What SMEs can learn from Lego’s near-death experience

There would be few companies as enduringly successful as the 90-year-old Danish toymaker Lego, and yet just over a decade ago, things looked very, very different.

On the back of a bumper movie release, the staggering success of the female-focused Lego Friends range, and the kudos of being named the world’s most powerful brand, it seems that for Lego, the only way is up.

The building blocks of discontent

Storm clouds of disruption first started appearing on Lego’s horizon in the 1990s and early 2000s, as video games threatened to take the toymaker’s place in the hearts and minds of children. All of a sudden, Lego began falling out of favour.A pile of miscellaneous LEGO bricks

By the end of 2003, Lego’s sales had plunged by 30 per cent in one year, the company had racked up debt of $800 million and the once formidable business was teetering on the edge of bankruptcy.

In the face of such a dire predicament, Lego’s leadership recognised that a crisis is a terrible thing to waste and that the company needed to transform itself – and quickly.

In a 2001 media interview, the grandson of Lego’s founder and the company’s then president, Kjeld Kirk Kristiansen, conceded that by the mid 1990s, Lego had become a slow company.

"We were a heavy institution. We were losing our dynamism," he said.

Innovating for innovation's sake

In an effort to address this loss of dynamism, Mr Kristiansen and his fellow executives embarked on a frenetic pursuit of innovation.

For a time, the strategy worked. Lego Group’s sales increased 17 per cent from 2000 to 2002. But in the early months of 2003, the Lego empire began to crack. Retailers were choking on a backlog of unsold Lego sets from Christmas 2002. Inventory ballooned by 40 per cent in some outlets.

This dilemma was not due to too little innovation, but rather a shocking lack of profitable innovation. All the creativity from the previous few years had generated a wealth of new products, but only 6 per cent were actually making money.

Amidst this new and somewhat deeper crisis, a new Lego CEO by the name of Jorgen Knudstorp was appointed in 2004.

Reconnecting with core audiences

Mr Knudstorp quickly identified that the Lego Group had over-innovated, spread itself far too thin and had launched so many new initiatives that the company had lost a "crisp sense of identity". In short, the company was in desperate need of a prune.

A key focus on turnaround strategy was to return to ‘core products’. Lego sold off assets such as the LegoLand theme parks and eliminated almost 30 per cent of the company’s product lines.

Production processes also required attention. In just seven years, from 1997 to 2004, the number of elements in the company’s inventory had exploded, ascending from slightly more than 6,000 to more than 14,200. So had its range of colours, from the original six to more than 50.

Despite this volume, some 90 per cent of the new elements were used just once, and with all this increased complexity, manufacturing costs skyrocketed.

Mr Knudstorp’s strategy was to reduce the number of components in Lego’s product portfolio by a full 50 per cent.

The results were almost immediate. By the end of 2005, Lego rebounded from a US$292 million loss the previous year to a pre-tax profit of US$117 million.

That same year, the company would post sales of US$1.2 billion but, more importantly, profitability would more than triple.

Just over a decade later, Lego’s turnaround has been nothing short of breathtaking. In September 2014, for instance, they overtook Mattel as the world’s biggest toymaker — an enormous accomplishment by any measure. Less than a year later, Lego was voted the most popular toy of all time.

Today, children around the world spend a combined five billion hours playing with Lego products each year.

Every second, seven Lego sets are sold somewhere on the planet, with Lego’s extensive network of factories churning out a staggering 22 billion plastic bricks each year — roughly 500 bricks per second.

The reality, though, is that Lego is only enjoying this staggering level of momentum because it was willing to prune.

As Jim Collins points out in his book How the Mighty Fall, companies that come back from the brink of downfall end up being stronger as a result of the experience.

Lego is certainly a case in point – its near-death experience was perhaps the best thing that ever happened to it!

Michael McQueen is a business strategist and author of Momentum: How to Build it, Keep it, or Get it Back


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