1

BRAC University Corporate

Masterminds
 Full Marx
Eqra Md Resalat Ohee
Rafsaan Muhab Shams
Md Ayman Chowdhury
Sk. Ezaz Ahmed
 3

Industry Analysis
Market Growth
1. 4% growth per year
2. Seasonal Demand
01
Retail Competition
Changes in customer behavior
1. Kids shifting towards technology
2. Afterschool activities reducing
02 03 1. Strong retail competition for
shelf space
playtime for toys
2. Rise of many strong companies
3. Demand for fad toys surge or
3. Product life cycle declining
collapse rapidly
 SWOT Analysis for LEGO
Strengths Weaknesses Opportunities Threats

1. Unique brick 1. Huge variation of bricks

1. Unmatched product 1. The growth of
product making it complex
2. Global market competition
2. Strong brand 2. High costs from molding 2. Changing habits
name machines of kids
3. Friendly to all 3. Costly and complex 3. Takeover of tech
users supply chain based
4. Excess production and entertainment
slow inventory turnover
 01
5

02

Design and innovation

problem

Manufacturing
cost problem

Unrelated Diversification and Expansion

Diversification of products failed and has
created multi layered problems for LEGO

04

Cost Structure problems

03

Inventory and supply chain

management problems
 QUESTION 1
Underlying problem: Extravagant and unprofitable diversification and innovation strategy

SYMPTOMS
New products cannibalizing the
New products inconsistent core products
with core values

Huge costs behind new

Only few of the new products designs and production
profitable
 BCG Matrix
HIGH

• Theme Parks
• LEGO Stores • Star Wars bricks series
Market Growth

• Online shop
• LEGO watch, wearables
• Books • LEGO Bricks
• Video Games (DUPLO, Technic series)
LOW

LOW Market Share HIGH

 OUR SUGGESTION
GOING BACK TO THE BRICK
Why?

Criteria of Comparison Basic Brick products Diversified Products

Sales have not increased in proportion to the
Greater sales and profit potential because of
Sales lesser costs and better appeal
investment. Fad products do not sell regularly
creating losses
The diversified products lost sight of its core
The brick holds a greater appeal to the kids.
Appeal to core customers Eg.: DUPLO
customers, the children and turned out to be
unprofitable
The new type of blocks were faster to
The simplicity enabled the parts to be easily
Complexity assembled and integration with other
assemble but more complex structures were
difficult

The costs of the basic few molds are Every new mold requires a huge amount of
Costs significantly less additional money. Complex ones require more
 Strategy to the Solution
How to make returning to the brick effective

01
Decreasing the number of types of blocks
A huge number of brick variation has backfired for LEGO in terms of both costs and popularity. They need to lessen brick
types to cut down costs and encourage more creativity by bringing in new product lines using the basic bricks

02
More Effective Market Research and Design
The company should bring in people that are actually interested in LEGO instead of design experts for product ideas to
boost their product lines. Focus groups have to be done more focused on children and what they want instead of inspiring
line managers to make own decisions. AFOL (Adult Fans of Lego) can be brought in for new ideas too

03
Meaningful Diversification
With the basic bricks in mind and better survey results, diversification can be done in the right direction as opposed to
looking for potential where it doesn’t exist. Lines such as DUPLO have to brought back too
 QUESTION 2

Underlying problem: High manufacturing costs in LEGO factories

SYMPTOMS
High production expenses in
Closed culture in creating present production areas
own product

Rivals significantly
Investment in Plant property lowering costs using third
and equipment failed to party producers
generate expected revenue
Low return on invested capital
 OUR SUGGESTION

OUTSOURCE MANUFACTURING TO EXPERT THIRD PARTIES

Why?

Criteria of Comparison Produce Outsource

Cost savings Costlier than competition Reduced production costs

Guaranteed good quality because of direct Expert third parties can be consulted in
Product quality control ensuring best quality
Focus on core competencies is diluted because The main branch can focus more on design and
Focus on core competencies of manufacturing hassles innovation

More people can be let go to reduce costs

Better resource allocation Have to maintain huge workforce
Duties of the people can be streamlined
 Strategy to the Solution

01
Expert Third Parties
Expert third parties are available that can be availed at lower costs. The core products may be kept with the
head LEGO plant but parts that are easier can be outsourced to these parties

02
Focusing on “Big Picture”
Streamlining manufacturing allows the company to keep sight of what is important, its design and future
products and thus dedicate more resources to creating better product lines

03 Better Profit margins

Low production costs will also improve relation with retailers because now LEGO will be able to offer more
profit margin to the retailers compared to before
 Question 3
Main factors behind the two problems

Designing Forecasting
● Complex designs with lots of unique ● Forecasting did not match demands
parts ● People called in personal favors from manufacturers
● Heavier new parts that are difficult to ● There was no accurate data
assemble
1 2 ● The company only looked for growth
● Limited time products such as movie
franchise products Distribution
● Retailer connections weak
Manufacturing ● LEGO stores not working out
• One extra mold required for each additional type of brick ● Low inventory turnover in some whereas products stagnant in
• Extra molds cost around 50000 if simple and much more others
if complex 3 4
 Reasons why some products were excess and others were
scarce

Poor demand Forecasting

Poor forecasting caused distribution to be poor and thus there was no coordination between demand and supply. This led to poor focus on the retail and hence
the mismatches
Leadership problems
Creating account specific managers increased complexity and events such as friends calling for specific products. This further diluted the actual demand in the
market
Complex and Unnecessary Diversification
Complex products that lacked integration would run out of stock for one missing out of 500. Coupled with poor forecasting this made products out of stock faster.
Seasonal product demands lasted for a small time and hence became loss projects shortly too

Growth Set as the Main Objective

With Growth set as the main objective the parts of the company focused more on expansion at any cost instead of calculating returns on the
investment properly
LEGO Retail Stores
The LEGO retail stores failed to be profitable because only the products in demand were sold from there like most retail stores more and thus all the products
that were on display were almost never sold
 Reasons why complexity and costs has risen making products
unprofitable

Diversification problem
The diversification was not in line with LEGO company's capabilities or expertise and hence the processes for making these additional things turned
out to be very expensive and caused losses. The new designs were more complex to make. This made the manufacturing more complex and further
increased costs
Cannibalization
Because of having growth as the main objective, LEGO forced some new products into the market that destroyed the market shares for their older
core products. These more expensive products brought in more losses

Huge Fixed costs

Things such as LEGOLand and LEGO Retail stores did not generate expected revenue and had forced the company to incur massive fixed expensed
every year leading to higher total costs

Lack of discipline and accountability

The managers were not keeping accurate records of the things that were costing them money and had to write off a lot of bad debt. The inventory
was getting costlier too due to bad forecasting
 QUESTION 4

Underlying problem: Inadequate Financial Analysis and Faulty Accounting System

SYMPTOMS
Difference of sales expense at
Absorption costing different sales points

Increasing product lines and Inventory write-offs and

associated fixed costs(molds) obsolesce along with
random production further
without proper product analysis
complicating the process
 EXPLANATION

1. Problems with Absorption Costing in LEGO

A. Distorted Profit and losses

Absorption costing does not deduct all fixed costs from revenues unless all the products are sold. With LEGO already
having lots of inventory left this severely mislead the management in determining the actual costs of their expansion
efforts

B. Useless in comparing product lines

Since absorption costing does not provide the variable cost of each product line, it is impossible to tell what products are
more profitable than the others and hence decisions about what products to keep were made very difficult
 EXPLANATION

2. Rapidly Increasing Fixed Costs

Increasing product lines meant rapidly increasing fixed costs which further added to the confusion in the
costing system of Lego.

3. Inventory and Production complications

Massive Inventory write-offs and obsolescence and random production by managers further added to the
confusion leading to a messy accounts book. And it got more complicated because of the non profitable
selling points of the products like the LEGO retail stores
 4. Sales and Administrative Expenses

Sales and Administrative expenses are higher in new products

Unit product cost = Manufacturing costs + packaging costs + Designing costs
• Doesn’t consider Sales and Administrative expenses
• Sales expense for unprofitable products is far greater than that of profitable products
• Consequence: Unit costs of unprofitable products are highly understated

Sales and Administrative

Major Sales Point
Expenses/ Unit
Popular, Retail Chain Stores like- Walmart, Target, Toys R
High-in-Demand, Us etc. LOW
Profitable (Low Operational costs,
Products No Fixed Costs)
Unpopular,
Company owned LEGO stores
Slow moving,
(High Operational & Fixed Costs) HIGH
Non-profitable
Products
 Conclusion
21

The financial recording has to

be improved with better
accountability and clarity Unnecessary fixed costs
have to be cut down by
outsourcing production Retailer
Proper forecasting and
connections are to
research has to be done from
be boosted
appropriate parties LEGO needs to reduce its
diversification and return
to their core
THANK YOU!