Why is Lego, The Leader of Building Blocks, Stable?

Founded in 1932, LEGO has a history of 89 years as a leader in the building block toy industry. In 2020, Lego's revenue will reach DKK 43.7 billion, net profit will reach DKK 9.9 billion, and it will become one of the largest toy companies in the world.

 

2.1 Exploration Period (1932-1954): Grasp the Opportunity and Achieve Effective Transformation
Lego was founded in 1932 as a manufacturer of wooden toys in the early days. In 1939 Kiddicraft produced the first plastic plug-in building blocks, and in 1947 invented the classic 2*4 basic pellets. Since the original creator Kiddicraft only applied for a patent in the UK market, it also brought Lego an opportunity for development. The founder of Lego had a timely insight into the development potential of this kind of plastic toy, and purchased the first injection molding machine in 1946, and began to gradually explore the plastic building block toy market. In 1949, LEGO launched the first plastic plug-in building block toy. In 1951, plastic toy production accounted for more than half, and entered the European market.

 

2.2 Growth period (1955-1988): active innovation, ecological gradual formation
In 1960, Lego divested its wooden toy production business and officially transformed into a manufacturer of plastic building blocks. Lego ushered in its first golden growth period and completed its counterattack from imitation to surpassing. Lego builds patent and ecological barriers through continuous innovation, continuously optimizes production technology strength and develops new markets, which is an important reason for its success in the high-growth track.

(1) Iterate production technology strength, register improved version of building block patents, and build patent barriers. Lego has continued to improve and innovate toys in the past ten years of producing plastic building blocks, and applied for the first improved self-locking building block patent in 1958. Lego improved bricks are stronger and more stable, which greatly improves the variety and playability of spelling.
(2) Innovate reasonably, expand product extension, and establish the ecological matrix of Lego building blocks. Godtfred, the helm of Lego, proposed the important concept "Lego System in Play" in 1955. The significance is to make every simple and classic part of the company have lasting value, and to integrate into the Lego toy ecosystem, interrelated and build infinite possibilities .

 

2.3 Bottleneck period (1989-2003): internal and external troubles, risks emerged
Benefiting from patent barriers and continuous iterative innovative product systems, Lego continued to hold the top spot in building block toys in the 1880s. In response to the predicament, Lego's management chose to adopt a radical development strategy and aggressively expand its product line in pursuit of growth. From 1994 to 1998, the number of new toy types launched by the company increased from 109 to 347, but this was accompanied by stagnant sales, continued decline in profit margins, inefficient new product launches and only a small number of products that were profitable.
Affected by internal and external troubles, Lego lost control of its core business and gradually fell into financial difficulties. The net profit rate has continued to decline since 6.3% in 1995, and it turned negative for the first time in 1998 (-2.5%). In 2000, the net loss rate exceeded 10%. 1998 saw Lego's first large-scale layoffs, with the number of employees dropping from 8,670 in 1998 to 7,821 in 1999.

 

2.4 Return to growth (2004-present): return to the core, incremental innovation

Facing the financial crisis, Lego's new CEO Jon Wig Knudstorp took office and formulated a "common vision plan" to rejuvenate the company. The plan is divided into three stages: survival, stabilization and growth. It provides the key guidance for the company to gradually get out of the predicament and achieve positive growth.

 

Survival stage (2004-2005): (1) Reduce unnecessary expenses, focus on the core business of building blocks, and set 13.5% as the profit margin that must be realized for each business. Since 2004, the company's sales growth rate has turned positive. (2) The management strengthens the understanding of the core business. "Building blocks, building system, brand and community" make Lego unique, and the "Lego building system" enables users to carry out unlimited innovation in a systematic mode.

Stable stage (2006-2008): (1) The debt crisis is gradually eliminated and the profit margin becomes positive. Profitable innovations need to be carried out around the core business. The company set up a "front-end innovation team" to try to find two new opportunities within a year that are expected to contribute 10% of the company's profits. (2) Trying to cooperate with Flextronics factory, the accuracy rate cannot meet Lego standards. This incident further strengthened the understanding of the maturity and uniqueness of the company's supply chain system, and the importance of production in the Lego model has emerged.

Growth Phase (2009-2010): Improving operational efficiency and identifying sustainable growth plans. At this stage, Lego has entered the right track and entered the fast lane of growth. In 2008, its revenue and net profit reached 9.5 billion and 1.4 billion Danish kroner, respectively, a year-on-year increase of 18.7% and 31.5%. The company began to formulate new business development plans.

 

The core of the "Common Vision Plan" is to allow LEGO to recognize its core business and uniqueness, and to carry out profitable innovations around the core business. With the successful implementation of the plan, Lego's advantages and uniqueness in the "building block building system" and "supply chain capabilities" have gradually become prominent, and its performance has improved significantly under the model of "focusing on the core and gradually innovating".

 

Despite the entry of many competitors, the company can still achieve continuous increase in market share during the slowdown of industry growth. In 2020, Lego's market share in the global building block toy market reached 68.6%, while the market share of Mattel and Spin Master showed a downward trend during the same period.

 

Adhering to the principle of innovation, there are frequent explosions in new and old fields.
(1) Building block field: Optimize the head series and launch a new best-selling product line.

(2) New fields: While consolidating its core business, Lego is gradually exploring new fields such as technology, film and television, and education, and adopts more strategic cooperation methods to speed up the pace of innovation.

 

The expansion of the Chinese market has achieved remarkable results. In 2007, LEGO began to establish its first brand retail store in China. In 2016, it opened the first LEGO Discovery Center in mainland China and the first brand retail store not operated by an agent. The LEGO Jiaxing factory was also officially put into operation in 2016, gradually realizing the The products are launched simultaneously in the Chinese market, and the pace of LEGO's Chinese market expansion continues to accelerate. From 2018 to 2020, the number of Lego China's offline stores has surged from 90 to 231, and the proportion of revenue in the Asia-Pacific region to total revenue has increased from 15.2% to 18.2%; as of 2020, the company's market share in China's building block market has reached up to 42.3%.

 

By sorting out the development of Lego, we believe that there are the following revelations:
(1) Grasping the core business and building a moat is the foundation for Lego to achieve sustainable growth. Lego's core business lies in the ability to build building block toy systems with high efficiency, high standards, and strong innovation. As an industry leader with a first-mover advantage, the company consolidated patent barriers through technological innovation during the rapid development of the industry, and continued to enhance core competitiveness in products, supply chains, channels, etc., and built a moat of brand power, which is also the reason why it can recover after difficulties The foundation of the heroic style and the gap with competitors.
(2) Innovation is the key to growth, but limited and profitable innovation needs to be carried out around the core business and strategic layout. The company takes the consolidation of evergreen products as the core, and gradually innovates around the core business to ensure the growth of operating performance. At the same time, it adopts strategic cooperation to continuously open up its own capabilities to enhance brand awareness, forming a snowball effect, and successfully achieving continuous double growth in revenue and profits.
(3) Develop emerging markets according to local conditions to open up the second growth curve. Although there were some imitators adopting low-price strategies before Lego entered the Chinese market, the company still quickly seized market share by virtue of strategies tailored to local conditions, strong brand awareness and differentiated products. With the recognition of the potential of the Chinese market, Lego opened the fifth Lego factory in the world to expand production capacity, optimize supply chain capabilities in new markets, and quickly respond to consumer demand, which is conducive to continuous expansion and performance growth.