For decades, Denmark-based LEGGroup has delighted children of all ages with its sets of construction toys. It is one of the largest toymaker in the world. LEGO is controlled by the Kirk Kristiansen family, descendants of founder Ole Kirk Christiansen, a master carpenter who made the first LEGO toy - a wooden duck. Kjeld Kirk Kristiansen, grandson of Ole, is Chairman of Kirkbi, the family holding company that owns 75% of LEGO. This has made him Denmark's richest person. In the first half of 2017, LEGO saw a five% decline in revenues. No sales drop occurred in the prior ten years. Jorgen Vig Knudstorp, Chairman and former CEO of LEGO Group, then announced a 'one-off, big move' where 1400 positions would go within six months. The company did not think that the landscape of retail was the key problem, but rather the business as a whole needed to transform:

'The way we do business, the way we do our marketing, the way we do our market management, but also how we run the whole administration of the company unfortunately has become too complicated as we've grown the company massively over the past 12 to 13 years'. Over the course of 2017, sales continued to decline - overall by 8% from the prior year and profits dropped by 17%.

The 85-year-old company was 'on the brink of collapse and foreign venture capitalists were circling ready to pounce' according to Neate (2018). The firm's new CEO, Niels Christiansen, said he could not see a 'quick fix to the problem and decided to focus on 'slashing costs and overhauling the company's bloated structure.' When a firm decides to engage in a major business re-organisation, employees are often fired. This may involve finding ways to reduce the cost of labour as well as to enable altered processes and structures and deal with perceived inefficiencies which have set in. A new CEO taking over a company whose sales and profits are in decline, such as Niels Christiansen, will often require detailed cost information before deciding to implement a new strategy. Extreme cost cutting and restructuring often go hand in hand.

1. Explain the concept of cost management and its usefulness for manufacturing and service companies using appropriate examples. 

2. Using the cost classification concepts introduced, explain how Lego could manage to cut its costs efficiently without jeopardising the innovation aspect of the business. Use appropriate references to support your arguments.