Lego Five Forces

Introduction

This essays lists some my ideas of how a strategic analysis of a company could start and look like. This blog entry does not claim to be a complete analysis or completely correct. It is meant to be a sample and all ideas are my assumptions. I never worked for lego... It is an extract from my work at university.

Lego is a toy maker in Europe and produces plastic brick stones, which is a niche in the overall toy market. Lego's sustainable competitive strategy is therefore a segmentation strategy, as it is focused on a narrow market niche within the overall toy industry. The following paragraph will determine the strengths of the different competitive drivers within this industry. In the end, Lego's most value-adding disciplines will be identified.

Porters 5 Forces Analysis

Substitutes (pressure very high):The highest pressure for Lego comes from substitute products. Substitutes are everything that rivals with Lego about children playtime, such as other traditional toys or computer games. Children get bored fast and switch to substitutes. They prefer to play with more sophisticated toys. Substitutes come from the entire toy industry as well as the electronic gadget market. There are no switching costs for substitutes and the prices of substitutes vary, the barrier to switch is therefore low.

Customers (pressure high): The pressure from customers is high. Customers of Lego are retailers such as Wal-Mart or Toys"R"Us. These have the bargaining power over lead times and price. For example, if Lego does not provide the toys quickly enough at Christmas, Wal-Mart could take Lego out of the shelves.

Suppliers (pressure high): Lego brick stones are made of plastic. Plastic is produced with oil and there is no chance for Lego to bargain with oil companies. Fluctuations in oil prices directly affect Lego's margin.

Competitors within the brick stone market (pressure low): There is Best-Lock from Hongkong and Mega Brands from Canada. Both compete with lego by low prices. Lego has a strong brand image and brand loyalty among customers and can charge premium prices.

Parents know Lego because they played with it themselves. As the parents are the ones who pay the toys and as they are the force that often decides over children's playtime, they will be the ones who make children play with traditional toys rather than computer games. Lego has therefore a critical competitive advantage over its competitors, as they can not look back on such a long history.

New market entrants (pressure low): There are low market entry barriers. Lego's patents expired and overseas competitors enter the market. As the oil prices collapsed during the financial crisis in 2008, it was easier for new entrants to get resources. In addition, the product is easy to copy. As the economic condition in the traditional toy market