BUILDING BLOCKS OF SUSTAINABLE ADVANTAGE

BUILDING BLOCKS OF SUSTAINABLE ADVANTAGE

Denmark’s Lego Group possesses one of the world’s most famous brands. Founded in 1932, Lego Group sells over $1 billion of its iconic toy building blocks annually. Lego also sells children’s clothing and computer games and operates four theme parks in Europe and California. But Lego blocks could not be simpler to produce, and there are no trade secrets to prevent someone else from figuring out how to make them. It is somewhat of a wonder, then, why Lego has been so successful for so long. It is not for want of potential competition. Mega Bloks of Montreal has been fighting an uphill battle against Lego since the early 1990s, and even smaller firms like Best-Lock of British Columbia are hoping to join the fray. At first blush, it seems that Lego is protected from competition by switching costs—a child with a collection of Lego blocks cannot easily incorporate Mega Bloks into the same play set. This is true, provided that Mega Bloks does not duplicate Lego’s sizes and colors. Given the relatively primitive technology, it is no surprise that Lego’s true source of sustained advantage has been its patents and trademarks. Lego’s patents provided virtual blanket protection against imitation. But the last of the patents expired in 1978. Trademark protection lasts far longer than patent protection (75 years versus 20 years), and Lego now relies on the former to ward off entrants. The first threat to Lego came from giant Tyco Industries, which attempted to introduce its own line of bricks in the United States in the 1980s. Lego sued to stop Tyco, arguing that the Lego brick design deserved trademark protection due to their unique “look and feel.” Tyco ultimately prevailed, but by that time Tyco’s toy division had been acquired by Mattel, which decided not to enter the building block market. Unfortunately for Lego, Mega Bloks was waiting in the wings. Mega Bloks already had a toe hold in the market, selling jumbo bricks targeting infants and toddlers. In 1991, Mega Bloks began selling Lego-sized blocks that were compatible with original Legos. Lego sued to stop Mega Bloks, again citing trademark protection. Over the next decade, Lego lost nearly every one of its legal challenges to Mega Bloks. To make matters worse, German courts struck down the “Lego Doctrine” that effectively banned competition in Germany. As Mega Bloks and smaller firms gained share, they also put downward pressure on prices. By 2002, Lego was losing money and had to lay off one-third of its Danish workforce, even as Mega Bloks posted modest profits. But Lego had already taken steps to undo the damage. In 2001, the company hired outsider Jorgan Vig Knudstorp to be the new head of strategy. Knudstorp spent two years learning the business, and in 2004 Lego implemented his turnaround plan. The key to Knudstorp’s strategy is an emphasis on theme product lines, such as Lego Star Wars Bionicles, Lego City, and Lego Architecture. These lines carry on the Lego tradition of demand complementarities— a child with one Bionicle will want another to join in a Bionicle battle. More importantly, the theme lines enjoy trademark protection; Mega Bloks can manufacture generic Lego-sized building blocks, but that is where the competition ends. Sales of theme lines are up, and they are selling at premium prices. Despite the global economic downturn, Lego has enjoyed several years of steady and sometimes spectacular profit growth.

 

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