The Strategist

Lego is investing in expansion. What's the plan?


09/07/2016 - 15:30



In the first half of the year, Lego’s profits decreased by 1.8% and amounted to 3.5 billion Danish kroner (523 million dollars). The Danish company said it has become a victim of its own popularity. Demand for well-known Lego toys was so huge that the company couldn’t cope with influx of orders. The group decided to expand production capacity and hire additional staff in China, Mexico and Hungary.



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Lego is one of the world’s most profitable toy manufacturers in the world after American company Mattel, seller of Barbie dolls. Over the past 12 years, the company's sales have grown on average by 15% a year, and the last year was a record with plus 25%. At the same time, Asian and European markets are already saturated, and Lego now relies on South and North America.

Few European companies are choosing to invest their profits nowadays. However, Lego Group set to create 3.5 thousand new jobs around the world, and build new factories in China, Mexico and Hungary. John Goodwin, CFO of Lego, commented:

"Now about 80% of Lego’s sales occur in countries where lives only 20% of children of our planet. So we feel that we are missing many opportunities to attract more kids. After a 10-year period of double-digit sales growth, we have changed our point of view and realized that it's time to invest, restart ourselves for the sake of the next phase of development. "

During the first half of 2016, the manufacturer increased number of employees by 24%, to 18.5 thousand people, compared to the same period last year, according to the company's statements.

"In addition to expansion, a significant increase in number of employees will allow us to add new features to be able to respond to future needs of consumers and market trends. These investments in people and infrastructure will obviously have an impact on growth of our short-term profit,"- said John Goodwin.

Lego has always stood out among the other manufacturers thanks to its construction sets and figurines. They were created by designers hired precisely for development of new products, of which the company was very proud. However, then Lego got baffled by behavior of children in focus groups. When put in artificial conditions, they showed almost no interest in "serious games", and did not want to collect complex structures. In addition, a seemingly endless possibility to produce the most different branded products was way too attractive to refuse.

As a result, the company has gone far away from the main line, taking up lunch boxes, pajamas and theme parks. Sometime after that, Lego decided to get back on track. The company started ethnographic studies to understand how modern children play and learn. Lego realized that it was time to "go back to the bricks" and focus on development of cognitive skills and abilities associated with them.

In 2009, the company introduced a new slogan "It's a new toy every day" to emphasize its main principle - the idea of  importance of the game. It also started to create an Internet community.

Paul Leinwand, Strategy Consultant at PwC's, and Cesare Mainardi, former CEO of Booz&Company commented: "Lego expanded provided opportunities by adding a digital design. Games like Mindstorms kits, with which one can build computer-controlled robots and machines, shows that the company remains true to its heritage while making it relevant for today's children and parents."

CEO of Lego Jørgen Vig Knudstorp not only focused on returning individuality, but also decided to revise its operational activities. It turned out that many of the company's costs did not contributed to successful implementation of the strategy. The analysis showed that every engineer and every head of production areas had their own favorite suppliers of components. It turned out that the company employed services of over 11 thousand suppliers, more than that of Boeing.

Then, designers of the company refocused on interchangeability of components, and started to look for compromise solutions to lower costs. This led to changes in the creative approach: "The best cooks are not the ones who have all ingredients, but those who are able to work with products available in the kitchen." As a result, Lego managed to introduce rational approach to suppliers, manufacturing processes, and even distribution channels, which proved to be very profitable. 

source: euronews.com, wsj.com, 'Strategy That Works: How Winning Companies Close the Strategy-To-Execution Gap' by Paul Leinwand and Cesare Mainardi




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