The Lego group, is a toy manufacturer based in Denmark and
is perhaps best know for
the Lego brick, which has been voted the toy of the century on several occasions.
Lego is today an extremely healthy company.
Over the last couple of years the company has reported record revenue and
Lego's story has not always been that bright.
In 2003 and 2004, Lego experienced serious financial and strategic difficulties.
The financial crisis, which could be traced back to the end of the 1990s in
the history of Lego had accumulated net losses worth 880 million
Danish Crowners, and 1.8 Billion Danish Crowners in 2003 and four respectively.
Sales have fallen by 30% in 2013, and 4% in 2014.
Now these results were the most disappointing results in the history of
the entire company.
To deal with the situation back then and
to avoid bankruptcy, a number of measures were taken.
Among other things, Lego appointed a new group Chief Executive Officer,
a CEO, Jørgen Vig Knudstorp, whose basic task was to save the company.
And then one of the things he did was to initiate a major analysis of the entire
company, it's business model, and the assumptions underlying the business model.
And one of the key findings of this analysis was that the highly complex and
inflexible global supply chain obscured the company's competitiveness.
This finding resulted in the process of restructuring the business model and
particularly the supply chain.
The time latest production facilities in Denmark,
Switzerland, the United States, and South Korea, were reduced in size or
closed down while new factories were opened up in Eastern Europe and in Mexico.
These decisions were taken parallel with the choice of outsourcing
up to 80% of the production to gain economies of scale,
to reduce production complexity, and to increase flexibility in the supply chain.
The sub-supplier given the majority of the production was a company called
Flextronics which is a huge Asian original equipment manufacturer.
However, as history told us, the collaboration did not last for long.
Despite Lego's goal of optimizing its global value chain,
the outsourcing collaboration was cancelled after merely three years.
It's became evident the result attempting to manage and
overcome the complexities of the production network by outsourcing it to
an external provider was actually more complex global manufacturing footprint.
In particular, the collaboration with Flextronic presented the Lego
group with some rather daunting and unexpected challenges.
Considering the extreme pace of the transition,
it eventually turned out problematic for Lego to coordinate and
control the increasingly global and complex network of
the production facilities, as well as to ensure a reliable and
seamless transfer of production knowledge between the two companies.
As a result, in 2008 the LEGO group announced that it would
phase out the corporation that Flextronics all completely, and
rather start the process of sourcing back the production to an in-house set up.
How does this all relate to this module on strategic decision making?
what we want to know is why the Lego executives at the time weren't able to
foresee the challenges of outsourcing before joining teams with Flextronics.
Clearly, Lego lost a lot of money on the allegedly failed outsourcing journey and
would presumably have been much better off on their own.
Therefore, over the next lectures, we will investigate the process of strategic
decision making, and explore how this matter formed for performance.
This action might not be possible to undo. Are you sure you want to continue?