Business Management: Rebuilding LEGO, one brick at a time.

LEGO was founded in 1932 in a workshop by a creative carpenter from Billiard, Denmark with the name of Ole Kirk Chritstansen. The concept: a self locking brick toy for children was an instant success and 82 years on, although facing very dark times has just finished one of their most financially successful years. Every year, Lego produces 19 billion bricks - equivalent to around 36,000 bricks per minute. To give you a bit of perspective of the popularity of Lego - there are around 62 Lego bricks for every of the world’s 6 billion inhabitants. The self locking brick by Lego is single handedly, the most popular and successful toy product for children in history. Whilst on the surface, with such popularity it would be difficult to imagine that the company was stressed financially, between 1993 and 2003 however things couldn't have gone worse (Lutz, 2015). 

Between the years 1993 and 2003, the executive committee at Lego completely lost control. The committee had a very weak go- to- market strategy and limited experience in operating an established company. The company ‘retired’ a large number of established designers who had conceptualised and developed the original sets of Lego and replaced them with a new breed of young designers, who were top university graduates with a supposed ‘signature design flare’ (Lutz, 2015). The newly appointed, young designers were given a vast budget for research, development and innovation and while in many industries, giving employees the opportunity to create and innovate would be considered positive, in the case of Lego however, too much money was being thrown on ideas and concepts in very diverse markets picked, with very little direction by employees. Some of these products, were big, others were small. Most of which were not based upon the original uber- successful, self locking brick concept. Beginning in 1999, Lego released electronic toys, television programs, action figures, jewellery, clothing and spent an insane amount of money and time developing computer programs for a very niche market. Most of these new, ’experimental’ products downright failed and because of the volatility in demand and no budget constraints for innovation within its employees, Lego almost became bankrupt (Roberts Innovation). 

Sales were plummeting and Lego continued to fund the young designers product ambitions, despite the large budget for driving innovation within the company, most of the innovations had complete and utterly failed and most of its other toy lines were generating very heavy losses. The company spent lots of money attempting to tap into all sorts of markets with no real sense of direction thus not able to pinpoint what customers really wanted and make significant sales to keep the company profitable (Lutz, 2015). 

Lego came very close to hitting bankruptcy due to a key issue within its corporate identity and company culture towards the ideas of profit and money making. Two essential components to creating a lasting and profitable venture. Since its founding in 1932, Lego had always been profitable and over the course of 66 years until 1998, complacency within its employees started to set in and the terms profit and money were considered ‘dirty’ words. Rather than being open to setting sales targets for each of its products to ensure profitability, employees refused to cooperate and were primarily focused on developing many unique products rather than a handful of products that would generate a significant profit for Lego (Delingpole, 2009).

By 2003, Lego was operating on very little cash. The company had lost US$300 million, and was projected for a total loss of up to US$400 million in the following year.  In order to generate operating cash, Lego sold a 70% stake in its Legoland Theme Parks for US$460 million (Wharton, 2012) and moved most of its self locking brick production factories to cheaper facilities in regions of Mexico and Czech Republic. Poor management was a significant, central reason for the downfall of Lego and it was clear that the inexperienced executive team, was not able to recognise there strengths and or weaknesses thus not being able to seek help and get guidance when they were unsure or uneducated (Daniels, 2016). Lego removed its existing Chief Executive Officer and appointed a new Chief Executive, Jorgen Vig Knudstorp and in collaboration with his new executive team, designed a modern, organised and structured innovation plan that allowed groups of employees to remain developing new products as long as it was consistent with the goals and missions of Lego and could be developed within a reasonable time and appropriate budget. Furthermore, the distribution of responsibilities for innovation in all areas across the sections ensured the turnaround of the business (Robertson, 2009).

Lego’s new innovation plan designed by the new executive team was split into four sections (Robertson, 2009): 

• Functional Groups - responsible for core business processes including sales, manufacturing and supply chain
• Concept Lab - responsible for developing new products and play experiences 
• Product and Marketing Development - responsible for developing the next generation of existing products 
• Community, Education and Direct - responsible for providing support to customers and Lego communities 

By introducing a more experienced and educated executive team and implementing a carefully structured innovation plan that set a clear structure for all employees to follow, Lego was effective in establishing a solid foundation for financial success. While these two strategies were indeed successful, Lego could have accelerated the resolution of poor  management by merely releasing and selling existing products that were successful whilst adjusting the team environment and appointing a new team simultaneously. Simple products such as Lego houses and cars that did not require a complete revamp but rather a rebrand. 

Lack of planning within Lego was also a big issue that most employees during the dark periods of Lego could resonate with very well. According to the theory on why business’ fail, in most major companies, careful, methodical and strategic planning are used to ensure that a business can run smoothly at all times. The theory also states that care must be taken to regularly study, organise, plan and control all activities of its operations - in particular the continuing study of market research and customer data, an area which is prone to disregard once a business has been operational for a considerable amount of time (Daniels, 2016). Lego struggled to keep customer interest and was focused upon building products that they thought customers wanted rather than actually researching and speaking with customers to find out what was wanted and needed - therefore, not addressing the guidelines of the theory to creating a sustainable and profitable company. Thankfully, under the new executive team, Lego set up its “Future Lab” a lab run by scientific researchers to find out how kids play and parents interact with the aim of identifying what customers really wanted (Lutz, 2015). The researchers at the lab discovered that there was a significant difference between the behaviours of American and European parents. Future Lab Leader, Anne Flemmert- Jensen noted that “American parents don’t like play experiences where they have to step in and help their kids a lot. They want their kids to be able to play by themselves,” while parents in Europe on the other hand are more hands on and are more likely to sit down and spend time on the floor interacting and building with their kids. Furthermore, the researchers concluded that only 30 Lego products were producing a whopping 70% of the companies toy revenue (Ringen, 2015). 

Using this information, Lego was able to produce toys based upon consumer needs and feedback - for America, the kits were designed and developed for self- exploration and discovery while for Europe, the kits were built to ensure more interaction and collaboration with others. The company was also in a much better position for deciding what type and theme of products customers wanted (Marrero, 2016). Lego addressed the strategic planning theory issue outlined above by introducing the the cost efficient research lab, a key introduction that contributed to making Lego the world’s most powerful toy company once again.

While setting up a research lab proved to be very effective and a pivotal strategy that led to the turnaround of Lego, the company could have utilised its significant internet following by sending out targeted customer surveys across social media through Facebook, Twitter and LinkedIn and or email to find out very similar information in a much quicker and cheaper way (Fine J, 2014). The surveys could have directly addressed the companies questions around what customers wanted and what customers were prepared to pay for each toy. 

Profit was considered a very dirty word amongst Lego’s 8,300 employees - “We were not used to talking about money’, one employee said. According to staff, Lego’s founder and former Chief Executive, was a deeply religious and wholesome man who referred to Lego as an educational lifestyle rather than merely a money- making business and company (Delingpole, 2009). The founders original ideology was fixated upon most employees - something the new executive team was struggling to get rid of. According to Kotter (1979), there were four key reasons as to why the executive team struggled to persuade employees to change:

• Self- interest — putting self first before the objectives of the company
• Misunderstandings — when the purpose of change hasn't been communicated
• Different assessments of the situation — employees may disagree on the advantages and disadvantages of change 
• Low tolerance of change — people prefer familiarity and don't like being out of their comfort zone 

In order to abolish this original thinking and implement a new way of thinking with its employees, Lego’s executive team made a conscious decision to change management styles so that the reason for self- interests holding employees back would be void. From leading and managing in a democratic style, all managers were instructed to lead in an autocratic style, a style of leadership that involves managers delegating and telling employees what to do rather than giving employees total freedom of their employment outcomes - something that was not able to be measured and tracked. Lego also needed to convince their employees that the new path Lego was taking was for the better and the day- to- day satisfaction would still be retained under the new management styles (Leadership Toolbox, 2015). In order to convince staff that this new regime would be for the better, Lego introduced extrinsic rewards. In particular, higher salaries and bonuses for all of its staff (Marrero, 2016). The new rewards motivated many staff to agree with the companies changes and continue working towards the new goal. While the tangible reward for changing clearly helped persuade staff, Lego could have ensured the smooth transition by introducing intrinsic rewards as well. The intrinsic reward system would have provided much more employee satisfaction and enrichment and would have saved Lego a considerable amount of money initially as they would only be spending money on improving their quality employees - employees who were committed to Lego (Watson, 2014). 

It is clear that the strategies Lego and its executive team implemented were effective and ultimately lead to the turnaround of the business. In 2013, Lego’s revenue hit US$4.7 billion making it once again, the largest toy company by both revenue and net profit surpassing Mattel with a considerable margin. 

Bibliography

Primary Sources

• Delingpole J, 2009, When Lego lost its head - and how this toy story got its happy ending, http://www.dailymail.co.uk/home/moslive/article-1234465/When-Lego-lost-head--toy-story-got-happy-ending.html#ixzz40gMJUNIP  
• Nast Marrero, 2016, Senior Agile Consultant at Lego // Email Interview

Secondary Sources

1. Daniels S, 2016, Business Management Class
2. Fine J, 2014, How to do Market Research, http://www.inc.com/guides/marketing/24018.html 
3. Leadership Toolbox, 2015, Leadership Styles: Autocratic Leadership, http://www.leadership-toolbox.com/autocratic-leadership.html 
4. Lutz A, 2015, Lego’s Turnaround Strategy’ http://www.businessinsider.com.au/legos-turnaround-strategy-2015-5 
5. Ringen J & Jensen A, 2015, http://www.fastcompany.com/3040223/when-it-clicks-it-clicks 
6. Robertson D, 2009, Innovating a Turnaround at LEGO, https://hbr.org/2009/09/innovating-a-turnaround-at-lego 
7. Watson Z, 2014, 4 Real-World Examples That Explain Intrinsic Motivation,  http://technologyadvice.com/gamification/blog/4-real-world-examples-clearly-explain-intrinsic-motivation/ 
8. Wharton, 2012, Innovation Almost Bankrupted LEGO — Until It Rebuilt with a Better Blueprint, http://knowledge.wharton.upenn.edu/article/innovation-almost-bankrupted-lego-until-it-rebuilt-with-a-better-blueprint/