Jørgen vig knudstorp net worth

Answer this case study questions

1. What were LEGO's main expectations and learnings from the relationship with Flextronics?

2. What are the key challenges in maintaining a relationship like the one between LEGO and Flextronics?

3. How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility and coordination?

4. Discuss the key considerations when outsourcing or offshoring production.

LEGO Case study

On March 18, 2011, Jørgen Vig Knudstorp, CEO of the LEGO Group, strode out of the cafeteria at company headquarters in Billund, Denmark, and turned right into the packaging area. He had just witnessed a discussion between Bali Padda, Executive VP of Global Supply Chain, and Mads Nipper, Executive VP of Markets & Products, that had ended without clear decisions. Knudstorp wanted Padda and Nipper to know that he was available to help with the decisions if necessary.

Known among families worldwide for its iconic brick-based toys, the LEGO Group was privately held by the Kirk Kristiansen founding family and had been committed since its early days to developing the imaginations of children. A rocky decade had culminated in a near-death experience in 2004, but the Group had gotten back on track under Knudstorp’s leadership. Between 2004 and 2010, the Group’s revenue had grown by 165% in a stagnant global toy market, making it the world’s fourth largest traditional toy maker. By 2010, its return on invested capital soared above 160%. (See Exhibits 1 and 2 for selected financials and the company’s organization.)

Padda and Nipper had started their annual negotiations on how many new components product designers would have available for their new products. (A “component” was a LEGO® brick of a particular shape in a specific color or with a specific decoration.) Since the 2004 crisis, LEGO Group leaders had tightly controlled the component count; setting the next target was always difficult. Nipper felt that Padda’s target was not compatible with the new products that designers envisioned, especially a proposed line of buildable games. “With that target, we’d have to drop half of our projects, including the new games line. We need to add groundbreaking developments like games to sustain our growth. We can’t achieve that with this target.” But Padda had never been convinced by business-case arguments that tried to justify adjustments to production. In addition, the idea of complex buildable games raised a red flag in his mind; this was not about adding just another brick shape. A number of LEGO employees were convinced that the company should enter the games market with a new product line, but Padda and many others had their doubts.

The Toy Industry

As Knudstorp reflected on the component count and games decisions, he considered the evolution of the global toy market. The industry booked wholesale revenues of $83.3 billion in 2010. The retail market for toys grew at a steady pace of about 4% per year, but demand for specific fad toys could surge or collapse rapidly. (See Exhibit 3 for selected industry figures.)

Industry observers noted a few important trends. First, fad toys seemed to be rising and product life cycles declining, perhaps not surprising for an industry, as one journalist put it, “subject to the whims of [kids] who can’t decide which shoe to put on which foot.”1 Second, in many parts of the world, children had more after-school activities and less unscheduled time to play than in the past. Third, for kids over three years old, demand had shifted toward technology, either in a toy itself or in the form of toys coming with access codes to online worlds.2 As children gave up traditional toys earlier for videogames and online activities, childhood became shorter and adolescence longer. Parents were often torn between buying the toys their kids wanted and those they considered good for their children.

Thousands of toymakers served the world market, but a handful led the industry. Mattel, the world’s leading toymaker by revenue, featured brands like Fisher-Price, Barbie, Hot Wheels, and American Girl dolls.3 Hasbro, the second largest player, housed brands such as Transformers, Monopoly, GI Joe, Play-Doh, and Playskool. To win consumer attention, retail shelf space, and sales, toymakers introduced new products, cut their wholesale prices, sponsored cooperative ads and promotions with retailers, provided in-store support, and advertised to consumers. The impact of new product introductions was muted by rapid imitation and limited protection of intellectual property. To boost brand presence among consumers, toymakers often licensed characters from media companies. Mattel, for example, was the “favored creator of toys based on Disney and Pixar characters.”4 Toymakers increasingly manufactured in Asia, where labor was inexpensive and subcontractors stood ready to produce goods on their behalf. The majority of toys sold in the U.S., for instance, were manufactured in China by outside contractors, while global players such as Hasbro specialized in new product development, sales, and marketing.

Toymakers went to market via diverse retail channels, including independent toy specialists, chain stores, discount stores, department stores, and online stores. In choosing among toys to stock their shelves, retailers focused on profit per square foot and consequently considered margin, turn, and product space requirements. In a highly seasonal business in which consumers bought a large fraction of their toys during the holiday season, retail purchasing occurred mainly in the second half of the year.5 Large retail chains had separate toy buyers for each toy category; for instance, different buyers might manage board games and construction toys.

Building the LEGO Group (1916-1992)

In 1916, Ole Kirk Kristiansen, a humble carpenter, bought a wood workshop in the rural Danish village of Billund and began to build houses and furniture for farmers. In 1932, he added wooden toys to his production and chose the name LEGO, formed from the Danish words “LEg GOdt” (“play well”). Only later did he learn that in Latin “lego” meant “I assemble.” Aiming for quality, he wrote on his wall, “Only the best is good enough.”

Ole’s son Godtfred started working in the business in 1932 at age 12. In 1947, the firm became the first in Denmark to buy a plastic injection-molding machine. By 1949, its portfolio had grown to 200 plastic and wooden toys, including the automatic binding brick, a forerunner of the modern LEGO brick. In 1954, during a ferry ride to England, a purchasing agent complained to Godtfred that toy departments were a mess: toys lacked a systematic organization. The comments moved Godtfred to consider a “LEGO system of play.” Such a system began to form in 1958, when the company changed the design of its bricks to match its current form. When a fire destroyed the LEGO Group’s wooden warehouse in 1960, Godtfred discontinued wooden toy production. Knudstorp reflected:

Godtfred Kirk Christiansen bet the whole farm on one-third of his business, plastic toys, and not just any toy – the brick. Godtfred Kirk Christiansen felt he had stumbled onto something unique with this brick. You can build anything out of it. It doesn’t fall apart when you throw it around. And you can add to this system forever as it allows you to create a new toy every day, make endless variations, thereby inspiring and challenging a child’s imagination and creativity. Godtfred Kirk Christiansen realized that in this system, the value of play expands exponentially the more elements you have.

In 1963, Godtfred laid out ten principles of “good play” that defined LEGO product characteristics (see Exhibit 4). By 1967, the company produced LEGO bricks in 218 distinct shapes. In 1977, Godtfred’s son Kjeld Kirk Kristiansen joined the company’s management. Born in the same year as the brick, Kjeld felt, in Knudstorp’s words, that “The LEGO brick is more than a toy. He knows what the brick can be and what it can do for humanity.”

From early on, a strong culture of creativity at the LEGO Group favored the steady introduction of new products and themes based on the brick system. The high quality of bricks and the standardized spacing between studs ensured that all elements made after 1958 were compatible with one another, resulting in enormous opportunities for creativity. The Group expanded its audience in 1968 with larger “DUPLO” bricks for children under five and, in 1977, with the LEGO Technic line for teens. By 1980, about 70% of Western European families with children under 14 owned LEGO bricks.

By that time, a three-phase production process lay at the heart of Group operations. First, in the molding phase, injection-molding machines produced plastic elements in massive numbers. Because it took a molding tolerance of 0.002 millimeters to make bricks clutch each other right, Godtfred focused on developing industrial excellence and cutting-edge capabilities in material science and production technology. Second, in the decoration phase, specialized parts were painted. Third, in the packaging phase, the many small elements that made up a product were placed in a box along with an instruction manual.

Godtfred controlled the company’s operations closely, and no new product, brick, or color was introduced without his approval. Until the early 1980s, LEGO bricks came in five base colors: black, white, red, blue, and yellow. Kjeld felt that the company’s sustained growth required new bricks, but it took him 10 to 15 years to convince his father to add the color green. Kjeld also added new themes, began to collaborate with the MIT Media Lab on robots in the mid-1980s, expanded into Eastern Europe and Asia, and maintained a strong position in America and a leading one in Western Europe.

The LEGO Group enjoyed steady organic growth and profitability. By 1992, it was a top 10 global toy manufacturer, and according to Advertising Age, accounted for about 80% of the construction toy market. With its products so popular among consumers, LEGO Group management came to see retailers as “a necessary evil.” Christian Iversen, Executive VP of LEGO Corporate Center, recalled:

We were used to stable growth and expansion, driven by our growing pipeline. This was further fueled when the Berlin Wall came down, with millions of young Eastern Europeans eager to get their hands on Western products. If anything, the LEGO Group worked hard to control sales growth. The head of production, a strong person on Kjeld’s team, watched production costs and capacity closely. When I joined in 1993, the first meeting I attended was about how to shelve several product introductions so that projected growth would fall to the target range of 8-10%. We had such a grip on the market and unmet demand that we could gradually add new products and more or less decide five years out what and how much we wanted to sell.

The Growth Period That Wasn’t (1993-1998)

In the early 1990s, several shifts in the toy market caught the LEGO Group’s management by surprise. Knudstorp explained:

Birth rates in our core markets—Western Europe and North America—declined, as did household spending on toys. Between 1993 and 2003, the total profit pool in the industry decreased by 50%. Traditional mom & pop stores started to disappear. Retail channels consolidated, and mass discounters featured toys more aggressively. Mattel, Hasbro, and others pushed manufacturing to the Far East. Finally, market research suggested that children had less time for unstructured play, had shorter attention spans, and looked more for instant gratification as well as fashionable and electronic products. These changes did not play to our strengths.

In 1993, Kjeld Kirk Kristiansen suffered a severe illness and left the company for a year. Upon his return, he built a five-person management team to help him run the company. Increasingly, Kjeld pushed responsibility to frontline managers, so they could be more responsive to market dynamics. The head of production was dismissed. Growth became the new focus. Fueling the drive to grow was a desire to leverage the LEGO Group’s position among the world’s top 10 brands for families with children. Iversen said:

The other companies on that list, such as Disney and Nike, were much larger than us. We concluded that our brand must have huge untapped potential. This potential seemed to lie outside our core play systems, so we stretched our brand and explored opportunities in new areas. We experimented with new ways to push out more products, without necessarily having an eye on their margin. The businesses were encouraged to make their own decisions. Suddenly you couldn’t speak to an important retail customer without offering an account-specific product. We also did studies on how to grow in untapped markets like Southern Europe and concluded that we needed products tailored to those markets.

The Group branched out beyond the brick. Inspired by the success of its family leisure park in small Billund, it opened LEGOLAND Windsor (U.K.) in 1996. The same year, the company launched www.lego.com and began to develop videogame software related to its products. LEGO Media was set up in London to develop media products linked to LEGO play themes (e.g. movies, television programs, or books). The company introduced children’s wear in 1993, watches in 1996, and LEGO® MINDSTORMS® robotic bricks in 1998. Knudstorp reflected on the company’s strategy during these years: “All of these efforts to push our boundaries felt natural in our Disney-like brand stretch strategy. There seemed to be potential everywhere.” Expansions tended to be done in-house, not through partners. Mike Moynihan, VP of marketing, explained: “The mentality was that only we sufficiently knew our brand, and the expression of it could therefore not be outsourced.”

In its brick-based product lines, the Group launched a host of new themes and products. Designers created LEGO products with more complex and chunkier pieces for some sets, so that children could build objects faster and arrive sooner at the playing part of the experience. The number of distinct components rose. In cases where brick shapes were more pre-defined, such as the lower and upper side of a car, they were harder to combine with other pieces.

Despite management’s efforts and significant investments to grow the top line, sales stagnated. In 1998, the LEGO Group faced the first financial loss in its history.

The Fix that Wasn’t (1999-2004)

To restore profitability and growth, Kjeld brought in a new CFO, Poul Plougmann, who soon became COO and took over day-to-day management. Ploughman’s experience with turnarounds at Danish companies led the press to announce the arrival of “Mr. Fix-it.” A restructuring program was launched to cut costs by DKK 1 billion [US$140 million]1 and lay off up to 1,000 employees (10% of total staff). Of the 100 top executives, more than 60 were asked to leave. Ploughman’s “Fitness Program” included measures to streamline production, reduce organizational layers, and increase responsibility and customer focus, all to build a simpler, more responsive, global business system. When management announced these drastic measures, employees stood up and applauded.

Change To develop stronger leaders who could take the group into new areas, Ploughman moved managers around rapidly. People stayed in one position for 6-12 months before rotating or being replaced by someone who could do a better job. General leadership experience was valued more than direct experience with LEGO toys.

Design responsibilities were shifted from small, rural Billund to global product development concept centers in creative locales such as Milan, London, and San Francisco. Production was streamlined and geared to match forecasts. Several tool-making factories were sold, and manufacturing processes that were difficult to automate were transferred to the LEGO Group’s new plant in the Czech Republic. In sales, senior management consolidated 25 country-level sales companies into five regional entities. The incentives of salespeople were tied, in part, to whether their actual sales exceeded their forecasts. Back-office functions were globalized.

Management decided in 1999 to sell directly to consumers through two initiatives: an online shop and LEGO-owned retail stores in Europe and the United States. Iversen recalled that “this was both about meeting the consumer in the right places, online and in our own stores, and about building the brand. Another reason was that we found ourselves increasingly working with discounters that were squeezing us on their shelves. This made it impossible to display the wealth of our brand.”

The Group’s product line continued to evolve. Among the most prominent product launches in 1999 was the brick-based LEGO® Star Wars™ theme. While the LEGO Group had developed many play themes over the years, LEGO Star Wars was the first in-licensed brand. The decision had not been an easy one. Long-time employees bristled at the idea of placing the word “War” on a LEGO box and putting laser guns in the hands of LEGO minifigures, who traditionally carried nothing more lethal than a pirate’s sword. The financial potential of the partnership was also difficult to assess. Iversen recalled that “these debates about the danger of eroding our brand heated up when we launched LEGO Star Wars. But we saw it as an opportunity to be more ‘in tune’ and add storytelling to building.” More licensed products followed, including “Winnie the Pooh and Friends” in 1999 and “Harry Potter” in 2001.

In 2002, the company repositioned the preschool line, LEGO® DUPLO®, under a new brand name. Nipper explained: “We tried to tap into mothers’ emphasis on child development and make the product more learning-focused.” The expansion of theme parks continued with the opening of LEGOLAND California in 1999 and LEGOLAND Germany in 2002. Projects like videogames continued to flourish, but some lifestyle initiatives, such as wristwatches and publishing, were cut back after 2000.

ConsequencesKnudstorp recalled the ensuing difficulties in operations:

When I was brought in as a consultant in 2001 to analyze the supply chain, I realized nobody had kept an eye on complexity. Product developers argued that the number of distinct shapes did not matter, as the marginal cost of an extra mold was so low. And management did not see the impact of this on design, manufacturing, servicing of retailers, forecasting, and managing inventory. You could be out of stock for a product just because you miss one of its 675 pieces, which you did not make when you got the forecast wrong. The total number of components was not visible, but in 2004 we discovered that it had more than doubled since 1993. We had 3,560 different shapes, 157 colors, and 10,900 elements in our assortment. Each shape required a mold, and a mold cost €50,000 on average, or up to €300,000 for complicated ones.

Padda also recalled the company’s operations nightmares.

When I joined in 2002, there was a lack of discipline, of accountability, and a costing system that I could not figure out. I couldn’t understand how net production prices were determined or which products were profitable. It took me six months to get a sense of our fill rate to customers [the proportion of demand delivered without delay from stock on hand]. I found out it was anywhere between 5% and 70%, and my colleagues told me not to worry. My inventory costs were exploding, we had a lot of write-offs and obsolescence, and I couldn’t explain anything! We started to control costs, for example by ordering fewer molds, but sometimes we could not meet demand anymore. Balancing supply and demand was further complicated by individuals directly calling their friends in manufacturing and asking them to produce more of this or that.

The LEGO Group’s major customers were frustrated by stock-outs and slow-moving inventory. Padda recalled, “When I met the Wal-Mart buyer for the first time in 2004, he asked me: ‘Can you please tell me why I shouldn’t put dog food on the shelves?’” LEGO Group’s own stores were well received by consumers, but the company struggled to run them efficiently.

Among the Group’s new products, the LEGO Star Wars line thrived, rising to become 35% of total revenue. The repositioning of LEGO DUPLO proved less successful. Nipper recalled, “Many consumers found the new products did not live up to our promise and missed the LEGO DUPLO brand. A German retailer bluntly asked me, ‘Have you absolutely lost your mind?’ This was only one of several innovation and marketing approaches at the time that customers did not understand.” Increasingly, senior leaders noticed that managers were attributing poor results to factors beyond their control; weak sales, for instance, might be blamed on nice weather, which discouraged consumers from buying indoor toys.

The company’s results were characterized by large profit swings. The Group saw 25% top-line growth and a return to profitability in 1999, a sales downturn and a loss in 2000, and a small profit in 2001. The upswing continued in 2002, stimulated by new product launches, a new Star Wars film, growth in core products, and a strong U.S. dollar.

By 2003, it became clear that the new growth strategy wasn’t working. Sales plunged by 26% to DKK 6.8 billion, and the company lost DKK 935 million. Management acknowledged that the substantial investment in expanding the product portfolio and consequent cost increases had not produced the desired results. Worse yet, some new products had cannibalized core products and eroded earnings. In a year without Star Wars or Harry Potter movie launches, the unsatisfactory sales of products with movie tie-ins accounted for more than 50% of the overall sales decrease. Iversen summarized the situation: “We were pregnant with many initiatives and their costs, and the market environment turned against us.” In December 2003, Kjeld Kristiansen asked Plougmann and four of

his 14-person management team to leave the company. When 2004 brought another loss and pushed the LEGO Group to the brink of bankruptcy, Kristiansen invested in the company, retired as CEO, and handed the position to Knudstorp.

Managing for Cash (2004-2005)

The appointment of then 35-year old Jørgen Knudstorp as the LEGO Group’s first outside CEO surprised industry observers. Born a short distance from Billund, Knudstorp had earned a PhD in Business Economics at the University of Aarhus, Denmark and had started his career as a consultant at McKinsey & Company before joining the LEGO Group as Director of Strategic Development in 2001. Iversen recalled that “the reaction in the Danish corporate community was: ‘How can they put a ‘rookie’ in charge when they are struggling to survive?’ But Kjeld had gotten to know Jørgen, had come to trust his views, and liked his values.”

Knudstorp and his management team developed the “Shared Vision” strategy, a 7-year agreement with the board to restructure and stabilize the business, boost sales, and reduce debt. Iversen added:

Jørgen bluntly told the board that if they wanted the business to survive in the long run, this could not be a quick fix. He said that if he was a financial investor, he would advise them to sell. But if they did not want to sell, they needed to believe that the LEGO family firm could do it right. They needed to allow us to deliver long term and not quarter by quarter, and they would have to sacrifice some of the ‘sacred cows.’

The plan had three stages: “Manage for cash” (2004-2005), “Manage for value” (2006-2008), and “Manage for growth” (2009+). The first stage focused on securing the survival of the company and gaining control by focusing on “core” products and processes. Knudstorp explained:

I had many discussions with people in and outside of the LEGO Group to understand our identity, our core business, our unique capabilities, and the value proposition for our customers and consumers. Based on what I found, I decided to focus on four core priorities: 1) the LEGO brand, 2) the LEGO brick, 3) our unique system of play, and 4) the loyal LEGO community. These priorities became our foundation for the shared vision and framed our decisions on the business portfolio, manufacturing, innovation, and so on. In hindsight, there were a few things missing, like key account management, but we realized this only later. (See Exhibit 5 for the brand definition and core values.)

The management team streamlined the business and product portfolios, using fit with the LEGO Group’s core along with financial performance as a guiding framework. Any ventures beyond the brick were immediately curtailed. Knudstorp recalled some difficult times.

I had the banks breathing down my neck and asking for immediate repayment of all outstanding debt. We quickly needed to close or sell items to generate cash. My CFO listened to my theory about the ‘core’ and said, ‘I don’t get all you’re saying, but what I take away is that a core is something which makes a superior return. But if you take this to the extreme, since our business is almost destroyed, there is no meaningful core in that sense.’ So we had to decide what parts we could and should turn around, and how each of those ventures would affect the system as a whole.

In 2005, the company sold the LEGOLAND parks to private equity group Blackstone for €375 million but kept a 22% equity stake in the new theme park operator, Merlin Entertainment. The equity stake gave the LEGO Group some control over its brand and later resulted in additional profit,

when Merlin turned around the parks’ performance. Management also shut down the video games unit and returned the LEGO DUPLO brand to its original positioning. Knudstorp reasoned, “We decided to rebrand the preschool line. It was not profitable, particularly its buckets of loose bricks, but for me this was close to the core.” The team also reintroduced LEGO CITY and launched a new and improved version of the programmable robot kit LEGO MINDSTORMS. LEGO Clickits for girls, a constructible fashion accessory line, was discontinued because it was “too far away from the core.”

A 2004 decision to trim the number of brick components was “relatively easy” for Knudstorp, although less obvious to some production and development managers:

Some of them did not believe complexity was a problem and continued challenging this. One day in September 2005, I had to fire five of the seven senior manufacturing executives and put Bali [Padda] in charge, not because they were low performers, but we just did not have the same view on what it would take us to be successful again. I cried almost as much as they did as I knew them and their families for years, but it was the right decision.

Finding the right target for the number of components was not easy, Padda remembered:

We ran calculations with consultants and tried to juggle with the figures and our gut feeling, until we came up with a target number of 5,000, which sounded like the right optimum. Of course there was a lot of noise in the organization, with designers complaining we took their creativity away, but in my view this took us back to the basics of system of play.

Once the management team started taking out molds, people were overwhelmed by how much the company benefitted from simplification. Knudstorp also sought to outsource any non-core operational processes.

Manufacturing was not one of my priorities. We had lost our edge in manufacturing and supply chain management in the 1990s when many competitors like Hasbro started outsourcing things, and our costs were out of control. We felt that it should be easy to find professional manufacturers able to operate the factories better than we could. Also, offloading the factories meant taking a huge chunk of our fixed asset base and risk off our balance sheet.

Padda added,

As part of our analysis, Jørgen asked me to explain the exploding manufacturing costs, but I just couldn’t. The forecasts and sales orders varied so much, and these changes were directly taken to our production line. A change in a salesperson’s forecast could alter the order on a molding machine within the hour. We produced what we guessed would be the demand, and at the same time, could not respond quickly enough. One day I told my wife, I had had it and would leave the LEGO Group, but that night I started to suspect we actually had a demand problem.

For outsourcing, the Group chose electronics manufacturing service provider Flextronics, because of its experience in molding. An employee recalled how Knudstorp went to the shopfloor of Billund’s factory to announce the decision to move much of the operations out of the firm and Denmark: “Here was this young guy telling all these people that in three years time about 80% of them would be laid off. But instead of leaving, many at the time felt this may be the wrong decision and said they were going to work harder to prove there is something worth fighting for.” It was Knudstorp’s hardest decision so far because of the consequences for “his” people. Outsourcing to Flextronics affected thousands of loyal employees in factories in Denmark, Korea, Switzerland, and the United States.