This post is in partnership with Knowledge@Wharton, the online research and business analysis journal of the Wharton School of the University of Pennsylvania. A version of the article below was originally published at knowledge.wharton.upenn.edu.
Few toys have caught the imagination of children everywhere more than LEGOs — the multi-colored plastic blocks that can snap together to construct houses, castles, space ships or fantastical imaginary figures. The Danish company (whose name roughly translates to “play well”) traces its roots to a failed carpenter named Ole Kirk Christiansen, who in 1932 decided to put his skills to work creating toys made of wood. In the late 1940s, Christiansen invested in the then-risky injection molding technology needed to make the plastic blocks. In the late 1950s, Ole Kirk’s son, Godtfred, came up with the interlocking stud-and-tube design that made the company a household name.
But there is a side to the company’s story that is rarely told, one that Wharton practice professor David Robertson says can serve as a guide to both the importance and the perils of innovation in today’s global marketplace. In his new book, Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry, Robertson, who wrote the book with journalist Bill Breen, recounts how a binge of innovation almost bankrupted LEGO — and how the company brought itself back from the brink by returning to its roots.
An excerpt of the edited conversation follows. You can read the entire conversation here.
LEGO went through a decline in the 1990s and the 2000s. There are plenty of stories out there about companies that responded too late to changes that would significantly impact their business or how their customers lived. Is that what happened with LEGO, or was there something different going on?
Robertson: There were two phases in that decline, and one led to the other. The first one was from 1993 to 1998; LEGO went through this stagnant period where really it had reached the end of a natural growth cycle. There are only so many feet of toy space and so many toy stores around the world, and LEGO was on those shelves already….
LEGO tried to keep the growth going by tripling the number of new toys that it offered between 1993 and 1998, but sales didn’t go anywhere. Cost, on the other hand — as you can imagine, if you triple your number of products without changing your sales, your costs go up, your profits go down and LEGO suffered the first loss in company history in 1998. So the company laid off 1,000 people. The grandson of the founder, who has now been leading the company for 20 years, steps aside. He says, “Maybe I’m not the right person to lead this company in the next generation.”
He brings in a turnaround expert, and that guy finishes the layoff. His name is Poul Plougmann, and he realizes that LEGO is actually operating in a very different world than it was just 10 years before. He goes out and he starts looking at the market and finds that kids are getting older [at a] younger [age], that the whole market for toys has changed with companies like Toys R Us and Walmart being much more sophisticated, much more powerful, in terms of their market power. Lastly, a lot of other toys had switched their production to China, and so their toys, the other toys you could buy for your kids [besides LEGOs], were getting cheaper. On the other hand, the Danish kroner had increased in value against the dollar, and LEGOs were still being made in Denmark. So LEGOs were getting more expensive while other toys were getting less expensive, kind of a double hit. The company realized that it really needed to do something different. And that’s when they embarked on this experiment with innovation.
When the company begins its push for innovation, it introduces a lot of what sounds like “can’t miss” products, including collaborations with the creators of Star Wars and the Harry Potter books. There was also some really innovative work going on that involved computerizing LEGO’s trademark blocks and putting them into a virtual world. But the company still finds itself in deep financial trouble — why is that? What was leadership missing when they were embarking on this campaign of innovation? Do you think they could have seen the problems if they had been paying attention to different things?
Robertson: The short answer to that question is that they lost control of the innovation. They tried to innovate in lots of different ways, and they did. They came out with a lot of different toys. Some of those toys were hits like LEGO Star Wars, LEGO Harry Potter and Bionicle. There were a couple of really big hits, and in a way, those were really dangerous for LEGO because [they created] a thick layer of cosmetics that hid a pretty ugly business underneath.
There was a toy called Explore that was a line of toys for toddlers, and they were actually pretty good toys, just from my point of view. But they weren’t very LEGO-y. They didn’t have much construction as part of the toy. LEGO tried to listen to its customers, which you’re supposed to do, and they came out with a line of toys called Jack Stone, which was this minifigure crossed with G.I. Joe, this hero that would save the day. The thing is, these toys were really built for that child who didn’t like LEGO, which was the majority of kids, the company found from one study. These toys would snap together in about 10 minutes and the kids could start playing.
But a lot of us as parents, the reason we buy LEGO for our kids — and we may not admit it to ourselves — it’s that rainy Sunday afternoon when the kids are driving us nuts and we want a couple hours of quiet, so we get the LEGO set. Well, if you bought the Jack Stone set, you would have 10 minutes and then the kids are running around screaming again. So it drove away some of the fans of the brand.
Lastly, one of the experiments that LEGO did during that time was something called Galidor, a huge, expensive failure. It was a buildable action figure, which there was a big market for. What the company tried to do is something that we suggest here still at Wharton: To try and create a full spectrum of innovation, a whole set of complementary innovations that will reinforce each other. Galidor wasn’t just a toy; it had electronics in it that you could play games in. It had an accompanying video game. It had a TV show that would tell kids the story behind the toy. They did all kinds of marketing so there would be Galidor toys in McDonald’s Happy Meals and lots of different innovations that would all build to create this unbeatable offer in the market.
But LEGO kind of got away from what it knew how to do. The TV show, for example, was so bad. And I looked this up on IMDB: Nobody who ever acted in it acted in anything ever again. It destroyed careers. It was just stunningly bad because LEGO drove that show and really didn’t know how to do that.
It took them a while to figure all this stuff out. The problem was that they had these successes from Star Wars and Harry Potter, but those successes were really only successful in years in which there was a movie. So there was a Star Wars movie in 1999 and 2002. There was a Harry Potter movie in 2001 and 2002. There was no movie from either franchise in 2003 or the first half of 2004. Sales of those two toys fall off a cliff, and LEGO is left with one profitable product, Bionicle. Everything else is losing money, and LEGO is a fixed cost business. So if you get above a certain level, then you start making money very fast. If you fall below a certain level, you start losing money very fast. And LEGO started losing money very fast in 2003.
That would be the time that I would think a lot of firms would have completely abandoned an innovation strategy and said, “We don’t have the money; we don’t have the time to innovate. We have to concentrate on survival.” But LEGO didn’t really do that. What did it do, and what do you think the lesson is there for other firms?
Robertson: Well, they really had no choice. They had to innovate. They’re in a market that is a vicious global competition, with fickle customers who have rapidly changing tastes. If you’re in the toy industry, like in many industries, you have to renew your product line every year or two. And so LEGO had no choice but to innovate.
But they cut it way back. What they realized is that these ideas about how you should innovate, all of the things that drove them from 1999 to 2003, had driven them out of control. The “out of the box” thinking almost put them out of business. What they did after 2003 is they kind of went back in the box. They went back to the brick, and they focused more on the police stations and the fire trucks and the other things that not only were what their fans wanted, but were also pretty profitable for them. When they went back in the box, they found that there was a lot of money in the box and that fans returned to the brand.