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Lessons from LEGO’s Digital Economy

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Danish toy company Lego continues to ride the crest of the wave, despite stiff competition by mobile video games.

The Danish company is the second largest in its industry in terms of sales, surpassed only by Mattel, the manufacturer of Barbie, which in 2013 generated lower operating profits than its rival. These successful results were largely due to Lego’s digital economy, which has prevented the company from being pushed aside by new technologies. To examine its business strategy, the first thing to be  considered is that its audience consists of children.

While it’s true that construction games are also a challenge for adults, who can easily take part in the process, play with their children, and take an interest in their kids having fun with this type of toys (before other types of entertainment), the purchase decision is influenced by the demands of the children, and the company targets its efforts at them, as well as the nuclear family as a whole.

Lego’s video games

Lego launched its first computer video game, based on its physical games, in 1997. At that time, the PC had proven itself to be a powerful entertainment platform and was beginning to enter the home. Consoles were still an expensive option by comparison. Since then, the company hasn’t stopped releasing new games and has progressively added supports for its software development as new ones have started to become more popular.

lego’s digital economy

From Windows, it made the jump to Mac OS, and to video game consoles at the end of the 90s and early 2000s, including portable devices like the GameBoy Advanced and Nintendo DS. Lego’s objective has always been to be wherever kids find entertainment, instead of trying to use advertising spending, for example, to try to keep kids from changing their habits.

If kids are playing on the computer, then that’s where Lego breaks in, to position itself among the available play options. Of course, this isn’t the company’s primary business, but the visibility helps the physical games to sell better. Today, smartphones and tablets are the supports that have the biggest influence on children. For years, Lego has been releasing games for these devices, mostly for iOS, abut there are also a few available for Android.

All the mobile video games that are based on Lego’s physical games are free. There are other games that are centred around characters or worlds whose copyright does not belong to the company, like the Batman, Harry Potter or Lord of the Rings sagas. In these cases, the downloads are paid and there is only an iOS version. But in all cases, the main function of the video games is to spread the brand.

Perhaps the biggest challenge in Lego’s digital economy in this area is the video game Minecraft, which is based on building virtual structures with blocks, and will soon release its own movie, perhaps inspired by the ‘The LEGO Movie’ project. The movie was a success for Lego not only in terms of publicity, but also at the box office and among critics. It’s not a shoddy product; quite the opposite, it’s an adventure comedy with refined aesthetics, humour and charisma. It was so well received that the sequel is already being prepared for 2017. In this case, the objective was to generate affinity with the brand, especially with families, which was the film’s target audience.

lego’s digital economy

Unafraid of 3D printing

The popularization of 3D printers is making some companies afraid that their products will be able to be printed at home, giving rise to a kind of piracy that affects certain businesses, just as the creation of P2P networks did for the music and film industries. In response to these concerns, toy manufacturer Hasbro, which makes Transformers, signed an agreement with 3D Systems to allow some of its toys to be produced in the home. And Lego is thinking of taking a step in that same direction.

Lego’s CFO, John Goodwin, confessed to Financial Times just this year that 3D printing represents an opportunity for the company. He said that this technology opens up new paths and added that they are looking for a way to take advantage of it so that consumers can benefit. For example, they recently filed for a patent that allows the customization of the 3D-printed pieces.

Stimulating crowdsourcing among fans

Lego has an online platform where it invites its consumers and fans to upload their own ideas for physical products. If one of the proposals gets 10,000 votes, the manufacturer will consider whether or not it should be launched commercially. This initiative allows the company to be in constant contact with its most loyal customers and to enrich itself with their suggestions.

It also helps to create a circle of fans, which is decisive for a brand, both because of the fans’ loyalty and the publicity that they generate, which is of the best kind.

The manufacturer also has exclusive web content, such as Build with Chrome, which is an application that runs in the browser and allows the user to move and connect Lego pieces, simulating how it would be done in reality. The software offers a 3D environment adapted to the building of structures.

Innovation in toys

In addition to all these actions, Lego has also devoted its energy to innovation in toy manufacture. Robotics is one area that the company has been focusing on for years and its new kits have been expanded to include the latest technology, such as sensors. The company recently announced a project to connect its physical products to the virtual world of video games. Consumers will be able to build a structure and then take a picture of it with a smartphone camera to unlock a game based on the construction. This trial will be limited to the United States for now.

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Entrepreneurship

Will Financial Liberalisation Trigger a Crisis in China?

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The People’s Republic of China (PRC) has been liberalizing its financial system for nearly 4 decades. While it now has a comprehensive financial system with a large number of financial institutions and large financial assets, its financial policies are still highly repressive. These repressive financial policies are now a major hindrance to the PRC’s economic growth.

The PRC is at the beginning of a new wave of financial liberalization that is necessary for supporting the country’s strong economic growth. The country’s leaders have already unveiled a comprehensive program of financial reform, which includes 11 specific reform measures in three broad areas: creating a level-playing field (such as allowing private banks and developing inclusive finance), freeing the market mechanism (such as reforming interest rate and exchange rate regimes and achieving capital account convertibility), and improving regulation.

But could financial liberalization lead to a major financial crisis in the PRC? What would be the consequences for financial stability as the PRC moves to further liberalize its financial system? If the PRC repeats the painful experiences of Mexico, Indonesia, and Thailand, then it might not be able to achieve its original goal of overcoming the middle-income trap.

International experiences of financial liberalization, especially those of middle-income economies, should offer important lessons for the PRC. In our new research, based on cross-country data analysis, we find that financial liberalization, in general, reduces, not increases, financial instability. This powerful conclusion is valid whether financial instability is measured by crisis occurrence or by fragility indicators, such as impaired loans and net charge-offs. The only exception is that financial liberalization does not appear to significantly lower the probability of systemic banking crises, although it does lower the risk indicators for banks. These results have higher statistical significance and are greater in magnitude for the middle-income group than for the entire sample.

The insignificant impact on banking crises, however, should be interpreted with caution. One of the possible explanations is that under the repressed financial regime, the government supports banks with an implicit or explicit blanket guarantee. This reduces the probability of an explicit banking crisis, although the banking risks may be even greater because of the moral hazard problem. In fact, government protection of banks could also increase the probability of a sovereign debt crisis or even a currency crisis before financial liberalization.

If financial liberalization significantly reduces the likelihood of financial crises, especially in middle-income economies, then why did some middle-income economies experience financial crises following liberalization? We further investigate whether the pace of liberalization, the supervisory structure, and the institutional environment matter for outcomes of financial liberalization.

We obtain three main findings. First, an excessively rapid pace of financial liberalization may increase financial risks. The net impact on financial instability depends on the relative importance of the “liberalization effect” and the “pace effect.” In essence, what the “pace effect” captures could simply be the prerequisite conditions and reform sequencing that are well discussed in the literature. Second, the quality of institutions, such as investor protection and law and order, also matter. International experiences indicate that investor protection can significantly reduce the probability of financial crises. Third, the central bank’s participation in financial regulation is helpful for reducing financial risks during financial liberalization. This is probably because central banks always play central roles in financial liberalization, especially in the liberalization of interest rates, exchange rates, and the capital account. If a central bank is responsible for financial regulation, its liberalization policies might be more cautious and prudent.

Our research findings offer important policy implications for the PRC. (1) Further financial liberalization is necessary not only for sustaining strong economic growth but also for containing or reducing financial risks. (2) Gradual reform may still work better than the “big bang” approach, and sequencing is very important for avoiding the painful financial volatilities that many other middle-income countries have seen. (3) The government should also focus more on improving the quality of other institutions, especially market discipline, to contain financial risks. (4) It is better for the central bank to participate in financial regulation. The new regulatory system should focus exclusively on financial stability and shift from regulating institutions toward regulating functions. It should also become relatively independent to increase accountability.

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About the Author 

This submitted article was written by  and  of Asia Pathways, the blog of The Asian Development Bank Institute was established in 1997 in Tokyo, Japan, to help build capacity, skills, and knowledge related to poverty reduction and other areas that support long-term growth and competitiveness in developing economies in the Asia-Pacific region.

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Entrepreneurship

Understanding Cryptic Startup Terms

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The startup world throws around a lot of jargon.

Some of it is fluff, some of it is important.

Rather than pretend like you know what people are talking about, I’ve found it’s good to make sure I actually understand the terminology.

So, here’s a few essential startup terms you should know.

KPI

Stands for Key Performance Indicator. This is a measurable value that indicates how effectively your company or product is achieving its business goals.

Example: I would guess a main KPI of AirBnB is guests per night (how many people are staying on an AirBnB property on any given night).

The idea is that you can focus on improving key indicators, which should then directly influence your company’s goals.

Churn Rate

Your churn rate is the percentage of customers who stop subscribing to your service in a given time period. You can calculate the churn of anything (like revenue or employees), but it’s most often referring to customers.

This is considered the main enemy of any subscription company.

Example: As of this writing, Buffer’s monthly user churn is 5.9%.

Your acceptable churn rate depends entirely on your specific industry and company.

OKR

Stands for Objectives & Key Results. This is a framework for setting, communicating, and monitoring goals.

Objectives are goals, which tell you where to go. Each objective has key results, which indicate how you’ll get there.

Example:

Objective: Increase our recurring revenue.

Key Results:

  • Share of monthly subscriptions increased to 85%.
  • Average subscription size of at least $295 per month.
  • Reduce churn to less than 1% per month.

More examples.

MRR

Stands for Monthly Recurring Revenue. This is income that a company an reliably anticipate every 30 days. MRR is intended for products or services that have a defined price and recurring term.

Example: As of this writing, Treehouse’s MRR is $2M+.

To put two terms together, your MRR churn is the erosion of your monthly recurring revenue.

There is also ARR: Annual Recurring Revenue, not to be confused with Annual Run Rate (below) which even uses MRR in its calculation.

USP

Stands for Unique Selling Proposition. This refers to the unique factor of your company or product that sets you apart from all your competition. It’s the answer to the question, “Why should I do business with you instead of anyone else?”

Example: M&M’s “Melts in your mouth, not in your hand.” M&Ms use a patented hard sugar coating that keep chocolate from melting in your hands.

ARR

Stands for Annual Run Rate. This is a method used to project future revenue based on your current revenue. To get it, simply multiply your MRR by 12.

While that might seem inaccurate, ARR is a helpful tool to get an idea of long term growth and visualize the size of your business.

Example: If a company’s MRR for last month was $100k, its current ARR $1.2M.

Burn rate

Your burn rate is the rate at which your company spends money in excess of income. It’s a measure of negative cash flow. It is usually quoted in terms of cash spent (lost) per month.

Burn rate a good measuring stick for a company’s runway — the amount of time it has before it runs out of money.

Example: If a company has $1 million in the bank, makes $100k per month, and spends $200k per month, it has a burn rate of $100,000/month. It also has a runway of 10 months.

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About the Author

This article was written by Jordan Bowman. 

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