How Lego Switched from being on the Brink of Bankruptcy to being the World’s Most Powerful Brand told in Business Model CanvasEstimated Reading Time: just 4 min

The Business Model Canvas (BMC) is the structure of a business plan in one single page.

The Canvas is popular with entrepreneurs and intrapreneurs for business model innovation.

Fundamentally it delivers three things:

Focus: since it is more concise than a traditional business plan
Flexibility: sitting on a single page, it is a lot easier to tweak than a business plan
Transparency: it makes a much easier to understand a business model

This business model design template is based on:

• Customer Segments
• Value Propositions
• Channels
• Customer Relationships
• Key Activities
• Key Resources
• Key Partners
• Revenue Streams
• Cost Structure
• Social & Environmental
• Benefits/Costs

An interesting case study of a successful Business Model Canvas application is The Lego Group.

The Lego Group is a company that went in the spotlight for manufacturing and selling a line of plastic construction toys.

The company is headquartered in Billund, Denmark where its founder, Ole Kirk Christiansen, started crafting wooden toys in 1932. The name Lego derives from Danish “leg godt”, which means “play well”.

The first evolution of the business happened in 1947 when a production of plastic toys was started leading in 1949 to the first version of the now familiar interlocking bricks, called “Automatic Binding Bricks”. The technology used was plastic injection molding while the material utilized at this point was cellulose acetate.

Despite the general feeling that wooden toys were better than plastic ones, Lego succeeded in innovating the market because of the high-quality standards of its products.

The Automatic Binding Bricks were still facing serious limitations in terms of locking ability and versatility.

Ole Kirk’s son, Godtfred Kirk Christiansen, who succeeded to his father in 1954 decided he wanted to overcome these limitations for the Bricks to have a definitive break-through on the market.

As a result of this, in 1958, the modern bricks design was patented, and the material changed to ABS polymer (Acrylonitrile Butadiene Styrene).

In 1978, Lego produced the first mini-figures that are one of the most famous toy characters in the world.

At this point, the business model of Lego Group looked as it follows:

1. Customer Segments: the company targeted a Mass Market made of kids/teenagers and the Segmentation was based on Demographic Factors regardless any other psychographic attribute
2. Value Propositions: Lego aimed to deliver

• Systems for Creative Play (that allowed to build infinite items with a finite set of bricks)
• High-Quality Toys (following the motto “The Best is Never Too Good”)

3. Channels: the company reached its customers using a strategy based on Partner Channels (wholesalers and distributors)

4. Customer Relationships: Lego had really few relationships with the final customers while it was in touch with wholesalers and distributors.
This led to inefficiencies along the company due to:

• White Noise in receiving info about final customers’ needs and expectations
• Bullwhip Effect along the Supply Chain

5. Key Activities: the core activities for Lego were:

• Designing Versatile Solutions that could be combined in order to generate an infinite set of items
• Optimizing Operations in order to lower the costs and improving the quality of products

6. Key Resources: the key assets for Lego were:

• Patents and Designs
• Manufacturing Processes

7. Key Partners: Lego’s business model worked thanks the relationship the company had with:

• Suppliers
• Wholesalers and Distributors

8. Revenue Streams: revenues were mainly generated by exploiting the Patents and Selling Lego bricks

9. Cost Structure: the main expenses for Lego were due to:

• Manufacturing
• Distribution
• Salaries
• Patents/Legal Matters

10. Social & Environmental Benefits/Costs: ABS material was not recyclable, and it is arguable if it impacted the environment more than wood. Nowadays, recycling ABS is getting more frequent so that this Environmental Cost could be less impacting

Despite Lego looked unstoppable in the early 80s, the strong competition generated by an increasing number of players on the Toys Market and the introduction of videogames put the company in danger.

In fact, in 2004 The Lego Group was on the brink of bankruptcy as they appointed Jorgen Vig Knudstorp as CEO.

The causes that lead to that situation were a struggle to:

• Give consumers what they wanted
• Effectively manage costs and margins

The first move made by the new CEO was to cut down the number of parts managed from over 12,000 to 6,000. This reduced complexity and freed Working Capital.

The second move was to link Design to Manufacturing Costs so that the company gained control over margins and profitability since the New Product Introduction phase.

The third move was to offload all the products that were unprofitable in terms of market positioning or revenues.
This step highlighted that Lego was able to survive only because of the income generated by Bionicle and the Star Wars Series.

Lego launched the first Star Wars kits in 1999 and this represented the company’s first foray into licensed series.

The success of Star Wars kits led to an important takeaway, in fact, Customer Segments were split into:

• Kids/Teenagers
• Collectors (both Lego and license kits ones)

This switched the company target from a Mass undetermined Market to a Niche Market made of passionate customers looking for specific products.

This led Lego to learn how to get in touch with customers in order to understand what they wanted.

These initiatives brought new energies to Lego that is now one of the biggest players in the world.

In fact, in 2015, the company:

• Reached 600 billion Lego parts produced
• Replaced Ferrari as World’s Most Powerful Brand

Below you can find the new business model synthesized in a BMC.