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Amazing Turnaround: How LEGO Avoided Bankruptcy

A few years ago, I had the opportunity to teach a Case Study on LEGO at a renowned business school. Here is the fascinating story of how LEGO avoided bankruptcy.

LEGO is a family-owned company founded in 1932 in Billund, Denmark. They started with wooden toys but eventually switched to plastic interlocking bricks in the 1950s, which became their signature product.

LEGO is derived from the Danish words "leg godt," meaning "play well."

By the late 20th century, LEGO was a globally recognized brand known for creativity and imaginative play.

However, by the early 2000s, the company faced a series of challenges that put its very existence in jeopardy.

The issues threatening the company were multiple:

  1. Diversification Issues: In the 1990s and early 2000s, LEGO expanded into various areas like theme parks, clothing, and video games. While diversification can be a good strategy, LEGO spread itself too thin and ventured into areas outside its core competence.

  2. Competition: The rise of video games and electronic toys meant that traditional toy companies like LEGO faced fierce competition. Children's play patterns were changing, and LEGO seemed to be losing its relevance.

  3. Financial Struggles: By 2003, the company reported a loss of over USD 150 million. The situation was so dire that there were rumors of a takeover or the company being split up.

Recognizing the threat, Jørgen Vig Knudstor, a longtime LEGO employee, was appointed in 2004 to initiate a turnaround strategy. His strategy was as follows:

1 - Back to basics

His strategy was to return to the basic and refocus LEGO on its core product, the iconic LEGO brick.

Recognizing that the company had spread itself too thin, he decided to divest non-essential ventures, including selling the majority stake in LEGOLAND theme parks to the Blackstone Group.

Alongside this, LEGO reduced its extensive product range by more than half to concentrate on high-performing, quintessential offerings.

This "Back to Basics" approach re-established LEGO's brand identity and prepared the company for its next phase…

2 - Streamlining operations

With a simpler product range, Knudstorp then took steps to restructure the company, streamlining operations, cutting costs, and improving efficiency.

This involved identifying and rectifying inefficiencies in production and distribution, leading to the closure of certain facilities and the expansion of others.

A significant portion of the workforce was laid off to align operational capacity with the revised product strategy and reduce overheads.

LEGO also streamlined its supply chain, optimizing inventory levels, improving supplier relationships, and enhancing distribution channels.

These restructuring efforts resulted in substantial cost savings, increased operational agility, and restored stakeholder confidence.

3 - Engaging with fans

Adult Fan of LEGO

LEGO actively engaged with Adult Fans of LEGO (AFOLs) through conventions and support for user-designed set ideas on LEGO Ideas. This valued fan input, fostering brand loyalty and connection, expanding their customer base. Collaborations with fans led to innovative product offerings, such as the LEGO Technic and Architecture series. These generated positive publicity as fans promoted sets they helped create, resulting in organic marketing.

4 - The new heroes

One of the most significant moves was the licensing deals LEGO struck with franchises like Star Wars, Harry Potter, and Marvel. This allowed them to create sets based on these characters and stories. Updated sets were released with each new film or series . Special edition sets catered to adult enthusiasts and collectors. These deals led to a significant increase in LEGO's revenues and ensured their relevance for new generations. Collaborative marketing with movie releases amplified the brand's visibility and attracted a diverse audience.

5 - Into Innovation and tech

LEGO collaborated with MIT Media Lab to develop LEGO Mindstorms, a blend of building, robotics, and programming. They updated Mindstorms to keep up with technology and initiated educational programs like FIRST LEGO League. This positioned LEGO as a player in tech education and attracted tech-savvy kids and educators. Their dedication to innovation and educational play reinforced their commitment to staying relevant.

As a result, by 2005, the company returned to profitability, and by 2008, it reported record profits !

Sets based on popular franchises, combined with innovative products, made LEGO more popular than ever. The LEGO Movie in 2014 further boosted the brand's appeal.

LEGO then expanded its presence in key markets, especially in Asia, with the opening of factories in countries like China.

This near-collapse and revival of LEGO was an amazing lesson in business. It demonstrated the importance of starting or restarting from the core, taking courageous actions, and co-creating with customers and partners.


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