Lego
Complete a thorough External Analysis of LEGO: a PEST analysis and Porter’s Five Forces analysis of the toy industry and justify your assessments. What does your analysis of industry trends tell you about Lego’s trials and tribulations, and what is the likelihood of future profitability in this industry, given its structure? What can Lego do?
Take into account when writing paper
What is/are the key strategic issue(s) faced by the company as presented in the case? What are the causes of the issues faced by the company? What are your thoughts/analyses/recommendations for resolving these issues
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JAN W. RIVKIN STEFAN H. THOMKE DANIELA BEYERSDORFER HARVARD LEGO (A): The Crisis BUSINESS SCHOOL FEBRUARY 5, 2013 In late 2004, J0rgen Vig Knudstorp faced the toughest challenge of his young career. A mere thirty-six years old, Knudstorp had recently bee11 named CEO of the LEGO Group - a long successful toymaker with a world-renowned brand, but a company suddenly on the brink of financial collapse (Exhibit 1). If Knudstorp failed to make the right decisions, and fast, the LEGO Group would likely slip from the hands of its founding family and be swallowed up by one of the giant conglomerates that increasingly dominated the toy industry. Hard decisions faced Knudstorp at every turn. Should the LEGO Group fall back to the plastic brick product lines that defined its past, or should it continue into the new product lines that many considered its future? Within the plastic-brick arena, should the company continue to make most of its own products, or should it shift to a contract manufacturer? Why was the Group running out of some products and awash in inventory of others? Why had complexity and costs risen so dramatically and made so many products unprofitable? Indeed, why was Knudstorp struggling to figure out which products were truly unprofitable and which made money? The Toy Industry As Knudstorp reflected on the LEGO Group's crisis, he considered the evolution of the global toy market. The industry booked wholesale revenues of $61 billion in 2004. The retail market for toys grew at a steady pace of about 4 % per year, but demand for specific fad toys could surge or collapse rapidly. Industry observers noted a few important trends. First, fad toys seemed to be rising and product life cycles declining, perhaps not surprising for an industry, as one journalist put it, 11 subject to the whims of [kids] wl10 can't decide which shoe to put on which foot." 1 Second, in many parts of the world, children had more after-school activities and less unscheduled time to play than in the past. Third, for kids over three years old, demand had shifted toward technology,, either in a toy itself or in the form of toys coming with access codes to online worlds.2 As children gave up traditional toys earlier for videogames and online activities, childhood became shorter and adolescence longer. Parents were often torn between buying the toys their kids wanted and those they considered good £or their children. Professors Jan W. Rivkin a11d Stefan H. Thomke and Europe Research Center Assistant Director Daniela Beyersdorfer prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright© 2013 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/ educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or trai1smitted, without the permission of Harvard Business School. LEGO (A): The Crisis Thousands of toymakers served the world market, but increasingly, a handful led the industry . . Mattel, the world's leading toymaker by revenue ($5.1 billion in 2004), featured brands like Fisher Price, Barbie, Hot Wheels, and American Girl dolls.3 Hasbro, the second largest player ($3.0 billion), housed brands such as Transformers, Monopoly, GI Joe, Play-Doh, and Playskool. To win consumer p.ttention, retail shelf space, and sales, toymakers introduced new products, cut their wholesale prices, sponsored cooperative ads and promotions with retailers., provided in-store support, and p.dvertised to consumers. The impact of new product introductions was muted by rapid imitation and iimited protection of intellectual property. To boost brand presence among consumers., toymakers often licensed characters from media companies. Mattel., for example, was the '' favored creator of toys based on Disney and Pixar characters.''4 Toymakers increasingly manufactured in Asia, where labor was inexpensive and subcontractors stood ready to produce goods on their behalf. The majority of toys sold in the U.S., for instance, were manufactured in China by outside contractors., while global players such as Hasbro specialized in new product development, sales, and marketing. Toymakers went to market via diverse retail channels, including independent toy specialists., chain stores, discount stores, department stores, and online stores. In choosing among toys to stock their shelves, retailers focused on profit per square foot and consequently considered margin, turn, and product space requirements. In a highly seasonal busi11ess in which consumers bought a large fraction of their toys during the holiday season, retail purchasing occurred mainly in the second half pf the year.5 Retail competition had heated up in recent years. In the United States, for instance, pressure from the likes of Wal-Mart and Target had driven Toys R Us, the nation's largest toy chain, to hire investment bankers to review its '' strategic alternatives'' in 2004. Building the LEGO Group (1916-1992) To the toy market, the LEGO Group brought a heritage that reached back to 1916, when Ole Kirk Kristiansen, a humble carpenter, bought a wood workshop in the rural Danish village of Billund and pegan to build houses and furniture for farmers. In 1932., he added wooden toys to his production and chose the name LEGO, formed from the Danish words ''LEg GOdt'' (''play well''). Only later did he learn that in Latin ''lego'' meant ''I assemble." Aiming for quality, he wrote on his wall, ''Only the best is good ,enough.'' Ole's son Godtfred started working in the business in 1932 at age 12. In 1947, the firm became the first in Denmark to buy a plastic injection-molding machine. By 1949, its portfolio had grown to 200 plastic and wooden toys, including the automatic binding brick, a forerunner of the modern LEGO brick. In 1954, during a ferry ride to England, a purchasing agent complained to Godtfred that toy departments were a mess: toys lacked a systematic organization. The comments moved Godtfred to �onsider a ''LEGO system of play." Such a system began to form in 1958, when the company changed the design of its bricks to match its current form. When a fire destroyed the LEGO Group's wooden warehouse in 1960, Godtfred discontinued wooden toy production. Knudstorp reflected: 2 Godtfred Kirk Christiansen bet the wl1ole farm on one-third of his business, plastic toys, and not just any toy - the brick. Godtfred Kirk Christiansen felt he had stumbled onto something unique with this brick. You can build anything out of it. It doesn't fall apart when you throw it around. And you can add to this system forever as it allows you to create a new toy every day, make endless variations, thereby inspiring and challenging a child's imagination and creativity. Godtfred Kirk Christiansen realized that in this system, the value of play expands exponentially the more elements you have. . . L'EGO (A): The Crisis In 1963, Godtfred laid out ten principles of 11 good play'' that defined LEGO product characteristics (Exhibit 2). By 1967, the company produced LEGO bricks in 218 distinct shapes. In 1977, Godtfred's son Kjeld Kirk Kristiansen joined the company's management. Born in the same year as the brick, Kjeld felt, in Knudstorp's words, that ''the LEGO brick is more than a toy. He knows what the brick can be and what it can do for humanity." From early on, a strong culture of creativity at the LEGO Group favored the steady introduction of new products and themes based on the brick system. The high quality of bricks and the standardized spacing between studs ensured that all elements made after 1958 were compatible with one another, resulting in enormous opportunities for creativity. The Group expanded its audience in 1968 with larger ''DUPLO'' bricks for children under five and, in 1977, with the LEGO Technic line for teens. By 1980, about 70% of Western European families with children under 14 owned LEGO bricks. By that time, a three-phase production process lay at the heart of Group operations. First, in the molding phase, injection-molding machines produced plastic elements in massive numbers. Because it took a molding tolerance of 0.002 millimeters to make bricks clutch each other right, Godtfred focused on developing industrial excellence and cutting-edge capabilities in material science and production technology. Second, in the decoration phase, specialized parts were painted. Third, in the packaging phase, the many small elements that made up a product were placed in a box along with an instruction manual. Godtfred controlled the company's operations closely, and no new product, brick, or color was introduced without his approval. Until the early 1980s, LEGO bricks came in five base colors: black, white, red, blue, and yellow. Kjeld felt that the company's sustained growth required new bricks, but it took him 10 to 15 years to convince his father to add the color green. Kjeld also added new the1nes, began to collaborate with the MIT Media Lab on robots in the mid-1980s, expanded into Eastern Europe and Asia, and maintained a strong position in America and a leading one in Western Europe. The LEGO Group enjoyed steady organic growth and profitability. By 1992, it was a top 10 global toy manufacturer, and according to Advertising Age, accounted for about 80% of the construction toy market (which accounted for a few percent of the total toy market). With its products so popular among consumers, LEGO Group management came to see retailers as 11 a necessary evil." Christian Iversen, Executive VP of LEGO Corporate Center, recalled: We were used to stable growth and expansion, driven by our growing pipeline. This was further fueled when the Berlin Wall came down, with millions of young Eastern Europeans eager to get their hands on Western products. If anything, the LEGO Group worked hard to control sales growth. The head of production, a strong person on Kjeld' s team, watched