LEGO Goes Back to the Brick

The story

For decades, the LEGO Group, a family-owned toy company in the small Danish town of Billund, seemed unbeatable. Its interlocking plastic bricks were in homes all over the world. But by the late 1990s, children had video games and computers to play with, and LEGO began to worry that the brick was old-fashioned. The company had its first-ever loss in 1998.

LEGO's answer was to try almost everything. It opened theme parks, made video games, launched clothing and TV shows, and designed many new kinds of special pieces. Some ideas were hits, like sets tied to the Star Wars and Harry Potter movies. But movie sets sold well only in years when a new movie came out. Meanwhile, every new special piece had to be designed, molded, stored and shipped, which made the factories more and more complicated and expensive. In 2003 sales dropped sharply and LEGO began losing money fast.

The numbers became frightening. In 2004 LEGO lost about 1.9 billion Danish kroner, more than $300 million. Kjeld Kirk Kristiansen, the founder's grandson who owned the company, put about 800 million kroner of his own money into it, and in October 2004 he stepped down as head of the company. He handed the job to Jørgen Vig Knudstorp, a young former McKinsey consultant who had joined LEGO only in 2001. Many people inside the company wondered whether it would survive.

Knudstorp's first goal was simple: stop the bleeding and make sure the company didn't run out of cash. LEGO cut jobs, from about 7,300 workers worldwide in 2004 to about 5,300 two years later. In 2005 it sold its Legoland theme parks to Merlin Entertainments, a company owned by the investment firm Blackstone, for about 375 million euros, keeping a 30 percent share. It also moved some manufacturing to lower-cost countries in Eastern Europe. Most importantly, it cut back the huge number of different pieces and colors. Designers were asked to build great sets from a smaller, shared "palette" of parts, which made each piece cheaper to produce in large amounts.

The second goal was to remember what LEGO was for. Knudstorp told Fortune magazine in 2006, "Our vision is to be based on the Lego brick, that's our heritage and our future." LEGO went back to classic themes like police stations and fire trucks, built around the basic brick. The company also learned to measure whether new products actually made money, not only whether they were creative.

The turnaround came faster than many expected. LEGO earned a profit of about 702 million kroner in 2005. By 2008, while much of the world was sliding into a deep recession, LEGO's sales grew almost 19 percent to about 9.5 billion kroner, and its profit before tax reached about 1.85 billion kroner. Knudstorp called the year's results "extraordinarily good." In the years after that, LEGO grew into one of the largest toy companies in the world.

The LEGO story is not a story against new ideas. LEGO kept inventing new sets and later made hit movies. The lesson is about focus: new ideas work best when they are connected to what a company already does well, and when someone checks whether they pay for themselves.