Value Propositions & Strategic Resources - Lego
Context
Use the case study to populate the following VRI table for LEGO. Evaluate each of the resources listed in the first column and describe whether they are valuable, rare, and difficult to imitate or substitute.
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Case study: LEGO
In 1947, the LEGO company – currently the world’s largest toy manufacturer – became the first organisation in Denmark to buy a plastic injection-moulding machine, which was used to create plastic bricks (Rivkin, Thomke & Beyersdorfer, 2012). In 1958, the organisation changed the design of its bricks to the, now familiar, interlocking stud design they quickly patented (Augustyn, 2014). LEGO’s unique, patented features contributed to its success and the organisation amassed a large customer base in Europe, which was the brand equity that justified opening of the first LEGOLAND in Billund (Augustyn, 2014).
However, in 2011, fad toys were on the rise, product life cycles were declining, kids over three years old demanded more high-tech toys due to a general shift toward technology, and many children replaced traditional toys with videogames and online activities (Rivkin, Thomke & Beyersdorfer, 2012). Parents were often torn between buying the toys their children wanted and those they considered good for their children.
Competitor Mattel leveraged rising trends and featured brands like Fisher-Price, Barbie, and American Girl dolls (Mattel, n.d.). Toymakers increasingly manufactured in Asia, where labour was inexpensive and subcontractors stood ready to produce goods on their behalf. With manufacturing outsourced to China, global players, such as Hasbro, specialised in new product development, sales, and marketing (Rivkin, Thomke & Beyersdorfer, 2012).
LEGO differed from its key competitors in some respects – especially when it came to manufacturing technology. In terms of manufacturing, advancements in its plastic formula allowed it to mould with a precision of up to 0.002mm (Rivkin, Thomke & Beyersdorfer, 2012). This technology creates the perfect fit for bricks to clutch each other well (LEGO, n.d.). After an attempt to outsource manufacturing in the 2004–2005 period, LEGO returned to production in-house between 2007 and 2008. At the time, in the decoration phase, specialised parts were painted after moulding and Chinese contractors were used for this purpose (Rivkin, Thomke & Beyersdorfer, 2012).
Across the industry, it was common practice for toymakers to sell to their customers via diverse retail channels, including independent toy specialists, chain stores, discount stores, department stores, and online stores. In 1999, LEGO decided to sell directly to consumers through two initiatives: an online shop and LEGO-owned retail stores in Europe and the US (Rivkin, Thomke & Beyersdorfer, 2012). The rationale included meeting the consumer in the right places, building the brand, and displaying brand wealth, which would not have been possible from the crowded retail shelves of third parties.
By 2004, LEGO had determined four core priorities: the LEGO brand, the LEGO brick, its unique system of play, and the loyal LEGO community (Rivkin, Thomke & Beyersdorfer, 2012). LEGO also became better at tapping into its strong community of loyal fans, so-called AFOLs (Adult Fans of LEGO). AFOLs are nurtured, especially, by products that fuel nostalgia – including vintage superhero sets and sets from the popular TV show Friends (Bhattarai, 2020). Beyond buying bricks for themselves and their children, many AFOLs interact on the internet to share experiences, pictures, and videos. They also join clubs that arrange large exhibits and attend LEGO conventions (Bhattarai, 2020).
LEGO dedicates people to work with communities in different geographic regions called LEGO User Groups (LUGs). LEGO regularly asks LUGs for their opinions, connects them to co-creation projects or specific development areas, and brings them together in conferences on specific topics (LEGO Ambassador Network, n.d.).
Context - Question from the LSE
Use the case study to populate the following VRI table for LEGO. Evaluate each of the resources listed in the first column and describe whether they are valuable, rare, and difficult to imitate or substitute.
Answers Table
| Resource | Valuable? | Rare & Difficult to Imitate? | Strategic? |
|---|---|---|---|
| Production System for Manufacturing | In 1963, switched to ABS for ‘perfect fit.’ Fun and quality are important features; the system enables rebuilding and interoperability. Therefore valuable. | Up until 1978 the patent protection meant it was rare and difficult to imitate. Then became less effective. Toy manufacturing moved to Asia (1990s); many ‘Lego clones’ available. | By insourcing in 2007 this allowed labour/moulding/ S&OP efficiencies. Insourcing made it rare and difficult to imitate. Therefore strategic. |
| Production System for Decoration | This is a valuable resource as it directly affects the look of the product which is important for numerous features of customer value. | Resources required for decoration are not rare or difficult to imitate. Colour palettes can be subtly changed for substitution. | Not strategic. Decoration was outsourced to Chinese contractors in 2004 and not insourced in 2007 as it was non-core. |
| Lego-owned physical store | All core priorities can by showcased in Lego stores. It gives Lego direct control of the purchasing experience, a weakness vs Mattel. | In distribution terms it is rare; 170 Lego vs two for Mattel. A competitor can’t imitate a Lego store. Difficult to substitute as competitors chose to have few stores globally (cost). | Helped Lego outperform in a stagnant market. ‘Fun’ is the biggest customer value differentiator vs Mattell. Enabled sustained competitive advantage. |
| Lego online store | The introduction of Lego.com added value to customers. It helped improve purchase experience, launch initiatives and was key to Lego’s community strategy. | Around 1999 launch many toymakers diversified retail channels; it wasn’t rare. Resources available to build e- stores were widely available. Not difficult to imitate. Mattel sold on barbie.com in 2000). | Not strategic based on VRI analysis. Explosion of online presented an opportunity for value creation. Competing offerings available for value capture. |
| Brand | Lego brand is synonymous with fun and quality (value curve). By 1993 Lego was globally a top 10 brand. Brand seen as core priority under Knudstorp’s turnaround. | Lego brand is rare, a unique resource. It is in short supply and persists over time. Brand can’t be imitated; this is story and values since 1930. Brand can’t be substituted, since 1978 many brands have cloned the product (not brand). | Knudstorp organised Lego to capture value from the brand (i.e. VRIO). Brand was a significant factor in turnaround (165% growth in stagnant market). Therefore strategic. |
Context - Question from the LSE
The case study reveals a tension between LEGO’s need to increase its number of components, to introduce more innovative toys and increase sales, and the increased cost of manufacturing those components. In your own words, discuss how this represents a trade-off between value creation and value capture. In addition, discuss the role of the reuse rate in this trade-off.
My thoughts - Answer for the LSE
Manufacturing is a strategic resource. Choices about the value proposition must be matched with manufacturing to ensure value capture. Rivkin explain that manufacturing and design were not aligned (resources were not exploited effectively, VRIO). Designers were increasing SKU complexity and unintentionally destroying customer value (creativity and interoperability). This hurt profitability due to downstream supply chain implications.
Lego were able to reach a compromise of 23% of components for new products due to the re-use innovation rule. It was a framework applied to every new SKU. Customers gained from compatibility and better service levels with no less variety. A rebrickable trend allowed more creativity and parents to be cost/eco conscious. SKU simplification created customer value.
Knudstorp explained that re-use helped reduce components. From 1999-2005 components grew from 9k to 12k but revenue fell from DKK 9.8bn to 6.3bn. In 2005-07 components fell sharply from 12k to 6k. Applying RBV, Knudstorp analysed the supply chain and expedited the response (i.e. 23% target). It saved Lego financially. The re-use rate disproved the hypothesis that more components led to more sales. It enabled a more effective use of resources, simplifying and reducing the cost of the supply chain. This simultaneously created and captured value.