Finance June 15, 2015 Last updated September 18th, 2018 1,794 Reads share

The Rise and Fall (and Rise Again) of LEGO – Brick by Brick

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LEGO has been enjoyed by millions of children and families around the world for decades, yet the company behind the brand was on the verge of going bust in 2003. It’s hard to believe that such a ubiquitous product very nearly disappeared.

The Rise and Fall (and Rise Again) of LEGO

Fast forward to 2015 and the privately owned company is now the largest toy maker in the world, having overtaken Mattel in the US.

So what happened and can other businesses learn from LEGO’s experience?

Let’s start from the beginning…

The beginning of LEGO

The Danish company was founded in 1932 by Ole Kirk Kristiansen, a full-time carpenter who made wooden toys for his four children in his spare time. He eventually set up his own business full-time and the number of products and employees began to grow. By 1949, the company was producing the plastic binding bricks, the toy that many people associate with the LEGO brand.

By the end of the 1960s, LEGO was being sold in 42 countries and employed 843 staff at its factory in Billund. LEGOLAND theme park had also opened its doors for the first time.

The company continued to expand around the world as LEGO became very popular with children. They loved being able to build whatever they wanted and parents approved of the creative nature of the toys. Despite the advent of computer games and an explosion in sales of cheaper toys manufactured in China, LEGO went from strength to strength, continuing to produce bricks in Denmark.

The LEGO Group is still owned by the Kirk Kristiansen family today. The Deputy Chairman of the Board is Kjeld Kirk Kristiansen, grandson of Ole.

LEGO’s downfall

The problems began towards the end of the 90s and the beginning of the millennium. At this point, there were 7,550 employees. The business saw explosive growth in some of its products but only at various times of the year.  LEGO partnered up with the big film franchises of the decade and therefore started producing kits that reflected the huge popularity of the Star Wars reboot and the Harry Potter films.

When these films were released, the company shifted millions of brick sets. However, when the films finished showing, LEGO were left with much lower volumes. This volatility meant they found it hard to control costs. When there were spikes in sales, deep-rooted problems and vulnerabilities in their brand and marketing departments were hidden.

It is easy to forget that LEGO is first and foremost a manufacturing company.  The company makes millions of small bricks every year to tolerances of 0.04mm. This is so they can fit together tightly but can be pulled apart. This precision work on a grand scale is costly, so when demand for the toy began to fluctuate, costs started mounting.

By 2003, the company was losing a million dollars a day mostly due to manufacturing costs and less popular products. Lego bricks were still selling but there were various other toys failing to make an impact (for instance the robot range, Galidor, and Jack Stone action man. All this stock was being produced but not enough was being sold to make a profit.

So how did LEGO turn itself around? What was the company’s strategy?

Management

A hot shot new CEO, Jørgen Vig Knudstorp, was handpicked by the founder’s grandson to take on the restructure in October 2004. The 36 year old and former Mckinsey  consultant invented the idea of ‘back to the brick’ which saw the firm sell off all the theme parks, cut a third of the workforce and embark on a new approach to innovation in their products.

Knudstorp felt the company had become complacent. The expensive head office was sold and managers were sent to work in smaller and more utilitarian buildings. He travelled to work in an old Citroen C5, a modest sign that times were changing. The CEO also insisted that any new products lines would need to make a 13.5% profit, the new standard margin.

The pressure was on in management to turn things around – some directors had been on the board for over 40 years and were used to a specific structure. Many top executives may have also been unaware the company was losing so much money. The company was not publicly quoted on a stock exchange and therefore did not always have to report to the markets and shareholders.

Products and innovation

The ‘back to the brick’ mantra meant the company was going back to its core products and values.  Bricks were standardised (so large numbers of them could be used in multiple products) and 30% of lines were stopped.

Bricks that were too easy to build did not sell well, so the team began to make products that were more challenging.

Harry Potter and Star Wars LEGO weren’t new ideas but they did bring in profits while cinema films lasted.  Innovation is vital for any firm and Lego made a big push to focus this in their turnaround.  The resulting products, such as Legends of Chima (a whole line of toys based around a mythical world), Ninjago (small action figures) and LEGO Friends, have all been huge successes and they do not rely on the Hollywood studios.  In a somewhat ironic twist, one of the biggest movies of 2014 was all about LEGO aptly named, The Lego Movie, as if to make a point!

There is a delicate balance between innovating and focussing on existing core products. LEGO has proved both can be done.

Research

Innovation is useless if a company doesn’t know what customers want or what their interests are. Resources were put into better global research of play and learning with parents and children. Many of the designers and staff were white, middle class and of a certain age. To understand what children around the world wanted to buy, there needed to be extensive research.

Marketing Channels

LEGO has been quick to realise the importance of social media for the younger generation in a digital age. The company perhaps realised earlier than most that many of the children they were selling to would have their own mobile phones, so apps and game platforms were easily accessible. As such, some products allowed children to use their phones or tablets in conjunction with their LEGO toys.

Another clever way the firm has utilised modern trends is in the use of crowdsourcing.  In Japan, the public can upload their own ideas for Lego and if it gets 10,000 or more votes, it’s considered for production and the inventor receives a cut of the profits.  LEGO Minecraft Micro World was launched in this way.

Socio economic factors

By going back to the basics, LEGO has appealed to parents in need of traditional toys that take their children away from the screen. The company has benefitted from the growth in gaming on consoles and tablets simply because parents want to encourage more traditional play for the i-generation.  I know I have!

Conclusion

I know that it’s sometimes annoying for business owners reading these sorts of case studies – what does a small company have in common with a multimillion pound global brand (even if it was in a spot of bother)!  LEGO had the financial resources to hire the best people and make some drastic changes but there are still lessons to be learnt for any business.

All companies, however big or small, can have problems with marketing, branding, costs, creativity and management to name a few.

Turning around a struggling business: key points to remember

  • Strong leadership
  • Stop thinking you always know best!
  • Listen to customers and conduct research
  • Seek advice
  • Continue to innovate
  • Review all services or products equally – don’t just focus on the products doing well
  • Keep control of costs

Images: “Macro view of heap of color plastic toy bricks/Shutterstock.com

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Robert Moore

Robert Moore

Robert Moore is the Marketing Manager for KSA Group Ltd who run the website Company Rescue. KSA Group are insolvency practitioners and turnaround specialists where rescue is always looked at as the first option

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