In 2004, LEGO recorded a loss of DKK 1.9 billion. It was the worst result in the company’s history and there was serious doubt about whether the family-owned business could survive in its existing form.
This seems strange now. LEGO is so firmly embedded in popular culture that it is difficult to imagine it becoming unfashionable, let alone running out of money. But the company had spent much of the previous decade worrying that children would lose interest in plastic bricks.
Video games were growing. Film-related toys were taking over more shelf space and children appeared to be moving towards products with characters and stories already built into them. LEGO’s answer was to branch out.
It opened theme parks, developed computer games and moved into clothing, television and other products. The toy range expanded too. Designers introduced new colours, characters and specialised parts to make each set look more distinctive.
The company was producing plenty of ideas. The problem was that many of them were expensive, difficult to manufacture or too far removed from the product people actually wanted from LEGO.
Too many pieces
The basic LEGO brick is an unusually efficient product. The same rectangular piece can appear in a castle, a police station or a spaceship. It can be used again once the original model has been pulled apart.
That efficiency began to disappear as the company added thousands of specialised components.
By the early 2000s, LEGO was reportedly manufacturing more than 12,000 different pieces. Some were only needed for a single set. Every new shape or colour had to be designed, tested, produced and stored. A piece that made one model slightly more interesting could create costs throughout the company.
LEGO did not have a reliable understanding of how much some of its sets cost to produce. A product could sell reasonably well and still make very little money once the complexity behind it was taken into account.
There were successful ideas during this period. The Star Wars range, launched in 1999, proved that licensed characters could work extremely well with LEGO. But success in one area encouraged the company to keep expanding elsewhere.
By 2003, the annual report was unusually blunt. Sales had fallen sharply and the company admitted that its growth strategy had failed. The following year brought an even larger loss.
Going back to the brick
Jørgen Vig Knudstorp took over as chief executive in 2004. He was 35 and had joined LEGO only three years earlier.
His first job was to find out which parts of the business worked. This was less straightforward than it should have been. LEGO had grown into a complicated group of products and activities without keeping a close enough eye on where it was making money.
Knudstorp reduced the number of components, cut costs and closed or sold operations that sat outside the central toy business. The LEGOLAND parks were sold to Merlin Entertainments, although LEGO retained a financial interest. Product development was tightened and designers had to work with a more manageable selection of pieces.
This could easily have turned into a dull cost-cutting exercise that left the company producing safe versions of old sets. That did not happen.
LEGO continued working with licences and developing new themes. It simply became more selective. New products had to fit the building system and make commercial sense.
The distinction mattered. A Star Wars set still felt like LEGO because the pieces could be taken apart and rebuilt. Some earlier experiments had treated the LEGO name as something that could be attached to almost any children’s product.
The company had been trying to follow its audience into every new form of entertainment. Knudstorp brought the attention back to the thing LEGO already did better than anyone else.
Listening to the people who still cared
During the difficult years, LEGO had underestimated another part of its audience.
Adults were still buying and building sets. Fan communities were sharing designs, collecting rare pieces and discussing the company’s decisions in extraordinary detail. These customers knew the product well and were willing to tell LEGO where it was going wrong.
The company began involving experienced fans in development. One of the best-known examples was the redesign of Mindstorms, its programmable robotics range. LEGO invited a small group of enthusiasts to contribute ideas and test the new version.
For a company that had traditionally guarded its product development, this was a significant change. It also made practical sense. The fans were already spending their own time finding unusual ways to use the product.
LEGO later expanded this approach through projects that allowed customers to submit designs and support ideas they wanted to see produced. It gave the company a source of new products with some evidence of demand attached.
There was still plenty of room for imagination. The difference was that LEGO had become more careful about which ideas reached the shelves.
A less exciting rescue than people remember
The LEGO turnaround is often presented as a story about rediscovering creativity. That is only part of it.
LEGO had never lacked creativity. It nearly failed because it allowed creativity to spread without enough control over cost, production or purpose.
The recovery involved spreadsheets, factory decisions and a large reduction in unnecessary complexity. It also required the company to admit that some of its grander plans had been wrong.
LEGO returned to profit in 2005. Over the following years, it introduced major new ranges, opened its development process to fans and found a large market among adults. Films and digital projects returned as well, this time attached more closely to the toys.
The company did not abandon innovation after 2004. It became better at deciding what deserved to be made.
The plastic brick had survived video games, changing fashions and LEGO’s own attempts to move beyond it. The immediate job was much simpler: reduce the number of pieces, work out which sets made money and give people better reasons to keep building.