August 14, 2023

LEGO: One of the Greatest Turnaround Stories In Corporate History

Background:

By the year 2003, Lego was encountering major difficulties.Sales had declined by 30% YoY, and the company had accrued a debt of $800 million by 2004.The operating margin had declined to 2.4% by 2003 from 18-19% in the late 1990s. An internal assessment revealed that the company had not introduced any valuable additions to its portfolio since the last decade.

Eventually,as a result of a series of key strategic decisions, LEGO emerged as the world’s most lucrative and rapidly expanding toy company, its annual sales grew by approximately 15% on average each year. By 2006, the operating margin had increased to 15.6%.

Challenges:

There were multiple problems that LEGO was facing that led to it being nearly bankrupt.

Following are some of the major challenges that it faced:

Increased Competition:

The rise of digital technology and video games offered new and immersive forms of entertainment for children and adults alike.
Electronic toys and interactive devices attracted attention away from traditional construction toys like LEGO.
Children increasingly turned to digital platforms, such as video games and mobile apps, for entertainment and creative play.

Stagnant Portfolio Innovation:

The company had not introduced significant, new, or innovative products to its portfolio for an entire decade leading up to 2003.
This lack of innovation likely contributed to the decline in sales and customer engagement that LEGO experienced during that period.

Financial Struggle:

LEGO experienced a severe financial crisis in the late 1990s and early 2000s due to over expansion, mismanagement of costs, and a decline in sales.
The company accumulated significant debt of $800 million by 2003, with an equity ratio of 54.4%.Moreover, it had a negative cash flow of more than $160 million.
One of the main reasons for financial distress was its rapid expansion into many unions and integral ventures like amusement parks, clothing, and media ventures.

Supply Chain Issue:

As the company introduced more product lines managing multiple suppliers, factory outlets and distributors became a problem.
Its inventory management system was not streamlined. The company also failed to accurately predict the demand for its products, which eventually led to over or under-production of certain products.
Moreover, LEGO used to source raw materials from different suppliers from all over the world which delayed the entire manufacturing process since the supply chain was susceptible to supply chain disruptions and quality issues.

The Turnaround:

In 2004 Jørgen Vig Knudstorp became the CEO of LEGO.Under his leadership along with the expertise of the Finance Director, some key strategic steps were taken which eventually led to the successful turnaround of the company.

Focus on Core Businesses:

LEGO discontinued some products and exited businesses that weren’t profitable and were not contributing to its core strengths.As a result, the company was able to allocate all resources to its core product, the interlocking plastic bricks.
As the focus was back on the core product, the company was able to allocate more time, and R&D budget to its core strengths. This allowed more rapid innovation in its core product.

Digital Innovation:

Another crucial step that the company took was acknowledging the changing play patterns of children due to advancing technology.
LEGO ventured into digital space with video games and online platforms.Hence this helped the company to keep up with the changing consumer preferences and giving its audience the experience, they wanted.
Entering the film industry was also part of the digital transformation. The LEGO group partnered with Warner Brothers and the Lego movie itself had a budget of USD $60 million.

Small Number Of Suppliers& Retailers:

LEGO narrowed down the number of suppliers and retailers it had in order to reduce its fixed costs.This helped in stabilising the pricing.
LEGO stopped working with very small retailers and focused on large ones.This helped in correctly identifying the demand trends and inventory management.

Engaging With The Fans:

Lastly LEGO actively started engaging with fans.LEGO Ideas is a platform where fans can give their feedback or even suggestions as to what the company should do.

Results:

After the turnaround in the early 2000s, LEGO experienced consistent growth in sales.10 years later, in 2014 LEGO’s sales exceeded $2 billion. Over this 10-year period, their sales rose by approximately 900%.
For the first time, LEGO overtook Mattel to become the world’s largest toy maker based on revenues.

Key Takeaway:

It is important for firms to stay aligned with their existing core customer base. Diversification at a rapid pace may make it difficult to allocate the resources required for product innovation and development.
Firms should continuously engage with their audiences and know the customer expectations from the brand.
Organizations should keep up with the changing technology and customer preferences in order to remain relevant in an ever-changing competitive landscape.
Organizations should work towards enhancing their overall operational efficiency. This can be done by implementing cost-saving measures or improved supply chain management with conscious efforts.
Financial discipline and sound financial practices should be prioritized and implemented to save the organization from being in huge amounts of debt.
Lastly, organizations should have a long-term perspective. Decisions should be evaluated based on their long-term implications on the company’s growth.

Disclaimer

The views and opinions expressed in this blog on Platform01 Consulting’s website are solely those of the respective authors. The information provided in these articles is for general informational purposes only and does not constitute professional advice.

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