In 1998, Lego hired a turnaround expert, Poul Plougmann, and offered him a hefty bonus to double sales by 2005. Plougmann tried to earn it by adopting a raft of innovation strategies. He set sail for “blue ocean” markets by introducing electronic educational toys under the Lego brand and, following the company’s success with Star Wars–branded products, partnered with Steven Spielberg to create a Lego movie studio. To become more customer driven and respond to current trends, the company even created, at Plougmann’s prodding, a completely new toy system without the ubiquitous plastic bricks and entered the hugely popular action figure market. Plougmann also started an ambitious project to digitize the Lego experience and offer kids the opportunity to build virtual structures. He tapped open innovation and heeded the wisdom of crowds by creating the Lego Digital Designer, which encouraged customers to design their own kits.
Plougmann and his lieutenants shook Lego out of its slumber, and rebuilt its culture around creativity and innovation. And then, four years later, in 2002, Lego experienced a disastrous sales slump in the critical Christmas season. In 2003, sales were 30 percent lower year over year and the company was US$800 million in debt. Annual cash flow was negative by $160 million, and the net loss was nearly double that figure. What had gone wrong? The short answer is that the volume and variety of innovations had overwhelmed the company’s capacity to handle change. The long answer makes up the rest of the book.
In early 2004, Kristiansen announced that Plougmann and his chief designer were out, and resumed leadership. He tapped 35-year-old Jorgen Vig Knudstorp, a fairly recent hire from McKinsey, to manage day-to-day operations. Knudstorp laid off 1,200 people and stanched the flow of red ink. Exploring the root causes of Lego’s problems, he realized that the frenetic pace of innovation had resulted in a proliferation of plastic parts that destroyed Lego’s economies of scale and cost discipline. Worse still, the company’s control systems were incapable of telling which products were profitable and which were not (94 percent were not). At the same time, Lego had lost its focus on the retailers that were its primary channel to consumers.
Knudstorp understood that Lego had to return to basics, stepping back before it could move ahead. One legacy of the undisciplined creativity of the Plougmann era provided Lego with the key insight and product line that would power a new way of thinking. The insight was that kids don’t just want to build things; they also want to tell compelling stories with the things they build. The product line was Bionicle, which married character assembly sets with an elaborate futuristic story line.
Bionicle, a portmanteau word derived from biological chronicle, was an artful combination of model building, storytelling, and adventure. Launched at the end of 2000, it was an immediate hit. Bionicle books and comics became bestsellers. Video games, clothing, lunch boxes, and backpacks followed. By 2003, the line was producing 25 percent of Lego’s revenues. “Bionicle is the toy that saved the Lego,” said Knudstorp.
The lessons in the Lego saga are many, but the bottom line is that although the desired outcomes of change (such as profitability and market share) are often generic, the hows are particular. Every organization has to find its own sequence and cadence. Poul Plougmann and his team got the coarse-grained headings on their action plans right, but their achievement depended on the deep, fine-grained appreciation of Lego’s culture and capabilities brought by Kristiansen, Knudstorp, and others.
Each of this year’s best business books relating company stories offers valuable lessons for leaders. For its evocative power and appreciation of all that is essential to life that cannot be measured in money, my Top Shelf selection is Story of My People, the first work of nonfiction to win Italy’s most prestigious literary award, the Strega Prize. In the ecology of Western capitalism, Prato is an edge community—one of those places where the future often appears first. Nesi’s tale is a valuable warning about how easy it is to sacrifice community on the altar of the marketplace.