Lego Case Analysis

LEGO CASE ANALYSIS 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 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 WalMart, 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 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 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. 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 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 1. 2. 3. 4. Strengths Patented Building Block Educational toy Strong Branding Quality Opportunities 1. Technology Based Branding 2. Licensing for Films and Video Games 3. Licensed Toy Market Weaknesses 1. Internal Record Keeping 2. Cost Of Manufacturing 3. Declining Growth Threats 1. Childhood “Play” Decreasing 2. Rise in technology 3. Imitation