Lego Group: An Outsourcing Journey

Case Study

Write up

Submitted by:

Ghalib Ali

Iman Fatima

Inam Ullah

Hashir Malik

Umair Fayyaz

Saqlain Munir

Introduction

The LEGO Group stands as a beacon of creativity, innovation, and childhood wonder in

the toy industry. Established in 1932 by Ole Kirk Christiansen in Billund, Denmark, LEGO has

evolved from a small carpentry workshop to one of the world's most beloved and recognizable

brands. What began with simple wooden toys has transformed into a global phenomenon,
captivating generations of children and adults alike with its iconic interlocking plastic bricks.

LEGO's journey to prominence is a testament to its unwavering commitment to quality,

imagination, and play. At its core, LEGO embodies the belief that every child has the innate

ability to build, create, and explore boundless worlds of imagination. This philosophy has fueled

the company's mission to inspire and develop the builders of tomorrow through its diverse range

of products and experiences. Over the decades, LEGO has expanded its product offerings beyond

traditional building sets to encompass themes ranging from space exploration and fantasy

adventures to robotics and digital gaming. The company's dedication to innovation has led to the

introduction of groundbreaking concepts such as LEGO Technic, LEGO Mindstorms, and LEGO

Ideas, empowering builders of all ages to unleash their creativity and bring their visions to life.

Beyond its product portfolio, LEGO's impact extends far beyond the realm of toys. The company

has become a global cultural icon, transcending language and borders to foster connections and

spark joy in millions of households worldwide. Through initiatives like the LEGO Foundation,

LEGO is committed to promoting learning through play and supporting children's development

in areas such as creativity, problem-solving, and collaboration. Despite its remarkable success,

LEGO has faced its share of challenges, including financial crises, shifting consumer

preferences, and supply chain disruptions. However, the company's ability to adapt, innovate,

and stay true to its core values has enabled it to overcome adversity and emerge stronger than

ever. As LEGO embarks on its next chapter, the company remains steadfast in its dedication to

inspiring and empowering builders of all ages. With a rich history of creativity, imagination, and

play as its foundation, LEGO continues to shape the future of play and inspire generations to

dream, create, and build together.

Quantitative Facts:

Financial Performance:

 Profits surged to DKK1.85 billion in 2008 and DKK2.2 billion in 2009.

 Revenue grew steadily, reaching DKK11.661 billion in 2009.

 Operating profit increased significantly to DKK3.002 billion in 2009.

 Investment rose to DKK1.042 billion in 2009.

 Cash flow from operating activities reached DKK2.655 billion in 2009.

 Total assets increased to DKK7.788 billion in 2009.

 Equity grew to DKK3.291 billion in 2009.

Employee Growth:

 Average number of employees increased from 5,302 in 2005 to 7,058 in 2009.

Financial Ratios:

 Gross margin, operating margin (ROS), net profit margin, and return on equity (ROE)

improved.

Qualitative Facts:

Supply Chain Management:

  LEGO outsourced production to Flextronics for cost-cutting.

 Flextronics offered plastics manufacturing and distribution expertise.

 Collaboration with Flextronics:

 The partnership faced challenges leading to a phase-out after three years.

Back sourcing Decision:

 LEGO opted for in-house production to regain control and ensure quality.

Financial Turnaround:

 Record profits in 2008 and 2009 due to improved efficiency and sales growth.

 Acquired factories in the Czech Republic and Hungary, and began construction in

Mexico.

Employee Performance:

 CEO credited employees for the company's success during the turnaround.

Global Presence and Expansion:

 Operations in 30 countries with over 160,000 employees.

 New factories acquired and construction of a facility in Mexico.

Major Problems:

1. Ineffective Outsourcing Strategy.

 LEGO's decision to outsource a significant portion of its production to Flextronics

resulted in unmet expectations and challenges, leading to a phase-out of the collaboration.

This highlights a major problem in strategic planning and execution.

2. Quality Control and Brand Vulnerability:

The collaboration with Flextronics raised concerns about maintaining quality standards

and brand reputation. Dependence on external partners jeopardized LEGO's ability to ensure

consistent product quality, leading to brand vulnerability.

3. Supply Chain Complexity:

The transition to outsourcing introduced complexities in managing the global supply

chain. LEGO faced challenges in coordinating production, distribution, and quality control

across multiple locations, impacting operational efficiency.

4. Financial Instability:

Prior to the turnaround, LEGO experienced financial instability, indicated by a deficit of

DKK1.8 billion in 2004. This financial crisis stemmed from ineffective cost management

strategies and underperforming supply chain operations.

Minor Problems:
1. Transition Challenges:

The fast-paced transition from in-house production to outsourcing posed logistical and

operational challenges for LEGO. This included knowledge transfer, relationship

management with external partners, and adapting to new production processes.

2. Limited Experience in Outsourcing:

LEGO lacked prior experience in outsourcing a large portion of its production,

contributing to the difficulties encountered during the collaboration with Flextronics. This

highlighted a gap in expertise in managing complex outsourcing arrangements.

3. Complex Product Portfolio:

LEGO's over-diversified and complex product portfolio compounded the challenges of

outsourcing. Managing production across various product lines increased operational

complexity and may have contributed to supply chain inefficiencies.

4. High Fixed Costs:

The decision to outsource was driven by the desire to reduce costs, including high fixed

costs associated with in-house production. However, transitioning to outsourcing did not

immediately alleviate these cost burdens, impacting profitability in the short term.
Financial Analysis of The LEGO Group:

1. Revenue Growth:

The LEGO Group experienced steady revenue growth from 2005 to 2009, with

revenues increasing from DKK 7.0 billion in 2005 to DKK 11.7 billion in 2009. This

indicates the company's ability to expand its market reach and increase sales despite the

challenges it faced during this period.

2. Operating Profit Margin:

The operating profit margin (ROS) improved significantly, rising from 5.4% in

2005 to 24.9% in 2009. This improvement reflects the success of the company's

turnaround strategy, including the decision to phase out the outsourcing collaboration

with Flextronics and transition to a more in-house production model.

3. Net Profit Margin:

The net profit margin increased from 3.0% in 2005 to 18.9% in 2009, indicating a

substantial improvement in profitability. This demonstrates the effectiveness of the

company's efforts to streamline operations, reduce costs, and improve overall efficiency.

4. Return on Equity (ROE):

 The return on equity increased significantly from 44.2% in 2005 to 82.3% in

2009, reflecting the company's ability to generate higher returns for its shareholders. This

improvement suggests that LEGO's strategic initiatives, including the restructuring of its

production network, were successful in enhancing shareholder value.

5. Cash Flow from Operating Activities:

Cash flow from operating activities increased consistently from DKK 587 million

in 2005 to DKK 2.7 billion in 2009. This indicates improved cash generation from core

business operations, which is essential for sustaining business growth and meeting

financial obligations.

6. Investment in Activities and Equipment:

LEGO's investment in activities, plans, and equipment increased over the years,

reaching DKK 1.0 billion in 2009. This demonstrates the company's commitment to

innovation, expansion, and infrastructure development to support future growth

initiatives.

7. Employee Growth:

The average number of employees increased from 5,302 in 2005 to 7,058 in

2009, reflecting the company's expansion and investment in human capital. This indicates

LEGO's focus on talent acquisition and retention to support its business objectives.
Overall, the financial analysis indicates that LEGO successfully navigated through challenges,

including the phase-out of outsourcing with Flextronics, to achieve significant improvements in

profitability, operational efficiency, and shareholder value. The company's strategic initiatives,

coupled with strong financial performance, position it well for sustainable growth in the toy

industry.

Application of Strategic Models:

1. SWOT Analysis:

Strengths:

- Strong brand reputation and recognition: LEGO is renowned worldwide for its

quality, creativity, and iconic brick design, fostering brand loyalty among

consumers.

- Innovative product development capabilities: The company continuously

introduces new sets, themes, and partnerships, keeping its product line fresh and

appealing.

- Effective turnaround strategy led by management: Under CEO Jorgen Vig

Knudstorp's leadership, LEGO successfully navigated through financial

challenges and repositioned itself for growth.

Weaknesses:

- Overreliance on outsourcing with Flextronics: The partnership with Flextronics

led to unexpected challenges and ultimately, a decision to bring production back

in-house, indicating a weakness in the outsourcing strategy.

- Lack of experience in managing large-scale outsourcing collaborations: LEGO

lacked the necessary expertise to effectively oversee such a significant

outsourcing arrangement, leading to operational issues.

- Vulnerability to supply chain disruptions: Relying heavily on external partners

increased LEGO's exposure to supply chain risks, as evidenced by the challenges

faced during the Flextronics collaboration.

Opportunities:

- Expansion into emerging markets: LEGO can capitalize on the growing middle

class in emerging economies by expanding its presence and tailoring products to

local preferences.

- Diversification of product portfolio: The company can explore new product

categories or partnerships to diversify its offerings and attract a wider range of

consumers.

- Investment in sustainable practices and materials: With increasing consumer

awareness of environmental issues, LEGO can invest in sustainable materials and

practices to appeal to eco-conscious customers.

 Threats:

- Intense competition from rival toy manufacturers: LEGO faces competition from

established players like Mattel and Hasbro, as well as emerging competitors in the

toy industry.

- Changing consumer preferences and trends: Shifts in consumer preferences

towards digital entertainment or other toy categories could pose a threat to

LEGO's traditional brick-based products.

- Economic uncertainties affecting consumer spending: Economic downturns or

recessions may impact discretionary spending on toys, affecting LEGO's sales and

profitability.

2. PEST Analysis:

Political:

- Regulations related to labor practices and environmental standards: LEGO must

comply with labor laws and environmental regulations in the countries where it

operates, impacting production costs and practices.

- Trade policies impacting manufacturing and distribution: Changes in trade

policies, tariffs, or trade agreements could affect LEGO's global supply chain and

distribution channels.
Economic:

- Economic downturns affecting consumer spending on toys: Declines in consumer

confidence or disposable income could reduce demand for LEGO products,

affecting sales and profitability.

- Exchange rate fluctuations impacting production costs: LEGO's international

operations expose it to currency risk, as fluctuations in exchange rates can affect

the cost of materials and production.

Social:

- Shifting demographics and cultural trends influencing toy preferences: LEGO

must adapt its product offerings to cater to changing demographics and cultural

preferences to remain relevant in diverse markets.

- Increasing emphasis on sustainability and ethical sourcing: Consumers are

increasingly concerned about environmental and social issues, prompting LEGO

to prioritize sustainability and ethical sourcing practices.

Technological:

- Advancements in manufacturing technologies improving efficiency: LEGO can

leverage technological advancements to enhance production efficiency, reduce

costs, and innovate its products.

 - Digitalization influencing toy design and marketing strategies: LEGO can

incorporate digital technologies into its products and marketing campaigns to

engage tech-savvy consumers and stay competitive in the digital age.

3. 7S Framework:

Strategy:

- Transitioning from outsourcing to a more in-house production model: LEGO aims

to regain control over its supply chain and enhance operational efficiency by

bringing production back in-house.

Structure:

- Reorganizing global supply chain operations to enhance control and efficiency:

LEGO is restructuring its supply chain to streamline operations, improve

coordination, and optimize resource allocation.

Systems:

- Implementing new systems for procurement, production, and distribution: LEGO

is investing in advanced technology and IT systems to automate processes,

improve visibility, and enhance decision-making across the supply chain.

 Shared Values:

- Focusing on quality, innovation, and sustainability: LEGO's core values drive its

commitment to delivering high-quality products, fostering innovation, and

promoting sustainable business practices.

Style:

- Leadership style emphasizing adaptability and strategic decision-making: LEGO's

leadership adopts an adaptive and collaborative approach to address challenges,

drive change, and achieve organizational goals.

Staff:

- Investing in talent acquisition and development to support organizational goals:

LEGO prioritizes attracting, retaining, and developing top talent to drive

innovation, creativity, and performance.

Skills:

- Developing capabilities in supply chain management, production, and innovation:

LEGO is enhancing its capabilities in key areas such as supply chain

 management, manufacturing processes, and product innovation to sustain its

competitive advantage.

4. Industry Competition Analysis:

Porter's Five Forces:

Threat of New Entrants:

Moderate due to barriers to entry like brand reputation and scale, but potential threats

from emerging competitors or disruptive technologies.

Bargaining Power of Suppliers:

Moderate to high due to reliance on suppliers for materials, but mitigated by

diversification of suppliers and strategic partnerships.

Bargaining Power of Buyers:

Moderate to high due to the availability of alternative toy brands, but LEGO's strong

brand loyalty and unique product offerings provide some leverage.

Threat of Substitutes:

Moderate due to the availability of alternative forms of entertainment, but LEGO's

distinct product offering and brand appeal provide differentiation.

Intensity of Competitive Rivalry:

 High due to the presence of several large toy manufacturers competing for market share,

leading to price competition, innovation, and marketing battles.

These strategic models provide comprehensive insights into the internal and external factors

shaping The LEGO Group's business environment, helping to identify opportunities, mitigate

risks, and formulate effective strategies for sustainable growth.

Possible Solutions with Justification:

1. Strengthen In-House Production Capacities:

Justification:

Given the challenges faced during the outsourcing collaboration with Flextronics, strengthening

in-house production capabilities can provide greater control, quality assurance, and flexibility in

managing the supply chain.

Implementation:

Invest in expanding and optimizing existing production facilities in key locations such as

Denmark, Hungary, the Czech Republic, and Mexico. This will reduce reliance on external

partners and enhance responsiveness to market demands.

2. Diversify Supplier Base:

Justification

Overreliance on a single supplier like Flextronics exposes LEGO to significant supply chain

risks. Diversifying the supplier base can mitigate these risks and provide alternative sourcing

options.

Implementation:

Identify and onboard additional suppliers for critical components and materials, ensuring

geographic diversity and assessing suppliers' capabilities, reliability, and adherence to quality

standards.

3. Enhance Supply Chain Visibility and Collaboration:

Justification:

Improved visibility and collaboration across the supply chain can enhance coordination,

efficiency, and responsiveness to changes in demand or disruptions.

Implementation:

Implement advanced supply chain management systems and technologies (e.g., RFID, IoT) to

track inventory levels, monitor production processes, and optimize logistics. Foster closer

collaboration with suppliers through partnerships, joint planning, and information sharing.

4. Invest in Innovation and Product Development:

Justification:
Innovation is crucial for maintaining competitiveness and meeting evolving consumer

preferences. Investing in R&D and product development can drive differentiation, market

growth, and customer satisfaction.

Implementation:

Allocate resources to research, design, and development of new products, themes, and

experiences that resonate with target demographics. Embrace emerging technologies (e.g.,

augmented reality) to enhance product features and engage tech-savvy consumers.

5. Adopt Sustainable Practices and Materials:

Justification:

Sustainability is increasingly important to consumers and stakeholders, influencing purchasing

decisions and brand perception. Adopting sustainable practices and materials can enhance brand

reputation and long-term viability.

Implementation:

Source eco-friendly materials, reduce waste and emissions, and implement energy-efficient

manufacturing processes. Communicate sustainability initiatives transparently to consumers and

stakeholders to build trust and loyalty.

6. Strengthen Risk Management and Contingency Planning:

Justification:
Anticipating and mitigating supply chain risks is essential for ensuring business continuity and

resilience in the face of unforeseen events such as natural disasters, geopolitical tensions, or

pandemics.

Implementation:

Develop robust risk management processes and contingency plans to identify, assess, and

mitigate potential risks. Establish alternative sourcing options, redundant supply chains, and

crisis response protocols to minimize disruptions and maintain operations.

7. Empower and Train Supply Chain Personnel:

Justification:

Competent and empowered supply chain personnel are essential for executing strategic

initiatives, driving continuous improvement, and adapting to evolving business requirements.

Implementation:

Provide comprehensive training and development programs for supply chain staff to enhance

technical skills, leadership capabilities, and cross-functional collaboration. Foster a culture of

innovation, accountability, and continuous learning to empower employees to contribute to

supply chain optimization and value creation.

By implementing these solutions, The LEGO Group can address the challenges highlighted in

the case study, strengthen its supply chain resilience, and position itself for sustainable growth

and success in the dynamic global toy market.

Recommendation and Decision:

After a thorough analysis of the case and considering various factors affecting The LEGO

Group's supply chain dynamics, the following recommendations and decisions are proposed:

1. Transition to a Hybrid Supply Chain Model:

Recommendation:

The LEGO Group should transition to a hybrid supply chain model that combines in-house

production capabilities with strategic outsourcing partnerships.

Decision:

Implementing a hybrid model allows LEGO to leverage the benefits of both in-house production

control and external partner expertise. This approach mitigates risks associated with over-

reliance on either strategy and provides greater flexibility to adapt to market fluctuations.

2. Focus on Strategic Partnerships:

Recommendation:

Prioritize building strategic partnerships with select suppliers that align with LEGO's values,

quality standards, and long-term objectives.

Decision:
By forging strong alliances with reliable and capable suppliers, LEGO can ensure a stable and

collaborative supply chain ecosystem. Strategic partnerships enable shared risk management,

innovation, and mutual growth opportunities.

3. Invest in Digital Supply Chain Technologies:

Recommendation:

Allocate resources to invest in advanced digital supply chain technologies and analytics

capabilities.

Decision:

Embracing digitalization enhances supply chain visibility, agility, and efficiency. Implementing

technologies such as IoT sensors, AI-driven forecasting, and blockchain-enabled traceability

enables real-time decision-making and optimization across the supply chain network.

4. Adopt Sustainable Practices:

Recommendation:

Integrate sustainability principles into all aspects of the supply chain, from sourcing raw

materials to end-of-life product disposal.

Decision:

Embracing sustainable practices aligns with consumer expectations, regulatory requirements, and

corporate responsibility goals. Prioritize eco-friendly materials, energy-efficient processes, and

circular economy initiatives to minimize environmental impact and enhance brand reputation.

5. Empower Supply Chain Talent:

Recommendation:

Invest in talent development programs to empower supply chain personnel with the skills,

knowledge, and autonomy to drive innovation and continuous improvement.

Decision:

Nurturing a culture of learning, collaboration, and empowerment fosters employee engagement

and organizational resilience. Provide ongoing training, mentorship, and recognition to cultivate

a high-performing supply chain team capable of navigating complex challenges and driving

strategic objectives.

5. Monitor and Adapt to Market Trends:

Recommendation:

Continuously monitor market trends, consumer preferences, and geopolitical developments to

anticipate changes and proactively adjust supply chain strategies.

Decision:

Agility and responsiveness are critical in a rapidly evolving industry. Regularly review and refine

supply chain processes, supplier relationships, and product offerings to stay ahead of competitors

and capitalize on emerging opportunities.

7. Establish Clear Metrics and KPIs:

Recommendation:

Define clear performance metrics and key performance indicators (KPIs) to measure supply

chain effectiveness, efficiency, and sustainability.

Decision:

Establishing quantifiable goals and benchmarks enables objective evaluation of supply chain

performance and alignment with organizational objectives. Monitor KPIs regularly and use data-

driven insights to drive continuous improvement initiatives and optimize resource allocation.

In conclusion, by implementing these recommendations and decisions, The LEGO Group can

build a resilient, agile, and sustainable supply chain that supports its long-term growth,

profitability, and brand reputation objectives. Through strategic partnerships, digital innovation,

talent development, and adaptive strategies, LEGO can navigate complexities in the global toy

market and continue delivering value to customers worldwide.