Colin Stein

Lego Case
Summary

LEGO’s storied history, from its humble beginnings in high-quality wooden toy
production, through its forty year growth and rise to global dominance, leading up to its near-
financial collapse in late 2004, carries with it, as all epic stories do, a sense of irony. The
systematic organization introduced by Godtfred Kirk Christiansen to the toy world in 1958, a
critical strategy that laid the foundation for all of LEGO’s future success, failed to carry over to
the company’s own operational strategy as LEGO matured in the late 20th century. The great
emphasis placed on systematic organization in the product itself never translated to the
company’s supply chain; as the production and sales of toys evolved, LEGO refused to
restructure its own operations to match the systematic organization that it had long touted as one
of the company’s founding principles.
As LEGO entered the maturity phase of its product’s life cycle in the late 1980s and ‘90s,
with significant competitors like Mattel and Hasbro growing, consolidating, diversifying, and
solidifying their place in the toy market, LEGO remained entrenched in an operational structure
suited for a foregone era. As LEGO grew, so did its product line, resulting in the ever-increasing
complexity of not only the products themselves, but also the ordering, production, delivery, and,
perhaps most importantly, forecasting of LEGO products. The failure on LEGO’s part to adapt
both its supply chain and overall managerial strategy to the complexity of its product line
resulted in major supply and demand forecasting errors; Bali Padda, Executive VP of LEGO’s
Global Supply Chain, discusses this problem:

And management did not see the impact of this on design, manufacturing, servicing of
retailers, forecasting, and managing inventory. You could be out of stock for a product
just because you miss one of its 675 pieces, which you did not make when you got the
forecast wrong (5).

Failure to place an order for a single piece, used in any number of box sets, would halt
supply of all the products in need of that piece. The inherent complexity of forecasting,
particularly within LEGO’s disorganized supply chain and management structure, resulted in
significant supply inconsistencies, reminiscent of global cosmetics giant Avon in the ‘90s: the
products that didn’t sell as well resulted in rising inventory costs, while the products that did sell
well weren’t available because forecasting was off. This hurt LEGO’s relationship with
disgruntled retailers, raised costs, and decreased revenue, because those that wanted to buy
popular LEGO products simply couldn’t.
The costs associated with inconsistent inventory forecasting were exacerbated by
LEGO’s marketing and new product development strategies. Starting with the wildly popular
LEGO Star Wars product line in 1999, a response to the release of a new Star Wars film, LEGO
grew too attached to and dependent on the success of a movie for the success of its products. The
result was mercurial profit and loss year over year; in one year, LEGO would surpass
expectations and net profit reflected the success of strategic brand partnerships with film
franchises like Star Wars and Harry Potter. The next year, with no film, LEGO’s net profit was
once again in the dumps. This marketing and product strategy, tied closely with its financial
stability, was wholly dependent on whether or not a blockbuster movie licensed by LEGO in its
products would be released that year. This was a dangerous game to play, and LEGO felt the
financial impact of it.
Discussion Questions

1) What has led the LEGO Group to the edge of bankruptcy?

LEGO’s main problems revolve around its supply chain management and marketing
strategies. As discussed above, the over diversified product line, a product line far too
complex for LEGO’s supply chain system, resulted in inventory inconsistencies. Slow-
moving products caused inventory costs to rise, while stock-outs of popular products
frustrated LEGO Group’s major retail customers and, subsequently, the day-to-day shoppers
who wanted popular products that weren’t available.

LEGO’s marketing and product strategy also hurt its bottom line in a major way. LEGO
relied too heavily on the temporary success of its strategic brand partnerships with major
movie franchises, success which was unpredictable and unreliable. The company’s new
product development and innovation, factors which could have helped smooth out the huge
profit swings between films, were nearly non-existent. The rising costs associated with its
supply chain inadequacies, coupled with diminishing revenue and profit from poor marketing
and financial strategies year after year, ultimately led LEGO to the edge of bankruptcy.

2) What is your assessment of management moves during “the growth period that wasn’t”
(1993-98) and “the fix that wasn’t” (1999-2004)?

The Growth Period That Wasn’t

During this period, management focused on huge investments in market research and product
line expansion and complexity. Overall, decisions were made to invest capital in LEGO’s
brand, and leverage the brand in the same way Disney and Nike had to take advantage of
some “untapped potential” that LEGO saw in its brand and company. This investment
strategy proved unsuccessful, as the significant investments in marketing to grow the top line
only resulted in stagnant sales. It seems that during this time, LEGO threw money at
anything and everything, “without necessarily having an eye on their margins (4).”
Videogame software, movies, television, books, children’s wear, watches, robotic bricks,
more complex product designs. You name it, LEGO invested in it. This somewhat frivolous
investment strategy, with little to no attention paid to the margins of each new product, was a
poor management move.

The Fix That Wasn’t

The fat-trimming, cost cutting solutions of new CFO Poul Plougmann during this time
resulted in an even more inadequate supply chain system. With rising complexity came rising
costs. In an attempt to lower these costs, inventory forecasts were negatively affected. The
new brand and financial growth strategy, linked directly to the success of major film
franchises, proved to be a failure, resulting in unpredictable profit swings and stagnant
growth.
3) As Jørgen Knudstorp, what would you do throughout the LEGO Group in order to turn the
company around? Be specific.

1. Create a centralized planning group comprised of managers from major markets

around the world. Have them study demand and inventory levels across the region,
and create a system to view sales trends of LEGO products and related inventory.

2. Install a supply chain and scheduling system, to support planning, coordination, and
forecasting throughout the region. Put a regional team at the top of this system, to
make decisions about inventory, supply, and costs from an external perspective,
looking at the supply chain situation as a whole.

3. Take LEGO into the 21st century. Invest heavily in product innovation to expand
LEGO into tablets, computers, and console systems.

4. Leverage the strong brand partnerships with film studios. Make movies (Like the
company did with LEGO Star Wars and LEGO Batman). Going even further, partner
with streaming services like Amazon Prime and Netflix, two companies who are
looking to create content on their own. Interactive LEGO TV.