The LEGO case study explores the transformation of the LEGO Group, a global leader in toy manufacturing, under
the
leadership of CEO Jørgen Vig Knudstorp. It focuses on the company’s evolution from a near-crisis situation in 2004 to
becoming a robust and innovative brand by 2010. Key highlights include:
1. Crisis and Turnaround (2004-2005):
• Challenges: Declining sales, excessive product complexity, misaligned strategies, and rising operational
inefficiencies pushed LEGO to the brink of bankruptcy.
• Initial Actions: Knudstorp implemented the “Shared Vision” strategy focusing on stabilizing finances,
reducing debt, and streamlining the product portfolio. Non-core businesses (e.g., theme parks and video games)
were divested to focus on the LEGO brick and the core “system of play.”
2. Innovation and Operations Management:
• The company revamped its innovation processes by aligning them with consumer insights and internal
efficiencies. Design teams worked within strict guidelines to control complexity, ensuring that the reuse rate of
components increased without compromising creativity.
• LEGO returned to in-house manufacturing after outsourcing to Flextronics proved inefficient due to
misaligned operational models.
3. Consumer and Retail Focus:
• LEGO emphasized stronger retailer relationships by tailoring its offerings and aligning supply chain
operations with retailer needs, such as improving service levels and inventory management.
• Direct consumer engagement through online platforms, LEGO User Groups (LUGs), and the “LEGO
Ambassadors” program enhanced brand loyalty and community participation.
4. Resurgence and Results (2006-2010):
• Strategic re-launches of classic product lines (e.g., DUPLO, TECHNIC, MINDSTORMS) and new innovations led
to significant sales growth.
• By 2010, LEGO had achieved a 37% increase in sales and a 69% surge in profits, with its market share in
construction toys reaching 80%.
5. Future Challenges:
• The company faced a dilemma between limiting complexity for operational efficiency and expanding its
product portfolio to drive innovation, including potential entry into the board games market.
• Sustaining growth while balancing creativity, operational excellence, and brand consistency remained a key
focus.
The case illustrates LEGO’s strategic pivot from survival to growth through disciplined operations, consumer-centric
innovation, and a strong organizational culture.
1. What led the LEGO Group to the edge of bankruptcy by 2004?
A. The Growth Period That Wasn’t (1993-1998):
1. Market Misjudgments:
• Declining birth rates in core markets (Western Europe, North America) and reduced demand for traditional
toys caught LEGO off guard.
• Children’s preferences shifted to instant gratification toys, electronics, and video games, which misaligned
with LEGO’s strengths in unstructured, creative play.
2. Uncontrolled Expansion:
• LEGO stretched its brand too far by entering unrelated areas like theme parks (LEGOLAND Windsor),
children’s apparel, and watches.
• The company adopted a Disney-like “brand stretch strategy” without sufficient expertise in these fields.
3. Increasing Complexity:
• Product lines expanded without sufficient oversight, leading to a doubling of components from 1993 to
2004. This complexity drove up production costs, inventory challenges, and inefficiencies.
4. Weak Retailer Relationships:
• LEGO viewed retailers as a “necessary evil” and failed to focus on their needs. This led to poor collaboration,
lost opportunities, and stock management issues.
B. The Fix That Wasn’t (1999-2004):
1. Management Disruptions:
• Poul Plougmann’s “Fitness Program” cut costs and layers in the organization but ignored the cultural and
operational core of LEGO.
• Excessive rotation of managers created instability and diminished expertise in key areas.
2. Ineffective Outsourcing:
• Moving product design to creative hubs like Milan and London diluted LEGO’s understanding of its core
customer base.
• Manufacturing was outsourced or sold without understanding LEGO’s need for precision and consistency,
causing delays and higher costs.
3. Unfocused Product Lines:
• LEGO failed to prioritize high-margin core products, continuing to introduce new items that cannibalized
existing sales.
• Licensed themes (e.g., Harry Potter) drove short-term revenue but increased dependency on external
intellectual property, making LEGO vulnerable to shifts in market trends.
4. Lack of Operational Discipline:
• Costs spiraled due to inconsistent forecasts, misaligned manufacturing, and an inability to adapt inventory
levels to demand.
• LEGO lacked systems for tracking profitability by product or customer, resulting in significant operational
losses.
2. Why did Knudstorp’s strategy work?
A. Most Effective Actions:
1. Focus on Core Values and Products:
• Knudstorp streamlined the portfolio, eliminating ventures outside the LEGO brick system (e.g., theme parks,
video games).
• A renewed emphasis on the LEGO brick and its “system of play” brought the company back to its
foundational strengths.
2. Reducing Complexity:
• The number of components was cut, simplifying manufacturing and inventory while maintaining creativity
and compatibility across products.
3. Operational Efficiency:
• Outsourcing was reversed, and production was brought back in-house, ensuring tighter control over quality
and costs.
• A new sales and operations planning (S&OP) system synchronized supply with demand, reducing
inefficiencies.
4. Consumer and Retailer Engagement:
• LEGO shifted its focus to building strong relationships with retailers, aligning its product and distribution
strategies with their needs.
• The creation of the LEGO Ambassadors program and online community engagement strengthened consumer
loyalty.
B. Least Effective Actions:
1. Initial Manufacturing Outsourcing:
• The decision to outsource manufacturing to Flextronics failed, highlighting LEGO’s underestimation of the
need for specialized production.
2. Slow Move to Digital Innovations:
• While LEGO successfully launched online platforms and consumer engagement initiatives, it was slower to
capitalize on digital and hybrid play trends, delaying key opportunities.
3. Should LEGO launch the new line of board games?
Arguments in Favor:
1. Market Expansion:
• LEGO Games could introduce a new revenue stream by appealing to a wider demographic, including parents
and girls.
• The board game market is more stable and less seasonal than the construction toy segment.
2. Differentiation:
• LEGO’s ability to combine building with gameplay creates a unique value proposition that competitors like
Hasbro and Mattel may struggle to replicate.
3. Brand Strength:
• Leveraging LEGO’s strong brand could help overcome barriers in the board game aisle, where it lacks
established presence.
Arguments Against:
1. Complexity and Cost:
• Launching LEGO Games would require 250-600 new components, introducing operational complexity
reminiscent of pre-2004 challenges.
• Developing and sourcing durable boxes and specialized dice would increase costs and strain existing
resources.
2. Cannibalization Risks:
• Board games could dilute LEGO’s core brand identity and cannibalize sales of traditional brick-based sets.
3. Low Margins:
• Board games traditionally have lower profit margins and are often used as loss leaders, which might not align
with LEGO’s high-margin business model.
Recommendation:
LEGO should proceed cautiously with the board games line. To mitigate risks:
• Pilot Launch: Begin with a limited, test-market launch to gauge demand and operational impact.
• Leverage Existing Components: Use existing bricks and designs (e.g., minifigures) to minimize complexity
and cost.
• Target Niche Segments: Focus on family games that emphasize LEGO’s creativity and storytelling strengths,
appealing to parents and girls.
