From Near-Bankruptcy to Most Valuable Company: Inspiring Story of Lego - MBA Case study analysis

Summary

Lego’s journey from its humble beginnings in the 1930s to its rise as a global brand is a story of resilience and innovation. Founded by Ole Kirk Christensen during the Great Depression, Lego grew through key innovations like the stud-and-tube system. However, by the late 90s, the company faced a major crisis, nearly going bankrupt due to overexpansion and poor product strategies. A dramatic turnaround began in 2003 under CEO Jørgen Vig Knudstorp, focusing on cost-cutting, innovation, and embracing adult fans. Today, Lego remains a household name, celebrated for its creativity and staying power in the toy industry.

Takeaways

• 😀 Lego's success story began with founder Ole Kirk Christensen during the Great Depression when he started producing wooden toys.
• 😀 In 1949, Lego introduced a revolutionary plastic injection molding machine, leading to the creation of their iconic brick system.
• 😀 The introduction of the stud and tube coupling system in the 1950s laid the foundation for Lego's future success as a creative play system.
• 😀 Despite challenges, including fires and factory setbacks, Lego persisted and expanded into new areas like theme parks and Duplo toys for younger children.
• 😀 By the 1990s, Lego faced significant challenges due to market changes, technology, and competition from licensed toys like Star Wars and Harry Potter.
• 😀 In 1998, Lego reported its first-ever loss of $48 million due to the shifting market and internal issues, including slow innovation.
• 😀 The partnership with Lucasfilm in 1999 to create Lego Star Wars was a major success, exceeding sales predictions by 500% and reviving the brand.
• 😀 Despite a risky expansion into theme parks, retail, and video games, Lego faced significant losses in the early 2000s, with unsold inventory and high debt.
• 😀 In 2003, Lego's CEO was replaced by Jørgen Vig Knudstorp, who helped turn the company around by focusing on profitability and cutting costs.
• 😀 Under Knudstorp's leadership, Lego restructured, focusing on a smaller product range, catering to adult fans, and reestablishing its core identity.
• 😀 By 2008, Lego had successfully bounced back from the brink of collapse, becoming one of the most successful toy companies in the world.

Q & A

What were the main reasons for Lego's struggles in the 1990s?

Lego faced struggles in the 1990s due to rapid expansion without focusing on innovation, changing market dynamics, and technological advancements that impacted how kids played. The U.S. market had shifted toward licensed toys, and Lego couldn't keep up, leading to a significant loss in 1998.

How did Paul Plougmann contribute to Lego's turnaround?

Paul Plougmann, a turnaround expert, was hired to help Lego recover. His major contribution was overseeing a product expansion phase and partnering with Lucasfilm in 1999. This led to the creation of Lego Star Wars, which exceeded sales predictions by 500%, turning the company's fortunes around.

What was the initial innovation that Lego introduced in the 1950s?

In the 1950s, Lego introduced the stud and tube coupling system, a groundbreaking innovation that created a new platform for creative play, which laid the foundation for their future success.

What impact did the partnership with Lucasfilm have on Lego?

The partnership with Lucasfilm in 1999 was a game changer for Lego. It resulted in the Lego Star Wars product line, which became hugely successful and revitalized Lego’s sales, proving the value of smart partnerships in overcoming challenges.

What caused Lego's financial crisis in the early 2000s?

Lego faced a financial crisis in the early 2000s due to over-expansion into multiple industries, including theme parks, retail, and video games. The company's focus on innovation led to high-risk investments, which didn’t pay off, resulting in unsold inventory, negative cash flow, and massive debt.

How did Jorgen Vig Knudstorp help to rescue Lego from bankruptcy?

Jorgen Vig Knudstorp, appointed as CEO in 2004, led the company through its financial crisis. He focused on cutting costs, selling non-essential businesses, reducing the number of Lego pieces, and fostering a new corporate culture centered on profitability and innovation. His efforts led to a remarkable recovery by 2008.

What challenges did Lego face in 2002, and how did this impact their sales?

In 2002, Lego’s Christmas sales failed to meet expectations, and retailers reported unsold Lego sets, with some outlets holding over 40% of inventory. This contributed to a sharp decline in sales, negative cash flow, and a growing debt crisis for the company.

What was the role of adult Lego enthusiasts in Lego’s recovery?

Adult Lego enthusiasts played a crucial role in Lego's recovery. Knudstorp’s strategy involved tapping into this fanbase to create new, innovative products, which helped establish a profitable core and reinforced Lego's identity as both a play and business system.

What was Lego's approach to innovation during the 1990s and early 2000s?

Lego's approach to innovation during the 1990s and early 2000s involved diversification into various fields such as theme parks, retail, and video games, as well as attempting to out-innovate competitors with risky product expansions. However, this strategy ultimately led to instability and financial losses.

What lessons can be learned from Lego's journey through adversity?

Lego’s journey teaches the importance of adapting to market changes, focusing on core strengths, and making strategic partnerships. Even in the face of adversity, companies can turn around their fortunes through innovation, customer-focused strategies, and a willingness to change.