1. Jorgen Vig Knudstorp became CEO in 2004. Assess the key strategic decisions he has made, including outsourcing and divesting the theme parks.

2. LEGO’s movie-themed products, keyed to popular film franchises such as Harry Potter, Lord of the Rings, and Spider- Man, include detailed construction plans. Do you think this is the right strategy?

3. Using Porter’s generic strategies framework, assess LEGO in terms of the company’s pursu it of competitive advantage.

4. What risk, if any, is posed by LEGO’s movement into multimedia categories such as video games and television?

The LEGO Company is a $4 billion global business built out of the humblest of materials: interlocking plastic toy bricks. From its base in Denmark, the family-owned LEGO empire has extended around the world and has at times included theme parks, clothing, and computer-controlled toys. Each year, the company produces about 15 billion molded plastic blocks as well as tiny human figures to populate towns and operate gizmos that spring from the imaginations of young people (see Exhibit 16-12). LEGO products, 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 providing 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 provide 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 situation was compounded by the dollar’s weakness relative to the Danish krone; LEGO posted a record loss of $166 million for 2003. The company 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 outside 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 strategy, 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.