Lego bricks still hold special meaning to many young adults who have played with the bricks in their teenage years. I, for one, count among those young adults as I was an avid collector of Lego products myself: whenever there were new Lego products released, I used to nag my parents to buy them for me and promised to be a ‘good boy’. Thus it came quite natural to me that I wanted to investigate the Lego group – the symbol of my childhood nostalgia – as a full case study report for my Strategy for Creative Technology Business class. Established in 1932, the Lego group was the world’s leading toy manufacturer that was embodiment of dream and imagination to children. Parents too, inspired by Lego’s brand image as ‘fostering mental development and creativity for kids’, patronized their products in spite of Lego’s relatively high prices.
By the turn of the millennium, however, the changes in the toy industry coupled with expiry on their license, Lego faced huge challenged, reflected in their net loss of 308 million Euros in the early 2000s. Nevertheless, Lego’s exemplarily strategic management practices under its CEO, Knudstorp brought the company back to brilliance and as of 2014, Lego thrives once again as the world’s most competitive toy company. As such as is the case, this essay shall examine Lego groups ‘from riches to rags to riches’ story with a special focus on the strategic management process.
Founded in 1932 by Ole Kirk Christiansen, the LEGO Group made wooden toys in the craftsman shop in Billund, Denmark. LEGO was an abbreviated form of the Danish expression, “leg godt” (play well). Over the following 15 years, Christiansen’s business focused around offering great items that supported innovative play. He composed his toys to enamor the creative ability of the nearby kids; through building, they created a feeling of pride in achievement and learned while playing. In the belief that he had discovered the perfect new material for his developing organization, Christiansen purchased his first plastic infusion embellishment machine in 1947. The fateful result was LEGO’s famous item, the plastic block with eight studs, which the organization soon applied for patent in 1958. Afterwards, the Lego company vehemently advertised their products with their pamphlets, competitions and newsletters.
It was this legacy – for quality, inventive play, group and experimentation – that Christiansen passed on to his children, who proceeded to claim and run the organization. For the following 20 years, the LEGO Group developed gradually and consistently, arriving at more or less 1 billion Danish kroner in revenue 1978. LEGO’s unique ‘play experience’ appealed to customers as it was focused around free-structure play: Children built universes of their own picking; they didn’t have to read lengthy manual or guidelines. Over the next 10 years the organization expanded worldwide scale, increasing sales to DKK 5 billion in 1988. From 2000 the organization started had additional growth again as it started selling licensed products based on intellectual property such as the Star Wars movies.
Based on these data and information it was relatively simple to produce a SWOT analysis which can be illustrated in the chart below.
High brand image
Solid distribution networks
Relative financial liberty
Narrow product portfolio
Low presence in Asia
Economic growth in core market
Increasing global middle class
Further acquisition of market share
Continued franchise collaboration
Blue ocean in Asia
Skewed geographical distribution
Low switching cost
Change in toy market
Film industry dependency
In 2003 the dangers innate in this development strategy got to be frighteningly genuine. The LEGO Star Wars and LEGO Harry Potter units, while sold well when those movies were released, meant that LEGO were dependent on those Hollywood movies. In 2003 there was absence of a successful film such as Star Wars no Harry Potter film thus LEGO’s sales plummeted. Added to this was the US dollar that started declining from its 2002 making LEGO products more expensive to US customers. LEGOLAND parks were making losses too, and the expenses of manufacturing more than 12,500 different bricks stayed high. In 2003 and 2004 the organization saw its greatest misfortunes ever, with its deficit recording over 300 million Kroners. As its inconveniences got obvious and the top management started hunting down results and they understood that the toy business was changing significantly in no less than four ways which was taking toll on LEGO’s future First and foremost, electronic games, hand-held devices, sites and even cellphones were diminishing the interest for customary toys.
Nobody knew how far the business would fall, however everyone agreed that electronics would eventually supplant mechanical toys, making them obsolete. Additionally, with kids starting to use multimedia devices such computer and mobile phones as early as the age of eight, they were losing enthusiasm toward customary toys. Secondly, the nature of retail industry, whose relationship was vital to LEGO, were changing as they turned into super stores, for example, Wal-Mart and Carrefour had an undeniably vast aggregate amount toys at economical prices. This signified a power shift from manufactures to retailer: those days that manufactures could dictate its prices to customers, as in the 1960s, were gone. Hence, toy producers needed to fight for shelf spaces, often at the expense of making a loss.
Thirdly, due to the new retail environment and the outsourcing of assembling to Asia, the toy business confronted the huge demand to cut down its prices. Lastly, the LEGO Group started to see that the less expensive, fake products produced by other companies were perfectly exchangeable with LEGO components. These toys were not only cheaper but also quicker, offering items for sale to the public before LEGO could. The LEGO Groups sued those copycat LEGO producers in numerous nations, contending that the LEGO block was an icon that ought to be secured by permanent trademark assurance, not short, decade long patent security However, LEGO lost all of its lawsuits as it failed to persuade any courts. As a result, without any legal protection 2003 the LEGO Group lost almost DKK 1 billion kroner and its cash possession was perilously low. This was the biggest misfortune ever, a sign that numerous spectators believed LEGO was beyond redemption. Yet, the losses for 2004 almost multiplied from previous years.
Before going into further detail on LEGO’s strategic management, a value chain analysis can be applied to illustrate the situation LEGO was at. The graph on the left demonstrates the internal problems LEGO had, such as cost in supply and production line while inefficient use of customer base in written under service part. Likewise the graph on the right hand side shows the solution for those problem, including LEGO’s outsourcing strategy in supply stage of value chain. Therefore both SWOT and value chain analysis helps understanding LEGO case and its implementation of stagey.
It was right now that 35 year old Knudstorp, who had created a plan to spare the organization, was designated president and CEO. In October 2004, the organization was into a bad situation. Competition was getting fiercer than ever and the toy business was advancing in ways that did not support the LEGO Group, and the organization was nearly bankrupt. Besides, to Knudstorp. the organization had no clear idea of who it was nor what items it ought to offer. It was clear to everybody that changes were required. Knudstorp and a few different associates in 2004 figured another business plan for the organization. Their idea had three stages. Initially, they needed to enhance the organization’s money flow and get rid of debt; much of this, they proclaimed, would be achieved by auctioning off non-vital holdings, lessening operational cost and outsourcing manufacturing process.
Second, to build net revenues, they needed to expand their product offerings. Lastly, the organization needed to develop naturally, to imagine better approaches for creating value. Before the end of 2005, they had finished the significant objectives of the first stage, and it was time to start the second and third stages. With a PhD in Economics, Knudstorp had worked at Mckinsey & Co for three years, then joined the LEGO Group as a Strategy executive in 2001. Knudstorp titled their new plan “Shared Vision.” Knudstorp described it not as another procedure, rather as an action plan for survival that based on LEGO’s historical strengths. The arrangement had three parts.
The primary stage, ‘Stabilize for Survival,” was to be done in 2004 and 2005, and concentrated on decreasing cost, disposing of debts and reinstating profits to LEGO. The second stage, “Profit from the Core,” to be completed in 2006 and 2007, meant to enhance the productivity and development of the organization by revitalizing the center product offerings and converting the business stage through outsourcing of assembling and extensive use of the IT. The last stage, “Accomplishing Vision,” aimed for 2008 and 2009, concentrated on creating inventive new play equipment that could strength LEGO’s position in the market. The LEGO Group instantly started to diminish debts and cut expenses.
In 2004 it began outsourcing of most of its plastic block assembling to outside suppliers or its own production lines in nations whose labor was cheap, like Vietnam. Thus, LEGO fired half of its employees and blue collar workers it directly employed. In 2006, LEGO announced that 80 percent of production would move to nations in Eastern Europe and Mexico for cheap labor. In addition, the LEGO Group sold a 70% stocks of the four Legolands to the Blackstone Group for $456 million. To diminish production and assembling expenses, it started decreasing the inventory of LEGO parts. Knudstorp and his group realized that diminishing the amount of parts would be strongly opposed in LEGO’s Design Division and could also harm the organization’s image. A few designers contended that it would ruin imaginative interpretation of LEGO products and lessen the amount of items available, which would lower incomes for LEGO Group.
Yet a lessening in segments would streamline producing operations, trim inventories, decrease expense of out of date products, lessen mold speculation cost drastically and unburden distribution network. The group tasked with the exertion accepted that a number of the segments were unnecessary and damage the organization’s profits. For instance, the cook character puppet had seven distinctive faces, each one made by a different segment and the group thought one was enough. Lessening the current number of 12,500 parts by to half, the group guessed, would compel the designers to concentrate and make most of what they have. Before the end of 2005 the LEGO Group got through its immediate crisis. Despite the fact that sales were even because of the discontinuation of a few items, the organization had relatively safe cash amount. Besides, expenses were down 35% and LEGO had zero debt. As Phase 2 of Shared Vision started, the organization targeted revitalizing its product offerings and gain profit. The product lines were re-examined to show gainful profit.
The management team additionally was concerned that how they would execute the third period of the Shared Vision new thoughts for natural development that was planned to start in 2008. One product offering that required revitalization was LEGO City. Although it was one of the oldest and top rated product offerings of the organization, LEGO City products had been declining since 2000 and some thought the product offering ought to be eliminated. The profit share of this product to the organization’s declined from 15% to 7 % in 2003. In 2004 LEGO City marketing chief, Birthe Jensen, asked her group to reassess and ascertain the product whether to be continued. As a result, it was found out that they, were not differentiated enough and lacked focus to attract customers. To get up and go, Jensen and her group chose they would create more sensible items, more appealing features to kids that could give immediate satisfaction.
At the end of 2005, with the organization on a robust fiscal balance, Knudstorp considered next action plan. Sales had decreased by 35% in the past two years, and the organization was all the while conforming to the reduction in work force. The decrease in LEGO segments was likewise being felt, inside and outside the organization. Designers whined that their inventiveness was being diminished, and some enthusiastic clients grumbled when their most loved segments or figures were not produced anymore. Of Course, the group thought about how LEGO’s designers would respond to reducing amount of parts accessible to them. Thus the management team decided to test their designers to find out if the toys were developed just from the parts accessible would that significantly decrease LEGO’s product quality.
Knudstorp and his group likewise understood that they required to enhance improvement adequacy. It was vital to create new toy product as well as the up and the next generation of famous products such as Bionicle, Exoforce, LEGO City, Harry Potter Star War and different toys. In order to accelerate the item development and improvement procedure the organization had executed a stage-entryway handle in 1995, called the LEGO Development Process (LDP), to enhance the speed of introduction of items to market. However, in the course of recent years, the LDP had degenerated into an unwieldy bureaucracy. For an item to development, fancy agendas must be rounded out, and every planner and designer was required to fill out paperwork and checklist many times before approval. As indicated by Per Hjuler, VP of item improvement, at first it worked well, however then it got excessively cumbersome.
LEGO also had another serious issue with its success rate of new product development. Bringing a new item to market took about 36 months. By 2003, as indicated by Hjuler, “one and only or two” of ten new item thoughts really made it to market. Thus they had to enhance the procedure making it faster and more successful. Notwithstanding being moderate, the item improvement procedure experienced an absence of accomplishment in creating and bringing to market drastically new thoughts. In order to address this problem, LEGO had made a Concept Lab, whose role was to create progressive products that would prove to be disruptively innovative. The Lab was seen as a free resource to others, and Concept Lab staff frequently got included in the advancement of more incremental item ideas.
This inefficient use of employees, coupled with the trouble of finding out ideas through the LEGO Group’s complex development procedure, blocked successful operation of the Concept Lab. An alternate open door for development was in the territory of licensing. While the organization lost many lawsuits in establishing trademarks, it concurred that there was still a business opportunity in licensing the LEGO brands to outside products by partnership. These partner organizations could make books, films, workstation amusements, T-shirts and different items around brands, for example, Bionicle, Exoforce and LEGO Star War. LEGO additionally longed to investigate whether it could enlarge its inside development team with outside innovators. Yet in both cases, it required to guarantee that the items produced were safe with the brand picture of every product offering and not stolen by outsiders.
In view of its exploration, the organization likewise realized that it was not making use of its extensive passionate customer based. For instance, LEGO recently made an online design program called LEGO Digital Designer, which permitted clients to make new LEGO toys basically. So each customer could create a new LEGO toy according to their personal preferences and find out prices to produce them. In addition they also launched another service called LEGO Factory which let clients to buy different clients’ products. While the logistics of the shipment and mass production of these units was still being worked on, the organization saw extraordinary potential and gradually started working on it.
Subsequently, LEGO’s new strategic management plan, ‘Shared Vision’ proved its worth when it was proven that LEGO was clearly back on track through its revenue and market share. As of 2008, the results of ‘Shared Vision’ strategy were in. While there remained much more to accomplish, it was explicitly evident that Knudstorp plan worked well for the LEGO Group’s recover. By restructuring the company, redefining the innovation process, connecting with outside development partners, and putting in place a number of mechanisms to coordinate innovation efforts, the company had reversed its slide and claimed itself as the world’s most profitable toy manufacturer. Sales went up too overall, and projects to revitalize brands such as LEGO City and Bionicle ended as great success and their products were always well sought out.
Moreover, the relaunch of LEGO Mindstorms co-developed with a passionate group of outside enthusiasts far exceeded its initial expectation, selling more than 150,000 units in 2007. Aside from sales figures, the company had introduced some toys based on LEGO Factory designs that actively encouraged customer participation and the service was growing well, contributing to enhanced brand image of LEGO. In addition, the organization planted more business ideas in the pipeline that could lead to further growth, including an online multiplayer game to be called LEGO Universe, which would serve as a sales platform for its potential customers. All was good and Lego’s dominance was undisputed.
In conclusion, it seems reasonable to me to conclude that Knudstorp business strategy of ‘Shared Vision’ proved highly effective in brining about LEGO’s revival and recovery. LEGO’s ‘riches to rags and to riches’ story has become an epic history of hero’s return to the world’s toy market. The process of shared vision clearly demonstrates combination of cost leadership and product differentiation, two vital principal goals of management which were pursued concurrently at LEGO by Knudstorp. Many companies that rely on selling seemingly outdated products, such old toys or antique furniture, fountain pens ought to learn from LEGO’s exemplary success in exploring ‘the new’ from, the old, creating value in between. Therefore, those companies should rather, we should make it a duty to draw lesson from Lego’s example as a successful model to follow.
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Q 1. What led the LEGO group to the edge of bankruptcy by 2004? By the end of 2003 Lego was already facing crisis owing to dipping profits and declining market pool for toys. Lego had planned to expand into markets beyond building toys and needed huge investment to be made in it. But it found difficult to compete when fad players and other toy manufacturers were giving them stiff competition in a market that already was supposed to be giving lesser returns every year. This was mostly due to factors out of the control of Lego and other toy companies because, firstly, a research suggested that the demand of children who were primary customers of these companies were changing rapidly to fashionable and electronic products. They had lesser attention span and looked for instant gratification, and were lesser inclined to play with toys involving physical activity. Also Lego found it difficult to be competitive when its manufacturing base was in European markets while toy companies were moving to Far East and Middle East where labor was comparatively cheaper.
Management move by Lego: After Lego realized that it had to correct its declining profits, it decided to venture into new markets and imitate the success of Disney which had created a brand value for its customers through theme parks, accessories media and video games. Lego created an amusement park called LegoLand Windsor, came up with video games, accessories and robotic toys. This did not work very well for Lego as Disney already had a brand value which it created through its own characters, while Lego was still a toy making company in the minds of people. It was an early move and the market was not ready for Lego to establish as an entertainment company. Thus profits kept on declining. Lego then focused on improving organization internally to reflect in profits, when it’s COO, Plougmann restructured the organization and tried to turn around the company.
The target was to hire the best talent and improve focus of the company towards innovation and creation of new markets. Layoffs were also done and processes were streamlined to become more profitable. Lego made new theme parks on themes of Winnie the Pooh, Star Wars, Harry Potter. They had profits from some of these but the overall profitability of the company was fluctuating and none of the management moves by the government seemed to get the company back on track. Analysis of why the management moves failed: Lego was focusing its strength in the wrong direction. It was trying to portray itself as a brand image that it wasn’t. Imitating Disney couldn’t have saved it until it had created brand recognition as an entertainment company like Disney.
Also, the company was investing huge amounts of money in making theme parks while it was not financially strong. The problem was that, Lego was making a large number of shapes and components and yet not selling enough toys to make profits. It had 3,560 different shapes several colors. Each of the mold to make the shapes could cost 50 to 300 thousand Euros. This made the company slow in delivering supplies on time. The users already had enough of other options like the fad companies or competitors to fulfill their demand for toys. Lego missed out on correcting its process by making toys more profitably, and rather looked externally trying to emulate Disney. This move brought them to bankruptcy in 2004 and the company fell into a major crisis.
Q 2. Knudstorp’s turnaround strategy: Effective and not effective actions.
After Knudstorp became CEO of Lego, the company was already facing a huge financial crisis. He came up with a new strategy called “The Shared Vision” to turnaround the company. He came up with a 7 year agreement with the Board of Directors of the company to restructure the business, reduce debts increase sale and provide direction to the company. The strategy was based on three stages:
1. Manage for cash(2004-05)
2. Manage for value(2006-08)
3. Manage for growth(2009 and later)
Manage for cash focused on saving the company from bankruptcy and provide it the necessary cash. This was a survival strategy based on focusing on the core strengths. Basically, the company was trying to do too many things at the same time, including surviving a competitive and declining market and also expanding at the same time. The essence of “Shared Vision” strategy was to divide it into stages where the company could focus on survival first and gradually have its stronghold by expanding into new markets. The first step Lego took was to improve the efficiency of its plants and synchronizing its activities to cut down cost on factories, distribution systems, supply, shipping etc. The focus was not on imitating Disney anymore but surviving the market and generating profits.
Effectiveness of this action:
1. Lego focused on its core strengths once again including establishing the brand name, going back to Lego brick games, creating a community around their products to increase participation. 2. The Logoland parks were sold while it kept its stake in profitable Merlin Entertainment parks which generated cash for the company. 3. The focused efforts resulted in greater profits from lesser products. Lego Duplo, Lego City and Lego Mindstorms were the core products generating profits for the company. 4. The management had clear idea of when to focus on business survival and when to go for growth. The growth timeline made company postpone non important expansion plans to later in future. 5. Lego reduced the number of components it produced for the complex toys. This improved its fill rate and reduced delay in delivering supply to the market. Faster sales cycle generated greater profits.
Non effective actions:
1. Lego decided to shift back its manufacturing from China to its own factories in an effort to reduce the lead time required in maintaining supplies in accordance with the shifting demands of children. The lead time in Chinese factories was 12 weeks and shifting the facilities beack to itself could help Lego push SKUs faster. This was not a good step as it boosted the cost of production for the company which harmed them more than the lead time. 2. The company incurred huge cost in bringing production back to its own manufacturing units in Europe. A lot of cash was invested in re building the capacities while it had to lay off employees in Bilund factory. This could have been avoided.
Overall, the strategy to plan the survival and growth actions worked in the company’s favor and gave it opportunities to expand in new markets and also streamline its own capabilities thus generating more profits. The market share improved and profitability increased. Thus, Knudstorp’s turnaround strategy was overall successful.
Q 3. Should Lego launch the new line of Board games?
Of its history and the various ups and downs that the company faced, and the way it turned around itself, one important lesson we learn from Lego is that it worked best for the company when it focused on its core strengths and developed its capabilities. Lego always has to fight with competitors and fad companies emulating their products but wins on the community building and innovation front. Board games on the other hand do not fit in within this strategy of Lego as they do not provide Lego’s community benefits and can be imitated easily by other players. It will soon turn into a price war which is not Lego’s core strength.
Lego would be better off if it comes up with new Lego building models with technological facelift given in its toys. With the rise in IT and Tech., children these days get more excited about gizmos and technology. Lego can profit from combining its core strengths of making building models with technological embedment in it. This would create a unique selling space for Lego which will be difficult to compete in. The board games definitely do not fit in this strategy of the company and are also very price sensitive. Thus, in my opinion, Lego should focus on its core strengths and not get into the line of Board games.