A play-by-play account of Lego’s decline and resurrection

Walk around the original Legoland in the tiny Danish town of Billund, and it is easy to believe one is in a child’s idea of heaven.

Miniature replicas of Copenhagen’s waterfront and the Millennium Falcon, Han Solo’s spaceship in “Star Wars,” compete with all manner of rides to keep Lego’s target group, boys ages 5 to 9, happy.

This Legoland draws about 1.5 million visitors a year, all attracted by the seemingly simple idea of interlocking tiny plastic bricks. Little wonder that the family-owned company is the world’s most profitable toy maker and the second-largest by sales. But just 10 years ago Lego was on its knees.

Its decline and resurrection form the narrative of the book “Brick by Brick: How Lego Rewrote the Rules of Innovation and Conquered the Global Toy Industry.” It was written by David Robertson with Bill Breen and published by Crown Books.

Robertson is a former Lego professor of innovation and technology management at Switzerland’s Institute for Management Development, but now at the Wharton School at the University of Pennsylvania. The raw material he deals with is every bit as durable and gripping as Lego bricks.

In the 1980s and early 1990s, the company enjoyed fantastic growth as it introduced new themes, such as castles and space, as well as figures with facial features. Its first licensed product — “Star Wars” in 1999 — seemed the crowning glory.

But some of its top managers feared the brick was no longer chic. Children seemed keener to play video games or take up fads such as Tamagotchi, the hand-held digital pet.

Robertson tells the resulting roller-coaster tale mainly from the angle of innovation. In 1998, panicking as the company experienced its first loss since being founded in the 1930s, the Kristiansen family owners turned to Poul Plougmann, formerly an executive at Bang & Olufsen, the television and hi-fi maker.

The thesis of the book is that Plougmann adopted all the main tenets of the innovation playbook — such as hiring diverse and creative people and fostering open innovation — but executed many of them wrongly. Lego not only started too many projects, but also seemed to lose confidence in its core concept of building toys, embracing an easier-to-construct series around a character called Jack Stone.

The result was a company that was losing money and bleeding cash, fast. Joergen Vig Knudstorp, a former management consultant at McKinsey & Co. who was asked for a diagnosis, told directors, “We are on a burning platform.” The problem was not lack of innovation, but lack of profitable innovation.

Knudstorp became chief executive and set about — in Robertson’s telling — doing innovation correctly. Jack Stone was dropped, and a fire engine, part of the Lego City line, was reintroduced — as was the Duplo brand for toddlers. Lego staunched the losses, and sales grew fast: its compound annual growth rate in recent years has exceeded 20%.

Robertson tries to tease out the differences in approach between the two CEOs, but parts of the tale read very similarly: innovations and product lines failed under both men. He is mostly successful, but some of the explanations turn on distinctions that are not always easy to grasp.

Another problem is that Lego is saved largely by two lines from Plougmann’s time: Bionicle and Star Wars.

And a big part of the turnaround seems to have had little to do with innovation: Lego lacked basic financial controls and churned out too many different parts.

A simpler Lego, where each line had to make a profit, turned out to be much healthier than an opaque business with insufficient control over what was developed and at what cost.

Still, Robertson’s take on Lego’s success holds plenty of lessons for companies pondering how to remain innovative in a fast-changing world.

With new lines such as Ninjago, products such as board games, and open innovation through fan-designed sets via its Cuusoo platform, Lego is showing how far you can take one simple yet brilliant idea.

Richard Milne is the Oslo correspondent for the Financial Times of London, in which this review first appeared.