Playing is part of everybody’s childhood. It is fun, educa- tional and important for the development of our individual physical, intellectual and social skills and competences. There are many ways to play, and companies in the global toy industry compete fi ercely and must constantly change to gain and maintain the interest of children and their parents.
It was therefore a pleasure for Jørgen Vig Knudstorp, 1 CEO of the LEGO Group, when he announced the results for 2012:
‘We are again able to present a result which exceeds our imagination.’
Sales amounted to DKK23.4 billion (£2.64bn; $4.04bn; €3.14bn), 2 an increase of 25%, and net profi ts were DKK5.6 billion, up by 35% (see Table 1 ). In addition, the LEGO Group improved its market share to 8.6%, ranking it third in the global toy market. Sustaining and managing growth remains a key strategic challenge for the 80-year- old LEGO Group.
The LEGO brick – a major factor in the expansion of the LEGO Group
The company was founded in 1932 in the village of Billund, Denmark, by Ole Kirk Christiansen. Wooden toys quickly became the best-selling item, and the company took the name ‘LEGO’ – a conjunction of the Danish words ‘LEg GOdt’ (‘play well’). In 1949 the company started producing early versions of the well-known LEGO plastic bricks. In 1958 the current interlocking principle with studs and tubes was invented and patented. The tightly
gripping pieces made it possible to build more stable and bigger constructions than before. The public was reluctant to accept them at fi rst, preferring more traditional wooden toys than plastic (then a new material). However, the LEGO bricks gained in popularity and the basic bricks were sup- plemented with fi gures and technical features, such as small electronic engines, which extended the playing opportunities. The fi rst LEGOLAND theme park was estab- lished in 1968 in Billund. Internationally, the LEGO Group began to grow and the number of employees increased from just 65 in 1950 to 1000 in 1970. Even during the economically diffi cult environment of the 1970s and 1980s, the LEGO Group continued to be successful by
CASE STUDY
The LEGO Group: adopting a strategic approach Anders Bille Jensen
The LEGO Group had historically been a successful, family-led, innovative and high-growth company in the global toy industry. However, the company hit some hard times in the 1990s and early 2000s. Following a successful turnaround the company is now on a growth trajectory, requiring ongoing efforts involving many aspects of strategic management.
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This case study was prepared by Anders Bille Jensen, University of Southern Denmark. It is intended as a basis for class discus- sion, not as an illustration of good or bad practice. © Anders Bille Jensen 2013. Not to be reproduced or quoted without permis- sion. Thanks to the LEGO Group for contributing to this case. This case has been written based on multiple sources, including literature, TV/radio interviews, the LEGO Group website, internet searches and, not least, interviews with key people at the LEGO Group. Financial figures are based on material from the company’s website, including annual reports, press releases and company history. LEGO and the LEGO logo are trademarks of the LEGO group.
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THE LEGO GROUP 545
introducing innovative products (e.g. LEGO TECHNIC, and new play themes like LEGO Castle, LEGO Space and LEGO Cowboys). It also took its fi rst steps into new markets, notably the USA, South America and Asia. In 1985 the company employed 5000 people (3000 in Billund). Successful devel- op ment continued into the early 1990s.
A family-run company
This development was driven by the family from the early years until the late 1990s. When Ole, the founder, died in 1958 the company was taken over by his son, Godtfred. As a junior Vice President, Godtfred had been one of the main driving forces behind the growth of the company for some years. Third-generation Kjeld was the fi rst to hold a
graduate degree from a business school. After gaining experi- ence in the Swiss subsidiary, Kjeld took over as CEO in 1978 while Godtfred continued serving on the board and remained passionate about the development of the com- pany and its products until his death in 1995. Under Kjeld’s leadership the LEGO brand had become established as a unique and iconic brand. Success had been built on a com- bination of effective leadership, innovative products and international growth. In 1996 the company received the IMD ‘Distinguished Family Business Award’.
A difficult time
In the mid-1990s Kjeld was planning for the future. Growth in electronic toys and changes in playing habits
Table 1 Key financial figures, 2003–12
Financial highlights
in Mn DKK 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003
Consolidated income statement Revenue 23,405 18,731 16,014 11,661 9,526 8,027 7,798 7,027 6,295 6,770 Expenses (15,453) (13,065) (10,899) (8,659) (7,522) (6,556) (6,393) (6,605) (6,394) (7,919) Operating profit 7,952 5,666 4,973 2,902 2,100 1,471 1,405 423 (99) (1,148) Financial income and expenses (430) (124) (84) (15) (248) (35) (44) (51) (75) 88 Restructuring costs, impairment 1 (22) (80) (43) (813) (455) Profit before tax 7,522 5,542 4,889 2,887 1,852 1,414 1,281 329 (987) (1,515) Net profit for the year 5,613 4,160 3,718 2,204 1,352 1,028 1,290 214 (1,800) (888)
Consolidated balance sheet Total assets 16,352 12,904 10,972 7,788 6,496 6,009 6,907 7,058 5,160 8,785 Net assets, discontinuing activities 2 1,367 Equity 9,864 6,975 5,473 3,291 2,066 1,679 1,191 563 404 2,344 Liabilities 6,488 5,929 5,499 4,497 4,430 4,330 5,716 6,495 5,160 6,441
Cash flow statement Cash flows from operating activities 6,220 3,828 3,744 2,712 1,954 1,033 1,157 587 720 989 Investments 3 1,787 1,580 1,200 1,258 443 399 316 237 285 653 Cash flows from financing activities (4,535) (2,519) (3,477) (906) (1,682) (467) 597 (656) (70) (205) Total cash flows (88) (233) (671) 558 128 592 1,925 1,570 443 (541)
Employees Employees, continuing activities 10,400 9,374 8,365 7,286 5,388 4,199 4,908 5,302 5,603 6,535 Employees, discontinuing activities 4 1,322 1,029 1,160
Financial ratios (%) Gross margin 71.1 70.5 72.4 70.3 66.8 65.0 64.9 58.0 57.9 54.3 Operating margin 34.0 30.2 31.1 24.9 22.0 18.1 17.0 5.4 (14.5) (23.7) Net profit margin 24.0 22.2 23.2 18.9 14.2 12.8 16.5 3.0 (28.6) (13.1) Return on equity (ROE) 66.7 66.8 84.8 82.3 72.2 71.6 147.1 44.2 (131.0) (28.1) Return on invested capital 1 40.2 133.4 161.2 139.5 101.8 69.7 63.6 16.2 (2.0) (13.5) Equity ratio 4 60.3 54.1 49.9 42.3 31.8 27.9 17.2 8.0 5.9 26.7
All figures in million DKK
Source : Excerpts from highlights in the annual reports 2012 and 2007. Figures have not been reported completely consistently and may not be fully comparable due to omission of specific items and changes in accounting practices
1 Restructuring and impairment costs related to actions taken during the crisis years 2 Including investments in property, plant, equipment and intangible assets 3 LEGOLAND Park employees 4 Excluding a subordinate loan provided by the owners
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546 THE LEGO GROUP
were a concern. Would kids stop playing with traditional toys? There were, however, also a lot of opportunities which could be based on the existing strong position of the group. Kjeld was also keen on combining initiatives with a new, decentralised management structure, which could take the LEGO Group into the future.
In 1995, major new 10-year objectives were set, plans were made, resources allocated and initiatives were launched. The overall objectives were to become the best- known brand among families with children, to grow sales by 100–200% over a 10-year period, and to establish three or four LEGOLAND parks. The brand would be expanded by entering into alliances with partners in related areas such as fi lms, clothing and games. A new and more decentralised management style was also introduced to strengthen the management of the organisation and make it less depend- ent on Kjeld. Over the next few years, a number of senior and long-serving managers left, as they disagreed with the new management style and/or with the new strategy. Conversely, new managers and specialists were hired to support the new strategy.
The whole expansion plan proved to be too ambitious and resulted in signifi cant problems for the company. Profi tability declined and eventually turned into losses; debt increased to a level that threatened the autonomy of the company. The company was facing a crisis.
Kjeld realised that the LEGO Group was facing problems which were unfamiliar to the company and its current management. He stepped back and an external chief operating offi cer (COO) was hired. The performance and results of the company continued to fl uctuate, showing no consistent development. Kjeld stepped in again at the beginning of 2004 and the COO left the company. At that time, however, outsiders began to question who was running the business: the family, the new managers, or – worst case – the banks? Late that year, Kjeld handed over the CEO position to Jørgen Vig Knudstorp (‘Jørgen’), then a 35-year-old executive Vice President. His relatively young age and his background caused some discussion in the press. However, he had a good track record. Jørgen holds a BA in Economics and a PhD from the University of Aarhus (Denmark). He worked at McKinsey & Co. as a Management Consultant (1998–2001) before joining the LEGO Group as Director, Strategic Development. He was promoted to become Senior Vice President, Corporate Affairs. 3
Would he be able to handle the task or would he fail?
Back on track and creating the basic recipe of growth
The LEGO Group became profi table again in 2005 and began a growth journey which has been going on since then. Profi tability has also increased signifi cantly (see
Table 1 ). The development has been based on a number of interacting and mutually supporting initiatives.
Focus on the core business and improvement of the capital structure As a privately owned business the LEGO Group must be able to fi nance its own activities and service its debt. During the crisis the LEGOLAND parks were (partly) divested, which reduced the debt burden. In addition to these struc- tural initiatives an important element has been the rebirth of the traditional business. The combined effect of debt reduction, growth and improving profi tability has resulted in a strong fi nancial position which is clearly seen from the equity ratio, 4 which – after paying out dividends – has been doubled since 2008.
Focus on sales and distribution As with many other manufacturing companies, the LEGO Group is dependent on retailers. Having attractive brands and products (for end customers) is crucial for leveraging bargaining power towards distribution partners. This dimension is increasingly important as retailers are expand- ing and consolidating on a global scale. Such partners are big companies such as Toys R Us with turnover in the region of $14 billion, and Wal-mart with sales in the region of $450 billion. Good relations are also important in order to align expectations, obtain market information and fi ne- tune sales in both the short and the long run. The LEGO Group actively involves major retailers in the planning of the future product portfolio. As a recent development, direct sales through online channels and brand retail stores have increased to 10% of sales.
Focus on cost, quality and supply chain The toy market is highly seasonal with peak sales in the second half of the year (Christmas), which makes produc- tion planning a challenge. Many toy manufacturers spend the fi rst half of the year building up stocks of fi nished goods which are then sold and distributed in the latter half of the year. This is a challenge, as the specifi c composition of the sales is diffi cult to predict. During the crisis years, the LEGO Group tried to outsource production of the bricks in order to save costs. This soon proved to be a mistake, as quick market feedback, fl exibility and fast adjustments in the supply chain were lost as external sourcing partners could not cope. Simultaneously maintaining quality and having an ability to respond to short-term changes in demand are key success factors.
Focus on innovation To stay ahead of the competition and align with changes in children’s playing habits, differences between markets and segments (e.g. boy/girl, geographies and cultures) and
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THE LEGO GROUP 547
technological innovation, a continuous fl ow of new products is needed. Such products are both classic LEGO products but also launches based on current themes such as new movies. This strategy has paid off as up to 60% of annual sales are from product innovations, most recently ‘Ninjago’ and ‘LEGO Friends’, in addition to pro- duct renewals within the ‘LEGO StarWars’ and ‘LEGO City’ assortment. Approximately 160 employees are dedicated to development. The LEGO Group has been very successful in including users through open innovation processes. LEGO users – of all ages and all over the world – are encouraged to add new models based on their own ideas. These proposals are then evaluated by the management and ranked in user panels. The most successful ones are included in the assortment. A new line of products, LEGO Architecture, was initiated by a user interested in constructing famous buildings in LEGO. Further, the LEGO Group won 4 out of 12 awards at the Toy Fair 2013. The combined innova- tion effort is important to ensure interest from users, high levels of turnover in retail outlets and staying ahead of competitors.
Focus on the brand and brick quality Over the years, the LEGO Group has focused on brand building and product quality to compensate for the expira- tion of patents. At the core of this strategy has been an accumulated knowledge about plastics and production technologies. The results are superior gripping power of the bricks and leadership in non-poisonous plastics which imitators have not yet been able to achieve. Direct imitation and compatible bricks are therefore more a threat to the brand (as consumers may take inferior imitations for LEGO products), rather than direct sales threats.
Not everything, however, has been successful. Entering the digital scene has been a challenge. A major initiative – an online multi-player game – called ‘LEGO Universe’, in which players could build, create and play together via the internet, was launched in 2010 after several postponements. It was not very successful and had to be withdrawn again. Other games, however, have sold in millions. It remains a priority for LEGO to provide offerings that facilitate children’s options of moving between the digital world and the physical construction bricks when playing.
The LEGO Group’s overall development, so far, has been successful. In a stagnant toy market – some geographical regions are even declining – the Group has been able to grow sales from DKK7 billion in 2005 to more than DKK23 billion in 2012. 5 Product lines include pre-school, traditional bricks, play themes, licensed products, robots, games and educa- tional products. As a result the LEGO Group has an estimated 8.6% share of the global toy market (up from 4.8% in 2008), ranking it as number three in the market.
Future challenges
Jørgen does not perceive the current, successful position as a fi nal destination, but rather as a starting point for taking on new initiatives to ensure continuous improve- ments and sustained growth. As the LEGO group is a highly focused company, there are no other product ranges to compen sate for any failures. Keeping up performance and growth remains a priority. Just a few years ago many deci- sions were strongly infl uenced by fi nancial necessity. Today the LEGO Group has a strong fi nancial position, strong growth and more options than it has had for years. The context of the decisions has changed dramatically, but they are still very important for the future development of the company. Jørgen is thinking about what should guide his strategic decisions. One lesson from the last decade stands out: the LEGO Group has developed a new under- standing of its roots, its successes and its failures. The company has decided to stay close to construction toys and develop in this area, applying the ‘obviously LEGO, but never seen before’ principle, refl ecting newness but also a natural recognition and fi t with the LEGO brand. This understanding can only be helpful to a certain extent – multiple markets, products and organisational entities require a more fi ne-grained and systematic approach.
As Jørgen adds:
‘The LEGO brick will continue to be our foundation. In some markets we don’t have a huge presence yet, and there our goal is to increase market share by raising awareness and attracting new audiences to our prod- ucts. Whereas in other markets, for example Germany, we already have a high market share so to increase that we need to cater for new target groups with new products.’
Taking the refl ections a step further, some of the LEGO Group’s potential strategic challenges are as follows.
Geographical scope and market presence Balancing existing and new/high-growth markets remains a challenge despite the recent growth taking place in a broad range of markets. LEGO’s big markets are well estab- lished, but to a certain degree are mature and stagnant markets. Still, doubling the market share in the USA would mean signifi cant growth. The Asian region accounts for approximately 10% of the total sales, and market shares range from 3 to 25%. Asia and South America require ongoing investments in local organisations and facilities, as these are markets where the LEGO Group has only limited knowledge. Taking the uncertainty in the global market into consideration, are the speed of growth and the balance of markets optimal?
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548 THE LEGO GROUP
Handling the growth Further expansion of production in existing and new facilities spread over the world requires signifi cant funds. With a healthy cash fl ow and a good equity ratio, the fi nancial situation is currently not a major concern. However, main- taining a high and successful level of innovation, building capacity and hiring more than 1000 new employees (in 2013 alone) require signifi cant organisational resources and add to the complexity of the group, for example in maintaining quality levels, fi nancial controls and compliance with local laws. Can the organisation cope with this growth? Where – and how – should it be strengthened?
Girls – pursuing the growth opportunity Historically, LEGO has had a higher appeal to boys than girls. Over two decades the company has tried several times to adapt its products and communications to girls. After four years of preparation a breakthrough was achieved in 2012. LEGO Friends ® (a product range specifi cally aimed at girls) has resulted in signifi cant sales and demand above capacity. Apparently there is a large female market. How should this success be followed up?
Navigating in the competitive arena The success of the LEGO Group has not gone unnoticed by its competitors. Recently Mattel and Mega Brands have decided to form a partnership. For girls they have created a ‘playing universe’ which combines the Barbie doll with bricks from Mega Bloks. For boys the combination is to apply the Hot Wheels brand from Mattel with bricks from Mega Brands. Hasbro has launched Kre-O to build on its Transformers universe. Bricks from both Mega Brands and Hasbro are compatible with LEGO bricks. In addition there are other players in the market, as well as substitutes in the form of video games. Should this affect the strategic agenda of the LEGO Group? To what extent should the company pursue its own agenda and/or respond to com- petitors’ initiatives?
Playing in the digital and new media age The LEGO Group has not been successful in this area, despite multiple attempts and allocating huge resources. During the last two decades it has witnessed compan ies in these sectors growing into big companies, including game
producers Bandai-Namco and Tomy-Takara from Japan (with combined sales of $6.5 billion). Why is it that the LEGO Group did not succeed with LEGO Universe? Should the LEGO Group take any new major initiatives in this area or remain satisfi ed with its current development?
Education and play Although the idea of educational toys is not new, a separate business unit has been established for educational products. This business unit has grown signifi cantly and sales in 2012 exceeded DKK1 billion, but sales are unevenly distributed in different geographic regions (with market leadership in some markets). How does this affect the positioning of the LEGO brand in various markets?
As the LEGO Group grows, the challenges are changing and include both short- and longer-term issues and issues related to each other. Obviously, these decisions will have different implications in terms of the resources and cap ab- ilities they require. Additionally, such decisions determine which markets and which competitors the LEGO Group will face. Further, it has to be remembered that the LEGO Group is not a public company and has to fi nance its growth from its own capacity to generate funds. On the other hand this protects the company from broader investor pressure and possible takeover attempts.
Imagine you are in Jørgen’s position and have to prepare the strategic agenda. What do you think about these issues? What information would you need? What resources can you get – how and when? Who would you involve in the strategy process? What tools would you use? How much can you plan in advance and what type of activities need a more action-orientated approach?
Notes and references 1. Jørgen Vig Knudstorp was appointed in 2004 and was the first CEO
from outside the family. 2. DKK1 = £0.114 = $0.175 = €0.134. 3. See http://www.imd.org/about/foundationboard/knudstorp.cfm for fur-
ther details. 4. Equity ratio is defined as equity/total assets. In general, a high equity
ratio indicates a strong capital structure of the company, especially if combined with a strong cash flow.
5. By comparison, Mattel, the world’s largest toy company, has annual sales of approximately DKK 40 billion ($7.1 billion) and Hasbro of DKK 23 billion ($4.1 billion). In Asia a big player is the Japanese- based Bandai-Namco company.
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