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Here is the case. we are asked to identify the issue of the case and find the alternative way. we already find the issue: Lego competes in the toy industry, while that industry is very broad, we can narrow down the industry to sub-categories. Where Lego best fits within the toy is in the construction toys, where you can take sets of building blocks and build virtually anything you want. However within the industry, there is lots of competition, so the issue that we are presented with is how can Lego differentiate themselves from the competition. and we have a summary of the key point we have to use in alternative analysis.we just need to write it according to the summary.between 1-2 page double space is ok.and i will also provide the external and internal analysis of Lego.( you may need it, i’m not sure, our professor said it’s better to connect our alternative analysis with our external and internal analysis)
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THE LEGO GROUP: BUILDING STRATEGY
Paul Bigus wrote this case under the supervision of Professor Darren Meister solely to provide material for class discussion. The
authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised
certain names and other identifying information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written
permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies
or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University
of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected].uwo.ca.
Copyright © 2011, Richard Ivey School of Business Foundation
Version: 2013-02-01
On February 15, 2011, world-famous toy maker the LEGO Group (LEGO) assembled an internal
management team to create a strategic report on LEGO’s different product lines and business operations.
Over the past two years, numerous threats had emerged against LEGO in the toy industry: the acquisition
of Marvel Entertainment by The Walt Disney Company created major implications for valuable toy
license agreements; LEGO had lost a long legal battle with major competitor MEGA Brands — maker of
MEGA Bloks — with a European Union court decision that removed the LEGO brick trademark; new
competition was preparing to enter the marketplace from Hasbro — the second-largest toy maker in the
world — with the company launching a new rival product line called Kre-O. It was critical for the
management team to identify where to expand LEGO’s product lines and business operations in order to
develop a competitive strategy to continue the organization’s financial success and dominance in the
building toy market.
COMPANY HISTORY1
LEGO first began during the Great Depression in 1932, when Danish carpenter Ole Kirk Kristiansen and
his sons started making wooden toys after the demand for building houses and furniture declined. Some
of the first toys they made included yo-yos, wooden blocks, pull-along animals and wooden vehicles.
Kristiansen believed that “only the best is good enough” in manufacturing children’s toys; this motto was
so important to him that it was carved on a sign and hung on the workshop wall to serve as a reminder to
always produce top-quality products. He used the highest quality materials and workmanship to produce
toys that were designed to last through years of play. In 1934, the company name LEGO was created
when Kristiansen held a friendly competition among the workshop employees to help name the company,
with a bottle of wine as the prize. Kristiansen won the competition himself by creatively combining the
first two letters of the Danish words leg and godt, meaning “play well,” to form the name LEGO, which
also meant “I put together” in Latin. In 1942, disaster hit the small company of only 12 employees as the
entire workshop burned to the ground. Not willing to quit, Kristiansen rebuilt the factory and
painstakingly remade all of the lost designs from memory in order to keep the company going.
1
Daniel Lipkowitz, The LEGO Book, Dorling Kindersley Publishing, New York, 2009, pp.10-49.
Authorized for use only by Brandon O’Hearn in Strategic Management at Saint Mary’s University from Jan 08, 2019 to Apr 03, 2019.
Use outside these parameters is a copyright violation.
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9B11M086
Following the end of World War II, LEGO became the first company in Denmark to purchase a plasticinjection molding machine in 1947; however, the new machine came at a high cost, requiring the
company to risk a large portion of revenues and face the additional financial risk of plastic toys being
expensive to manufacture. With the acquisition of the new machine, one of the first plastic toys to be
created by LEGO was a baby rattle that was shaped like a fish. It did not take long before the investment
in the machine proved to be a success, as LEGO quickly expanded its business operations to produce over
200 varieties of plastic and wooden toys. Using the new technology, the first plastic LEGO bricks —
named Automatic Binding Bricks — were created and sold in sets in 1949; however, this name did not
last long as it was changed to LEGO Bricks in 1953, with the addition of the LEGO name being molded
onto every brick manufactured.
Godtfred Kirk Christiansen, one of Kristiansen’s sons, had grown up with the family company and
eventually became the junior managing director of LEGO. Upon returning from a toy fair in 1954,
Godtfred and a co-worker had a conversation during which they realized that no system existed to connect
different products or items in the toy industry. To Godtfred this represented a key opportunity to design a
new structured system of toy products, selecting the LEGO brick as the best company product with which
to create what he referred to as the “LEGO System of Play.” The idea behind the LEGO System of Play
was that each and every LEGO brick should connect to each other — not just within one set but across
multiple sets. A ‘Town Plan’ series with 28 building sets and eight vehicle sets was developed and
released. The strategy was simple but important: each additional LEGO set obtained by a child increased
the amount of LEGO bricks that the child had available to build with, thus more sets equalled more
creative opportunities. The different Town Plan models included LEGO bricks as well as various plastic
people, trees, vehicles and road signs. In order to help market the product to children and parents, the sets
were creatively designed in collaboration with the Danish Road Safety Council to help teach children
about traffic safety. Godtfred commented on the LEGO System of Play: “Our idea is to create a toy that
prepares the child for life, appeals to the imagination and develops the creative urge and joy of creation
that are the driving force in every human being.”2
The development of the LEGO System of Play lead Godtfred to realize that improvements were needed to
the LEGO brick design so that bricks could lock together firmly yet come apart easily: he referred to this
as the brick’s ‘clutch power.’ Finding the correct clutch power would allow for more stable and secure
LEGO brick models that would not easily fall apart. With such a brick design and building capability,
Godtfred believed that it would be possible to create anything out of LEGO bricks. In attempting to find
such a design, LEGO experimented with different plastic-injection molding designs that included various
shapes and connection methods before finally selecting a brick design that added hollow connection tubes
to the bottom of the existing LEGO brick design. With the improved design, when two bricks were placed
directly on top of each other, the hollow tubes on the underside of the top brick connected firmly between
the existing circular studs on the top of the bottom brick, providing the perfect amount of clutch power.
Pleased with the results, Godtfred submitted an application in Denmark on January 28, 1958, to officially
patent the improved LEGO brick design. The year signified a historical event for LEGO; unfortunately, it
also represented a major loss with the death of LEGO founder Kristiansen. This left Godtfred in charge of
the company, which had grown to 140 employees.
The 1960s
During the 1960s, LEGO had experienced rapid success with the new brick design, expanding sales to
many European countries as well as new markets in the United States, Canada, Japan and Australia. After
2
Daniel Lipkowitz, The LEGO Book, Dorling Kindersley Publishing, New York, 2009, pp.18.
Authorized for use only by Brandon O’Hearn in Strategic Management at Saint Mary’s University from Jan 08, 2019 to Apr 03, 2019.
Use outside these parameters is a copyright violation.
Page 2
9B11M086
another fire destroyed the workshop where LEGO wooden toys were made, the company decided to stop
selling wooden toys altogether and focus completely on the LEGO brick and System of Play. By 1967,
more than 18 million LEGO sets had been sold in 42 different countries, with LEGO employing over 600
people. The company had also expanded the LEGO brick design to include over 200 different shapes such
as wheels, flat bricks, train tracks, windows, doors and flags; this added further detail and allowed more
creative possibilities to the System of Play sets. In an effort to help children and parents with the variety
of bricks and the increased complexity of building sets, LEGO introduced building instructions as a
standard feature of each building set. The increased success and popularity of LEGO around the world
lead to the development of the first LEGOLAND theme park, opening in LEGO’s home country of
Denmark in 1968. During the same year, LEGO continued to experiment with new products, introducing
a brick called DUPLO which was eight times the size of an original LEGO brick and safe for children
under five.
The 1970s
By 1975, LEGO had grown to over 2,500 employees and continued to develop new innovative sets that
included a series for girls involving doll houses and furniture, ships made out of LEGO that could float in
water and a LEGO Technic series which created models with mechanical moving parts. In 1978, LEGO
continued to transform the building toy industry by introducing the first miniature figures with painted
faces and movable arms and legs. LEGO incorporated the mini-figures into the launch of three new play
themes: LEGO Castle featuring medieval knights and castle sets, LEGO Town featuring city characters
and modern buildings and LEGO Space featuring astronauts and spacecraft. The company changed
leadership again in 1979, when third-generation Kjeld Kirk Kristiansen, Godtfred’s son, became president
and chief executive officer (CEO) of LEGO.
The 1980s
With LEGO celebrating its 50th anniversary in 1982, the company continued to expand operations,
launching an educational line for schools as well as a DUPLO Baby series. Over the years, LEGO
continued to experiment by combining LEGO bricks with technology, introducing a Light & Sound series
in addition to a LEGO Technic series — that allowed motors to be controlled by a computer — in 1986.
Success of the LEGO play themes continued with new Castle, City and Space sets being released each
year, in addition to a new LEGO Pirates theme being launched. With many children building their own
LEGO creations without instructions, buckets full of assorted LEGO bricks were also made available to
purchase for creative building. LEGO had become established around the world as the building toy of
choice, with many fan clubs being created and building competitions taking place. To stay connected to
an ever-growing market, a LEGO magazine was also made available in many countries to keep members
up to date on new product information and creative building ideas.
The 1990s
LEGO had grown to become one of the top 10 largest toy manufactures in the world by 1990. Global
operations employed over 7,000 people and included over 1,000 injection molding machines in five
LEGO factories. LEGO utilized its strong brand image by opening LEGO stores to exclusively sell
LEGO products and merchandise. The use of television advertising also helped the company to build a
familiar “LEGO Maniac” slogan. With the increase of home computer use and the rise of the Internet,
LEGO launched the official LEGO website (www.LEGO.com) in 1996. Following soon after in 1997,
Authorized for use only by Brandon O’Hearn in Strategic Management at Saint Mary’s University from Jan 08, 2019 to Apr 03, 2019.
Use outside these parameters is a copyright violation.
Page 3
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LEGO also diversified its product line by launching many new creative play themes such as LEGO
Western, LEGO Adventurers, LEGO Aquazone, LEGO Iceplanet, LEGO Time Cruisers and LEGO
Space Insectoids. The company had even created a LEGO brick vacuum device to help children do their
least-favourite LEGO activity — picking up the bricks. LEGO advanced again in 1999, as for the first
time the company acquired the licensed rights to famous movies and children themes, which lead to the
launch of LEGO Star Wars and DUPLO Winnie the Pooh product lines. Combining Star Wars licensed
property with LEGO bricks allowed for constructible sets to be created, featuring various well-known
characters and vehicles from the widely-popular franchise films. The LEGO Star Wars theme was a huge
success, quickly developing into one of LEGO’s most profitable product lines.
2000 and Beyond
Following the success of LEGO Star Wars, other popular licensed rights were obtained for new product
lines. Harry Potter, Spiderman, Batman, Indiana Jones and SpongeBob SquarePants were all developed
into LEGO series sets. Licensed rights were also obtained for DUPLO sets including Bob the Builder,
Dora the Explorer and Disney themes. The licensed agreements did not stop there as LEGO viewed
professional sports as new opportunities, subsequently launching series sets with LEGO NBA Basketball,
LEGO NHL Hockey and LEGO Soccer. Lego also continued to develop products internally, offering new
play themes such as LEGO Knights’ Kingdom, LEGO Alpha Team, LEGO Bionicle, LEGO Discovery,
LEGO Clikits Jewelry, LEGO Studios, LEGO Mars Mission and LEGO Exo-Force. As LEGO was also
popular with many adults, special edition sets were created for advanced LEGO builders and collectors,
featuring such famous structures as the Statue of Liberty, Taj Mahal, Eiffel Tower and the Star Wars
Death Star. Some sets proved to be more successful than others; as a result, some product lines were only
sold for a few years before being discontinued in order to free valuable shelf space, production and
advertising resources to produce LEGO sets that were in high demand.
With the successful acquisition of many licensed rights, LEGO partnered with video game design
companies to develop video games for both computers and video game consoles: this resulted in over 30
LEGO video games being released between 1997 and 2009, featuring the popular LEGO licensed product
lines of Harry Potter, Batman, Indiana Jones and Star Wars. LEGO had also developed video games
based on its own successful product lines and themes. Overall, many of the video games were highly
popular with both children and adult age groups, as they featured LEGO characters and famous movie
storylines to play and explore in LEGO-designed environments. At a time when many video games were
seen as too violent — with content inappropriate for children — LEGO provided non-violent video games
with content that parents could trust.
LEGO continued to expand beyond traditional video games to develop a virtual online LEGO Universe in
2010. After paying online to register, players could design their own personalized LEGO mini-figures to
be used to explore online environments and interact with other online players. LEGO was also constantly
updating and improving the LEGO website, which was receiving over four million visitors per month
from over 200 countries by 2003. All LEGO items were made available to purchase online, and the
website also provided interactive games, animated videos and comics. One of the most popular additions
to the LEGO website was the introduction of software called LEGO Digital Designer: this allowed a user
to design a LEGO set online, using the enormous catalog of LEGO bricks available. After users finished
building their own personal designs, the site would automatically calculate the cost for the materials,
Authorized for use only by Brandon O’Hearn in Strategic Management at Saint Mary’s University from Jan 08, 2019 to Apr 03, 2019.
Use outside these parameters is a copyright violation.
LEGO expanded into a new business area with the release the first-ever LEGO computer game. The
combination of LEGO and computers continued with the LEGO MINDSTORMS line, which allowed
users to build and control complex sets with the use of desktop computers and remote controls.
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THE FIRST TIME MANAGEMENT SAVED THE COMPANY3
The threats in the toy industry did not represent the first time LEGO management had faced serious
issues. Between 1998 and 2004, the company had lost money four out of seven years. Revenues had
dropped 30 per cent in 2003, and continued to fall another 10 per cent in 2004. Problems existed not with
the LEGO products but behind the scenes in how the company manufactured and distributed LEGO
around the world. Years of continuous growth added layers of complexity to LEGO’s operations.
Knowing that the company needed to change directions, Kjeld stepped down as company CEO in 2004.
He was replaced by Jorgen Vig Knudstorp, who had started at LEGO as the director of strategic
development in 2001. In his first actions as CEO, Knudstorp assembled a leadership team of senior
executives and managers to start analyzing every part of LEGO’s supply chain operations as a whole: this
included everything from new product development to materials sourcing, production and distribution.
The leadership team discovered that over the years, as new products represented a larger amount of
annual revenues, newer-generation LEGO sets had become more elaborate while providing less profit in
return. Product designers were creating new sets without giving full consideration to the costs of materials
or production: this resulted in LEGO dealing with over 11,000 suppliers, as designers often selected their
own vendors. Not considering production costs resulted in serious waste. If a designer created a new brick
or selected a rare colour, manufacturing would often be left with extra materials or costly resin colours
that would never be used again. Inefficiencies were also revealed from the poor organization of LEGO’s
plastic-injection molding machines, with each one capable of producing every type of LEGO brick: this
required costly retooling and created long downtimes, translating into production facilities only operating
at 70 per cent of capacity. Upon producing a finished product, the leadership team traced additional high
costs to distribution operations. Logistics represented a web of 26 different providers that shipped
products from multi-levelled distribution networks: this created a backlog of orders and inefficiencies in
inventory levels. The leadership team continued to uncover damaging business practices at the final retail
level. Overall, LEGO was spending the same amount of time dealing with thousands of smaller
independent stores that represented one-third of revenues as it did with 200 larger chain and big box
stores that generated two-thirds of revenues. Smaller stores also added extra costs for LEGO in shipping,
labour and inventory, as they often ordered less than a full carton of product. In turn, the disproportionate
amount of time with chain and big box stores equalled inaccurate forecasting and inventory shortages that
decreased sales.
In order to make LEGO profitable again, the leadership team introduced numerous changes across the
organization. Cost-saving measures were found by cutting the selection of LEGO brick colours in half,
while also reducing the number of different mini-figures available. The production cost for each
individual LEGO brick shape helped identify and reduce expensive items: this resulted in an 80 per cent
reduction in the amount of suppliers needed. With better production costs, designers could be shown the
impact of using existing brick shapes compared to creating new molds and colours. Further down the
supply chain, the leadership team increased production capacity by assigning certain machines to make
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