Lego — The Rise and Fall and Rise Again

Here is the video of this transcript: Lego

When I was a child, I used to be obsessed with Lego. At first, I was attracted to solely the Lego Bionicle sets. But then, at some point, I began using other sets as well. Lego had cemented such a strong position in the toy market that I would have never thought it would one day come close to bankruptcy. So, what really pushed the giant to the brink of collapse? Let’s dive in.

Lego was created in 1932 by Danish carpenter Ole Kirk Christiansen. While holding his main carpentry job, he introduced a line of hand-carved toys. He came up with the name Lego by merging two Danish words, leg godt, which translated to play well. By the way, in the face of the Great Depression, Christiansen nearly went bankrupt. He added more product lines to his business in order to weather the depression. But a decade later, his shop was destroyed by a fire. That did not stop Christiansen from reopening a larger and more modern toy factory. And this time, he was experimenting with plastic instead of wood. By 1949, Lego introduced Automatic Binding Bricks, a system that enables the blocks to grip together.

The next two decades saw the company grow tremendously. When Lego introduced their Lego System of Play, they marketed it as an integrated toy system. The idea was to initiate the purchase of the first set and thereafter sell add-ons that could be bought to complement the existing system. Think about building a city set. First the buildings and roads would be provided. Then the street signs, cars and trucks would be considered add-ons. It was not until 1957, that the Lego brick with studs on top and tube at the bottom was introduced. Children could literally build any structure they wanted. The only limit would be the number of bricks they had.

Lego was expanding internationally in the 60s, licensing its North American operations to Samsonite. Sales agents were hired to market the bricks to other parts of the world. Themes such as Town, Space and Pirates, would be developed to house new product lines. And the beauty of it was that all of the themes could be integrated with one another. Ole’s son, Godtfred, was overseeing the management of the company. He had laid down around 10 principles that Lego toys should fulfill. One of them was to design the toys for all age groups. At first, children from three to 16 years old were targeted. But Lego then introduced sets for pre-schoolers and older kids as well.

Lego was conquering the world one brick at a time. By late 1980s, sales reached 600 million dollars. However, Lego hit a few bumps on the way. The biggest threat was the emergence of new competitors, specifically Chinese imitators. Since the patent for the Lego brick expired in early 80s, any manufacturer could easily replicate the toy system. One such manufacturer was Tyco Toys, which produced cheaper building blocks that were similar in design and size to that of Lego. Although Lego sued Tyco for its copycat product, Tyco was allowed to continue its operations, stealing a sizeable portion of the U.S. market share.

In the 1990s, Lego built upon its Legoland Park, a theme park built with millions of Lego bricks. New parks were opened around the world to generate brand awareness. Since the 1990s saw the rise of electronic games, Lego wanted to take a stab at it. They started equipping their sets with electronic components. I did find their Mindstorms set appealing, although, if I recall correctly, they were quite expensive. Lego also partnered with Microsoft to create computer games. Later, their games were made available on various gaming consoles. The business went beyond toys to include a clothing line that was popular in Europe.

The real problems for Lego started in the late 90s. Competition in the toy space intensified. Hasbro and Mattel were obvious competitors but the most dangerous ones were still the Chinese firms flooding the market with cheaper alternatives. Lego was adding more product lines but overall, they did not sell more items. The rise of video games shifted children’s play time significantly from physical toys to virtual ones.

Lego decided to bring in new blood and layoff its tenured designers. Although top graduates from the best schools were brought in, they actually knew nothing about toy design. One of the worst product line failures during that time was Galidor. The new designers were changing the core of Lego. The number of parts produced doubled from 6,000 to 12,000, causing manufacturing and storage headaches.

What supported the firm during that time was the success of their Bionicle and Star Wars product lines. The licensed series was seen as an untapped potential. Harry Potter naturally became the next product line. But it seems that they had overestimated the demand for the toys, as they would remain popular only in the months following the release of the books or movies. And when no new movies were released, they scrambled to generate ideas. The company essentially stagnated and suffered its first loss in 1998. As a result, they cut more than 1,000 jobs to bring costs down.

Jorgen Vig Knudstorp joined the company as a consultant in 2001, only to find that the company was running itself to the ground. By 2003, Lego faced mounting manufacturing costs and weaker demand for their toys. Sales was down around 30% and they still had to service around 800 million dollars of debt. Lego is a fixed cost business. If its manufacturing facilities do not churn out new profitable product lines, it would probably need to wind down. The company was on the brink of bankruptcy when Knudstorp was named CEO in 2004. Under his leadership, the company reinvented itself brick by brick.

Knudstorp set up a strategy that involved a mix of innovation and going back to basics. First of all, he reduced the workforce considerably and outsourced operations to a number of developing countries. Then, he decided to axe all divisions that were not core to Lego. That included the theme parks and videogames division. And to reduce the burden on manufacturing operations, he reduced the number of components manufactured to less than 6,000.

New designers were brought in to experiment on new ideas through a trial and error approach. Lego ventured into the movie space with a new strategy. Instead of relying on outside movie franchises, Lego released its own movie in 2014, which became a huge success. This meant that they did not have to rely on blockbuster movies to create new product lines. The firm also used the internet to their favor. They launched their own crowdsourcing platform where the winning ideas would receive a percentage of the sales generated.

All these initiatives got Lego through the difficult years and helped it re-establish itself as a market leader. Revenues ballooned to over 38 billion Danish Krona, which is equivalent to around 5.8 billion dollars. I believe that Lego will have to keep fighting for its place in the children’s toy space.

What should Lego do to maintain its grip in the market? Should it begin to pivot in video games again? What are the toys of the future? As always, let us know what you think.

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