Context
In the late 1990s and early 2000s LEGO expanded fast: theme parks, video games, clothing, new lines of sets. The number of unique pieces and sets grew year after year. In 2003 and 2004 the company posted large losses and, by estimates, was close to bankruptcy.
Symptom
Revenue was falling and costs were rising. According to the annual report, the 2004 loss was 1.9 billion Danish kroner, almost twice the loss of the year before.
Cause
Complexity grew faster than revenue. Many pieces were used in only one or two sets, while production, warehousing and logistics paid for each of them. By management's own account, the company poorly understood which products made a profit and which lived off the others.
The fork
Keep expanding in the hope of new hits, or first honestly calculate where the company was making money and where it was losing it.
Decision
In October 2004 Jørgen Vig Knudstorp, a former McKinsey consultant who had joined LEGO in 2001, became chief executive. First profitability and complexity were calculated for every product and business line; then decisions were made.
Execution
The number of unique pieces was cut roughly in half. In 2005 the company sold the Legoland theme parks and focused on its core product, brick sets. Development of new sets began to take into account the cost of each new piece.
Outcome
According to the annual report, in 2005 LEGO returned to a profit of about 0.5 billion Danish kroner with revenue growth of 8 percent. In the following years the company became one of the world's largest toymakers.
What it means for you
The turnaround began with an audit that showed where the company was losing money. Until the numbers show profitability by product, any cutting is done blind.
- Do you know the profitability of each of your products or services after all costs?
- How much complexity has each new product added over the last three years?
- Which business lines live off the others, and do their managers know it?
We would start by allocating costs to products and finding the ones that pull in more resources than they bring.
Key dates
| Year | Event |
|---|---|
| 2003 | Large loss |
| 2004 | Loss of 1.9 billion Danish kroner; in October Knudstorp becomes chief executive |
| 2005 | Legoland parks sold; return to a profit of about 0.5 billion Danish kroner |
Sources
- LEGO Group. *Annual Report 2004*: Source
- LEGO Group. *Annual Report 2005*: Source
- David C. Robertson. *Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry*. Crown Business, 2013.
- Wikipedia. *Jørgen Vig Knudstorp*: Source
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