Lego Group, Marketing and Operation Management Report

FOUNDATIONS OF MANAGEMENT (PART A) LEGO Group Marketing and Operations Management Report Prepared: For: LEGO Group By: Eva Gaal On: 17 November 2008 Introduction At the request of the LEGO Company, this report advises the company on the expansion of its operation based on market segmentation, appropriate marketing mix, new product design and development, including total quality management for outsourcing new partners. LEGO Group is the fifth-largest toy manufacturer of the world and has operated successfully for 75 years; however, it has had some problems in the last couple of years. To solve these problems, LEGO introduced a seven-year strategy plan, which consists of some fundamental changes regarding to the processes, procedures and structure of the company. This strategy so far has been executed successfully as shown in the financial results; however, LEGO is going to face some more challenges in the future. (LEGO Annual Report 2007, 2007). 1. / Market segmentation ‘Market segmentation is defined as the subdividing of a market into distinct and increasingly homogeneous subgroups of customers’ (FM-A, 2004, p. 3) and ‘it centres on the assumption that customers demonstrate heterogeneity in their product preferences and buying behaviour’. (Green, 1977, Wind, 1978, cited in Dibb, 1998, p. 394). ‘The business did actively segment its market’ (Dibb, 1998, p. 399), as LEGO identified itself from the very beginnings as a toy manufacturer it therefore automatically determined its marketing segmentation approach. In the children's toy market the primary segmentation base is the age (the older the more complex product); however, the real buyers are the parents (e. g. LEGO Duplo). Such an approach is popular because it is convenient, clear-out, easy to implement and stable over time. ’ (Curran and Goodfellow, 1989, p. 23, cited in Dibb, 1998, p. 399). During the company operation LEGO identified more and more secondary segmentation variables (FM-A, 2004) such as †¢ gender (dollhouse for girls: LEGO Belville and robots, football stars for boys: LEGO Sports, LEGO Racers), †¢ geographical area: level of income and purchasing power (matured countries – more complex products like Technic, Bionicle, developing countries – simple products like Duplo, Creative Building) education (different product rages for classroom education and for child development at home) †¢ psychographic, lifestyle: reflects the parents believe in the importance of education and creativity of the LEGO produc ts LEGO related its products directly to this segmentation group and positioned them in the certain markets. Why is market segmentation important? Identification of market segments, physical product configurations and brand positioning (LEGO positioned itself as a premium brand) are the most important decisions that companies face in the global marketplace. (Hassan et al. , 2003). LEGO identified country-wide segments and targeted them with its products range, based around the importance of education and creativity. Universal segments across country boundaries are considered as micro factors for values, attitudes, lifestyle and perception. (Hassan et al. , 2003). Even if market segments can be identified as LEGO did, it does not necessarily mean they are attractive or that a suitable marketing mix can be designed for each segment. This can be one reason why LEGO had difficulties in early 2000, however, ‘there is a lack of quantifiable evidence about the impact of segmentation on business performance’. Dibb, 1998, p. 396). The other reason could be that despite the well documented benefits which segmentation offers, businesses continue to encounter implementation difficulties. (Dibb, 1998) Marketers are using intuition rather than systematic analysis to identify segments (Wind and Cardoza, 1974, cited in Dibb, 1998) – follow their competitor s (LEGO started to create high-tech toys) with the lack of critical analyses about their attractiveness to the business. By recommendation it is that LEGO should review its segmentation approach including identification of segment profitability and life cycles (see Appendix 1. ; collection of segments data; global buyer based vs country based features etc. to identify new market opportunities and niches. Although there is a lack of quantitative research on the question of segmentation success factor, there are guidelines that divide 3 part (before – during – after) segmentation process, Kotler’s check-list and attractiveness criteria (Abratt,1993, cited in Dibb, 1998), (see Appendix 2. ). The result of this analysis should then be applied in the development of the existing segments (e. g. argeting older age-groups 20+, enter into new markets e. g. in Asia or identify new segments) to make decisions about targeting and to determine positioning. (Dibb, 1998). 2. / Marketing Mix After the market has been successfully segmented, target segment selected, and positioning strategies created, the marketer needs to proceed with development of the marketing mix. (Goldsmith, 1999, p. 181). The marketing plan consists of the eight main elements below which are the major areas to achieve and expand the sales and profit goals (see Appendix 3. ). Some of them are unique for Technic products (like product & price) but some of them cannot be separated as they are associated to the brand (cost-effectiveness). Product LEGO’s vision is that the Group will increasingly refine and improve its product range to enable its new product range to compete (LEGO Annual Report 2007, 2007), for example with the many electronic toys on the market, other companies are determined to reach buyers. Therefore in the 1970’s LEGO started to launch the Expert Builder sets, which included parts like gears, axles and cogs, which could be used to build working models of vehicles and machines (e. . cars, trucks, tractor etc. ). These products were more advanced, therefore more suitable for teenagers (12+). They were designed to help children learn creatively through play and to improve abilities to solve complex problems. In the 1980s the Expert Builder series was renamed to the Technic series. (Regani and George, 2007). By the early 1990s h igh-tech toys appeared in the market from other companies. Therefore the LEGO Technic series had to be improved to build robots and other automated or interactive systems to keep up with its competitors. Price LEGO’s unique position is based on the high quality, durability and safety of its products, utilizing a premium branding strategy where a higher price is associated, which therefore differentiates LEGO in relation to its competitors within the current market. The Technic products consist of more complex and special elements, therefore the production cost is higher than the standard bricks. Customers are prepared to pay this higher price to get the added benefits of the special design product of LEGO. However, this higher price (? 60-? 120) completely fits into the LEGO products price range (? 20-? 200). Place LEGO uses the following channels to provide their products (including LEGO Technic products) to customers (LEGO Annual Report 2007, 2007): – distribution: two centres in North America, two centres in Europe – direct sale: brand stores, mail order business, online sales (e. g. Amazon) Promotion The LEGO brand is the sixth most well known brand in the world (HVG, 2004) and this gives competitive advantage against the competitors in the promotion activity. LEGO is using to promote the Technic products through advertising during TV children programs (e. g. Off Roader) and through sales promotion (e. g. pecial online offers, Technic Gallery). Increasingly, online reviews written by satisfied customers are used to promote their products. Other possibility to promote Technic products would be to build one of them in the brand store to demonstrate how it works. People Not only in the production have LEGO maintained a high quality, but also in the performance of the servic e for customers. By TECHNIC products is very important that appropriate training for employees is given due to the complexity of the products. Processes ‘Lego products have to satisfy all market standards regardless where they were manufactured. (Regani and George, 2007, p. 6). It also has to provide high quality technical support especially such a complex product as Technic and customer service. ‘LEGO customer service was thus awarded the prize for â€Å"Best Centre for Customer Service† in Europe. ’ (LEGO Annual Report 2007, 2007, p. 19). Physical evidence The high quality production of the LEGO product (ISO 14001) guarantees that the Technic toys can be easily assembled following the technical instructions and there are no missing parts and all elements fit perfectly well together. The assembled toy looks and works exactly as shown on the packaging. Personalisation As the newest element of the marketing mix, personalisation offers a personalised version of the brand. This has a direct impact on all other elements relevant to LEGO products. Customers who are unhappy with mass produced products can design their own individual TECHNIC product on the internet and order this more personalised version online. However, ‘personalised products may imply personalised prices’. (Goldsmith, 1999, p181. ). 3. / New product design development It may be easier to develop a personal version of an existing product than to develop a wholly new product. New products come in five versions: product improvements, line extensions, brand extensions, new brands, and new-to-the-world innovations. (Peter and Donnelly, 1997, p. 125, cited in Goldsmith, 1999). From the very beginning LEGO shows a high commitment to new products innovation. When LEGO created the first non-toxic (ABS) interlocking plastic bricks in six different colours and launched their little yellow minifigure these were new innovations and built a base of their success as LEGO was named ‘Products of the Century’ by Fortune magazine. The LEGO elements which have been manufactured since 1958 are fully compatible, therefore LEGO sets can be passed on from one generation to the next. (Regani and George, 2007). As children’s interests changed over the years LEGO had to design new high tech product ranges to keep up with the present technology. The product development takes place primarily at the company’s Billund headquarter (internal brainstorming), but the LEGO Group has bases all over the world to monitor the latest trends, review of competitors’ products and also monitor the customers’ requirements and feedback. LEGO Company Profile, 2007). Innovation and creativity can be expensive and LEGO has lots of primary limitations of its product design; therefore each design option must be evaluated and assessed against a set of design criteria. (FM-A, 2004). The new products have to comply with the existing ones. The new product has to fit to the production line, because to adjust or create a new production process has a high additional cost. LEGO Group’s motto â€Å"Only the best is good enough† and to fulfil this ambition all products have to comply with the appropriate safety and quality standards. Several activities such as quality management, environmental (green) issues, preventive action and testing on mechanical, chemical, electrical properties to ensure the product is free from hazards. Along with the high tech and licensed products LEGO should – and indeed must – concentrate on the development of its classic product lines (e. g. variety of product line extensions which are fit with the existing ones and wide range of possibilities of packaging (smaller supplementary parts are relatively cheaper for customers than bigger packs, etc. ). 4. / Total quality management for new outsourcing partners It has a lot of elements therefore hard to find the right definition of TQM. There are some interpretations which concentrate on different aspects (FM-A, 2004) like participation and quality circles (IshiKawa), quality cost, employee participation and motivation (Crosby), internal and external focus of customers, fitness for use (Juran) and Six Sigma (see Appendix 4. ) . One of the overall definitions of TQM is n effective system for integrating the quality development, quality maintenance and quality improvement efforts of the various groups in an organisation so as to enable production and service at the most economical levels which allow full customer satisfaction. (Feigenbaum,1986, cited in FM-A, 2004, p. 380). As definitions are wide and different in the practice the TQM is different company by company, however we could find some basic statements. LEGO is a good example of TQM as quality is the core of LEGO’s activity. Quality is firmly rooted in our fundamental beliefs, or mission statement, or strategy goals, and our values. As a world leader in the field of quality experience, service, and products, we focus on the customer’s perception of quality. (Regani and George, 2007, p. 6). In reflects of competitiveness and being cost-effective, it was a strategic decision to outsource its large production to Flextronics. However, outsourcing includes risks; can the quality and the time-management (JIT) be assured? What are the crucial factors of the LEGO’s successful TQM which they should absolutely recommend to their outsourcing partners? †¢ Participation: commitment at all levels Both parties have to participate to successful quality management. Senior and middle managers: |Should avoid |Should consider | |autocracy |support | |individualism |team building (team spirit) | |restrict behaviour |training | – Employees: Employees’ involvement improves morale. (FM-A, 2004). ‘We view the implementation of this policy as the shared responsibility of all LEGO employees. (Regani and George, 2007, p. 6). †¢ Culture – Adopt a quality-conscious philosophy as LEGO’s motto: â€Å"The best is good enough† – Organizational culture, LEGO established e. g. a department for Corporate Quality Control †¢ Training – Institute training on the job; self-improvement to be proud of their jobs. (FM-A, 2004). LEGO implemented a new competence model which defines the eight most important competences for LEGO employees and regularly asking their workers about their opinion of the process. †¢ Continuous improvement – ‘Quality management is the continual examination and improvement of xisting processes. ’ (FM-A, 2004, p. 382). Not enough to introduce but also need to open the continuous improvement. As LEGO meets the highest quality standards they independently show how changeable the market is. LEGO takes care to stay up-to-date in the safety requirements (EU CE, ISO). †¢ Monitoring (including preventive activities) – LEGO quality management aim to prevent defective production (18 out of every million elements are defected) therefore have to assure quality in the production process internally and externally (quality assurance), rather than inspecting goods after they have been produced. FM-A, 2004). Although the high quality production which avoids defaults LEGO carries out regular inspections of production. What can LEGO provide the company they outsourced to with? †¢ Documentation – A company quality manual may summarise the quality management policy and system. – A procedures manual sets out the functions, structures and responsible for quality in each department. – Detailed work instructions and specifications for how work should be carried out show how to achieve the desired quality standards. Training – Integrated relationship (training in LEGO’s place) – Knowledge sharing: train the trainer program (LEGO provide trainers) †¢ Monitoring – LEGO can delegate people from its monitoring team. Summary and conclusions Following the seven-year-strategy plan in the last couple of years, LEGO’s situation has already stabilized. The further expansion of the operation is possible. LEGO needs to rethink their attractiveness of the market segments and approach them to identify new market opportunities and niches. By actively using the appropriate elements of marketing mix (not only the classical 4Ps) and thinking about the product design possibilities they should also consider the existing competitive advantages of their product and the cost of fitting to the process involved. In case of outsourcing as a cost-saving LEGO needs to support its partners to keep up the quality as LEGO’s core value. REFERENCES Abratt, R. (1993) ‘Market segmentation practices of industrial marketers’. Industrial Marketing Management, Vol. 22, pp. 79-84. Cited in Dibb S. (1998) Market segmentation: strategies for success. Marketing Intelligence & Planning, 16/7, 1998, pp. 394 – 406. Curran, J. G. M. and Goodfellow, J. H. (1989), ‘Theoretical and practical issues in the determination of market boundaries’. European Journal of Marketing, Vol. 24 No. 1, pp. 16-28. Cited in Dibb S. 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Six Sigma [pic] ———————– Segment profitability and life cycle Turnover Year 1970 1990 1958 2008 LEGO Brick LEGO Technic LEGO Star Wars Substantial Accessible Measurable Stable Actionable Expected market growth Competitive position Market size Market fit with organisational objectives and resources Personalisation Product Price People Processes Place Physical evidence Promotion The Marketing Plan Defect reduction Yield improvement Customer delight Profitability improvement