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Corporate Strategy1999

Speaker - PHILLIP

(10secs)

Welcome and group introductions

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Founded in Denmark, 1932

Worlds 5th largest toy manufacturer

Manufactures, distributes and retails plastic building block kits -LEGO Primo, LEGO Duplo, LEGO System and LEGO Technic

Employees 10 000 people

Revenue US$1.1 billion

CEO, Kjeld Kirk Kristiansen

New businesses - LEGOland, LEGO Lifestyle, LEGO Media, LEGOMindstroms

LEGO Group

CLARE (45secs)

1. LEGO founded in Billund, Denmark, 1932, is the worlds 5th largest toymanufacturer

2. Famous for its interlocking plastic building blocks

3. Which are sold under 4 age related brands - LEGO Primo, LEGO Duplo, LEGOSystem and LEGO Technic.

4. Employing almost 10 000 people across the globe

5. Revenue just short of US$1.1billion

6. Traditionally, the business is organised into various strategic business units inEurope, the Americas, Asia-Pacific and Japan and business units focused onthe global supply chain.

7. CEO, K Kristensen, (founders grandson) wishes LEGO to become ‘the mostpowerful brand in the world among families with children by 2005’.

8. To aid this goal, LEGO begun adding new business lines in the 1990s –

LEGOland Theme Parks - Windsor, UK (1996); California, US (1999); andGunzberg, Germany (2003 completion)

LEGO Lifestyle (1991) - consumer products such as clothing, footwear, bags,watches and puzzles

LEGO Media (1996) - children's software, music, video and books

LEGO Dacta - school use

AND………LEGO Mindstorms

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1984 Early R+D

1986 Launched computerized building set for schools; deemedpremature

1993 Strategic business unit created after the successful trial ofa programmable brick

1995 Home PC ownership and Internet usage is sky-rocketing.Market dominated by game-oriented ‘edutainment’ products

1996 Target market identified: Conscious, Caring and Capableparents, (CCC), 20% of US households

1997 LEGO Mindstorms launches

LEGO Mindstorms

CLARE (30secs)

1. Mindstorms R+D began in the 80’s

2. In 1986 LEGO Launched an early school version but was deemedpremature for the consumer marker due to low PC ownership

3. Development continued through the late 80’s

4. And in 1993 after LEGO successfully tested a programmable brick anew strategic unit was created.

5. As PC ownership and internet usage increased. Lego saw aemerging market,

6. The new products were to target CCC parents, approx. 20% of UShouseholds.

7. March 1997 Mindstorms launches

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Integrate or continue unabated?

CLARE (45secs)

The introduction of Mindstorms was a radical change for Lego Group.

It was separated from the core business from Research & Developmentto production and marketing.

It even created its own channel partners and supply chains. This hascreated various advantages such as increased responsiveness andmarket agility, but its operating style has been viewed by core Legomanagement as against the norm, thus creating a conundrum forKristiansen regarding future directions – whether to integrate the newbusiness or allow it to continue unabated

This analysis will put forward recommendations to the Lego group inregards to the best strategy for the Mindstorms business that willmaintain the Lego brand, benefit customers globally and driveeconomies of scale within the core business. In order to present theserecommendations, an extensive internal and external environmentalanalysis has been undertaken, along with identification of the criticalsuccess factors, current capabilities and performance

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Macro EnvironmentalAnalysis

SANDEEP (10 secs)

For those of us, that are to old to remember or to young to know, letstake a broad look at what 1999 was like and the factors that may havebeen influencing LEGO’s operations.

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Instability in the developing world;

WTO free-trade negotiations breakdown; andEuropean Parliament elections.

Political

SANDEEP (10 secs)

1. Political instability in some regions of the developing world (i.eBalkans);

2. World Trade Organisation December negotiations in Seattlebreakdown due to contrasts between USA, European Union anddeveloping nations proposals on free trade;

3. European Parliament Elections, may see a shift in policies

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Economic

Euro introduced as Denmark abolishes the Krone;changes to the Danish taxation system; and theInternet boom is still aiding economic growth

SANDEEP (10secs)

1. Common European Currency, euro announced.

2. Denmark officially abolishes krone;

3. Denmark announces more uniform taxation system to beintroduced;

4. The internet bubble is bigger than ever and still ‘bubbling’

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Sociological

Changing attitudes to early childhood development;away from instructional methods; and leisure time is

evolving from outdoor activities.

SANDEEP (10 secs)

1. Changing attitudes to early childhood development, away frominstructional methods

2. The use of leisure-time by young children is evolving away fromtraditional past-times, such as outdoor activities

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TechnologicalSpeed of information technology increasing;communication networks impacting on society; andinternet and PC games impacting the toy market.

SANDEEP (10secs)

1. Speed of information technology rapidly changing,

2. Increase societal impacts of communication and networks

3. Widespread use of internet and advanced video/PC games impactsthe global toy market

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LegalLabour market reforms in Denmark; and

potential changes to intellectual property laws.

SANDEEP (10secs)

1. Denmark announce labour market reforms in relation tounemployment schemes.

2. Rapid changes in technology especially in the internet impactedworld legal bodies to consider updating the intellectual property law

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Environmental

Increasing global concern for the environment; overconsumption and over population; governmentsintervening

SANDEEP (10 secs)

1. Concerns that the global economy could be seriously effected byover consumption and increasing populations;

2. Governments intervention such the EU ban tobacco advertising andsmoking in public places.

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Industry Analysis

CLARE (5secs)

How were these environmental factors affecting the toy industry?

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Industry Rivalry

CLARE (45 secs)

Threat of new entrants

High: risk of existing competitors (e.g. K'Nex) entering the computerised buildingblock market

Medium: risk of competitors outside the toy industry (Sony, EA), who haveexisting brand relationships with the target market through games and software.

Buying power of suppliers

High: Heavy reliance on partnerships in order to keep the unit lean

Threat of substitutes

High: due to the plethora of education and entertainment options available

Buying power of customers

Low: in the consumer market, due to size and fragmentation.

High: in the schools market where many decisions are centralised

Competitive rivalry

High: heavy competition from entrenched competitors and new entrants to themarket

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Flexibility Adaptation; speed to market; pricing; anddistribution.

Innovation In products; services; support; and technology features.

R+D Continual new and exciting products

Brand awareness Market appeal

Economies of scale Vital for profit margin

Business Synergies Across LEGO group

Critical Success Factors

SANDEEP (45secs)

For the LEGO Mindstorms business to survive within the highlycompetitive global toy industry the Critical Success Factors are:

Flexibility to adapt to market requirements including product design,speed to market, pricing, proper distribution channels and serviceand support from core business management and staff.

Innovation in products, so that the target market does not becomebored and move to a more exciting product. Consumers in thismarket also expect more and more in terms of service, support,technological features

Research & Development investment to ensure that new, exciting andrelevant products are brought to market ahead of the competition

Brand awareness and appeal to the target markets.

Economies of scale for production is essential due to the high cost ofR&D, marketing and distribution

Multi-Business synergy across the LEGO group

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SWOT Analysis

PHILLIP (10secs)

Given that the dilemma is to whether Majgaard integrates Mindstormsinto the LEGO core or not.

We have chosen to address the SWOT analysis as a comparison of thetwo bodies - Lego Core and Mindstorms Business unit.

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Strengths

LEGO

Resolved vision;

Outstanding reputation;

Extensive distributionnetwork;

Success in addressing org.mindset problems; and

High brand awarenessamongst target market.

Mindstorms

Astute marketing;

Flexible, timely operations;

Global vision;

Products reflect LEGO’sfoundation; and

Strong launch and initialsales.

PHILLIP (25secs)

LEGO

•Resolved vision, outstanding reputation and extensive brandawarenessExtensive distribution network, well-established buyer relationships

•Proven success in addressing organisational and mindset problemsi.e. 1994 Compass Management program, 1999 Fitness Program

•High brand awareness amongst the target market

MINDSTORMS

•Astute marketing

•Flexible, timely operations

•Global vision

•Products reflect LEGO’s‘constructionism’ foundation

•Strong launch and initial sales

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Weaknesses

LEGO

‘Instructionism’ products;

Poor sales growth in recentyears; and

Viewed as ‘entertainment’rather than ‘education’

company.

Mindstorms

Partnership conflicts.

Staff that lack LEGOknowledge

PHILLIP (15secs)

LEGO

•Products tending towards ‘instructionism’

•Poor sales growth in the late 1990's

•Viewed as an "entertainment", rather than an "education" company

MINDSTORMS

•Partnership conflicts

•Staff that lack LEGO insider knowledge

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Opportunities

LEGO

New alliances with majorplayers, i.e. Lucas Filmsand Star Wars brand; and

Economies of scaleopportunities throughintegration withMindstorms.

Mindstorms

Further market penetration;and

Establish new target marketwith schools.

PHILLIP (15secs)

LEGO

•New alliances with major players, i.e. Lucasfilms – Stars Wars brand

•Economies of scale opportunities with integration of Mindstorms

MINDSTORMS

•Further penetration into the existing target market

•Establish new target market with schools

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Threats

LEGO

Declining profitability;

New competitors; and

Increased internal conflicts;

Mindstorms

Unfamiliar substantivecompetitors, i.e. Sony,Microsoft, Nintendo andSega.

PHILLIP (15secs)

LEGO

-Declining profitability

-New competitors

-Increased Internal conflicts

MINDSTORMS

•Unfamiliar substantial competitors i.e. Microsoft, Sony, Nintendo, Sega

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Company Analysis

PHILLIP (5secs)

Lets take a closer look at the current strategies, capabilities andperformance of Mindstorms and the Lego Core.

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Corporate Strategy Perspectives

PHILLIP (30secs)

Majgaard’s dilemma reflects the diametric poles of corporate levelstrategy perspectives.

The portfolio organisation perspective - Is a business conglomeratewhere individual business responsiveness is emphasised.

And

The integrated organisation perspective - Is where synergy isfundamental throughout the entire group of businesses.

(De Wit and Meyer 2004)

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LEGO’S Current Corporate Strategy

Since the early 90’s senior management have beenworking towards an integrated organisationperspective;

CEO was preaching a universal approach revolvingaround ideas, exuberance and values; and

Merging activities and processes to become moreefficient, realizing synergies ahead of retainingresponsiveness.

PHILLIP (30secs)

Since the early 1990’s senior management at LEGO had been workingtowards an integrated organisation perspective. Kristiansen waspreaching a universal approach revolving around the LEGO ideas,exuberance and values.

This translated to merging activities and processes to become moreefficient by realising synergies ahead of retaining responsiveness.

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LEGO’S Current Corporate Strategy

Formally structured core business;

Strategy was focused on planning, forecastingtrends, and product programming.

The fitness program, involves reducingorganisational layers and staff, clearer lines ofresponsibilities and a greater customer focus.

Predictable product lifecycles;

Continuous marginal improvement;

PHILLIP (30secs)

The formally structured core business was successful in dealing withpredictable product lifecycles and achieving continuous marginalimprovement. The corporate level strategy was focused on planning,forecasting trends, and product programming.

The latest strategic approach, the Fitness Program, involved reducingorganisational layers and staff and establishing clearer lines ofresponsibilities, thereby creating a greater customer focus.

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Business Strategy Perspectives

PHILLIP (30 secs)

Majgaard’s solution not only had to address the corporate levelstrategy. It had to address the business level strategies of the core andthe various SBU.

Typically, a business can have either of these perspectives.

An outside-in perspective - where emphasis is on markets overresources and the business is opportunity driven.

Or

An inside-out perspective - where the internal strengths are utelisedand resources assist in attaining a distinctive position.

(De Wit and Meyer 2004)

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LEGO’S Current Business Strategy

Variance in business strategies across the SBU’s;

New business units have an outside-in perspective;

Core business has an inside-out perspective; but

Recent core activities project a change towards amarket focused strategy (outside-in strategy).

PHILLIP (40 secs)

The Strategic Business Units had varied business level strategies. Thefour new business units, (Mindstorms, Legoland, Media, Lifestyle,Dacta) had a greater outside-in perspective emphasising markets overresources.

They were opportunity driven, based on market demand, environmentaladaptation and focused on attaining an advantageous strategic positionfor LEGO.

In contrast, the core SBU’s (including the new products team) displayeda greater inside-out perspective concentrating on internal recoursesover external markets.

However, recent joint ventures such as the new Star Wars LEGO withLucas Films indicate that Kristensen’s integrated corporate strategymay have influenced the traditional SBU approach.

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Functional Analysis

CLARE (30secs)

In 1999, the LEGO Mindstorms team was responsible for their ownfunctional departments; separate to the core LEGO business. Thisallowed flexibility with regards to adapting their functions to fit theunique product offering of Mindstorms and was not dictated to by thetraditional processes of the LEGO core group. This separation however,meant that the team did not take advantage of economies of scale orleverage the existing capabilities and knowledge of LEGO Group staff.

This structure, whilst causing issues within the LEGO group allowedMindstorms to develop and launch to market a highly innovative,successful new product.

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Mindstorms Capabilities

HR Experienced early challenges; hired externally; global recruitment; seeking fastpaced innovative employees.

Marketing Decentralised from LEGO core.

Pricing For price leadership.

Distribution Hybrid non-traditional channeling createdconflict with the core distribution.

Promotion Outsourced PR/advertising focused only onthe US market.

CLARE (1.30 min)

HR The Mindstorms team experienced initial challenges in recruiting staff from within the company, asthe over-riding attitude was that ‘hey didn’t want to be too closely associated with Mindstorms in case itfailed’. Due to this hurdle, the Mindstorms team had to seek expertise outside the core group.

This resulted in a support services team that was partially located in the U.S to be closer to the targetmarket and hiring people who had specific industry knowledge, yet lacked company knowledge. Thisgeographic diversity meant that the Mindstorms business was truly positioned to think globally.

The culture of the people they hired and the innovative nature of the team meant that it was managedand led very differently than the core group. They operated in a fast-paced, informal environment whereemployees worked in partnerships with their external stakeholders, with caused friction with the LEGOgroup.

Marketing As this was an innovative product offering, with a completely different marketing messagethan the traditional LEGO products, Marketing was decentralized and controlled by Mindstorms.

Pricing In stark contrast to the LEGO ‘magic number’ of not selling anything for more than $39.99, theMindstorms marketing team employed a strategy of price leadership, due to the uniqueness of theiroffering and sold their products for between $200 - $219.

Distribution Mindstorms forged LEGO’s traditional distribution channels and utilised electronics stores,direct sales through LEGO and CCC companies to get their product to market. This caused frictionbecause developing these channels were unprofitable and had the potential to damage relationships withlong-term distributors, which they still relied on for the remainder of the LEGO business

Promotion Because of the strategy to build a lean team, it meant Mindstorms had to seek expertiseoutside of the LEGOGroup. They outsourced their PR and advertising. As these agencies were locatedin the U.S it allowed Mindstorms to develop meaningful messages to their largest target market althoughit did not allow for local adaptation of messages as was the case with the LEGO group with marketingfunctions in local markets.

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Mindstorms Performance

Financial Sales are 1% of LEGO; goal to increasegrowth rapidly; high cash needs; and financiallosses in 1998 resulted in 1000 job losses.

Customer Creating awareness; online communities areattracting adults; competitive robotic eventsare attracting children.

Internal Build strong supply chains; operational efficiency; economies of scale.

Growth Synergies aligned with constructionist valuesand core competencies; responsiveness tomarket through innovative.

SANDEEP (1.5min)

The purpose is to link various key indicators to larger scale objectives of LEGO including vision andstrategy. The focus is to have a measure of various performance based metrics based on theBalanced Scorecard, which includes; financial outcomes, customer, internal business processes andlearning and growth.

Financial: launched to the global market in January 1998 and sold approximately 100,000 units in itsfirst year. This translates to approximately 154 million DKK, or 2% of LEGO Group sales in 1998.Considering this was a new product, LEGO strategy is to increase growth rapidly at 20% per yearcompared to average sales growth of 3% between 1995-1998.

As the cash needs of the Mindstorms business would be high, the strategy would be to invest heavilyto increase market share and create cash inflow or divest/no further investment in Mindstorms. Thisis especially important because in 1998, high investments in new products led to cash outflow almostDKK 1500 Mill, resulting in an earnings loss of almost DKK 200 Mill. Almost 1000 employees havebeen let go in 1998 (www1.LEGO!.com)

Customer: Whilst there is a strong market need to create high consumer awareness, this needs to beachieved without expensive marketing campaigns and assume a dynamic, price leadershipposition. Online communities such as LEGO Mindstorms learning centres attracted adults,additionally LEGO robotic events to attract 9-16 year olds especially in the US helped to captureattention of the new products.

Internal Business Processes: As Mindstorms is a separate SBU, research and development andsales were not part of the core LEGO group. The purpose is to build strong supply chains, leanmanufacturing methods and economies of scale.

Learning & Growth: To ensure alignment and synergies with core constructionist values and continueto be innovative and responsive to market needs. Measures that can be introduced includeEmployee Satisfaction surveys and completing gap analysis between Mindstorms and LEGO Groupfor core competencies based on performance

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Recommendations

PHILLIP (10 secs)

Based on the analysis undertaken and the strategic vision of the coreLEGO group, it is recommended that LEGO Mindstorms be integratedinto the core group with components of a portfolio approach.

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Hybrid Corporate Perspective

CLARE (10secs)

Thereby undertaking a hybrid corporate strategy that takes advantageof and captitalising on synergies whilst remaining responsive in keyareas.

What will the hybrid approach look like?

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Manufacturing and Production

Sharing value-added activities;

Lean manufacturing;

Parallel production processes; and

Economies of scale.

SANDEEP (25secs)

Manufacturing and Production (sharing valued-added activities)

Lean manufacturing and parallel production processes would beimplemented into core manufacturing methods to enhance value andincrease reliability and flow. The economies of scale created by thiscentralised production would assist in driving a more aligned pricingstrategy and reap benefits to customers.

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Suppliers and Channel Partners

Aligning positions to improve competitiveness;

Channel partner synergies; and

Strengthening existing relationships

PHILLIP (20secs)

Supplier and strategic channel partnerships (aligning positions to

improve competitiveness)

Channel partner synergies would be monitored for leveraging valuecreation versus disturbing existing relationships which are important forthe LEGO core business.

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Internal Cultural Challenges

Remain innovative; via

The creation of a Mindstorms Champion Group.

CLARE (20secs)

Internal cultural challenges (remaining innovative)

A Mindstorms Champion Group will be created, with members whorepresent each functional area of the core LEGO group. Thesemembers would promote the benefits of Mindstorms and have thepolitical clout to break through bureaucratic barriers yet have the abilityto create consensus and direction.

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FinanceLeveraging resources; Reduced operating costs;Sustainable growth; and Increased Profit margins.

SANDEEP (25secs)

Financial (leveraging resources)

Projections show that Mindstorms will contribute increasingly to LEGOGroup sales as operating margins are high at 20% and there issustained growth from integrating some of the functions. IntegratingMindstorms into the LEGO group will actually reduce operating costsdue to lean optimization in the whole organization. This will improvedramatically the overall profit margin by an additional 4% per everyyear.

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References

De Wit, B and Meyer, R 2004, Strategy:process, content, context.

International Thomson, Singapore

Ireland R D., Hoskisson R E. & Hitt M A., 2008, Understanding Business Strategy, Concepts & Cases 2nd Ed. Cengage Learning,

Hubbard, G 1990, Analysing a Case, in Cases of Strategic Management: Australia and New Zealand, G Lewis, A Morkel, G Hubbard, GStockoprt, and S Davenport (eds), 2nd ed, pp. viii-xvi, Prentice Hall Sydney

Porter, M, (1998) Competitive Strategy: Techniques for analyzing industries and competitors, Free Press

1999 Statistics, Denmark viewed on August 10, 2009 <http://www.dst.dk/HomeUK/Guide/economico/1999.aspx >

Environmental Issues – Global Issues viewed on August 10, 2009< http://www.globalissues.org/issue/168/environmental-issues>

Lego Financial Accounts 2001 viewed on August 20, 2009< http://cache.LEGO!!.com/downloads/aboutus/accounts2001eng.pdf>

Lego Mindstorms – What went wrong? Viewed on August 20, 2009< http://www.techuser.net/LEGO!.html>

Lego Pressroom Archives displaying historic financials viewed on August 20, 2009<http://www1.LEGO!.com/eng/info/default.asp?page=pressdetail&contentid=99&countrycode=2057&yearcode=2000&oldXML=true&archive=true>

Effects of Overconsumption and Increasing Populations viewed on August 10, 2009< http://www.globalissues.org/article/216/effects-of-over-consumption-and-increasing-populations>

BCG Growth-Share Matrix viewed on August 20, 2009< http://www.netmba.com/strategy/matrix/bcg/>

Historic Exchange rates viewed on 10 August, 2009< http://www.xe.com/ict/>

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Image References

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