The Lego Group, one of the largest toys-making company, was established in 1932 by Ole Kirk Christiansen in Billund, a small town in Denmark to manufacture wooden toy designs. Wooden toys designs were the main company products until the introduction of LEGO brick product in 1958, which has remained as the company’s main product. The LEGO brick product dubbed as ‘Toy of the Century’ is developed to make playing fun among the children, the fun is facilitated by the simple yet millions of combinational structures available in building structures using the LEGO bricks. To cover different ages of children, different products maintaining the brick concept has been created by the company to make playing fun in the different age groups. However with the company having ‘Toy of the Century’ as its main advantage over competitors and the source of large sales revenues, in the year 2004 the company was having major internal financial crisis traced back to the end of the 1990s.
The company’s financial woes were manifested by the 2003 and 2004 financial years’ reports where it recorded DKK 888million and DKK 1.8 billion net losses respectively. Also, the sales shrunk by 30 percent in 2003 and 40 per cent in 2004.This phenomenon was linked to the loss of the confidence in the company’s core product the LEGO brick. The loss of confidence in the LEGO brick product was caused by business diversification conducted by the company with the aim of broadening its portfolio. Both the customers and the employees were confused by the new developments, in which the company’s new venturing in television, video games and clothing could not be linked with its core product LEGO brick which is identified as the Lego group core product. A quick decision was then made by the company in the year 2004 to reverse on the worrying financial status, the decision made was to offshore and outsource its main production to Flextronics a Singaporean electronics manufacturing services provider.
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Lego Group decision to offshore and outsourced 80 percent of its production was with the aim of taking advantage of cost cutting benefits associated with outsourcing. Flextronics considered as a right partner by Lego Group, was then licensed and quickly awarded a long term contract because of its professional and industry capabilities. The outsourced company capability was about its right capacity and resources in molding, assembly, packaging and distribution of other company products. In addition to outsourcing, the Lego group decided to close major part of production in high-cost countries. However, the outsourcing contract awarded to Flextronics was terminated after three years after it was signed. The reason for termination of the contract was announced in the official press by the global supply chain vice president Iqbal Padda. In the press release he explained that although the outsourcing was very valuable and it maintained the company’s high-quality product, it was accompanied by challenges which were expected by Lego Group. Moreover, with a joint agreement made between Lego Group and Flextronics, a conclusion was reached that it was viable for the Lego group to manage the global manufacturing themselves.
After the termination of the contract, the Lego group took over its production by taking over their factory in the Czech Republic in February 2008 and moldings plants in Hungary and Mexico. This was also to other measures employed by the company’s top management with the aim of returning the company to its previous financial position before the crisis. The results were Lego Group was the fifth largest toys company regarding sales by 2009.and the growth was also accompanied by the quick outsourcing lesson.
Alternative solution on return to profitability
With the outsourcing of the company major production failing, the alternative solutions which might have been applied by the Lego Group include; 1.The Lego Group should have increased its staff productivity; their productivity would have been increased by clearly explaining its divestment plans; 2.The Lego Group should have focused on an extensive marketing for its core product LEGO bricks to improve on its sales revenues; 3.Removal of the new unprofitable products and concentrate on the core business product.
The Lego Group should choose the second alternative solution. This is by the results posted in the year 2003 and 2004 where the sales reduced by 30 percent and 40 percent respectively. For the Lego group to turn around its fortunes, Revenue increment strategies should be employed by the Lego Group.
Revenue increment strategies (Weatherford, 2016) includes, improved customers care services through after sales services, improving the product promotion through increased advertisements and extensive usage of social media platforms, using innovative ways of improving the company core product LEGO bricks in addition motivation of the sales and marketing team who will re-advertise the Lego Group core product LEGO bricks with new adjustments. For the revenue strategy to be effective a plan needs to be set.
Revenue increment strategy
With the constant loss of sales revenue by the Lego Group, a target sale increment will first be set and communicated to the sales team. The sales team will be-be told on products to concentrate on which is LEGO bricks, the main company product. Moreover, to motivate the sales team, the commission will be awarded on above target sale. Also after sales, services will be awarded to the company customers, and any complaint raised on the company product by the customers will be immediately attended to by the new helpful customer care team.
Moreover, to reclaim the customer base affiliated with the company’s LEGO bricks product, Extensive re-advertisement would have been set out. The usage of social media and improvement of the company websites are among the advertisement method which will help on new and improved sales which were previously dwindling. Furthermore, product innovation team will come up with new product innovations to appeal more to the Lego Group customers whom the company depends on for improved sales revenues.
Recommendations and conclusion
Apart from choosing revenue increment strategy instead of outsourcing as a way of reversing the Lego Group low performance, the Lego Group should have chosen to educate its employees on its plan of divesting into computer games, clothes, and television. This is to prevent the Lego Group employees from misunderstanding the Group long-term goals and the benefits of its divestments.
The company’s decision to inform its employee about its product lines would have made the employees understand the company long term strategy and the employees would have embraced the new concept while maintaining their high performances on the quality of the Lego Group core product LEGO bricks.
Weatherford, L. (2016). Tests of revenue management performance under different demand correlation assumptions. . Journal of Revenue and Pricing Management, 15(5) , 399-416.