International Marketing case analysis

“Everything Is Awesome, Everything
Is Cool” at LEGO
When Jørgen Vig Knudstorp stepped down as the CEO of LEGO in
January 2017, he was widely regarded as one of the world’s best
corporate leaders. After becoming CEO in 2004, Knudstorp had moved
quickly to turn around the fortunes of the maker of the iconic children’s
play blocks.
The LEGO Company is a $5 billion global business built out of the
humblest of materials: interlocking plastic toy bricks. From its base in
Billund, Denmark, the family-owned LEGO empire extends around the
world and has at times included theme parks, clothing, and computer-
controlled toys. Each year, the company produces approximately 15
billion molded plastic blocks as well as tiny human figures to populate
towns and operate gizmos that spring from the imaginations of young
people (see Exhibit 16-11). LEGO products, which are especially
popular with boys, are available in more than 130 countries; in the key
North American market, the company’s overall share of the
construction-toy market has been as high as 85 percent.
Kjeld Kirk Kristiansen, the grandson of the company’s founder as well
as the main shareholder, served as CEO from 1979 until 2004.
Kristiansen says that LEGO products stand for “exuberance,
spontaneity, self-expression, concern for others, and innovation.” (The
company’s name comes from the Danish phrase leg godt, which
translates as “play well.”) Kristiansen also attributes his company’s
success to the esteem the brand enjoys among parents. “Parents
consider LEGO not as just a toy company but as providing products that
help learning and developing new skills,” he says.
(Exhibit 16-11)LEGO has always been an innovator. For example, Mybots was a $70
toy set that included blocks with computer chips embedded to provide
lights and sound. A $200 Mindstorms Robotics Invention System allows
users to build computer-controlled creatures. To further leverage the
LEGO brand, the company also formed alliances with Walt Disney
Company and Lucasfilms, creator of the popular Star Wars series. For
several years, sales of licensed merchandise relating to the
popular Harry Potter and Star Wars movie franchises sold extremely
well.
The company has not always enjoyed nonstop success. After a
disappointing Christmas 2003 season, LEGO was left with millions of
dollars’ worth of unsold goods. The difficult retail situation was
compounded by the dollar’s weakness relative to the Danish krone;
LEGO posted a record loss of $166 million for 2003. The company then
unveiled a number of new initiatives aimed at restoring profitability. A
new line, Quattro, consisting of large, soft bricks, was targeted directly
at the preschool market. Clikits was a line of pastel-colored bricks
targeted at young girls who want to create jewelry.
In 2004, after LEGO had posted several years of losses, Jørgen Vig
Knudstorp succeeded Kristiansen as LEGO’s chief executive.
Knudstorp convened a task force consisting of company executives and
outside consultants to review the company’s operations and business
model. The task force discovered that LEGO’s sources of competitive
advantage—creativity, innovation, and superior quality—were also
sources of weakness. The company had become overly complex, with
12,500 stock-keeping units (SKUs), a palette of 100 different block
colors, and 11,000 suppliers.

Acknowledging that the company’s forays into theme parks, children’s
clothing, and software games had been the wrong strategy, Knudstorp
launched a restructuring initiative known as “Shared Vision.” Within a
few months, cross-functional teams collaborated to reduce the number
of SKUs to 6,500; the number of color options was slashed by 50
percent. Production was outsourced to a Singaporean company with
production facilities in Mexico and the Czech Republic, resulting in the
elimination of more than 2,000 jobs. The theme parks and computer
games businesses were sold.
Knudstorp also decided to focus on the company’s retail customers,
including Toys ‘R’ Us, Metro, Karstadt, and Galeria. After surveying
these customers, Knudstorp and his task force learned that the
customers do not require express product deliveries. This insight
prompted a change to once-weekly deliveries of orders that are placed
in advance. The result: improved customer service and lower costs. In
the three-year period from 2005 to 2008, on-time deliveries increased
by 62 percent to 92 percent. LEGO also logged improvements in other
key performance indicators such as package quality and quantity. In
2008, LEGO was awarded the European Supply Chain Excellence
Award in the category “Logistics and Fulfillment.”
In terms of competitive advantage, Knudstorp has noted, “A bucket of
bricks is the core of the core.” Still, he adds, “There’s more to being a
global successful company than being able to build a plastic brick.”
Evidence of the company’s magic touch can be found in LEGO Friends,
a new theme targeting girls that has sold extremely well. One
advantage of the new line: Because it was developed in-house, LEGO
does not have to pay licensing fees.
Moreover, the company’s forays into video games such as Lego Batman
2, The Lego Ideas Book and other children’s books, and TV series on
the Cartoon Network have proved successful as well. The Lego Movie,
released in 2014, was a global blockbuster with ticket sales of nearly
$500 million.
By 2015, under Knudstorp’s capable leadership, LEGO ranked as the
world’s number 1 toymaker, ahead of industry heavyweights Mattel and
Hasbro. In less than a decade, LEGO’s revenues had tripled, and its net
profit soared. Knudstorp credits his brief stint as a trainee kindergarten
teacher with helping him hone his leadership skills. One key decision as
the new CEO: listening to a marketing executive who advocated
focusing on “back-to-basics” toys such as fire engines and police
stations.

In 2015, after a three-year development process, Knudstorp
launched Lego Dimensions. This product represented LEGO’s first
attempt to target a game category known as “toys-to-life.” The $100
game kit can be used in conjunction with the Sony PlayStation,
Microsoft Xbox, or Nintendo Wii consoles. The game also comes with
several hundred pieces for building a controller, plus Batman, Gandalf,
and Wyldstyle. The game incorporates Doctor Who, Back to the Future,
and a variety of other popular TV and motion picture brands.
Going forward, Knudstorp will be chairman of LEGO and head up a new
entity, LEGO Brand Group. According to Knudstorp, “The LEGO Brand
Group will focus on things that are additive and are not being done
today.” One challenge facing Bali Padda, the new CEO, is to sustain the
explosive pace of sales and earnings growth achieved by his
predecessor.
Discussion Questions
1. 16-10.Jørgen Vig Knudstorp became CEO of LEGO in 2004. Assess the
key strategic decisions he made, including outsourcing and divesting the
theme parks.
2. 16-11.LEGO’s movie-themed products, keyed to popular film franchises
such as Harry Potter, Lord of the Rings, and Spider-Man, include detailed
construction plans. Do you think this is the right strategy?
3. 16-12.Using Porter’s generic strategies framework, assess LEGO in terms
of the company’s pursuit of competitive advantage.
4. 16-13.What risk, if any, is posed by LEGO’s movement into multimedia
categories such as video games and television?