Lego, the Danish toymaker, incurred economic losses in 2003 and 2004. Lego faced competition from low-cost copiers of its products and a fall in demand. In 2004, to restore profits, Lego fired 3,500 of its 8,000 workers; closed factories in Switzerland and the United States; opened factories in Eastern Europe and Mexico; and introduced performance-based pay for its managers. Lego reported a return to profit in 2005.
Based on Picking Up the Pieces, The Economist, October 28, 2006
a. Describe the problems that Lego faced in 2003 and 2004, using the concepts of the three types of constraints that all firms face.
b. Which of the actions that Lego took to restore profits addressed an inefficiency? How did Lego seek to achieve economic efficiency?
c. Which of Lego’s actions addressed an information and organization problem? How did Lego change the way in which it coped with the principal-agent problem?
d. In what type of market does Lego operate?