Block by Block: How LEGO came to dominate its market

Like a home, companies need a solid foundation to ensure they can withstand the test of time. LEGO—the Danish toy manufacturer—is one of those companies with a solid foundation. But unlike other firms, it has chosen to build this foundation using its iconic multi-colored, plastic, and easily snappable bricks. The world-famous LEGO brick has both propelled the company to its current success, and has laid the foundations for future growth. And while these foundations have slowly been built up, in the early 2000s the company was in a state of near-bankruptcy. How did it manage to turnaround its business and emerge as one of the world’s leading toy companies? The answer lies in going back to the basics.

Nowadays, the LEGO Group is among the world’s most recognizable companies, and certainly the most well-known toy company in the world. The company’s name is an abbreviation of the Danish words 'leg godt' which together translate to 'play well.' According to Forbes, it was ranked as the world’s 91st most valuable company in 2018, with a valuation of nearly $7.8 billion. During that same year, it had sales totaling some $5.1 billion. Back in 2015, it was ranked first in Forbes MostValuable Brand list, which rates companies based off of 'marketing-related intangible assets including names, signs, symbols, logos, and designs.' A 2017 report byBrand Finance noted that LEGO’s cross-generational appeal and the creative freedom it gives children were reasons why it became the world’s most valuable toy company, outperforming rivals Mattel and Hasbro. LEGO has seen several years of sustained growth in sales and marketshare, but things weren’t always so stable.

But just 16 years ago, in 2003, LEGO was on the brink of bankruptcy. It had acquired a debt of some $800 million, a negative cashflow of $160 million, and a year-on-year 30%fall in sales. In the 1990s, it had experienced consistent but stagnating growth rates.With the popularization of computers and electronic games, LEGO worried that it would start losing its share of the market if it did not adapt to this new consumer landscape. Hiring business consultants to advise it on its performance, LEGO started moving away from its core toy brick business. As theFinancial Review writes, it started rapidly expanding its product line to better compete with companies likeHasbro, which sold a wide range of toys fora varied target audience. The number of parts required to manufacture these newlines rose rapidly—from 6,000 to more than 12,000—which proved to be logistically difficult and expensive. Many of these new products included motorized and electronic elements; however, these frequently proved to be more expensive to make than their selling price. According to BusinessInsider, the rapid increase in the variety of toys sold by LEGO, many of which were commercial failures, proved to be expensive and moved the company away from its iconic toy brick models at a huge cost.

To compound the profit-related problems, the company’s structure was also in shambles. In the years leading up to 2003, many of its long-serving designers were fired and people with little knowledge or appreciation of the company’s roots were hired. Their attempt to innovate resulted in the creation of product lines that did not cater to consumer demand, resulting in plunging sales. LEGO also decided to branch out of toy making and started expanding its theme park network globally. However, with little experience inhospitality, operating these establishments proved to be a logistic and financial strain on the firm, and loss-making continued.

During these turbulent years, the main drivers of sales within the company were LEGO’s licensing deals with multi-million dollar blockbuster franchises like StarWars and Harry Potter. While providing millions of dollars in income, LEGO came to depend on the fate of other companies—in this case Hollywood blockbusters—to drive its own growth. Sales of its most profitable lines fluctuated based on movie release dates, which LEGO did not control.The company did well in the years when movies premiered, but sales plunged in ears when no new movies were produced.As a result, as then-COO Poul Plougmann explained, LEGO saw weak demand for its toys in 2003 and was essentially left without a profitable product line in that year. The company was on the brink of bankruptcy. So what changed?

By revamping the products that clients had grown to love over the decades of LEGO’s existence, the company ensured its survival.

That’s where Jørgen Vig Knudstorp comes in, taking over the company as its CEO in 2004. His strategy was a unique mix of innovation and going back to the basics. By revamping the products that clients had grown to love over the decades of LEGO’s existence—and modifying them in ways to ensure their relevance and continued popularity—the company ensured its survival.

Knudstorp’s first decisions included widespread structural and financial reforms. Manufacturing was moved fromDenmark to a number of developing countries where production-related costs were significantly cheaper. LEGO’s oversized workforce was significantly reduced. LEGOland, the company’s collection of theme parks, was sold for some $460 million. Though painful, these actions streamlined a company which had lost its 'dynamism' and entrepreneurial feel during the preceding decade. AsWharton’s business analysis journal reported, they reduced losses and set the stage for a new period of rapid growth.

This growth mainly came from a healthy balance of going 'back to the basics' while simultaneously looking towards the future. Knudstorp reduced the number of components manufactured by LEGO to only about 3,000, therefore limiting the firm’s offerings to those products that had proved to be popular with clients in the past. At the same time, the Global Insights division was created, the purpose of which was to research market trends and find out what parents and children wanted to see. An entrepreneurial atmosphere was fostered by LEGO’s Future Lab, which brought together designers from around the world and encouraged them to experiment and, through a trial-and-error approach, create toys that were truly sought-after. As Jonathan Ringen says in his 2015 article on the firm’s revitalization, LEGO became 'the Apple of toys.'

The company threw itself into a variety of new ventures while still retaining its original products. In 2007, it paired up withChicago-based architect Adam Reed Tucker, who had been constructing buildings out of LEGO bricks. What was born as a result was a new line of new products named LEGO Architecture. World-famous landmarks like the Eiffel Tower and The Statue of Liberty could be replicated in miniature forms using LEGO’s colorful bricks. These were cleverly targeted at a more adult-dominated demographic, and consequently sold at a premium price. While this line saw LEGO venture out of its typical product and audience range, the Architecture series nonetheless retained a distinctly-LEGO feel that played to people’s nostalgia. Its iconic brick remained central to the line, and thus LEGO fused innovation and experimentation with a throwback to the classics.

LEGO also learned from its past mistakes. Rather than relying on outside franchises to drive growth, like it did in the early 2000s with Star Wars and HarryPotter, LEGO decided to create its own series of blockbuster movies. In 2014, it released The LEGO Movie, which brought in some $500 million for the company, according to The CFO Center. This was widely seen as an attempt to appease an increasingly online and electronics-focused target audience. However, unlike its ventures into a more technologically-dominated market in the early 2000s, this time around the central heroes both on-screen and on store shelves remained its basic bricks and mini figures. LEGO’s venture into the film industry was yet another example of experimentation fused with the classics.

LEGO’s turnaround from its existential crisis in 2003 is remarkable. One of the world’s most recognized companies has seen exceptional growth over the past decade and a half. Through a mixture of old and new, LEGO has cherished the classics while embracing innovation, entrepreneurship, and technological change. LEGO demonstrates that companies that have grown large and cumbersome can adapt to rapid change and re-emerge as market leaders; by encouraging experimentation, listening to consumer desires, and staying true to their businesses’ foundations, LEGO has declared its intention to grow and deliver. By preserving this spirit of creativity and exploration, it has secured its place in our homes for years to come.