18 Mar 2013  HBS Cases

HBS Cases: LEGO

LEGO toys have captivated children and their parents for 80 years. But managing the enterprise has not always been fun and games. Professor Stefan H. Thomke explains the lessons behind a new case on the company.

 

Although it isn't part of the admissions criteria, experience playing with LEGOs can come in handy at Harvard Business School.

When Stefan H. Thomke teaches his new case about the iconic toy company, he gives students eight-studded LEGO building bricks to figure out how many different ways they can be combined. Thomke's experience goes back a long way—as a kid growing up in Germany he participated in a LEGO competition. As an adult, though, his interests lie more in the business behind the bricks. "When you've written many cases you have a gut feeling that one like this could be really great," he says.

Thomke, the William Barclay Harding Professor of Business Administration, wrote the case with Harvard Business School's Jan W. Rivkin, the Bruce V. Rauner Professor of Business Administration, and Daniela Beyersdorfer, associate director of the HBS Europe Research Center.

LEGO explores how the company-one of the most profitable toymakers in the world-grew to global dominance from humble beginnings; the mistakes that led it near bankruptcy; and why one turnaround attempt failed while a second succeeded. LEGO executives were unusually supportive about the case-writing process, Thomke says. "We had access to everybody; they wanted the story to be told truthfully, with all the good and the bad."

Building at the start

Part of that access included a visit to a wood craftsman's workshop in the small town of Billund, Denmark, where LEGO began, in 1916. 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 the Danish words for "play well" (and, as it turned out, the Latin words for "to assemble"). His motto "Only the best is good enough" would later be carved into a wooden plaque and hung in the workshop. These themes of good play and quality products were both bedrocks and touchstones for future generations of LEGO toy makers.

Godtfred Kirk Kristiansen represented the second generation, working alongside his father at age 12. The LEGO brick played with by kids and adults around the globe came into being during Godtfred's tenure. He considered it a unique, sturdy, simple product—a system—that offered endless opportunities for creative fun, and drew up a list of product characteristics including "long hours of play" and "quality in every detail" that was distributed to everyone in the company.

Like his father, Godtfred paid careful attention to every aspect of the business, applying, for example, his knowledge of material science and production technology to the brick-manufacturing process. It's because of these precise specifications that bricks made under his watch are interchangeable with those available today. Godtfred's cautious nature extended all the way to the profit margins: he 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 decadelong decision-making process-and the idea to include them came from Godtfred's son (and third-generation toymaker), Kjeld.

The snail's pace served the company well, as did the grandson of its founder. Under Kjeld's management, product demand was so high at times that executives actually found themselves discussing ways to slow sales.

A shock to the system

That all changed in the early 1990s as seismic shifts pounded the toy market. Big Box toy discounters trampled mom-and-pops and lowered prices dramatically. Meanwhile, birth rates declined, children had less time to play and not much interest in toys that didn't offer instant gratification. "These changes did not play well to our strengths," observed current CEO Jørgen Vig Knudstorp in the case.

Serious jolts were also taking place in the LEGO Group. Out of work for a year following a serious illness in 1993, Kjeld appointed a five-person management team to help him run the company when he returned. The group focused mainly on driving growth. When a benchmarking study revealed LEGO's global name recognition was on par with industry giants like Disney, the team started churning out new products and ideas to leverage the brand's untapped value. A line of LEGO-branded children's wear was created and a division of the LEGO Group was charged with pitching book, movie, and TV ideas. LEGO building sets became increasingly complex with more unique components.

While the number of LEGO-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 cost was accelerating, so they were starting to lose some significant money," says Thomke.

Danish turnaround expert Poul Plougmann was hired to reassemble LEGO and staunch the red ink. "He comes in and … does things by the book," says Thomke. "He lays people off, he streamlines some things, he globalizes." And yet the financial picture grew worse. "He's basically going by the turnaround book, but it doesn't work."

One continuing problem: the company's growing complexity was choking it. Adding more bricks made products harder to assemble, forecasts harder to determine, and inventory harder to manage. Depending on the kit, there was either too much inventory, or no inventory at all, and restocking could take months.

"You had this multiplier effect of added complexity that went through the entire supply chain," Thomke says.

LEGO has built one of the most profitable toy companies in the world.

The LEGO Group had also gotten too far away from the core values it had been building on for the better part of a century. The toymaker found itself needing to turn around its turnaround.

Outside the family

Enter Jørgen Knudstorp. He was just 35 years old when Kjeld promoted him from director of strategic development to CEO in 2004. (Kjeld retired that same year.)

Like Plougmann, he had no family ties to the company. Unlike Plougmann, his turnaround attempt succeeded. Knudstorp's slow-it-down approach of careful cash management, focusing on core products, and reducing product complexity certainly contributed to that success. It would also take re-engaging with customers, many of whom passed a love of LEGOs to their children while still connecting with the toys themselves. "One of the insights Jørgen had when he became CEO was that he needed to reconnect with the community [of loyal LEGO fans], one of the most powerful assets the company had," says Thomke. "It was a huge part of the comeback."

Knudstorp worked hard to define the core business of the company. "How you work with, and experiment outside of, the core of your business is part of that balance," explains Thomke.

Knudstorp recognized that innovation was part of that core, but he'd also seen the result of unconstrained creativity, so new product design began to be informed by market research, user feedback, and how well the toys matched the vision of quality creative play laid out by its founding fathers. Putting parameters on how people innovate had the paradoxical effect of making them better at it.

Reining in the creative process was part of a larger push by Knudstorp to reduce overall complexity within the organization. On the supply chain side, he did away with many of the unique brick components added during Plougmann's tenure, and eventually decided to bring brick manufacturing back in-house to ensure quality control.

Finally, Knudstorp made big changes to the management team, firing five of seven manufacturing executives and appointing a new leader for the team. A psychoanalyst was brought in to teach the management team how to identify decision-making made by logic versus emotion.

Sustainable and balanced

It turns out that LEGOs promote lifelong learning. While the bricks themselves teach children the fundamentals of construction and creativity, the company's almost century-old history of management change has important lessons for businesspeople. "Managing sustainable growth is also about managing a balanced business system," says Thomke. "Complexity is something you need to watch very closely."

Controlling complexity, clarifying the core of its business, and engaging the larger community helped save the LEGO Group. Although he was not a Kristiansen by birth, Knudstorp's management style and business ideals closely mirrored those of its founding fathers. Only the best was, and is, good enough.

About the author

Maggie Starvish is a writer based in Somerville, Massachusetts.

Comments

    • marcos Vizcaino Gerlach
    • KAM, HABERMAA?

    Good article. Lego is in many countries brand number 1. Although birth rates declined and decline now still the growth due that many of the people that play LEGO are not kids but adults!

     
     
     
    • Romuald Kepa
    • self-employed

    I believe this article is a perfect companion to the seminal work "What Leaders Really Do" by John P. Kotter, HBR 1990. Strong leadership without strong management is a lottery game.

     
     
     
    • Ted Gutelius

    Our grandchildren love LEGO. But each package (and they have lots) contains a specific product--a firehouse or police station. They do not build different products or toys out of the same box. So it's not so much innovation, but following directions.

    The article says that product complexity has been reduced. With nearly 1,000 parts in any one box, that does not seem to be the case. The kids love having 1,000 parts.

    Perhaps this article is not the current LEGO?

     
     
     
    • Dr. Mrunal Asher
    • Director, ITM's Institute of Management & Research, Nagpur

    A very interesting case to understand how a word's reputed firm can go bankrupt if market forces are not recognized in time. 4 Ps of marketing is somewhere neglected while following the legacy of driving the growth with high brand image. Competition, Pricing and the Demand Pattern need to be watched carefully with marketing research efforts. Liked the decision-making approach focusing on systems and simplifying the complexity in managing the business, keeping aside emotions. One needs to be really tough and quick in turn-around efforts once the loopholes are correctly identified.

     
     
     
    • Kapil Kumar Sopory
    • Company Secretary, SMEC(India) Private Limited

    LEGO is a well known brand name and the products have generally been in good demand. This article shows how leadership needs to develop to control complexity of a firm's operations. It also reflects focused vision on what is planned and how the future would be improved.

     
     
     
    • ?va Varga
    • Managing Director, E M Consutlancy

    Here once again is a classic example of how companies can go so terribly wrong when they stray off the 'KISS' principle and lose sight of their clients, their core values and thereby the integrity of their products. In LEGO's case Knudstorp's management style of 'going forward to basics' thankfully saved the day - not only to their bottom line, but also to the continued enjoyment and development of many.

     
     
     
    • Phillip Gelman
    • Managing Partner, MoneyInTheTill.com

    One can be too easily seduced by the ephemeral and forget that his business is with basics - as the LEGO case shows. LEGO provided a child with the opportunity top create. Ready-made kits do not offer any creativity: once a kit is assembled it has no further function. Do not lose sight of your original mission. If it aint broke, don't fix it.

     
     
     
    • Anders Sorman-Nilsson
    • Managing Director, Thinque

    Interesting article. I have written extensively about Lego and how it used the process above to re-invent itself and kick into the S-curve of the Business Life Cycle (which others like Kodak failed to do). One of the most interesting things about Knudstorp is how he combined both the timeless classics and culture of the organisation and combined them with timely, on trend developments in the marketplace. In a sense he blended digital developments with analogue developments, and together with focus and relentless simplicity, the company survived and has gone from strength to strength since 2005. You can check out my blog on this at http://thinque.com.au/blog/retail-futurist-re-imagining-legos-toy-story.php - Anders

     
     
     
    • Ryan Fong
    • Father

    The creativity comes when after the child has followed the instructions and built the set, they take it apart and start making new creations out of multiple previous sets. That is what my 10 year old son does.

     
     
     
    • Carsten
    • CEO, One

    From Denmark and only a short comment. Mr. Knudstorp has made one of the most amazing transformation ever seen. High perfomance and Cut Cost, driven marketing , people Leader and focus on retail. Thats World class perfomance.

     
     
     
    • Anonymous

    The Lego Education products are a great investment that too many people still don't know about. Homeschoolers especially but other engineering-oriented extra curricular students very often have bought from the catalog when I've showed it to them. The Lego Education line is still a little too hidden.

     
     
     
    • Noman Ahmed Khan
    • CEO, BiMS COLLEGE

    Excellent case. Managing supply chain complexity and continuously inventing oneself toward customer centricity is a must in today's market.

     
     
     
    • Tim Oei
    • CEO, AWWA

    This case study hits home for me the point of not complicating the business. Being in social services, the "slow-it-down" approach and reconnecting with the community is a vital message for me.

    PS I love Lego and enjoyed playing with them with my children when they were young. By the way, they are still playing with the same toys now and have great conversations whilst building new creations! Thank you Lego!

     
     
     
    • Chris Sutcliffe
    • Owner, The Bean People

    I think one of the greatest values of Lego as a product is that it lasts! My son inherited his mother's Lego and we added to it as he constructed more and more things with it. It does not break and it does not wear out. Our son is now older but we still keep the bucket of Lego for when younger kids visit and for the day when we shall pass it on to our grand kids. Well done Lego and yes, keep it less complex so that the kids can build their own inventions.