LEGO The LEGO Company is a $1.6 billion global business built out of the humblest of materials: interlocking plastic toy bricks. From its base in Denmark, the family-owned LEGO empire extends around the world and has come to include theme parks, clothing, and computercontrolled toys. Each year, the company produces about 15 billion molded plastic blocks as well as tiny human figures to populate towns and operate gizmos that spring from the imaginations of young people. LEGO products, which are especially popular with boys, are available in more than 130 countries; in the key North American market, the company's overall share of the construction-toy market has been as high as 80 percent.
Kjeld Kirk Kristiansen, the grandson of the company's founder as well as the main shareholder, served as CEO from 1979 until 2004. Kristiansen says that LEGO products stand for "exuberance, spontaneity, self-expression, concern for others, and innovation." (The company's name comes from the Danish phrase leg godt, which means "play well.") Kristiansen also attributes his company's success to the esteem the brand enjoys among parents. "Parents consider LEGO not as just a toy company but as providing products that help learning and developing new skills," he says. LEGO has always been an innovator.
For example, Mybots was a $70 toy set that included blocks with computer chips embedded to provide lights and sound. A $200 Mindstorms Robotics Invention System allows users to build computer-controlled creatures. To further leverage the LEGO brand, the company also formed alliances with Walt Disney Company and Lucasfilms, creator of the popular Star Wars series. For several years, sales of licensed merchandise relating to the popular Harry Potter and Star Wars movie franchises sold extremely well. After a disappointing Christmas 2003 season, LEGO was left with millions of dollars worth of unsold goods. The difficult retail situation was compounded by the dollar's weakness relative to the Danish krone; LEGO posted a record loss of $166 million for 2003.
The company unveiled a number of new initiatives aimed at restoring profitability. A new line, Quattro, consisted of large, soft bricks is targeted directly at the preschool market. Clikits was a line for pastelcolored bricks targeted at young girls who want to create jewelry. In 2004, after several years of losses, Jørgen Vig Knudstorp succeeded Kristiansen as LEGO's chief executive. Knudstorp convened a task force consisting of company executives and outside consultants to review the company's operations and business model. The task force discovered that LEGO's sources of competitive advantage- creativity, innovation, and superior quality-were also a source of weakness. The company had become overly complex, with 12,500 stock-keeping units (SKUs), a palate of 100 different colors for block, and 11,000 suppliers. Acknowledging that the company's forays into theme parts, children's clothing, and software games had been the wrong strategy, Knudstorp launched a restructuring initiative known as "Shared Vision."
Within a few months, cross-functional teams collaborated to reduce the number of SKUs to 6,500; the number of color options was slashed by 50 percent. Production was outsourced to a Singaporean company with production facilities in Mexico and the Czech Republic, resulting in the elimination of more than 2,000 jobs. Knudstorp also decided to focus on the company's retail customers, which include Toys "R" Us, Metro, Karstadt, and Galeria. After surveying these customers, Knudstorp and his task force learned that they did not require express product deliveries. This insight prompted a change to once-weekly deliveries of orders that were placed in advance.
The result: Improved customer service and lower costs. In the 3-year period from 2005 to 2008, on-time deliveries increased by 62 percent, to 92 percent. LEGO also logged improvements in other key performance indicators, such as package quality and quantity. In 2008, LEGO was awarded the European Supply Chain Excellence Award in the category "Logistics and Fulfillment." In 2006, LEGO launched a new generation of programmable robots in the Mindstorms line. As Knudstorp noted, "Mindstorms is as close to the core as you can come other than a bucket of bricks, which is the core of the core."
Discussion Questions
1. Jørgen Vig Knudstorp became CEO in 2004. Assess the key strategic decisions he has made, including outsourcing, divesting the theme parks, and launching new toys in the Mindstorms line.
2. In 2004, LEGO continued its entertainment promotional and product tie-ins with new Harry Potter and Spider-Man movies. Do you think this is the right strategy?
3. Using Porter's generic strategies framework, assess LEGO in terms of the company's pursuit of competitive advantage.