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Lego Case Analysis Argumentative Essay Sample

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Lego Case Analysis Argumentative Essay Sample

The LEGO Group’s vision was to “inspire children to explore and challenge their own creative potential”. Its motto, “Only the Best is Good Enough,” had stuck with company since 1932 when Ole Kirk Christiansen, a Danish carpenter, established the company in the small town of Billund in Jutland, Denmark, to manufacture his wooden toy designs. As the company itself stipulated it: “It is LEGO philosophy that “good play” enriches a child’s life — and its subsequent adulthood. With this in mind, the LEGO Group has developed and marketed a wide range of products, all founded on the same basic philosophy of learning and developing — through play.”3 With this simple idea, the company had through its history grown into becoming a major multinational corporation, and was by 2009 the world’s fifth largest manufacturer of toys in terms of sale.

The LEGO group began in 1932 by Ole Kirk Christiansen, a carpenter from Billund. LEGO is from the Danish phrase leg good, which means play well. Since thousand 1960, the LEGO has release thousand of set variety of themes. An Adventure journey through five years from 2004 to 2009 has taught LEGO Group the fifth largest toys company who has signed contract with Flextronics. In 2004, radical changes took place within LEGO, organization as consequence of its internal crisis that drew the company near bankruptcy. One of the causes for dropping the revenue is about loosing of confidence of its core product, LEGO bricks.

Furthermore, the diversification had resulted in vast complexity and inefficiency which confuse the customer and employee. The LEGO group had at the time roughly 11,000 supplier, a number that almost twice compare with Boeing used for its plane, that number has also the contributor of the dropping of LEGO revenue. In October 2004, Jorgen Vig Knudstorp was appointed as Kristiansen’s successor. The Jorgen was only the second person outside the founding family who held the position of CEO. He defined and implemented the three core principles :

1. Be the best creating value for its customer and sales channel
2. Refocus on value we offer to our customer
3. Increase an operational excellence

Issues/problem identification

The issues of LEGO at 2004 was the unreliable its supply chain which cannot compete with the nature of the LEGO business. Due to many products/SKU, the supply chain cost was hit significantly, how to ensure the right component was in stock, furthermore, due to the level of distribution channel, many small distributors which create a huge of complexity and the fluctuate demand that cause very terrible effect on the supply chain. Many products came with the high cost because of its mold.

By having of outsourcing option can reduce the cost. Related to the distribution problem, the new policy distinguished explicitly between approach of retailer helped the company focus on large chain. After deciding the Flextronic as outsource company with had the 80/20 composition (outsourcing/inhouse). However after 3 years, unpredicted demand plus minus 30% and 60% of LEGO production was made in the second half years, which caused the relation between LEGO and Flextronic broke. Flextronic just focused on the cut cost and reduce the complexity, not focusing on LEGO value. Related theory/frame work/models

COMPETITIVE FORCES AND FIRM STRATEGY: THE FIVE FORCES MODEL
Five forces model A framework proposed by Michael Porter that identifies five forces that determine the profit potential of an industry and shape a firm’s competitive strategy.
1. Threat of entry
2. Power of suppliers
3. Power of buyers
4. Threat of substitutes
5. Rivalry among existing competitors

Threat of Entry
Entry barriers are obstacles that determine how easily a firm can enter an industry. High entry barriers can correspond to high industry profitability, assuming there is no excess capacity in the industry. The Power of Suppliers

The bargaining power of suppliers captures pressures that industry suppliers can exert on an industry’s, and therefore a company’s, profitability. Inputs into the production process include raw materials and components, labor (may be individuals or labor unions, when the industry faces collective bargaining), and services. Power of Buyers

The bargaining power of buyers concerns the pressure buyers can put on the margins of producers in the industry, by demanding a lower price or higher product quality. When buyers successfully obtain price discounts, it reduces a firm’s top line (revenue). When buyers demand higher quality and more service, it generally raises production costs. Strong buyers can therefore reduce industry profitability and with it, a firm’s profitability. Threat of Substitutes

The threat of substitutes is the idea that products or services available from outside the given industry will come close to meeting the needs of current customers. The existence of substitutes that have attractive price and performance characteristics results in low switching costs, increasing the strength of this threat. Rivalry among Existing Competitors

Rivalry among existing competitors describes the intensity with which companies in an industry jockey for market share and profitability. It can range from genteel to cut-throat. THE VALUE CHAIN AND ACTIVITY SYSTEMS

The value chain describes the internal activities a firm engages in when transforming inputs into outputs.23 Each activity the firm performs along the chain adds incremental value—raw materials and other inputs are transformed into components that are finally assembled into finished products or services for the end consumer. The value chain concept can be applied to basically any firm, from those in old-line manufacturing industries to those in high-tech ones or even service firms. Primary activities Firm activities that add value directly by transforming inputs into outputs as the firm moves a product or service horizontally along the internal value chain. Support activities Firm activities that add value indirectly, but are necessary to sustain primary activities.

The value chain perspective helps managers to see how competitive advantage flows from the firm’s system of activities. In the value chain perspective, the distinct activities a firm engages in are therefore the basic units of competitive advantage. It is important to note, however, that competitive advantage at the firm level is the outcome of the interplay among all of the firm’s activities, not just a selected few. To create competitive advantage, a firm must be operationally efficient and also able to leverage its unique system of activities. Michael Porter emphasizes that the essence of strategy is to choose what activities to engage in and, more importantly, what not to do. Case analysis and solution

Based on Porter 5 Forces, there were no significant of the external force which impact the LEGO business. The new threat, Power of the buyer, substitute product, bargaining power of supplier, and rival among competitor have no significant impact for the business. The value chain perspective may describe better for the condition of LEGO. The Value chain

Problem in Assembling and Molding, The increasing of variety of SKU (color, shapes) of LEGO element creates higher complexity and impact in some chain in the supply chain. Because of its complexity, the next challenge was how to ensure the component was in stock when its needed. The high component made a higher mold needed which caused higher cost. The seasonal demand fluctuation makes the inventory became worst.

Solution :
1. Limit growth of number of SKU (SKU rationalization)
2. Outsourced product to Czech Republic and Hungaria
3. US capacity was shifted to Mexico
4. Outsource product capacity to subcontractor like Sonoco, Greiner, Weldenhammer, 2B Pack and Flexytronics.
5. Create Just in Time methodology
6. Create freezing period 1-2 weeks for leveling the production The second problem was in the distribution center, since LEGO focus in all the level costumer, the flexibility towards all retailer made it impossible to manage supply chain. Furthermore with decentralization distribution center made the alignment between the supply chain were more hard to handle. Solution :

1. Lego should focus on the large retailer for more focus and simple in distribution.

a. The 55 European DC facilities were centralized in Jirny, Czech and the operation was outsourced to DHL
b. The 55 logistic carrier were trimmed to 11 carrier
c. The NA DC were centralized at Alliance, Texas and the operation were outsourced.

2. Reduce the SC complexity with centralized DC
The last problem was in the outsourcing (with Flextronics). The process was very fast and rapid, thus made the knowledge transfer was very bad. Furthermore, the value of LEGO were not align with the value of Flextronics. Solution :

1. Change management need to be more robust especially in the knowledge transfer
2. Value alignment takes a significant effect to the business operation Conclusion and recommendation

1. The challenge of doing the business may coming from the internal organization, not always coming from the external, alignment the internal organization would be more effective tackle the LEGO problem.
2. Creating complexity (high SKU) need to be supported from the supply chain side. SKU rationalization may be the solution to lowering the complexity in the operation.
3. More complex the organization (Supply Chain) creates more risks especially in optimizing inventory, cost, etc.
4. The change management takes the significant role in the transition of the business model. Lesson learned

1. Outsourcing may not be the best alternative to cut cost.
2. The seasonal of demand cannot be control, the organization must adapt with the pattern of the demand
3. In the outsourcing business strategy, knowledge creation and value alignment are the most important thing except the cost reduction.
4. When choosing the SKU, the marketing and sales team, should align with the supply chain.

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