An Analysis of LEGO'S  Marketing Strategy in China

An Analysis of LEGO'S  Marketing Strategy in China

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Executive Summary

This report has analysed LEGO’s marketing strategy in China. From the analysis of how corporations manage global operation strategies through marketing operation across global markets and cultures, the following have been identified.

LEGO leverages its reputation, brand equity, and many years of operations to gain competitive advantage. It is also supported by its huge resource portfolio.

Innovation and creativity are the major sources of sustainable competitive advantage. Through the VRIO framework, redundant and dynamic capabilities, threshold and distinctiveness, the study shows that LEGO adjusted its operations to suit the Chinese market. 

LEGO entered China through a direct entry mode. This was unlike the models it used to enter the UK and US. However, it responded to the Confucius culture in China, hence the need to customise its products. Besides, it wanted to take advantage of the cheap labour, availability of raw materials and market. 

From the analysis of market/environment opportunities and characteristics, the use of PEST and Porter’s five forces shows the company’s potential in resources and favourable external environment. 

From the analysis of the 4Ps of the marketing mix, LEGO uses product differentiation. It uses price skimming. It has localised its products (place). Its product promotion utilises new media approaches. 

However, LEGO is facing increased competition from online games and video providers. The company should use its innovation to increase its target customer base. For instance, instead of targeting children (7 to 12) years, should also target adults by providing video games and other products that can attract them. 

Keywords: product differentiation, PEST analysis, Porter’s five forces, entry modes.

 

Table of Contents

Executive Summary 2

Introduction 2

Company Capability and Products Portfolio 3

Redundant and dynamic capabilities 3

Threshold and distinctiveness 4

Market/Environment Opportunities and Characteristics 5

PEST analysis 6

Porter’s five forces 6

Marketing Strategies and Tactics 7

Market selection 7

Target customers 8

Mode of Market Entry 8

Strategy 1: Manufacturing 8

Strategy 2: Licensing & merchandising 9

Marketing Mix 9

LEGO product strategy 9

Price – pricing strategy 9

Place and distribution strategy 9

Promotion and advertising 10

Conclusion and Recommendations 10

References 11

 

Introduction

The purpose of this excerpt is to analyse Lego’s marketing strategy in China. LEGO boasts of a long history since its inception in 1916. It came about when Ole Kirk Kristiansen, the Danish carpenter bought a woodwork workshop in Billund, then a small Danish town. OIe’s business idea was to build houses and furniture. However, preceding the 1930s global Great Depression, Ole affirmed findings of characteristics of entrepreneurs of flexibility (Roos & Victor, 2018). Ole’s rethink of business plan, and the business bankruptcy risk, Ole started to make a range of toys for young children. Whereas currently, the toys portray the artistic LEGO Blocks, by then they included wooden building blocks embedded with alphabetic letters. Others include hand-painted pull-along toys and yo-yos. Even though the process of making the toys was manual, the toys were made with high levels of precision and quality. Ole’s business received a boost at the time Germany occupied Denmark in the 1940s as the government banned the use of metal to make toys, as the resource was channelled towards making war paraphernalia. Wooden toys became the preferred option. 

From the wooden toys, Ole opted for innovation and after the war in 1947, he purchased a plastic injection moulding machine from a British Manufacturer. This enabled LEGO to enter plastic technology in making toys (Geislinger, 2020). LEGO enjoyed a competitive advantage from the purchase of the machine at the time because plastic toys were expensive to assemble. With the ability to make toys in greater detail and design, LEGO started to make higher quality toys – colourful cars, tractors, and trucks – which became a preference for young children. The summary chronological development of LEGO includes;

• 1949 – production of the first LEGO bricks called Automatic Binding Bricks, later renamed LEGO Mursten in 1953 (Roos & Victor, 2018).

• 1954 – Ole’s sone – Godfred Kirk Kristiansen, came from a toy trade fair in Britain with new ideas of making toys. This led to the introduction of system play, which was lacking in the industry by then. He later created a toy system where every element connected with another to create the system for play. 

• 1955 – the LEGO system was completed and this led to the creation of Town Plan range of construction sets. The innovation enabled children to create their simulation of town centre – people, cars, street boards, houses and shops et cetera. 

• 1957/8 – production of LEGO brick.

• 1978 – the creation of LEGO Minifigure – with over 2500 different characters to date. 

• 2002 – began the production of Yoda – that enables the creation of shorter-legged figures (Roos & Victor, 2018). 

Therefore, from a beginning that was marred by the global Great Depression challenge, LEGO has grown to become one of the global leaders in toys manufacture. The development is based on the philosophy “Only the best is good enough”, which enables one of the best innovation of toys system of play. 

Company Capability and Products Portfolio

Redundant and dynamic capabilities 

According to Gupta (2021), the dynamic capability theory applies in analysing the way an organisation acquires and deploys its resources geared towards meeting market demands competitively as per the market environment. In this regard, (Gupta, 2021) defines the dynamic capability of LEGO as the ability to purposefully create, extend, and modify resource base. On the other hand, when LEGO announced a 7-year rebranding process from 2004 (Ilmudeen et al., 2020), it is the process sold of LEGOLAND parks to raise funds for saving the company. Besides, some resources that were not serving its development optimally were sold alongside. 

LEGO’s dynamic capability resonates with its flexible backbone model. For instance, it applies the hybrid approach in providing low-cost messaging and support of its customers. Besides, it offers a wide range of collaboration and tailored services to customers. The company’s capabilities enable it to succeed in education, new product development, logistics, augmentation and technical support (Srikant & Lessard, 2020). 

Threshold and distinctiveness 

LEGO also shows distinctive and threshold competencies. Such competencies are the reason the company enjoys a competitive advantage. They include innovation, creativity, and installation of production facilities (Corrall, 2017). Others include creativity in product designing, extensive knowledge in the sustainable use of raw materials, and efficient supply chain. Besides, the company enjoys a global reputable brand name, it has maintained the quality of its products over years and has efficient leadership and management. A combination of these capabilities is as shown in table 1 below which enable LEGO to attain its current successful position in the global toy market. 

Table 1LEGO Core competencies and strengths. Source: (Author)

VRIO analysis

VRIO framework’s potential entails conducting an internal analysis of a company to identify its core competencies (Chatzoglou et al., 2018). The model is an abbreviation of value, rarity, imitability, and organisation. The table below shows a summary of LEGO’s VRIO.

Key: N – No, Y – Yes, L - Likely

Based on the table above, LEGO’s tangible resources are highly valuable. The financial resource is too rare, and this provides the company with its current competitive parity and competitive advantage. Among its organisational developments, LEGO boasts of modern plants and facilities as well as location – which are valuable. For instance, the company has moved its production to countries that can offer cheaper labour such as China. it has also taken its products closer to the target market such as China. 

Due to LEGO’s many years in the industry, its reputation and trademark is a valuable resource. Besides, the innovation process is rare, valuable and highly costly to imitate. In this regard, the company’s innovativeness in production offer it sustained competitive advantage. On the other hand, LEGO’s shared vision is provided by its resources. For instance, the efficient management of the current CEO enables the organisation of all resources to attain the required sustainability, which provides it with a sustained competitive advantage. 

LEGO also boasts of its intangible resources. For instance, right from the CEO, its human resource is highly skilled. This is highly costly to imitate. The company’s innovation capabilities rely on the skills of its employees, which is costly to imitate or hire the same employees. On the other hand, LEGO’s brand name is a world-class reputation, as it ranks among the top ten best brands. 

Market/Environment Opportunities and Characteristics

Market or environmental opportunities entails those opportunities that a business can harness. However, every market has competition and a business must have competitive advantages to survive the competition. To analyse LEGO’s market opportunities and characteristics, PEST and Porter’s fives forces models are used as shown below.

PEST analysis

Political aspects

LEGO is an international organisation. Political trends in the markets it operates affect its operations and profitability. LEGO is ranked among the top toy companies in the world. Together with its subsidiaries, it currently operates in 130 countries globally (Knudstorp et al. 2017). As it distributes its products in these countries, political stability is important. Another area is the regulations. For instance, a country like the United States has safe regulation for children toys. Some countries like China have regulations against biased advertising and marketing. 

Economic aspects 

Currently, the markets are shifting to emerging economies such as China. This shift affects the presence of LEGO in China and other countries. Besides, the world is experiencing an increase in wealth especially public wealth. This has led to increased spending on toys and games. Such trends boost LEGO’s sales. As was predicted by OECD that the middle-class will increase from 1.8 billion to 3.2 billion, this provides an increased market for LEGO due to increased spending on leisure and other activities. 

Socio-cultural aspects

In the current global social trends, there are reduced fertility rates as women are actively engaged in economic activities. However, targeting a country like China, its 1.4 billion population provides a huge social setting for children, who may prefer LEGO’s toys. Secondly, LEGO’s presence in China is affected by the country’s culture, especially high context issues on marketing and production promotional activities.

Technological aspects

LEGO enjoys the benefits of technology and product development. However, there exists a threat in increased internet access as video games and online games, toys and cartoons may affect consumption of the company’s products. Besides, the new 3D printing techno9logy that LEGO uses is easily imitable by competitors. 

Porter’s five forces

LEGO’s external environment affects its operations in terms of internationalisation capabilities relative to its competitors. To analyse these factors, the table below summarises the company’s Porter’s five forces.

 

Marketing Strategies and Tactics

When LEGO entered China in the 1980s, it used conventional marketing strategies. They included advertisements for its products over the mainstream media such as television, radio, and print media. However, through the enablement of internet and digital media, LEGO’s marketing strategies and tactics in China have changed. For instance, the company now applies social media/content marketing strategy. Given that it is already a reputable brand, it has huge followings on social media platforms such as Facebook, YouTube, and Instagram among others. Its effectiveness for using the social media channels is to enhance its engagement with customers. For instance, the company uses viral marketing especially for parents within the age of its target consumers. Through a viral marketing approach, Bhattacharya, Gaurav and Ghosh (2019) explain that a brand fosters a conversation that is shared among people on the social media platforms. As such, LEGO has over 15 million followers on Facebook. It captures their attention through regular updates and keeping up conversations. 

Market selection

A multinational corporation (MNC) like LEGO is subject to various dimensions of external institutional environments. Based on institutional theory, MNCs are required to conform to existing rules, dimensions, norms and procedures of locations that they enter in the foreign markets (Shen, Puig & Paul, 2017). Therefore, in fostering market selection to China, LEGO used the institutional theory. One of the determinants in China was culture. Due to this, LEGO’s decision to invest in a manufacturing plant in China was partly to create toy products that resonate with the local culture. Such integration with the local culture has been LEGO’s approach in several of its major markets such as the US and UK. 

Target customers

Camilleri (2018) explains that a business can only get it right with products and marketing went targets the right kind of customers. LEGO’s target customers in China can be explained using the geographic, demographic, psychographic, and behavioural approaches (see table below). 

 

Mode of Market Entry

LEGO has its products in 130 countries. However, the company is on the lookout for expanding its operations. At the time LEGO entered China, it started by opening LEGO stores in the country’s major cities as well as those that showed demand and interest for the products (Törmer & Henningsson, 2020). Secondly, LEGO learned the network of the new market. From here, it observed that there was no need creating products lines specific for the Asian markets like Chin this because due to the company’s reputation, the Chinese consumers already had the liking for the company’s products. Besides, the consumers had presented their acknowledgement of the advanced digitisation of the products on the Chinese market. This market environment enabled LEGO to continue to make more digitised products for the local and international markets. 

Strategy 1: Manufacturing 

LEGO used a focused strategy while entering China. As a result, the company increased its profits and sales by 4% in 2018. Based on the PEST analysis, China continues to grow its middle-class population. This has continued to present a future opportunity for the company. Due to this, China started to operate its factory in China. This mode of entry, based on Törmer and Henningsson (2020) utilised the cheap labour in China. This was coupled with China’s advancement in technology and material science. 

Strategy 2: Licensing & merchandising 

One of the essential parts of LEGO is diversification. As an iconic area of its marketing strategy, the company makes multiple toys and their related sets. Besides, the company has branded out into multiple mediums to promote the brand (Li & Turner, 2018). T maximise on this trend, LEGO operates The LEGO Movie franchise and The LEGO Batman Movie. Both have raised the company’s profiles of licenced properties. LEGOLAND theme parks can be found in other countries outside China such as Dubai, Malaysia, Florida, Billund, and California. Besides, LEGO has merchandising business operations in China. 

Marketing Mix

The 4Ps of marketing strategy is used in this part to explain LEGO’s marketing mix. This model analyses a firm’s products, price, place, and promotions (Lahtinen, Dietrich & Rundle-Thiele, 2020). 

LEGO product strategy 

LEGO is among the biggest block toy globally. however, the company does not restrict itself to toys. Rather, it occupies a broader space in the market. For instance, it commenced its operations as a toy manufacturer and later became a great marketer. Besides, LEGO specialises in product differentiation. For instance, it offers the following mix of products to its customers.

• Video game – this is managed by LEGO Media International Limited. Some of the games include Star Wars, Batman, and Marvel Superheroes.

• Board games – Managed by LEGO Games. They include the Creationary, Minotaurus, and Ramses Pyramid. 

• Films and Television – after the release of the movies, it experienced huge pre-orders and eventual shortage in the store.

• The LEGO Movie – Substantially consumed.

• LEGO – The Adventure of Clutch Powers. 

Price – pricing strategy 

When LEGO entered China, it used penetration pricing strategy to gauge the market. According to Liu, Zhai and Chen (2018), penetration pricing attracts first customers but provides low revenue for a business. Afterwards, LEGO sells its products using the skimming pricing strategy. LEGO’s products are expensive. The price resonates with product quality. For instance, before the products enter the market, they undergo precision manufacture with high-quality materials.

Place and distribution strategy 

LEGO uses both direct and indirect distribution strategies. For instance, the company is headquartered in Demark. However, it has major product units in the United States, UK, China, and Singapore. Secondly, the company uses retail stores. Thirdly, the company has localised its products as they can be found in supermarkets, movie theatres, and amusement parks among others.

One of the direct models of LEGO’s products is exporting. LEGO exports its products throughout the world. This approach makes the company’s products readily available to its customers. China is used as an export conduit for the company’s products in Asia. This is based on the company’s manufacturing business processes in China. On the other hand, LEGO’s products are available online from platforms like eBay and Amazon. 

Promotion and advertising 

The reason LEGO boasts of its reputation and fame is due to promotional strategies – especially the use of conventional media and unique marketing strategies. For the conventional media, LEGO has for decades promoted its products on television, radio, and print media. Most people who have grown up seeing the advertisements are now baby boomers, which now have young children and grandchildren. Therefore, LEGO as a brand is easily remembered in the memory of these customers, who have the decision making power for their children regarding the toys they should use.

LEGO’s use of unique market strategies started when the company was making only the plastic bricks and small figurines into the LEGO sets. The company started to attach themes on its products such as comics, cartoons, movies, and video games. Through its expansion beyond toys and play and into official website and games, its ability to provide trophies, rank players and give items as well as badges provided a unique marketing strategy. 

Conclusion and Recommendations

This excerpt has analysed LEGO’s marketing strategy in China. it has demonstrated an understanding of how a global operation strategically manages its marketing operations across global markets and culture. Based on the analysis of LEGO’s history, the company has grown from the brick-and-mortar way of operation to the current high levels of innovation. It emerges and innovation and creativity through leverage on technology can help a company to gain competitive advantage. 

Meanwhile, LEGO’s success in China through the use of competitive advantage derives its strengths from its capabilities and products portfolio. For instance, the company’s redundant and dynamic capabilities, threshold and distinctiveness show how it adjusted its resources to suit the competitive environment. while doing this, the company through the analysis of the VRIO framework shows both its tangible and intangible capabilities have high levels of value, rarity, and costly imitability. 

About the market/environment opportunities and characteristics, the analysis through the PEST and Porter’s five forces show that China presented an opportunity for LEGO. The opportunities emanated from favourable political, economic, social, and technological factors in China. Besides, from the analysis of Porter’s five forces, LEGO’s huge resource base, reputation and brand equity helped it is set up a plant in China, and customise products to suit the local market. The decision was informed by the conservative culture. As such, LEGO’s entry mode (direct entry) by setting up a plant in China has been effective to date. 

From the analysis of the marketing mix using the 4Ps of marketing show that LEGO has diversified its products. Secondly, the company use penetrating pricing strategy when it first entered China but switched to price skimming with time. Currently, it offers premium pricing for its products. Thirdly, the company has a delocalised place where the customers can access products. Fourthly, it applies multiple approaches in promotion, from the traditional methods to the current digital media marketing strategies.

Going forward, LEGO will continue to be an iconic company in the industry. However, there is an increasing competition especially with children preferring online games and related toys. Therefore, LEGO should first venture in this area. Secondly, the company should use its innovation to increase its target customer base. For instance, instead of targeting children (7 to 12) years, should also target adults by providing video games and other products that can attract them. 

References

 

Bhattacharya, S., Gaurav, K., & Ghosh, S. (2019). Viral marketing on social networks: An epidemiological perspective. Physica A: Statistical Mechanics and its Applications, 525, 478-490.

Camilleri, M. A. (2018). Market segmentation, targeting and positioning. In Travel marketing, tourism economics and the airline product (pp. 69-83). Springer, Cham.

Chatzoglou, P., Chatzoudes, D., Sarigiannidis, L., & Theriou, G. (2018). The role of firm-specific factors in the strategy-performance relationship: Revisiting the resource-based view of the firm and the VRIO framework. Management Research Review.

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Geislinger, A. C. (2020). How Lego rebuilt and became the top toymaker in the world (Doctoral dissertation).

Gupta, A. K. (2021). Innovation dimensions and firm performance synergy in the emerging market: A perspective from Dynamic Capability Theory & Signaling Theory. Technology in Society, 64, 101512.

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