Chapter 4

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In the early 1930s in Billund, Denmark, carpenter Ole Kirk Christiansen started a company that built wooden toys. He named his company LEGO, combining the first two letters from each word in the Danish phrase leg godt, which means "play well." Christiansen believed in quality"only the best is good enough"a value that stays with LEGO to this day.

During the 1950s, LEGO articulated its plastic bricks as part of a "system of play," based on learning through imagination, creativity, and problem solving. By 1958 LEGO had refined the design of the classic LEGO brick; those 1958 bricks still click and lock with any of the billions of bricks LEGO has made since. Buoyed by the tail end of the baby boom generation, LEGO grew rapidly in the 1960s and 1970s. That growth slowed during the 1980s when the "construction toy market" lost favor to electronic toys and software.

LEGO reacted by broadening its market. In the 1990s, LEGO opened three LEGOLAND theme parks, developed video games and electronic toys, produced books and TV shows, and licensed watches and clothing. Although the new product lines increased sales, costs rose even more quickly. In 2004, LEGO lost more than $300 million. LEGO needed a strategy to turn things aroundand fast!

To address the immediate financial weakness, LEGO sold off LEGOLAND theme parks, outsourced production, and consolidated its product lines. In assessing its strengths, LEGO recognized (1) its brand name was widely trusted; and (2) its enduring system of play, building with bricks, provided a platform for innovation. To focus its new strategy, LEGO redefined its market around the iconic brick with a vision to equip children for the future through creative, playful learning. LEGO thought it could profitably grow in the "active play market."

LEGO next sought to get to know its customers better. So the company set loose teams of researchers who embedded with families to understand how seven- to nine-year-old boys in Germany and the United States lived and played. One finding showed LEGO that it had taken the wrong lessons from the growth of video games. LEGO assumed kids wanted immediate gratification in play, so it dumbed down many of its toys. But the new research found that kids wanted opportunities to demonstrate masteryevidenced by the scoring, ranking, and sharing common in many computer games. LEGO also discovered that while kids lived very scheduled lives, they appreciated time to themselves.

Guided by these insights, LEGO introduced new kits. For example, it introduced LEGO City's fire station and police station kits and Star Wars movie-themed kits targeting the previously studied seven- to nine-year-old boys segment. Some of these kids (and their parents) were looking for products to bridge the physical and digital worlds, so LEGO introduced Boost. LEGO Boost kits include simple motors and sensors and introduce kids to basic computer coding through a smartphone or tablet app. With the Boost kit, kids can make Verniea robot with a bowtie and moving eyebrowsFrankie the Cat, or three other models. At $160, the Boost kit is not cheap. But LEGO knows the kit delivers what many parents want from their kids' toys. LEGO's research found German and American parents (much more than Japanese parents, for example) seek out toys that combine play and learning. For older boys seeking more of a challenge, LEGO Mindstorms provide advanced robotics construction kits.

The Star Wars kits and LEGO Mindstorm robots struck a chord with another market segmentadults. Thanks to the Internet, the dispersed adult fans of LEGO (they call themselves by the acronym AFOLs) found they weren't alone. At first, LEGO didn't design a marketing mix for the AFOL segment. That changed when it discovered that some AFOLs spent thousands of dollars a year on LEGO. When LEGO introduced the 3,104-piece, $299 Imperial Star Destroyer kit, it flew off store shelves. LEGO Architecture, which lets users build replicas of famous buildings such as the Eiffel Tower and Sydney Opera House, also appeals to adults. AFOLs account for 5 to 10 percent of all LEGO sales and influence even more.

Over the years, LEGO has made several failed attempts to crack the "girls active play market." LEGO research showed that after age 5, most girls lose interest in LEGO products. LEGO knew a big opportunity awaited if it could figure out this market. Its researchers spent time observing girls at play; their findings drove decisions for the LEGO Friends line. Research showed that whereas boys like to complete a kit before they start playing make-believe, girls prefer to play and pretend as they build. So the Friends kits come with bagged parts, allowing the girls to start storytelling and rearranging sooner. Girls also had opinions about the LEGO figurines (LEGO calls them "mini-figs"). Whereas boys play with the mini-figs in the third person, girls project themselves onto each figure; further, girls found the traditional stubby mini-fig ugly, so Friends mini-figs look more like real people. The main mini-fig characters in LEGO Friends come with names and backstories described in accompanying books. LEGO Friends work across culturesshowing strong sales in the United States, Germany, and the fast-growing Chinese market. Thanks to Friends, sales to girls went from 9 percent to 27 percent of LEGO's total sales.

In 2014, LEGO entered a new product-market when it released its first feature-length movie. The LEGO Movie and a sequel The LEGO Batman Movie were hitson screen and off with accompanying kits. Success across product markets helped LEGO earn annual profits of more than $1 billion on sales of more than $4 billion. By "playing well" with boys, girls, and adults, LEGO constructed the most valuable company in the toy business.

APPLYING CONCEPTS FROM CHAPTER FOUR ANSWER THE FOLLOWING QUESTIONS:

How else could LEGO segment the market?Use at least two segmenting dimensions not discussed in the current case and describe each market segment.Describe three marketing tactics that could be used in developing a strategy for each targetmarket.