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In order to survive the largest internal financial crisis in its roughly 70 years of existence, management had, among many initiatives, decided to offshore and outsource a major chunk of its production to Flextronics. Only three years into a ten-year contract, the two companies decided to part ways. Quin and Pedersen discuss how LEGO was able to not only weather this crisis but come out stronger.
Consider reviewing Professor Pedersen's latest case:
TELENOR GROUP: DEVELOPING A NEW BUSINESS MODEL
Frank Elter, Marcus M. Larsen, Torben Pedersen
10/04/2019
Transcript
Hi, I'm Matt Quinn. Thanks for joining us for decision point. From Ivy Publishing at the Ivy Business School. The lego group is well known for capturing the imaginations of multiple generation. It's hard to imagine that in two thousand and four the company found itself in your bankruptcy and facing a general loss of confidence in his core product, the Lego break, with almost twice the number of suppliers to what Boeing use for ex planes. The company quickly adopted an outsourcing strategy to reduce complexity and cut cost. However, only three years later, production was brought back in house with some major lessons learn. The lego group and outsourcing journey, written by Marcus M Larson, Tarvin Peterson and Dmitri slepne off, follows legos miraculous rebound from its failure and challenges students to chart a future path. Today we speak with Torvin Peterson about the years long experience working with Lego and writing the case. Professor Peterson is a professor at Bocconey University with extensive published research on the interface between strategy and international management. Enjoy thank you again for joining us this morning. Let's dive right into the meat of the case. The case has three main sections and follows lego through a turbulent time in his strea. Kid. You describe from your perspective what's at stake in the case. So the case, of course, we followed the company here legal a period of, you can say, more than five years, and and of course it's a different phases in the sense that in the beginning, you can say the face here is that that it's really a burning platform the company is on. It's actually very close to bankruptcy and thing like that. So they desperately had to do something. They were losing money every day, a lot of money here. So so they desperately had to do something and they got a new young CEO coming in and one of the things was to actually outsource there all the operations so they could focus on all the things in their business. So they were. So that was the the first phase where they were desperate to do something, and then they teamed up will flextronics, a huge equipment manufacturer that, of course, it's doing production for many other companies. So that was a phase where they consolidated and they learned a lot about over rationally excellence and thing like that. But then later on that was actually some disagreement between the development of Lego and afflecks running. So the last phase they actually decide to go to to to split and go away. They agreed on both going away from the contract. So you can say you can say in the in the beginning they were forced to do it, but then they actually really managed to change the ship and get to get to earn money again, and then in the in the end they decided to take back what they had outsosd. So so you can say what is interesting here is also that it was to relatively large and experience companies that make a ten year contract. Was a ten year contract, but they actually agree both of them that after three years they should actually drop the contract and go back to where there were. So you can say in some sense it's you can discuss what it's a failure or what, because because the contract was not lasting as they planned. So that it is basically you can say, the three highlights or the three faces of the case here. And one of the things you've mentioned already is the length that this case covers, and you cite interviews with Lego management across two thousand and four and two thousand and eight. This is really interesting. How did the long term relationship develop between you, your coauthors and Lego? Was this planned or was this kind of a natural, organic evolution of a conversation, because that's kind of rare to have that kind of access over that amount of time. And I would say we actually have an ongoing relationship with will equal. Legal is one of the companies that we spect the academic world in the sense that they know they need some inputs from also from the academic world. So we have a we have had many, many research protching with him or with the years. I also have a PhD student today that is working on a project in legal. So so so you can say we have we have been in discussion with him some up and some of the managers of legal is giving talks in our educations and even presenting, sometimes this case, legal managers themselves, in our in our classes. So it's coming out of that and in that sense you can say it's more organically because it's it's an spinoff of the ongoing relationship we have with a company and it sounds like there's kind of a win win on both sides. Lego gets your expertise in your CO author's expertise and you have this access and ability to write a case that then they get to use as well. So that's that's really cool that you've been able to develop that. Let's dive back into the to the case a little bit. The case notes that two of legos competitors, has bro Mattel, really took different path, one with outsourcing off shore and the other with keeping its offshore production and kind of in house. You know, could you talk about Legos strategy and what they decided to do and the differences in the approaches that are really talked about in the case? Yeah, so, so you can say the key thing will legal is, but it was actually something they learned also a long this journey, was that that for them, flexibility is streme the important. So in all in all parts of the organization, it means also the production part, which is very much the focus of the case here. So so they need to be extremely flexible because you can say two thirds of their sales is in the fourth quarter of the year. We talk about Christmas sales, of course. So so so that is where we're parents buy legal boxes to to to their kids, which means that the data they can they can fix the production, the better they can for for see what will be a hit for Christmas, so to say, and thing like that. It so so therefore, all the whole way they have builded is to have as most flexibility as possible, and it also means in terms of location of their production facilities. So they have it in Mexico, which is, you can say, low cost but still close to us. They have it in the Tech Republic, which is low cost but still close to to to the markets in Germany and funds and things like that. So while the others they were, you can say they were more often placing big production in in China because it's cheaper. It's still cheaper there, but they and then they were shiving it from China to to their main markets. Today, of course, legal also have production in China, but it's only to serve the Chinese market. So to fade not it is not to ship it to other markets. And even you just mentioned China. There and the way that legos been able to pivot and find opportunities and and chase different opportunities. You know, is there a chance, you know, given so much as changing in the world, that he will give in the last sixty eight months, a lot more continues to change. You know, there any chance that you're going to be doing a follow up on this case with the challenges that we're seeing now and how legos managing to pivot and evolve now? What do you think they're I think I think, of course, this this was this whole whole outsourcing journey with flextronics was really an I open a far far for legal themselves. They they didn't know so much about o rational excellence, how to run the production there. Were much more focused on designing new legal boxes and they didn't they didn't know the cost of too much complexity and the need for standardization, they need for dormentation and thing like that. So all that they learned from this, and you can say they have since then they have continued. They really have gone much further than what we describe in the case and and you can say some of the things they do today is that they actually work on having a digital twin of everything they do, so they have a so nowadays they are getting closer and closer to have a digital copy of their physical production so they can do all kind of experiment mentation in the digital world and thing like that. Before they do with physically and think like that. And when you say will we get a follow up case, we might do that. That's actually one of the project we work will legal on today. So so, so, so it's my it's possible that we will. We can do a follow up case because they have moved a lot since then. Every so cool to see the the evolution and the things that they learned, you know, many years ago informing them today. That's so great to hear and again speaks to that relationship that you've built and the openness that they've got. I want to talk about the openness and their ability to share as an organization. You know, if it talked about some challenging things in the conversation that you've had and in the case, was it hard to convince them to speak about and be transparent about failures, or was this really part of their culture as an organization to be able to do that? You're right, and one of the interesting thing about this case is actually it's about a failure. Most all the cases is about successes and thing like that, because of course that's what companies like to talk about, how they like to promote themselves. I would say, of course, this company. I think they also respect the academic world, as I say. So they are they are open, but but there's also a limits to here. There were things we were not allowed to write here also when we were getting too close with him. But of course they had to accept this case and they have are fully accepted every word in this case. And but there was a few things we had to change. But it's basically also because we have this ongoing trustful relationship with them. I have to say, do you have any other advice for somebody new to case writing or maybe going through this where there there's a lot of back and forth with a company and a company's maybe not sure about releasing information? What advice do you have for an author or a writer to help smooth that process, to get the openness and get that final case that shows maybe some challenging topics in it? What do you think? Of course it's a part of it is to have this, you can say, trustful relationship with him. So so it's a it's hard to come in from we had and say now you have to mop and give tell us all about all your problems and and thing like that. So it's a it's a give and take relationship. And another another suggestion is you can say what. Companies Very often focus a lot on students. It's not necessarily us as academics. You can say is also awesome as a cademics, but but they actually with the case is much more interested in getting exposed to our students because they have to work out require our students and in in the future. So so you can say this about that, that getting that, that you get promoted and ex post to our students. And of course the students like to have a head, not a not a glory picture, but actually a real picture off of how life is and think like that. So so it's it's so taking a little bit, you can say, the students perspective also here, because they're were keen on having a good rotation among the students. Yeah, and I think, going back to your point, I think when a company is authentic and tells the truth, that's kind of endearing to a student or to a reader. They recognize that whether really being truthful here is not just a fleft piece which, as a case, never works out. People can can sense that and see that maybe there's more to this that's not being told. so the honesty and candor within the cases is important. The case has been life for a number of years now and you've taught it probably dozens and dozens of times. Have there been any surprises that you've come across when teaching it over the years? Any challenges, things that you know, perspectives that you never thought of or approaches that you haven't thought of? Talk to us a little bit about that. I think. I think actually my but I mostly have been surprised about I'm t being teaching this case in many different countries all over the world. It's actually how how students get engaged in it because of the product of legal everybody can relate to these legal breaks. Everybody has a has a childhood or something like that where they know so, so it's more so it's not more students engagement because they they know the product, they have a sympathy for the product and think like that. So so it's more that that have have surprised me. I'm not sure that's so much of the case, I think. I think the case is actually quite straightforward and most students actually gave it get the main point of the case or this that it. That what you can say. The big question when I teach of courses. Why do they actually decide to go to split and go away? And and most students actually get that point when they read the case. And you can say debar and I'm more superficial level. So so. So it's not that I'm I'm being so much surprised about different bake two, but it's more the engagement discussing the case. And I'm a point that we should follow up on is that this is a brand that is truly global. So many of the students across generations have grown up with this brand, played with the Trinoma, myself growing up with them, and my daughter, who's ten now, as the new evolved the Lego sets and how they work with that. It must be really neat to see the excitement of students being able to, you know, really recall the brand and it's easily accessible. Like you said, was that part of your thinking when you decide to write the case, that this was a brand that everybody knew? was that part of the Calculus and writing the case? Yeah, I would say so. I've been writing a number of cases with different quarters and clearly, clearly those cases that are doing best and both in my own teaching and even selling best and thing like that. Those are there more wellknown brands like a legal, Calsberg, equal shoes and thin like that. So clearly this was also part of this reality. Yep, and we're seeing that, you know, recognition of the brand and of the product that that brand produces. So it's not at all surprising to hear your comments about that. I want to take the time to thank you for joining us and talking about the experience of writing, of teaching. The case of your continued work with the company is such a great example for others to try to follow us, to not just develop a onetime relationship but, you know, see them through what's now, almost, Gosh, fifteen years for for you working with with Lego. Do you have any other, you know, parting thoughts for authors, any hot tips about writing and and how to approach case writing? The way I usually stought a case is trying to to understand what is the dilemma here. So for me it's very much about finding a dilemma you can build up in class. And here, of course, the dilemma is why do they actually decide in the end to a contract that seems successful? They are praising in the beginning. Why do they actually go go apart after some time here. So so for me a case always starts will on the trying to understand what is it dilemma. You can and then you build a of course a lot of insides around that. So so so you can you can maybe split the group in class by saying, okay, you are, you are, are go for the head and you are go for the head. And in this case there's one group that is legal, that's one group that's flixtronics here and and think like that. So so the dilemma where you have to put yourself in the minds of the manager. This is the key for me for riding a case. And then need to be a very good to Lima in order to be able to write a good case. Yeah, different perspectives, different opportunities, different frames of you that a student can attack or different groups can attack. This have been a great conversation. I thank you for again for joining us and I look forward to seeing your next case about Lego and seeing that go back and tie to the learnings from the first one. Thank you again. Yeah, thanks a lot. If you enjoyed today's episode, subscribe to Decision Point on spotify or wherever you listen. Be sure to check out the show notes for links to cases, resources and more. have any feedback, send us an email at cases at IV DOC A.