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LEGO's Management Accounting Decision

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Introduction

1. Strategic management accounting According to the market competitors and customer needs, I have three different strategies for LEGO?s three strongest-selling product lines. First LEGO City faces the competition from MEGA?s high similarity but low price MEGA Bloks. The market situation is that competitor?s products price lower than LEGO but still capture low market share. That means LEGO has significant customer loyalty and good brand image. Even LEGO has most of the market share (LEGO?s sales revenue is 3.7 billion in 2010 and MEGA?s sales revenue is 0.368 billion almost 10% of LEGO), but the customers are price sensitive because the MEGA Blocks had seen 17 years sales revenue growth. According to economies of scale and learning curve, I suggest LEGO City use cost leadership strategy to compete the MEGA Company because LEGO has 2400 different brick shapes and more than 50 years production experience so that they can produce lower cost than competitors at the same quality. Thus LEGO should maintain price parity with MEGA by doing this it can prevent the MEGA from expanding the market share and reap the higher profit premium from the cost advantage. Second, the licenses product lines represented by LEGO Star War is one of the most prevail products. However the production of license toys needs to pay a large advance of money to the licensor as well as a percentage of the net sales for a licensed product. After acquiring Marvel Entertainment, the Walt Disney Company owned a large amount of entertainment licenses. The additional economic profit that results from owning the licenses is transferred to the Disney. What?s more LEGO?s main competitor in this segment is Hasbro who had an existing license agreement to produce Marvel toys and games until 2017. The above analysis shows that LOGE has no competitive advantage in this segment, as a result, the profit and profit rate will not high. ...read more.

Middle

The company uses target costing to establish concrete and highly visible cot target for their new product. To maximize cost control and enhance profit improvement, most companies set relatively aggressive target. Frequently a gap exists between the target cost and cost projects for the new product based on current designs and manufacturing capabilities. Closing the gap through cost reduction is central to the target costing process. The world?s best practise companies have four certain commonalities in supporting the target cost that are very effective organizational structures, responded to the ?voice of the customer? streamlined their product development process, and actively engaged their supply chain to achieve target cost objective. First the LEGO?s target costing should be supported by a matrix organizational structure where a vertical functional organization combines with horizontal cross-functional trams. In detail, LEGO has three teams of major series of products: LEGO city, DUPLO and LEGO star war. Each team is cross-functional and include members from design engineering, manufacturing engineering, purchasing, production and finance. The teams implement value engineering to increase the value of LEGO?s products like their internal developed LEGO City to customers through improved designs. Furthermore, improvement of manufacturing lead to cutting half of the selection of LEGO brick colours and the number of mini-figures available is reduced a lot. +reorganization of lego?s plastic injection molding machines. This help to save raw material costs. Second the LEGO should respond to the voice of customer, in other words, they must examine whether or not their customers are willing to pay for the design attributes. If the cost of the innovation is greater than its value to the customer, the attributes should be abandoned. For instance, when a designer wants to create a new brick or select a rare colour, he or she had better assess whether the customer willing to pay for this additional attributes. Third, LEGO should improve their product to the direction of minimizing unique customer requirement and incorporating changes that will provide value to a large customer base. ...read more.

Conclusion

As the LEGO company is in a growing market segment and the competitors it faced are still small (MEGA) or new entrant (Hasbro), the firm should focus to maintain its market share and reduce cost by the economies of scale and learning effort. I recommend LEGO to use balanced scorecard because it is a tool to articulate, execute and monitor strategy by using a mix of financial and non-financial measures. It is designed to translate vision and strategy into objectives and measures across four balanced perspectives: financial, customers, internal business processes and learning and growth. Therefore, it focuses on all the activities that generate financial results, rather than financial side alone. Balance scorecard can act as both a control system and a management tool. In other words, it can be used for monitoring performance as well as for strategic planning. The use of scorecard ensures that strategy and performance measurement is closely aligned. Each factor has its own objectives and accordingly measure mechanism. First, financial perspective, the objective of LEGO is maintain existing large market share at the same time earn higher profit premium. Management could use EVA which is obtained by subtracting a capital charge for the average investment in the division from divisional net income to measure LEGO?s financial performance. Second, from customer perspective, LEGO has objectives to produce high quality products in order to attract retailers and new customers, as well as cultivate customer loyalty so that retain customers. Internal process perspective refers to increase whole efficiency and eliminate waste. By Learning and growth perspective refer to produce more innovation bricks because a large amount of annual revenue of LEGO comes from launching new products. What?s more evolving manufactory process also help firm to reduce cost and increase efficiency. Fifth, benchmarking is a way of identifying potential improvements in effectiveness and efficiency, in current operations and also in considering future strategy, by looking at how the organisation?s performance compares with others. The organisation needs to look objectively at its current internal operations and then look at best practice in those areas in the organisations or other industry sectors. ...read more.

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