Assignment:
Management Team Decision
Letting Go at Lego By definition, toys should be fun. Unfortunately for you, competing in today's toy industry is anything but. Cutthroat competition and children's changing interests have pushed toymakers to consolidate, cut costs, and grow through licensing agreements with media giants like Disney and Nickelodeon, something many toymakers consider to be selling out. No one needs to explain the crushing pressure to you-you're the new CEO of Lego, the first outsider in the company's history to run the family-owned business-because you were hired to save the company from sure decline. Last year, Lego had over $1 billion in sales. Its proprietary manufacturing operation pumps out 15 billion components a year-that's 1.7 million bricks, Lego people, and other elements per hour.
By the numbers, Lego is the world's leading tire maker, producing 306 million tiny rubber tires a year for its sets. Lego's iconic bricks are so versatile that with a pack of only six bricks, a child can create 915,103,765 unique configurations. It's no wonder that Lego beat out Barbie and the teddy bear to be named Toy of the Century by Fortune magazine and by the British Toy Retailers Association. Despite the volume of product being produced, the perennial accolades, and a reputation for nurturing creativity in children, Lego is losing money at an alarming rate. On last year's $1 billion in sales, the company lost a whopping $240 million. It also carries about $750 million in debt. That means you begin your stint as CEO squarely behind the eight ball.
First on your list of things to do: change the company mission from "nurturing the child" to "I'm here to make money for the company." Part of what's weighing Lego down is the fact that the company does it all. Lego uses its own designers to develop new products; other companies use a combination of in-house talent and innovation labs to come up with new-product ideas. Lego manufactures its bricks (and other products) on extruding machines it developed itself at company-owned factories in Denmark and Switzerland, where labor costs are stratospheric; 70 percent of the world's toys are manufactured in China by contract manufacturers hired just to produce the toys and with labor that costs pennies on the kroner.
Lego distributes all of its own products; other companies use third-party logistics companies like DHL and UPS to manage distribution. Lego even books $5.2 million in travel a year through an in-house travel agency that uses proprietary software; most companies use dedicated travel services, like American Express Travel. To bring Lego back into the black, you've got to cut costs, and the fastest way to cut costs is outsourcing. The biggest savings would come from outsourcing your production, but that also carries the biggest risks. Controlling your manufacturing would be difficult.
You'd have to share your machinery technology- what if a contractor started using your technology and specifications to make black-market Legos, something not at all inconceivable if you outsourced to China? And there's the fact that Legos are part of the fabric of Billund, the Danish town of 6,500 where the bricks were invented and where Lego's headquarters employs most of the company's 8,000 workers. Most of the people in Billund work for Lego. Still, savings from outsourcing manufacturing alone would bring the company to nearly break-even levels. Controlling distribution helps you manage inventories and track sales trends, but should Lego really operate its own distribution network? So many companies specialize in this area that it's hard to equal their capabilities. Even something that is as seemingly easy to outsource as travel is not so easy.
In-house travel agents know the insand outs of Lego's travel policy; an outside provider is not always able to recognize a breach in the policy. Lego managers book 10,000 air tickets a year, and the head of the travel department says her team saves the company $325,000 in administrative costs alone over working with an outside company. One thing is certain: You're not going to be able to make a decision on what to outsource (if anything) without consulting your management team. Form a team of four or five students to act as the management team for Lego. You may want to refer to Exhibit 9.13 as you work through the following questions.
Questions
1. What risks, if any, does outsourcing pose to Lego's corporate identity?
2. What do you think Lego's core and noncore business activities should be?
3. Do you outsource production, which will by itself achieve your cost-cutting goal, or do you outsource a smattering of other functions and ep Lego a "toymaker" rather than a "toy marketer"?