The LEGO Success Story: Getting Everything to Awesome!
How has LEGO transformed itself from a business on the brink of bankruptcy to the largest toy company in the world?
At The LEGO Group, “Everything is awesome!” The aptly titled theme song for the company’s 2014 Blockbuster film, The LEGO Movie, captures the success of a multi-year operational re-alignment that has reaped tremendous financial dividends for the once struggling, globally recognized toy brand. Helped in part by Blockbuster films and headline capturing partnerships with the likes of Star Wars that sustain a strong brand awareness, the secret sauce of LEGO’s financial turnaround has been successfully tweaking its operating model to meet changing business model pressures.
Just over 10 years ago, LEGO found itself on the brink of bankruptcy. Faced with increasing competition from a globalizing economy, video game entrants and mass adoption of the internet, LEGO implemented several poorly prescribed innovation strategies. One such strategy was the hiring of a team of leading young European designers with no toy making expertise. The result was a severe escalation in number of parts (blocks), climbing rapidly from 6,000 to over 12,000 and causing a nightmare for logistics, storage, and infrastructure expansion with no corresponding gain in sales.
“Innovative” technologically advanced products, like Galidor (above) did not meet the ethos of the LEGO brand and cost more to produce than they were being sold for.
Beginning in 2004, under the new leadership of Jørgen Vig Knudstorp, LEGO went to work to combat evolving business competition, implementing a host of operational improvements that have allowed its business to flourish:
Streamlined product line: Back to the basics. LEGO introduces new products every year, but is mindful of the costs of this innovation. The leadership team reduced the number of different LEGO bricks produced, eliminating those that were costly to source, standardizing their design, and thus increasing the team’s ability to react more quickly to consumer trends. Additionally, the company decided to sell off non-core, underperforming business lines. Lesson learned: focus on core competencies, and do not be afraid to shut down operations of unprofitable businesses.
Innovation within reason: LEGO prides itself on creating unique ways to tap into the needs of its customer through advances in field research and design thinking. In an environment where mistakes can be made cheaply and there are no cost or feasibility constraints, a team called the Future Lab is tasked with generating interesting concepts for the company, even though many of them never end up getting launched. Yet, after the idea generation phase, the company ensures that costs of innovation are clear to designers. LEGO has devised rules regarding the creation of new colors, shapes and ordering of new materials. Lesson learned: no boundaries should be placed on idea generation, but strict guidelines limit the chances of creating loss leading toys.
(R&D expenses have moved in-line with Revenues & Profitability)
Small number of suppliers: LEGO strategically chooses to work with a narrower set of suppliers to stabilize pricing. Previously, engineers had one-off relationships with suppliers, ordering specified products from various vendors and leaving tremendous, costly waste in the system.
Focus on large retailers: Cutting out distribution to some of the smaller retailers, the company is able to reduce fulfillment costs and eliminate orders that consist of less than a full carton of bricks. Additionally, the company works closely with large retailers on demand forecasting, inventory management and product customization.
Lesson learned: create financial advantages from scale that improve margins and put pricing pressure on competition.
Proximity of manufacturing facilities: LEGO has built its manufacturing facilities close to core markets allowing LEGO to get products to shelves faster and respond quickly to last minute demands. The company currently has factories in Mexico, Hungary, Czech Republic, and Denmark and is building a facility in China. Lesson learned: use size and financial might to create physical barriers to entry for early stage competitors.
LEGO’s business model had historically been guided by two principles: capacity for innovation and commitment to quality. Ironically, a focus on innovation and quality at no costs actually led to mismanagement of the operating model and a huge drop in profit for the company. As described above, LEGO’s current operating model is set up to create unique competitive advantages that have been critical in enabling LEGO to turn around its financial performance.
Yet despite LEGO’s remarkable turnaround, constant evaluation of operating and business model efficiencies is required. LEGO recently announced that it had failed to foresee a jump in demand in Europe and, as a result, may not be able to meet all orders around Christmas time. Until existing factories are expanded and new factories are built, the company must focus on improving its customer demand forecasting capabilities. Under the current operating model, the company’s sales team meets monthly to adjust order estimates for the coming month based on sales in the prior month – a system that could require analytical improvement. However, as proven by its commitment to adjust operating tactics to meet business model goals, LEGO will likely address this flaw so that “everything remains awesome” for the company in 2016 and beyond.
Student comments on The LEGO Success Story: Getting Everything to Awesome!
This is a great report, Sam! I particularly enjoyed reading about their consolidation of factories closer to their headquarters rather than outsourcing production to many different locations. Do you know if demand suffered as a result from the decreased number of pieces? My understanding with LEGOs is that even though you buy them in a set, pieces are meant to be used generally and creatively. With a limited number of pieces available (down from 12,000), did consumers feel that their ability to produce was limited?
In addition, do you know why LEGO opted not to bring all operations in house and vertically integrate? For example, would it be beneficial for their economies of scale to own the entire supply chain rather than just the factories?
Thanks for your comments! I think originally when they cut down the number of pieces, demand didn’t actually suffer much because at the time, something like 30 products generated about 80% of the sales. They really cut out the “loss leaders.” In terms of integrating the entire supply chain, my understanding is that they have been able to negotiate attractive pricing from suppliers and given their focus is on design and quality, I would think they would want to focus on these core competencies.
Great article Sam! Enjoyed reading about Lego, and it brought back fond memories. Your point on “innovation within reason” is an important one. We’ve seen too many examples of companies that trip up during the move from conception to execution. It also nicely ties in what we learnt in the TOM innovation module regarding Design Thinking. I presume that all of this successful, business-building innovation is a result of them really focusing on empathizing with how kids play and interact across different markets, and then designing based on that vs. a boardroom brainstorm.
Looking ahead, how do you think Lego should think about the future? Continue to stick with the basics? With 3D Printing and Rapid Prototyping getting more mainstream and accessible, this could pose interesting challenges and opportunities for Lego.
You make a great point. The reason LEGO has been so successful in the last 10 years in terms of design and innovation is because of their intense focus on understanding their core customer. The company undergoes deep ethnographic studies of how kids play and through this understanding, creates new products. I would be interested to see how LEGO expands/changes its product line given the technological innovations across the gaming space.
Very insightful! I enjoyed learning about Lego’s successes and failures in developing a product portfolio that fits with Lego’s competitive strengths, as well as the innovations they have made in their supply chain and supplier relationships to improve the bottom line.
I’d be interested to learn more about two things – 1. What has been the impact of e-commerce for Lego? For example, for its top-line, has e-commerce made Legos more accessible to consumers, perhaps even broadening the options available to customers due to a long-tail inventory in e-commerce? Has e-commerce allowed Legos to establish more efficient distribution networks? 2. Has the diversification of markets Lego plays in led to any tensions between global / local organizational units? I’d imagine the center of power to shift gradually as emerging markets to be a huge driver of growth for Lego.
Great points on e-commerce. They have a great website where customers can buy directly through the site, but I am not sure the impact e-commerce has had on their top line. In terms of growth, the company has definitely moved beyond its core markets of Europe and North America and is doing a major push in Asia. Their current focus is on finishing up a new manufacturing plant in China which will serve all of their Asia markets.
I’d be very curious to examine what impact the focus on margins had on more of their educational and computer focused LEGO lines, such as the “Mindstorm” series. LEGO has a great opportunity to be considered an educational tool for students, by allowing them to build and program machines on their more advanced set. This may exact a high toll on profitability due to the level of complexity and cost of this product line, but it really drives brand equity by pushing the idea that LEGOs can be an educational tool, not just a recreational one. If they are not careful to continue to build this positive perception of their products, they might be undermining their long term growth.
Totally agree that brand perception is huge for them, especially among their target market, which is not just kids, but parents of kids who must decide that it is worthwhile to buy LEGOs for their kids.
It amazes me how LEGO has been able to survive over the past two decades with the rush to market of so many new electronic toys. Not only have they survived, but they’ve flourished! Just look at their jammed-packed (everyday) store with arguably the best real estate value of any vendor in Rockefeller Center – that’s proof in itself.
Your post was great. Toy production in general just seems like it would need a lot of R&D to compete, but for a company like LEGO, maybe it actually will hurt them more than help them since their basic product is already so good. I wonder what their plans are for the future and how they want to expand the LEGO name. They just were successful doing that with a motion-picture (which was great, by the way). But their attempts at replicating Disney’s success with Disneyland didn’t quite work out as well. I would love to see how “LEGOland” actually fared, and if there is any room to tweak this model to make it much more successful.
You make great points. LEGOland theme parks are actually not owned by LEGO Group. I think they made a smart choice to divest of these assets earlier in the 2000s since their core competency was not hospitality.
This was a great read especially since I had my fair share of Legos growing up! I thought both the “streamlined product line” and “innovation within reason” sections were particularly relevant because there seems to be a resurgence in creative art pieces being made from basic lego sets. Some examples that come to mind from following sports are: an Indians clubhouse manager used to make player mosaics out of legos (http://www.cleveland.com/tribe/index.ssf/2013/07/baseballs_stars_cant_keep_thei.html) and an Ohio State fan makes replica college football stadiums (http://www.ncaa.com/news/football/article/2015-11-06/big-ten-football-fan-creates-mini-stadium-replicas-using-legos).
Another interesting development seems to be the rise of independent Lego stores both in the US and around the role. Probably more of a marketing question than TOM but will be interested to see how these contribute to Lego’s future growth!
I really like the images you included! I totally agree that there has been a resurgence of the “basic” bricks. I do think the LEGO store helps in terms of brand perception and getting the name out their, especially in light of the competition from Mattel and other toy companies.
Definitely my favorite toys as a child. Not to mention getting to visit Lego Land in Malaysia! Great insights, Sam. I was interested to read that they went back to the basics and reduced the number of different LEGO bricks produced. This makes perfect sense from an operations standpoint, especially if they were struggling financially due to the high costs of part creation from complex designs and lack of scale. However, if anything, when I look at a LEGO store today, I feel like I see a lot of complex pre-formed pieces that almost act as a piece of art rather than a building block. In addition, I see a large variety of pre-packaged sets, which would definitely increase distribution complexity. I would be interested to learn how this fits into the operating model that you describe and if it helps them to compete against the diverse variety of online and physical toy offerings today. I love the basics of LEGOs and hope that their operating model can continue to evolve to ensure their success!
I definitely agree that the number of bricks has increased over the last several years. However, different from the late 1990’s / early 2000’s, this is likely due to the Future Lab’s field research and response to studies of core customers, not simply to creative designers deciding to focus on craftsmanship/complex designs. It will be interesting to see how the company fairs as it does increase the complexity of its products to appeal to a broader market!