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Corporate Strategy: Final Group Report
Submitted by: Team Dragons
Darpan Soneja, Bianca Obert, Brenda Terzis, Vincenc Pedret, Omar El
Asfari, Alfredo Muchacho, Max Karreth
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1. Introduction
LEGO is one of the top 5 toy makers in the world and is on a trend to continue outpacing its
competitors. In 1993, the company which started off as a brick–toy–maker transformed into a global
corporation by beginning to diversify in different businesses. Despite these moves, LEGO was unable to
achieve the desired growth. High costs for in–house diversification and outsourced production, forced
LEGO to reconsider its approach in 1999, but despite adopting aggressive cost–cutting measures,
organizational changes and promoting innovation, LEGO could not achieve a turnaround. After a serious
financial crisis in 2004, LEGO had a major change in management and a new CEO, who was instrumental
in shaping their present corporate strategy around the diversification model. As a result of the implemented
strategy, LEGO managed to increase sales by over 37% in 2010. LEGO achieved a return on sales, which
increased, from 4% in the early 2000’s, at the height of its crisis, to an industry–leading 30%. Net profit
also jumped to 69%, which made LEGO the undisputed leader in construction toys, and the most
successful premium toy–maker in the world. In continuation of its three–step plan, LEGO has continued its
overarching diversification strategy for its growth period. LEGO currently operates in three main business
segments, which are: building sets, retail and theme parks and media entertainment (see Exhibit 1 in
Appendix). With its current corporate structure and unrelated diversification strategy, LEGO plans to
move back into successful growth and ‘invent the future of play’.
1.1 Toy Industry
The global toy industry topped $83 billion in 2010 and is expected to grow over 4% annually,
most notably in Asia Pacific. Mattel is the industry leader in the toy business (6.26 million USD in sales),
followed by Bandai–Namco (5.53 million USD in sales), Hasbro (4.29 million USD in sales) and LEGO
(3.56 million USD in sales). Out of all the toy–makers, LEGO is leading in terms of operating margin, 22%
compared to an industry average of 10%, and clearly enjoys a premium brand. This makes competitive
rivalry quite high within the toy industry (see Exhibit 2 in Appendix). Despite these promising numbers,
the toy industry is facing a deadly trend: “kids–getting–older–younger.” Demand is shifting from the classic
toy industry to the gaming and tech industry and threatens the industry to be substituted with the likes of
Electronic Arts and Zynga surfacing as potential competitors. In an effort to fight this trend, toy–makers
have increasingly worked with entertainment companies, such as Walt Disney and Warner Brothers, to
produce licensed toys. For example, the 2002 Spiderman movie generated over $100 million in related toy
sales. This places a lot of control over the toy sales in the hands of the media licensees, the two major ones
being Walt Disney and Warner Brothers. License fees are usually structured with a very high initial fee
and a long–term sales commission. This results in a lot of bargaining power for the supply–side of the toy
industry. In addition, the entry barriers to the toy industry are generally quite low, if the entrant brings in a
lot of capital. To counter this threat, Hasbro has, for example, converted its Transformers toy line into a
successful movie franchise. This focus on the media industry and threat of decline puts the toy industry in
an interesting position. Overall this shows that the toy industry is facing some difficulties in terms of long–
term growth. The question to be answered is, ‘How would individual corporate strategies of the toy
companies, and possibly that of media entertainment companies, shape the future of this industry?’
1.2 Corporate strategy triangle analysis of LEGO
The corporate strategy triangle of Collis and Montgomery serves as a tool to analyze the corporate
strategy of a company. The triangle shall be used to introduce LEGO from a strategic standpoint. The
aspects covered will be vision, goals and its resource continuum. The resource continuum thereby serves
as a unified visualization of the business, organization and resource aspects of the corporate strategy
triangle.
The vision of LEGO is to ‘Invent the Future of Play’. The mission of LEGO is to “Inspire and
develop the builders of Tomorrow” (see Exhibit 1 in Appendix). LEGO’s mission and vision statement
project an environment of creativity, innovation and learning. The vision statement of LEGO is not just
restricted to bricks or toys, but essentially all forms of playing and entertainment, which foster
globalization and digitalization and aims at being a pioneer in the industry.
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Lego’s goals and objectives have continued to adapt themselves to the changing climate of the
global toy industry. After facing some issues in the early 2000’s, LEGO introduced a 3–step strategy to put
the company back on a growth track. These goals and objectives were: Manage for Cash (2004–2005),
Manage for Value (2006–2008) and Manage for Growth (2009+). To deal with the financial problems of
2004, LEGO made it an immediate priority to liquidate certain assets of the firm for tackling debt and for
ensuring the continued survival of the business in the long run. After ensuring the survival of the firm,
LEGO focused its attention towards e–building its brand value and growth by adopting a unique
diversification strategy to ensure continued growth.
LEGO can be found on the more specialized spectrum of the resource continuum in contrast to its
competitors (see Exhibit 4 in Appendix). LEGO is essentially very specialized in producing one type of
toy, the classic building set. This however narrows the scope of LEGO in terms of doing business. Doing
business is therefore a shared practice for effective deployment and as a result, a lot of its internal
resources and assets can never be transferred to other business areas. As LEGO is also very specialized, it
is much more focused on being operationally lean. Lastly, LEGO, although privately owned and relatively
small, requires a larger corporate office size. This is not just in terms of employees, but also infrastructure,
innovation and communication. All in all, this puts LEGO on the specialized spectrum of the resource
continuum.
In conclusion, LEGO has a very specialized corporate strategy and a clearly defined vision. Its
goals have adapted to make sure LEGO will continue to grow. The most recent goal follows the vision and
is growth through diversification. Further analysis will show whether this strategy is aligned with the
resource continuum and the company as a whole.
2. Problem Statement: Why LEGO?
LEGO is a very interesting case for corporate strategy. The company has been facing some
problems in the recent past and has only recently incepted its new growth strategy. This growth strategy
has been mainly focused on diversifying the corporation. While its competitors focus on product segment
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a. Vision: How does diversification fit with the vision of LEGO?
The success of a corporate strategy is very much dependent on its alignment with the company
vision. LEGO not only has a very defined vision, but also one, which challenges the status quo of the
industry. An example of successful alignment of the diversification strategy and the vision can be
exemplified with LEGO’s expansion into video games. One of the key benefits of video games is its strong
synergy with the classic building sets. Especially in today’s world, where over 75% of kids have access to
a mobile device; the combination of classic toys and digital trends is even more evident. LEGO started
producing video games in the mid 1990s, but only recently, this diversification has proven successful
because of the increased importance of technology and industry shifts. This diversification allows LEGO
to invent the future of play while at the same time ensuring that its strategy is aligned with the vision.
At the same time, diversification can also be misaligned with the vision. For example, LEGO’s
introduction of board games was a failure. Board games were too unrelated to the experiences and values
of LEGO. Also, the introduction of board games was not timed correctly with the no longer being a
growing market.
Overall, LEGO’s diversification strategy seems to be in a fit with its vision. A shift in new
industries allows LEGO to continue to grow and deliver its mission, despite a declining toy market. It is
also important for LEGO to select the right industry segment for diversification as carefully picked
industries for diversification will align the overall strategy with LEGO’s vision.
b. Internal Consistency
The diversification strategy of LEGO must be consistent with several internal business factors,
namely the corporate strategy triangle elements. To test the strength of this alignment, it is important to see
how the strategy performs in three aspects. Firstly, whether the corporate strategy of LEGO really fits in
terms of business scope, resources and organizational structure. Secondly, does the diversification strategy
really enhance or yield a new corporate advantage? And lastly, does the corporate strategy still allow
LEGO to reach its goals and complete its mission.
LEGO’s diversification into the entertainment industry, with the movie and the video games,
shows how the diversification strategy can be a good corporate fit. The entertainment industry is definitely
not part of LEGO’s core business and LEGO does not have the necessary resources to successfully
diversify into this area. However, by forming strategic alliances, for example with Warner Brothers, LEGO
has been able diversify. It gives ownership over the execution to its partners, thereby circumventing the
problem of its resources (both financial and operational), and uses its business strengths (especially the
LEGO brand) to form new synergies. The very recent LEGO movie exemplifies this. Putting them together
makes the diversification strategy a strong and, more importantly, an enhancing fit for the company.
Diversifying can also give LEGO a competitive advantage over its competitors. A long–standing fight in a
red ocean can thereby be shifted into the blue ocean. LEGO has, in the recent years, started to expand its
classic building sets with licensed building sets (e.g. LEGO Star Wars). With these licensed building sets,
LEGO has generated over 35% of its sales. This not just shows the success of this diversification, but also
how it serves as a competitive advantage. Through its strong brand, right timing, LEGO has been able to
create a synergy between the entertainment industry and its classic building sets. This puts LEGO closer to
the goal of creating a future of play, which is more experience–based.
Lastly, diversification also needs to help LEGO reach its internal goals. On the one hand, LEGO
wants to remain a toy company. This was supported by LEGO’s Chief Marketing Officer Mads Nippers in
the statement: “We are not an Entertainment Company”. Nevertheless, LEGO does realize that it has to
move away from the classic toy market and find growth. Moving towards building more an experience
around playing with LEGO, helps leverages the strong brand image of LEGO. For example, to achieve this
goal, LEGO has ventured into building theme parks. The theme parks are operated externally and LEGO
only owns a small share in them. With these theme parks, LEGO not only has a clear competitive
advantage over Mattel and Hasbro, but it also allows it to create synergies between its toys and an entire
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LEGO experience. This shows that the diversification strategy of LEGO is internally aligned and can help
LEGO achieve its internal goals.
c. External Fit
The diversification strategy of LEGO is a problematic in terms of external fit. LEGO needs to
reduce its dependence on its existing product line (the LEGO Brick toys) for profits and at the same time
develop diversification strategies, which generate revenues and synergy, while limiting the ownership to
LEGO. The company also needs to survive in the current competitive scenario while maintaining to
innovate on a regular basis.
Although the movie and the games have been a huge success in terms of brand marketing and
awareness, the company’s alliance with Warner Brothers along with its overdependence on existing
licensing agreements for producing movies and games ends up giving its partners the lion’s share of the
profits leaving negligible profits for LEGO. This is not a sustainable strategy in the long run. Another
factor for LEGO in its external competitive environment is that LEGO essentially produces only one type
of toys as compared to its competitors like Mattel and Hasbro, which produce several types of toys like
Barbie, Hot Wheels or Transformers. This puts LEGO in a disadvantage on not being able to follow a
product diversification strategy like its competitors. On the other hand, this might also be seen as a
competitive advantage as LEGO dominates the toys segment based on building blocks with an 80% market
share and charges premium prices for its brand. At the same time, the single product strategy also forces
LEGO to diversify in order to grow.
LEGO’s strategy so far has been one, which has adapted to the needs of its customers. In fact, the
company has gone the extra mile to involve loyal customers and adults in developing its products. This
also provides LEGO with an advantage over its competitors as they are able to assess the customer needs
in a better way and has allowed LEGO to bring in new elements into the competitive environment and be a
source of innovation.
In summary, although LEGO’s diversification strategy looks attractive, it needs to be sustainable
in the long run by continuing to foster innovation and generating profits.
d. Feasibility
The corporate strategy of LEGO might look extremely attractive, but its feasibility is not
guaranteed as it fails to generate a substantial financial return while putting an excessive strain on the
company’s cash reserves. LEGO also needs to continue to focus on its vision and brand value for long–
term strength.
The diversification strategy so far has been extremely successful in generating brand value,
especially in the case of the LEGO Movie. However it has not contributed significantly in terms of profits
due to poorly negotiated licensing agreements. The success of the LEGO movie has however shifted the
balance of power in favor of LEGO and has put the company in a position where it can renegotiate its
agreements, especially with Warner Bros. LEGO’s diversification strategy needs to be such that it
generates profits and at the same time guarantees LEGO the sole ownership of assets. Apart from this, the
bulk of the revenues for LEGO still come from the toys it sells. This overdependence for revenue
generation only on toys is in essence a failure of the diversification strategy. Another factor, which might
harm the feasibility of this strategy is the emergence of technology as a substitute to toys as kids
increasingly are shifting away from toys to games on iPads and gaming consoles.
In conclusion, while the diversification strategy of LEGO has been feasible in terms of generating
brand equity, it has not been financially feasible to stand by itself owing to the company’s dependence on
poorly negotiated external alliances.
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e. Corporate Advantage
The overall diversification strategy of LEGO has somewhat resulted in generating a Corporate
Advantage. This corporate advantage arises from synergies and right timing in the diversified business
areas. LEGO has been able to create an experience in playing by continuing to grow its brand value and
consolidate its position as a premium toy maker.
LEGO as a company thrives on innovation and creativity. Over the years, the company has
evolved itself from an ordinary toy maker to creating a ‘LEGO experience’ with the help of movies,
amusement parks and video games. This is very much in line with the internal consistency and the external
fit of LEGO. It has also allowed LEGO to differentiate itself from its competitors and diversify in related
businesses thereby generating a corporate advantage.
The diversification in the movie business besides the amusement parks and the games has led to
the phenomenal growth of LEGO as a brand. This strategy is also aligned with the vision of firm, which
aims to invent the future of playing. Also, LEGO has managed to position itself as a premium toy maker
over the years, which specializes in building sets. This has also led to the firm to enhance its internal
capabilities and production process. A majority of the toys are manufactured in house, and the company
become more vertically integrated and has shifted to well aligned production planning and supply chain
management practices.
Although the diversification strategy of LEGO has been successful in reviving the brand image
and is in line with the Vision and the internal consistency of the firm, yet it faces some issues with the
external fit of the firm, especially with regards to the licensing agreements. Also, LEGO as a firm is facing
an internal resource problems and has failed to generate substantial revenues over the years. In essence,
what might seem like diversification strategy has actually turned out to be passive investments in ventures,
which have been successful in reviving the brand of LEGO but failed to generate value in terms of
liquidity.
4. Recommendation
In order to leverage effectively on its brand value and successfully execute its diversification
strategy, LEGO needs to implement the following suggestions:
The licensing agreements of LEGO with its partners like Warner Brothers and other game
developers are structured in a way, which enables the partner firms to walk away with the majority of the
profits. At the time of the structuring of these agreements, the bargaining power of LEGO as a brand was
much lower. This is no longer the case as the balance of power now has shifted in LEGO’s favor (see the
LEGO movie). LEGO needs to renegotiate these agreements and if possible try and build closer ties with
these firms in order to leverage on their core capabilities. This is very much similar to the Pixar–Disney
case, where the bargaining power of Pixar increased after its initial successful partnership with Disney.
LEGO should start moving from selling just bricks in its retail outlets to selling an experience.
This helps LEGO continue to build its brand value, deliver its vision and support the underlying
motivation behind the diversification strategy. As an example, LEGO could look Apple and its very
competitive retailing strategy, which allows it to sell more than just technical gadgets in its stores. Clearly,
the recommendation for LEGO is to support its vision alignment with the diversification strategy. LEGO
like Madame Tussauds and ‘Ripley’s Believe it or Not’ Museum, can come up with the concept of LEGO
World, where life size cartoon and movie characters, miniature models of famous buildings etc. could be
present in their LEGO Avatars. This would enable LEGO to sell the ‘LEGO Experience’ while retaining
the sole ownership of assets and profits.
LEGO can also grow by forming joint ventures would also allow it to become more financially
independent. LEGO could, for example, work with Zynga for an online game. While Zynga could provide
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technical and IT resources, LEGO could become more involved and provide more than just its brand value
(e.g. continuous innovation through its open innovation model). A joint venture is however more capital
intensive than just a partnership and since LEGO is privately held and not in the best financial health, it
needs to increase its cash reserves in order to make this feasible in the future.
Implementing these recommendations will allow LEGO to improve its diversification strategy by
gaining more independence and autonomy in terms of diversification, while at the same time pursuing a
sustainable growth strategy by leveraging on its brand strength.
5. Conclusion
It evident that LEGO has been successful in reviving itself from the brink of bankruptcy in 2004
and has since then continued to dominate the toy market in the Building Blocks segment. The company has
also adopted a progressive diversifying strategy by diversifying into games, theme parks and the movie
business. All these elements of their diversification strategy have continued to generate a corporate
advantage in terms of developing brand awareness, but have failed to contribute substantially in terms of
generating profits.
What LEGO needs to do now is to leverage on its existing brand value and renegotiate its position
with its partners, while continuing to innovate and diversify in areas which not only boost its brand image
and perception, but also provide the company with the necessary profits in order to grow in a sustained
manner in the future.
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Appendix
Exhibit 1: Corporate areas of LEGO
Exhibit 2: Porter’s 5 forces analysis
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Entry threat is low as entry barriers are low. Market can however be entered with capital (to overcome
economies of scale, brands, etc.). For LEGO, the brand limits a lot of threat, especially in terms of
owning distribution channel access and upholding quality standards (avoids dumping). With power is
being shifted to the suppliers of licenses, they also become a serious threat to enter the market. Disney
CFO Tom Stagger has explicitly not ruled this step out: “As many of these deals concluded over time,
we will have the flexibility to either bring them in–house or pursue third–party licensing agreements
depending on how we can feel we can create the most value.”
Threat of Substitution is mediocre. Industry–wide substitution threat is high due to emergence of new
industries. For LEGO alone, it is relatively low.
Bargaining power of suppliers is becoming higher. Suppliers for manufacturing are quite low (as a lot
of production is based on commodities and not intermediate goods). Power is shifting increasingly to
the suppliers of licenses (required for games, theme parks and movies).
Bargaining power of buyers is mediocre. LEGO sells only 10% through its own retail channels. This
puts some dependency on buyers for the toy industry (not just LEGO), More bargaining power is
given to the buyers because they can integrate backwards and produce their own toys (like Walmart
has done already). However brand strength of certain toys (like LEGO or HotWheels) has been
keeping power moderately in level.
Competitive rivalry is quite high. There are a few competitors out there and are competing in the same
way on a lot of different levels. The competition is shifting towards Asia, which has shifted a focus to
the Asian competitors. Nevertheless, LEGO has a considerably higher operating margin and enjoys a
premium brand position.
Exhibit 3: Vision and Mission Statement of LEGO
Vision: “We want to pioneer new ways of playing, play materials and the business models of play –
leveraging globalization and digitalization. It is not just about products, it is about realizing the human
possibility.”
Mission: “Our ultimate purpose is to inspire and develop children to think creatively, reason
systematically and release their potential to shape their own future – experiencing the endless human
possibility.”
Exhibit 4: Resource continuum
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Bibliography
1. HBS Case Study: LEGO (9–613–004)
2. HBS Case Study: LEGO (A) – The Crisis (9–713–478)
3. Richard Ivey School of Business: The LEGO Group – Building Strategy (9B11M086)
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