The LEGO® Group never seemed like they were in trouble. In 2004, they still sold US$1.35 billion worth of toys. What was not known, however, was that the company had lost money four out of the seven years from 1998 – 2004. It was estimated that the company was losing $337,000 in value daily, and the leadership knew that it was crucial to address certain matters if they were to keep LEGO® open.
LEGO®’s Head of Strategic Development (and later CEO), Jørgen Vig Knudstorp, started an in-depth assessment of the company, and what he discovered during 6 months of examinations and evaluations was that there was a lack of innovation. “[They] had plumped up [their] top line, but [their] bottom line had grown anorexic. All the creativity of the previous few years had generated a wealth of new products, but only a few were actually making money,” David C. Robertson wrote, author of Brick by Brick: How LEGO Rewrote The Rules Of Innovation And Conquered The Global Toy Industry.
The company’s exponential losses were partly as a result of their attempt to diversify in the late 1990’s due to the belief that its brightly coloured building blocks were losing appeal and were under threat from the internet and online games. From 1994 to 1998, LEGO® had tripled the number of toys they produced. “Production costs soared but sales plateaued, increasing by a measly five percent over four years,” Robertson wrote.
The company was in serious trouble and with the assistance of Financial Director, Jesper Oveson (former CFO of one of Scandinavia’s major banks, the Danske Bank), Knudstorp began to make extensive changes.
The pair decided on a short-term action plan, which meant that they wanted to achieve improved cash flow rather than sales growth. They managed to turn LEGO® around by implementing the following changes:
- They cut costs drastically (unfortunately, this included doing away with 1000 jobs)
- They improved their operational processes and outsourced a lot of work
- They set financial targets for the company to determine in which markets they were making or losing money
- They implemented strategies to better manage cash-flow
- They introduced performance-related pay
- They slowed down their retail expansion
- They cut down on the number of components they manufactured (from almost 7000 to 3000)
- They reduced the product-to-market duration
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