Piece by Piece A Breakdown of Lego

Objective We aim to study how Lego has adapted its organizational structure to suit changes in the environment, and the resulting effects on their employees as well as the community. Introduction The Lego Group was founded in 1932 by carpenter, Ole Krik Kristiansen. It has been passed down generations to Kjeld Krik Kristiansen, grandson of the founder. The world's fifth largest manufacturer of toys, its reins were subsequently handed over to Jorgen Vig Knudstorp in 2004. This was done in hope of returning the company to prosperity through extensive restructuring. Lego encountered many problems during its rise to dominance of the toy industry, and had to adapt and make changes to survive and stay current and relevant. In this paper, we shall investigate several problems faced by the Lego Group so as to gain insights and valuable lessons. Expiration of Patents The patent on the design for the Lego brick expired in 1981. This opened the door to imitators which accounted for the largest threat to Lego's dominance of the construction toy market in the 1980s and 1990s. The simplicity of its basic building blocks was a liability in that other companies could easily reproduce the basic design. These competitor products were typically compatible with Lego bricks and marketed at a lower cost. This forced Lego to enter lawsuits with other companies involving trademark infringement on packaging, logos, and accessories but not on the brick design itself.

A notable problem came from the established toy company Tyco Toys, which in 1984 launched its Super Blocks series based on Legos design. Lego sued Tyco but after four years of litigation, they were unsuccessful in stopping sales of Super Blocks. Lego attempted to trademark the "Lego Indicia", the studded appearance of the Lego brick, hoping to stop the production of Mega Bloks, yet another Lego imitator. In May 2002, the Federal Court of Canada dismissed the case, asserting that the design was functional and therefore ineligible for trademark protection. Lego's appeal was dismissed by the Federal Court of Appeal in July 2003. In October 2005, the Supreme Court ruled unanimously that "Trademark law should not be used to perpetuate monopoly rights enjoyed under now-expired patents" and maintained that Mega Bloks can continue to manufacture their bricks. Because of fierce competition from copycat products, the company has always responded by being proactive in their patenting and has over 600 United States granted design patents to their name. Change in Childrens Preferences The 1980s brought about a wave of new entertainment avenues for children. Cable television, the VCR, and video game consoles, all meant that kids now spent less time playing with toys. Even within the toy industry, Lego was losing ground to action figures due to the scenario based play that the latter offered. Lego executives failed to realize this and were content on achieving growth through global expansion. Into the 90s, Legos expansion had plateaued, while its competitors grew more robust with the birth of the Internet. Lego, despite being lauded by experts and parents alike for its creative style of play, no longer appealed to children above the age of 7. As a result, the company suffered a loss of 1 billion kroner (US $120 million) in 2000 and had to retrench over 1000 employees. Recognizing the need for change, Lego began paying more attention consumer feedback and market research to determine how best to proceed. A new class of programmable bricks, known as Lego Mindstorms, was introduced to appeal to a

more computer savvy generation. To recapture the interests of children, Lego partnered with other brands to create themed Lego kits, such as Star Wars and Harry Potter a practice that was already prolific in the toy industry. Taking a page from popular crazes like Pokmon, Lego also created a new brand of toys known as Bionicle, complete with its own mythos that was crafted by Lego designers to appeal to older children. The strategy seems to be working, with Lego turning in a profit since 2005. Failure to Adapt to Globalization Due to the growing dominance of discount retailers such as Wal-Mart, and the decline of specialized toy sellers, Lego was put under greater pressure on the prices of its products and lead times. Lego had missed out on major changes, and failed to modernize its supply chain management. For almost six decades, Lego had focused on delivery to smaller retailers who had dominated the toy market in the 1950s. However, in the 1990s, as its competitors started to shift their focus on delivering to the bigger retailers, Lego was still focused on brand building. This had resulted in Lego losing ground to companies that were working on more complex chain management system. A new competitor, Mega Bloks, took Legos expiring patents, to enter the market in the 1990s. By producing at least 50% of its bricks in Asia, Mega Bloks had a strong competitive edge over Lego, which were still producing more than 90% of its bricks in the outskirts of Billund. Production in Asia resulted in lower production costs, which enabled Mega Bloks to be able to sell its products at a much lower price than those from Lego. In 2004, Mega Bloks posted a net income of $25.2 million while Lego struggled with losses. Over-Diversification of Lego The traditional toy market was decreasing in developed countries due to cheaper replicas, competition from electronic goods as well as declining birth rates. It seemed logical for Lego to attempt moving into different markets. It opened LegoLand theme

parks in the US and over Europe, which included rides, activities, restaurants and large-scale Lego models. One major mistake Lego made was when they tried to reach further to their younger consumers. Their popular Duplo series was phased out and replaced with Lego Explore, causing confusion among parents when they thought Lego stopped producing such toys for their pre-school children. As a result, their revenue in that market was halved. Lego also adopted a more holistic approach by launching their range of lifestyle products like clothes, watches and video games. However, as they attempted to reach out to a wider target audience especially the female consumers, they left out their prime audience, boys aged five to nine. Over-diversification was relatively easier to solve, selling off assets would also generate cash flow. The theme parks were sold and left for the new owners to run, while Lego kept 30% of the shares. Lego also decided to stop production for products which deviated from their core competency, which was building bricks. This move especially included products targeted at the female consumers which Lego had tried desperately to attract. Subsequently, Lego went about a diversification process, this time doing it the right way by diversifying within their core competency. By striking deals with film companies like Lucasfilm, they were able to develop products based on films such as Star Wars, Indiana Jones and Harry Potter. These products proved hugely successful. Moreover, their Bionicle range has also continually been expanded due to its popularity. Lego has even managed to attract children through the Internet with Lego Factory, a downloadable software which allows one to design his/her own toy and request for it to be produced. On 26th October 2010, Lego will also be releasing their MMOG (massively multiplayer online game), Lego Universe worldwide.

Empowered Designers Legos decentralized structure empowered their designers with decision making authority and the freedom to create. New designs got more intricate and detailed requiring unique and additional parts, which increased production cost per toy. Designers were also allowed to source their own vendors for new parts and materials, due to the lack of official procurement compliance procedures. By 2004, Lego had more than 11000 suppliers and engineers were ordering specialized parts at irregular intervals. This reduced Legos ability to leverage on the economy of scale in dealing with suppliers lowering its profit margin. Furthermore without proper quality control, the empowered designers had only 30 products generating significant sales while majority of the 1500 stock keeping units were no longer manufactured and accumulating in the warehouse. Lego decided to retain its decentralized structure, while implementing regulations within it. Design teams now consist of non-creative staff for a more holistic analysis of a design before implementation. Teams were to devise their own set of rules for creation of new products and materials. Designers were also encouraged to create within the constraints of existing materials and parts to lower production costs of the company. In addition, Lego established a large scale outsourcing deal with Flextronics to produce more than 70 per cent of its parts which allowed for a greater bargain to be struck thus greatly reducing the cost price of the products. These cost saving moves increased Legos sustainability. Inability of Managing the Highly Decentralized Structure The highly decentralized structure that Lego was operating on resulted in the different sections of the company working independently from each other rather than co-operating efficiently. For example, within Lego, its Marketing managers did not work together with its designers, even though these managers had vital information from Legos market research. This led to the designers not having a focal point and went astray from the type of designs they should be concentrating their attention on.

It also meant that Lego as a company could not pool its resources effectively as individual departments were not communicating to each other. Subsequently even individuals were not pooling resources to cut cost. Designers would carry on with their overly complex designs and send the required parts to production without considering if there were similar pieces already in production. This changed when top management took a stronger stand, forcing designers to pool their resources hence cutting unnecessary spending and increasing the profit margin of the company. A highly decentralized system did not work for Lego because it is a company that needed its departments to come together and focus on its projects with top management ensuring that there is no wastage of resources or repeated manufacturing processes. Thus when it moved towards a highly diversified and decentralized system, it essentially crippled itself. This led to a large level of redundancy and waste within the company that cumulated in the net loss in 2004. The change in the top management, beginning with the change of CEO, resulted in cost cutting measures that were aimed towards making a larger profit from a smaller turnover. This meant cutting the redundancies within Lego and streamlining its management style, morphing it into a more centralized and hierarchical system that would enable the focusing needed within Lego.

Critical Evaluation Strategy of Company Legos reaction to their expired patents was to obtain copyrights for its other products to prevent competing companies from pirating its intellectual property. This was where Legos business level strategy went askew. It wasted valuable resources that Lego could have channeled into designing new and competitive products. They should have used their position as an early entrant to counter emerging competitors. They could have been more aware of their expiring patents and devised preventative measures. This would have ensured Legos dominance in its core competency. In fairness, Lego did continue to design new products. However they were not sufficiently aggressive in acquiring copyrights. We feel this would have given them a greater advantage over their competition. Another poor strategy Lego adopted was to sue the imitator companies that were actually not legally infringing on its intellectual rights. As a result, Lego lost more money due to the unnecessary legal fees. Instead, Lego should have strengthened the marketing of its products to their consumers. This would have promoted Lego amongst their customers and persuaded them to choose Lego over less recognized brands. Legos focus was short-sighted in that they chose to attack their competitors instead of increasing their own advantage. Changes in Environment The environment that Lego operated in was drastically changing. However, due to its conservative culture, Lego was internally resistant to change. This conservative culture stemmed from the dynastic nature of the company. The new CEO forced the company to adopt a more pragmatic culture. Hence Lego eventually managed to catch up by updating their product range. Lego needs to keep up this mentality of pragmatism to thrive in this dynamic economy. They need to understand the market

and develop its products accordingly. They have started to bring themselves out of the niche market that they were trapped in and now cater to a more general crowd. We feel Lego needs to keep doing this to make themselves more prominent and diverse in greater aspects of the educational toy industry. Globalization A globalized economy eroded Legos dominance. They were being undercut by competing retailers underselling them to large conglomerate supermarkets. Legos answer to this was to change its Functional-Level Strategy by streamlining its company structure. It outsourced its distribution to DHL and manufacturing to cheaper nations like Mexico. This meant Lego could concentrate on what it did best, designing and creating new products for its customers. By changing the structure of how the company operated, Lego managed to keep its foothold in the economy and make a comeback. This change in the Functional-Level Strategy was a product of the improvements in top management and the companys Business-Level Strategy. To maintain profitability and growth, a company must be ready to adapt to the changing environment even if that means downsizing and streamlining operations. Over Diversification Lego could have used diversification to their advantage. However, they targeted wrong areas of development. Lego expanded into areas which it had no prior experience in, for example theme parks and even a clothing line. Lego could have used feedback to direct its scope of diversification according to Argyris Theory of Action, Model II. This would have helped them avoid expanding into wrong areas. Another method of diversification that Lego could have adopted was to expand within the scope of their core competency. They would have had more knowledge and experience in the field and hence been more successful.

Retaining the Decentralized Structure Lego initially had a decentralized company structure. Generally most mature companies move towards this structure as it allows its employees greater freedom of operation. However, Lego granted important members of its staff too much freedom. For example, its designers were given excessive leeway to operate in. Legos solution of introducing team-based checks and balances was a good way to rectify this situation. This demonstrates Lego managers ability to pick out problems internally and deal with them efficiently. Lego has established a very effective design process. While specific teams were assigned individual products, these were circulated among other teams. This allowed designs to benefit from the collective knowledge of everyone, while maintaining individual accountability. Additionally, teams had to operate within budget and inventory constraints, helping to keep down production costs. This made the design process self-regulating and efficient. Design teams are highly diverse, consisting of members from creative, financial and technical departments. This kind of team benefits from having a wider perspective. However, teams need to be wary of tensions arising from their differences. Careful management of the members is necessary to deal with problems of prejudice and tokenism. For example, designers might come to see members of the finance department as hindrances to their design vision. Also, it is difficult to strike a balance on dynamics of the team members. If one member was given authority, he could downplay the opinions of the other members, thereby losing the advantage of a wider perspective. On the other hand, if no clear leader is established, the team may experience difficulty in coming to decisions. Hence, while Legos solution of a team based approach to organizing its employees might seem very efficient and self correcting, it must be noted that such an approach requires a lot of minute managing of human relations among the employees to ensure that tensions do not boil over and undermine their productivity. A strong belief in the company mission is essential as it serves as a uniting factor to overcome these differences.

Conclusion Before 2005, Lego was experiencing an organizational decline. Its conservative culture made it slow to respond to the rapidly changing environment. Organizational development was sluggish due to its negligence of feedback. Legos decentralized structure led to a crisis of control. Competitors pushed ahead while Lego was left struggling in their wake. The turning point came with a strategic change in leadership, bringing about sweeping reforms. Effective reorganization saved them from dissolution and organizational death. Lego was able to learn from past mistakes and incorporate those lessons into their culture and future strategies. It has done amicably in lieu of the problems it faced and has reclaimed its position as an industry leader.