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LEGO's Turnaround

Updated on February 1, 2018

Analysis of LEGO's Turnaround Case

Introduction

Lego’s revival from a company nearing bankruptcy to a high performing entity has been considered to be the greatest turnaround in the history of business. Since its formation back in 1932 to 1998, Lego had not recorded any significant loss. However, the company found itself in big trouble in 2003. During this time, there was a drastic reduction of its sales by 30% year in year out while their debts were in excess of $800m. Lego went further to seek the counsel of such companies as Matchbox boys, Hot Wheels, and Fisher-Price. These companies had a varied and broad portfolio. However, their advice did not work out for the company and it almost got out of order. In 2015, the Lego Group began recording massive profits, overtaking its rivals by big margins, thanks to the new strategies by the company. This turnaround of Lego is credited as the greatest in corporate history.

Reasons why Lego Faced Bankruptcy in the early 2000s

In order to sustain itself in their industry, Lego came up with a number of strategies in the early 2000s that were borrowed from business experts. Among these included 1) Hiring innovative and diverse staff, 2) Creating products that were game changing, 3) Seeking assistance from different constituencies, 4) seeking markets that have lesser competitive where the firm can dominate (MINICASE 12 420). Lego perceived the advice of the business experts as a sure way to achieve the expected success.

An internal analysis initiated by the firm indicated that there was nothing of value that had been added to the company portfolio for over a decade. This stirred the business to hire outside consultants and strategies to device the best way of turning around the company’s fortune. Some of the strategies that were proposed as a way of leveraging the issues bedeviling the firm included but not limited to diversification (Mincase 12 435). There argument was that having been existed since 1950s, the brick business was now obsolete.

However, by 2004, the firm’s debts rose by more than $1 while sales declined by 40% in just two years. At this period, there were a lot of internal problems that was experienced by this entity. For instance, the chief marketing officer of Lego, Mads Nipper, at that time and the management did not have an idea on how much the business used in manufacturing many of its products. Furthermore, they also did not have sufficient idea on how much were generated from specific sets. The most interesting realization was in regard to the type of sets which included LEGO fiber-optic and micro-motor kits (Chao1). In both of these cases, it costed more for LEGO to source these specific parts than the entire selling price of the whole set, subsequently leading to a significant loss.

Among the reason for these missteps is the overreliance of graduates from top design colleges in Europe who did not harbor practical experience in Lego processes. Despite their great knowledge, these designers did not know much about practical toy design, as well as Lego building. Moreover, certain sets were more costly for Lego to produce than the price at which the sets were sold at. This translated that each set brought a loss instead of profit to the company. This was certainly due to poor management which nobody was aware of. Therefore, generally, during 2000s, Lego did not harbor a good operations management system (Chao1). Indeed, poor management and the business structure contributed to failure of the instituted plans and strategies.

Lego’s business structure was certainly quite complex. This complexity made it difficult for them to run the business and to realize their growth potential. The high level of investment which they thought was good for the company failed to materialize to the benefit of the business (Ringen 1). The management was thus compelled to reduce this complexity to create an efficient and a leaner business that cans response to the current business needs.

Stiff rivalry was another reason why Lego were performing badly. In 2004, the firm was facing intense competition from such companies as Hasbro and Mattel. Some of these companies had a more competitive edge than Lego whether in structure, management, products, price, and technology among others. During this time, Lego could not make a significant level of sales and as such, encountered debts amounting to more than $1 billion. Additionally, there was a slump of sales by more than 40% in just two years (Mincase 12 444). Therefore, core factors that had contributed to Lego’s bankruptcy include poor advice by consultants, intense competition in the market, and finally poor management and organizational structure. These had to be looked at accordingly in realigning measures.

Lego’s Core Competency

Unique toys are among the core competency for Lego. Some of its toys are made from a specific set such as Harry Potter sets while others are made from assorted colors and sizes. Alongside the peculiar products are popular conventions such as those in Seattle, Washington. In these conventions, Lego fans, both old and young are allowed to visit and shop for a diversity of models created by Lego from various parts of the world. Furthermore, the firm understands the importance of customer management and as such they recruit the AFOLs who are the most passionate to act as its representatives and consultants on existing, upcoming and new product lines (Ringen 1). The brand is therefore, keen to adjust to the consumer’s changing preferences while working hard to maintain its values of caring, creativity, imagination, quality, fun, quality, and learning.

Lego also enjoys distinctive competencies which assist it in obtaining a competitive advantage. Among these include creativity and innovation, large scale production facilities, knowledge and skills in the required raw materials, knowledge in product designing, effective supply chain, a focus on high standards and quality, and reputable brand name. Furthermore, Lego has also a flexible backbone mode. In particular, the hybrid system offers support and a lost cost messaging to its customers. In addition, the precise tailoring of products and the sense of collaboration ensure that customers are given what they prefer (Chao1). This partnership helps the company in logistics, education, augmentation, new product development and technical support.

LEGO’s Competitive Advantage

A combination of four factors defines LEGOs competitive advantage. These factors include its pricing, assortment of merchandise, brand equity and visual merchandising. Throughout the world, LEGO is known as a popular toymaker. Furthermore, the themed retail stores provide clients with engaging in-store experience thanks also to its unique product lines (Hansegard 1). This uniqueness of the products alongside the peculiar experience helps to drive sales in the toy market.

Majority of Lego’s products are mainly centered on construction toys. Lego customers are able to proceed with their relationship with the firms products through YouTube clips and video games presented online. There are endless opportunities for construction toys, and this is presents an overarching advantage for Lego over its competitors. With the construction toys, products can be futuristically themed, historically themed or harbor a present theme (Chao1). This adds to the products uniqueness.

Since 2005, LEGO was able to growth in a tremendous level. Among the reason for this tremendous growth is the Lego community which is regarded as the core asset of the firm. The power of customer contributions was realized in 2005 when the firm began engaging enthusiastic fans in development of products. Furthermore, the management particularly the CEO had a regular meeting with Lego’s adult fans. Since that time, the company continues encouraging its fans to interact with it in different ways as well as offer their ideas on product development. This worked by attracting a massive number of adults to play with Legos. In addition, there are more designers will to work with Legos on a voluntary basis and these are accessed to help the company in inventing. Interestingly, there is a platform where customers are allowed to design their own products which are then sold to them or to others using the company’s design software (The Economist, March 8, 2014). In this approach, the company is able to articulate the weaknesses and strengths of specific products as observed by the super users in platform provided.

It also needs to be mentioned that the mission statement of LEGO celebrates innovation and creativity of children. By adhering to this mission statement, the firm’s products have enabled them to remain relevant, particular to its niche market of children’s toys within the age bracket of 6-12. It also needs to be mentioned that LEGO conducts an update of its product line on a regular basis and most of them feature construction sets that are themed with the latest movies.

What Must Lego Do to Sustain Its Competitive Advantage

In order for Lego to leverage its competitive advantage, diversification is one of the best strategies it needs to embrace. Although there was a focus of this strategy by LEGO, the management had done it in the wrong way. Indeed, the entity had attempted becoming a lifestyle brand with its own line of video lines, the clothes line, and even watches. In this regard, the firm attempted to refocus energies on attracting girls and such began neglecting its core customers, who mainly consisted of boys within the age of 6-12. However, this was regarded arrogance and failure to listen and consider the needs of customers. In this regard, although the diversification should be extended to targeting girls, it should not ignore its core customers. Furthermore, the diversification should also entail the manufacture of more product toy lines than what currently exists. The widened variety of toys would subsequently increase the firm’s market base and hence; sales.

Geographically, it would also be important if LEGO created its presence in more countries. Though the businesses products are currently sold in more than 130 nations, there are still more nations that could present a viable business opportunity for LEGO. In particular, developing countries present more opportunities for growth.

Conclusion

In general, this analysis makes it clear that the failure of LEGO before its landmark turnaround was a result of poor management. The company went bankrupt while in the hands of Ole Kirk Christiansen, the single business owner who did not have an experience or skills in running a complex entity. The case informs that effective management of a business entails capable, well trained and focused leaders as well as effective strategies. With clear goals and objectives and effective leadership strategies, it is possible to transform a loss making firm into profitability. In the meantime, LEGO still has immense opportunities to grow and expand its business. As already seen, there is still more diversification needed in terms of product coverage and in geographical perspective. In product diversification, the firm needs to add more products to its portfolio and consider all calibers of customers. In geographical perspective, the nation needs to venture into more countries especially developing nations where opportunities for growth abound.

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