Identify a business that recently folded. What were the causes of the failure?
Lego is an example of a company which failure to assess their core competencies and concentrate on the core products resulted in substantial financial loss and put the firm to the edge of survival. In 2003, Lego sales dropped by 26% or $228 million (Aschcroft, 2014).
The US market, particularly, experienced a drop of 35%; Asian markets declined by 28%. In large part the fall was caused by the shortfalls in the sale of movie tie-in products. In the 2000s, the entire toy industry experienced big troubles. However, the experts admit that the reason of failure of the Lego Company derived from the lost focus (Ashcroft, 2014).
The company failed to develop a well-defined strategy, clearly articulate core competencies and set the focus on core products which should have provided it with a sustained competitive advantage. Worst of all Lego management appeared to be out of touch with their customers. Lack of communication between buyers and end-users, i.e. kids, on the one hand, and R&D teams, marketers, and executives, on the other, faced the company with a risk of breaking up due to debt default. Yet another reason of failure was rooted in logistics and relationships with retailers. Lego managers completely ignored the Stock Turn and Margin Approach (STAMP). Instead, retailers were overstocked with unsold products which offered diminished margins as a result of clearance sales.
According to Robertson and Breen (2014, p.63), the unsold inventory level at some outlets of giant retailers, like Target and Walmart, sky-rocketed by 40% in 2003. Sales decrease to a large extent was attributed to the failed projections of movie tie-in products’ sales, particularly the Star Wars and Harry Potter series, in 2003, a year when new movies were not released. At the same time, Lego’s own brand Bionicle appeared to be more demanded and even was included in the Top 10 most wanted presents for Christmas (Ashcroft, 2014), although the sales also declined by 20%. Inspired by the success of PlayStation, Xbox and the like, Lego management believed that the future would be digital and embarked on the collaboration with the Miramax film Company. Within their diversification strategy, Lego also embarked on developing lifestyle products (LEGO Kid’s wear), learning concepts (LEGO education), girl toys (LEGO dolls), publishing, and television (Ashcroft, 2014).
However, diversification away from the core business to adjacent markets requires a new set of skills and capabilities and distracts resources from the core activities (Zook & Allen, 2010). As a matter of fact, even Lego own retail stores and Legoland theme parks became a frustration to management. On the one hand, they were capital intensive and often failed to generate adequate returns on investments. On the other, Lego own retail units deteriorated revenues of the key retailers, like Walmart, Kmart, Target and Toys R US.
In summary, it is important to reiterate that the problems of Lego Company were attributed to the …