CAN YOU MAKE THE ELEPHANT DANCE?
“Who Says Elephants Can’t Dance?”- The book by Louis V. Gerstner who was the CEO of an Elephant called IBM, tells the story of how the dynamic CEO led IBM’s competitive and cultural transformation bringing it back to glory from the brink of bankruptcy to a name to reckon in the technology business.
In 2004, LEGO the Elephant was staring at the monster of bankruptcy. This is the amazing turnaround story of LEGO, a Danish family-owned toy company that went from teetering on the brink of collapse and edge of bankruptcy to becoming the most powerful brand in the world.
If you are not familiar with the background, Lego was founded by Ole Kirk Kristiansen, a Danish carpenter in 1932, and the name LEGO was inspired by two Danish words, “leg godt” which meant “play well.” The great depression in the 1930s forced him to reinvent and so in 1949, LEGO began manufacturing its signature interlocking toy bricks creating infinite possibilities for imagination in kids. From its humble beginnings in 1932 until 1998, the company had never posted a loss. In 1998 for the first time, the trend reversed and LEGO reported its first loss of $48 million.
Then on, the losses increased year after year and by 2003 it was in deep trouble, as they lost 30% in sales. The forecast for 2004 was even worse. Unfortunately, the prediction came true and in 2004, Lego posted its biggest-ever loss of $285 million and an unpaid debt of $ 800 million. Such was the fall that there was a time the company was losing $337,000 in value daily.
But in 2013, just nine years later, LEGO became one of the most valuable companies and the biggest toy brand achieving a revenue of $4.5 billion and reaping a profit of $1.5 billion.
The LEGO case is the finest example of how an Elephant can escape near death, get back on its feet and begin to dance again.
LEGO is a classic business turnaround story.
This story details some of the best and effective techniques available to not just turn an almost bankrupt company around, but also to supercharge any small business or even a start-up. Let’s begin!
Just before we move forward, let me share some fun and fascinating LEGO facts you must know. Even if you are not a LEGO fan these facts would surely make you one and would make reading more interesting.
- There are close to 90 LEGO bricks for every person on the earth.
- Every second, 7 LEGO sets are sold by retailers around the world.
- During Christmas time nearly 28 LEGO sets are sold each second. Wow!
- 1300 LEGO pieces are produced per second, 78,000 per minute, and 4,680,000 per hour.
- The number of LEGO bricks sold in a year if laid end to end would reach more than 5 times around the world.
- Kids, globally spend 5 billion hours a year playing with LEGO.
- According to mathematician Soren Eilers a 6 (4×2 LEGO bricks) can be combined in 915,103,765 ways.
- The second-largest LEGO set ever sold is the LEGO Taj Mahal with 5923 pieces.
The Quality Obsession.
There is an interesting but true story about the Lego Group’s motto “Det bedste er ikke for godt” (English: only the best is good enough).
One day Ole Kristiansen’s son Godtfred, trying to impress his father through his money-saving strategy, proudly displayed a batch of wooden ducks which he had finished by just using two coats of varnish instead of the usual practice of using three coats. His father was unhappy and verbally reacted by forcing him to go back and rectify his mistake by applying the third coat. Later on, when Godtfred took over the reins of the company after his father’s death, he carved the words “Det bedste er ikke for godt” on a plaque.
This motto, created by Ole Kristiansen is still used today to encourage and inspire LEGO’s employees, never to compromise on quality and is hung in the entrance of the Lego Group headquarters at Billund. One of the factors in the long-term success of the company is attributed to their emphasis on the importance of quality.
Even today Lego’s quality control is rigorous. Just ask any kid or any parent and they will tell you how sturdy and hard the bricks are. The Lego bricks have to be quite strong to hold together, but at the same time can be easily pulled apart by a child. LEGO calls it the “Clutch Power.”
Even the molds that are used to produce LEGO bricks are accurate to within (0.002 mm). Because of this high degree of accuracy, only around 18 bricks produced in every million fail to meet the company’s high-quality standard.
How LEGO Lost its Way.
After 1998 as LEGO sales wheels started to flow the slippery slope downwards towards bankruptcy, consultants were hired to advise the top leadership at the company’s Danish headquarters in Billund. They started diagnosing and studying the competitor. Looking at Mattel, which was home to famous brands like Barbie, Hot Wheels, Fischer-Price, and more, they advised LEGO to diversify its portfolio, as they felt the bricks had become almost obsolete.
Well, LEGO as expected seriously took the advice: it launched a clothing line and brand shops, wristwatches, introduced jewellery for girls, opened theme parks, built video games, created its own TV series, started book publication despite having very little or no experience in the areas. This advice proved quite costly as the huge investments and capital-intensive developments in unrelated and different fields turned out very risky moves and, in the process, accelerated its downfall.
Not knowing what to do, the company asked Jorgen Vig Knudstorp then head of strategic development to make a report on the problems. “We are on a burning platform” he wrote in June 2003 memo to LEGO’s board of directors, “losing money with negative cash flow and a real risk of debt default which could lead to a break-up of the company.”
He later recalled that some top management executives did not think that his predictions about the future were true and they see things differently.
“I remember walking out of the building, says Knudstorp, “and I called my wife and said that this might be my last day with the company.” This turned out to be untrue and instead, he was appointed CEO in October 2004.
Knudstorp was with Mckinsey before joining LEGO in 2001. Looking for someone who could turn the ship around Kristiansen appointed Knudstorp as the CEO, believing that his analyst background, excellent people skills, industry knowledge, and long-term vision could prove unlikely saviour for the iconic company. He was just 36.
The Turnaround Begins.
To begin with, Knudstorp invested the first few months in diagnosing the root cause. His consultancy background has taught him that the first step to problem-solving is understanding the root cause.
He quoted Jack Welch the legendary CEO of GE, “A good CEO must see things as they are, not as you wish them to be.”
Understanding the “Fact-finding is the first step to problem-solving” he studied the situation deeply and came up with a short-term strategic action plan to help save the company first followed by a long-term strategy for growth.
He crafted a methodical plan of rebuilding LEGO the way her users build it, brick by brick. He said “Right now, our mission is to survive. To cut costs, sell businesses and restore our competitiveness.” He knew that the bleeding has to be stopped as they were losing money every day. He decided to stick to the core and thus began with selling the peripheral businesses in which it had no expertise in – the Legoland theme parks, and video games productions.
Innovation with Purpose.
One of Knudstorp’s assessments was that LEGO has implemented some poor innovation strategies leading to losses. One such strategy was to retire a large number of designers who were instrumental in creating the sets from the late 70’s and replace them with a team of 30 top graduates from leading European design colleges with literally no toy-making experience. The result was a massive two-fold increase in the number of parts(blocks) climbing from 6000 to over 13000 leading to a nightmare in logistics, storage, and expensive infrastructure expansion without corresponding return in sales.
On assuming the charge Jorgen Vig Knudstorp took the hard call and slashed the number of individual parts back to 6500. This made sense as the design lab observed that 90 percent of the pieces were used only once, and most of the costs lay in developing the individual parts and the molds for producing them. Learning by the experience the designing was again linked to manufacturing cost.
The new innovation code was simple: focus on profitable innovations with our core expertise and timeless products in mind. Use core capabilities and innovate products around it.
Lesson learned: Always maintain your focus on core competencies and expertise. If possible, make your core competency your competitive advantage. Never hesitate to get rid of unprofitable entities and learn to let go. Remember many times less is more.
LEGO did not lose because it diversified, but because it ignored its core business. So, in case of diversification keep eye on your cash flow.
Close to Customers.
Knudstorp was a firm believer in becoming more customer-driven. LEGO has always enjoyed a huge loyal fan base, which he felt can offer new ideas for new products. All they have to do is to embrace and engage them and put creative control into their hands rather than in the only hands of the company’s top designers. He started inviting small focus groups to get involved in the new design process, began working together with a huge base of AFOLs (Adult Fans of Lego) to create a unique set of products that were well received by both the kids and adults community.
Leveraging the power of the LEGO community was the mantra. Rather than seeing the internet as the killer, it was used as a strong medium to allow the LEGO community to spread further by sharing their creations and sponsoring events.
It even launched its own crowdsourcing competition where originators of winning ideas would get 1 % of their product’s net sales. Some of the designs that saw the light of the day include Lego birds, female Nasa scientists, a time machine, and the Beatles yellow submarine.
In 2011 LEGO initiated another online platform for encouraging open innovation. The result became a best-selling model- a combination of Minecraft and Lego.
Another initiative was called “camping with consumers” in which the LEGO designer team spend time traveling all around the world, meeting and talking to kids and their parents. This includes participating in their daily lives keenly watching how kids play on their own and interact with their friends, how kids influence family decision making, how they build and unbuild, why some toys remain all-time favourites, and why others do not.
All the data was incorporated back into the design process. He also brought in psychologists to work with its target group – kids.
To appeal to the dreams and desires of kids in the digital 21st century LEGO created Mindstorms which included smart bricks with both software and hardware to build customized robots
A key reason for LEGO’s incredible success is its incredible ability to engage and interact with its community and users. A great example of how a business can turnaround by creating more value for its customers using limited resources.
Lesson learned: Never assume that you know what your audience wants. Spend time with them. Stay close and listen to your customers. Be open to ideas from anywhere.
Control your Value Chain.
This is where you create real value for all stakeholders: channel partners, customers, and shareholders. Earlier design engineers had individual relationships with suppliers, which they would prefer while ordering raw materials and resources, thus leaving wastes and leaks in the system.
Knudstorp narrowed down supplier count to stabilize pricing. He focused on working closely with large retailers on inventory management, demand forecasting, and product customization. With the intention of ensuring that your retail partners have the right quantity at the right time with good margins, he focused on making the retailers happy.
Lesson Learned: Create financial advantage for both the company and its partners by focusing on volume and scale, thus putting pricing pressure on your competition.
Other key moves included:
- To stop bleeding, they cut costs drastically (including doing away with 1,000 jobs).
- Improved operational and technical processes and outsourced a lot of work.
- Introduced performance-related pay.
- Took steps to reduce product-to-market time.
- Slowed down retail expansion.
The surgery was drastic so was the illness. The result was that LEGO under the dynamic leadership of Jorgen Vig Knudstorp not only survived and recovered but went on to become the most profitable and fastest-growing toy entity in the world. In 2013 the company achieved sales revenue of $4.5 billion and profits of $1.5 billion. And in 2017, LEGO was voted the most powerful brand in the world overtaking even Apple and Ferrari.
LEGO’s turnaround story is ample proof that Elephants too can dance and companies that have grown large and complex can reinvent themselves by adapting to rapid changes and embracing controlled innovation, entrepreneurship, and technological change.
In 2014, LEGO released its first movie, “The LEGO Movie” which made $69 million in its opening weekend and in all raked in $500 million at the box office. The theme song of the movie, “Everything is awesome” captures the essence of what LEGO is all about.
Although Lego is in the business of play and fun but takes its business seriously.
If you have found this case study helpful or interesting, please do share your LEGO experience and feedback in the comments section below and also share it with others.
In Business Keep Everything Awesome.