LEGO's Escape From Near Bankruptcy: A Business Documentary

LEGO is now the largest toy company in the world and its growth shows no signs of slowing down, but this wasn’t always the case.

As young kids were increasingly spending more of their time on digital entertainment and less time with physical toys in the 90s, LEGO was seriously worried that it was at risk of losing the interest of an entire generation of children and its core business of iconic building bricks.

So the company began to heavily focus on innovation and diversifying its business as quickly as possible. LEGO began to invest heavily in creating its own digital entertainment and video games with an in house computer game division. It also opened several new LEGOLAND theme parks all over the world, and it created many new toy product lines using new and specialized parts.

The conventional business wisdom is that innovation is important for any company that wants to grow, but LEGO’s massive expansion didn’t really work. Most of these new ventures were very costly and had poor sales upon release, so LEGO’s innovation binge cost the company lots of money. In 2003, the company posted a net loss of $300 million dollars for the year.

It was clear that serious changes needed to be made if the company wanted to survive and avoid bankruptcy. The company hired the management consultant Jorgen Vig Knudstorp who found that LEGO needed to control its costs and focus its ambitions if it wanted to survive. The Kristiansen family agreed with his vision, so the family stepped down from active management in LEGO and hired Jorgen as CEO in 2004.

Jorgen had to act quickly to get LEGO some cash, so he began to sell off assets that the company could use to fund its operations for their strategic pivot. LEGO sold a 70% stake in its LEGOLAND theme parks to Blackstone for $460 million and closed the company’s corporate office. Unprofitable segments of the business like the LEGO computer games division were also shut down.

LEGO then turned its attention and focused its efforts on its core business and product: the LEGO brick itself. You see, during this time period in LEGO’s history, the number of different kinds of pieces it was manufacturing had skyrocketed from around 6,000 to over 12,000 total.

The company also was introducing new product lines that often were nothing like the company’s classic building bricks. Themes like Znap, Primo, Scala, and Galidor were virtually unrecognizable as LEGO products and none of them sold well or were successful: but they certainly added to the company’s rising manufacturing costs.

This bloat in the number of different parts they were manufacturing was a huge problem because while its manufacturing, storage, and logistics costs were going up, all of these specialized new pieces weren’t actually helping create any new sales or adding top line revenue. This left LEGO with growing costs and quickly shrinking profit margins.

To get its costs back on track, LEGO simplified its manufacturing processes and slashed the number of new pieces it was creating. Under Jorgen, the company cut the number of active kinds of LEGO pieces in half which greatly simplified its logistics and lowered costs. The company also integrated its design process with accurate information about manufacturing costs so that it could effectively set prices for its products.

Another huge part of what saved LEGO and helped the company survive was its focus on strategic partnerships and forming licensing deals with brands like Star Wars. The company first forged a strategic partnership with the Star Wars brand in 1999 for the release of Episode 1 the Phantom Menace. The sets were a smash hit as passionate Star Wars fans bought LEGO versions of some of the most iconic characters and scenes from their favorite movies.

This showed LEGO that they could expand the popularity of the LEGO brand and reach new audiences and fan bases by partnering with other franchises. This was a win-win for both companies – brands like Star Wars would receive a cut of the merchandise profits from LEGO and LEGO could tap into the popularity of recent blockbuster movie releases and all of the marketing that comes with them in order to boost their sales.

To this day, Star Wars remains one of the most successful LEGO themes of all time and it has been a mainstay in LEGO’s catalog since 1999. Its success for LEGO sparked future licensing deals with franchises like Harry Potter, Marvel, Lord of the Rings, Jurassic Park, and Minecraft that have continued to propel LEGO’s business higher and higher.

LEGO’s comeback from near bankruptcy is a great case study on the dangers of expanding a business too quickly and losing sight of the core product and audience. Investing in tons of unprofitable innovations that were dead ends nearly bankrupted the company, but by recentering the company’s focus on its core product, LEGO was able to avoid bankruptcy and get back to what made it a success in the first place: the LEGO brick itself.