Marginal Utility

by Tom Bozzo

For a bit of an antidote to Bad News Fatigue, the Guardian has a pretty good article (via The Brothers Brick) on the turnaround of the LEGO Group, which a few years ago was on the brink of bankruptcy and/or absorption into one of the toy megacorporations but now is enjoying double-digit sales growth even in basket-case markets. [1] It's a bit long on ancient company history, but the short version is that under their ex-McKinsey CEO, the company opted largely to stick to its knitting [2], divest various non-core assets [3], and also outsource a good chunk of their production — mostly to Eastern Europe — to cut costs. The über-nerd version from a couple years back, in the supply-chain management magazine Strategy + Business, is here. An interesting additional detail omitted in the former and post-dating the latter is that the company is re-insourcing the outsourced production, though not necessarily returning it to Denmark.

I wouldn't be mentioning this if there weren't some lessons for the current Troubles herein.

For Ed Montgomery (congrats on the quite possibly thankless new job and Go Maryland College of Behavioral and Social Sciences!), there's a reminder that companies can run themselves out of business by efficiently producing products that cannot be sold for a compensatory price. LEGO's element production and set-packaging operations were famously efficient and automated in the crisis period. As the S+B article explains in detail, the rest of the operation was a disaster. If anything, reducing Danish labor costs was a sideshow for, if not a distraction from, the rest of the restructuring. Which is to say, there's only so much to take out of the hides of the UAW.

A saving grace for the LEGO Group was that its failures mainly were behind-the-scenes; the things that were losing them DKr by the billions largely weren't erosive of their products' reputations, so:

Part of this recession-busting feat, Nipper concedes, is down to the fact that in times of trouble, consumers - in this case, parents - turn to "the well-known, the safe, the durable. Lego may not be the cheapest toy, but parents know it has stood the test of time, it will last years, provide hours of quality play, represent good value for their hard-earned money."

Ceding reputations for "representing good value" in favor of "having the most cash on the hood" is an obvious failing of Detroit's legacy management, in hand with reactionary product planning.

For observers of the Danish model of relatively open markets plus a strong social safety net, there's a warning that it's not necessarily an automatic producer of contentment under all economic conditions. From the Guardian:

"This town isn't just about Lego any more, you know," observes a woman who asked to be called just Birgita, perching her youngest son on the back of her bicycle outside the supermarket. "It hasn't been for a long time. We're proud of Lego, certainly, but there are lots of other companies, lots of other jobs here now. The good thing was that all that happened when the rest of the economy was still in quite good shape. Heaven knows what it would have been like today, with half the world collapsing."

This account is anecdote, sure, but the apparent success of the Danish model isn't its production of armies of the happily unemployed. On the contrary, by both EU and US standards, Denmark has exceptionally high employment and low unemployment rates. At some level, there's no substitute for full employment, and the Invisible Hand does not promise to provide that.

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[1] This has very little to do with my recent birthday; official estimates are that there are about 250,000 serious adult fans out there.

[2] I.e., selling cool sets to build from the little plastic bricks.

[3] E.g., the LEGOLAND theme parks, which you know aren't a Company operation in part because an employee of the Schaumburg, Illinois indoor facility was using the colloquialism "Legos" to refer to "LEGO bricks" or "LEGO elements" in orienting a new employee; such talk is supposed to be forbudt for trademark protection reasons.

Labels: creative destruction, labor, LEGO