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Introduction to Business Models

What Is The Challenges Research Ongoing Opportunities?

According to Chesbrough (2010), business models cannot be considered as a static business approach but it is actually less durable and it is often found to change with the changing technology. Considering the increasing impact of artificial intelligence and better communication network, the business models are found to suffer from a worse situation. Many companies have to re-think about their business model and re-design it in order to meet the ever changing market situation and also to comply with the advancing technology.

The aim of this essay is to analyse the situation that lead to the toy manufacturing company Lego, Denmark to re-think about its business model. It has been noted that in the past few years the revenue of the company decreased by 5% because of the decreasing demand of the toys over the globe (Foss & Saebi, 2017). However, in the market of United States and Europe, the sales have been found to increase a bit. The major reason behind the declining business can be easily regarded as the increasing impact of the technology and development of the smart connected products.

In the view point of de Jong and van Dijk (2015), business model has been referred as a plan that is focused on generating revenues and making a profit. The business model actually defines and explains what particular products and services the particular business plans in order to manufacture and market its products, how the planning is done for the business calculating the expenses to be incurred in doing so. Disruption in the business is the term used to refer to the innovative approach that a business proposes in order to create a new market and increase the value of the products that it sells. According to Johnson, Christensen and Kagermann (2008), disruption innovation has been termed as the most effective business idea that creates the most influential impact on the business in the recent century.

The toy and play set manufacturer, Lego, aims at providing an innovative and enjoyable experience through the toys that they manufacture. In the early days, the company used to create wooden and simple toys for the children. With the evolution in time and technology, Lego started manufacturing automatic toys as well and the company expanded becoming one of the largest toy manufacturers in the world (Lego.com, 2018). Considering the increased demand of the products, the company decided upon change in its business model and pursued such paths that could easily leverage its brand names. In fact, it has also been seen that Lego was associated with various television channels, theme parks, motion pictures as well as video games (Lego.com, 2018). The target market of the toy manufacturer has always been the children and thus the business model has been aimed to target the children. Lego’s direct physical consumers are both the retailers and the online sellers (Aversa & Haefkiger, 2016). The products are sold in chain stores, online stores, supermarket and departmental stores and also in independent toy shops. US being the largest market for the toy manufacturer, it has a long lasting relationship with the large retail chains like Wal-Mart, Toys R US and Target to be specific. Considering the change in the pattern of preferences and increasing demand of innovative products, this brand has also been found to include a set of its own third party franchise in order to diversify its product portfolio (Zhang et al., 2014).

Re-thinking Business Models: Lego Case Study

Reading Zhang et al., (2014), it has been found that the advancement of the information technology has revolutionised the business models of various products. The mechanical, electrical or other such complex products are being connected with smart connected products like sensors, data storage, microprocessors that actually benefitted the wireless connectivity (Tan et al., 2017). These features have definitely created an exponential opportunity for new functionality.

Considering the increased impact of technology and innovation in every field, Lego has been found to re-build its business model because the company has been found to reach near bankruptcy. The company has been found to try to improve its business by adding new toys to its list and focusing on the online content and film franchise. However, the approaches made by the company did not result in effective outcome and that the company faced a high level of bankruptcy in 2004 by considering the new ventures like the films and the new toy lines (Aversa & Haefliger, 2016). The drastic changes in the business situation have resulted in falling of the business first time in 13 years and thus, an approach to simply its business operation. This situation eventually leaded to cutting of around 1,400 jobs that is almost 8% of the entire work force of the company globally.

Key Partners

§  Customers

§  Suppliers of raw materials

§  Distributers

§  Sellers

§  Re-sellers

§  Wholesalers

§  The resources like plastics and other manufacturing products are acquired from the partners

§  Distributing and selling the products is the key activity that the partners perform

Key Activities

§  Re-designing of the product is the primary value proposition required

§  Distribution channels include both inland and overseas distribution of products.

§  Customer relationship is maintained by various communication medium

§  Revenue is generated with the increased sell of products.

Value Proposition

§  Durability and innovative products is the primary value that is given to the consumers

§  The customer problem of innovative products is solved

§  The needs of recreational activities and fun and amusement are the customer’s need that is fulfilled.

Customer Relationships

§  Relationship with the consumers by  getting feedback for improving the business has to be established

§  At present only a one way communication can be seen

§  With the changing preferences in products, it is important to understand the present demand of the consumers.

§  Maintaining customer relationship might be costly for the organization

Customer Segments

§  The major target group is the children but the buyers can be from any age group

§  People from all age and all segments are important

Key Resources

§  Financial as well as raw materials are the primary resource required

§  Distribution is carried on by suppliers and distributors

§  Revenue is generated by increased sale of products

Channels

§  Products are purchased from retailers and wholesalers

§  The channels are integrated by supply chain activities

§  Land transportation is the most effective

§  Consumers buy the products from the retailers

Cost Structure

§  Manufacturing and transportation of the products

§  The machineries are most expensive

§  Designing the product is most expensive

Revenue Streams

§  For the innovative and the design of the product, consumers pay a good amount of money

§  Currently playing for quality and design of the product

§  Payment is made by direct purchasing

§  Revenue stream contribute for 80% of overall revenue

The changing nature of the products due to the advent of the smart connected products has definitely disrupted the value chain proposition of the business as well. This made the existing companies to re-think and design their business models as well as the products because there has been a creation of completely new industry due to this nature of the product manufacturing (Dong et al., 2015). This is turn has also resulted in a transformation of the traditional business partners and the suppliers.

The challenges related to the increased demand of the consumers with respect to the change in the demand and preferences can be overcome by the set of capabilities. The engineers and the graphic designers at Lego have the capability of improving the business model. In addition to this, the availability of the resources required for the manufacturing of product is also required for the betterment of the business model (Zott, Amit & Massa, 2011). By this means the company can be able to meet the demand of the market and fight against the increasing competition in the market.

Smart Connected Products and Disruptive Innovation

Conclusion

A detailed analysis of the impact of smart connected products on the business models of an organisation has been carried on in this study. It has been found that the Lego, the toy manufacturer failing at providing smart connected product has resulted in the decline of the sales of the product. This is a clear indication that the company should be considering a change in their current business model in order to support the changing preference of the consumers. With the overall analysis, it can be easily recommended that Lego can easily include the concept of smart connected accessories in its products. Thus, product differentiation and product development is the only means of fighting against the increased competition in the market.

Reference list:

Aversa, P., & Haefliger, S. (2016). Building Business Model Portfolios: Implications for Strategic Diversification.

Chesbrough, H. (2010). Business Model Innovation: Opportunities and Barriers. Long Range Planning, 43(2–3), 354-363.

de Jong, M., & van Dijk, M. (2015). Disrupting beliefs: A new approach to business-model innovation. McKinsey Quarterly.

Dong, X., Lin, H., Tan, R., Iyer, R. K., & Kalbarczyk, Z. (2015, April). Software-defined networking for smart grid resilience: Opportunities and challenges. In Proceedings of the 1st ACM Workshop on Cyber-Physical System Security (pp. 61-68). ACM.

Foss, N. J., & Saebi, T. (2017). Fifteen years of research on business model innovation: how far have we come, and where should we go?. Journal of Management, 43(1), 200-227.

Johnson, M. W., Christensen, C. M., & Kagermann, H. (2008). Reinventing your business model. Harvard Business Review, 86(12), 50. Scroll down to find the article.
Osterwalder, A., & Pigneur, Y. (2010). Business Model Generation. New Jersey: Wiley
Porter, M. E., & Heppelmann, J. E. (2014). How smart, connected products are transforming competition. Harvard Business Review, 92(11), 64-88.

Lego.com (2018) About Us Retrieved from: https://www.lego.com/en-us/aboutus [Accessed on: 23-4-2018]

Madani, V., Das, R., Aminifar, F., McDonald, J., Venkata, S. S., Novosel, D., ... & Shahidehpour, M. (2015). Distribution automation strategies challenges and opportunities in a changing landscape. IEEE Transactions on Smart Grid, 6(4), 2157-2165.

Porter, M. E., & Heppelmann, J. E. (2015). How smart, connected products are transforming companies. Harvard Business Review, 93(10), 96-16.

Tan, S., De, D., Song, W. Z., Yang, J., & Das, S. K. (2017). Survey of security advances in smart grid: A data driven approach. IEEE Communications Surveys & Tutorials, 19(1), 397-422.

Zhang, Z. K., Cho, M. C. Y., Wang, C. W., Hsu, C. W., Chen, C. K., & Shieh, S. (2014, November). IoT security: ongoing challenges and research opportunities. In Service-Oriented Computing and Applications (SOCA), 2014 IEEE 7th International Conference on (pp. 230-234). IEEE.

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