The Lego Group was founded in 1932 by Ole Kirk Christiansen. For years of development, Lego has achieved the transition from a carpenter’s workshop to a global enterprise. Its Lego brick has been named the ‘toys of the century’ twice and greatly contributes to the company’s stable growth. Nevertheless, Lego struggled mightily in the early to mid-2000s. Sales dropped 30 percent in 2003 and 10 percent more in 2004, and the company was destroying about $337,000 in value every day (Oliver, Samakh and Heckmann 2007).
How could such a seemingly successful toymaker suffer severe financial difficulties and almost stand at the brink of bankruptcy? One prominent problem behind its crisis is Lego’s over-diversification and over-expansion in its product portfolio and ignorance of its core business. In the first part, the report aims to analyse its over-expansion problem from strategy, marketing and management perspectives respectively, and then it provides the Lego Group the ‘focus on the core’ solution, based on related management and marketing theories. Part 1: Lego’s Over-Expansion Problem
From the early 1990s, the Lego Group began to practise an expansion and diversification strategy, and invested sustainable funds in its new products. The following cost increased, however, it did not produce a desired result. The expansion action cannibalised on the sales of its core products and thus eroded earnings. To examine the reasons behind it, strategy, marketing and management perspectives are all consulted. 1.1 From a strategy perspective, Lego’s expansion and diversification strategy failed to fit into its position. Strategy is about a set of activities which delivers a unique mix of value to the company and builds its competitive advantages within the industry. It in some ways determines a company’s position in the market. Companies are all trying to achieve the ‘strategic fit’, in terms of initiate activities, including allocating resources, planning and producing. For Lego, its most prominent resources and products are its brick and building system-based toys. They grow and defend the company’s position on the toy industry. However, influenced by the adjacent market and rivals, Lego hastily developed an expansion and diversification strategy, which extended its business into software (Lego Moviemaker), lifestyle products (Lego kids’ wear), books, theme parks and so on.
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Many of them, such as Legoland Parks, belonged to capital-intensive products, but provided limited return, or even no gains. Lego’s wrong strategy wasted much unnecessary money and energy in new and unfamiliar areas, and forgot to consolidate its position in the core toy market. Consequently, Lego lost market share, as well as its competitive advantages. 1.2 From a marketing perspective, Lego’s over-expansion ignored products’ law of development. Introducing new products to the market every year is not necessarily a bad thing, but Lego did not align its value chain with that strategy. From the manufacture and operation part, in the process of New Product Development, Lego failed to consult its products’ idea and design, and market needs. Some toys, such as Scala and worst and Galidor, had problems in its internal idea and design. The ‘Galidor’ series contains so many new components exclusive to each individual set that it resulted in awkward kits that did not comfortably match a Lego toy design. Some products, such as the LegoEducation which aimed to cultivate children’s learning capabilities, received low consumer recognition, due to its absence of marketing research and analysis.
Moreover, Lego’s Product Life Cycle Management is poor. In the market, every new product needs certain period to grow and become mature. However, Lego’s continuous introduction of new products declined their life cycle. Consumers did not have enough time to know, recognise and accept one product, and following products came up. Such a short product life cycle led to the number of stock keeping units (SKU) multiple every year and increased the inventory backlog. 1.3 From a management perspective, Lego’s over-expansion resulted from its lack of a clear leadership with a command management structure. In the core of the Lego Group, its leadership team and management structure was messy. First, Lego inherited the family-business management system. The Kristiansen family controlled the business by generations. They might lack professional management knowledge in decision-making, as the market became increasingly competitive.
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Second, Lego recruited its external managers based on their general leadership experience, rather than their direct experience with Lego toys (Rivkin, Thomke and Beyersdorfer 2013).
Thus these managers lacked a clear vision and mission for the company’s future. Furthermore, there was a big hole in its management structure. The diminishing of responsibility resulted its lack of discipline, control and transparency in accounting, costing and production management. Such an internal management chaos pushed Lego into a wrong decision-making. As its competitors like Tyco Toys and Mega Bloks extended its products into digital, Lego’s managers believed that the Lego bricks was going to die. Hence Lego rushed into adjacent markets in the perceived needs to diversify away from the original business (Greene 2010).
Part 2. The Solution: “Focus on the Core”
Lego’s over-diversification and over-expansion brought several negative consequences. The improvement of the basic skills set within the business were sacrificed for other areas. The R&D costs increased without any significant improvement in sales. Higher number of SKUs within the production process led to a low return on assets. As a result, rationalising the product offer, introducing back to the core business, and focusing on the Lego brick legacy is a good solution for Lego’s future. 2.1 The core competence provides the best chance for a company’s sustainable growth. Business cannot afford too much diversification, for its resources and capacities are limited. Rather than expanding its business in many areas without emphasises, it is wise to strengthen its core competence, as it is the key differentiated the company from competitors. For Lego, its core competence is the brick and the building system, and subsequently its core product is the construction toys.
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They are far more than other toymakers like Mattel and Hasbro can compare to. The Core Competence Theory suggests that a company is expected to effectively allocate resources to the core and thus to achieve the technology, management and service improvements. Consequently, in the future, Lego is expected to concentrate its energy on the core business, innovate its brick and building system and develop construction toys for a clearly defined customer group. it is an effective way to rebuild Lego’s competitive advantages in the toy market. 2.2 Back to core is easy to meet customer satisfaction.
In the current marketing concept, producers not only need to produce the products, but also have to keep customers satisfied with their products. In other words, today whether a company can grasp customers’ needs and wants and bring satisfaction to them will directly influence the company’s financial performance and market share. The Lego brick is designed to practise children’s creativity, imagination and problem-solving abilities. Due to its perfect combination between entertainment and learning, the Lego brick wins many parents’ preferences. The parents are Lego’s target customers. Although digital toys have dominated the market and children have less unscheduled time, traditional toys are still attractive, as they can bring children the real and physical enjoys. With respect to consumers’ wish of having fun in a short time, Lego maybe simplify its building system to bring children commitment but not occupy them too much time. The more market-responsiveness and focused product range not only meet customers’ satisfaction, but also rebuild Lego brand.
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2.3 Limitations of the solution and alternatives
“Focus on the core” is proved to be an effective solution for Lego’s sustainable growth. It helps Lego achieve the financial turnaround by high-quality and customer-oriented products. Nevertheless, there are some limitations in the solution. One is the limited potential of the core products. Based on the Product Life Cycle, the Lego brick has reached its maturity, even decline stage. It is hard for the company to innovate in it. The other is the restraint of Lego image. Lego’s expansion and diversification show its ambition in penetrating other areas, apart from toymakers. However, the ‘focus on the core’ solution redefines Lego’s image as a toymaker, and may limit its potential. For this point, perfect its supply chain and let it fit for its expansion strategy may be an alternative.
Greene, J. 2010, “How Lego Revived Its Brands”, 23 July, Bloomberg Businessweek, viewed 30 September 2014, <http://www.businessweek.com/innovate/content/jul2010/id20100722_781838.htm>. Oliver, K., Samakh, E. & Hechmann, P. 2007, “Rebuilding Lego: Brick by Brick”, Booz & Company, Business+Strategy, issue 48. Rivkin, J. W., Thomke, S. H. & Beyersdorfer, D. 2013, “Lego (A): The Crisis”, Harvard Business School, 9-713-478.