Activity 1: The Lego Case Study

Lego has long been an industry leader in children's toys with its simple yet unique building block-style products. A
Danish carpenter whose family still owns Lego today founded the privately held company in 1932. But by 2004, the
company found itself close to extinction, losing$ I million a day. A new CEO was brought in, and within five years
sales were strong, profits were up, and naysayers who felt the new strategy was going to fail were proved wrong.
In fact, sales, revenues and profits continued to be strong. Revenues grew from 16 billion Danish krone (DKK) in
2010 to over 28 billion DKK in 2014, and in the same period, profit almost doubled from 3.7 billion DKK to 7 billion
DKK.

With the advent of high-tech forms of entertainment, such as the iPod and PlayStation, Lego found itself more
antique than cutting edge in the toy world. When new CEO Jorgen Vig Knudstorp, a father and former McKinsey
consultant, took over, the company was struggling with poor performance, missed deadlines, long development
times, and a poor delivery record. The most popular toys frequently would be out of stock, and the company was
unable to ship enough products or manage the production of its more complicated sets. Retail stores were
frustrated, and that translated into reduced shelf space and ultimately to business losses.

Knudstorp changed all of that. He reached out to top retailers, cut costs, and added missing links to the supply
chain. For example, prior to the new strategy, 90% of the components were used in just one design. Designers
were encouraged to reuse components in their new products, which resulted in a reduction from about 13,000
different Lego components to 7,000. Because each component's mold could cost up to 50,000 euros on average to
create, this reduction saved significant expense.

Lego was known for its traditional blocks and components that would allow children to build just about anything
their imagination could create. The new strategy broadened the products, targeting new customer segments. Lego
managers created products based on themes of popular movies, such as Star Wars and the Indiana Jones series.
The company moved into video games, which featured animated Lego characters sometimes based on movies. The
company created a product strategy for adults and engaged the communities who had already set up thousands of
Web sites and blogs featuring Lego creations. It embraced the community who thought of Lego as a way to create
art rather than simply as a building toy. And the company designed a line of Legos aimed at girls because the
majority of its products had primarily targeted boys.

The culture of Lego changed to one that refused to accept nonperformance. The company's past showed a
tendency to focus on innovation and creativity, often at the expense of profits. But that changed. "Knudstorp ...
made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to
succeed .... Its business may still be fun and games, but working here isn't,"20 describes the current culture at
Lego.

Some of the most drastic changes came from within the Lego organization structure. After its massive losses in
2004, Lego switched its employee pay structure, offering incentives for appropriate product innovation and sales.
Key performance indicators encourage product innovation that catalyzes sales while decreasing costs.
Development time dropped by 50%, and some manufacturing and distribution functions were moved to less
expensive locations, but the focus on quality remained. The creation of reusable parts alleviated some of the strain
on Lego's supply chain, which in tum helped its bottom line.

Lego also expanded into the virtual world, extending into video gaming and virtual-interaction games on the
Internet. Thinking outside the company's previous product concepts cut costs while encouraging real-time
feedback from customers across a global market. Additionally, Lego created brand ambassadors who organized
conventions across the world to discuss product innovation and to build communities of fellow customers. With
increased revenue, Lego managers considered entering the movie-making business-a risky proposition for a toy
company. However, Lego's success with Hollywood-type action figures fueled its interest in a movie-making
endeavor.

The growth put strains on the IS supporting the business. Order management and fulfillment were particularly
affected, resulting in the inability to meet customer demand. Employee management systems were stretched as
new employees were added to support the growth and additional locations. Product design and development,
especially the virtual and video games, required new technology, too.

To solve some of these problems, Lego managers used the same approach they used for their blocks. They created
a modularized and standardized architecture for their IS, making it possible to expand more quickly and add
capacity and functionality as it was needed. They implemented an integrated enterprise system that gave them
new applications for human capital management, operations support, product life cycle management, and data
management. The new systems and services, purchased from vendors such as SAP and IBM, simplified the IT
architecture and the management processes needed to oversee the IS.

One manager at Lego summed it up nicely, "The toy world moves onwards constantly, and Lego needs to re-invent
itself continuously. Significant corporate re-shaping introduced new energy to the company." 21 He went on to say
that simplifying Lego's IT systems and implementing an efficient product development process that was able to
maintain quality and cost favorably positioned Lego to respond to the fast-changing pace of the toy industry.

Discussion Questions
1. How did the information systems and the organization design changes implemented by Knudstorp align
with the changes in business strategy?

2. Which of the generic strategies does Lego appear to be using based on this case? Provide support for your
choice.
Porter's generic strategies are ways of gaining competitive advantage – gaining the “edge” for your
business.”
There are two main ways of achieving this within a Cost Leadership strategy:
• Increasing profits by reducing costs, while charging industry-average prices.
• Increasing market share by charging lower prices, while still making a reasonable profit on each sale
because you've reduced costs.
---------------------------------
Cost Leadership
• is about minimizing the cost to the organization of delivering products and services.
invest in new tech.
finding efficient logistics, low-cost labor, materials, facilities)

Differentiation
• involves making your products or services different from and more attractive than those of your
competitors.
• typically involve features, functionality, durability, support, and also brand image that your customers
value.
To make a success of a Differentiation strategy, organizations need:
• Good research, development and innovation.
• The ability to deliver high-quality products or services.
• Effective sales and marketing, so that the market understands the benefits offered by the differentiated
offerings.
 The Focus Strategy
Companies that use Focus strategies concentrate on particular niche markets and, by understanding the
dynamics of that market and the unique needs of customers within it, develop uniquely low-cost or well-
specified products for the market.
For each generic strategy, carry out a SWOT Analysis of your strengths and weaknesses, and the
opportunities and threats you would face, if you adopted that strategy.

Organizations that achieve Cost Leadership can benefit either by gaining market share through lowering
prices (whilst maintaining profitability) or by maintaining average prices and therefore increasing profits.
All of this is achieved by reducing costs to a level below those of the organization's competitors.
Companies that pursue a Differentiation strategy win market share by offering unique features that are
valued by their customers. Focus strategies involve achieving Cost Leadership or Differentiation within
niche markets in ways that are not available to more broadly focused players.

3. Are the changes implemented by Knudstorp an indication of hyper competition? Defend your position.
hyper competition is a condition when the competition is so intense, creating instability in the market.
These conditions require companies to change strategies continuously.

Rapid technological and structural changes

Adoption of flexible strategies is common because the competitive landscape is changing rapidly
Low entry barriers, allowing new players to enter and challenge existing companies.

4. What advice would you give Knudstorp to keep Lego competitive, growing, and relevant?
UNDERSTANDING THE LEGO CASE STUDY
1. How did the information systems and the organization design changes implemented by Knudstorp
align with the changes in business strategy?
Lego has been in the toy manufacturing business since 1932. It produces building blocks and toys for
kids. The company earned high profits since its start but has seen a rapid downfall in the year 2004. In
2003, sales had fallen off drastically, dropping 35 percent in the US and 29% worldwide. It had massive
debts almost equal to its annual sales. At this point of time Lego appointed Jorgen Vig Knudstorp as its
new Ceo to the organization. This was the first time that the company appointed an outside person other
than a family member as a CEO. Knudstorp joined Lego group in 2001. Former he worked as a consultant
in Mc Kinsey & company and university researcher as Aarhus University. Knudstorp had a strategic plan
in mind to first save the company from huge debts and bankruptcy. He chose to connection store
network to the creation line and retailers. He chopped down his stock keeping units considerably. He
sorted out meetings to the top customers of the organization who are the significant shareholders of the
organization. He presented some new inventive showcasing techniques into the business which could
support up the benefits of the organization. Lego began to make items on the prominent motion
pictures, kid's shows and so forth. Lego additionally began to make computer games and go into the
virtual world. This gave an enormous swing to the benefits of the organization. Lego executed
incorporated frameworks, capital administration, and information administration. SAP and IBM gave the
framework programming, administrations required to the organization.
2. Which of the generic strategies does Lego appear to be using based on this case? Provide Support
for your choice.

The principal procedure of the Lego since it has been built up is to stay top in the business sector. In any
case, amid this period, i.e. from 2000-2004, Lego just needed to stop their misfortunes. Lego
additionally needed to cut down a large portion of its accessible outlines to spare the
generation costs. It additionally concocted another thought of the assembling of toys in view of
prominent motion pictures like Ironman, Tomb raider and so on. This new promoting system
offered ascends to another considered going into video gaming world. Additionally, Lego made
brand representatives to promote their items over the globe. It likewise began a different section in
their assembling industry for young ladies furthermore for grown-ups for covering a bigger client
base. Every one of these procedures has truly helped Lego's business to progress during the
downfall.

3. Are the changes implemented by Knudstorp an indication of hyper competition? Defend your
position.

When Mr. Knudstorp has been delegated as the CEO of Lego, he needed to make a stride which c a n
briefly mitigate the circumstance of the organization as the organization has never
experienced such immense misfortunes. Additionally at a point Lego was bankrupted. So he has
executed long haul changes to the organization. I might want to say that the progressions made by
Knudstorp were not hyper focused. Since, every one of the progressions he made drove the
organization to recover from the disastrous circumstance in which it was and those progressions.

4. What advice would you give Knudstorp to keep Lego competitive, growing, and relevant?

Lego has been in the toy producing industry since 1940's. In this way, it is very normal for an
organization such as Lego to have a few high points and low points. We have as of now seen the
measures and steps taken by Mr. Knudstorp which were truly valuable for the association when
required. I might want to say that Lego and Knudstorp need to proceed similarly they are doing well now
furthermore keeping up great client connections and considering the client input and rolling out the
essential improvements. A portion of the procedures might be marginally more dangerous, where Lego
needed to go into Hollywood. I would say higher the risk, higher the benefit. Additionally, Lego need to
watch out for the more up to date models which are being released into the toy market. This way Lego
can be more focused with its competitors and make more profits.

MAIN PROBLEM:
The main problem for the Lego Group was to identify the new market where it can expand its product
line and business operation so that they can formulate the competitive strategy. In addition to this, the
company wants to continue their financial success and maintain market dominance in the increasing toy
industry in coming years.

SWOT ANALYSIS:
Strengths:

 has recognized as one of the largest manufacturing players in the toy industry.
 its ability to innovate by making the use of technology without affecting the core standards of
the company.
 experience that the company have helped them to fulfill the requirements of their clients as the
Lego Group has been in the business of toy manufacturing for many years.
 Diversification of the products is another strength of the company. (The company has diversified
its brand into TV, Video games and movies. Lego Group provides the playful Educational learning
to the children by playing the game.)

Weaknesses:
 main weakness of the Lego Group is that the company’s product designs are easy to copy.
 loss of identity because of the increase in the toy industry is increasing rapidly making it difficult
for the company to differentiate itself from the other industry players.
 The products of the company are expensive, which may result in decrease market shares as
there are several low price alternative available.

Opportunities:
 The Lego Group should need to develop more programs and activities of branding in order to
reach the new market target segments.
 using the latest technologies the company can enhance its learning.
  The Lego Group can also move its production operations and activities into other places where it
is cheaper to produce. This is an opportunity to reduce it’s cost production.

Threat:
 The growing market
 Brand competitors (Mega Bloks / Hasbro)
 It was important for the management team to determine where to expand Lego product lines
and business operations, in order to develop a competitive strategy for the continuation of the
past years, organizations have financial success and market dominance toy building.