External factors

The external analyses conducted through a PESTEL and Porter’s Five Forces has led to a better understanding of Lego’s opportunities and threats and ultimately, the attractiveness of the industry of traditional toys and games.

4.5.2.1 Possibilities

Digitalization has, in recent years been challenging the industry of traditional toys and games to innovate and adopt new ways of playing. Lego has introduced sets, including augmented reality and apps to allow more digital play and creates a unique experience for the children. The opportunity of the growing use of digitalization is for Lego to combine their Lego brick with the latest digital trends,

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which result in innovative ways to use the Lego brick. This is an opportunity to keep the brick relevant without using licensing rights.

Children have today a higher saying in household purchases than ever before, which is an outstanding opportunity for Lego with children as its primary target customer segment. An increase in children’s influence on household purchases could imply an opportunity for increasing sales for Lego if exploited successfully. To do so, Legos must be able to understand and advertise through distribution channels that are reaching the children and offer products that children find interesting.

The global demographic of children is changing, and Asia Pacific – especially China – is estimated to become the biggest market regarding the population of children. This proposes a vital opportunity for Lego to invest in this market as its most revenue generating markets are stagnating.

Furthermore, China is expected to have increasing GDP per capita while the political situation in China regarding intellectual property rights have improved significantly, offering Lego a tremendous opportunity. The company has, in recent years experienced double-digit grown in the Chinese market why they continue to invest in the market.

The demand for more environmental-friendly products is viewed as an opportunity for Lego. As previously mentioned, the company has already set goals for producing sustainable products which show potential for Lego will exploit this opportunity.

Collaborations with external business partners have proven to be a success for Lego why future collaborations are viewed as an opportunity for the company to generate future sales. Collaborations allow Lego to enter areas of business which are out of their regular business e.g. the collaboration between Lego and Nintendo. Such collaborations keep Lego relevant and have been accepted well by the company’s customers why new collaborations are viewed as an opportunity for the future of Lego.

4.5.2.2 Threats

Counterfeit products have become a rising problem as Lego has become more well-known. The threat is especially towards Lego’s image as consumers might wrongly think they have bought a Lego set meeting the safety criteria which can cause harm to the consumer. Counterfeit products can contain dangerous chemicals why Lego is focusing on limiting these products as they damage the brand value of Lego and is of danger to the consumers’ expectations of quality products. Counterfeit is also a threat to the revenue of Lego.

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A no-deal Brexit is a great threat to Lego due to the possibility of tariffs on goods. If no-deal is settled and the United Kingdom leaves the EU, it would have the consequence of the terms from the world trade organization being applied. These terms would result in tariffs on goods and border checks which would have considerable economic consequences for Lego. The UK is the fourth largest revenue-driving country, why the future trade relationship between the UK and EU is important for Lego.

Lego has activities in several markets with different currencies. Lego is thus facing a substantial risk of exchange rate fluctuations which could have a high impact on its profitability. In the future, China is expected to be one of Legos larger markets why this threat of fluctuation is a great risk to Lego. The company focuses on eliminating some of the risks by using derivatives.

Lego operates in a market formed by legislation on toy safety which is vital due to the safety of children.

Changing regulations which affect the operations of Lego is a threat to Lego e.g. changes in legislation on ABS threatened the future of Lego Duplo. The credibility and reputation of Lego are also at risk due to a breach in the legislation can result in dismissing sales and damage in the brand value and status.

The increasing trend in secondhand toys is an increasing threat to Lego due to the high quality of its products which allows them to be handed down for generations. This threatens Lego’s future revenues as consumers buy secondhand toys instead of generating new sales. Furthermore, the System of Play allows for new and old bricks to fit together why secondhand Legos are more advantageous.

The product lifecycle of the traditional toys and games industry is rather short, which is a threat to the operations of Lego as it puts a constant pressure to develop new and exciting products. This puts significant pressure on the innovation of Lego.

Part 5

Budgeting &

forecasting

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5 Budgeting & Forecasting

This part of the thesis will contain the budgeting and forecasting in order to conduct a valuation of Lego based on a present value approach.

The forecasting system is based on a sales-driven forecasting approach as recommended by Petersen et al. (2017).

The budgeting and forecasting are based on the findings in the strategic and financial analysis as the historical period is used as a foundation for the forecasts and provides insights about the trends and levels of the financial value drivers to be estimated.