Lego Case Study

Introduction

LEGO is seen as an extraordinary company not only in the eyes of parents who proudly watch their children build castles and town halls, but also in the eyes of high-minded academicians. Playing with LEGO sets is widely believed to develop motor skills and creativity in children, considered essential tools for real-world problem solving. The firm, founded in 1932 by a Danish carpenter did well continuously.

Business Problem

But by the late 90’s signs that something was amiss at LEGO started emerging. Lego found itself more antique than cutting edge in the toy world. In 1998, the firm posted a small loss. By the early 2000’s, the firm was burning cash losing almost $1 million a day. Jørgen Vig Knudstorp, a former McKinsey consultant who came to the family-owned Lego Group as an outsider in 2001 was named CEO in 2004. How did Knudstorp make a huge turnaround and rescued Lego?

Knudstorp’s Business strategy

Knudstorp understood the company was struggling mainly because of poor performance, missed deadlines, long development times, and poor deliver record. LEGO Company increased its focus on cutting costs, especially by adjusting production capacity to the reduced activity level. Knudstorp believed the company needed not so much a strategy, more an action plan so he developed an action plan in the short term rather than a comprehensive strategy. In a streamlining exercise, he cut the number of bricks or elements used to produce LEGO toys from 13,000 to 7,000.

He demanded that designers be creative with existing parts because each new element was less useful in the overall scheme of things and the mold needed to produce each part cost nearly 50,000 Euros. In a firm where deadlines were set and then casually postponed, resulting in delays of months and sometimes years in the product development labs, Knudstorp demanded and achieved a newfound discipline.

Lego was known for their traditional blocks and components that would allow children to build just about anything their imagination could create. Knudstorp still liked diversification and strongly advocated that LEGO should venture into the virtual gaming world. LEGO has introduced computer games with its building-block characters playing heroes and villains. In recent years, LEGO’s sales have largely come from theme-based building sets licensed from Hollywood titles such as Toy Story, Star Wars, and Pirates of Caribbean. Lego created a product strategy for adults and engaged the communities who had already set up thousands of Web sites and blogs featuring Lego creations. They embraced the community who thought of Lego as a way to create art, rather than simply a building toy. And they designed a line of Legos aimed at girls, since the majority of their products had primarily targeted boys.

Knudstorp’s Organizational Strategy

Knudstorp made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to succeed. Once the company had gained the freedom to live and have a strategy, the management team set out to optimize the firm’s value. In order to do that, they had to answer the question: why does Lego Group exist? Ultimately, they determined the answer: to offer our core products, whose unique design helps children learn systematic, creative problem solving—a crucial twenty-first-century skill.

Implementing a strategy of niche differentiation and excellence required a looser structure and a relaxation of the top-down management style and empowered managers. For example, Knudstorp stopped participating in weekly sales-management and capacity-allocation choices and pushed decisions as far down the hierarchy as possible. Lego switched its employee pay structure, offering incentives for appropriate product innovation and sales. Key Performance Indicators encourage product innovation that catalyzed sales while decreasing costs. Development time dropped by 50% and some manufacturing and distribution functions were moved to less expensive locations, but the focus on quality remained. The creation of reusable parts alleviated some of the strain on Lego’s supply chain, which in turn helped its bottom line.

Knudstorp’s IS Strategy

The growth put strains on the information systems supporting the business. Order management and fulfillment were particularly affected, resulting in the inability to meet customer demands. Employee management systems were stretched as new employees were added to support the growth and additional locations. Product design and development, especially the virtual and video games, required new technology, too. To solve some of these problems, Lego managers used the same approach they used for their blocks. They created a modularized and standardized architecture for their information systems, making it possible to expand more quickly and add capacity and functionality as it was needed. They implemented an integrated enterprise system that gave them new applications for human capital management, operations support, product life cycle management, and data management. The new systems and services, purchased from vendors such as SAP and IBM, simplified the IT architecture and the management processes needed to oversee the IS.

Critique and Analysis

Some critics of these theme-based sets and LEGO’s entry into the virtual world view these moves as a betrayal of LEGO’s core theme of ‘nourishing the child’. Knudstorp countered these punches saying that LEGO’s video games are in fact complementary to its freestyle building block games. In fact, he claims that children, who play LEGO’s video games, see those characters and come to the physical set to build and enhance their imagination. The numbers are firmly on Knudstorp’s side. Not only are the firm’s new games selling well but the time-tested building block sets of nearly five decades are also selling like hot cakes. After a near-death experience in the mid-2000, LEGO’s financials are thriving. Even during the great recession of 2009, sales jumped nearly 20%. In Britain, LEGO’s sales are growing by 50%. From less than 3% market share in the early 2000’s, LEGO now commands close to 6% of the world’s toy market.

Answers to Case Questions
How did the information systems and the organization design changes implemented by Knudstorp align with the changes in business Strategy?

In every phase of strategy change, Knudstorp paved the way by moving leaders within the company and altering organizational structures and ways of working. For example, Lego set up a business area dedicated to direct-to-consumer sales, which is all about education and collaborative networks and is fundamentally different from selling to retailers, which is all about efficiency. Knudstorp also created a healthy competition between employees by introducing pay structure based on performance. Lego created a modularized and standardized architecture for their systems, making it possible to expand more quickly and add capacity and functionality as it was needed. They implemented an integrated enterprise system that gave them new applications for human capital management, operations support, product life cycle management, and data management. Further, they implemented SAP – supply chain and IBM products to help their information systems take better decision for marketing and analyzing to fit o their business strategy.

Which of the generic strategies does Lego appear to be using based on this case? Provide support for your choice. Lego appears to have used the focus strategy. A focus model effectively involves focusing on differentiation or cost leadership on a specific segment or section instead of industry wide. This strategy allows the organization to achieve a local competitive advantage, even if it does not achieve competitive advantage in the marketplace overall. Lego had been guilty of chasing too many fads and ignoring the focus on key LEGO kit construction products. There had to be a return to the LEGO brick building a coherent expandable universe of toys.

There had also to be a focus on profitability, especially the basic potential of the core products. Knudstorp put focus back on the core business, as well as a few items that were doing well (including the movie/TV show themed Legos) and shifted focus away from the products that were not doing well, and continued to uphold LEGO’s high standard of quality (differentiation). He reached out to top retailers, cut costs, and added missing links to the supply chain. By focusing on a new design strategy Lego was able to achieve significant cost saving by reducing the Lego mold components from 13,000 to 7000.

Are the changes implemented by Knudstorp an indication of hyper competition? Defend your position?

Yes, the changes implemented by Knudstorp are an indication of hyper competition. Lego had a stage gate innovation process and that means that they would start out with 60 ideas, which eventually become between 15 and 20 that we actually launch, so it’s the name of the game that not everything that’s developed will get launched. Not everything that’s on the market today will stay on the market, so as an organization that’s part of the learning that it is creative destruction if you like, that you have to kill something to make room for something new. For Lego it’s a major part again of the discipline of running a successful and profitable enterprise is that you’re willing to sort of kill your darlings so to speak and exit products relatively fast. Even before they become a failure you exit them so you always stay fresh and renew your assortment and also keep your assortment very focused.

What advice would you give Knudstorp to keep Lego competitive, growing, and relevant?

As Per Knudstorp, it’s a golden rule in business that most companies don’t die from starvation; they die from indigestion because there’s so much opportunity if you start opening your eyes to it. In fact, one of the major jobs that Knudstorp did is to cut all the wild weeds and stay focused on really building all the branches that are healthy for Lego’s business to build on. One of the rules I stick to is you can really only build an adjacency to your core business every 3-5 years because it’s such a major undertaking in terms of culture and capabilities. The other significant aspect is listening to customers to find out what is most important to them and then adding value along the dimensions they define.

References
http://www.businessinsider.com/how-lego-made-a-huge-turnaround-2014-2 http://hbr.org/2009/01/lego-ceo-jorgen-vig-knudstorp-on-leading-through-survival-and-growth/ar/1 http://www.thomaswhite.com/global-perspectives/jorgen-vig-knudstorp-ceo-lego-group/ http://www.meettheboss.tv/video/full-version-man-who-rescued-lego