Emily Lai
BA 453
LEGO Case
With the loss of its patent, numerous threats from rivals, and recent lawsuits, the notorious
building-block toy maker LEGOs, must find a way to sustain its competitive advantage and continue its
heritage of success into the future. There are a few strategies the privately-owned company can take
including creating an economically-priced product line, optimizing their inventory management and
supply chain, continuing to secure license agreements, and creating relationships with schools.
Although LEGOs has enjoyed a history of success, its legal challenges portrayed by the PESTEL
(Appendix A) include its expiration of its patent and loss of its building-block trademark which have both
diminished their competitive position. Due to these factors, big players in the toy industry such as
Hasbro and MEGA Brands were able to create building blocks similar and even compatible to LEGO’s.
The barriers to entry in the building-block subset has lowered substantially and entering the buildingbrick toy market as a big company with economies of scale is attractive. With LEGO’s being priced higher
than their competitors, they may start losing market share especially with MEGA Brands already owning
25% of the North American market. Aside from an increase in substitutes for the building-block toys,
consumers also have many other products their children can turn to from tablets, to smartphones, and
other types making threat of substitutes very high (Appendix B).
A strategy LEGOs can take is focusing on an integration positioning. In the past, they were using
differentiation and had the ability to with their patent. Their product was unique, the blocks had the
perfect clutch power, and could not be replicated or sold legally until 1988. Due to this, owning the
manufacturing equipment, and having licensing deals with entertainment franchises, LEGO’s enjoyed
the ability to price their products relatively high while building a loyal customer base. Their past strategy
also involved securing licensing deals and releasing new series and themes consistently; their biggest
success in licensing was seen with the Star Wars kits. As seen in their strengths (Appendix C), LEGO had a
strong brand image and won “Toy of the Century,” reflecting their successes in consistently being a
recognized toy in past years. Today however, their competitive advantage is diminishing as they are
easier to imitate and no longer meet the VRIO factor. Luckily, LEGOs has been vertically integrated for
some time and has the ability to control their production giving them some management of their costs.
As seen in their financials (Appendix D), LEGO has a huge gross margin that has continued to increase to
72.5% in the recent year of 2010. Together, by managing costs and optimizing operations, LEGOs can
refocus on volume and being the biggest market share holder in the building-blocks sections, while
having competitive pricing with its rivals.
Although the gross margin of 72.5% is large, LEGOs seems to have many costs as their operating
margin is 31.1% for 2010 (Appendix D). This vast gap is explained through labor costs, material costs,
and production costs. A strength LEGOs has is their efficient leadership team that was formed in 2004;
this team found ways to cut costs, enact cost-saving measures, and managing inventory more efficiently
(Appendix C). Based on the financials and looking into the long-term, I believe LEGOs can go further by
cutting down labor costs. In 2008 and 2009, LEGO’s employee growth rate was over 10% more than
their revenue growth rate (Appendix D). Also, many employees were spending time with smaller
independent stores than larger retailers that were making two-thirds of the revenue. By keeping the two
leveled, enacting merit systems and cutting less productive individuals or teams, LEGO can manage costs
and create a more motivating environment. Another cost they can continue to cut is production.
Although they have increased production cycles, a potential future investment they may consider is
using 3D printing which may be quicker, cheaper, and more efficient. Aside from labor and production,
LEGOs can also invest in an inventory management or sales system that can pinpoint which kits sell best,
and the geographic location of top sellers. This would enable them to cut out kits that won’t make as
much money, focus on their top selling product lines, and, or, distribute specific kits to a certain area
that sells more than another. An addition to their software could be an ability to track the most popular
LEGO pieces and forward this data to designers who are creating future kits, encouraging them to use
pieces already in production. This would allow LEGOs to cut waste from pieces that are rare while saving
costs and production time. All these are tied into the current leadership team’s success in cutting down
logistic suppliers to four and replacing smaller distribution centers with hubs located close to retailers.
With the new changes in place and a better control on employees, inventory management, and
production methods, LEGOs can continue cutting their costs down and improve their operating margin.
With controlling and minimizing costs, LEGOs can then market their kits at a lower price making
them more competitive to their rivals. In 1984, TYCO released a plastic brick product compatible with
LEGOs that communicated the idea, “If you can’t tell the difference, why pay the difference.” Luckily for
LEGOs, their patent was still active at this time and they won the lawsuit. However, this shows an
opportunity for cost-leadership in the building-brick toy market. With the patent expiration, other
competitors have already entered the market, and LEGO must accept the need to competitively price as
they are now imitable. A way LEGOs can leverage this is with their recent goals in managing costs
already, and continuing to optimize their supply chain and inventory management as listed above. A
pricing strategy LEGOs could take includes reducing pricing for their own themes such as LEGO
Adventurers, or LEGO Iceplanet, while keeping prices the same for their seasonal licensed products. This
would give the price-sensitive consumer the opportunity to purchase high quality LEGO sets for kids at a
lower price, but also purchase seasonal entertainment themes that may become collectible in later
years at a price no higher than before. This strategy would be feasible as parents grew up playing LEGOs
themselves, making the product nostalgic and a recognized brand. Parents would be able to ensure their
children also get the experience at a price relative to the other building-block options on the market.
Since children go through phases of liking new stories, movies, and other entertainment, charging higher
prices on licensed-kits would leverage the loss in margins for the regular themes as these would have a
higher turnover and are only available for a seasonal period.
With Disney’s acquisition of Marvel, it may make it harder for LEGOs to be consistent with their
licensed kits in the future. Disney now has more control over distributing license agreements and has a
favorable history with Mattel. Hasbro’s current license agreement with Marvel is set until 2017. One of
LEGOs core competencies is the ability to innovate and consistently release new creative play themes,
some of their most successful involving third-party license agreements. Their successful acquisition of
many licensed rights also led them to new avenues for video games later leading to an online gaming
platform. LEGOs must exercise this capability of license acquisitions in the future to stay competitive. To
sustain their current relationship with Disney, LEGOs should prove financially that their current licensed
kits are doing well. Since license agreements typically involve a large advance and a royalty, showing
high volumes of sales would mean LEGOs can generate a large royalty on top of the advance paid. With
Disney now having more control of licensing agreements, LEGOs should aim for long-term agreements
for stability which would also allow them to release new innovative themed kits over the time period,
something they are successful at. To appear more attractive to the licensor, LEGOs could add a page on
their interactive website asking parents and children what kits they’d like to see in the future. For the
most popular answers, LEGOs could use customer engagement to prove to the licensor that this specific
theme would be popular. Also, as the original building-block brand and one that has been around for
decades, LEGOs should argue for licensing deals specifically for building-block toys, while competitors
like Hasbro and Mattel could use licenses for other types such as action figures or props. By proving the
demand, and using their position as the original building-block company, LEGOs can look more attractive
to future licensors.
Mattel, Hasbro, and MEGA Brands are all very large players in the toy market and have a global
presence. Mattel and Hasbro are the two largest manufacturers and have diversified type of toys
beyond building-blocks. MEGA Brands on the other hand has been making the same products as LEGOs
since 1984 and has successfully secured licensing agreements while expanding around the world. Since
Hasbro and Mattel are so large and diversified in the type of product lines they offer, LEGOs has an
advantage with their brand history, and ability to focus all resources and capital on making their one
product, the building-block, the best. Before their patent expiration, LEGOs was VRIO and developed
their core competency of brand reputation and loyalty over the years of releasing new sets. Parents
recognize the LEGOs brand as they grew up playing with them as well, and this creates a generational
cycle of them purchasing kits for their kids. By staying a household name and being known as the best
and highest-quality building-block through nostalgic memories and past experiences, LEGOs can
maintain their brand reputation and create loyalty for future generations. A way they can establish their
brand in new generations today is partnering with the education system and schools. LEGOs could
donate discontinued kits or release an education LEGO kit for preschool to first grade classrooms at a
discount of retail. Similar to LEGO brick buckets made in the ‘80s, this education kit would be a bulk
amount of the most popular pieces, and include a sheet of some examples models you could create.
The bucket would include enough pieces for an average class of 20 to play and interact together. This
strategy would give children hands-on experiences with LEGOs, challenge their creativity which goes
along the company’s values, and encourage them to want their own kits at home. It will align the brandaware parent with the now brand-aware child who gets to play with LEGOs every school day. Looking
into the long-term, it would also continue LEGO’s tradition and history by creating brand loyalty for the
future when these children become parents.
When these strategies come together, they allow LEGOs to have a competitive advantage over
Hasbro, Mattel, and even the second largest building-brick rival, MEGA Brands. Continuing to optimize
their inventory and supply chain will lower costs, enabling them price more competitively to their
competitor’s building-block toys. By showing demand and acquiring licensing agreements specifically for
building-block toys, LEGOs can continue their core competency of creating new kits while helping the
licensor make money. Lastly, by partnering with schools, LEGOs can achieve their mission of inspiring
and developing children to think creatively while generating brand loyalty into the future.
Appendix
Appendix A: PESTEL
Political: The way politics plays a role in the toy industry is consistent with LEGO’s competitors. A key
difference however is that LEGO’s must be considerate of the political stability within Denmark, and the
European Union which is applicable to their company. Although they operate internationally, they are
still a privately owned company from Denmark.
Economic: A tactic LEGO’s competitors have used in the past include marketing their substitutes as a
cheaper version; this means LEGOs is seen as being higher priced and must be mindful of the current
economic state and their consumer’s price sensitivity. With more products becoming similar to LEGOs
since their patent expiration in 1988, LEGO must find new ways to sustain a competitive advantage and
create value for their customers.
Social-Cultural: A key factor in LEGO’s past success is their licensing deals with major entertainment
characters such as Star Wars and Spiderman. They were able to create LEGO sets and video games
themed after popular entertainment blockbusters. New movies and stories are out frequently and LEGO
must constantly pivot and align with social-cultural trends in entertainment for children, while landing
licensing deals with these companies.
Technological: With new technologies and developments in the toy industry from video games, to
tablets, and other handheld electronics, LEGO will see many other competitors outside the building
block subset that can potentially take some of their market share. It may need to shift its gaming and
video game platforms to smartphone and tablet apps to better capture both todays and the future
market of gaming. Another shift in technology is production; with the rise of 3D printing, LEGOs may
consider a new method of production that may potentially decrease costs.
Environmental: LEGO’s is related to many other themes and entertainment blockbusters and is seen as a
staple toy to children and their parents. With business and consumer trends shifting to sustainability, it
must be considerate of the plastic waste they create in their supply chain, their eco-friendliness, and
their position on being a “green” company that cares about its customers, community, and other
stakeholders.
Legal: With LEGO’s patent expiring in 1988, many other competitors have rose with similar or equivalent
products, prompting LEGO to have a legal altercation. It’s recent suit with MEGA Brands failed as the
court ruled LEGO’s brick trademark did not qualify. Furthermore, LEGO has no power in the courtroom
to file a suit against its direct competitors who create equivalent building blocks due to their patent nolonger being active. This causes new challenges for the company as barriers to entry have lowered
substantially since the expiration, prompting new players to enter the market.
Appendix B: Porter’s Five Forces
MEDIUM
HIGH
HIGH
HIGH
Threat of New Entrants: MEDIUM
Although the threat of new entrants has increased for LEGOs with the expiration of their patent, a new
entrant would need large operations and economies of scale to have a competitive advantage. LEGOs
only has one product, plastic building-blocks but also has large distribution globally, their own
production, and a loyal brand base. Due to this, the threat is high for existing toy companies to enter the
building-block space such as Hasbro or MEGA Brands, but low for toy companies starting from scratch.
Bargaining Powers of Suppliers: HIGH
The bargaining power of suppliers is high due to LEGO’s raw inputs coinciding with oil prices. Although
LEGOs has equipment for a part of their production, oil is required to manufacture plastic and cost of
materials may vary based on market oil prices.
Bargaining Powers of Customers: HIGH
With more substitutes and complements available to consumers now, LEGOs may be pressured as their
revenue or market share may diminish due to other building-block sets available at a cheaper price.
Although LEGOs is known for their history and quality, consumers may go with a cheaper option during
times of financial hardship.
Threat of Substitutes: HIGH
With the patent expiring, the threat of substitutes is very high. LEGOs has already suffered from
imitators like TYCO in the past. Now, there is the threat of legal building-block toys and the ones made in
Asia that sell for a lower price. Also, aside from building-blocks, parents and children have a vast variety
of different types of toys to choose from.
Appendix C: SWOT
Strengths
 Strong brand reputation, leader in toy
industry throughout a couple
generations, creating sense of nostalgia
 Won “Toy of the Century”
 Efficient Leadership Team that optimized
supply chain
 Successful acquisition of many licensed
rights
 Innovative and engaging website, with
four million visitors per month
 Consistent innovation and releasing new
themes
Weaknesses
 No intellectual property or patent
(expired)
 One main product line: building blocks
 No main focus on operations:
o No consideration by designers in
production cost
o No emphasis on cost
management
o Inefficient production schedules
and use of machines
o Extensive supply chain systems
creating complexities and
disadvantages
Opportunities
 Move to smartphone/tablet app market
 Secure long-term licenses with Disney
after their acquisition with Marvel
 Create new product lines beyond building
blocks
 Create lower-cost product line options
 Become more environmentally friendly
with plastic waste and overall brand
image
 Look into 3D printing for potential cost
reduction in production
 Secure relationships within education
industry from schools to classrooms
 Expand in emerging markets such as
China and India
 Create geographic specific cultural
themes
Threats
 Loss of LEGO brick trademark, losing
apart of brand recognition
 MEGA Brands creating smaller-sized
blocks compatible with LEGOs
 MEGA Brands securing licensing
agreements with Marvel, Disney, and
more
 Hasbro creating Kre-O, compatible blocks
with LEGOs
 Disney’s acquisition of Marvel creating
more control over licensing agreements
 Mattel having long and favorable history
with Disney
 Other smaller toy companies/brands that
can create similar toys with building
concepts or other substitutes
Appendix D: Financials
Revenue
Revenue Growth
Net Profit
Equity
Return on Equity
Average Return on
Invested Capital
Gross Margin
Operating Margin
Net Profit Margin
Employees
Employee Growth
2010
$16,014,000
37.3%
$3,718,000
$5,473,000
84.8%
159.55%
2009
11,661,000
22.4%
2,204,000
3,291,000
82.3
138.75
2008
9,526,000
18.7%
1,352,000
2,066,000
72.2
107.8
2007
8,027,000
2.9%
1,028,000
1,679,000
71.6
73.4
2006
7,798,000
72.5%
31.1%
23.2%
8,365%
17.8%
70.3
24.9
18.9
7,286
35.2
66.8
22
14.2
5,388
28.3
65
18.1
12.8
4,199
-14.4%
64.9
17
16.5
4,908
1,290,000
1,191,000
147.1
65.5
Key Takeaways:
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Revenue has grown substantially since 2006, with a consistent and increasing growth rate in
recent years
Synonymous with revenue, net profit has also been increasing steadily
Equity and ROE have both increased, showing a good steady increase in return on shareholder’s
money
Average return on invested capital has grown substantially and is over 100% beginning 2008,
showing profitable returns on investment
Gross margin is extremely high compared to operating and net profit margin showing many
costs within operations and wages
Employee growth fell substantially between 2006 and 2007, but jumped beyond revenue
growth in both 2007 and 2008
Employee growth is now lower than revenue growth in 2010