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LEGO CASE: THE CRISIS

LEGO CASE: The Crisis


Angel Flores
Jose Gonzalez
Hanny Medina
Katherine Sierra
BUS 532 Business Strategies and Decision Making
Millennia Atlantic University

November 27,2014

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LEGO: THE CRISIS

Background
History of the LEGO Company found its begging in 1916 when Ole Kirk Christiansen
bought a woodshop in the rural Danish village of Billund and began to build houses and furniture
for farmers. In 1932 the financial situation of the company got worst and Mr. Christiansen found
he in the necessity of dismiss all his employees. Shortly after Mr. Christiansen suffer the lost of
his wife with the responsibility of his four sons had the idea of create toys for his children
looking for relief their sorrow. After realizing how happy and pleased were their children he
thought that would be a good idea to star building toys.
In 1932 since the sales of its toys were running slow Ole Christiansen thought that
perhaps the company needed a good name then he wanted to convey the Danish expression Leg
godt which meaning is playing well in a short word that was easy to remember and that was
how the name of LEGO came through. In 1936 the company started registering its profits, due
that Mr. Christiansen decided that was time to optimize its process by acquiring high-end
equipment. In 1942 a fire consume the workshop and all the drawings and models were
destroyed then Mr. Christiansen started a the construction of a new and bigger factory and went
to Copenhagen looking for a new plastic-molding machine that has just arrive to Denmark. He
started to produce plastic bricks after experimenting with some different figures.
In 1947 after the introduction of the Ferguson tractor; the plastic brick toys became a
success. Unluckily the sales were dropping during the summer and the company had too many
toys in stock then Godtfred Christiansen who joined his father on this venture in 1932 decided
that his toys were not just to be sold seasonally and went to his distributors in order to sale his
current product. In 1954 during a business trip to England a purchasing agent complained to
Godtfred that the toy department were a mess: toys lacked of systematic organization. This
comment moved Godtfred to consider the LEGO system of play due this in 1958 the company
changed the design of its brick to match its current form. Ole Kirk Christiansen died and
Godtfred Christiansen assumes the head of LEGO.

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In 1960 a fire destroyed the LEGOs group wooden warehouse and Godtfred Christiansen
decided not to resume the wooden toy production. In 1961 looking for expansion and opening
Godtfred realize that he needed to sell his product world wide, for that reason he started to build
the Billund Airport this move make easy to bring guests and business connections to visit the
factory. In 1963 Godtfred laid out ten principles of Good play the defined LEGO product
characteristics. In 1967 the company reach the ability to produce LEGO bricks in 218 shapes. In
1968 since Godtfred felt the necessity to expand his showroom center he realize that a theme
park would be a great idea to show his products and then LEGOLAND was founded.
Furthermore, the group expanded its audience in 1968 with the larger DUPLO bricks for
children under 5 and 1977 were launched LEGO technic line for teens. By 1980 about the 70%
of Western European families with children over 14 years old owned LEGO brick.
Executive Summary
The LEGO Group is a Denmark toy company founded in 1932 by Ole Kirk Christiansen.
The firm has been in the market for some time and was used to have stable growth and
profitability. However, the situation changed at the beginning of the 2000s, when the brand
couldnt maintain its steady ground. During this period of time sales decreased by 29% to DKK
6.8 billion and the company lost DKK 935 million, which led LEGO to the edge of bankruptcy.
Corporate and Competitive Strategies Used
The LEGO Group is pursuing a corporate growth strategy based on differentiation, which
is fundamental for the success of the company, since their costumers choose to buy the products
based on quality and not so much on price. The firms competitive advantage is built upon
innovative products that promote creativity and fun when playing.

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External Analysis
Industry/ Competition Fiver Forces
Current Rivalry Opportunities

Although there is a strong level of competition in the toy industry, LEGO is one of the
few and definitely the biggest firm in the construction toys market. This is an
opportunity because the brand has a strong position in this industry with more than 60%
of the market.

Current Rivalry Threats

The rivalry between LEGO and its competitors, such as Mattel, Megablock, and Hasbro,
is based on innovation in order to launch new products as the market changes. This is a
threat because these competitors aim to broaden the market and obtain an important share
of the global entertainment industry.

Potential Entrants Opportunities

The LEGO Group has differentiated products and counts with loyal customers. This is an
opportunity because it creates a barrier for potential entrants into the industry.

Potential Entrants Threats

The threat of new entrants can be relatively low, since there is a high cost of investment
and research and development expenditure to enter this industry.

Bargaining Power of Supplier Opportunities

The power of suppliers can be seen as low, given that LEGO has as a core competence
the manufacturing of their own products; therefore, the brand uses standardized inputs

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such as raw materials that can be obtained from many suppliers. This is an opportunity
because the dependence upon suppliers is low.
Bargaining Power of Supplier Threats

The power of suppliers can be high for the LEGO Group when dealing with licensed
products. This is a threat because the dependence upon suppliers is greater with
intellectual property.

Bargaining Power of Buyer Opportunities

LEGO possesses an established base of loyal consumers that choose their products not
only on the price but also on other factors such as taste and preferences. This is an
opportunity for the brand to be more innovative and maintain their buyers satisfied.

Bargaining Power of Buyer Threats

The power of buyers for LEGO may be high, because consumers can choose many
alternatives of different toys within the industry. This is a threat considering that the
switching cost is low

Substitute Products Opportunities

As the traditional toy industry has been overshadowed by new trends such as fad toys and
electronic games, the LEGO brand has been developing videogames, movies and
television programs. This is an opportunity because the company has expanded its branch
of products creatively.

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Substitute Products Threats

The threat of substitute products is high for LEGO, given that the modernization of toys
and entertainment has increased significantly. Therefore, children have been replacing
traditional toys for videogames and online activities.

General External Environment

Economic opportunities

High-income countries are recovering the global financial crisis, this is an important
opportunity for LEGO to take advantages over competitors, because the demand for toys will
increase and is the best opportunity for market expansion.

Economic threats

The large number of toys manufacturer that compete with LEGO. The company has to be
aware of competition to be always on top of the market. To continuing innovating to be on top
the market is need a big economics support to cover the costs, which is risky for company
finances and also can affect the demand to drop the innovative product level. Good example
diverse product lines that make the company draws away from the core product.

Demographic opportunities

Expansion of the market cover Western Europe and North America, LEGO products are
directed to all gender and ages; there are different categories according age and gender: Play
materials in this children's age up to 0- 16+, lifestyle products, family attractions and media.

Demographic threats

How population reacts to unemployment may cause difficulties achieving greater efficiency
in sales and market positioning. Continue spreading LEGO to worldwide market mainly

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Southern Europe is a good opportunity to expand their market, but also is considering a threat
because increase cost of transportation.

Sociocultural opportunities

Highly skilled employees are part of the LEGOs team, their creativity and talent allows that
company keeps innovating products and be a step forward in the toys market. This opportunity
represents a potential target marker to generate more income.

Sociocultural threats

Culture for toys is rapidly changing and evolving every day. Now a days kids use to play
video games or use an iPad as entertainment. This is a threat because the traditional mom starts
to disappear from toys stores and decrease sales, but thats why LEGOs team creates video game
software. An other threat face by LEGOs is that kids have more after school activity and less
unscheduled time to play than in others times.

Political-Legal opportunities

None found

Political-Legal threats

None found

Technological opportunities

LEGO Company always keeps innovating to their customers by implementing new


technology. During the evolution of the company they start implementing technological shapes
to create a complete system, for example LEGO Star Wars. In recent years kids became more
familiar with technological toys like video games, because of that LEGO create their own video
game. Also when customer goes to LEGOLAND they can see the lattes toys with integrate

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movement technology and play the video games. Moderate technology implementation bring
product expansion and manufacturer efficiency.

Technological threats

Technology is a good idea to maintain customer attention, but like everything it has to be
moderate. Its means that using technology to create a new toy can lead a big diversification
which could bring long tern issues mainly economic issues. For example the use of robots on
Lego systems increase cost of manufacturing and production. Lack of technology for business is
lack of customers interest.

Internal analysis

Strategic managers strengths

LEGOs CEO is very professional and prepared on Strategic Development. The CEO
evaluated the current situation that LEGO is facing and suggested some strategies that can help
little by little the company to recover their finances by organizing their business units and
delegating to third party outsource manufacturing.

Strategic managers weaknesses

At the moment in which Knudstorp enter to LEGO group the company was in the worst case
scenario and Created credibility was difficult, this is one of the main weaknesses that CEO face,
because is a young professional and in some cases he could not have enough experience. Also
the lack of information is another issue for CEO and it is considering a weakness: he needs to be
involved in every detail of the company in order to see what are the causes to solve current
consequences.

Corporate structure strengths

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Is a strong brand that has remained over time; despite the company derived its product line
they maintain the core product. Also to improve product and avoid more losses the top manager
team decide to delegate the production of bricks to third party and be focus on increase finance
and meet demand.

Corporate structure weaknesses

Company was disorganized both inside and outside, to many product lines; which create a
cannibalization of core product. Many product lines lead the company to decrease in term of
finance; a good example is when they produce distinct brick shapes without matter, they were
looking at the cost of an extra mold but not the cost of design and manufacturing. For instance
those investment that looks smalls without loss are long term risky because is a certain loss.

Corporate culture strengths

Play, innovate and be involve is part of company culture. LEGO was built on the values of
hard work, humility and teamwork. Employees believe, participate and provide ideas in the
creation and implementation of the products.

Corporate culture weaknesses

Lack of Discipline. There are companies that go toward a financial collapse because a lack
of innovation, LEGO Group goes through a financial collapse from a excessive of innovation but
there was a lack of discipline of inventory costing and accountability system as companys
values.

Product-operations strengths

Technology for process. LEGO remaining its commitment to product quality and key
concepts, added an innovation perspective that have been successful at moving such innovations

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from the ideas stage into the implemented strategy on stage embracing to the new business
environment LEGO adopting strategies in relation to innovation and technology uses new forms
of technology for internal manufacturing processes maintaining the company's values in relation
to quality and manufacturing which contribute to the consumer experience.

Product-operation weaknesses

The Inventory Cost. The proportion of demand delivered without delay from stock on hand.
The inventory costs were exploding, producing obsolescence, there were not a control costs, by
ordering molds as one of the examples, and sometimes they could not meet demand. Balancing
supply and demand was further complicated by individuals directly using then third parties in
manufacturing to produce the items missing.

Marketing strengths

Unique product. LEGO group may be seen as largely from the LEGO brick is more than a
toy having a main approach offering a high quality differentiated product which the experience
of the child as an end user is the key consideration.
Licenses and partnerships. Products like the brick-based LEGO Star Wars theme were
launched that was a financial opportunity being more storyteller

Marketing weaknesses
The Group branched out beyond the brick. Approached in focusing its efforts to push

out of its edges, The LEGO Group braced too many Top lines of Markets with operational
consequences, failing to its brand promise Play Well referring to make a good toy with high
quality that meet the customer needs.

R&D strengths

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Promotion to R&D. LEGO group seeking an expansion its goes through a Non-Traditional
lines inspired in Lego Tradition (Video games, Theme Parks, Movies, Magazines) of market to
LEGO, adapting itself to innovation in diversifying its product ranges. Such diversifications
come from of the need to compete in a broader market than merely that of traditional children's
toys.

R&D weaknesses

Failure to meet the LEGOs fan needs. The diversifications of market pursuing a
competitive advantage into a growth changing environment, LEGO developed some initiatives
with a lack planning stage ignoring the end user likes that is a main approach within an
innovation process.

Human resources management strengths

Organizational values. The company leans on a broad organizational values that is


constantly learning and developing through of its Staff, which are a functional key to the
continuous improvements to company's high standards product quality

Human resources management weaknesses

Contradictions. Despite LEGO might be seen as a company with great organizational


values, in some cases the company meet minimum standards in any case and so this doesn't
really form a policy. Therefore LEGO only aims in a positive light to costumers rather than to
create a solid learning organization policy.

Information systems strengths

Meet the customers with the online store. The Initiative to develop an online shop was
very important about reaching the customers establishing an information channel where they

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may be comfortable to go shopping online and to be well informed about all of LEGO news,
thereby breaking the breach in some information layers in the past.

Information systems weaknesses

Necessity to keep enhancing. Despite LEGO has tried many different actions to the web
development and some ways has been successful, Lego needs to continue to try finding the best
way of the internet for the company mixing with the approach as children will continue using
much time on the internet making this framework more friendly to the end user.
Financial Analysis

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As the chart depicted above, LEGO had an important financial progress from 1995 until
2002 with profits up to of 366 million DKK supported by LEGOs capability to lean along on the
product licensing success by products as Harry Potter and Star Wars in 1999 and 2001
respectively, growth in core products, and a strong U.S. dollar. Therefore LEGO started to be
dependent on licensing.
LEGOs debacle was in 2003-04 where the company incurred a major deficit of 935
million DKK in 2003, with a substantial decline in sales of 26 %. That was the clear indication
that the strategic issues had failed.

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When the profits fell in 2003 the management had to acknowledge that the strategically
expansion bye new products had not produced the expected results. Everything played a role in
the financial collapse with a company licensing depending, a year without Star Wars or Harry
Potter movie, it became on a disappointing sales with more than 50% of the global sales
decrease, starting 2004 with another loss and the LEGO bankruptcy menace.
Segmentation and Target Market
Demographic:

Four age groups:


0-5 years
4-9 years
7-16 + years
Family groups

Geographic:
America, Europe, Asia and Japan
Psychographic:
Toy created for learning process and entertainment

Behavioral:
Not provided
Market Research
LEGO is a product directed to children of all ages and worldwide, actually the brand
name was create to be familiar to children. In the begging LEGO was a successful toy company
but in recent years finances were decreasing for them. What maintain LEGOs in the toy industry
is their constant innovation and technology implementation, knowing that the biggest competitor

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in technological terms are Ipads and computer games, due that LEGOs produces around 70 new
product to meet demand and keep customers interest on both product and brand.
Strategic Issues

Strategic Issue #1

Complexity
What is the issue?
Product developers had not kept control over the necessary elements to control the production
lines, which is the case of the molds, since the marginal cost of an extra mold was so low, the
distinct numbers of shapes was not important. While management did not take into account the
impact of the designs, manufacturing, servicing of retailers, managing inventory and forecasting.
Why is this an issue?
LEGO is experiencing a poor control into their process. If forecast was got wrong the
product line could be out of stock if one element of a set is missing. This disable the capacity of
meet the demand of your distributors, produces high inventory costs, obsolescence and loss.

Strategic Alternatives

Alternative #1
What: Implement corrective control parameters over the manufacturing process.
How: Assessing procedures and applying economical and accounting theories that allows to
establish control parameters and therefore to improve the proper use of the resources as well as
evaluating the products that are being produced and eliminating those who supposes greater
deviations bias within the production and standardizing the use of common elements.

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Who: Everybody who is involved in the manufacturing process should be bind to this alternative
including managers and as well the product developers.
When: as soon as possible.
Where: within the manufacturing facilities of LEGO.
Alternative #2
What: Outsource the manufacturing process.
How: Find a third party capable to assume the designs concepts and products of the firm. By
transferring all the knowhow to a new manufacturer.
Who: High-Level executive of LEGO
When: After assessing Alternative #1 if the final conclusions falls that LEGO is unable to
conducts its own operations or this results in high expenses for the company.
Where: (Asia)

Recommendation

We recommend applying Alternative #1. Since the process has a lack of control there is a
possible solution to this problem by implementing several tools and theories that help the LEGO
production system get on the correct track rather than outsourcing its manufacturing system.
Within the implementation of the corrective control parameters we strongly suggest an inversion
in IT and the implementations of accountable and statistics theories that allows the
manufacturing system swing among the trends of the current market without increasing costs or
generating a high rate of waste that is translated in loss for the firm. Since outsourcing the
manufacturing process will improve the profitability of the products it could be also compromise
the development of an integrated low cost-differentiation strategy.

Strategic Issue #2

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Diversification of product
What is the issue?
During the period of 1993 to 1998 the company was eager to growth betting to amplify
its participation on the market. Collected data from studies reveal that birth rate in the core
market has decline, as did the household spend in toys. LEGO positioning was falling behind
since Hasbro and Mattel pushed his manufacturing to the Far East allowing them to be more
competitive in prices and finally market research suggested that children had less time to
structured play, had shorter attention spans, and looked for more instant gratifications as well as
fashionable and electronic products.
The firm started to experiment with new ways to push out more products, without
necessarily taking care of margin. In that sense LEGO started to develop a new line of products
including video games, theme parks and clothes as well.
Why is this an issue?
When LEGO decided to venture in new product the management target shift from head
productions to seeking growth, as consequence several decisions were taking without taking into
the account important factors such as, margins, profitability, production efficiency, among others.
The result of these actions includes: swinging profitability, product cannibalism, write-offs and
obsolescence. Therefore, an economic loss that conducted the company near to bankruptcy.

Strategic Alternatives

Alternative #1
What: Get rid of all products that are unrelated to the LEGO core business and all product that
were found unprofitable.
How: Selling the theme parks and other franchises unrelated to the core business of LEGO.

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Who: CEO Jorgen Knudstorp should be the responsible prior to the approval by the Christiansen
family whom own the company.
When: between 6 months and 1 year as far.
Where: different locations.
Alternative #2
What: Development of a business units.
How: the development of a business unit entails a comprehensive analysis of how is the current
business or how it should be, assessing the sources of competitive advantage and then defining a
plan to capture and sustain an unassailable relative advantage over competitors.
Who: CEO Jorgen Knudstorp should be the responsible of this task
When: between 6 months and 1 year as far.
Where: Billund, Denmark.

Recommendation

We recommend applying a combination of Alternative#1 and Alternative #2. The reason of


our recommendation is due the high exits barriers that could represent get rid of all theme parks
and video games, which could be potential business opportunities. Also the development of a
business unit fulfills the desire of growth that LEGO is craving but in a structure way, The CEO
should conduct the answers to the essential questions: How well are we positioned in relation to
competitors? What can we do to enhance our relative advantage? What can we learn from
costumers today to better compete tomorrow? What specific moves will position us for greater
success? Can our current business model take us into the future?

Implementation

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Changes in corporate culture: after founding that the complexity and the excessive
unstructured diversification taken by the head leader of LEGO has harm its business its corporate
culture will change turning in orientation to the core business of the company. Which is the
plastic brick. Even though, the company enjoys of a sufficient source of innovation, so by
structuring a growth plan and wiping of the harmful traits and manners better results could be
found.
Changes in Product-Operations: on the assessment perform over the case it was found that a
lack of structure and planning drove the firm to make bad decisions over 20 years. Obviously
this is reflected over the claims of the product developers whom never take into the account the
reactions of including new designs and as well increased the level of complexity over the
process, all these sum to the unrelated business in which the firm did incur. Once focusing on the
main gap of the production it expected that several cost found reduced and operations reach a
high level of performance.

References

RIVKING, J., THOMKE, S., & BEYERSDORFER, D. (2013). LEGO (A): The Crisis. The
Harvard Business Review, (9-713-478), 2-7. Retrieved September 17, 2014, from https://hbr.org/
Vang-Pedersen, M. (2013). Valuation of LEGO Group. Retrieved September 17, 2014 from:
http://studenttheses.cbs.dk/bitstream/handle/10417/4035/morten_vang-pedersen.pdf?sequence=1
Alves, P. (2012). LEGO Strategy Analysis. Retrieved September 17, 2014 from:

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http://pedroantaoalves.files.wordpress.com/2013/04/strategicmanagement_lego_10de12.pdf
The Lego Story: 80th Anniversary Video by the Lego Group [Motion picture]. (2012).

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