University of Exeter

BEMM108 - Entrepreneurship: New Venture Development

2016/2017

Business Report - Lego Group

Submitted by

Pimpitcha Limtrakul 650051446

MSc International Management

6 March 2017

To

Dr. Olga Kalinowska - Beszczynska

(Word count: 2,053 words)

Excluding Abstract and References

 
 Abstract

The purpose of this business report is to provide the key factors that
contribute to the company’s long-term success for the Board of Directors. Lego is
chosen as an exemplar company due to the company’s long history since 1932 and its
well-known interlocking bricks. Moreover, the company is one of the most recognized
and reputable companies that was able to make a huge turnaround after its financial
crisis in 2004 caused by the rise of emerging technology and the decline of birthrates
globally. Behind the success story of Lego, there are three main drivers that help the
company stay competitive in the market. Firstly, innovation and creativity is the main
force that drives the achievement of Lego. By creating innovative culture called
“Design for Business”, everyone in the organization is now able to share their ideas
that associated with its business’s strategies and goals. Secondly, running a
successful business requires more than just having great ideas. It also requires a
strategic leadership. Jorgen Vig Khundstorp, a formal CEO of Lego, is an excellent
example as he could rescue the company from a crisis and turn it into one of the
world’s most profitable toymakers. With his analytical and management skills, Lego
could cut a huge amount of its operating costs and remain competitive in the market.
Thirdly, by collaborating with lucrative partners, Lego could strengthen its brand image
and gain more market segments from its partners. Ultimately, it is these three critical
factors that lead to a success of Lego.

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 Table of Contents

1. Introduction........................................................................................................... 4

2. Company Background......................................................................................... 4

3. Critical Factors for long-term success

3.1 Innovations and Creativity................................................................................. 5

3.2 Strategic Leadership......................................................................................... 6

3.3 Strategic Partnership........................................................................................ 7

4. Conclusion........................................................................................................... 8

5. References.......................................................................................................... 10

6. Appendix............................................................................................................. 12

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Introduction
More than half a century ago, toys were recognized as solid materials made
by wood, paper, plastic, etc. However, in the 19th century, there had been a
development and enormous evolution in toy industry. The evolvement in toy industry is
not just about how it is produced, but the way children play also changes. The major
factor that affected the changes is due to the rise of technology advancement that
pulled children away from physical toys (Hatch, 2011). Lego Group is an excellent
example of a very successful company that could adapt to the digital economy while
focusing on its core value. The company is ranked as the second most reputable
company in 2017 due to the quality of its products, innovation, leadership, and
performance (Reputation Institute, 2017). Lego brand is highly valued as consumers
have fond memories of interlocking plastic bricks and their abilities to create a strong
relationship with children and parents around the world. The brand equity is attached
with the capability to improve children skills and make learning enjoyable and
meaningful (Lego Group, 2017). Moreover, customers expect high quality,
standardization, and satisfaction from Lego and therefore the management team
ensures that quality toys are produced.
The need to study Lego’s success is due to the fact that the company is an
interesting case study of a turnaround of an almost bankrupt organization, attributed to
choosing the right strategies. Thus, the purpose of this business report is to determine
the key factors and competencies that the Danish toymaker company, Lego Group,
employs and contributes to its long-term success and stay competitive in the market.

Company Background
Lego Group is one of the most famous toy producers in the world. Its toys
have attracted children and their parents over the past 80 years. The company is a
privately held company owned by a Danish family. It was found in 1932 by Ole Kirk
Kristiansen who began making wooden toys and emphasized the motto ‘Only the best
is good enough’, which is still used nowadays as Lego’s core value (Lego, 2016). In
1958, the business was handed over the business to his son, Godtfred Kirk
Christiansen who continued the improvement of the wooden to plastic toys. Now the
firm is best known for the producer of Lego-brand toys, comprising mostly of
interlocking plastic bricks. Lego Group also builds several amusement parks around
the world called Lego Land, and operates several retail stores in Europe, North
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America, and India. However, the company had been financially successful until early
1990s when the toy industry suddenly changed during the period of millennium which
partly due to a decline of birth rates, and a rise of a digital era, which gave a significant
impact to the company (Lunde, 2012). During that time, the company almost went
bankrupt and lost $300 million in 2003 while its market share started to decline.
The struggle of Lego’s financial continued until 2004 when the company
started to recover and achieve a dramatic turnaround when Jorgen Vig Knudstorp,
who is the first non-family member, was appointed as CEO of Lego. The company
then realized that diversification away from the original bricks was also one of the main
reasons that Lego experienced such difficult times. Later, Lego was restructured and
focused more on its core competence and operations including costs cutting and ways
to generate margins and sales (Jensen, & Gronholt-Pedersen, 2016). Since then, the
company revenues remarkably rose by more than 15 percent a year on average,
making Lego becomes the most profitable toymaker in the world (See Appendix).

Critical factors for long-tem success

To understand how Lego Group could sustain its competitiveness and
remain their long-term success despite the declining market share in the toys industry
and the increasing competitiveness in technological era, three key factors, including
innovations and creativity, strategic leadership, and strategic partnership, are
explained as follows.

1. Innovations and Creativity

According to Carmeli, Gelbard, & Gefen (2010), innovation is the key force to
competitive advantage in a highly complex environment and a major driver for the
growth of economy. The ability to innovate has positive direct consequences to
compete at the individual, organization, regional, and federal level. More than half a
century after interlocking bricks was first introduced, Lego is one of a few companies
that has a clear vision of innovation within its organization. The company has
continually stayed one step ahead of innovation curve by discovering new ways to
engage consumers of all ages and introducing new products every year. However,
culture is the most important pathway to create innovation and therefore Lego’s
management team tried to create innovative culture while still generating profits to the
company. Lego created a more organized structure and designed a new innovation
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structure called D4B or “Design for Business” (Elmansy, 2014). The process is
developed to ensure the continual connection between innovation, strategies, and
organizational goal. This process also ensures that creative side and business side
share the same objectives and both functions fully understand the organization
strategy. The company not only focuses on the innovation of new products, but also
includes community innovation for improving customer loyalty and membership,
business innovation for pricing models and new distribution channels, and process
innovation for improving insight research and decreasing development time.
Lego’s initial response to its declining market share in the 1990’s was to
focus on its creativity and core competency. It was a risky move but Khudstorp
proclaimed that the company must go back to its core value and keep innovating.
Khudstorp has the same attitude and entrepreneurial skill as Romero, the multi-
millionaire, who never gives up and is not afraid to take risks. Romero explains that
business is like a fashion and when it reaches a maturity stage and things start to
decline, new ideas need to be created in order to build better innovation capabilities
(‘BBC News’, 2010).
The combination of Lego’s open innovation approach and product
development has turned the company around completely. Open innovation is a
strategy that breaks down traditional company boundaries. It allows intellectual
property ideas, and users to move freely both into and out of an organization
(Chesbrough &Garman, 2009). Lego’s open innovation or Lego Digital Designer
enables the whole network including employees, customers worldwide to co-create
and co-develop the products that they dream of through crowdsourcing platform
(Kalcher, 2012). The online platform currently generates hundreds of new products
suggestions annually and the company could gain more insights about customers’
preferences. It also ensures that the company did not stray too far from what their
customers want and gain deeply knowledgeable about the product.

2. Strategic Leadership
Leadership is another major factor that helps business maximizes efficiency
and it plays an important role in the success of any organization. According to
Schoemaker, Krupp, & Howland (2013), strategic leadership and management are
abilities to adapt and develop a vision to compete in changes in economic and
technological environments. Jorgen Vig Khundstorp, the formal CEO of Lego Group, is
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known as the man who transformed the company from a deep crisis and turned Lego
into one of the world’s most profitable toymaker. Moving quickly to rescue the
company in 2003, Knudstorp had to reorganize the company structure, increase sales,
reduce debt, and focus on cash flow than ever before (O’Connell 2009). With the
implementation of tight financial control and a focus on day-to-day operations, Lego
could gradually reduce its cost of producing plastic bricks by, for example, outsourcing
the plastic-brick production in Mexico and the Czech Republic where the labor and
facilities costs are cheaper.
During 1990s, Lego lost the main focus on its core business of building
blocks and diversified into variety of non-core businesses and product lines, such as
amusement parks, publications, and cloths. Kaplan & Norton (2001) explain that
focused companies are those that enter into new markets only when doing so
strengthens the core competencies. Khundstorp who believes in the value of focused
strategy decided to sell most of the non-core businesses and refocused everyone’s
attention on Lego blocks. Moreover, the company invests in activities that related to
Lego’s core capabilities by introducing new product tools, negotiating licensing
arrangements with strategic partnership, and creating new innovations such as Lego
Digital Designer (Milne, 2016). Therefore, it was Khundstorp’s strategic leadership,
analytical and management skills that were initially the essential factor that helped
Lego made a high turnaround.

3. Strategic Partnership
Lasker, Weiss, & Miller (2001) explain that strategic partnership is a
significantly effective way to build business, allow companies to compete in new
marketplaces, gain customer awareness, and generate sales. Co-branding enable
organizations to combine their finest competencies and empower similar market
statement. To deal with the challenges and complexity of a technology era and a
highly competitive market, building partnership with customers, suppliers, and
Intellectual Property alliances are essential for Lego Group to survive in a business.
Lego applied a strategy where it used brand partnerships to maximize and
extend its core competence. The company formed strategic partnerships and made
licensing agreements with companies that share the same values and similar target
audiences, such as Star Wars, Harry Potter, Warner Brothers and Disney (Thielman,
2013). Lego has the ability to transform the potential that is latent in popular culture.

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With this strategy, the company could generate a significant amount of sales
especially in 2015 when revenues and profits increased by 25% and 31%, respectively
due to a huge demand of Lego Star Wars. Fans of these lucrative partnerships are not
limited to kids and neither are those of Lego. Therefore, the company could increase
the reach of a company’s target audience. Lego is also developing partnerships with
charities such as UNICEF and tech companies such as Google in order to emerge into
new markets, access new technologies, and innovate new ideas (Lego, 2017). Thus,
when working with the right partnerships, Lego could find a way to grow its business
and gain competitive over its rivals in today’s changing marketplace.
Lego continuously tried something different. The company released Lego
Movie in 2014 by partnering with Warner Animation in order to deliver creative
direction to the core fans of the brand (Gustafsson, 2015). The Lego Movie is an
animated adventure comedy based on Lego construction toys and became a $486
million global blockbuster. The move into the digital market has a potential to open up
opportunities to collaborate with marketing partners as part of its digitalization.
Moreover, the company could strengthen its brand image and increase brand
relationship with families.

Conclusion
Every organization in every industry will eventually find itself in the middle of
a digital intensive business environment with a rise of technological platform, an
increasing demand of digital products and services. For Lego to be competitively
successful in this new dynamic ecosystem, an adaptation together with innovation is
essential and critical. When Lego restructured and returned to its core business “Lego
Brick”, they soon realized that it was innovation that ultimately saved the company.
Open innovation, for example, is one of Lego’s innovation strategies that allow users
including employees and customers to share ideas through crowdsourcing platform.
Moreover, the platform generates hundreds of new product suggests each year, which
helps Lego gain more insights about consumers’ preferences. The second factor that
contributes to the long-term success of Lego is strategic leadership. Less than 5 years
that Khudstorp could turn the company around by working on new vision which is
based around the Lego brick, building better relationship with employees and
customers, and empowering employees to make decision at all levels of the hierarchy,
and, at the same time introducing tight financial controls. Strategic leadership is
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different than other styles that they not only make day-to-day decisions, but also have
a long-term vision for company’s growth and survival while maintaining its short-term
financial health (Rowe & Nejad, 2009). Lastly, strategic partnership is the right recipe
for Lego’s success. Partnering with lucrative partnerships such as Disney and Star
Wars helps Lego stay competitive in the market. This is a smart move for the company
as many of these partners already posses massive installed customer-bases. Lego
could immediately enter into existing and established customer segments and gain
more market shares. Most importantly, with strategic partnerships, Lego could retain a
legal monopoly over these intellectual properties, which allow the company to
differentiate itself from other firms and gain a competitive advantage over rivals.

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 Appendix

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