Lego Case Analysis

1. From early 1990s to 2004, the Lego Group, a long successful toymaker with a world-renowned brand, fell into the edge of bankruptcy. Compared with the highest revenue in 1999, the revenue in 2014 decreased by 35.6% while the net profit was negative, seven times less than that in 1999, the lowest in the past ten years. Its net profit margin and ROE were also the lowest. The gross margin and inventory turnover were all lower than its competitors. The strategic moves in the two main periods “growth period that wasn’t” (1993-1998) and the “fix that wasn’t” (1999-2004) lead to its poor performance. External Analysis

Substitutes: High. Fad toys, electronic products, videogames, online activities could easily be substitutes of Lego products. Threat of new entrants: Moderate to high. Rapid imitation and limited protection of intellectual property lowered entry cost. Suppliers:

1) For raw material, suppliers such as chemical factories should have more bargaining power. Mold suppliers have more power than the company, if mold was not manufactured by Lego itself. 2) As Inferred from the case, Lego should have certain power over plastic injection – molding machine suppliers, as the business grows. Buyers: Buyers have strong power over Lego products.

1) Retailers would have more power than Lego if Lego decided to cooperate with retailers instead of selling directly to consumers through online shop and Lego-owned retail stores. 2) It’s a highly seasoned business. Consumers bought a large fraction during the holiday season, retail purchasing occurred mainly in the second half of the year. Rivalry:

1) For retailing channels, the rivalry is low. As Lego sold directly to consumers through two channels online and self-owned retail stores. 2) Competition among its competitors heated up in recently years. Pressures from retailers became higher. Retail channels consolidated, and mass discounters featured toys more aggressively. Outsourcing to lower cost became popular in this industry. Internal Analysis

Strength
Weakness
World-renowned Brand
Adapting to market trends
High quality of the products
Instability and inefficiency of the management
Employees are lack of discipline/accountability
Substantial investment in expanding product portfolio
High production cost; conflicts between design and cost
Low inventory turnover
Limited distribution channels
Opportunities
Challenges
Emerging markets
Diverse product lines
More competitive distribution channel
Fierce competition
Limited protection of intellectual Property
Market shifts
From the analysis we can see that the Lego Group was in a very difficult situation. To turnaround the situation, it has to solve the weakness and seize the opportunity while focusing on a clear strategy. 2. Strategic Actions

1993-1998
1999-2004
Built a five-person management team
Frontlined managers
Dismissed the head of production
Focused on growth not margin
Businesses were encouraged to make own decisions
Branched out beyond the brick: Opened LEGOLAND Windsor (U.K.); launched www.lego.com; began to develop videogame software; set up LEGO Media to develop media products; introduced children’s wear, watches and LEGO MINDSTORMS robotic bricks New themes and products in brick-based product lines

New CFP became COO responsible for day-to-day management
Launched a restructuring program to cut cost and lay off staff (more than 60% top executives) Managers rotation
Design responsibilities shifted to global product development centers Streamlined production aiming to match forecasts
Sold out several tool-making factories; non automatic manufacturing processes were transferred to Czech Republic Consolidated 25 country-level sales companies into five regional entities; salesmen were tied with incentives Globalized back-office functions

Decided to sell directly to consumers through two channels online and self-owned retail stores Evolvement of product lines: LEGO Star Wars, LEGO DUPLO
Expansion of theme parks
Videogames flourished, lifestyle initiatives were cut back after 2000 Analysis / Reasons
The Lego Group frequently shifted its strategy. The management shifted its strategy from steady organic growth and profitability into focusing on growth in 1993 and then tried to restore profitability and growth through “fitness program” and series of changes during the period of 1999 to 2004. The strategic actions deviated from some of the ten principles. The Lego Group tried to catch up the market trends during the period, but they ignored that the industry total profit pool decreased by 50% Between 1999 and 2003. It’s naturally for players to reduce mass production and focus on core competency. However, the Lego Group invested significantly in expansion not only in brick-based product lines, but also beyond the brick.

The expansion was not focusing on its core competency. Instability of the management, laying more stress on general leadership experience, and “fitness program” led to inefficiency and low moral/accountability among staff. Non-outsourcing and in-house expansion without cooperating with partners boosted expenses. Two retailing channels were too limited compared with competitors’ diverse retail channels. More complex design conflicted with automated production line. It largely increased molding cost / production cost and caused an extremely low inventory turnover, much lower than its competitors. Major customers were frustrated by stock-out and slow-moving inventory. Currency fluctuations was also one of the main reasons for its unsatisfying performance. Therefore, the strategic actions failed to gain a better result, though the group boosted its investment during the two period. 3. a.

The business should be adjusted to meet the demand of the market. The Lego Group should continue expanding into new product areas like media products which could complement the plastic products as well as cater for increasing consumer needs in this area. For products which are less related to its original products and mission such as clothes and watches should be stopped. Though it should continue expansion, the competency of its plastic bricks should be maintained. b. For the core plastic bricks, the Lego Group should continue manufacturing them by its own factories to ensure the best quality. For other complementary products like media products, it should utilize partners’ expertise. c. During the two periods mentioned in the case, the designers created more complex and distinct pieces for some sets to cater for the market shifts. However, they didn’t see the impact of this on design, manufacturing, servicing of retailers, forecasting and managing inventory.

It could be out of stock for a product just because of missing one piece. Inaccurate or wrong forecast made inventory situation (stock-out or overstocked) even worse. d. This should due to the frequent shift of senior management and the loose in production control. During the first period (1993-1998), Kristansen left the company for one year and dismissed the head of production when he returned. The new management team focused more on market dynamics than production. In the second period (1999-2004), a new CFO became COO, more than 60% of top executives and more than 10% of total staff were laid off, manager rotation every 6-12 months, and general leadership was valued more than direct experience with Lego toys. All of those made it difficult for the group to identify the unprofitable products.