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The LEGO 	

Case Study	

2014
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The A

CONTENTS !

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1 ! Introduction!!
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2!
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Difficult start to the decade 2001.!

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Financial Focus - the !
Oveson addition. !

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Back to basics and the limit
to adjacencies. !

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3 ! Signs of Recovery 2002.!
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4 ! Hopes dashed - 2003.!
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5 ! LEGOLAND parks.!
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6 ! LEGO Brand Stores.!
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7 ! The Knudstorp Review.!
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10 ! Developing the strategy !
why do we exist? !

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11 ! First the action plan - first!
things first. !

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12 ! Summary and Conclusions!
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13 !Appendices !
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13.1 Knudstorp on!
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communication !
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13.2 References and slides

The A

1 Introduction !
In 2014, LEGO® announced record
results. In the financial year 2013,
revenues had increased by 10% to 25.4
billion danish krona. Profits before tax
were 8.2 billion DKK. The company had
once again delivered an impressive
operating margin of 33% before tax.!

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In US dollars, the company had achieved$4.5 billion of revenues and profits of $1.5
billion. Revenues had increased from justover $1 billion some seven years earlier.
LEGO® had replaced Hasbro to become
the largest toy company in the world
second only to Mattel. !

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In just eight years, revenues at the Danish
toy manufacturer had tripled. The company
had turned around a loss of 2.5 billion
krona in the financial years 2003 and 2004
to an operating margin the envy of hightech stocks around the world.!

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The transition had boosted prices andgross margins from 56% to over 70%, slashed operating costs from 70% to 37% of
turnover and doubled sales per employee. !

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Return on equity had increased from zero to almost 70% and equity values had increased
from 400 million to over 11 billion DKK. Valued on par with NASDAQ’s Facebook, thecompany would be worth over $150 billion. Not bad for a toy company based in Denmark. !

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The future had not always looked so promising. In presenting his report to management inJune 2003, Jørgen Vig Knudstorp, then head of strategic development had pulled nopunches, “We are on a burning platform, losing money with negative cash flow and a realrisk of debt default which could lead to a break up of the company”. Quite a turn around!!

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How had the remarkable transition been achieved? In this case study we analyse theperformance of the company using our corporate strategy framework of analysis. We apply
the same techniques to Apple [2012] and Amazon [2014]. The results are fascinating,offering comparison and contrast in the approaches used within each company.!
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Check out also the Excel and Keynote Slides available as a FREE download from the site.!
The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 3

2 Difficult start to the decade - 2001!
For LEGO® it hadn’t been such a great start to the decade. In
2000 the company had a loss of DKK 831m, which the Chairman
described as “unsatisfactory”. There had been little or no growthin the year. Global net turnover was DKK 9.5 billion, compared to
DKK 9.8 billion in 1999. In US dollars the company has lost $100
million on revenues of around $1.2 billion.!

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2000 had been a very difficult year for the entire toy industry. But
despite many strengths and high points, the LEGO Company was
impacted because it was believed by many, including key
customers and management, to have lost focus.!

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The LEGO Company planned to reduce or abandon certain
initiatives outside of the core business, including wristwatches,
publishing and other lifestyle products. At the same time, LEGO
intended to reduce losses in software and the LEGOLAND parks.!

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The strategy was to refocus on the LEGO brand – stimulating
imagination, creativity and learning – “it is what children andparents expect from us. We will continue to expand within thisarea, applying a growth strategy with a huge potential and lowerrisk”. !

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More emphasis was to be placed on using leading-edge
technologies in ways that support LEGO brand values – such as
extending the “intelligent brick” concept of LEGO MINDSTORMS
to open up whole new ways of playing and learning, as well as
initiatives such as LEGO Studios, putting the power ofmoviemaking in the hands of children.!

New products included the “power product” programme, as well development of the
TECHNIC and BASIC brands. It was believed that Bionicle, a new product with great
potential, first launched in Europe in February 2001, would combine physical and online
play with LEGO story building.!

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Products such as Harry Potter, Bob the Builder and Life on Mars – many of which would
be launched or expanded in the next year and beyond – were new concepts to provide
children with imaginative “story starters”. The product strategy - to create open-ended playscenarios with popular or fantasy characters with LEGO elements.!

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Check out also the Excel and Keynote Slides available as a FREE download from the site.!
The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 4

Part of the growth strategy for 2001 andsubsequently would include tapping the market
potential in the United States, Japan, the United
Kingdom and other European countries where
market saturation was far from achieved. !

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The Chairman was anxious to assure all LEGO
enthusiasts around the world the LEGO Company
was not in danger, despite a difficult financial year. !

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Safe in their hands !

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“The LEGO brand is as strongas ever. The LEGO Company
was built upon a vision that
we should nurture the childwithin every one of us. This isa timeless vision, and we willremain true to it and build our
future success upon it.” !

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It all sounded very promising and so it seemed initially.!

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 5

3 Signs of Recovery 2002!
In 2001 the LEGO Company
returned to profit. A pre-tax
profit of DKK 530m, comparedwell to a loss of DKK 1.07
billion the year before. Profit
from primary operations was
DKK 822m. This result was
described as “satisfactory”.
The 2001 result appeared to
be an obvious improvementon the previous year ’s
negative performance.!

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The successful result was attributed to a marked increase in sales and extensive internalchanges in areas such as production, control and the product range. “The changes havelargely been implemented – and have indeed borne fruit during the financial year.”!

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Sales rose from 9.5 billion DK in 2000 to 10.7 billion DK. Higher sales to the American
market were the biggest single factor behind the increase. Asia/Pacific and virtually all
European markets contributed to the higher level of turnover. !

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As for multi channel retailing, there was also an increase in mail-order and Internet sales
via LEGO Direct. “The LEGO Company has almost completed the process of radical
change in which it has been engaged over the past few years. The many adjustments
have helped produce a more efficient and market-oriented organisation” claimed the
Chairman in the Annual Report for the year. !

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“Our Company’s financial success is due primarily to the resolute effort made in many
areas. This has included a more market-responsive and focused product range, productmix, more efficient production procedures, and more targeted marketing. We havesucceeded in coming up with a product programme which has proved more attractive tothe consumer, and we have become better at reacting faster to consumer wishes.”!

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“The sharp rise in sales was due especially to such product series as Harry
Potter, Bob the Builder and LEGO BIONICLE"!

The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 6

The sharp rise in sales was due especially to such product series as Harry
Potter, Bob the Builder, LEGO BIONICLE and the more classic LEGO
products – all of which contributed handsomely to the year’s result.!

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“The LEGO “Light’ Project, which brought about very far-reaching changes
in our control systems, planning procedures and organisation, has alsoenabled us to respond quicker to the wishes and needs of the market.”!

The Chairman warned that despite these many improvements, !

”the massive boost in sales left us at times unable fully to satisfy demand in
all areas. !

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“Not all was well in LEGOLAND as would prove to be the case in

the following year. In 2004 the LEGO Group would have to takeradical new steps to tackle its most serious financial crisis to date”. !

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 7

The LEGO Group through three generations

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4 Hopes dashed - 2003 !
In something of an understatement, 2003 was described as a very
disappointing year for LEGO Company. Net sales fell by 26 percent
from DKK 11.4 billion in 2002 to DKK 8.4 billion. Play material sales
declined by 29 percent to DKK 7.2 billion.!

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The result was a pre-tax loss on earnings of DKK 1.4 billion, i.e. adrop of DKK 2 billion compared with 2002. “The year’s result can
only be described as unsatisfactory. The negative development
reflects an unsuccessful growth strategy with a consequent lossof market shares.” announced the Chairman in the Annual
report.!

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At the beginning of 2003, substantial inventories of LEGO
products, particularly in the USA, had built up within retailchannels as the 2002 Christmas sales had failed to meet
expectations. !

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“By February 2003, behemoth retailers such as Target andWalmart were choking on a backlog of unsold LEGO sets.
LEGO inventory had ballooned by 40% at some outlets to morethan twice the amount of stock considered to be
acceptable.” [p 63 Robertson & Breen]!

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As a result, LEGO sales were extremely slow at the
beginning of 2003. The downward trends continued andimpacted on the year as a whole. !

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The traditional toy market stagnated in 2003, whereas thetrendier part of the market saw progress. The intensifiedcompetition in the traditional toy market resulted in a loss ofmarket share in most markets. Competitors chose to pursue a
strategy of aligning themselves with LEGO Company’s products
and marketing, new trendy products emerged and retailers
developed own private labels products.!

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The decline was particularly marked in the US where sales dropped by approximately 35
percent compared to 2002. Asian markets experienced a fall of 28 percent. A significant
part of the decline in these markets was attributed to shortfalls in the sale of movie tie-in
products. There had been no follow through on the initial Star Wars success.!

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The traditional Central European markets initially performed rather well and showedstability for most of the year. !
The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 9Late in the year, however, sales also declined in these markets.
Germany finished the year approximately 20 percent below prioryear’s level, and the UK, Holland and the Nordic markets fell by
13 percent. Only the new markets in Eastern Europe anddistributor markets maintained sales on a par with prior year.!

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Sales of movie tie-in products developed unsatisfactorily. Interestin the Star Wars range and, to an even greater extent, the Harry
Potter series - the 2002 top seller - fell below expectations in ayear without new movie releases. The drop in sales of theseproducts accounted for more than 50 percent of the overall sales
decrease.!

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LEGO Company’s own BIONICLE® range performed better, although sales fell by up to 20
percent. Nevertheless, one of the products in the range reached the Top 10 list of the mostwanted Christmas presents in the USA. At the same time, the first BIONICLE DVD,
produced in collaboration with the MIRAMAX film company, had an enthusiastic reception
in global markets.!

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The sales slowdown affected LEGO Company’s product range across the board.
Nevertheless, it was encouraging to note (or so it was claimed) that sales of the classic
LEGO products, Make & Create, doubled and the new products for girls, CLIKITS™, also
got off to a good start. The range was discontinued in 2006.!

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CLIKITS™, off to a good start - it was not to last.!

The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 10

5 LEGOLAND parks!
The strategy of the LEGOLAND parks was to come under heavy scrutiny. The project wasincreasing “visibility” of the brand but was capital intensive providing limited return. Only
the Billund site was making a significant profit. The overall result for the LEGOLAND parks
in the year was on a par with 2002, although there were widely differing developments
within the individual parks.!

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LEGOLAND Billund Denmark, ended the year with a new visitor record and increased
profits by around 10 percent. Despite a slightly weak peak season when the park receives
nearly 40 percent of its visitors, the year finished impressively, achieving its highest evervisitor numbers for one day in the park’s 35 year history in September 2003.!

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LEGOLAND Windsor UK, experienced a minor decrease in net sales due to a declining
number of visitors. However, turnover per visitor increased and the result was on a parwith 2002.!

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LEGOLAND California USA, saw a weak start to the year, but ended the season better
than ever before. This meant that, in terms of visitors as well as turnover, the park
achieved a result comparable to 2002 which indicates that previous years’ decline in visitor
numbers appeared to have been halted.!

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LEGOLAND Deutschland did not manage to avoid the “second year” effect which had
been noted in connection with the opening of new parks. While the year got off to a goodstart, the very hot weather in the peak season kept many visitors away. Although the hotsummer also adversely affected LEGOLAND Billund and Windsor to some extent, theconsequences for the German park were more noticeable. On some days, the number ofvisitors totalled only 60 percent compared with the same days in 2002. !

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Demanding a separate skill set to the toy tradition, the parks were becoming andexpensive distraction to management and to the overall direction of the company.

The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 11

6 LEGO Brand Stores!
Within the own retail unit,
twelve new test shops wereopened during the year inaccordance with the strategy
aimed at strengthening theconsumers’ experience of
LEGO products through own
brand stores. The total numberof shops under the new concept
increased to 15. Besides the 15
test shops and the shops in theparks, LEGO Company had afurther five branded shops andfour outlet shops. The final
expansion plans for brandstores were under preparation and were expected to be in place during 2004. Over threehundred stores were within the ambitious longer term objectives of the retail division. !

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In many ways the own brand stores were something of a distraction to management and tothe core business. Capital intensive, demanding a completely different skill set, thestrategy was at odds with the ambitions and objectives of the major customer groups. Key
retailers including Walmart, Kmart, Target and Toys R US, were unlikely to take kindly tothe own retail concept. They were already frustrated with the loss of focus on the basics of
the LEGO business and the lack of stock turn and margin performance of the product offer
in store.!
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Demanding a separate skill
set to the Toy tradition, theretail stores, like the themeparks, were becoming andexpensive distraction to
management and to theoverall direction of thecompany.

The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 12

7 The Knudstorp Review!
In 2003, given the deterioration in the financial performance ofthe company, Jørgen Vig Knudstorp then head of strategic
development was asked to undertake a review of the problems
and produce a report. Knudstorp had joined the company from
McKinsey & Company. !

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Knudstorp was born within one hour of the main LEGO site, hadbeen a childhood fan of LEGO and was keenly aware of thecompany’s heritage. Knudstorp had a strong sense of the
LEGO traditions.!

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The McKinsey training and tradition had taught Knudstrop that
“Fact finding is the first step to problem solving”. That would
require a back to basics review and assessment. Quoting Jack
Welch CEO of General Electric, “a good CEO must, see things
as they are, not as you wish them to be”. A back to basics
review lay at the heart of the review strategy.!

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J F Kennedy would say “the great enemy of the truth is very
often not the lie, deliberate, contrived and dishonest, but themyth, persistent, persuasive and unrealistic”. This tenet of world affairs was no less true ofbusiness and management misperception of the underlying business. !

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What Knudstorp discovered was particularly disturbing. In presenting his report tomanagement in June 2003, he pulled no punches : !

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“We are on aburning platform,
losing money withnegative cash flow
and a real risk ofdebt default which
could lead to abreak up of thecompany’. !

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 13!
Jorgen Knudstorp later explained to Diana Milne from Business
Management Magazine : “In 2003 we pretty much lost 30 per centof our turnover in one year. The decline continued in 2004 withanother fall of 10 per cent. So one year into the job, [Knudstorp
was to become CEO in 2004], the company had lost forty percent
of its sales. We were producing record losses and cash flows were
negative. My job was how to stop the bleeding. We had to stabilise
sales and cut costs dramatically to deal with the new reality ofselling 40 percent less than we had done two years earlier. We had
too much capacity, too much stock. It was sitting in the wrong
countries. The retailers were very unhappy”. !

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Lego was off track and management didn’t really understand how far it was off track. Most
employees and customers were very clear about the problems but there were no lines ofcommunication to enable the key messages to get through to the top. !

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The company was organised in a form of matrix management. Twelve senior VPs wereoverseeing six regions, operating in silos with little accountability. Worst of all there
appeared to be no assessment of product profitability. The company had no idea which
products were making money and which were failing to produce an adequate return on thesometimes, heavy tooling investment. !

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Management was out of touch with major customers. New products for 2003 werecompeting for retail space on shelves already overstocked with unsold merchandise. The
concept of STAMP collections i.e. Stock Turn And Margin Performance within retail
distribution had been of little focus to the product development teams. Retailers wereoverstocked with products which offered diminishing margins as clearance offers ensued. !

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Focus on the end user (the child) had ignored
the means of access and distribution (theretailer). There had been a lack of follow
through on Star Wars and Harry Potter at crucial
times in the product life cycle. This hinted at alack of continuity planning amongst themarketing and product development groups. !

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Lack of profitable innovation was also
apparent. Sales had increased but the bottom
line had deteriorated. There were lots of new
products but no profitability. The number of SKUs within the product range had escalated
from 6,000 in 1997 to over 14,200 by 2004.!

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 14!

8 Financial Focus !
Knudstorp was assisted in his mission by the arrival of Jesper
Ovesen as the new Financial Director. Ovesen had been Chief
Financial Officer of Danske Bank, one of the largest banks in
Scandinavia. He was also alarmed by what he discovered. The
financial analysis was inadequate. There was a profit and loss
account by country but no product analysis. There was no line
profitability. The company did not know where they made money
or lost money. The LEGOLAND parks were a cash drain but noone really knew why.!

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Ovesen quickly completed the financial analysis and began to develop financial targets,particularly for line profitability. Targets of full manufacturing cost ratios (FMCs) and ROS
return on sales targets were set. The company introduced a 13.5% return on sales target
for all products within the LEGO portfolio. !

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Analysis of capital allocation and measurement of return on capital performance would
place the LEGOLAND parks under scrutiny leading to disposal in 2004. !

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Kuudstorp and Ovesen believed the company needed not so much a strategy, more anaction plan. Managing the business for cash rather than sales growth. Sell off the themeparks, slow retail expansion, slash the product offer and cut 1000 from the work force.
Develop an action plan in the short term rather than a comprehensive strategy.

The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 15

9 Back to basics and the limit to adjacencies. !
A chance encounter with Chris Zook of Bain & Company assisted
Knudstorp in his thinking. Zook was the author of “Profit from theCore” in which ZOOK argued that profits arise when companies
focus on core products for clearly defined customer groups.
Businesses could not afford too much diversification or as Zook
described “the development of adjacent markets”. Zook sugested,
growing companies could afford perhaps one adjacent market
move every five years. Knudstorp realised LEGO had been
trying to develop not one adjacency every five years but
something like five adjacencies every year.!

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The owners of the company had been spooked by the patent
expiry of the basic LEGO brick in 1988. New players like Tyco
Toys and Mega Bloks had developed me too products. New
products including software, games, PlayStation, Xbox and thelike had convinced senior management the move would bedigital. “The LEGO brick was going to die!”. Hence the rush into
adjacent markets in the perceived need to diversify away fromthe original business. !

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LEGO had tried to developed a diversification strategy (ZOOK’s
adjacent market moves) which included software (LEGO
Moviemaker), learning concepts (LEGO education), lifestyle products (LEGO Kid’s wear),girls toys (LEGO dolls), books, magazines, television, theme parks and own retail with agoal of over three hundred retail stores. !

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Each move had demanded a special set of skills away from the basic skill set within the
LEGO business. Knudstrop was to herald a return to basics, reminiscent of the “Stick to
the Knitting” mantra of Peters and Waterman [1982]. !

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The company had been guilty of chasing too many fads and ignoring the focus on key
LEGO kit construction products. There had to be a return to the LEGO brick. Back to thebrick as a building system. A coherent expandable universe of toys. There had also to be afocus on profitability, especially the basic potential of the core products. !

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At the end of 2003, it was decided to change the business strategy and set out a series of!
specific initiatives in order to ensure a stable platform for the Company’s development.!

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 16

Knudstorp would later say !
“One of the rules I stick to is you can really only build an
adjacency to your core business every 3-5 years because it’ssuch a major undertaking in terms of culture and capabilities.
Rather than doing one adjacency every 3-5 years, we did three tofive adjacencies every year. So I think that’s what nearly killedus”. !

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I think we found there were basically two fundamental challenges
that grew out of this period - over stretching and over expansion. Focus had been lost on
basic execution, simple things. We didn’t know really what we produced on a weekly basis.
There was a lack of transparency. We didn’t know where we made money and where welost money. It was obvious that the strategy was wrong but we didn’t know what the rightstrategy would be, largely because the old one had looked like it was the right strategy. !

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So we actually for the first two years of this new transformation of the company said,“Look, we don’t have a strategy. We just have an action plan”, which is a plan of detailed
plan of back to basics, serving the retailers really well, making the products children reallycared about, getting back to the core of what Lego had always been about, sort of aprocess of rediscovery.!
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”We’ll spend a couple ofyears to stabilise thebusiness and restore
execution. We’re gonna
spend three years
restoring profitability andthen eventually we’regonna get back to organic
growth”. !

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The action plan to survive, cut costs, sell businesses, restore
competitiveness, generate cash and ignore the dash for growth in theimmediate future. !

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 17

The business had to focus on retail first, then the end user. The
challenge to restore competitiveness by focusing on retailcustomers, working to improve margins and stock turn for the major
customer group. Delivering, to stores the right kits in the rightvolumes at the right time, creating a balanced portfolio on the shelf.
Improving STAMP, the stock turn and margin performance in store. !

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Focus on Kids would follow. End user customer orientation would be
developed using focus groups and paying more attention to the
AFOLs, the Adult Fans of Lego. The process would Lead to project MINDSTORM with theengagement of customers in product development. !

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Knudstorp was to involve LEGO in the wisdom of crowds, crowd storming in the productdevelopment process. !

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What would Steve Jobs have made of it all? Henry Ford would have had none of it, “Askmy customers what they want and they would probably have asked for a faster horse.” As
it was they got the Model Ford T, in just one colour - black. !

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The back to basics action plan was to focus on classics like DUPLO, LEGO, LEGO
Technic and Lego Mindstorms. In addition. to utilise story based products like Star Ways,
Harry Potter, Bob the Builder and Bionicle. !

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DUPLO was first launched in the 1970s for the junior 2 - 5 market. One of the mostpopular launches was Bob the Builder in 2001. The characters and theme a perfect fit for
the LEGO construction, build and play system. In a shock move, despite years of strong
brand development and recognition, all of the infant toys in the LEGO range wererebranded as LEGOEXPLORE with different
colour packaging. The
strategic marketing mistake
was reversed in the
Knudstorp review.!

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“The
successful
implementation of these
initiatives was crucial for
LEGO Company to ensureprofitable growth and at thesame time, uphold its
strong, global brandposition among families
with children.”!
The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 18

10 Developing the Strategy - why do we exist? !
In search of the basics, Knudstorp asked - Why do we exist? What
do we do better than anyone else? What makes us unique?!

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In conventional strategy analysis we ask, what is the USP theunique selling proposition. What are the KSFs, the Key Success
Factors. What are the factors which develop competitive advantage.
How can we develop the Kaizen process - consistently andpersistently enhancing the KPIs, the Key Performance
Indicators developed from the KSFs the Key Success Factors. !
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10.1 The Brick and the System!
The answer for Knudstorp lay in the brick, back to the simple
thing, the LEGO brick, a unique rediscovering of the corebusiness. Not just the brick but a unique building system, inwhich all parts fit together. Fit together so tightly but not so
The search for strategy
tightly that a two year old cannot take them apart. !

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10.2 Quality - Masters of the Mould!
Then would follow quality. “Only the best is good enough” the founders legacy. Quality notoccasionally right but consistently right. To achieve that LEGO had become masters of themould, a core competency, an important component in the basic skill set. By 2014
Knudstorp would talk of the manufacturing of 30,000 individual components every minute,a staggering 25 billion pieces every year. Each component manufactured with precision by
world masters in moulding. !

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But it is not enough to be “world masters in moulding” LEGO would need to develop
operational expertise on a world scale. !

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10.3 Logistics - the right product in the right place at the right time !
To ensure the right kits arrived at the right Walmart store at just the right time, logistics
would demand the co-ordination of operations involving warehouses in Mexico and USA
with manufacturing operations in Denmark, Hungary, Czech republic, China and USA. !

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Optimally producing the right inventory, at the right costs would demand the expertise ofenterprise architects, engineers all with immense strategic capability. The task for the
LEGO revival was intense. !

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“Not just a brand but a business system maintaining competitive
advantage”!

The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 19

11 First the action plan - ten steps !
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Rationalise the product offer - cut 30% of the product offer!
Attack the cost base!
Slow the LEGO stores programme!
Shed the theme parks!
Jettison the computer sales business. !
Relaunch DUPLO !
Introduce financial targets - Line profitability , Consumer Product
Profitability 13.5%, the ROS benchmark. FMC - targets for full manufacturing cost. !
Close to the customer - putting the retailers first !
Understand the end user - focus groups, mind storming, listen to the AFOLS!
Better segmentation, DUPLO, LEGO and FRIENDS for the young females.!
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11.1 Rationalise the Product Offer - return to basics!
For several years, LEGO Company had invested substantial funds in expanding its
product portfolio. This commitment and the consequent cost increases had not produced
the desired results. In some cases, new products have even cannibalised on the sales of
LEGO Company’s core products and thus eroded earnings.!

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The development of new products had led to an escalation of the product offer, without any
significant improvement in sales performance. Higher number of SKUs within the
production process had led to a diminishing return on set up costs. The increased productoffer led to complications in the sales process and also at point of sale within the major
retailers.!

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Towards the end of the year, it was decided to focus on the classic LEGO products with
their strong ties to the universal and timeless LEGO bricks and the values that consumers
associate with the concept. This involved a non-recurring cost of DKK 450 million, primarily
allocated to writing down operating assets and buildings as well as redundancy payments
resulting from the reduction in activities.!

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11.2 Attack the cost base!
As early indications were that weak sales would continue throughout the year (2003),
LEGO Company increased its focus on cutting costs, especially by adjusting production
capacity to the reduced activity level. This resulted in a global reduction in the number ofstaff of 600 later to rise to over 1000. It was decided to move forward the closure of the
Lättich factory in Switzerland to February 2004. The planned closure resulted in further job
cuts of approximately one hundred.!

!

The ongoing endeavours to adapt production to lower sales contributed towards asatisfactory inventory situation at the end of the year. The reductions in costs, including theredundancies, only moderately affected the 2003 result but were to impact more fully on
the 2004 outturn.!
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11.3 Bring Back DUPLO !
“The future creating a platform for stable earnings and balanced
growth within the play material area is crucial for LEGO Company’s
future.” was the statement in the Annual report for 2003. !

!

“For this reason, the Company changed its business strategy at theend of 2003 and set out a number of specific initiatives for 2004. The
revised business strategy would focus on developing and marketing
the Company’s more timeless core products that are in general demand because of theirpower to stimulate children’s creativity and learning.”!

!

One of the consequences was the re-launch of LEGO® DUPLO®. In 2002, the DUPLO
brand was replaced by the new development system for pre-school children, LEGOEXPLORE, aimed at creating a simple and accessible system of stimulating play methods
for young children. The company failed, however, to persuade consumers of thesebenefits, and sales of pre-school products dropped by 37 percent during the year,
accounting for approximately 10 percent of LEGO Company’s sales. Such sales levels are
obviously far from satisfactory for these former top sellers. !

!

The decision to drop LEGO® DUPLO® had been a mistake which was quickly recognised
and reversed. The DUPLO brand had an important role to play in the market segmentation
process. !

!

In 2004, the pre-school products were to be relaunched under the LEGO® DUPLO® and
LEGO BABY brands. Movie tie-in products would continue to be an important, althoughrelatively minor, part of LEGO Company’s range. The substantial fluctuations in the salesof these products were considered to be incompatible with the desired stability in earnings.!

!

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12 Summary and Conclusions!
In 2003, LEGO was according to the Knudstorp review “on a burning
platform, losing money with negative cash flow and a real risk of debt
default which could lead to a break up of the company”. The
company had reported losses of $228 million on sales of just over $1
billion in 2003 and a loss of $207 million on sales of $1.1 billion in
2004.!

!

In 2013, the company achieved $4.5 billion of revenues and profits of $1.5 billion. LEGO®
had replaced Hasbro to become the largest toy company in the world second only to
Mattel. Return on sales had increased to 33% and sales per employee had doubled.!

!

Lego achieved this sensational turnaround under the leadership of Jurgen Knudstorp. A
focus on core products and values. Clear leadership with a command structure focused on
profitability. A premium pricing strategy and a high return on sales target. A return to corevalues on product quality, the lego legacy and a value for money proposition for end users
and the retail customers. !

!

Understanding the KSFs, the key success factors were instrumental in this process. Closeto the customer became a Knudstorp mantra. Using focus groups for kids and AFOLs, theadult fans of Lego in the process, new product ideas were tested during the productdevelopment process. !

!

The sometimes short product life cycles demanded a steady new product development
programme in which products were brought to market within a much shorter time frame
and within a given cost base.!

!

A process of market segmentation and customer segmentation, led to the refocus on
DUPLO for the younger market, LEGO as the core brand and Lego FRIENDS, opening thebrand to the young female market. !

!

The company analysed the offer
into Fantasy and Reality matrix.
E x c i t e m e n t i n t h e o ff e r w a s
maintained by products such as
Star Wars, Harry Potter and Pirates.
The more technical were inspired byTechnic and Architecture. The
younger age group enthralled with
Bob the Builder. !

!
!

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The Knudstorp process had :!
Created a clear vision for the future direction of the company.!

!

Set a clear direction for LEGO and fundamentally changed the way the company didbusiness with major retailers.!

!

Created a clear command structure within the organisation with an emphasis on
performance and profitability. !

!

Defined gross and net margin targets defined as the major challenge within productdevelopment including a premium price strategy and a 13.5% return on sales target.!

!

Restored competitive advantage by focusing on retail customers, in particular theirprofitability. Understanding the importance of “STAMP” the impact of Stock Turn and(Margin Performance), gross margins achieved in store.!

!

Reduced the level of risk by right sizing the activities, cost base and assets to a lower
overhead base, reducing the break even level for a given level of turnover. !
!
Introduced back to basics, focussing on the Lego brick legacy. A
focus on the brick and the system, developing core products for aclearly defined group of customers. Avoiding the lure of too manyadjacencies.!

!

Encapsulated the belief in the brand and the company, In Knudstorp’s
own words “Passionate about what you are doing, living your dream”. !

!

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The Lego Case Study.com from John Ashcroft and Company, experience worth sharing. Page 24

13 Appendices!
13.1 Knudstorp on Communication!

!

How are we doing boards !
“So for instance in the factories, rather than introducing an IT system andelaborate reporting, we put the reporting up on a white board. We createdsomething we still use to this day. We call it a visual factory. Every Friday
morning at 7:00 a.m. we’d get together and the managers would write down
how the factory was performing in front of all of us. Green numbers forgood outcomes, red numbers for bad outcomes. People look at that and say, “When are you gonna
put it in an IT system?” and I say, “It’s never gonna go into the IT system because it’s all into doing
the sharing of data and how we are doing.” !

!

Communication / Cascade !
It’s a social mechanism that starts driving change, because once you’ve written that red number up
there you don’t need to be told I need to change that. You start changing it. So it’s about that. We
introduced which customers were profitable. We made it very transparent. We’ve worked a lot on
our communication. I write a weekly letter to all our 500 middle managers about how is thebusiness doing. Sometimes I reflect on what’s working, what’s not working. Creating a really flatorganization with a fluent dialogue where people feel that they can say exactly what they think, !

!

Management by wandering around !
I had some great colleagues around me who had more experience and said, “Look, don’t kid
yourself by saying you want change. You need to introduce the systems, the incentives, theprocesses. You need to work your way into it. You don’t talk your way into it. Get out there.” Sowhat I did was I spent very little time in my office. I joined these visual factories even thoughpeople would say, “Well we’re discussing capacity in factory number five right now” and the CEO
said, “That’s a bit awkward.” He’s never been here before. It’s not like I walked in and said, “I
believe you should turn that machine off and turn that one on” because I had no clue, and thatwould be delegating to the highest level of incompetence to have me do that, but it was moresending a signal. !

!

So it’s literally a lot of dialogue, walking around, acting, being part of the acting. New ways of doing
it and then reflecting on it through my personal communication, whether it was in one-to-ones or in
the weekly letter on my blog, which all employees can read. It’s about being there.!

!
!

13.2 References & Books of interest !
Ashcroft !
J K!
!
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[2012]! !
Ashcroft !
JK! !
!
[2012]! !
Herman !
S!
!
!
[2012]! !
Jakobsen !S!
!
!
[2008]! !
Peters, T & Waterman RH! !
[1982]! !
Poulsen !
PT! !
!
[1993]! !
Robertsen ! D and Breen B.!
[2013]! !

!
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!
!
!
!
!
!
!
!

Dimensions of strategy.com!
The Apple Case study.com !
Building A History - The Lego Group!
Lego Legacy ! !
!
Danish !
In Search of Excellence!
A Company and It’s Soul Per Thygsesen!
Brick by Brick.!

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13.3 Chart Sets !
A complete set of slides in Keynote, PowerPoint and PDF format are available from the website
together with the ten year financial analysis in excel format.

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