Lego Essay

1. External factors that have led LEGO Group to the edge of bankruptcy:

• Demand for substitutes and change consumer behavior shown by industry trends – fad toys rising coupled with a decline in product life cycles; children having more after-school activities and less unscheduled time to play; children having shorter attention spans and seeking more instant gratification; demand shifting toward technology for kids over 3 and fashionable and electronic products
• Decreased demand – declining birth rates in core markets (Western Europe and North America) and declining household spending on toys; between 1993 and 2003, the total industry profit pool decreased by 50%
• Change in industry structure – mom & pop stores disappeared, retail channels consolidated, mass discounters featured toys more aggressively; competitors pushed manufacturing into Asia

Internal factors that have led LEGO Group to the edge of bankruptcy:

• Decentralization of decision making; pushing responsibility to frontline managers; dismissal of head of production
• Growth became the new focus – heavy investment in product lines expanding well beyond the core product (the brick) into media products, theme parks, clothing without considering margins
• Expansions were done in-house rather than through partners keeping costs high, whereas Lego’s competitors outsourced manufacturing for reduced costs
• Design of brick-based product lines became more complex and number of distinct components more than doubled since 1993
• Focus on operational efficiency rather than strategy
• Lack of discipline, accountability and coordination across the company

2. Assessment of strategic actions taken during the “growth period that wasn’t” (1993-1998):

• Establishment of 5-person management team, dismissal of head of production and shift of responsibility to frontline managers

• This led to decreased coordination, increased risk of confusion and did not provide a clear framework for decision making within the company as “[t]he businesses were encouraged to make their own decisions”

• New focus on growth, stretched brand, expanded product lines outside of core play system and experimenting with new ways of distributing without considering margins

• Attempting to focus on several avenues at once, especially away from the core product, led to compromises and inconsistencies which exacerbated the erosion of the Lego brand and the competitive advantage Lego once had with its target customers
• This expansion led to confusion amongst employees as well as the customers
• Some new products cannibalized core products

• “Disney-like brand stretch strategy”

• this attempt to re-position branding to become more Disney-like was not sustainable as no trade-offs were made, Lego did not place any limits on internal coordination and control and organizational priorities were not clear
• strategy generally rests on unique activities and bench-marking rivals such as Disney does not drive uniqueness

• New themes and products for brick-based product lines with more complex and chunkier pieces for faster assembly and quicker to play; that were also harder to combine with other pieces

• This was inconsistent with Lego’s original strategic position for its product defined in Godtfred’s 10 characteristics; specifically “7. development, imagination, creativity; 8. The more LEGO, the greater the value; & 10. Quality in every detail”

Assessment of strategic actions taken during the “fix that wasn’t” (1999-2004):

• Restructuring program – Ploughman’s “Fitness Program” – implemented to streamline production, reduce organizational layers, and increase responsibility and customer focus to build a simpler, more responsive, global business system

• Ploughman did not distinguish between operational efficiency and strategy as this program focuses on operational efficiency

• Managers moved around rapidly (every 6-12 months) and general leadership was valued more than direct experience with the product

• Constant change does not allow for the clear communication of strategy and reduces organizational motivation and focus

• Design responsibilities shifted to global product development centers while difficult to automate manufacturing processes were transferred from main factory to new plant in Czech Republic

• Focus on multiple product lines and an increasingly complex supply chain led to a decrease in coordination, created confusion and a reduction in motivation and focus
• Product developers and management did not see the impact of increasing the distinct shapes on design, manufacturing, servicing of retailers, forecasting & managing inventory
• Employees did not worry that fill rates varied between 5-70% nor that inventory costs, write-offs and obsolescence were high

• Salesperson incentives tied to whether actual sales exceeded forecasts

• Puts focus and priority on maximizing sales at any cost instead of company strategy without any internal coordination or control; if supply cannot meet the demand, can lead stock-outs

• Introduction of in-licensed brands (i.e. LEGO Star Wars)

• Products with movie tie-ins accounted for more than 50% of overall sales decrease during years without movie launches

• Re-branding of LEGO DUPLO

• Re-positioning away from core product and confusing to the customer

Strategic Plan: Lego’s strategy should seek to define and deepen its position as well as tighten its fit. In trying to expand beyond its core product, Lego got away from its strategic position and did not build on its unique product – the brick. Lego needs to refocus on the brick, reduce the number of components and promote optimization of effort across all activities.