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I.

What are LEGOs points of difference?


Legos points of difference were born from its humble beginnings
dating back to 1916. Ole Kirk Kristiansen, the founder preached the
importance of quality and felt that only the best was good
enough. This value and other important factors like innovation and
creativity separate the company from its competition.
The
companys most well-known product the LEGO brick differentiated
LEGO in many ways as it has created value by empowering its
customers to explore their creative side. In essence, the product is
so versatile that the possibilities are endless. The bricks definable
trait was summarized best by CEO Jorgen Knudstrop as the only
material that is held like glue, but is able to be taken apart. Its
unparalleled uniqueness comes from the level of customization and
end users imagination. With innovation and Legos, there are an
infinite number of possibilities.

II.

What has led the Lego Group to the edge of bankruptcy?


The company morphed into a poorly organized firm in its
managerial structure. What once was a very effective operation
quickly underwent a sudden overhaul of the companys leadership
team and operational focus.
Most significant was that there
appeared to be no assessment of product profitability. Operational
nightmares and the lack of accountability led to an explosion of
inventory costs and write-offs. Management had no idea which
products were making money and which were failing to produce an
adequate return on investment. Furthermore, management lost
touch with major customers. New products were cannibalizing
already overstocked with unsold merchandise. Focus on the end
users ignored the retailers who became overwhelmingly frustrated
with the stock-outs and slow-moving inventory.

III.

What is your assessment of management moves during the


growth period that wasnt (1993-1998) and the fix that
wasnt (1999-2004)?
There were several missteps from a strategic standpoint, namely
the lack of profitable innovation. The outcome was a series of very
expensive failed product launches. The issue that LEGO faced was

that they were executing several new ideas, but little value was
generated from them.
Management lost touch of what made them successful. The hiring
of Poul Ploughman was an epic mistake as he sought to change
what was already a very effective operation. During his tenure
management lost touch with what customers wanted. Prior to the
transition to Knudstorps reign, LEGO was obsessed with novelty.
The firm was so far removed from understanding what their
customers wanted (or even who they were), that these new ideas
failed to create value. Several of the new products were based on
assuming that they knew what the market wanted, not by the actual
research and feedback they received from their customer base. The
innovation the firm created was dwarfed by its flawed strategy. They
thought that the power was in the brand, but in actuality the power
was in the brick.
IV.

Why did LEGO outsource manufacturing?


Upon Jorgen Knudstorps reign, he aimed to streamline operations.
He felt that his manufacturing team was overwhelmed and that they
would benefit from simplification. He then decided it would be in the
companys best interest to outsource any non-core operational
processes. Management also felt that manufacturing should be
placed lower on the priority scale and that they had lost their
overall edge in supply chain management. The company lacked
procurement compliance procedures and inventory were being
underutilized and led to the waste of materials.

V.

Why didnt it work out?


Outsourcing ended up being the wrong decision because Flextronics
business model differed too much from LEGOs.
Effective
coordination and control of various production facilities became too
complex. Since the outsourcing was done at a very rapid pace, the
transfer of production knowledge could not be reliably transferred.
The company needed flexible and responsive production to handle
seasonal fluctuations and demand uncertainties.
Flextronics
method designed to optimize economies of scale through
predictable, uniform production schedule. The firm did not recognize
the "distinctiveness" of their products and needs in relation to
Flextronics' expertise. As a result inventory accuracy suffered,

quality did so as well, and costs at times rose. To produce exactly


what LEGO needed in exactly the right quality they needed to bring
manufacturing back in-house.