S w
8B10M94
Teaching Note
LEGO GROUP: AN OUTSOURCING JOURNEY
PhD Fellow Marcus Møller Larsen, Professor Torben Pedersen and Research Assistant Søren Frølunde wrote this teaching note as
an aid to instructors in the classroom use of the case Lego Group: An Outsourcing Journey, No. 9B10M094. This teaching note
should not be used in any way that would prejudice the future use of the case.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written
permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies
or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University
of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
CASE SYNOPSIS
The LEGO Group (LEGO), a world-famous brand voted “Toy of the Century” by both Fortune Magazine
and the British Association of Toy Retailers in 2000, was, in 2003 and 2004, experiencing serious financial
and strategic difficulties. This led to the appointment of Jørgen Vig Knudstorp as the new Group chief
while new factories were opened in Eastern Europe and Mexico. These decisions were taken in parallel
outsource production. This part of the case proposes that, despite the outsourcing resembling a failure for
LEGO, it can also be seen as a beneficial learning experience. The entire process made LEGO understand
its own company, structures and processes considerably better and consequently what it takes to create a
competitive and profitable business platform. Particularly, the case illustrates how LEGO sought after and
Page 2 8B10M94
The case examines the organizational, contractual, managerial and learning challenges of outsourcing a
TEACHING OBJECTIVES AT A GLANCE
While the case is broad in its scope, it also goes into detail on a range of issues. The main teaching
Organizational Learning: One of the central themes of the case is the learning process that LEGO goes
through from the initial company analysis in 2004 to the termination of its relationship with
Flextronics in 2008 and onwards. The learning experience can be split up into two categories —
“learning by success” and “learning by failure.” A discussion of the first category could highlight how
search for superior methods and practices.
Organizational Design: The case can be used to facilitate a discussion of system integration, interface
management, and the standardization and modularization of production processes in international
companies. Relevant discussion topics here include the pros and cons of different types of
Corporate Strategy: The three-part journey for LEGO provides good grounds for discussing the pros
and cons of captive offshoring versus offshore outsourcing. Possible topics here include the rationale
behind LEGO’s decision in relation to focusing on a single large partner, where to locate production
and what parts of the value chain to outsource. A similar discussion can be had in relation to captive
choice, asset-specific investment and moral hazard.
Supply Chain Management: To better manage the relationship with Flextronics, LEGO created a
deliberate sales and operations planning (S&OP) process. This process was set up to handle the
difficulties of coordinating market demand forecasting, supply and the production facilities’ roles and
for the primary production facilities.
Page 3 8B10M94
other topics.
SUGGESTED READINGS
International Corporate Strategy
P. Ghemawat, “Distance Still Matters — The Hard Reality of Global Expansion,” Harvard Business
Review, 7:8, 2001, pp. 137-147.
M.E. Porter, “How Competitive Forces Shape Strategy,” Harvard Business Review, 57:2, 1979, pp. 137-
145.
M. E. Porter, “Competition in Global Industries: A Conceptual Framework,” Competition in Global
Industries, edited by Michael Porter, Harvard Business School Press, Boston, MA, 1986, pp. 15-60.
Organizational Learning and Design
P.M. Madsen and V. Desai, “Failing to learn? The effects of failure and success on organizational
learning in the global orbital launch vehicle industry,” Academy of Management Journal, 53:3, 2010,
pp. 451-476.
C. Argyris and D. Schön, Organizational Learning: A Theory of Action Perspective, Addison-Wesley,
Reading, Massachusetts, 1978.
Theory of the Firm
Oliver Williamson, “Comparative Economic Organization: the Analysis of Discrete Structural
Alternatives,” Administrative Science Quarterly, 36, 1991, pp. 269-296.
J.B. Quinn and F.G. Hilmer, “Strategic Outsourcing,” Sloan Management Review, Summer 1994, pp. 43-
55.
TEACHING GUIDELINE
The fact that LEGO is a highly known global brand makes this case very suitable for classroom discussion.
This is further strengthened because the case includes a major OEM (Flextronics), the story takes places on
several continents, and it deals with a crisis response.
Page 4 8B10M94
A good starting point for a discussion is the pre-outsourcing phase, and looking at why LEGO got into
difficulties and its rationales for considering outsourcing or offshoring as a solution. The next step could
A discussion can also begin with organizational learning. An interesting discussion is how successes and
failures affect organizational learning. This discussion relates to topics such as intrapreneurship and how
The complexity as well as the density of the case forces students to sort through a large amount of data to
In general, it is recommended that undergraduate students be asked closed-ended questions of a simpler
For graduate students, an open-ended approach is more recommended. Graduate students should be asked
ASSIGNMENT QUESTIONS
1. What were LEGO’s main expectations and learnings from the relationship with Flextronics?
2. What are the key challenges in maintaining a relationship like the one between LEGO and Flextronics?
3. How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility and
coordination?
4. Discuss the key considerations when outsourcing or offshoring production.
5. Describe the competitive environment of the industry and how it relates to LEGO’s strategic choices.
CASE ANALYSIS
1. What were LEGO’s main expectations and learnings from the relationship with Flextronics?
A natural starting point for understanding “what” LEGO learned from its relationship with Flextronics is to
look at what the company expected to learn. LEGO’s expectations for the sourcing collaboration with
Page 5 8B10M94
experiences” as well as relating to the discussions of single-loop versus double-loop learning.
Many of the expectations were fulfilled through the relationship between LEGO and Flextronics, as it
provided the impetus for closing down or moving several factories and thus reducing the production
The failure to obtain the expected economic results was to a large degree caused by the fact that LEGO
was encountering hidden costs of offshore outsourcing, relating to the new and unexpected cost of
maintaining a sourcing relationship.1 Arguably, these hidden costs were mainly caused by the vast
relationship end.
Through the establishment of the relationship, LEGO learned much about outsourcing, codification and
standardization of knowledge and processes. But from the failure experiences in the relationship, LEGO
learned perhaps even more valuable lessons, which sparked motivation to refine its knowledge and
such cases, learning not only drives improvements in a company, but also often fosters fundamental
questioning of values and assumptions, leading to significant changes. An interesting point for further
classroom discussion is, therefore, if failure experiences are necessary for dramatic and fundamental
organizational change to take place.
1 R. Aron and J.V. Singh, “Getting offshoring right,” Harvard Business Review, 75:5, 2005, pp. 84-93.
2 P.M. Madsen and V. Desai, “Failing to learn? The effects of failure and success on organizational learning in the global
orbital launch vehicle industry,” Academy of Management Journal, 53:3, 2010, pp. 451-476.
Page 6 8B10M94
2. What are the key challenges in maintaining a relationship like the one between LEGO and
Flextronics?
This question can be answered with a variety of different frameworks depending on the level of difficulty
For a more sophisticated approach, a framework outlining the different hidden costs and difficulties of
outsourcing or offshoring can be used (see Exhibit TN-3). In the exhibit, the four typical costs when
outsourcing production identified by Dibbern et al. (2008)3 can be seen. The costs identified in this article
serve as a good starting point to find out where key challenges might come from. The costs include
coordinating and integrating the vendor and the client’s resources to achieve the specified objectives. The
two parties encountered much coordination costs, as they realized that the costs of coordination were
higher than initially expected due to the difference in business models. The control costs relating to
controlling of performance and coherency of the outsourced work did, on the other hand, not seem to be a
S&OP process.
Finally, a more theoretical approach to the discussion can be to use either a principal-agent framework, a
transaction cost economics (TCE) framework or a property rights perspective to discuss the different
challenges related to an outsourcing relationship. In a principal-agent framework, relevant discussions
incentives. Eventually, a TCE discussion could be based on, for example, Williamson’s discrete structural
alternatives; i.e., which governance structure is most efficient for LEGO.4
India,” MIS Quarterly, 32:2, 2008, pp. 332-336.
4 Oliver Williamson, “Comparative Economic Organization: the Analysis of Discrete Structural Alternatives,” Administrative
Science Quarterly, 36, 1991, pp. 269-296.
Page 7 8B10M94
3. How can LEGO handle the supply chain complexity to improve knowledge sharing, flexibility
and coordination?
One of the main reasons that LEGO chose to outsource such a large part of its production to Flextronics
control over its production and demand.
One of the first initiatives taken to reduce complexity in LEGO was a drastic reduction in its component
portfolio with a planned reduction from 12,000 bricks in 2004 to 5,500 bricks in 2011, and a requirement
that every new product should contain at least 70 per cent “evergreen” bricks. Another initiative that was
other big toy producers, such as Mattel and Hasbro, who both have significant production in China. Mattel
has mostly its own factories while Hasbro has outsourced a big chunk.
In the effort to reduce complexity to increase flexibility, LEGO also started a thorough standardization and
continuous knowledge-sharing and “translation” of tacit knowledge through documentation and
codification.
One of the most remarkable initiatives that LEGO undertook to better integrate the company activities was
periods or products for different periods as well as by good client relationship management. In the end,
LEGO increased the flexibility of the production and supply chain, which was seen as essential in creating
a sound business platform.
4. Discuss the key considerations when outsourcing or offshoring production.
Page 8 8B10M94
A good framework for discussing the case with a resource-based perspective is the one proposed by Quinn
and Hilmer (1994). They discuss both what constitutes a core competency, which activities a company
final point they make is the trade-off between flexibility and control. This is an interesting point in relation
to the LEGO case: Should outsourcing primarily reduce costs or should it first and foremost increase
outsourced. This point is also interesting in relation to LEGO given the present production setup, with the
majority being undertaken in-house.
5. Describe the competitive environment of the industry and how it relates to LEGO’s strategic
choices.
A question like this one will need either the students or the professor to provide extra material as the case
A good way to approach this question could be first to conduct an industry analysis using, for example,
either a SWOT or a five forces framework. Such an analysis can be combined with a country analysis
framework such as Porter’s diamond model (1990) or Ghemawat’s CAGE framework (2001). Both of
these frameworks can provide good insights into some of the most important factors when choosing one’s
Instead of using a framework to analyze the industry, a more open-ended discussion is also highly relevant.
One example of this is a discussion on why LEGO has chosen a “locally” based production set-up as
opposed to the vast majority of companies in the industry who either produce on their own in China or
outsource their production to China. In the case, LEGO’s need to be responsive is the main argument
However, the combination of the PEST and the five forces does help in structuring the discussion and
assisting students in thinking thoroughly about the different dimensions of competition and profitability in
the toy industry. As can be seen from Exhibit TN-5, different factors impact the industry, leading to a
medium (but growing) competitive rivalry. One of the main contributors to this is the high threat of