Unit 6: Implementation

Case 12: LEGO Group: An Outsourcing Journey

Marcus Møller Larsen

Torben Pedersen

Dmitrij Slepniov

PROLOGUE

1 The last five years’ rather adventurous journey from 2004 to 2009 had taught the fifth-largest toy-maker in the world—the LEGO Group—the importance of managing the global supply chain effectively. In order to survive the largest internal financial crisis in the company’s roughly 70 years of existence, resulting in a deficit of DKK1.8 billion in 2004, the management had, among many initiatives, decided to offshore and outsource a major chunk of LEGO’s production to Flextronics, a large Singaporean electronics manufacturing services (EMS) provider. In this pursuit of rapid cost-cutting sourcing advantages, the LEGO Group planned to license out as much as 80 per cent of its production, besides closing down major parts of the production in high-cost countries. Confident with the prospects of the new partnership, the company signed a long-term contract with Flextronics. “It has been important for us to find the right partner,” argued Niels Duedahl, a LEGO vice-president, when announcing the outsourcing collaboration, “and Flextronics is a very professional player in the market with industry-leading plastics capabilities, the right capacity and resources in terms of molding, assembly, packaging and distribution. We know this from looking at the work Flextronics does for other global companies.”1

2 This decision would eventually prove to have been too hasty, however. Merely three years after the contracts were signed, LEGO management announced that it would phase out the entire sourcing collaboration with Flextronics. In July 2008, the executive vice-president for the global supply chain, Iqbal Padda, proclaimed in an official press release, “We have had an intensive and very valuable cooperation with Flextronics on the relocation of major parts of our production. As expected, this transition has been complicated, but throughout the process we have maintained our high quality level. Jointly we have now come to the conclusion that it is more optimal for the LEGO Group to manage the global manufacturing setup ourselves. With this decision the LEGO supply chain will be developed faster through going for the best, leanest and highest quality solution at all times.”2

PhD Fellow Marcus Møller Larsen, Professor Torben Pedersen and Assistant Professor Dmitrij Slepniov wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.

Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail [email protected].

Copyright © 2010, Richard Ivey School of Business Foundation          Version: (A) 2010-11-12

3 This sudden change in its sourcing strategy posed LEGO management with a number of caveats. Despite the bright forecasts, the collaboration did not fulfill the initial expectations, and the company needed to understand why this had happened. Secondly, what could LEGO management have done differently? Arguably, with little prior experience in outsourcing this large amount of production, the LEGO Group had had a limited knowledge base to draw on to manage a collaboration like this. Yet, with Flextronics’ size and experience with original equipment manufacturers (OEMs), this, in theory, should not have been a problem. Lastly, one could ponder whether the unsuccessful collaboration with Flextronics had been a necessary evil for the LEGO Group. LEGO management’s ability to handle its global production network after the Flextronics collaboration had surely changed, and aspects like standardization and documentation had to a much larger extent become valued.

INTRODUCING THE LEGO GROUP: ONLY THE BEST IS GOOD ENOUGH

4 The LEGO Group’s vision was to “inspire children to explore and challenge their own creative potential.” Its motto, “Only the Best is Good Enough,” had stuck with the company since 1932 when Ole Kirk Christiansen, a Danish carpenter, established the company in the small town of Billund in Jutland, Denmark, to manufacture his wooden toy designs. As the company itself said, “It is LEGO philosophy that ‘good play’ enriches a child’s life—and its subsequent adulthood. With this in mind, the LEGO Group has developed and marketed a wide range of products, all founded on the same basic philosophy of learning and developing—through play.”3 With this simple idea, the company, through its history, had grown into a major multinational corporation, and, by 2009, was the world’s fifth-largest manufacturer of toys in terms of sales. The same year, the LEGO Group earned DKK11.7 billion in revenues and DKK2.2 billion in profits, and had a workforce of approximately 7,000 employees around the world (see Exhibit 1 ). Its corporate management consisted, besides the chief executive officer and the chief financial officer, of four executive vice-presidents with respective business areas (markets and products; community, education and direct; corporate centre; and global supply chain) (see Exhibit 2 ).

Products and Markets

5 The LEGO brick was the company’s main product (see Exhibit 3 ). The iconic brick with the unique principle of interlocking tubes offering unlimited building possibilities was first introduced in 1958 and had basically remained unchanged ever since. The underlying philosophy of the brick was that it would stimulate creative and structured problem-solving, curiosity and imagination. In the company’s own words: “In the hands of children, the products inspire the unique form of LEGO play that is fun, creative, engaging, challenging—all at the same time …. We strive to accomplish this by offering a range of high quality and fun products centred around our building systems.”4 The simple yet multifunctional and combinational structure of the brick (there were as many as 915 million possible combinations to choose from with six eight-stud LEGO bricks of the same color) had therefore been core to the company’s history and success. In fact, the LEGO brick had been rewarded the “Toy of the Century” designation by both Fortune Magazine and the British Association of Toy Retailers.

EXHIBIT 1: The LEGO Group Financial Figures

Source: The LEGO Group Annual Report, 2009.

6 To segment the products, however, a number of categories had been created: First, “pre-school products” comprised products for the youngest children, who had yet to start school. The LEGO DUPLO products were examples of this category. Second, the “creative building” category targeted sets or buckets of traditional LEGO bricks without building instructions. Third, “play themes” products were the products that had a particular story as their basis. This could be themes such as airports, hospitals and racing tracks. The classic LEGO City line and futuristic BIONICLE theme products were examples of this category. Fourth, and related to the play themes, were the “licensed products,” which were built up around movies or books that the LEGO Group had acquired the rights for, such as Harry Potter, Star Wars and Indiana Jones. Fifth, “MINDSTORM NXT” was a programmable robot kit, where consumers could construct and program robots to perform different tasks and operations. Sixth, “LEGO Education” comprised products that had been specifically developed for educational purposes. Last, in 2009 the LEGO Group made its first move into the board game category with the launch of the “LEGO Games” product line. The underlying logic of the entire product portfolio was to reflect the fact that children grow older and develop, and thus demand more challenging stimulation.

(Pearce 12-1-12-5)

Pearce, John, Richard Robinson. Strategic Management, 13th Edition. McGraw-Hill Learning Solutions, 2016-01-02. VitalBook file.

The citation provided is a guideline. Please check each citation for accuracy before use.