Lego Brand Revival Case Study

From its founding in 1932 until 1998, Lego had never posted a loss. By 2003 it was in big trouble. Sales were down 30% year-on-year and it was $800m in debt. An internal report revealed it hadn’t added anything of value to its portfolio for a decade.

In some ways Lego CEO Jørgen Vig Knudstorp is a better model for innovation than Steve Jobs

Consultants hurried to Lego’s Danish HQ. They advised diversification. The brick had been around since the 1950s, they said, it was obsolete. Lego should look to Mattel, home to Fisher-Price, Barbie, Hot Wheels and Matchbox toys, a company whose portfolio was broad and varied. Lego took their advice: in doing so it almost went bust. It introduced jewellery for girls. There were Lego clothes. It opened theme parks that cost £125m to build and lost £25m in their first year. It built its own video games company from scratch, the largest installation of Silicon Graphics supercomputers in northern Europe, despite having no experience in the field. Lego’s toys still sold, particularly tie-ins, like their Star Wars and Harry Potter-themed kits. But only if there was a movie out that year. Otherwise they sat on shelves.

“We are on a burning platform,” Lego’s CEO Jørgen Vig Knudstorp told colleagues. “We’re running out of cash… [and] likely won’t survive”

In 2015, the still privately owned, family controlled Lego Group overtook Ferrari to become the world’s most powerful brand. It announced profits of £660m, making it the number one toy company in Europe and Asia, and number three in North America, where sales topped $1bn for the first time. From 2008 to 2010 its profits quadrupled, outstripping Apple’s. Indeed, it has been called the Apple of toys: a profit-generating, design-driven miracle built around premium, intuitive, covetable hardware that fans can’t get enough of. Last year Lego sold 75bn bricks. Lego people – “Minifigures” – the 4cm-tall yellow characters with dotty eyes, permanent grins, hooks for hands and pegs for legs – outnumber humans. The British Toy Retailers Association voted Lego the toy of the century.

When The Lego Movie came out in 2014 the film snob website Rotten Tomatoes awarded it a 96% approval rating: only Oscar nominees 12 Years a Slave and Gravity matched it. This year’s follow-up, The Lego Batman Movie, outperformed the last “proper” Batman movie, Batman v Superman: Dawn of Justice, to such a degree that DC Comics now faces a genuine problem: audiences overwhelmingly prefer the Dark Knight in his pompous and plastic version voiced by Will Arnett, rather than Ben Affleck’s portrayal.

Lego’s revival has been called the greatest turnaround in corporate history. A book devoted to the subject, David Robertson’s Brick by Brick: How Lego Rewrote the Rules of Innovation, has become a set business text. Sony, Adidas and Boeing are said to refer to it. Google now uses Lego bricks to help its employees innovate.

Lego’s saviour is the aforementioned Vig Knudstorp – a father of four, perhaps not uncoincidentally – who arrived from management consultants McKinsey & Company in 2001 and was promoted to boss within three years, aged 36. “In some ways, I think he’s a better model for innovation than Steve Jobs,” Robertson has said.

Last month I flew to Billund, a small town in the Jutland peninsula where Lego was founded. The landscape was flat and grey, but as I drove from the airport a large primary coloured arm or head would occasionally appear though the pine trees: the Lego Group owns several buildings here and has decorated the landscape accordingly. I was immediately in a good mood.

Boys are more about good versus evil, but girls really see them-selves through the Mini-doll

“Billund was built to function, not to please,” explained Roar Trangbaek, Lego’s cheerful, bearded publicist. “There’s not a lot of fun here.” He meant there wasn’t a lot to do there – it’s hard to imagine the nightlife is up to much – but given that 120m Lego bricks are manufactured here every day, fun was very much the point of the place. As if to prove it, Trangbaek handed me his business card. It was a Minifigure of himself.

The following morning the Lego Group was due to announce its latest annual results. Today was an opportunity to meet some of its key employees, tour the factory and be among the first to step inside Lego House – a 130,000sq ft marvel that will open in September, and is expected to draw 250,000 visitors a year. It has been designed by Bjarke Ingels, the hottest name in architecture right now, whose commissions include Google’s HQ, the new World Trade Center and last year’s Serpentine Pavilion. Ingels certainly seems to have enjoyed himself: Lego House resembles 21 giant Lego bricks stacked into a 30m tower. Visitors can climb up to the rooftop garden and down the other side, pausing to take in attractions, restaurants, play zones and a gallery dedicated to fan-made Lego extravaganzas. Life-sized Lego sculptures had been placed around the interior – a cop, a firefighter – while real-life construction workers in hi-vis tabards beavered away around them, a surreal sight.

Lego had compensated for the disruption to the town’s shops by allowing them to exclusively sell Lego kits of the Lego House, the only place in the world they’ll be available. (For Lego’s numerous cult fans, this is a massive deal.)

Vig Knudstorp rescued Lego by methodically rebuilding it, brick by brick. He dumped things it had no expertise in – the Legoland parks are now owned by the British company Merlin Entertainments, for example. He slashed the inventory, halving the number of individual pieces Lego produces from 13,000 to 6,500. (Brick colours had somehow expanded from the original bright yellow, red and blue, sourced from Piet Mondrian, to more than 50.) He also encouraged interaction with Lego’s fans, something previously considered verboten. Far from killing off Lego, the internet has played a vital role in allowing fans to share their creations and promote events like Brickworld, adult Lego fan conventions. A year before James Surowiecki’s landmark book The Wisdom of Crowds was published, Lego launched its own crowdsourcing competition: originators of winning ideas get 1% of their product’s net sales, designs that so far include the Back to the Future DeLorean time machine, the Beatles’ Yellow Submarine and a set of female Nasa scientists.

“Lego has this incredible ability to engage with people and that has single-handedly enabled it to weather very, very difficult seas,” says Simon Cotterrell, from brand analytics firm Interbrand. “What’s made them successful over the past 10 years is their ability to create new entities, movies, TV shows, by partnering with brilliant people. They’ve said: ‘We might not make as much money if we outsource it, but the product will be better.’ That mentality is very Danish. It comes from saying: ‘We’re engineers. We know what we’re good at. Let’s stick to our knitting.’ That’s a very brave thing to do and it’s where a lot of companies go wrong. They don’t understand that sometimes it’s better to let go than to hang on.”

It also started making hit toys again. As well as putting a focus back on classic Lego lines like City and Space, it has launched the ninja-themed Ninjago line, Mindstorms, kits that allow you to build programmable Lego robots, aimed at teens. And for grown-up kids, Lego Architecture, replicas of the Guggenheim, Burj Khalifa and Robie House, that last one not for the feint-hearted or time-poor – it contains 2,276 bricks. Most impressively for a company with a customer base that in 2011 was 90% boys, it finally cracked the girls’ market. Lego Friends features a reconfigured “Mini-doll” and centres on five characters in the fictional Heartlake City. None of this has happened by chance. Lego is said to conduct the largest ethnographic study of children in the world.

“We call it ‘camping with consumers’,” says Anne Flemmert Jensen, senior director of its Global Insights group. “My team spends all our time travelling around the world, talking to kids and their families and participating in their daily lives.” This includes watching how kids play on their own and with friends, how siblings interact and why some toys remain perennial favourites while others are relegated to the toy box. Children are fickle – as the makers of forgotten “must-have” Christmas toys, like Pogs and Furby, will concede.

Ninjago was crowdsourced: its first iteration featured skeletons as enemies because tests proved they were the most popular baddies among six-year-old boys, globally. “Ninjas crystallised themselves because we were, like: ‘What’s the greatest hero entry point?’” says Cerim Manovi, senior design manager and creative lead on the line. “We showed them superheroes, everything – but ninjas just grabbed kids right there.”

Lego Friends took four years of research (plus a $40m global marketing push) to get right.

“One of the main things was they couldn’t really relate to the Minifigure,” says Mauricio Affonso, Friends’ model designer. “It’s too blocky. Boys tend to be a lot more about good versus evil, whereas girls really see themselves through the Mini-doll. They wanted a greater level of detail, proportions and realism.”

Lego Friends sets (bakery, amusement park, riding camp, etc) tend to feature something else missing from boys’ sets: a loo. The boys don’t care, the girls’ pragmatism demanded it.

"The Lego Movie" premiered last Friday and made $69 million in its opening weekend, giving it the largest debut of the year so far. Yet only 10 years ago, the company was on the brink of bankruptcy, and such a massive undertaking (let alone a successful one) would have been out of the question.

When Jorgen Vig Knudstorp came in as Lego CEO in 2004, the company was struggling to give consumers what they wanted and effectively manage costs. Knudstorp finally brought fiscal responsibility to the Danish toy maker. He also tried something novel — handing over creative direction to the core fans of the brand.

It worked. Creativity combined with smart management ultimately saved the company.

Lego Designer Mark Stafford, a fan who was recruited to help rethink the company's products, recently took to Reddit to share some of the behind-the-scenes details of the turnaround.

When Stafford attended an AFOLCon (Adult Fans of Lego Convention) event in the United Kingdom a couple years ago, he heard Lego's chief marketing officer Mads Nipper speak about the terrible period between 1999 and 2003. Stafford writes of it:

The LEGO company at that stage had no idea how much it cost to manufacture the majority of their bricks, they had no idea how much certain sets made. The most shocking finding was about sets that included the LEGO micro-motor and fiber-optic kits — in both cases it cost LEGO more to source these parts then [sic] the whole set was being sold for — everyone of these sets was a massive loss leader and no one actually knew.

Here's an image from eBay of one of those motorized kits. The "fiber optics" are actually clear plastic tubes that connect to a battery-operated LED-light pack:

Stafford continues:

This was combined with a decision to 'retire' a large number of the LEGO Designers who had created the sets from the late 70's through the 80's and into the 90's and replace them with 30 'innovators' who were the top graduates from the best design colleges around Europe. Unfortunately, though great designers they knew little specifically about toy design and less about LEGO building. The number of parts climbed rapidly from 6000 to over 12,000 causing a nightmare of logistics and storage and a huge amount of infrastructure expansion for no gain in sales. Products like Znap, Primo, Scala and worst; Galidor all came out of this period.

That "Galidor" series he mentions with such disdain was based off a kid's show of the same name. It involved so many new parts exclusive to each individual set that it resulted in awkward kits that did not comfortably fit into the Lego brand. Here's one being sold on eBay:

The only reason Lego survived during this difficult time was due to the success of the Bionicle and "Star Wars" series. The first "Star Wars" Lego kits launched in 1999 and represented the company's first foray into licensed series, many of which became integral to the company, as this infographic from Wired illustrates. But Lego could not survive on several big sellers alone.

Knudstorp, a former McKinsey consultant, took charge of the foundering company in 2004 and immediately got to work. Stafford explains:

Jorgen Vig was put in charge, he made the hard call and made redundancies, they slashed the number of parts down to 6000 (a figure that has grown, but we're still below well below the 2003 total) — the company reorganized and analyzed all costs, design was finally linked to manufacturing cost and re-focused on the core business of making construction sets. The unprofitable LEGO Computer games business was shut down. (Some of these guys returned to the UK and started their own company called Travellers Tales, they then licensed the LEGO computer game business and freed from LEGO management (who know nothing about computer games) they still make the LEGO computer games today — making good money for all involved — including LEGO.)

After consolidation and streamlining, Knudstorp led a charge to put creative control into the hands of hardcore fans of the brand rather than in those of top designers who had skills but lacked a real understanding of Lego's history. The company held its first designer recruitment workshop in Sept. 2006. Writes Stafford:

I was one of the 11 designers hired at that time, new managers were in place in the Design building, all developed inside the company, these guys loved the product, they knew the customers as they had grown up playing with LEGO and they had ideas that had been restrained for years. They hired several kid focused design graduates and a few AFOLs (adult fans of LEGO), of which I was one.

Stafford is one of the designers of the "Legends of Chima" series, which has an accompanying animated television show. The kits feature plenty of new parts and characters but never venture beyond the classic Lego "feel" that designers like Stafford helped bring back to the brand. Here's an example, from Lego's website:

For Stafford, the best proof of Lego's turnaround is captured by the new movie:

For me it's been an absolutely fantastic seven years so far and I see all of the work and principles these guys have created as the message of The LEGO Movie, it's not just a toy, it's a tool for creation and imagination and getting LEGO bricks into the hands of kids is the only aim of everything we do. I'm so proud of being even a tiny bit involved in it!

Here's a trailer for the film:

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