................................................................................ 7
4.1.3 Fast introducing of new product.........................................................................7
4.1.4 Interchangeability and Compatibility...................................................................7
4.1.5 Customized to any age, interest and ability............................................................8
4.2 Product diversification.................................................................................................................8
4.2.1 Horizontal diversification.................................................................................8
4.2.2 Fan engagement............................................................................................. 8

5.

Assessment of the strategy...........................................................................................................8

5.1 Differentiation strategy analysis..................................................................................................8
5.2 Diversification strategy analysis..................................................................................................9
5.3 LEGOs strategy criticism..........................................................................................................10

6.

Future improvement recommendations....................................................................................10

LEGOs turnaround

1. Introduction to the LEGO Group

In 1932 Ole Kirk Christiansen created LEGO in Billund, Denmark. The LEGO word
derives from Danish Leg godt, which means play well. The company is known around
the world for producing plastic bricks in different colours, which can be assembled to
construct buildings, vehicles, or anything else the imagination can create. However, it was not
until 1949 when they started producing their famous blocks.
LEGO is today owned by the fourth generation of the Kirk Christiansen family and it still
maintains the same philosophy: good quality play enriches a child life as a key element in
their growth (Lego.com, 2011).
The vision of LEGO is very clear: Inventing the future of play. Its mission follows the
same path: Inspire and develop the builders of tomorrow. The values of LEGO are easy to
recognise; creativity, imagination, quality and security are the hallmark of the company.
(Aboutus.lego.com, 2008)

Over the years, LEGO has been reinventing itself, entering new markets and targeting
different groups. In 1998 LEGO went through a rough patch, due to the growth in the
electronic toy market, which made its yearly results become negative. They reacted to these
problems with internal changes, such as retails, staff replacements and the most successful
measure, agreements with Lucasfilm (Star Wars), the Harry Potter Franchise and Disney. As a
result, sales grew dramatically, helping the company become profitable again. After this,
LEGO experienced one more period of big losses in 2003 and 2004, when they reached losses
of 1,931 million of Danish Krone (around 230 million); however after making some
changes, the company went back on track in 2005.

Evolution of LEGO yearly results (mDKK)

LEGOs turnaround
Self-made with data from Annual Reports (Aboutus.lego.com)

Nowadays, LEGO has a very large number of product lines, which go from its famous
blocks to videogames or movies.
-

LEGO DUPLO: Big blocks designed especially for children between 0 and 5 years old.
LEGO BRICKS: The classical well-known blocks of the company.
LEGO THEMES: Based on stories or movies. Some of the most famous ones are LEGO
HARRY POTTER or LEGO STAR WARS. They also have a variant for girls, called

LEGO FRIENDS.
LEGO MINDSTORMS: LEGO brings us the possibility to create and programme

robots. The first one was launched in 1998.

LEGO EDUCATION: Aimed at teachers and students, when you work hands-on, you
remember better than if someone simply tells you (Aboutus.lego.com, A short

presentation 2014).
LEGO VIDEOGAMES: Adapted to the new trends, LEGO has partnered with many

companies to release videogames for many different platforms.

LEGOLAND: The first LEGOLAND was opened in 1968 in Billund and after that, five

more parks have been opened around the world.

LEGO MOVIES: Being the newest market for the company, The LEGO Movie had a
spectacular audience reception.

2. Current position analysis

2.1 Marketing Mix (4Ps) Analysis

Product: In this day and age, the products of LEGO spread all over the world with good
compatibility and large variability: toys, video games and movies. Thanks to the agreements
between LEGO and other companies, the firm can launch a lot of products in various fields
with good quality and long lasting usage life. (Lego.com, 2014).
Price: Based on customer feedback and comments from different channels, LEGO is
regarded as an expensive toy brand. They make products in the highest standards based on the
principle of best and safest so the price goes along with it (Reality Prose, 2013). And as
time goes by, it seems that the rising trend of the price of LEGO sets has intensified in the
past couple of decades. This high price made it hard for LEGO to enter some of the specific
market segmentations such as China and India, where the budget constraint is lower than in
western countries (Murphy, 2011).
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LEGOs turnaround

Placement: LEGOs products are usually distributed through third party stores (B2B).
However, LEGO also has two channels in B2C process - store sales mode and online sales
mode. The diversity of sales methods gives LEGO more chances to get direct contact with
their customers through LEGO club, LEGOLAND, worldwide toy stores and online shop
(Business Development Strategies, 2012).
Promotion: LEGO is using different kinds of promotion methods in order to reach the
best publicity effect. For instance, the beautifully designed and well-made packages of the
products can be a really persuasive element that makes difference in the customers decisionmaking process. Also, the advertisements showed on the TV and the Internet give LEGO
more chance of exposure in front of the public, which can stimulate the recognition and recall
of the customers toward the products and the brand. LEGO also has a unique promotion
method that is to provide free magazines to the LEGO members who sign up on the official
website so as to spread the information to more potential customers. In addition to these, word
of mouth is an external objective form of promotion. A brand with good word of mouth can
gain more trust and loyalty from the customers. (Chevalier & Mayzlin, 2006)

2.2 Target customer analysis

The target customer of LEGO has changed over time. Prior to 2002, the target customers
of LEGO were boys from 7 to 12 years old, because the product was as simple and
conventional as traditional bricks. However, in recent years, LEGO has developed many kinds
of toys that not just simply aim at young boys, they also target young girls with the product
LEGO FRIENDS. Since LEGO views its products as activators of childrens curiosity and
creativity, the primary target customer of LEGO at the present time is children and young
teenagers from 5 to 15 years old. Nevertheless, they are also focusing on adults as their target
customers. With the development of collaborations with other companies such as DC comics
and Marvel Entertainment, LEGO has already launched a series of toys, video games and
movies suitable for adults. LEGO MINDSTORMS, is aimed at more mature clients as well.
(Global CMO The Magazine, 2013).

LEGOs turnaround

2.3. SWOT Analysis

2.3.1. Strengths
The main strength of LEGO is its brand image. The LEGO product is well-known by
each generation and the LEGO Club has nearly 5 million members in more than 130
countries. In 2014, the company announced record results, after reaching $4.5 billion of
revenues and prots of $1.5 billion in the financial year 2013 (around 3.6 and 1.2 billion).
Return on sales had increased to 33% and sales per employee had doubled. At the first
semester of 2014, LEGO replaced Hasbro as the largest toy company in the world.
LEGO owns a broad range of products enabling it to attract a larger consumer base. The
brand has successfully introduced line extensions and innovative products to strengthen the
brand. We can observe for instance a huge licenses policy which concerns movies as much as
video games or limited editions.
LEGO gives convincing proofs of its value. Numerous measures have been set up
regarding the environment such as using recycled fibres in its packaging. The firm is also
leader in the bio-plastics field. In some years, its toys will be produced without oil. The brand
also built a school at Billund, Denmark, for children from 3 to 7 years old which is an extreme
instrument of brand content.
2.3.2. Weaknesses
LEGO produces nowadays toys which are far from the original blocks. The risk is to lack
of efficiency in production and create faulty products which might even require recall. Cost
increases could as in 2003 produce negative results with new products which cannibalize on
the sales of LEGO Companys core products and thus erode earnings.
2.3.3. Opportunities
These days, the technology plays a key role in childrens entertainment. The typical
consumer in this market is a child, older than 10 years old, which is usually the time when
children leave the toys market. With the innovative focus LEGO has, it could easily enter this
market, as it started to do in September 2013 with MINDSTORMS, a new generation of
robots that can be controlled with a mobile app. LEGO has a clear opportunity in this
industry, and we believe it should keep introducing new products. Furthermore, the
introduction of new cartoon characters gives LEGO the opportunity to create more licensing
agreements.
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LEGOs turnaround

And last but not least, new policies in countries like China have allowed people to have
more children. These countries, like many other in emergent markets (South America, SouthEast Asia), which have a higher birth rate than western countries, are real opportunities for
toys manufacturers.
2.3.4. Threats
The market and its competitors are a real threat for LEGO, whose toys are simple and
functional. Indeed, many other toys have more functions and are more sophisticated than
LEGO products. Also, Hi-Tech products and companies are the new competitors of LEGO.
Mattel, the first direct rival of LEGO, is growing. It rebought Mega Brands in March 2014,
for $460 million. This is a problem for LEGO, as its biggest competitor is becoming bigger
and bigger.
LEGO also faces environmental and social threats. Public consciousness about these
matters has been growing during the last few years. For example, in 2012, Greenpeaces video
denouncing Shell and its drillings in the Arctic became viral. A petition collected more than 1
million signatures to push LEGO to give up its 50-year agreement with Shell and the
company was forced to break its partnership with the oil multinational. Similarly, in 2011,
Greenpeace revealed the industrial group Asia Pulp and Paper (supplier of paper products of
LEGO, Mattel and Disney) was responsible of the deforestation in tropical forests in Sumatra,
Indonesia. LEGO decided to put an end to the contract.
In 2012 LEGO was charged for leading sexist stereotypes with its 100% girls range and
the Heartlake city, feminine version of LEGO CITY. 8 months later, LEGO launched its
equipment of women scientists, astronauts, palaeontologists and chemists.
If many threats like these happen in the future, LEGO can be jeopardized and weakened
with trials and adjustments of products.
2.4 BCG Matrix
The purpose of the BCG matrix it to show a physical representation of where LEGOs
business units are, in terms of market share and growth. First is the Poor Dogs section, which
is for units that arent doing so well in terms of growth or profit. For LEGO, products such as
LEGO Books fall into this section. The next section is the Question marks, where products
have a possibility of growing to become Stars, or to fall down into the Poor Dogs section.
LEGOLAND and the retail stores can be in this section. The Star section is where the
products with the highest amount of growth and the highest market share belong. As seen on
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LEGOs turnaround

the matrix, LEGO Digital media is represented by the LEGO Movie logo. Lastly is the Cash
Cows section where products that gain a substantial amount of profit, but dont experience
much growth, are located. On this matrix LEGOs standard toys are represented by the original
LEGO block.

3. Product decisions: expanding the product mix

The term product mix refers to the number of products supplied by a company, which can
be grouped into different product lines. There are, in general, three ways a company can
expand its product mix: through product variation, product differentiation and product
diversification.
3.1 Product variation
Product variation consists of altering some characteristics of an existing product, but
keeping the core function unchanged. That means, an already existing product is renovated,
but it is still, in essence, the same product. Therefore, the product range of the company does
not increase, since the old product ceases to exist in the markets. There are mainly two types
of product variation: product care, which refers to making small continuous modifications;
and product relaunch, which implies bigger changes.
3.2 Product differentiation

This process increases the number of products in a product line of a company by

changing some characteristics of an already existing item, creating a new variant. The original
product is kept in the markets, and the new one is launched, so the product mix depth
increases. There are two kinds of differentiation:

LEGOs turnaround

Vertical product differentiation: variants of different quality at different prices

Horizontal product differentiation: variants with different functions but comparable

quality and price levels

3.3 Product diversification

Through product diversification, a company adds new products to its portfolio that are
not directly related to the existing ones. This can be done by developing new products, allying
with other companies, or acquiring other firms. With this, the width of the product mix grows,
as new product lines are opened.
There are three types of diversification:

Horizontal diversification: it refers to the creation of new products at the same market
level as the previous ones, to satisfy the needs of the same or new customers.

Vertical diversification: it implies going up or down the value chain, undertaking tasks
usually made by suppliers or distributors.

Lateral diversification: it is probably the most radical of all three types of

diversification. It is done when companies move into totally new markets that have no
relation at all with previous activities of the firm.

4. LEGOs strategy

After the near-death experience in the late 1990s and early 2000s, and in order to stand
still in the increasingly fierce competition, LEGO has insisted on ceaseless innovation of
products, for which differentiation and diversification strategies were adopted.

4.1 Product differentiation

Starting from the basic plastic bricks and other elements with only primary colours and
shapes available, LEGO keeps adding new variants to the already established products. Each
new generation of offerings adds more complexity. Plastic bricks now come in up to 100
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LEGOs turnaround

themes, including Bionicles, City, Harry Potter, Duplo, Friends, etc. Some main features
displayed in LEGOs product differentiation strategy are the following.
4.1.1 Horizontal differentiation
As a horizontal differentiation strategy, LEGO has created many variants for its bricks,
but keeping quality and price at a comparable level.
4.1.2 Tie in with popular culture
LEGO keeps finding a way to successfully satisfy the changing needs of the customers by
setting all kinds of themes for its bricks. With the classical life scenes, such as city, space or
robots, and popular and cultural stories, like ninjas or the Lord of the Rings, LEGO has
become a hit again and again.
4.1.3 Fast introducing of new product
Its hard to tell how fast LEGO introduces new toy designs and concepts every year to
cater to its market. To cope with the fierce competition, LEGO chose to fight back its way
with continuous innovation. Therefore, the company has to considerably invest in its R&D
initiatives and accumulates 600 United States patents to its name so far (Ipexl.com, 2009).
4.1.4 Interchangeability and Compatibility
By keeping the nature of its bricks constant, LEGOs customers can expand their
collection without having to shelve their older sets. Hence, any LEGO toy set can be plugged
and played with other compatible sets, to ensure its longevity and play value, and besides to
inspire customers creativity when combining bricks from different sets.
4.1.5 Customized to any age, interest and ability
From DUPLO for toddlers, FABULAND for pre-schoolers, to the engineering oriented
sets with motors, batteries and moving mechanical parts, LEGO makes sure not to miss any
age of its target kid customers. And as the hottest toy company in the boy segment, LEGO is
always trying to gap the gender differences in how kids play to reach girls market.

4.2 Product diversification

Not contented with toys, from the mid-1990s, the LEGO Group moved into video games,
TV programs and movies. And with LEGOLAND theme parks established successively and
apparel products launched, LEGO diversified its product line with moves beyond only toys.
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LEGOs turnaround

4.2.1 Horizontal and vertical diversification

Without nearly any change of the market level, LEGO is just aimed at launching new
services to meet variant needs of its customers. Furthermore, Lego has some stores to sell its
own products directly to the customers. This is a clear vertical diversification strategy.
4.2.2 Fan engagement
On LEGOs website, one can watch videos, play online games or download comics and
wallpapers, all of them featured with LEGO characters. Just like the theme park, this is
another way to engage customers into LEGOs culture and stimulate the purchase of adjacent
products, but freely.

5. Assessment of the strategy

5.1 Differentiation strategy analysis
As a result of LEGOs differentiation strategy, the company appears as a wellexperimented firm and gives an image of toy specialist. By focusing on only one field of
activity - the bricks -, LEGO holds a leading position in the whole toy industry.
The toys market is very competitive, which means that firms have to renovate their
products every one or two years. The differentiation strategic plan allows LEGO to renovate
and launch new product every once in a while.
From a financial perspective, it reduces the production costs because same materials can
be used in the production process of different products, which leads to economies of scale.
However, this strategy by itself can be risky for LEGO because it stakes everything on
just one sector in what can sometimes be an uncertain environment. If a new competitor
enters the market, or the behaviour of consumer changes, for example, LEGO might have
troubles compensating the downfall; we can say, in some way, LEGO has put all its eggs in
one basket. Moreover, the firm can suffer from a loss of reactivity and flexibility: the fact that
all resources are allocated to one single activity means that the firm is less flexible and
responsive to demand and requirements, especially in terms of adaptability to new markets.
To cope with this problem, a good diversification strategy is crucial.

LEGOs turnaround

5.2 Diversification strategy analysis

As explained before, by forming strategic alliances with partners and developing new
product lines unrelated to its original product, the brick, LEGO has implemented a product
diversification strategy.
The risk of this strategy is not zero, but the benefits are large and positive. Using this
strategy offers many advantages, some of which are detailed below.
This strategy decreases the risk explained before by diversifying LEGOs activities. In the
case where an activity would slow down, the other ones could compensate for the losses.
The company is able to ensure the long-term future of the Group by investing in innovating
sectors, like the firm did with the digital products. Using a diversification strategy makes it
possible to take advantage of any opportunities that may arise: LEGO can reach new target
groups, or surf on new trends, like amusement parks or online games.
But to make this strategy efficient, the firm should be prepared to face some risks as well.
First, the company faces financial risk of excessive dispersion of resources, overstretching and over-expanding. These can lead to enormous costs and financial distress.
Moreover, by diversifying too much, the firm risks developing products that differ too much
from the original brand image and the brand can lose coherence toward consumers.
Finding a new positioning and a new brand image that will fit with the new product mix is
a real challenge. By deciding to develop movies, it is unclear whether LEGO is still a toy
manufacturer, or the brand perception has changed among consumers.
And last but not least, this strategy increases the complexity of managing the firm. By
opening new product lines, the company has come to be a giant with many divisions and the
managerial tasks have become a challenge at every level.
5.3 LEGOs strategy criticism
To conclude, one can say that by implementing at the same time two product strategies,
differentiation and diversification, LEGO has tried to have the best of both of them.
While it remains risky to implement a diversification strategy, it also allows LEGO to be
in position to face the economic uncertainties of the toy market. Furthermore, the
differentiation strategy gives the company the opportunity to strengthen its position on the
market.
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LEGOs turnaround

The main criticism on LEGOs strategy is the risk of over-expansion and out of the box
thinking. In the case of LEGO, a diversification strategy means constant innovation to create
new products for new markets. This continuous innovation implies paying huge attention to
the new products and prototypes, forgetting about the traditional core products. As a result,
LEGO might chase too many trends and can lose control of the different product lines. The
diversification strategy remains efficient provided that LEGOs management ensures to keep a
coherent expandable universe of toys.

6. Future improvement recommendations

After having analysed the past and present strategy of The LEGO Group, we are now able
to construct some recommendations for the future of the company.
First of all, they should become more precise with the production and inventory of their
products that have shorter life cycles. We dont recommend that they discontinue their
innovation in this area, but LEGO should become more selective and put limitations on how
many new products they introduce in a year. With the life cycles of many of its units being so
short, LEGO tends to over produce sometimes. This stays in the remaining inventory when
the unit has lost popularity. To fix this, LEGO should either become more precise in
predicting the demand for these short lived units, or to re-invent the units in a way that will
make them profitable in another market, i.e. India.
Also, another recommendation we make to LEGO is to become more strategic in their
expansions. They need to reach into markets like Asia and Australia, where their brand isnt as
strong. For growth in the Asian market (mainly India), LEGO should create a less expensive
version of a previously existing product line. To do this we recommend that, to avoid the
expenses attached to recreating a product, LEGO should significantly decrease the price of the
many excess products that are in surplus in the European and American markets. Also, LEGO
could create a smaller package/set of certain products that could also be offered at a
significantly lower price.
LEGO should also consider implementing marketing strategies to boost certain units of
the company that are not performing as well. For example to enhance the sales and popularity
of LEGO Friends, or other units directed towards young girls, LEGO should try product
bundling. If LEGO were to offer one free entry into one of its LEGOLAND theme parks or to
the viewing of one of its films, it would increase the sales of one unit (a product such as
LEGO Friends) while promoting another unit (LEGOLAND or LEGOMOVIE).
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LEGOs turnaround

Lastly, we recommend that LEGO focuses on the remaining weaknesses that have been
highlighted in the SWOT analysis. This includes the return to the idea of the basic block
which is the most essential piece to LEGO.
If LEGO manages to solve these problems, the company can have a bright, long-lasting
future, helping children around the world to learn and have fun using their imagination.

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