LEGO Report(2)

Table of Context 1. Problem Definition......................................................................................................................2 2. Structure.......................................................................................................................................2 3. Limitations and source criticism.................................................................................................2 4. Introduction..................................................................................................................................2 5. The Internal Situation of LEGO..................................................................................................4 5.1. Economics.............................................................................................................................4 5.2 Organization..........................................................................................................................5 5.2.1 Types of structures.........................................................................................................5 5.2.1.1 Functional................................................................................................................5 5.2.1.2 Divisional................................................................................................................5 5.2.1.2.1 Product.............................................................................................................5 5.2.1.2.2 Market..............................................................................................................6 5.2.1.2.3 Geographic.......................................................................................................6 5.2.1.3 Matrix......................................................................................................................6 5.2.1.4 Conclusion...............................................................................................................6 5.2.2 Organization in LEGO...................................................................................................7 5.3 Marketing...............................................................................................................................7 5.3.1 Value chain analysis.......................................................................................................7 5.3.1.1 Support Activities....................................................................................................7 5.3.1.1.1 Firm infrastructure...........................................................................................7 5.3.1.1.2 Human Resource Management........................................................................8 5.3.1.1.3 Technology Development................................................................................8 5.3.1.1.4 Procurement.....................................................................................................8 5.3.1.2 Primary Activities...................................................................................................8 5.3.1.2.1 Inbound Logistics.............................................................................................8 5.3.1.2.2 Operations........................................................................................................9 5.3.1.2.3 Outbound Logistic............................................................................................9 5.3.1.2.4 Marketing.........................................................................................................9 5.3.1.2.5 Service..............................................................................................................9 5.3.1.3 Margin.....................................................................................................................9 5.3.1.4 Core competences.................................................................................................10 5.3.2 SWOT-analyses............................................................................................................10 5.3.2.1 Conclusion.............................................................................................................11 5.3.3 Market strategy.............................................................................................................11 5.3.3.1 Market Share.........................................................................................................11 5.3.3.2 Market Growth......................................................................................................12 5.3.3.3 Generic Strategy....................................................................................................12 6. Conclusion.................................................................................................................................12 7. List of literature.........................................................................................................................14 8. Appendixes................................................................................................................................15 8.1 Appendix 1...........................................................................................................................15 8.2 Appendix 2 – LEGO Corporate Management....................................................................16 8.3 Appendix 3 - Aided and unaided brand awareness among mothers 0-14..........................17 8.4 Appendix 4 – Growth Share – Matrix.................................................................................18 8.5 Appendix 5 – Ansoff’s Growth Matrix...............................................................................19 8.6 Appendix 6 - The new LEGO Group..................................................................................20

8.7 Appendix 7 – The development in the number of employees ...........................................22 8.8 Appendix 8 – Generic Strategies.........................................................................................23

1. Problem Definition In this project we have been given LEGO as an assignment. After finding some information, we have chosen the following as our problem formulation. •

How is the internal situation of LEGO?

2. Structure To analyze the internal situation of LEGO, we will be focusing on the following areas. •

Economics – models showing the financial highlights of the company

•

Organization – graphs illustrating the organizational structure of the company

•

Supply Chain Management – Focus on LEGOs Value Chain

•

Marketing and Sales – Graphs showing the development in LEGOs sales and value of being a big brand. Furthermore we will show various models which give a clearer picture of LEGO’s strategy.

3. Limitations and source criticism In general we are focusing the analysis on LEGOs internal situation in Denmark, but to give a better view of LEGOs financial situation we have chosen to look at LEGOs economy globally. LEGO introduced a new vision starting from 2004, so we are focusing the economic analyze on the period after 2004. The other parts of the analysis are focusing on LEGO from the early state until now.

4. Introduction LEGO – „Toy of the century“ In 1932, the LEGO Group was founded by a Danish carpenter, Ole Kirk Kristiansen. The company has remained within the family ever since, going from son to son, and is now owned by the grandson of the founder, Kjeld Kirk Kristiansen.

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From being a small workshop, making wooden toys, stepladders and ironing boards, the company has developed into a modern, global enterprise, producing the plastic bricks we know today. These plastic bricks are still as popular as ever and LEGO is among the leading manufacturers for toys in terms of revenue. With themes ranging from Star Wars to Harry Potter, the bricks are sold in hundreds of different countries. LEGO has been chosen as the „Toy of the century“ twice and is seen as having made a major contribution to children over the past 100 years. The name LEGO consists of the two Danish words „leg godt“ which means „play well“. Future Direction The company suffered a couple of rough years as they lost focus on their core competence, which are toys. They had seeked to expand the brand to theme parks, clothing and computer games. All of those turned out to be short-lived licenses. Then The Shared Vision strategy was made. They managed to recover, by rebuilding the company brick by brick, getting rid of anything that was not the core business, such as sub-brands (LEGO City, LEGO Pirates, and LEGO Castle). Now the focus for the next couple of years is to build a strong and profitable enterprise. LEGO came up with a model that should help them turn the company around. 1 They realized that in order to make the old family business a success again they had to start by stabilizing the company’s economy. That resulted in having to let a lot of employees go. They also had to go back to core competences of the company and when they have done that LEGO will grow again. These are the headlines of the Shared vision. The vision has many different factors, but the idea is that the core of business remains the same. They have outlined three major components of an importance, which include value offered to consumers and sales channels, refocusing on value offered to consumers and increasing operation excellence. In this report we will try to follow up on how the Shared Vision is doing and see if the LEGO Company has been able to put the bricks together the right way.

1

See Appendix 6

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5. The Internal Situation of LEGO 5.1. Economics In 2003 LEGO decided on a new vision for the company. After years of downfall LEGO decided that things had to chance and they created the plan “Shared Vision.” A seven-year plan that should help the old toy company turns around. This plan have had an positive impact on the entire company and in LEGOs latest annual report the numbers show the effect on the economy. We have chosen to analyze on LEGOs financial situation by taking a closer look at their income statement and balance sheet. By analyzing on the financial ratios we can see have the company is doing on some key areas.2 As we can see in the table LEGO has had an upwards going tendency in several important financial ratios since their seven-year plan was put in to action back in 2004. We can see here that the operating margin also called return on sales has gone from being -14,5 % to 22 %. That means that LEGO now actually earn money for each dollar sold. There is a bigger difference between the sales compared to the costs. We can also see that the return on equity has gone up quite a bit. LEGO is now giving the investors/owners more in return for their investments. The numbers also show that they were especially good at this in 2006. In the end that can improve LEGOs abilities to find new investors. The ratios also show that both the gross margin and the net profit margin are doing much better. LEGO is earning more money. The excess of sales compared to the total costs of goods sold has risen from 57,9 % to 66,8 %. Finally you can see that the development in the return in assets is very good, which means that the company is getting a better net income from each dollar they invest in themselves. If you compare these numbers with the financial ratios from another toy company like Mattel you can also see that LEGO is doing quite good compared to one of the biggest competitors3. These numbers are an average for a five-year period but they clearly show that it is LEGO not just the toy market in general that is doing especially well. LEGO are having better numbers in both the ROE, the ROA and the Gross Profit Margin which indicates that LEGO as a company is earning more money for each dollar sold and it is able to give more back to its owners at the moment. All in all these financial ratios along with the financial statements and comparison with another toy company are a clear sign that LEGO has been successful with implementing there economic strategy back in 2004. 2 3

For financial ratios look appendix 1 For financial ratios for Mattel look appendix 1

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5.2 Organization Before discussing the differences in organizational structure, it’s necessary to understand the meaning and purpose of organizational structure. Organizational structure formally determines the hierarchy within an organization. In other words; who reports to whom? Some companies attend to refer this as the organizational chart.

5.2.1 Types of structures Types of organizational structure include: functional structure, divisional structure, and matrix structure. Divisional structure is further broken down into three sub-types: product structure, market structure, and geographic structure. Every company has some sort of organizational structure, and for larger companies it is in many ways a must for them to have. This is for showing both in- and outside the company, who has which kind of responsibility.

5.2.1.1 Functional Functional structures are perhaps the most common organizational model used by companies. A company organized with a functional structure groups people together into functional departments, including purchasing, accounts, production, sales and marketing. Normally each of these departments would have a functional head that may be called manager or director depending on whether the function is represented at board level. The department leader is in charge of the main activities or functions that need to be performed within the organization, and the organization is vertically integrated from the bottom to top of the organization.

5.2.1.2 Divisional The divisional structure is broken down into three areas: product, market, and geographic. 5.2.1.2.1 Product

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Product structure groups employees together based upon specific products produced by the company. An example of this would be a company that produces three distinct products, "product a", "product b", and "product c". This company would have a separate division for each product.

5.2.1.2.2 Market Market structure groups employees together based upon specific markets in which the company sells.

5.2.1.2.3 Geographic Geographic structure groups employees together based upon specific geographic location. This is often used by large companies that operate in many areas.

5.2.1.3 Matrix Matrix structure groups employees by both function and product. This structure can combine the best of both separate structures. An example would be a company that produces two products, "product a" and "product b". Using the matrix structure, this company would organize functions within the company as follows: "product a" sales department, "product a" customer service department, "product a" accounting, "product b" sales department, "product b" customer service department, "product b" accounting department. Matrix structure is the most complex of the different organizational structures.

5.2.1.4 Conclusion Finding the organizational structure that works best for a particular company is very important. Using the wrong structure can result in poor communication, poor product development, poor customer service, and a myriad of other business problems. Any of these things can be detrimental to a company and could result in lost revenue or even complete failure of the company.

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5.2.2 Organization in LEGO If you look at LEGO’s corporate management4, they use the functional structure, which gives a very clear picture of who are the highest in the hierarchy. If you look further down in hierarchy, then the organization structure changes to divisional structure, with the 5 heads of each department under the Chief Executive Officer, are in the top of their respectively division. LEGO uses two types of divisional structure, since they have a different organization for each country, they use geographical structure, and furthermore they have in these countries a different staff for different products, meaning they also use product structure.

5.3 Marketing We have chosen to do the value chain analysis and the SWOT analysis to give a better picture about how the company is doing, regarding sales and management and supply chain. This will also show the company’s strengths and weaknesses. Furthermore we have chosen to do a growth-share matrix to define LEGO’s market share, and Ansoff’s Growth Matrix to see how they act on the markets.

5.3.1 Value chain analysis 5.3.1.1 Support Activities 5.3.1.1.1 Firm infrastructure The LEGO Group was founded by Ole Kirk Christiansen in 1932, now is owned by the founder’s grandchild Kjeld Kirk Christiansen. The LEGO group was the first in Denmark to buy a plastic injection-moulding machine, to produce quality toys. The name LEGO is printed inside all bricks to assure the security of the products. When the first real export of LEGO begins new markets are explored. In 1956 the first foreign sales company is established in Germany. New markets are being explored, LEGO France, British LEGO Ltd., LEGO Belgium and LEGO Sweden. They decided that English should become the official corporate language which improves the internal and external communication of the company. 4

See Appendix 2

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The LEGOLAND Brand was established in 1967. They changed their products in 1978 to mini figures with movable arms and legs.

5.3.1.1.2 Human Resource Management The LEGO Company has 150 designers of 15 different nationalities. Most of the designers have been trained at design or art schools in various parts of the world. The experience of designers from so many different cultures gives LEGO the opportunity to make products suitable for a larger market. The LEGO Company provides trainee programs for young people. By hiring young people they keep the young spirit in the company which helps to bring modern products on the market. The first personnel manager hired to create better communication with employees.

5.3.1.1.3 Technology Development The LEGO Company started out with producing wooden bricks with decorations. Later on they started to produce plastic and wooden cars, which offered new products to customers. Furthermore LEGO was the first in Denmark to buy a plastic injection-moulding machine in 1947. They start to use automatic machines and computers in the production which leads to lower costs and fewer mistakes.

5.3.1.1.4 Procurement The LEGO Company was the first in Denmark to buy a plastic injection-moulding machine, and later on, in 1956 they got their first own truck.

5.3.1.2 Primary Activities 5.3.1.2.1 Inbound Logistics The company has a development laboratory for plastic materials, furthermore they also have a test laboratory, and both of them are located in Denmark. The company produces its own raw materials and has them continuously tested in the company’s laboratories, which leads to high quality production. 8

5.3.1.2.2 Operations LEGO are testing new materials to increase functionality.

5.3.1.2.3 Outbound Logistic The LEGO Group centralizes its European distribution center (EDC) in Prague, Czech Republic, which supplies LEGO products to Europe, Asia, Africa and South America.

5.3.1.2.4 Marketing The first film about LEGO was shot in 1951 which was a good advertisement for the LEGO, since they gained more customers. The LEGO Company exhibits their new products at a toy fair in Germany, this helps gaining new consumers, because people can see the toys before buying it. They established a product development department, market analysis department, and a photography department, which gives satisfaction for the customer necessities. “There’s something for everyone!” This motto shows their marketing strategy and its effect on the customers. The biggest marketing factor for LEGO is the brand itself. This is shown by the high awareness 5 of the LEGO name.

5.3.1.2.5 Service LEGO provides a guarantee which covers all products for all their customers. The Lego group has its own costumer service website which informs customers about the company.

5.3.1.3 Margin Revenue

2008

2007

9,526

8,027

Net profit for the year 5

See appendix 3

9

1,352

1,028

-Profit for the year The group profit for the year amounted to DKK 1,352 million against DKK 1,028 million in 2007 -Increasing sales The LEGO Group saw an 18.7% increase in revenue from DKK 8,027 million in 2007 to DKK 9,526 million in 2008

5.3.1.4 Core competences LEGO has its core competencies in the both up-stream activities and down-stream activities in the value chain. Lego is the 6th largest manufacturer of toys, so it has to be strong with both up and down-stream activities.

5.3.2 SWOT-analyses • • • • • • • • •

•

STRENGHTS People development Market growth Effective marketing Lego.com Increasing economy Strong brand Toys with educational effect on children Film of heroes (star wars, spider man) The world's children spend 5 billion hours a year playing with LEGO bricks. Approx. 400 billion LEGO elements have been manufactured since 1949.

• •

WEAKNESSES Higher prices Narrow target group

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• • • • • •

OPPORTUNITIES Global compact Toy of the century Creative building Inventing new products Technological development LEGOLAND Parks

• • • • • •

THREATS Technological development of competitors Existing and new competitors Not “green” enough Lack of new product sales Decreasing economy Coping problem of the LEGO product from other country.

5.3.2.1 Conclusion After analyzing the LEGO Company we came to the conclusion that it’s the strongest toy manufacturer in the world. This is proved by its strengths which mainly lie in the company brand.

5.3.3 Market strategy 5.3.3.1 Market Share When using the growth-share matrix model6, it makes it possible to define how a company is doing on a market. In this case LEGO, are in Denmark, a “Cash Cow”, since they are a major producer which controls the Danish market. A “Cash Cow” is a product from a company with a high market share in a slow-growing industry. These products typically generate cash in excess of the amount of cash needed to maintain the business. They are regarded as staid and boring, in a "mature" market, and every corporation would be thrilled to own as many as possible. They are to be "milked" continuously with as little investment as possible, since such investment would be wasted in an industry with low growth.

6

See Appendix 4

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5.3.3.2 Market Growth You can define how companies chose to expand themselves by using Ansoff’s Growth Matrix7. Since LEGO have chosen to re launch their old products the latest years, it can be concluded that they use “Market Penetration” is the main growth strategy, since they are launching existing products on existing markets. Every time LEGO launch a new product on a market, they use “Product Development”, since they always put new products on existing markets.

5.3.3.3 Generic Strategy When using the generic strategy model8, you can define how a company produces their products, what they target themselves etc. LEGO uses differentiation strategy since they are having a very broad target group, and since they are trying to differentiate themselves from their competitors.

6. Conclusion It is clear from several major economic factors that the shared vision implemented in 2004 has had a positive effect on the company. Many key ratios like return on assets, return on equities and return on sales show that the company are very profitable and the earnings capacity is rising. This is also showed by the development in the number of employees. 9 When LEGO was doing poorly in the beginning of this century they chose to let a lot of people go, but now the number of employees is once again at the same level. This is all do to a new strong company with a big turnover. LEGO uses like many other major companies functional structure in the board, in for the rest of the company, they uses divisional structure, containing geographical and product structure, since LEGO is having a growing profit the latest years, it can be concluded that this type of structure works for them. LEGO uses a lot of power to increase the success of the company; this is shown by them training their designers, so they will do maximum performance, furthermore they try to develop 7

See Appendix 5 See Appendix 8 9 See Appendix 7 8

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their machinery with the newest technology. They also try their best to be first in the field with new inventions. Since LEGO chooses to manufacture their products themselves, they are not dependent on suppliers, which put them in a very strong position. LEGO has been awarded with the “toy of the year” award twice, which gives them a very strong position on the market, furthermore they have with help from their worldwide known brand, giving themselves a very favorable position, as one of the strongest toy companies in the world. This is also shown by their position with in the generic strategies. They are a company with a very broad target audience but at the same time with a lot of differentiation. There are no competitors out there that offer children the same kind of toy that will educate them while they are playing. At the same time the brick is easy to produce for the company. LEGO is in Denmark, the biggest toy seller, which can be seen on their strategy. As a very functioning “cash cow” they are with their products controlling the Danish market, and this is also visual when you look at how the gain more market share; which is by sending in existing products on existing markets. One thing LEGO also learned from the years of downfall that they should stay focused at the toy that is their biggest seller; The LEGO-brick.

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7. List of literature Books: Daft, Understanding the theory & design of Organization, Thomson Learning, 2009, about organization Reports: Annual Report 08 LEGO Group, LEGOs own report on the well doing of the company. Company Profile, An introduction to the LEGO Group 2009, LEGOs own presentation of the company 2009. Produced for the LEGO Group by Corporate Communications. Homepages: www.lego.com, LEGO, Their own homepage is used to find several different kind of information about the company. http://www.logisticsit.com/absolutenm/templates/article-transport.aspx? articleid=1647&zoneid=9, Manufacturing & Logistics IT, about the outbound logistics of LEGO http://www.marketlineinfo.com/library/DisplayContent.aspx?R=40CF4E47-9642-433E-9D848A5DC292A225&N=4294840848, Market Line Info, General information about LEGO http://www.bbc.co.uk/dna/h2g2/A454673, BBC, General information about the LEGO Company and its products. http://www.lego.com/eng/info/, LEGO, General information about the LEGO Company http://finapps.forbes.com/finapps/jsp/finance/compinfo/Ratios.jsp?tkr=Mat, Forbes, About Mattel’s financial ratios. www.wikipedia.com, Wikipedia, General knowledge http://www.nordicchamber.cz/article_files/LEGO-Nordic-chamber.ppt#23, Nordic Chamber, About the LEGO Brand and brand awareness

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8. Appendixes 8.1 Appendix 1 Financial ratios (in %): Gross margin Operating margin (ROS) Net profit margin Return on equity (ROE) Return on assets 10

2008 2007 2006 2005 66.8 65 64,9 58 22 18,1 17 5,4 14,2 12,8 16,5 3 72,2 71,6 147,1 44,2 28,5 23,5 18,6 4,7

5-Year Averages for Mattel Return on Equity 22.6% Return on Assets 10.9% Gross Profit Margin 49.4% Net Profit Margin (Total Operations) 9.2%

2004 57,9 -14,5 -28,6 -131 -14,5

22,6 10,9 49,4 9,2

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Return on assets is calculated by numbers from the annual report. The other ratios are provided by LEGO themselves in the report.

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8.2 Appendix 2 – LEGO Corporate Management

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8.3 Appendix 3 - Aided and unaided brand awareness among mothers 0-14

100 90 80 70 60 50 40 30 20 10 0 US

J Aided awareness

D

UK

F

Unaided awareness

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8.4 Appendix 4 – Growth Share – Matrix

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8.5 Appendix 5 – Ansoff’s Growth Matrix

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8.6 Appendix 6 - The new LEGO Group

Stabilize Stabilize the the company (get company (get control) control)

Organic Organic growth growth

Build Build defensible defensible core core of of products products

Improve Improve core core business business Rebalance Rebalance financing financing structure structure

Profit from the core

Achieving Vision

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8.7 Appendix 7 – The development in the number of employees

Employees

Average number of emplyees

6000 5000 4000 3000

Serie1

2000 1000 0 2004

2005

2006

2007

2008

Year

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8.8 Appendix 8 – Generic Strategies

Strategy formulation - generic strategies Competitive Advantage Differentiation

Low cost

Broad target

1. cost Leadership

2. Differentiation

3A. Cost Focus

3B. Differentiation Focus

Competitive scope Narrow target

05.10.2009

BWJ

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