Until 2004, LEGO had an impressive product portfolio, with no less than 7

categories:

pre-school products such as Lego Duplo,

creative building,
play themes such as Lego City line and Bionicle,
licensed products built around movies or books such as Harry Potter, Star
Wards and Indiana Jones,
Mindstorm Nxt, mainly the programmable robot kit
LEGO Education
LEGO Games including mainly board games.

The underlying logic of the entire product portfolio was to reflect the fact that
children grow older and develop, and thus demand more challenging stimulation.
However, the act of diversification resulted in vast complexity and inefficiencies, as
well as highly confused customers and employees.
One other problem consisted in the way in which the company was organized, that
is a form of matrix management. There were 12 senior VPs that were overseeing 6
regions, operating in silos with little accountability. Moreover, there appeared to be
no form of assessment of product profitability. The company had no idea which
products were making money and which were failing.
In addition to this, the management was out of touch with the major customers as
products aimed for 2003 were competing for space on shelves already overstocked
with unsold merchandise.
Whats more, focus on the end user had ignored the means of access and
distribution. Also, the lack of profitable innovation was also apparent. Sales had
increased but the bottom line had deteriorated. There were lots of new products but
no profitability.
After the changing of the CEO, careful scrutiny of the organization made the LEGO
Group aware of the fact that its ineffective and inflexible supply chain was a key
problem. In Knudstorps perspective, the supply chain is a companys circulation
system. You have to fix it to keep the blood flowing
Knudstorp soon had a meeting with Chris Zook, the author of Profit from the Core
in which he argued that profits arise when companies focus on core products for
clearly defined customer groups. Zook suggested that growing companies could
afford perhaps one adjacent market move every five years and Knudstorp realized
that LEGO had been trying to develop not one adjacency every five years but
something like five adjacencies every year. Each move had demanded a special set
of skills away from the basic skill set within the LEGO business. Knudstrop was to
herald a return to basics, to the LEGO brick. A focus on profitability, especially the
basic potential of the core products had to be implemented.
The business had to focus on retail