Lego Case Study: Free Sample Case Study To Follow

LEGO is a Danish company that was founded in 1916. Now this company is very popular around the world thanks to the legendary bright construction toys that develop imagination of the children. However, LEGO has been experiencing a very large number of problems since the late 1990s. In the case study the central focus is given to the LEGO’s business strategy that failed to respond to the changed buying habits and globalization issues that significantly reshaped the toy industry. Some of the reasons of the LEGO’s failure include the decision to open one more own plant in the Czech Republic instead of outsourcing production to Asia, overstocking or lack of inventory due to the absence of proper controls at the production sites, changed habits of the children that nowadays prefer to play video games and have very little free time, because they study much more than before.
If to apply the five forces model to this case, one will see that LEGO operates in a very competitive business environment even though LEGO’s products are unique and extremely hard to copy. In 2004 the toy industry had the wholesale revenues that equaled to $61 billion and the retail market gradually grew by approximately 4% every year. Nevertheless, the growth rates for the specific companies were very unstable. The same thing concerns LEGO. In 1999 the company was profitable, in 2000 – there was a loss, and in 2001 it grew again.
In terms of the competitors there are two very strong companies such as Mattel and Hasbro that own the key toy brands. There are also many smaller companies. In the past few years the majority of the companies realized that they can achieve a competitive advantage if the subcontract the production to the companies in Asia or other developing regions. After they outsourced the production, they could focus on the development of new innovative toys. Unfortunately for the LEGO, the top managers decided to stick to the conservative managerial approaches and therefore they still control the production process of most of the toys. In terms of the supplier power, LEGO is very independent, because it does not subcontract production. However, in the case study there is no information concerning what supplier choice LEGO has.
In the aspect of the buyer power, there were some dramatic changes in the developed countries that had a very negative impact on LEGO and other toy producers. Nowadays children have much more after-school activities and they started to give up the traditional toys even though the buying capacity of their parents is very high especially in the developed countries. Now children would rather play the online games. Moreover, parents often buy the toys that they think will be useful for their children. LEGO was trying to react to these trends by introducing a wider range of products and offering the online games, but the financial results turned out to be very unsatisfactory. So the company is still looking for the proper product range that will correspond to the buyer power.
Threat of substitution and threat of new entry should be of the greatest concern for LEGO. The company offers very unique toys that are hard to replicate, but there are many other companies in the toy industry that also offer innovative toys that grab attention of the customers. In addition, the company has to sell its products through many distribution channels, and sometimes it is very difficult to get enough space for laying out a wide range of the LEGO’s products. This is why LEGO decided to open own stores so that the buyers could have more choice. In the other business segments, LEGO is also exposed to the threat of the new entry, because there are not any durable barriers that do not allow the new entrants. The company has not been able to preserve a favorable position and ended up in the situation when it reacted too late to the changed markets. The new business strategy has been very ineffective in terms of reaching the business goals that were set up by the top managers hired in 1999.
In the case study it was written that the company developed the new business strategy when Poul Plougmann became a new CFO of the company. The main idea was to restructure the company in order to cut the costs by $140 million. LEGO was going to make more than 10% of the staff redundant. Moreover, 60% of the top executives had to leave the company too. Some other vital intentions included streamlining the production, improvement of the organizational structure, and better focus on the customers and their preferences.
As the result of the new strategy there were many rotations at the top level. Product development concept centers were opened in the global cities such as Milan, London and San Francisco. Production was aligned with the planning forecasts. Some small factories were sold and one new plant was built in the Czech Republic. In terms of the sales, LEGO decided to sell toys online or open own stores in the key markets. In addition, the new product lines were introduced. One of the most successful lines was the movie-related toys. LEGO Star Wars toys became the most sold products. The company also expanded in the new markets of online games, theme parks, etc.
Nevertheless, despite some very radical transformations, there were many weaknesses in the strategy. Executive Vice President of the Global Supply Chain at LEGO Bali Padda said after the strategy was introduced, there was no discipline and accountability and therefore the production costs were rising. In addition, the retailers were dissatisfied because of the stock-outs and very slow-moving inventory. The customers were also disappointed when LEGO decided to rebrand the LEGO DUPLO toys for children. Finally, the company realized too late that the new products negatively influenced the sales of the core products. As the result, in 2003 sales declined by 29%. Many top managers decided to leave the company after being unable to reach the positive financial results that were needed to save the company from bankruptcy.
Thus it seems that now the company’s competitive advantage is its brand name and concept. LEGO is regarded as a legendary brand that is always responsive to the customers. Even though the decision not to outsource production to the developing countries led to the increased costs in comparison with the costs of the competitors, one can see that the quality of LEGO’s products remains very high. In addition, a very broad product range and having own stores may also be regarded as the competitive advantage. The other companies sell their products in the stores that do not belong to them and therefore they do not have enough space for showing all their products and they have to pay the commissions for the sold products. Opening own stores helps LEGO to seek prominence in the competitive business environment.
Now the company is facing many challenges. In order to resolve all of them LEGO has to develop a new business strategy that will take into account all the mistakes that were made in the period of 1999-2004. First and foremost, the company should take the historical decision to outsource production to the countries where the labor force is inexpensive and where there are industrial clusters with sufficient resources that could speed up the production process. According to the case study, LEGO’s production capacities are located in Europe and there are no strict regulations how the production process should be carried out. As the result, there are many problems that were already mentioned in this paper. So opening the factories in the other countries in Asia, Eastern Europe and South America could reduce the production costs.
Secondly, the company should assess the profitability of all business segments in which it operates – online games, theme parks and selling toys require very different managerial approaches. Perhaps LEGO could create several daughter companies that would be more flexible and effective. The newly created companies could use the LEGO brand and other innovative ideas that belong to LEGO in order to get a competitive advantage.
Thirdly, LEGO should restructure the product range and stop producing the toys that bring the least revenue. In Exhibit 3 of the Case Study, one can see that since the 1980s the number of the distinct LEGO components increased six-fold up to 12,000 components. It means that now there is a variety. However, there are many problems when the toys are assembled, because a rare component of the toy that consists of 675 pieces may be missing. So, LEGO should optimize the number of the components and improve the inventory system in order not to allow the stock-outs. What is more, the company should think of the ways how the movie-related toys should be sold so that the core products did not suffer. Perhaps the limited editions or other distribution channels should be used in order to sell such toys.
Finally, LEGO should gradually build up its online presence, because more and more people, especially children prefer to spend time on the Internet. LEGO should develop e-commerce and increase presence on the social media where it can reach the customers and learn their preferences better. As the result Lego’s brand awareness will increase and the company will stay competitive and technologically innovative.
The reasons for the recommendations provided above are sensitive to the current possibilities of the company. It is obvious that the company cannot apply the managerial approaches that were popular in the XX century. A centralized production process may help increase the quality of the products, but the customers are very price sensitive, and will buy the toys that are much cheaper. Therefore LEGO has to outsource the production. Outsourcing may also help LEGO to become more popular in the large developing countries including China and India. What is more, the company created too many business divisions and is not able manage all of them – so the business divisions should receive more freedom in order to respond to all the challenges. Finally, rebuilding the product range and developing the online presence will help the company to be in touch with the young generation.
If the company introduces such changes, it will receive some positive financial performance implications. First of all the number of distinct LEGO components will stop growing and in fact might decline if the company decides not to expand internationally. The company has been producing more than 10,000 components since 2000 which is the result of the business strategy that was initiated by the new managers who wanted to restructure the company. The reduced number of produced components will lead to the lower expenses that equaled to DKK 6,252 million in 2004. As the result the net profit will increase and will be higher than DKK 1,931 million. The company will spend less than DKK 5,141 million on the liabilities and provisioning. One more important financial that will significantly decline if the company decides to outsource production is the number of the employees that work at the factories in the developed countries. In 2004 the average number of full time employees equaled to 7,345 people. If the company decides to build own factories in the other countries, the expenses related to the personnel will decline. In turn, if the company decides to outsource production by means of sub-contracting, the financial benefits will be even higher. Though, the process of outsourcing cannot be completed quickly, because there will be a lot of criticism in the key markets and especially in the home country Denmark.
In general the proposed recommendations may help to restructure the company from the organizational standpoint. The company will become more global and follow the strategy that many of its key rivals have been applying for many years. Changes in the product range and online presence will build up a solid customer base and drive down the expenses that the company has been unable to control since 1999.