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The Lego Group: Building Strategy Case 10

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    The Lego Group: Building Strategy, Case 10 Overview LEGO, the brand of toy that has been played with by multiple generations of people was founded during the Great Depression in 1932 by Ole Kirk Kristiansen, a Danish carpenter. Kristiansen started making toys out of wood and had 12 employees under him. The word LEGO combines two Danish words leg and godt, which mean “play well” and in Latin, fittingly means “to put together”.

    It’s ironic that LEGO was given that name because it was only later that Ole’s son Godtfred Kirk Christiansen strategically noticed an opportunity of creating the “LEGO system of Play” which was the idea that and every LEGO brick should connect to each other across multiple sets. The strategy was simple. Each set obtained by a child increased the amount of LEGO bricks the child would be able to play with. More sets meant more creative possibilities.

    Within this first strategic maneuver lied one of LEGO’s first mission statements which were “to create a toy that prepare the child for life, appeals to the imagination and develops the creative urge and joy of creation that are the driving force in every human being”. After perfecting the brick design by adding “clutch power” through connection tubes, which enabled the bricks to lock together firmly yet come apart easily, in 1958 Godtfred submitted an application for patent of the LEGO brick design in Denmark.

    During the 1960’s the company decided to stop it’s production of wooden toys and focus completely on the LEGO brick and System of Play. Later during that decade, the company grew to over 600 employees and grew its brick design to include over 200 different shapes such as wheels, flat bricks, train tracks, windows, doors, and flags. This was further implementation for their business model and mission, which was to enable creativity. More options for pieces to connect meant more creative possibilities. They then introduced building instructions for each building set. In the 1970’s, LEGO grew to over 2,500 employees.

    They developed new sets that included a series for girls like furniture and doll houses. They ships out of LEGO that could float in water. The LEGO Technic series was implemented which were models that contained bricks with mechanical moving parts. Other series like LEGO Castle and LEGO Space were then implemented as well. In 1979 the company again changed leadership to the third-generation Kjeld Kirk Kristiansen, Godtfred’s son, became the new president and CEO of LEGO. In 1982, LEGO reached its 50th anniversary and the company kept on growing, creating new products like DUPLO for babies and an educational line for schools.

    Looking for more ways to expand creative possibilities, they combined bricks with technology which included the Light and Sound series as well as a motorized Technic series in 1986. Lego continued a strategy of not only adding new series of models but adding addition models to that series. Examples of this are there increasingly popular Castle, City, and Space series where each had new model sets being released each year. The LEGO Pirates theme was launched during this time. They also made buckets full of bricks that didn’t contain instructions. This allowed for their continued mission of creative building.

    With much of this growth, LEGO wanted to stay connected to it’s growing market by releasing a multinational magazine to keep in touch with their market and keep customers up to date with new product information. In 1990, LEGO became a global company as one of the top 10 toy manufacturers in the world. They fully expanded into 7,000 employees and had a total of over 1,000 plastic injection machines housed in five factories. LEGO’s brand really shined during this time and the company wanted to capitalize on that brand by opening LEGO stores. In 1996 they launched www. LEGO. om. They also continued to introduce new themes into their product line. They even offered a vacuum that would help kids pick up bricks. In 1997 Lego switched gears and expanded by offering a new product – A LEGO computer game. They created the LEGO MINDSTORMS line, which allowed users to build and control complex sets with the use of computers and remote controls. In 1999, it made another strategically different yet important move by acquiring the rights to movies and children themes. These enabled the launch of LEGO Star Wars and DUPLO Winnie the Pooh product lines.

    The Star Wars theme was an instant success and became one of the most profitable product lines. This led to fully implementing this new strategy by obtaining other rights popular licensed intellectual property like other Disney themes, NBA Basketball, Soccer, Bob the Builder, Dora the Explorer, etc. When LEGO found that it had many different licensed rights they began to expand their computer game market share by partnering with videogame design companies to develop computer games as well as video games for game consoles. They started with 30 games being released between 1997 and 2009.

    Strategically this was smart because, since LEGO has been around for over 70 years, they market to young kids yet still are popular with adults that have grown up playing with LEGOS as kids themselves. The video games ended up being a hit with children and adults. At this time, there was a market for more age appropriate video games that didn’t include violence or other inappropriate behavior. LEGO tapped that market. They also continued to expand by offering an online virtual universe for interacting with other online users and building personalized LEGO mini figures.

    LEGO then introduced a digital designer software which allowed customers to design their own products and gave the option for the customer to buy the product with costs of materials all calculated for purchase. In 2010, LEGO sales reached a record of DKK 16. 014 billion. It’s the fourth largest toy manufacturer in the world with over 9,000 employees. It’s a household name and icon that is found around the world. It started as a twelve man operation and since then has produced over 400 million bricks, with 19 billion new bricks being made each year.

    Successful Corporate Strategy in the Past In 1999 to 2004, LEGO lost money. Revenues dropped 30 percent in 2003 and dropped another 10 in 2004. The problem was not with product itself, but with distribution and manufacturing. Kjeld stepped down as CEO and was replaced by Jorgen Vig Knudstorp who was originally director of strategic development in 2001. He assembled a team of executives that looked at every aspect of LEGO’s supply chain that included materials sourcing, new product development, production, and distribution.

    What they found was that new product sets were becoming more complicated and provided less profit in return. The cost of materials and production was increasing and becoming too much of a burden on the financial health of the company. Inefficiencies were found in plant plastic molding machines where they were only operating at 70 percent capacity. Distribution costs were too high which created a backlog of more inefficiency in inventory. Too much time was being spent with small independent stores where they were only getting one third of their revenue.

    LEGO had to find ways to cut costs. So they first cut the number of brick colors in half. This resulted in an 80% reduction in suppliers needed for production. They then increased production capacity by scheduling certain LEGO bricks on certain plastic molding machines on production cycles. This made labor more efficient and reduced the amount of downtime. They reduced the number of logistic suppliers from 26 to 4. They made larger hubs for distribution located in areas closer to retailers. This provided more control over inventory and would reduce shortages.

    They also provided discounts to smaller stores as incentives for placing orders early. They would also only ship cartons that were full. All of these changes in design, production, distribution, and sales led LEGO to increase its inventory turnover by 12% and in 2006 having profits increase by 240%. Competition LEGO has had some competition ever since it gained popularity in a variety of countries. Construx in 1983 and K’NEX in 1992 were both connector piece toy brands and each had their own types of connector pieces.

    TYCO made what it called Super Blocks in 1984 that was very similar if not almost identical to LEGO bricks. Not only that, TYCO marketed there item as being the cheaper alternative to LEGO in slogans like “If you can’t tell the difference, why pay the difference”. LEGO filed a lawsuit against them and won. Since LEGO’s patent expired in 1988, the barriers of entry for competition were brought down. MEGA Bloks was LEGO’s largest competitor that saw 17 years of sales growth and over 188 million dollars in revenue.

    It became the second largest toy building manufacturer behind LEGO. It had many licensing agreements that included Caterpillar, HALO video game, Marvel Comics, Disney among others. It also had 12 percent of the market share. In 2011, competition will heat up with Hasbro planning on launching a building block line called Kre-O that would be compatible with LEGO blocks. This product is a big threat because of the size of Hasbro being the second largest toy manufacturer. Kre-O has sets that contain two sets of instructions that make two different items with the same pieces.

    An example and popular item is the Transformer Kre-O can either be a vehicle or a robot. Problem/Critical Issue Where does LEGO go from here? With recent acquisition of Marvel Entertainment by Disney, LEGO is worried about all of the licensing potential that Marvel has because Hasbro has an existing license agreement to produce Marvel toys and games until 2017. This creates fierce competition of intellectual property between major toy manufacturers. For comic characters have proven to be a huge success within the film industry.

    The potential for market growth could be large for any toy manufacturer getting exclusive rights to all Marvel 5,000 plus characters. Analysis/Recommendation LEGO is a brand that is globally known like Coke and Nike. With the tremendous success it has had with sales in Star Wars video games and LEGO Star Wars product lines it, it would be a good idea to get licensing for product lines that contain the same type of popular characters or story as Star Wars. Other movies or TV shows are good places to look. Video games are a must as well.

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