IIBMS EMBA CASE STUDY ANSWER SHEETS – Marketing Management – Critically evaluate the LEGO turnaround strategy.
IIBMS EMBA CASE STUDY ANSWER SHEETS – Marketing Management – Critically evaluate the LEGO turnaround strategy.
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Marketing Management
Case V LEGO: the toy industry changes
How times have changed for LEGO. The iconic Danish toy maker, best known for its LEGO brick, was once the must-have toy for every child. However, LEGO has been facing a number of difficulties since the late 1990: falling sales, falling market share, job losses and management reshuffles. Once vote ‘Toy of the Century’ and with a history of uninterrupted sales growth, it appears LEGO has fallen victim to changing market trends. Today’s young clued-up consume is far more likely to be seen surfing the web, texting on their mobile phone, listening to their MP3 player or playing on their Game Boy than enjoying a LEGO set. With intensifying competition in the toy market, the challenge for LEGO is to create aspirational, sophisticated, innovative toys that are relevant to today’s tweens.
History
In 1932 Ole Kirk Christiansen, a Danish carpenter, established a business making wooden toys. He named the company ‘LEGO’ in 1934, which comes from Danish words ‘leg godt’, meaning ‘play well’. Later, coincidentally, it was discovered that in Latin it means, ‘I put together’. The LEGO name was chosen to represent company philosophy, where play is seen as integral to a child’s successful growth and development. In 1947 the company began to make plastic products and in 1949 it launched its world-famous automatic building brick. Ole Kirk Christiansen was succeeded by his son Godtfred in 1950, and under this new leadership the LEGO group introduced the revolutionary ‘LEGO System of Play’, which focused on the importance of learning through play. The company began exporting in 1953 and soon developed a strong international reputation.
The LEGO brick, with its new interlocking system, was launched in 1958. During the 1960s LEGO began to use wheels, small motors and gears to give its products the power of motion. LEGOLAND was established in Billund in 1968, as a symbol of LEGO creativity and imagination. Later, in the 1990s, two new parks were opened in Britain and California. LEGO figures were introduced in 1974, giving the LEGO brand a personality.
The 1980s saw the beginning of digital development, with LEGO forming a partnership with Media Laboratory at the Massachusetts Institute of Technology in the USA. This resulted in the launch of LEGO TECHNIC Computer and paved the way for LEGO robots. LEGO introduced a constant flow of new products in the 1990s, and placed greater focus on intelligence and behaviour. The new millennium saw LEGO crowned the ‘Toy of the Century’ by Fortune magazine and the British Association of Toy Retailers. LEGO is currently the fourth largest toy manufacturer in the world after Mattel, Hasbro and Bandai, with a presence in over 130 countries.
Challenges for the traditional toy market
A number of environmental shifts have been affecting the toy market over the past decade. Some of these are described below.
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Kids getting older younger. By the time most kids reach the age of eight they have outgrown the offerings of the traditional toy market. A central factor in children abandoning toys earlier in their lack of free time to play. Children today have a lot more scheduled activities and, with greater emphasis on academic achievement, a lot more time is spent studying. Faced with more media and entertainment choices these sophisticated and technologically savvy consumers are favouring electronic, fashion, make-up and lifestyle products. The most susceptible group to this age compression are ‘tweens’—children between the ages of 8 and 12—a US$5 billion market, accounting for 20 per cent of the US$20.7 billion traditional toy industry.
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Intensifying competition from the electronic and games market. As noted above, today’s young consumer is far more likely to be seen surfing the web, texting on their mobile phone, listening to their MP3 player or playing on their Game Boy than enjoying a LEGO set. A survey by NPD Funworld, in 2003, found that tween boys who played video game spent approximately 40 per cent less time playing with action figures when compared with the previous year. Handheld toys with a video and gaming element suit the mobile lifestyle of today’s tween. As demand for these more sophisticated toys increases, traditional toy makers are facing more direct competition with the electronic and video games market.
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Fickleness of young consumers. The toy market today is very fashion-driven, leading to shorter product life cycles. Toy manufacturers are facing increasing pressure to develop a competency in forecasting market changes and improving their speed of response to those changes. In an effort to get a share of the huge revenues generated by the latest hot toy, many toy manufacturers have left themselves more vulnerable to greater earnings volatility.
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Power of the retail sector. Consolidation in the retail sector and the expansion of many retail chains has placed enormous pressure on the profit margins of traditional toy makers. Major retailers can exert tremendous power over their suppliers because of the vast quantities they buy. Many retailers insert a clause in their supplier contracts that gives them a certain percentage of profit regardless of the retail price.
Traditional toy makers are struggling to keep up with these environmental changes. It appears no one is safe, when even the world-renowned LEGO brand can fall victim to changing market trends. The cracks first began to show in 1998, when LEGO made a loss for the first time in its history. This began a major reversal in the fortunes of a company that had become accustomed to decades of uninterrupted sales growth (see Table 9). Ironically, it is the success of LEGO that may ultimately have paved the way for its downfall.
Table 9 : LEGO financial information
LEGO financial information (Mdkk) |
2004 |
2003 |
2002 |
2001 |
2000 |
Income statement |
|||||
Revenue |
6704 |
7196 |
10006 |
9475 |
8379 |
Expenses |
(6601) |
( 8257) |
(9248) |
(8554) |
(9000) |
Profit/(loss) before special items, financial income and expenses and tax |
103 |
(1061) |
868 |
921 |
(621) |
Impairment of fixed assets |
( 723) |
( 172) |
– |
– |
– |
Restructuring expenses |
( 502 |
( 283) |
– |
( 122) |
( 191) |
Operating profit/(loss) |
(1122) |
(1516) |
868 |
799 |
( 812) |
Financial income and expenses |
( 115) |
18 |
( 251) |
( 278) |
( 280) |
Profit/(loss) before tax |
(1237) |
(1498) |
617 |
521 |
(1092) |
Profit/(loss) on continuing activities |
(1473) |
(953 ) |
348 |
420 |
( 788) |
Profit/(loss) discontinuing activities |
( 458) |
18 |
(22) |
(54) |
(75) |
Net profit/(loss) for the year |
(1931) |
(935) |
326 |
366 |
(863) |
Employees:Average number of employees (full-time), continuing activities |
5569 |
6542 |
6659 |
6474 |
6570 |
Average number of employees (full-time), discontinuing activities |
1725 |
1756 |
1657 |
1184 |
1328 |
What went wrong for LEGO
According to Kjeld Kirk Kristiansen, owner of the business and grandson of its founder, following many years of success the LEGO culture had become ‘inward looking’ and ‘complacent’ and had failed to keep pace with the changes taking place in the toy market. This lack of environmental sensitivity was evident in the US market in 2003, where LEGO failed to predict demand for its Bionicle figures, resulting in two of its best-selling products from this range being out of stock in the run-up to Christmas. It appeared nothing had been learned from the previous year, when also in the run-up to Christmas the much sought-after Hogwarts Castle sets were out of stock across the UK.
LEGO had also become over-dependent on licences in the 1990s, for products such as Star Wars and Harry Potter, as its main source of growth. This left LEGO vulnerable to the faddishness of these products: the years in which Star Wars and Harry Potter films were released coincided with profitable years for LEGO, while losses were reported in the intervening years.
The diversification of the brand into the manufacture of items such as clothing, bags and accessories was another mistake for LEGO. The company over-complicated its product portfolio and it ran close to over-stretching the LEGO brand. Kristiansen, resumed leadership in 2004 to guide the company out of crisis, is quoted as saying ‘LEGO was so busy chasing the fashion of the day it took its eye off its core brand.’
He phasing-out of its long-established pre-school Duplo brand, to be replaced by LEGO Explore, was another error. Parents were left confused, with many believing the larger-size Duplo brick had been discontinued. This error resulted in a loss of revenues from the pre-school market in 2003. Adult fans of LEGO (AFOLs) were also left disgruntled when LEGO changed the colour of its new building bricks so that they no longer matched the colour of the old bricks.
While other toy manufacturers have moved production to low-cost destinations such as China, LEGO has been reluctant to follow suit. Today it still manufactures the bulk of its product in Billund and Switzerland. The reasons posited for the company’s reluctance to move include a strong sense of loyalty to Billund, where one-quarter of the residents work at the LEGO factory, and concerns that a move would affect its brand image. While its loyalty to these sites is admirable, and brand image worries understandable, the question is whether its long-term future is viable without such a move.
A new direction for LEGO
In an attempt to turn around its fortunes LEGO has developed a number of new marketing strategies. These include the following.
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A back-to-basics strategy is seeing LEGO refocus on its core brick-based product range and place more emphasis on its key target group—younger children. In 2003, LEGO relaunched its classic range of brick-based products and many new product lines have centred on eternal themes such as Town, Castle, Pirates and Vikings. LEGO has reinstated the Duplo brand and introduced the Quarto brand, which consists of larger bricks for children under two. Other new lines include LEGO Sports, born from strategic alliances with the National Hockey League and US National Basketball Association. While the traditional audience of LEGO has always been young boys it has introduced a new range, ‘Clikits’, a social toy developed specifically for a female audience. Clikits consists of pretty pastel-coloured bricks, which provide numerous options to create jewellery and fashion accessories.
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LEGO has admitted to over-diversifying its brand. In response to this, LEGO has withdrawn many of its manufacturing lines, instead opting to outsource these to third parties via licensing deals. LEGO is also selling its LEGOLAND parks in a bid to refocus efforts on its core product and improve its financial situation.
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In an attempt to create a story-based, multi-channel, LEGO has engaged in a number of licensing deals, with varying degrees of success, but more importantly it is now developing its own intellectual property. The Bionicle range, launched in 2001, was the first time LEGO has created a story from the start as the basis for a new product range. The Bionicles combine physical snap-together kits with an online virtual world. This toy brand has also been extended into entertainment in the form of comics, books and a Miramax movie: Bionicle: Mask of light. The range has proved a major success for LEGO and, building on this success, it has developed Knights Kingdom.
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Sub-brands that LEGO has neglected, including Mindstorms and LEGO TECHNIC, both aimed at older children and enjoyed by some adults, are being given more attention. With so many adult fans of LEGO, efforts are also being made to further engage the adult market. The company is currently considering whether to market its management training tool, entitled LEGO Serious Play, to a wider adult audience.
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LEGO has overhauled its packaging, and the style and tone of its advertising. The emphasis is now being placed on the LEGO play an educational experience as opposed to product detail. The strap-line ‘play on’ was introduced in January 2003 to accompany the change. The slogan draws its inspiration from the company’s five core values: creativity, imagination, learning, fun and quality. LEGO is also making greater use of more interactive communication tools to promote its products, which it is believed will encourage consumers to interact more with the brand. 2005 has seen LEGO invite fans on a tour of the company. Here they are given the opportunity to meet new product developers, designers and toolmakers, and learn about the company’s history, culture and values.
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LEGO is also taking steps to reverse its insular culture. In an attempt to build a more market-driven organization, it is spending more time consulting children, parents, retailers and AFOLs. The company established the LEGO Vision Lab in 2002 to examine how the future will look to children and their families. A variety of sources are being used to make assessments of future worldwide family patterns, including anthropology, architecture, consumer patterns and awareness, culture, philosophy, sociology and technology.
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Plagued by supply-chain inefficiencies LEGO has improved production time from concept to the retailer’s shelf. An example of this is the Duplo Castle, which was developed in nine months.
Conclusion
Having taken its eye off the ball, LEGO is fighting back with a new customer-focused strategic approach. Continuous improvement, in response to changing market trends, is now key if LEGO is to ward off the many challenges it still faces. It is still involved in many licence agreements, making it vulnerable to this cyclical market. Its back-to-basics strategy has been widely praised but it remains to be seen if LEGO can balance this with its increasing activity in software. With children’s growing appetite for video games with a more violent content, can LEGO satisfy this target group while still remaining true to its wholesome ‘play well’ brand values? Will LEGO succeed in its attempts to target young girls and its desire to target a more adult audience? Will it succeed in its attempts to reduce costs and improve efficiencies? Will CEO Jorgen Vig Knudstorp succeed where his predecessors have failed? Only in the fullness of time will these questions be answered but one thing is for sure: no brand, no matter how powerful, can afford to become complacent in an increasingly competitive business environment.
Questions:
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Why did LEGO encounter serious economic difficulties in the late 1990s?
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Conduct a SWOT analysis of LEGO and identify the company’s main sources of advantage.
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Critically evaluate the LEGO turnaround strategy.
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