Lego's turnaround brick by brick case study

LEGO’s Turnaround: Brick by Brick

IN THE DECADE between 2005 and 2015, LEGO—the famous Danish toy company—grew fivefold from some $1 billion in revenues to $5 billion (see Exhibit MC12.1). Rediscovering, leveraging, and extending its core competence allowed a successful revival for a company that was floundering in the early 2000s. How did LEGO construct a successful turnaround? To answer this question, we first need to understand a bit of the history of this Danish wonder company.The LEGO company was founded in 1932 by Ole Kirk Kristiansen. The name is a contraction of the Danish words Leg godt, which means “play well.” Only later did LEGO executives realize that le go in Latin also means “I assemble.” Throughout its history, LEGO has had numerous formidable competitors, but it has outperformed all of them. Tinkertoys were more complex, Lincoln Logs were limited in what could be constructed, traditional blocks had nothing to hold them together and were too large to show much detail. LEGO bricks were the right balance of simplicity, versatility, and durability.

LEGO competes for the attention of children and their parents who buy the product. Moreover, there is also a sizable group of adult LEGO fans. In the wake of the personal computer revolution in the 1990s, however, the popularity of LEGO began to wane because of attractive alternatives for children such as gaming consoles and computer games. By 1998, LEGO was in trouble. The Danish toymaker hired a highly touted turnaround expert to change its fortune. Unfortunately, he had no background in the toy industry. To make matters worse, the new executive decided that LEGO’s hometown of Billund, Denmark, (with 6,000 people) was too provincial. He continued to live in Paris and either commute or run the company remotely.

Things at LEGO went from bad too worse. It started hyperinnovating and diversified into too many areas, too quickly, and too far away from its core. Among a whole slew of other innovation failures, the company created a Saturday morning cartoon called “Galidor,” which flopped. During this time period, it also decided to become a lifestyle company and to offer LEGO-branded clothing and accessories.

LEGO’s Turnaround

By 2003, LEGO was on the verge of bankruptcy. To avoid this fate, the closely held private company, owned by the Kristiansen family since its inception, needed to do something drastic and quickly. Almost out of desperation, it hired Jørgen Vig Knudstorp as CEO. His résumé was quite unusual to say the least: He was only 35 years old (in comparison, the average age for a Fortune 500 CEO is 55 years), held a doctorate in economics, and was a former academic. Knudstorp had transitioned to McKinsey, one of the world’s premier strategy consulting firms

Knudstorp decreed that LEGO must “go back to the brick” and focus on core products. As a result of the strategic refocusing, LEGO divested a number of assets including its theme parks. It also drastically culled its product portfolio by almost 50 percent, from some 13,000 pieces to 7,000. At the same time as Knudstorp focused LEGO again on its fundamental strengths, he was also careful to balance exploitation—applying current knowledge to enhance firm performance in the short term—with exploration—searching for new knowledge that may enhance a firm’s future performance. This allowed LEGO to improve the performance of traditional product lines, while at the same time to innovate, but this time in a much more disciplined manner.

In particular, LEGO increased sales of its well-known existing products by strengthening the interoperability of various LEGO pieces with other sets to encourage user innovation and creativity. To drive innovation, LEGO has brought its adult fans into the new product development process to leverage crowdsourcing—obtaining ideas from a large fan base using online forums and other Internet-based technologies. To drive future growth, LEGO under Knudstorp has been much more careful with its product extensions. In the past LEGO had licensed its brand freely to other brands, including Star Wars, Indiana Jones, Harry Potter, the Lord of the Rings, Batman, the Simpsons, and Iron Man. The problem was that the benefits from these licensing agreements accrued mainly to the existing brands, because LEGO did not own the more critical intellectual property. Knudstorp focused on owning and leveraging the core intellectual property. As a case in point, The LEGO Movie in 2014 was a particular high for the company, grossing $500 million on a $60 million budget in the first year alone. Unlike in previous movie tie-ins, LEGO owned the intellectual property, which meant that LEGO did not need to split profits with existing brands.

Challenges

Although LEGO has grown fivefold since Knudstorp took over, it faces a number of challenges. LEGO needs to strengthen its triple-bottom-line performance (along economic, social, and ecological dimensions) and address globalization challenges.

LEGO must address ecological concerns in the face of growing consumer criticism: Its signature bricks are made from petroleum-based plastic. The company is searching for an environmentally friendly material to replace its bricks that date back to 1963. To overcome its relatively large carbon footprint, the company is spending millions on a 15-year R&D project in hope of finding an eco-friendly alternative. The goal is to invent and then be able to manufacture bricks cost-effectively from a new bio-friendly material that will be virtually indistinguishable from the current blocks. It is a difficult problem to solve because LEGO bricks are precisely engineered to four-thousandths of a millimeter, hold a large range of colors well, and even have a particular sound when two pieces are snapped together.

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To continue to grow, LEGO must become stronger in emerging growth markets such as China. LEGO is a comparatively new entry into China because of the fear that knockoff bricks have sufficiently damaged its brand. Knockoffs, which are rampant in China, are of inferior quality and even have injured some consumers. Yet, with growth in Western markets plateauing and a larger number of Chinese entering the middle class, this market opportunity is critical to LEGO’s future success. Moreover, Chinese government officials endorse LEGO as a “mind toy,” which helps children to develop creativity. The hope is that creative children will grow up to drive innovation in firms, something many critics say Chinese companies lack. In addition, Chinese parents and grandparents are eager to spend money on things that are perceived to help their offspring to excel academically. In general, parents around the globe are more than happy to spend money on games that get their children away from mobile devices, computers, and game consoles.

To take advantage of the growth opportunity in China and other Asian countries such as India and Indonesia, LEGO opened offices in Shanghai and Singapore as well as a factory in Jiaxing, China. To address the globalization challenge more generally, LEGO also needs to internationalize its management. At this point, it is a local, small-town company that happened to be successful globally, especially in the West. LEGO hopes to become a global company that happens to have its headquarters in the 6,000-people town of Billund, Denmark.