LEGO CASE ANALYSIS 1

Lego Case Analysis

Taryn Gabbert, Austin Calltharp, Jin Lee, Michael Tran

University of Texas at Dallas

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Background

The Lego Company was initially started in 1916 in Denmark focusing on building homes

and furniture for farmers. Lego found its niche in 1932 when the first wooden building blocks

were created, from that moment the company had found its purpose in creating toys for children.

The toy product was developed further and eventually the wooden blocks were phased out for

plastic pieces. Lego grew its brand by developing several product lines for different age groups

and specializing its development and production process. However, Lego, as well as the rest of

the toy industry, experienced slow growth in the period from 1993 to 1998. The declining growth

was originally attributed to a declining youth population in key demographics, a decrease in

amount of time spent playing and the increase in technology driven toy products. This time

period served as a warning for Lego and the company started to diversify to push growth. Even

with these new changes Lego still wasn’t experiencing the growth it needed to become a large

player in the toy industry this can be accredited to several key problems within the Lego

infrastructure externally and internally.

Key Problems

The key problems that Lego faces are primarily external and internal issues. Externally

the market affects how Lego grows tremendously. Lego competes with the two big name toy

brands, Hasbro and Mattel. Both of these brands feature very popular toys such as Transformers,

Play-doh, and Monopoly for Hasbro, and Barbie, Hot Wheels and Fisher-Price for Mattel. One of

the main issues Lego has with their competitors is its lack of diversity among its products. Lego

initially started off with only a few shapes and five base colors. Kjeld was eventually able to add

a sixth color (green) when he was able to convince his father Godtfred the brand needed the

additional diversity to match its competitors. This need to add greater diversity to its core Lego
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products eventually added to Lego’s downward spiral when it started reaching over 3,560

shapes, 157 colors and 10,900 elements in their assortment. Each shape requires a mold, and

each mold cost 50,000 Euro on average or up to 300,000 Euro for complicated ones. Knudstorp

CEO of Lego, soon realized their push to meet their competitors in terms of diversity wasn’t the

solution for their Lego lineup, when he stated “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”. While the lack of product management, and rapid unneeded growth amongst its core

Lego lineup was continuously digging Lego into even more debt, it soon encountered its biggest

external issue in the form of technology. Technology was a huge factor amongst the three year

old and up age segment. One of the main issues Lego had with breaking into the kid’s

technology market was how would they take their core value of “development, imagination and

creativity” and embed it into their toys. Lego was quick to realize that they along with parents

wanted to continue to drive learning through its toys. Unfortunately this became incredibly

difficult given the issues Lego faced with kids giving up “traditional toys earlier for video games

and online activities, childhood became shorter and adolescence longer”. This growing shift in

the market would soon prove to be one of their most difficult external issues. Lego eventually

started development of video games with a learning focus, which it found great success.

Some of the internal issues in summary were the lack of accountability throughout the

company, and a costing system which no one could figure out, Lego themselves had no idea

what the costs of doing business were. This is what led to Bali Padda Executive VP of Global

Supply Chain to state “I couldn’t understand how net production prices were determined or

which products were profitable; it took me six months to get a sense of our fill rate to our

customers”. This lack of accountability led to some of Lego’s biggest customers such as Wal-
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Mart, for example, to ask upon their first meeting with Padda “Can you please tell me why I

shouldn’t put dog food on the shelves instead of Lego products?” Another internal issue Lego

faced as stated before is their lack of knowing which products were profitable and when to sell

them. This was a huge problem for Lego with its licensed products such as Lego Star Wars and

Lego Harry Potter. The problem with this was that Lego was unable to see that their licensed

products were its new bread and butter especially after they had evolved their standard Lego

lineup into a hemorrhaging problem. The main issue with the licensed products was the fact that

Lego in conjunction with their lack of accountability was unable to document their toy profits,

and when those toys were most popular. With a little help Lego could have identified that their

licensed toys, while producing huge profits, were only truly profitable for a short period

following the movies for which they were licensed after. Had Lego been able to identify this

trend and shifted production to its next licensed product, it would have had a much better shot at

sustaining an ongoing growth pattern. When analysis finally was done it was found that 28% of

Lego’s top line growth was primarily due to its licensed products for Star Wars and Harry Potter.

Alternatives

There are several viable alternatives that are available to Lego in remedying its continued

loss of profits in the years of 2003-2004. The first is centered on the financial management

system; the second is the costs and sales related to the Lego-brick products--specifically the

mold. The third is focused on increasing sales by following the footsteps of its competitors and

add technology to its products.

In order to be able to reduce cost Lego needs to take specific action. The underlying

issue Lego faces is its inability to properly record its financial transactions. This issue can be

remedied with proper financial management and record keeping; this will require an evaluation
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of how processes are currently done within the Lego system. A professional audit by a third

party can provide insight as to how the company is currently performing as well as what needs to

be fixed in the internal accounting processes. Professional auditing from third party services for

big companies like Lego can be expensive. An alternative to spending a large amount of money

on an internal audit from an external company would be for Lego to employ an internal auditor

themselves. This would reduce upfront costs and would allow Lego to consistently get feedback

on its record keeping and financial management. If this proved unsuccessful, other measures to

get its financial department up to standards could be done by a third party financial consulting

group. Once Lego’s financial department and record keeping has been fixed, analysis on its cost

can be done properly.

While proper analysis due to Lego’s current financial system is unavailable it is clear that

there is an extraordinary amount of cost arising from the distinct number of components. This

not only affects cost but also affects Lego’s ability to meet their retailers’ demands in a timely

manner. The whole manufacturing process of the Lego product needs to become more

standardized. Since there are already an existing 3,560 molds it would be irrational to get rid of

them, however reducing the number of molds used in its primary manufacturing process could

prove beneficial. If Lego’s base line of products only required 300 or less different molds (1/35th

of its potential) Lego would be able to streamline the process of manufacturing and make sure

their product was consistently in stock at its retailers. The remaining specialized molds could be

phased in and out of production as “specialized parts”. This would enhance brand value by

creating a “collectors” mentality among some of its different parts. Base line products could

rotationally feature a few different molds from the “vault”. This would entice collectors and
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children alike to buy on a more regular basis as different parts were rotated in and out of

production.

Additionally Lego could follow its competitors’ footsteps and add technology into its

products. This would help solve the problem that Lego is facing with the segment of children

that have become more interested in technology rather than traditional play. There are two sides

to this strategy, Lego could incorporate technology into its products or it could use technology as

a tool to make its classic toys more relevant to it ever evolving customer base. Lego has always

been uniquely known for its construction-style of play without any sound or light effects for

decades. To put in small components of electronics into a Lego spaceship would be difficult to

do because Lego has no prior experience in making technologically focused products. This

option offers benefits that are attractive to Lego, but to make it a success would require engineers

to figure out how to successfully combine the electronic components with the Lego bricks.

Testing for failures and time spent playing would also be required as simply creating a product

that embraces technological aspects does not mean it will become a success. Additional money

as well as research and development are needed, but cannot be spared under the current

economic conditions of Lego. Another problem that is associated with this option is the

cannibalization of other Lego products if this new product were to enter Lego’s product line. The

other side of the technology problem is to use technology as a tool to make its classic toys more

relevant to its ever evolving customer base. This option has already been explored by Lego by

creating videogames, but with great cost. An option for Lego to continue to do this without the

great cost associated with it is to allow the Lego name to be used by companies that are already

experienced in the game and film industry. This allows Lego to stay relevant and technologically

up to date without the core of its company having to branch out into a field it’s not familiar with.
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Lego would allow the use of its name for a percentage of profit and would also provide input into

the production of the films and videogames.

Taken together these options will produce great results in turning Lego around, but it is a

long-term plan that requires heavy investment of time, money, and resources. Simply put, these

alternatives are not the quick-fix that Lego is looking for right now. The following section will

list the proposed solution, which would address how to fix the huge deficit that Lego has

experienced in 2003 and 2004.

Recommendations

Lego has a brand image that is well-known for being a unique product: “the Lego Brick”

which allows for the growth and flourishing of creativity within children. Lego should look to

build upon its early success of its Lego brick by looking at its SWOT analysis (exhibit 1) and

cutting back on its thousands of molds and colors while building up its brand image in terms of

its Licensing Agreements. Their strategy should be to create seemingly simple and flexible

products, as well as create licensed toys and games which fully utilize the brand extension of its

licensees. Lego has already implemented this strategy and philosophy through licensing

agreements with hit movies such as “Harry Potter” and “Star Wars” with great success. That

being said trying to adopt another methodology when Lego is in the midst of a financial crisis is

a futile effort, especially considering its incredible success with its initial batch of licensing

agreements. Lego should look to further improve what it deems as its product life cycle for its

licensing products, by filtering out unpopular themes and increasing the production of the

trending products, while also managing decaying product life cycles.

In regards to Lego’s struggle with manufacturing costs, like mentioned before, Lego

needs to implement a new cost effective way to produce its bricks. Instead of focusing their
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efforts on creating new shapes and colors to further their creativity scope, Lego should focus on

what they originally did very well, which is creating universal bricks that come in a limited

number of molds and colors. This strategy would allow Lego to cut out unwanted manufacturing

costs and realign their financial focus on the production of their current and future licensed

products. Once costs have been cut, Lego should hire an internal auditor as hiring an external

auditing company can be costly to eliminate its inability to record financial transactions along

with providing Lego the means of tracking their costs so they can properly manage their short

term profits and long term future. By simplifying their strategy with their original “Lego Brick”

and making it more universal, Lego would not only cut back on total costs, it would redefine the

Lego brand image in terms of its licensed products. This market realignment would lead to

increased revenues, as well as a reduction in manufacturing costs created by the cutback of

molds and colors of the initial Lego Brick, making it more “plug-in-play” for future product

lines, while also giving Lego the ability to compete in the ever-evolving children’s toy market.

Exhibit 1
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Strengths Weaknesses
1. Patented Building Block 1. Internal Record Keeping
2. Educational toy 2. Cost Of Manufacturing
3. Strong Branding 3. Declining Growth
4. Quality

Opportunities Threats
1. Technology Based Branding 1. Childhood “Play” Decreasing
2. Licensing for Films and Video Games 2. Rise in technology
3. Licensed Toy Market 3. Imitation

Bibliography

http://www.mesirowfinancial.com/mfc/