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Brick by Brick
Case Study
Sometimes, a company's history contains more drama than a Russian novel. A recent case, "LEGO," explores how the toy maker grew to global dominance from humble beginnings, the mistakes that led it near bankruptcy, and why one turnaround attempt failed while a second succeeded. Stefan Thomke , the William Barclay Harding Professor of Business Administration, wrote the case with Jan Rivkin, the Bruce V. Rauner Professor of Business Administration, and Daniela Beyersdorfer, associate director of the HBS Europe Research Center.
LEGO began in 1916 as a wood workshop in the small town of Billund, Denmark. Carpenter Ole Kirk Kristiansen eventually shifted the business from making houses and furniture to crafting wooden toys. He based the name of his new venture on "leg godt," the Danish words for "play well." His motto, "Only the best is good enough," would later be carved into a wooden plaque and hung in the workshop.
Godtfred Kirk Kristiansen represented the second generation. The LEGO brick came into being during Godtfred's tenure; he considered it a unique, sturdy, simple product—a system—that offered endless opportunities for creative fun. Godtfred championed slow, steady growth. Because of this, it could take years for a new product to go to market. Green bricks, for instance, appeared in play sets only after a decade-long decision-making process. The snail's pace served the company well, as did Kjeld, the grandson of its founder. Under his management, product demand was so high at times that executives actually found themselves discussing ways to slow sales.
That all changed in the early 1990s as seismic shifts pounded the toy market. Big-box toy discounters lowered prices dramatically, trampling mom-and-pop stores. Meanwhile, birth rates declined, and children had less interest in toys that didn't offer instant gratification. Serious jolts were also taking place in the LEGO Group. Kjeld, out of the office for a year following a serious illness in 1993, appointed a management team to help him run the company when he returned. The group focused on growth.
LEGO building sets became increasingly complex. A line of LEGO-branded children's clothing debuted, and a division of the company pitched book, movie, and TV ideas. While the number of branded items grew, sales did not, and in 1998 the company suffered its first financial loss. "Their top-line growth was slowing down, but their costs were accelerating, so they were starting to lose some significant money," says Thomke.
LEGO hired Danish turnaround expert Poul Plougmann to stanch the red ink, but even after his cost cutting, layoffs, and efforts to globalize, the financial picture grew worse. One problem: The company's growing complexity was choking it. Adding more bricks made products harder to assemble, forecasts harder to determine, and inventory more difficult to manage. The toy maker found itself needing to turn around its turnaround.
Enter Jørgen Knudstorp, just 35 years old when Kjeld promoted him from director of strategic development to CEO in 2004. Knudstorp's slow-it-down approach of managing cash carefully, focusing on core products, and reducing product complexity certainly contributed to that success. It also required re-engaging with customers, many of whom passed a love of LEGOs to their children.
Although innovation was a core strength of LEGO, Knudstorp had seen the result of unconstrained creativity. New product design was soon informed by market research, community feedback, and how well the toys matched the vision of quality creative play laid out by its founders. Putting parameters on how people innovate had the paradoxical effect of making them better at it. Knudstorp also did away with many of the unique brick components added during Plougmann's tenure, and eventually decided to bring brick manufacturing back in-house for quality control.
Emphasizing simplicity, clarifying the core of its business, and engaging the larger community helped save the LEGO Group. Although Kundstorp was not a Kristiansen by birth, his management style and business ideals closely mirrored those of its founding fathers. Only the best was, and is, good enough.
—Maggie Starvish is a freelance writer for HBS Working Knowledge.
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