Executive Summary

Execution of both a business systems and Porter’s five forces analysis reveals in LEGO a massively revitalised business whose strategy has shifted from a resource-
based one to one that has focussed more on the positioning of the company’s products, also known as an outside-in strategy, and finally to a hybridisation thereof.
These shifts in strategy have restored LEGO’s competitive advantage, and serve to solidify it for the foreseeable future.
Introduction
In the decade since the peak of its crisis in 2004, LEGO has successfully extricated itself from the burden of its old strategy and streamlined its approach to become
the largest toymaker by revenue (Hansegard 2014a; Smith 2014). Analysis by way of utilising Porter’s 5 Forces Model and the Business Systems Model (appendices one and
two, respectively) reveals how LEGO was able to transform itself so effectively. This paper explores the aforementioned shift in strategy and attempts to diagnose the
degree to which LEGO’s strategy is an example of resource leveraging or market adaptation, analyse briefly whether or not LEGO’s newfound competitive advantage is
sustainable, and makes recommendations as to where LEGO should align its strategic direction for the future.
Theoretical Perspectives
Outside-in The outside-in, or positioning approach posits that a business ought to perform different activities to those offered by the competition in order to
generate a competitive advantage (Porter 1996). Porter (1996) stresses the difference between strategy and organisational effectiveness, proclaiming that competitive
advantage based on effectiveness is not sustainable due to organisational convergence, and ultimately leads to limited competition. In contrast to the resource-based
view, strategy begins through external
analysis, identification of market shortcomings and that leads to the positioning of the business such that it can fill this market and gain competitive advantage
therein (de Wit & Meyer 2010). Porter (1996) warns that smart and deliberate positioning is essential to a business’ competitive advantage, as a company that seeks to
fulfil the desires of all customers risk not only confused customers, but also confused employees, and that such activities degrade the company’s activities and
competitive advantage.
Inside-out The inside-out view of strategy, also known as the resource-based view (RBV), is one where businesses can develop a competitive advantage by harnessing and
utilising their internal resources, particularly what have become known as asymmetries, in innovative ways (Miller, Eisenstat & Foote 2002). Miller (2003) defines
asymmetries as an organisation’s skills, processes or assets, utilised effectively or not, which are nonimitable, rare and difficult to replicate economically. The RBV
rests on the assumptions that firms are heterogeneous in their skills and resources, and that, due to the limited mobility of such traits this heterogeneity is long-
lasting (Barney 1991). The difficulty found with attempting to measure such immeasurable asymmetries as tacit knowledge notwithstanding, the RBV has become well
accepted in literature as a legitimate form of strategy (Barney, Ketchen & Wright (2001).
LEGO’s Strategy: Before & After LEGO’s strategy shifted markedly between the crisis period culminating in 2004 and its recovery period into the present. Although
restricting the analysis of this paper to the above strategies creates a degree of false dichotomisation, it is still possible to make, from the evidences explored in
appendices 1 & 2, assumptions as to which strategies LEGO was inclined towards in these periods.
Prior to 2004 it could be said that LEGO was attempting to utilise an iteration of the inside-out, resource-based perspective by leveraging on its relatively colossal
brand power and appeal. It likely did so in response to the increased threat of substitution from indirect, technology-based competitors, as described in Appendix 1.
This, however, led to a massive reduction in operational effectiveness, due to a too diverse and unmanaged activity system and product offering (appendix 2).
LEGO’s post-2004 strategy brought a renewed focus on LEGO’s core competence, and the marketing of its brick products with renewed vigour and focus on quality, learning
and fun. In effect, this marked a return to traditional competitive practices as recommended by the outside-in perspective. By divesting itself of all of its side-
businesses, LEGO was making strategic ‘tradeoffs’, which Porter (1996) claims is a necessity for businesses who’ve misaligned themselves by seeking to fill every
market. It could be said that, from the available evidence, LEGO has shifted its strategy from a resourcebased view where it was trading on brand power, to a
positioning-based strategy where it has refocussed on developing competing products and shed distracting businesses.
However, LEGO’s recent foray into movie production lends credence to the theory that LEGO’s strategic alignment is not entirely clear-cut. By leveraging on the
‘universe’ it has created throughout various product lines, a distinct asymmetry, as a platform from which to launch movies, LEGO created a distinct competitive
advantage over its competitors. Thus it could be said that post-crisis LEGO has recently begun to utilise a hybrid strategy by which it can generate competitive
advantage through both positioning and resourcebased strategies.
The Question of Sustainability
A competitive advantage is sustainable if it holds the elements of competitive defendability and environmental consonance, meaning that the organisation is able to
stay competitive in relation to its competitors, but also keep up with the demands and trends in the wider environment (de Wit & Mayer 2010). By positioning itself
strongly within the toy industry using the outside-in perspective, LEGO is able to work to ensure that its market position remains uncompromised by competitors.
Furthermore, by seemingly adopting some elements of the RBV, LEGO will be more usefully able to flag new opportunities beyond its immediate market and expand into it,
as in the case of the LEGO Movie, allowing for higher levels of environmental consonance. One key obstacle ahead for LEGO, and a likely test of the sustainability of
its competitive advantage, will be how well it performs against Mega Bloks following its recent acquisition by Mattel (Mattel 2014).
Conclusion
Analysis of LEGO’s position through Porter’s five forces analysis and the business systems model revealed a company whose makeup has shifted dramatically whilst
operating in a highly competitive environment. LEGO has shifted from an inside-out-styled strategy to one that is more akin to an outside-in one, however recent
developments suggest that LEGO is now pursuing a hybrid strategy between the two. For an organisation the size of LEGO this is an appropriate, and recommended,
approach if well managed, as it allows the company to maintain not only its competitive dependability, but also its environmental consonance, thus ensuring its
continued competitive advantage.

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Appendices
Appendix 1. Porter’s Five Forces Porter’s (2008) Five Forces model serves as an analysis model for understanding the environment in which a business operates, and
focuses on five areas: The threat of new entrants, the bargaining power of suppliers, the bargaining power of buyers, the threat of substitutes, and rivalry amongst
existing competitors. These forces are analysed in order to develop a greater understanding of LEGO’s place in the toy industry.
Threat of New Entrants
Porter (1980) writes that the threat of new entrants into the industry is controlled by the barriers to entry, which include benefits of scale, customer switching
costs, capital requirements, incumbency advantages, access to distribution channels and government policy. The affect of the ease of entry is that the greater the
ease, the lower the profit potential of incumbents.
On the whole, the barriers of entry to the toy industry are relatively low, especially in comparison to other such industries as the automotive manufacturing industry.
Because of the ease of outsourcing production to developing nations, the capital costs required to enter the industry are minimal (Byrne 2013). A newcomer’s product,
should it resonate with its market, can easily outperform the offerings of the established players, but the question of the longevity of that demand remains constant,
due to the volatility of the market (Byrne 2013). Byrne (2013) writes that typically, customer-switching costs within the industry are low, given that a child can play
with a Barbie and a GI. Joe action figure simultaneously. Within the building block sub-industry, however, there exists a notion of forced brand loyalty, due to the
limited crosscompatibility of the various block brands. This has traditionally been one of Lego’s strengths, due to the fact that its blocks have remained internally
compatible for generations (Rivkin, Thomke & Beyersdorfer 2013). Another of LEGO’s strengths in keeping new competition at bay is its longevity and nostalgic factor;
many families have carry-over collections from previous generations, and are more inclined to add to it than render it redundant by investing in a new brand (McGinn
2007).
These factors, combined with LEGO’s brand power and resources, put new entrants to the industry at a distinct disadvantage compared with the incumbent LEGO.
Bargaining Power of Suppliers
Porter (2008) observes that where suppliers have high levels of bargaining power through, for example, control of a precious resource, they can
command higher margins from the business they supply to. Despite cutting its number of suppliers down from 11000 in its crisis stage and re-internalising its
manufacturing processes in 2009 after a brief outsourcing contract with Flextronics, LEGO still has many external suppliers (Dow Jones Newswire 2005; Bregar 2008;
Oliver, Samakh & Heckmann 2007). DHL operates LEGO’s primary distribution centre in the Czech Republic, IBM maintains its technology department, and the Blackstone
Group is heavily involved in the running of the Legoland theme-parks (McGinn 2007; Supply Chain Europe 2009). Whilst it is possible that tensions simmer beneath the
surface of public relations, there is little to indicate that there are any power imbalances in the relationship between LEGO and these parties. In regards to
component supply, however, LEGO regularly audits its suppliers in respect to human rights and environmental controls, giving perhaps some indication that LEGO holds
the power in the relationship (Vestburg n.d.). It is worth noting, however, that a supplier who is able to procure the sustainable alternative to LEGO’s ABS plastic
that it is searching for, might hold a great deal of bargaining power (Miel 2014).
Because of the abundance of outsourcing options available within the toy industry and the relatively uncomplicated products used therein, suppliers do not hold a great
deal of bargaining power (Byrne 2013).
Bargaining Power of Buyers
Powerful buyers or a conglomerate thereof, if they are responsible for a strong proportion of sales, have bargaining power over the business and can demand lower
prices or special concessions therefrom (Porter 2008). On the whole, the purchasing market for toys such as LEGO’s bricks is scattered and diverse, consisting of
individual family members rather than an organised group. In fact, buyer power is often undermined in the toy industry by the whimsy of the children they are buying
for (Byrne 2013).
Threat of Substitutes
The more easily substitutable a product is for another, the harder it is for an individual business within an industry to command a high premium without some other
distinguishing features (Porter 2008). The threat of imitation within the toy industry is a real one, especially in the case of the construction block sub-sector where
products are more functional than as in the action figures sector. For many years LEGO, the dominant construction brand, has unsuccessfully attempted to protect its
market share by issuing legal challenges to competitors (Chua et al. 2004; Tech Europe 2010; Asbell 2011; Austen 2005). With the courts determining that the LEGO block
cannot be protected under trademark laws, the door has opened for competitors, such as Mega Bloks and Best-Lock to compete, some of whom developing bricks that are
compatible with LEGO’s, further encroaching on its dominance (Austen 2005).
In the wider industry, LEGO and other incumbents such as Hasbro also face the threat of substitution by the increasing number of electronic devices, such as the iPad,
used by its target market (Oliver, Samakh & Heckmann 2007; Kenny 2014). LEGO’s recent foray into these forms of entertainment whilst managing to integrate these with
traditional construction serves to somewhat mitigate this trend (Hansegard 2014a; Delingpole 2009).
Rivalry Amongst Competitors
The toy industry, being characterised by low switching costs, limited markets, and somewhat perishable goods, is highly conducive to competitive rivalry amongst the
established incumbents (Byrne 2013). Industry incumbents, due to vast and varied product offerings, are theoretically able to cross-subsidise their competition by
drawing funds from their established cash cows. LEGO’s difficulty in this instance is that, whilst it has one of the highest revenues within the industry, cross-
subsidised competition in the construction toy sector
may be a potential threat, especially given Mattel’s recent acquisition of Mega Brands, one of LEGO’s primary competitors. (Hansegard 2014b).
Conclusion
The toy industry is a dynamic and mercurial one, with strong threats of rivalry, substitutes and new entrants, despite the relatively low bargaining powers of buyers
and sellers. It is a very difficult industry to compete in, but for those who succeed in marketing a success, the rewards can be plentiful (Byrne 2013).

Appendix 2. Business Systems Model The Business Systems Model, as outlined and explored by De Wit & Meyer (2010) is a tool for internal analysis of an organisation,
and places focus on the business’ product offering, activity system, and resource base.
Product Offering
De Wit & Meyer (2010) write that when a company has a wide and unorganised product offering many problems can develop, including poor economies of scale, unclear brand
image, low levels of flexibility and high levels of organisational complexity. This was certainly the case for crisisperiod LEGO, which had an enormous product
offering pursuant to its goal of being a lifestyle choice akin to Harley Davidson, with fiercely brand-loyal followers (McGinn 2007). LEGO developed theme parks, snap
jewellery, clothing lines, books, and a vast array of licences and deals (Marketing Week 2001; McGinn 2007; Bradley 2004). As a result, LEGO’s brand became diluted and
confusing for customers, focus was detracted from the main product line, and costs soared astronomically (Marketing Week 2001; Delingpole 2009; The Economist 2006;
Rivkin 2013; Sunday Telegraph 2005).
Post-2004, LEGO has renewed its focus on its primary business. Most external businesses, such as fashion and theme parks, were outsourced, Duplo was reintroduced, and
LEGO Friend’s, a female-oriented version of LEGO, was introduced (Kenny 2014). This streamlining helped cut costs and allowed the company to refocus on brick-based
products. In present times, LEGO’s revenue is the largest of the toymakers for 2014, jumping in response to the widely acclaimed LEGO Movie and the product-related
sales it has precipitated (Hansegard 2014b; Smith 2014; Colvin 2014). Of particular note is that LEGO’s Legends of Chima range has extended to include video games,
comics and a television series, which may be an indication that LEGO is now exploring the option of integrating the LEGO brand with other activities again (Hansegard
2014a; Schmidt 2014). This possible focus on integration, with movies and shows inspiring, and being inspired by, the physical product, could be a source of great
revenue opportunity for LEGO, but may also be a risk to the company’s focus if it once again strays too far from its delineated industry (Colvin 2014).
Questions of integration notwithstanding, LEGO has successfully segmented, and catered for, its markets, with Duplo appealing to toddlers, LEGO Friends
targeted towards females, LEGO Technic, Power Functions & Architecture for advanced users, and numerous themed products appealing to the appropriate fanbases. This
offering represents a much more coherent, brick-focused, product offering than that which existed at the turn of the 21st century. This improvement, combined with
LEGO’s powerful positioning of itself as a quality, customer service, and packaging leader, a position that is in stark contrast to its 2004 position, has led to
enormous growth (Schrum 2014; de Haaff 2013; Oliver, Samakh & Heckmann 2007).
Activity System
An activity system contains multiple functions, but is a value-adding process where each of its components acts towards the fulfilment of the overall objective of the
organisation (Zott & Amit 2010). Facets of the activity system include inbound and outbound logistics, operations, marketing & sales, and service (De Wit & Meyer
2010). Much of LEGO’s extrication from its crisis focussed on overhauling the activity system.
Inbound and outbound logistics Since 2004, LEGO’s supply and distribution chains have been massively simplified, streamlined and homologated (Oliver, Samakh & Heckmann
2007). For example, suppliers were cut down from an enormous 11000 to 2500, centralised distribution centres were constructed at key locations, and production was
shifted to cheaper labour markets (Oliver, Samakh & Heckmann 2007; Dow Jones Newswire 2005; Supply Chain Europe 2009). These changes have resulted in significant
savings and increased capacity of the system (Logistics Manager 2008).
Operations Oliver, Samakh & Heckmann (2007) write that LEGO has instituted rules and regulations in its design and manufacturing processes in order to minimise waste,
ensure uninterrupted production runs, increase communication, and lower inventory levels. In addition to these measures, LEGO has opened the possibility for customers
to be involved in the design process of new sets through its LEGO Ideas crowdsourcing initiative.
Marketing & Sales In addition, LEGO’s marketing, in addition to traditional forms, has become characterised by high degrees of integration, where one product, such as
the LEGO Movie, advertises the appeal of LEGO bricks, allowing revenues from multiple avenues in the process (Colvin 2014). Stronger supply chain management involving
greater collaboration with big retailers has also allowed more products to be available for customers when they want them (Oliver, Samakh & Heckmann 2007).
Service LEGO’s previously patchy and unreliable customer service has, since being revamped has significantly improved, being praised by industry analysts (Oliver,
Samakh & Heckmann 2007; de Haaff 2013). LEGO’s customer service now has multiple online channels and is beyond a reactive system, with LEGO proactively including extra
copies of pieces in LEGO sets which are prone to being lost (Diaz 2008).
Resource Base
De Wit & Meyer (2010) write that an organisation’s resource, or asset base is an important factor in its ability to perform, and that an organisation’s assets can be
tangible, relating to physical assets or intangible, relating to relational resources and competences.
LEGO has a powerful tangible asset base, comprising nearly AUD$3.5b, but its intangible resources are titanic (LEGO 2013). Holding the title of the toy of the 20th
Century, LEGO’s brand commands a great deal of recognition, and it is consistently rated as a favourite throughout multiple generations (Marketing 2010; Baldwin 2000;
Prigg 2000; Shoer 2011; Wainwright 2004; The Times 2004; Smith 2012). LEGO’s brand power and age, McGinn (2007) writes, gives it a distinct and long-lasting advantage,
due to the nostalgic effect of its brand on older generations who have fond memories of playing with LEGO, and wish to pass
them on to their offspring. This ability to elicit long-lasting loyalty is of great value in a market where there are many cheaper alternatives available.
In addition to its relational resources, LEGO’s workforce holds a great deal of competences that have been garnered throughout LEGO’s long history as an industry
leader. These competences had the unfortunate effect of generating a culture of complacency, with costings and money far from the mind of many of LEGO’s employees
(Delingpole 2009). This shortcoming, and the abundant creativity of the employees combined to result in an overstretched product range and production schedule, a
problem that needed to be eradicated if LEGO were to recover (Delingpole 2009). Overcoming this issue through tight controls was one of the many prongs of Knudstorp’s
revitalisation strategy (Rivkin, Thomke & Beyersdorfer
Conclusion
LEGO’s modern business system is far removed from that which nearly crippled it in 2004. LEGO has successfully refocused and revitalised its product offering,
streamlined its activity system, and has thus been able to properly leverage its vast resources, both tangible and intangible. The revolution of LEGO has also sought
to remove cultural complacency generated by LEGO’s long reign prior to the crisis.

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