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The LEGO Company is a $4 billion global business built out of the I humblest of materials: interlocking plastic toy bricks. From its base in Denmark, the family-owned LEGO empire extends around the world and has at times included theme parks, clothing, and computer-controlled toys. Each year, the company produces about 15 billion molded plas- tic blocks as well as tiny human figures to populate towns and operate gizmos that spring from the imaginations of young people. LEGO prod- ucts, which are especially popular with boys, are available in more than 130 countries; in the key North American market, the company’s overall share of the construction-toy market has been as high as 85 percent. Kjeld Kirk Kristiansen, the grandson of the company’s founder as well as the main shareholder, served as CEO from 1979 until 2004. Kristiansen says that LEGO products stand for “exuberance, spontaneity, self-expression, concern for others, and innovation.” (The company’s name comes from the Danish phrase leg godt, which means “play well.”) Kristiansen also attributes his company’s success to the esteem the brand enjoys among parents. “Parents consider LEGO not as just a toy company but as provid- ing products that help learning and developing new skills,” he says. LEGO has always been an innovator. For example, Mybots was a $70 toy set that included blocks with computer chips embedded to pro- vide lights and sound. A $200 Mindstorms Robotics Invention System allows users to build computer-controlled creatures. To further leverage the LEGO brand, the company also formed alliances with Walt Disney Company and Lucasfilms, creator of the popular Star Wars series. For several years, sales of licensed merchandise relating to the popular Harry Potter and Star Wars movie franchises sold extremely well. After a disappointing Christmas 2003 season, LEGO was left with millions of dollars worth of unsold goods. The difficult retail situa- tion was compounded by the dollar’s weakness relative to the Danish krone; LEGO posted a record loss of $166 million for 2003. The com- pany then unveiled a number of new initiatives aimed at restoring profitability. A new line, Quattro, consisting of large, soft bricks, is targeted directly at the preschool market. Clikits is a line of pastel- colored bricks targeted at young girls who want to create jewelry. In 2004, after LEGO had posted several years of losses, Jørgen Vig Knudstorp succeeded Kristiansen as LEGO’s chief executive. Knudstorp convened a task force consisting of company executives and out- side consultants to review the company’s operations and business model. The task force discovered that LEGO’s sources of competitive advantage creativity, innovation, and superior quality—were also sources of weakness. The company had become overly complex, with 12,500 stock-keeping units (SKUS), a palette of 100 different block colors, and 11,000 suppliers. Acknowledging that the company’s forays into theme parks, children’s clothing, and software games had been the wrong strat- egy, Knudstorp launched a restructuring initiative known as “Shared Vision.” Within a few months, cross-functional teams collaborated to reduce the number of SKUs to 6,500; the number of color options was slashed by 50 percent. Production was outsourced to a Singaporean company with production facilities in Mexico and the Czech Republic, resulting in the elimination of more than 2,000 jobs. Knudstorp also decided to focus on the company’s retail custom- ers, which include Toys ‘R’ Us, Metro, Karstadt, and Galeria. After surveying these customers, Knudstorp and his task force learned that the customers do not require express product deliveries. This insight prompted a change to once-weekly deliveries of orders that are placed in advance. The result: Improved customer service and lower costs. In the 3-year period from 2005 to 2008, on-time deliveries increased by 62 percent to 92 percent. LEGO also logged improvements in other key performance indicators, such as package quality and quantity In 2008, LEGO was awarded the European Supply Chain Excellence Award in the category “Logistics and Fulfillment.” In terms of competitive advantage, Knudstorp has noted, “A bucket of bricks is the core of the core.” Still, he adds, “There’s more to being a global successful company than being able to build a plas- tic brick.” Evidence of the company’s magic touch can be found in LEGO Friends, a new theme targeting girls that has sold extremely well. Moreover, the company’s forays into video games such as Lego Batman 2, children’s books such as The Lego Ideas Book, and TV series on the Cartoon Network have proven to be successful as well.

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