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Business Case Study: Lego's Organizational Structure

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  • 0:00 History and Context
  • 1:00 Restructuring and Refocusing
  • 2:44 The New Lego Group
  • 4:18 Results
  • 4:59 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Walk into your local toy store and you'll likely find an entire aisle, or section, for Legos. In the early 2000s, that wasn't the case, as Lego appeared to be dying a slow death. In this lesson, we'll find out what changed the outlook for Lego.

History and Context

In 2002, the Lego Group turned 70 years old. Founded in Denmark in 1932, by the 1990s someone would be hard-pressed to find a child's toy closet that didn't have any Legos. But the 1990s and early 2000s brought home video games and handheld electronics to the toy market, and Lego's sales started dropping dramatically.

Throughout the 1990s, the Lego Group did what many companies do when they feel attacked by the external environment - they tried to find a way to fit in. They had introduced Lego theme parks. Lego Bionicles, a more robotic attempt at traditional Legos, were launched in 2001. Brands focused on young girls were created. Lego looked for partners to start producing clothes. While not easy to see at the time, looking back, Lego was grasping at straws - some of which worked (like Bionicles) and some of which didn't (like the clothing). They had to figure out how to make toy blocks competitive with video game systems and a whole new generation of toys.

Restructuring and Refocusing

When the owners of the Lego Group saw that they weren't facing a shifting market or just changes in consumer preferences, they did what most companies do when faced with radical changes - they answered with dramatic changes of their own. They brought in a new strategist: Jorgen Vig Knudstorp, a lifelong Lego fan but not a Lego insider. His ideas started rebuilding the Lego brand within the constraints of the existing management, until financial losses in 2003 and 2004 worried the owners enough that they named Knudstorp the CEO.

Knudstorp set up an organizational structure that required each part of the company to be heavily scrutinized by teams of internal consultants that consisted of financial managers, logistics managers, and marketing employees. They didn't look at the Lego Group as an entire company - they looked at each part of Lego to see if they could stand on their own. Some could; some couldn't. That was the beginning of the change in structure and strategy, but one of the major 'ah-ha' moments for Knudstorp required fate to step in.

By chance, on a trip to the United States, Knudstorp met Chris Zook, a partner at a large consulting company and the author of the book Profit from the Core. In his book, Zook argues that companies with a core business - like the Lego Group - can only handle adding one new business to their enterprise every five years, if they want to be successful and not lose focus on their core. The Lego Group had been doing the opposite, adding new businesses to their portfolio as often as an idea arose, hoping it would be the one to save them.

Between his reflection on his readings and discussion with Zook and the results of the work the internal consulting groups had done, Knudstorp made the change that can now be traced back as the one that saved the Lego Group. He simply returned to the brick.

The New Lego Group

Knudstorp knew there were other good ideas that the Lego Group had and didn't want to shut them down, so he structured the company to have independent units. The theme parks were a unit that was actually sold in exchange for equity in the purchasing company; the robotics were a unit; the clothing was a unit. And, while some people didn't like it, the instructions Knudstorp gave were simple. At a corporate level, those units would receive the support they needed so that they couldn't die; basically, they were on life support and had to survive on their own. As of 2003, all focus was on the brick.

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