Being boldest when challenged most: LEGO

Our third and final element to sustain an outside-in belief system over many years is being boldest when challenged most. When the chips are down, outside-in companies are brave. We’ve seen how Sky launched NOW TV, a pay-as-you-go offering to appeal to millennials, as viewers flocked to disruptive competitors like Netflix. And how Handelsbanken faced up to the UK regulators in order to hold onto its outside-in business model when launching a subsidiary. Meanwhile, in 2004, in a rapidly changing world where children’s’ attention was increasingly dominated by technology, LEGO, the Danish family-owned toy company, returned to its roots of creative play.

LEGO operates in a tough environment competing against toy companies like Mattel and Hasbro, as well as tech companies like Microsoft and Sony. Since its launch as a wooden toy company in 1932, LEGO has always taken a long-term view, seeking to create customer value in new and better ways, whether that means creating plastic bricks when wood was in scarce supply after World War Two or creating the LEGO movie in 2014.

Today, there are more than 3,700 types of basic components, from mini figures to tubes and accessories such as wheels and swords. More than 900 million building combinations are possible with just six bricks of the same colour.41 LEGO mini figures outnumber real people.42

We are interested in the story of LEGO because it has clearly demonstrated a willingness to be boldest when facing a crisis, with numerous examples of this behaviour throughout its long history.

In the aftermath of the Wall Street crash in 1929, Ole Kirk Kristiansen’s carpentry workshop was suffering. Many of Kristiansen’s farmer customers were unable to commission work. Kristiansen laid staff off and focused on what he was best at - stepladders, ironing boards and his personal passion - toys. As his toy orders picked up, he focused on this product line, renamed his company LEGO in 1934 and invested DKK 3,000 in the company’s first milling machine. This was a huge leap of faith at the time when you consider that a house would have cost between DKK 4,000 and 5,000. But this was about quality, and the milling machine enabled Kristiansen to make safer toys with rounded edges at scale.

In 1942, disaster struck. A devastating fire razed the woodworking factory to the ground, destroying Kristiansen’s life work. Without insurance coverage to rebuild the factory, Kristiansen nearly gave it all up. In his memoirs he wrote, T have tried to find another site - but there doesn’t seem to be anywhere suitable ... Our aim is to do a really good and solid and pleasing piece of work so that people will know that LEGO products are quality.’ In the end, Kristiansen took out a sizeable bank loan to build a dedicated toy factory, securing the jobs of his 15 employees. The following year, he was employing 40 people.43

Wood was scarce and expensive after World War II, so Kristiansen needed to rethink. In 1947, he imported an expensive injection-moulding machine, and by 1949, he had developed the company’s first plastic interlocking bricks - Automatic Binding Bricks, 31.8mm long by 15.8mm wide, with eight studs in two rows of four, marketed in sets for kids to build whatever their imagination desired.

Ole Kirk Kristiansen’s sons saw plastic production as ruinous for the business. They decided to persuade their father to switch back exclusively to wood products. Ole Kirk Kristiansen’s response: ‘Have you no faith? Can’t you see? If we get this right, we can sell these bricks all over the world!’44

Quality remained essential for LEGO’s founder, but he had found a new and better way to create value for his customers through plastic bricks, a way to create an even more engaging toy. Staying with wood would have been about protecting an existing business model, acting like an incumbent. Moving to high-quality plastic bricks was a bold, outside-in move that created new value for LEGO customers. It was about being boldest when it mattered most.

After decades of growth, LEGO had become synonymous with children’s play. With three or more generations across the Western world knowing the unmistakable LEGO bricks, brand awareness and understanding was almost total. Engagement and advocacy were enviable.

But by the late 1990s, under price pressure from large retailers and with growth slowing, LEGO faced a crisis in confidence. Sales of electronic games were storming ahead, changing customers’ expectations. Executives tortured themselves: how could LEGO remain relevant in this dramatically changing world?

The business went in many directions at once. It chased after the girls’ market with new ranges, even jewellery. It expanded its theme park business. It introduced a line of kids’ clothes and watches. And it made a concerted attempt to develop LEGO-themed video games. In 2003, LEGO’s sales dropped by almost a third (versus 2002) and the company reported a loss of DKK 935 million. Sales continued to fall in 2004 and with a restructuring in full swing, losses that year mounted to almost DKK 2 billion.

This was a decisive moment, and LEGO’s response - to be true to its outside-in beliefs or to continue to chase sales - was going to be pivotal. Nokia’s response to a similar crisis when Apple invented the iPhone was to continue to try holding back the tide.

By contrast, LEGO’s CEO at the time, Jorgen Vig Knudstorp, led a bold response, returning the toy company to its roots. ‘What we realised is that the more we’re true to ourselves, the better we are,’ he said, quoting TS Eliot’s ‘Little Gidding. ‘The end of all our exploring will be to arrive where we started and know the place for the first time.’45

Mads Nipper led LEGO’s marketing and product development during this period and was also responsible for tackling complacency among employees. The root of the problem was that LEGO had lost touch with its core customers - boys (mostly) and girls aged 5 to 11.

Nipper challenged soothsaying strategists weary of the ‘now’ generation demanding easier more immediate solutions; they believed kids would not spend the time to create and build what was in their imagination. To him the evolution of LEGO’s classic fire truck told an important story. By 2001, the once iconic fire truck was futuristic, replete with bubble cockpit and oversized tyres. And in response to the trend that kids wanted everything now, the construction process had been simplified so the end result could be built more rapidly.

LEGO had lost touch, focusing on retailers and parents because that’s where the money came from, not kids, which is where the value was truly created. Kids that loved LEGO loved the process of construction. Making the end result easier to achieve gave them less value, not more. The toy had fallen between two stools all because an important insight had been lost - kids aren’t obsessed with the outcome at the cost of the process; the fun was in the challenge.46

Nipper reimagined the design process, drastically reducing the total number of parts used across the range. Rather than rubber-stamping each request, he let all the designers vote on proposed new parts. LEGO observer Jaap Grolleman notes:

Gone were the days when designers could (follow) wherever their imagination would take them. When LEGO confined its designers, it ran the risk of diminishing its competitive advantage. Except it didn’t. Gone were the complex components and the fire truck looked like a fire truck. It allowed kids to build their own creations again - instead of being left with components that were already identified.-»

Nipper was determined to bring kids at play back into the centre. He insisted the development teams systematically involve kids in the product design and development process. Just watching and listening to kids tell you what you need to know. ‘Children and drunks are the last honest people left on the face of the earth,’ he said.48

By March 2004, Knudstorp’s dramatic turnaround sold every part of the business that wasn’t core to the product; this included property in the US, South Korea and Australia, four theme parks and a videogames development division. He let go of 1,000 employees and outsourced many processes, reducing the headcount again by 3,500. LEGO reduced the number of parts it used from nearly 7,000 to 3,000, and it injected a sense of urgency into the design and production process, halving the time it took to develop a concept from idea to box from two years to 12 months.4'’ By 2005, the company was again making money - it turned a profit of DKK 505 million (which it tripled in 2006).

Throughout its history, LEGO has understood the importance of being boldest when it matters most. At times when the toy company is challenged hardest, it reacts in an outside-in way. From investing in an expensive plastic moulding machine when wood was scarce after World War Two and using that move to create a better, more engaging toys, to having the courage to return to its roots and help kids play creatively when the rest of the toy industry was chasing technology. It is this bravery that has enabled LEGO to sustain an outside-in belief system successfully over many years.

While LEGO’s dramatic turnaround led to a decade of growth for the toy company, nothing lasts forever. By early 2018, LEGO admitted that it had stretched itself too thin, revealing an 18% slide in pre-tax profits to DKK 10.4 billion in 2017. Chairman Knudstorp realised that once again adding complexity to the company had made it harder for the toymaker to grow further, so the firm pressed ‘the reset button’ with the aim of building ‘a smaller and less complex organisation.’ The work of an outside-in company is never done, and once again LEGO had to be boldest when it mattered most.

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