There's a reason we're the Global Number 1 provider of part-time CFOs

Call us on (800) 919-4022

25038413_xxl

A True Toy Story: LEGO’s Incredible Turnaround Tale

The story of how LEGO, the family-owned toy company went from teetering on the brink of disaster and hemorrhaging cash to delivering the highest revenues in its entire history and being voted the 2017 Most Powerful Brand in the World makes for a truly inspirational tale…

Fourteen years ago, LEGO’s Head of Strategic Development, Jørgen Vig Knudstorp, delivered the kind of assessment that most managers would gladly superglue their own ears shut to avoid hearing.

“We are on a burning platform, losing money with negative cash flow and a real risk of debt default which could lead to a break-up of the company,” warned Knudstorp at that meeting.

He’d discovered during six months of examining the company that there was a lack of profitable innovation, according to David C. Robertson, author of ‘Brick by Brick: How LEGO Rewrote The Rules Of Innovation And Conquered The Global Toy Industry’.

“LEGO had plumped up its top line, but its bottom line had grown anorexic. All the creativity of the previous few years had generated a wealth of new products, but only a few were actually making money,” wrote Robertson. “To make matters worse, the LEGO Group’s management organization and systems, shaped by decades of success, were poorly equipped to handle a downturn.”

The company’s management team—twelve senior vice presidents who oversaw six market regions as well as such traditional functions as the direct-to-consumer business and the global supply chain—didn’t collaborate but instead operated in their own silos.

The result was that the LEGO Group was expected to suffer a thirty percent fall in sales with $250 million in operating costs. It had a negative cash flow of more than $160 million.

By the end of the year, it was likely to default on its outstanding debt of nearly $800 million. Its net losses were likely to double the following year.

Knudstorp’s stark assessment should have come as no surprise. Something was going badly wrong at LEGO HQ Denmark: in the years from 1932 through to 1998, the company had never made a loss but from then on, the losses had increased year by year. First there had been a little loss in 1998 but by 2003—the year of Knudstorp’s no-holds barred assessment—that had grown to something deeply worrying.

Much worse results followed a year later when the company recorded its biggest ever loss of about £217 million. By then, Knudstorp had been appointed CEO.

“In 2003, we pretty much lost thirty percent of our revenue in one year,” he told Diana Milne in ‘Business Management Magazine’.

In 2004, the company had a further ten percent fall in revenue. “So, one year into the job, the company had lost forty percent of its sales. We were producing record losses and cash flows were negative. My job was how to stop the bleeding.

“We had to stabilize sales and cut costs dramatically to deal with the new reality of selling forty percent less than we had done two years earlier. We had too much capacity, too much stock. It was sitting in the wrong countries. The retailers were very unhappy.”

Knudstorp, a former McKinsey analyst, told James Delingpole of the ‘Daily Mail’, “We had a dress rehearsal of the world financial crisis: a strong decline in sales and a massive increase in our indebtedness.”

The losses were partly a result of the company’s attempt to diversify in the late 1990s, in the belief its brightly coloured building bricks were losing appeal and were under threat from computer games and the internet.

It was coming under pressure from other toy manufacturers since the last of its plastic toy brick design patents had run out in 1988 and the monopoly it had enjoyed for so long in the plastic toy brick market had begun to erode.

LEGO’s diversification saw it expand the number of theme parks it owned in a bid to help increase visibility of the LEGO brand across key markets. This was despite it having little hospitality experience. Unfortunately, these capital-intensive developments didn’t provide anywhere near the expected returns.

And the company had dramatically expanded the number of products in its portfolio, according to the ‘Brick By Brick’ author. In the years 1994 through to 1998, it had tripled the number of new toys it produced.

“In theory that was a good thing: experimentation is the prelude to real progress,” wrote Robertson. … “Problem was, the LEGO Group’s once-famous discipline eroded as quickly as its products proliferated.

“Production costs soared but sales plateaued, increasing by a measly five percent over four years,” Robertson said.

The company had little idea which products were making money and which were failing to produce an adequate return on the sometimes-heavy tooling investment, according to a case study from John Ashcroft and Company.

LEGO had even created its own lifestyle clothing range and brand shops and launched its own TV series, DVDs and video games.

So, by the time Knudstorp delivered his assessment, the company was in serious trouble.

The Turnaround Begins…

Which is why with the help of Finance Director, Jesper Oveson (former Chief Financial Officer of one of the largest banks in Scandinavia, the Danske Bank), Knudstorp began to make sweeping changes.

Oveson discovered there was an inadequate degree of financial analysis within the company. While there was a profit and loss account by country, there wasn’t product analysis or line profitability, according to John Ashcroft and Company. In other words, the company didn’t know where they made or lost money. Likewise, the theme parks were a massive cash drain but no one knew why.

The two men decided on a short-term life-saving action plan rather than a long-term strategy for LEGO, which would involve managing the business for cash rather than sales growth. Key moves included:

  • Setting financial targets. Ovesen introduced a near-term, measurable goal of 13.5% return on sales benchmark and established a financial tracking system—the Consumer Product Profitability system. It measured the return on sales of individual products and markets so the company could track where it was making and losing money. Every existing or proposed product had to demonstrate it could meet or surpass that benchmark.
  • Cost-cutting (including cutting 1,000 jobs)
  • Improving processes (many processes were outsourced which meant employee numbers could be cut by another 3,500)
  • Managing cash flow
  • Introducing performance-related pay
  • Reducing the product-to-market time.
  • Selling the theme parks and slowing retail expansion.
  • Cutting the number of components from almost 7,000 down to about 3,000.

The result of these and other changes was that LEGO recovered and went on to become the most profitable and fastest-growing toy company in the world. During the worst of the recession in the years 2007 through to 2011, for example, LEGO’s pre-tax profits quadrupled. Its profits grew faster than Apple’s in the years 2008 through to 2010.

LEGO the Super-Brand

LEGO’s success has continued. Earlier this year, LEGO (now being run by Bali Padda, as Knudstorp has moved into a role where he can expand the brand globally) announced its highest ever revenue in the company’s 85-year history.

And it overtook Ferrari and Apple to be voted the world’s most powerful brand. Each year, Brand Finance, a leading brand valuation and strategy consultancy, puts thousands of the top brands around the globe to the test to find the most powerful and most valuable of them all. This year, LEGO won.

“LEGO is the world’s most powerful brand,” it announced. “It scores highly on a wide variety of measures on Brand Finance’s Brand Strength Index such as familiarity, loyalty, staff satisfaction and corporate reputation.”

Its appeal to children and adults in this tech-centered world also garnered praise from Brand Finance.

It continued, “The LEGO movie perfectly captured this cross-generational appeal. It was a critical and commercial success, taking nearly $500 million since its release a year ago. It has helped propel LEGO from a well-loved, strong brand to the worlds most powerful.”

Which goes to show that even when disaster seems certain, it is possible to revive an ailing company. Of course, it helps to have a top-level financial advisor working with you to ensure the changes you’re making are the right ones.

What To Do If Your Company Is Suffering A Cash Flow Crisis

If your company is in dire straits, take action now—don’t imagine you can wish the crisis away or continue to do whatever you’ve been doing in the hope things will get better. They won’t.

Until you identify and fix your cash flow problems then put systems in place for managing cash flow, your company is at a very grave risk of insolvency.

Without well-defined and well-managed strategies to avoid running into cash flow problems and a plan to improve cash flow if such problems should arise, your company will continue to flounder.

Fortunately, you don’t have to do it alone. The CFO Center will provide you with a highly experienced part-time CFO with ‘big business experience’ for a fraction of the cost of a full-time CFO.

He or she will assess your company’s cash flow position and take the following steps:

Identify and address all the immediate threats to your business

Prevent cash flow problems from recurring and

Instigate the use of regular cash flow forecasts.

Having control of your company’s cash flow will allow you to operate within your means, and move away from a ‘feast and famine’ situation that plagues even the largest companies.

Having the right cash flow management processes in place and being able to spot peaks and troughs in trading to improve cash flow is one of the most critical components of any finance function.

Put an end to your cash flow problems now by calling The CFO Center today. To book your free one-to-one call with one of our part-time CFOs, just click here.

Scaleup Book Icon

Why Entrepreneurs’ Dream of Hypergrowth Fast Becomes A Nightmare

Rapid growth is the stuff most entrepreneurs dream about as they take their fledgling company through the early years but when it happens, it can quickly become the stuff of nightmares.
The bubbles in the celebratory champagne—“Here’s to our success!”—barely have time to go flat before the problems arise across the high-impact growth or Scale Up business.
Suddenly owners are beset by problems involving the people they’ve hired or not hired, their cashflow chokes, and processes that once worked so smoothly groan to a halt. Customers then leave snide reviews because products or services aren’t delivered on time, and key suppliers get angry at delayed payments. Bankers who were once so keen for business begin to crank up the pressure as overdrafts or loans get close to the ‘red zone’.
No wonder then that so many business owners spend hours every night staring into the darkness wondering what on earth happened to their once easy-to-manage business.
The owners of high impact growth or Scaled Up businesses are often the loneliest, most isolated and overworked individuals. While start-up owners get an avalanche of government help and assistance, their Scaled Up counterparts get very little attention or assistance.
The CFO Center/FD Centre’s Chairman Colin Mills says he’s seen first-hand what pressure does to business owners.
“I’ve sat in sales meetings with entrepreneurs who had literally been brought to tears by stress and frustration and the feeling that it’s all too much.”
It’s for this reason that Colin has written Scale Up: How to Take Your Business to the Next Level Without Losing Control and Running Out of Cash.
It’s aimed at the owners of companies facing or already experiencing the problems of scaling their businesses to ensure they minimize the problems and achieve growth in a controlled, sustained way.
“Our experience suggests that scaleup issues start to bite at about $1M/£1M Sales Revenue or a minimum of 10 employees,” he explains.
“By the time a business reaches $50M/£50M Sales Revenue or 250 employees (larger firms tend to have fewer employees per $/£ of Sales Revenue) they can most often be considered a “scaler”: they are past the main dangers of scaleup.”
In his book, Colin explains why scaling a business can be so problematic. The business owner has to deal with one or even all of the following:
• People challenges
• Sales and marketing challenges
• Operational challenges
• Administrative challenges
• Financial challenges
Colin explains, “Businesses run the gauntlet of increasingly severe challenges, mostly because they are growing but don’t have the necessary infrastructure to support their expanded operations.
“While on paper, they may have the revenue, the manufacturing base or customer reach of a substantial business, the culture, the controls, the processes, the personnel and the leadership remain those of a much smaller business than they were a short time before.
“Worse, they haven’t yet accumulated the resources to build and maintain that infrastructure.”
This creates a hazardous situation for the business, he says.
“The biggest danger in this period is that the business will either outrun itself or get stuck, like a deer in headlights. Outrun, as the company spirals out of control and its cash reserves dwindle trying to meet the expanded demands of the business.
“Or stuck, as the entrepreneur tries to cope with everything at once, frustrated that the problems he could happily once deal with—back when the business was smaller—are not being dealt with by the people he is employing, often at substantial cost.”
Overcoming such problems or avoiding them is only possible if you revise your business model.
“You need to consider your whole business model, because if you have a terrible business model, then the last thing you want to do is to start scaling it. If you do that, then all the small problems that make your life a nightmare now will become major headaches.
“If your business model isn’t great, however, it doesn’t mean that all is lost: there’s a lot you can do to retro-fit, design and redesign a business.”
Besides explaining the challenges scaling businesses face, Colin also provides the methods you need to use to overcome them—the same methods that the CFOs from the CFO Center offers its clients.
They’re also the methods the CFO Center has used in its own scaling up process, says Colin.
The CFO Center is a scaleup that has been growing at over 30% for the last three years with close to 400 CFOs but Colin admits he keeps a keen focus on the business, the business model and the key performance indicators.
“It might be a scaleup now, but that doesn’t mean to say it’s not going to careen out of control. I have to keep my eyes on the business, re-evaluate the business model, watch the indicators.”
Along with practical advice that you can use immediately, the book features an array of case studies in which business owners describe how they overcame the challenges of scaling their businesses.
So, if your business is on the verge of, or already experiencing the ‘difficult teenage’ phase and you’re wondering how to overcome the nightmare challenges you’re facing, this book is for you.
It’s available on Amazon as a paperback and Kindle ebook here.
And to discover how the CFO Center will help your company to scale up, please call us on (800) 919-4022 or contact us here.

fd-heart

Book in for a free financial health check

Book Now
fd-stars

Rate your company finance function in nine minutes

Take The F Score
fd-speech

Do you have a burning finance question? Ask one of the country’s top CFOs now

Ask The CFO
fd-money

Book yourself in for a complimentary 30 minute finance breakthrough session

Book Now
Call Now Button