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Founded in 1932 by Ole Kirk Kristiansen, Lego Group is a large private company in the toy-making industry. The etymology emanates from Danish language; “leg godt,” which means “play well”. Failing in wood supplies industry, Kristiansen began producing wooden toys, which succeeded in the market at the time leading to the creation of plastic toys which also hastily occupied the toy-markets.
Before 1993, LEGO had experienced ordinary troubles with sales without facing severe problems, as the rise of its products went on. After a catastrophic period between 1993 and 2004, sales grew again and reached £163 million in net profit in 2008, with sales increasing by 51% in the UK, with an increased market share of 2.2 to 3.3% (Elmansy 22).
Between 1993 and 2004, the company faced many problems. The biggest one, which happened between 1993 and 1998, consisted in a suspension of the sales’ increase. In order to keep growing, the company produced more products, but sales did not increase. Subsequently, costs went up and hindered profits (23). Toy industry was sharply altered so that it is not in favor of LEGO Group. Many competitors, like “Toys R” had broken the barriers of competition and had successfully entered in the market and many other companies had moved the factories in China, causing a decrease in their product’s prices.
These changes, combined with such poorly planned investment and the decline in the sales of some important lines of toys, in conjunction with the LEGO Group almost put it out of business making it to lose almost DKK 1 billion in 2003 and its cash fell dangerously low (Robertson 2008). The company suffered a record-breaking loss, which put the company at the brink of near bankruptcy.
The case of LEGO almost succumbing to bankruptcy is matter of global influence and authority more than anything else. LEGO participates in the global diverse market. Over the years, the company has been able to expand its business operations in nearly all major markets globally. LEGO, a household name in toy products, takes the upper hand by its strong brand recognition which is known throughout the world. The company is also well adept to marketing trend, especially in developing and emerging markets. Management wise, the company has a well-established management system that aimed at producing efficient and high quality toy products.
Nevertheless, despite these excellent conditions, LEGO still had to deal with decreasing sales in spite of producing more products – the company was losing its customers because of fierce competition in the market. In order to keep up with the competition, the company was forced to sell their products with lower margins to compete with brands that are cheaper but are of equal level of quality. What could have been wrong here? One of the most apparent weaknesses of the company is their unnecessary standardized procedures and products that led to the emergence of monotony in the entire system. LEGO group also puts higher margins on all of their products as compared to their rivals. LEGO must have thought that higher prices may add up to the premium value of their products. Indeed, despite the fierce competition and tug of war in the pricing aspects, the company was still able to obtain higher profit margins, which demonstrate that there are no substitutes that can be acquired. But another critical problem that add up to the problem is the lacking or weak internal communication that gave way to the rise of conflicts and irregularities among its workers.
This case presents several opportunities: the company has been able to expand its operations in large markets such as Europe and Asia and it has started to explore developing and emerging markets in Africa and South America. Another thing is that the company is selling with a single product brand: the company should consider creating more products as an addition to its product lines, giving more options for consumers to choose from. LEGO can take advantage of setting up IPOs in the market in order to increase its market value.
What LEGO initially did is it has gotten rid of this crisis by applying three main measures, costs’ reduction, innovation and reinventing its traditional products: (1) Firstly, it sold some assets, reduced the staff and outsourced several groups of production. But this didn’t seem enough; to make a U-turn in the company profits, its leaders had to improve the whole innovative system.
LEGO first tried to invent new products, hoping they could solve their problems. LEGO collaborated with production companies behind famous movies and characters such as Star Wars and Harry Potter to create new bricks that children would buy based on their passion for the movies rather than for LEGO itself (Elmansy 2014). But only a few of these products succeeded in the marked while the others resulted in a failure. Even successful products had a short-term success because they were based on cinematographic products which, once grew old, could cause the purchases of the theme to fall.
The very solution how LEGO solved its market crisis was by using the activity it was specialized to. It returned to its traditional brick themes, like racing cars and schools. These themes allowed costumers (mostly children) use the bricks for a long time. Also those who would buy a brick theme, would be tempted to purchase another one. This strategy was one of the greatest LEGO’s marketing strengths that would cause its sales to rise again. In February 2015, Lego replaced Ferrari as the "World's most powerful brand" (Brand Finance n.p.)
The LEGO case is an important and lesson for business strategists to understand the importance creativity and innovation in an organization. It shows that many models of business, rather than putting innovation, creativity and exclusive design in the center of the organizational process, try to support their success in costs’ reduction and outsourcing of products. The last model can result in a path to failure. This is true especially for those companies that depend on the rarity of design, creativity and innovation, like LEGO.
As happens to living things, a company can raise its chances of success by focusing only in their own niches, in what they are specialize to do, rather than diversifying to many activities which may lack any comparative advantages.
Works Cited List:
Elmansy, Rafiq. Learning More About Creativity And Innovation From LEGO, Smashing
Magazine, August 8th, 2014.
Rivkin, Jan W. Thomke, Stefan. Beyersdorfer, Daniela. LEGO (A): The Crisis, Harvard
Business School Case 713-478, February 2013.
Robertson, David. Crawford, Robert J, Innovation at the Lego Group, Harvard Business
Review, March 28, 2008.
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