The House That Lego Built

July 22, 2013, 6:15 p.m. ET

The House That Lego Built

Lego balked at licensing warlike ‘Star Wars’ toys. But then anthropological research convinced company executives that kids like to compete.


The patents on the core product of the Lego Group—its famous build-it-yourself bricks—expired decades ago, yet the company seems to be thriving: Its gross profit margin of 71% is far higher than that of other major toy companies and, for that matter, Apple. It was not always thus. Only 10 years ago, Lego was posting record losses; retailers were backlogged with unsold Lego toys; and it was unclear whether Lego would survive as an independent company. An internal review discovered that 94% of the sets in its product line were unprofitable. The turnaround story that followed is well told by Wharton professor David Robertson in “Brick by Brick.”As a family-owned Danish company, Lego isn’t watched closely by the American business press. Yet its story may hold as many lessons as those of companies whose chief executives adorn magazine covers. In Mr. Robertson’s diagnosis, Lego’s near-collapse came not from a lack of innovation but from an excess of it—more precisely, from innovation without discipline.

Mr. Robertson snaps together a story in four parts: the run-up to the crisis years of 2003 and 2004; the efforts of a new management team in 2004 to conduct triage and stabilize the company; the strengthening of Lego’s core business in 2005; and, finally, the introduction of strong new lines of business. In his telling, the old Lego, from 1998 until the crisis, is personified by Poul Plougmann, the chief operating officer; the new Lego, from 2004 onward, by CEO Jørgen Vig Knudstorp, a 33-year-old ex-McKinsey consultant who had joined the company as a roving strategist a few years before.

By the late 1990s, technology was changing the way children used their time. Computers, videogames and cable television seemed likely to bulldoze the market for the kinds of toys that made up not just Lego’s product line but its identity: that of the leading maker of buildable toys. The company had long catered to what it called the “joy of building” and the “pride of creation.” It wasn’t clear how the brick, with its basis in unstructured, imaginative playtime, could thrive in the digital age.


Brick by Brick

By David C. Robertson, with Bill Breen
(Crown Business, 305 pages, $26)

Lego responded by pursuing the innovation strategies popular among experts—”be customer-driven,” “disrupt your own markets,” “build an innovation culture” and the like. In one sense, the strategies worked: Innovation abounded. But little of it was making money.

In its quest to be customer-driven, Lego rolled out toys that came pre-assembled or involved minimal assembly. The idea behind them had been to embrace the reality that fewer children wanted buildable toys. But the result was toys that pleased no one: They denied the building experience to children who wanted it while failing to be interesting to everyone else. At the same time, the company lost millions on forays into electronics, computer software and television.

Upon coming to power, Mr. Knudstorp cut 30% of Lego’s product portfolio, including many of its newer offerings. To stave off financial doom, he also sold the company’s headquarters building and moved into simpler accommodations—and, more painfully, let go almost a third of the workforce.

But how to move beyond the rescue stage and toward growth? Based on input from top retailers and a large customer-research study, Lego executives concluded that even though young fans of buildable toys were a minority, there were enough of them to make a worthwhile market—and their parents were willing to pay premium prices. The company would now organize its innovation efforts around its potentially very profitable core audience.

Mr. Robertson, with the benefit of access to staff at Lego and partner companies, provides unusually detailed reporting of the processes that led to Lego’s current hits (and, inevitably, some misses). Among the hits is the Mindstorms NXT, the second generation of Lego’s robotics set, which hadn’t been updated or advertised since 2001. Mr. Robertson describes how Lego navigated between relying on sophisticated users to determine the product’s design and relying on its own expertise in the creation of building experiences.

Another product-development narrative with a happy ending is that of a product line that began with a vague, succinct mandate: “obviously Lego, but never seen before.” From there, it was shaped and reshaped by anthropological studies of children at play.

The company had long shied away from competitive play for philosophical reasons. (Relatedly, it balked at first at making licensed “Star Wars” toys—too warlike.) But in watching groups of children, Mr. Robertson reports, its researchers found that “self-ranking was a natural, instinctive part of their day-to-day lives.” In short, kids liked to compete.

Lego, obviously, was late to class. Yet once it got there, it was a diligent learner. Setting aside its attitude of Lego-knows-best, the company engaged in further testing and, in 2009, introduced a well-received line of buildable board games, like Lego Minotaurus.

Mr. Robertson’s account of Lego’s travails and rebirth is a nuanced and readable case study. That is not to say it’s flawless: At times, he strains to derive “rules” from episodes that don’t seem reducible to rules. (The shocking five-year gestation of a Lego online game doesn’t necessarily “demonstrate” that one should launch a product “before it’s completely ‘finished.’ ” It depends.) And he is awfully hard on Mr. Plougmann, whose troubled regime did produce major hits, such as Bionicles (a line of buildable action figures) and the original Mindstorms.

Today, the bits and bytes that Lego once feared are part of its lifeblood, thanks to a deal with a Warner Bros. subsidiary that develops Lego videogames—including, since 2005, Lego “Star Wars” games. And a computer-animated Lego feature film, its trailer now showing in theaters, is due next year.

Mr. Price is the author of “The Pixar Touch: The Making of a Company.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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