In the recent past, global economy has become quite volatile and vulnerable, a factor that continues to affect the financial position of both small scale and large scale companies. A classic example of these issues financial crisis, volatility believed to be behind the fall of some of the world’s greatest companies. One of the gravest challenges faced by manufacturing entities is the ability to deal with the increasing competition and globalization levels. The solutions need the development of rapid and agile networks to cut costs and also meet the demands of the clientele. Many companies are becoming more aware of the essence of an effective supply chain management. An analysis of the supply chain management of LEGO machine shows various challenges that risk the financial position of the company. Among them is the huge costs incurred by the company alongside risk managements strategies. Although considered one of the greatest toys manufacturing company in the world, these challenges still challenge LEGO’s ability to conquer new markets and partner with other mega companies. Lack of effective cost control policies and risk management strategies plight this company, forcing business experts to advocate for restructuration of the companies supply chain management policies.
Discussion and Analysis
LEGO group is a private-owned production company that manufactures toys that consist mainly of interlocking bricks. Founded in the early 1930s by Kirk Christiansen, the term ‘lego’ means to play well. Over the years, this company has grown to become the largest toy production company in the world. The success of this company has been accredited to a number of factors, including its effective competitive edge, capitalization of the ‘toy system.’ and business aggressiveness and its desire to dominate the market. While some of LEGO’s competition produced low quality toys, LEGO introduced the stud-and-tube system, which increased the number of brick toys, making them more versatile compared to toys produced by other companies. LEGO also capitalized on its toy system. Earlier, the toys produced by this company were marketed as generic systems; they lacked a common theme. LEGO later doubled down and introduced the Town Plan, bricks with a similar scale and a lot of add-ons. Through the years, the product has been able to cater to the gaming needs of children.
To beat its competition, LEGO became quite aggressive in its marketing strategies. While Minibrix and Kiddicraft dominated the UK market, LEGO’s management embraced marketing strategies that saw the company grow and venture into new markets, including Canada and the United States. These strategies solidified LEGO’s presence in the Toy market and pushed it to become a leading producer of toys in the market. Its patent fought to protect the company’s products from its competitors. In the 1970s, this company had another groundbreaking business innovation; the fantasy-themed building sets characterized by sale figures (the minifigures known today). This innovation was easily embraced by the customers and this move catapulted the company from strong company to a leading producer of children toys.
In any company, building a strong external network of links between the supply chain and various parties goes a long way into ensuring that products reach the clientele in the stipulated time frame. This requirement forces managements to shift their focus from the efficiency of its internal logistics and focus on the flow of products from the acquisition of raw materials through to the delivery of the products to the clients. Supply chain management can be defined as activities characterizing the planning, control, and execution of the flow of products from the time the raw materials are acquired, through the production and distributed to the time they reach the targeted customer. An effective supply chain management should be streamlined and involved policies that limit the costs and time incurred by the company. Because of the expansive and complicated process involved in supply chain management, it requires all involved persons to remain aware of the company’s objectives, visions, and missions towards its clientele and the society in general. An effective supply chain management further requires effective cost control and risk management strategies to ensure the creation of alignment and effective communication between the involved entities.
Over the years, LEGO has been forced with morph its business strategies to match the changes brought about by competition and globalization. The company has so far transformed its supply chain management system. The company was also forced to deal with a financial crisis, which although remained unnoticed by the clients and stakeholders, threatened the success of the company. Since 1998, LEGO group had been losing money following several internal operational issues. One of these issues was the existence of a complicated and ineffective supply chain, which forced the company to incur huge production and distribution costs. To save the company, the management decided to cut logistic costs by twenty-percent. While these strategies fixed the company’s challenges, the company was still struggling to cut costs and implement effective risk management strategies in is supply chain management policies. Noteworthy, factors such as globalizations and competition are ever-present, which means LEGO needs to revise its SCM policies.
Risk Management Challenges
As mentioned, one of the main challenges facing LEGO’s supply management is lack of effective risk management strategies. Risk management refers to the process of calculating and evaluating financial risks alongside the identification of procedures with the ability to avoid or limit their effects. In supply chain, risk is the only constant and thus, managing it should be a priority for business. The risk faced by this company comes in the form of demand volatility. It should be noted that the end users of LEGO’s products are children without an understanding of the concept of client loyalty. Unlike mature clients who put factors such as the years a company has served them into account, LEGO’s clients only use products from this company if they meet the entertainment level they yearn for. Currently, the company is focused on using data to predict client behavior as well as morphing needs and demands. The gaming world is diverse and factors such as technological advancements and cheaper technological advancements have made it easier for clients to access online games on the phones, laptops, and computers. This has further affected LEGO’s business in the sense that children today chose to play online games as opposed to playing with traditional toys, which for a long time were the company’s main product.
Technological innovations have hiked the number of online video games accessible by modern gamers. Unlike the past, players no longer need traditional physical toys to play. The internet has continued to provide a platform to play and in some cases, players can engage other players online. These changes have forced LEGO to change is marketing and distribution policies and has set some of its resources aside for online games. while some client have welcomed the idea, there are those that believe this move strips LEGO group of its identity and has lost confidence in the main product, that is LEGO brink. LEGO has also diversified to includes a product line of games of apparel and clothe lines, television, and theme parks. This level of diversification has hiked the complexity of the portfolio of the company’s core product and has further left employees and customers confused and dissatisfied. While this level of diversification was meant to cater to the changing needs of the clientele, it has created a phenomenon whereby, clients no longer understand LEGO’s product development strategies.
Cost Control Challenges
In business, cost control refers to a practice of ascertaining and plummeting expenses to hike profits. This process begins at the budgeting phase. Business owners strive to cuts costs to ensure they get profits from their business. Strangely, this is not always the case in mega companies. In an article published in BBC NEWs, Why is Lego not Clicking with Customers, Tom Espiner reveals that in 2012, LEGO’s CEO produced too many bricks and was forced to trade off the additional stock at a discount (Espiner, 2018s). The author’s arguments in this article bring to light some customer concerns relating to the company’s recent product development policies. There are concerns that the management has lost it imagination and forecasting capabilities. Other believe that LEGO is not selling as many bricks as it used to approximately a decade ago, which could explain the large sum of unsold bricks. These challenges have posed serious financial strains on the company. Since the unsold products are still a large part of the company’s production, marketing, and distribution strategies, this leaves a large financial gap on the company’s financial structure.
One of the main reasons why LEGO’s products have failed to entice the clientele is because the management has failed to keep up with emerging products trends. As mention, LEGO’s target market is children. Their fickle tastes are easily influenced and this has forced many to forgo LEGOs products for toys such as LOL Surprise Dolls, a product produced by LEGO’s competition. Although LEGO is still considered the market leader dominating approximately two thirds of the international market, its failure to conduct effective markets surveys or rather, understand the changing needs of the clientele poses negative impacts on the company. These failures also attract huge costs for the company and if effective policies are not embraced, LEGO will continue to fail in meeting the demands of the customers and continue its market domination. However, with effective recommendations, this company will be able to morph its policies and focus on cutting and improving its risk management strategies.
An analysis of LEGO’s business strategies shows that most of its challenges emerge from its inefficient risk management and cost control issues. The company seems unable to match the changing gaming needs and wants of their target market. Even after the technological innovations embraced by the company, it still seems to lag behind other companies. The company’s inability to understand the current gaming trends and how they influence the gaming needs of the clients has given this company a negative reputation and it seems its financial position is slowly getting effected. To help save this company, the management should conduct an in depth and get an understanding of the current gaming trends and how they are embrace modern gaming opportunities. This strategy will ensure that the company also understands the effects of technology on the gaming industry and how different innovations have been embraced by other gaming companies.
As far as cost factors are concerned, LEGO seems to spend a lot of money to produce and market products that fail to appeal to its clientele. However, if the management conducts extensive market studies, there is a possibility that it will learn how to cut costs by reducing the number of its traditional toys and focus on improving its online games. Market studies will help with the company’s diversification strategies, which means the company will be able to distribute products that entice the clientele and focus on building the company’s core product.
Although considered one of the greatest gaming companies in the world, LEGO is faced by risk management and cost control challenges that have negatively the financial position of the company. Factor such as competition and technological changes have seen this company morph from an entity focusing on the production of traditional toys to a company that produces both physical as well as online games. However, its business strategies have continued to bleed the company financially, a factor which calls for implementation of better supply chain management policies. The management should conduct a market analysis and understand how it can subsume emerging trends into its product development policies.
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