Lego: Not Another Brick in the Wall (Street)

Before there were motion pictures, video games and countless licensed minifigs populating shelves across the world, there was a little toy company and a little wooden duck. We explore how Lego built a business brick by brick.

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Episode Transcript

Speaker 1 (00:04):
Founded into Lego brand. Toys and building blocks are a
cornerstone of many people's childhoods. Even adults revel in the
joy and creativity that Legos bring. But despite building their
company on strong foundations, in two thousand and three, this
long standing Danish company was millions of dollars in debt
and on the brink of crumbling selling the product for

(00:26):
less than it costs to produce. So how did this
once popular company get so far in debt and how
did they go from selling product for below cost to
rebuilding into the world's second largest toy company. Let's connect
the bricks and find out. This is Lego on the brain.

(00:53):
So today, obviously we are telling about Lego, which is
famous for the building block toys, although that's not how
the company got started, you're right, Uh. It got started
in two by old Kirk Christiansen, who was a master carpenter,
so he was already doing carpentry work. Yeah, and then
when his carpentry things kind of fell out of demand

(01:15):
because of the Great Depression, he decided to use the
wood that he had left to make toys. He enlisted
the help of his son, Gottfred, who would become very
important to the Lego Company, and he chose the name
Lego for his company, which was inspired by Danish words
leg and gult, which were to play well. Yeah, and

(01:36):
and despite you know what you might deduce, ego does
not mean to eat well. Also, he did not realize
this at the time, but the Latin phrase I put
together is essentially lego. And you might think, oh, how
very clever. And not only was it a Danish phrase,
it was a Latin phrase. Well, that second part was
just happenstance. Yeah, But I will say when he first

(01:58):
started making toys, he actually hit bankruptcy and his family
was telling him to stop, just stop, figure out something
else to do, you know, get a bailout loan, and
he said no, And eventually his company started to take off.
He was really good at making toys. And in the forties,
you know, the best laid plans of mice and men
do have to go aglay. As we understand it, the

(02:20):
factory burned to the ground um and it destroyed their
wooden toys, and it destroyed their plans for new toys.
But you know, thankfully people liked what they're making, so
they were able to turn it around and keep producing
they had made enough money through the toy production that
they were able to have a recovery effort, which is
I mean, this could have been the brink right here,

(02:42):
the idea of you make wooden toys and your factory
caught fire. Yeah, that that would normally be and this
is why the company no longer exists. But because they
were able to rebuild, the story does not end there. Yeah.
Something else they were they were fiddling within the four
these was plastic injection molding, which is a kind of

(03:04):
a cheaper way to produce toys, and they kind of
figured it out, but they weren't allowed to use it
until the end of the forties because of material shortages.
The Danish government said no plastic injection molding right now. Right.
It was a similar issue that you saw during the
war in various countries where certain certain materials were earmarked

(03:25):
for war effort, and in the post war, especially post
war Europe, there were certain materials that were very scarce,
and so once that restriction lifted, they could actually use
this plastic injection molding UH machine to start producing plastic parts.
They made a little plastic balls and stuff early on.

(03:47):
The machine cost thirty thousand Danish krona, and to give
you an idea of how much that was in relation
to the company's value. Around that same time, they had
a revenue of four hundred fifty thousand crowna uh so
thirty crona. That represented a significant uh investment. You know,
it's not quite ten of the value of the company,

(04:09):
but still that's a that's a big investment, it is,
you know, but it did pay off. Now, along with
making lot plastic balls and stuff, they also made tiddley winks.
They had a traffic board game called Monti poly Yeah
Monopoly Monopoly. It's m O N Y p O l
I Yes. And they made their first Lego automatic binding

(04:32):
brick and it just rolls off the tongue. Yes, in
a four and eight stud version in four different colors.
This is a nineteen nine. But they didn't actually completely
come up with the idea. They had borrowed the design
from kitty Craft with their permission. No, this wasn't like
they ended up stealing someone else's designed. They actually they
actually licensed it. In fact, in nineteen eighty one they

(04:55):
bought the rights to the kitty Craft bricks. So I
think this is really interesting that leg O the company
had existed for a couple of decades before making the
product that we all associate with Lego, Like, I don't
even I mostly hear people refer to Lego bricks just
as Legos. Right, that's so you don't even think of
other things that the company has has gotten involved in

(05:18):
nom and and in fact, other snap together bricks like
knockoffs are also called Legos. Yeah. To the point, and
you have this in our notes, it's almost getting to
that stage where it's hard to protect the trademark because
if I thought people use it to refer to a
general line of products, and you haven't been able to

(05:38):
protect your trademark adequately, then it people can just use
it for anything. We see that with clean X and
Xerox and Jello and Lego did have some issues, uh
some lawsuits, but we'll get to that. By the end
of the nineteen forties, they had almost fifty employees and
the blocks were just doing okay at that time. Yeah,
they weren't. They didn't exactly just immediately take off and

(06:00):
become the iconic toy. It's true, um, but they also
in the fifties perfected the Legos coupling system. Yes, and
they patented it. Yeah, this is where you get those
tubes on the inside of the bricks where they snapped together.
And and they also had this philosophy with their bricks
because they had all these different shapes and sizes that

(06:21):
they could make, but they recognized that there was a
real value if you could make sure that they were
all compatible with each other, and that became a foundational
part of their design process. They actually called it the
Lego System of play, and the central idea of that
was if you make a new Lego piece, it should
be compatible with all the existing Lego pieces. And and

(06:44):
they've kind of veered away and veered back to that
over the years, but it's still basically the foundation of
of their idea today. Ye. That well, I mean, you
think about the way kids play, right, so you've got
the way you're meant to do something, quote unquote, but
kids they think outside the box all the time, unless
they're playing in a box, which is usually what happened.

(07:06):
Still thinking outside the box in the box, under a
box with a box. Yeah, there's a whole doctor Sucy
and kind of thing going on. But the idea being
that you don't want to limit kids creativity so that way,
if they have four different lego play sets, and each
place set is meant to be a specific type of thing,
don't punish them for experimenting and mixing things up and

(07:28):
making a mishmash, because that's where you see some real creativity.
So by the end of the nineteen fifties they had
really started to invest in automation as well, and they
got to a point where they had brick making machines
where one operator could could handle two machines at the
same time. And uh, I just like to think of
some Danish person standing between two massive machines, just a

(07:51):
lever in each hand and you know, alternating pulling down
on one while the other one is moving up and
just kind of like a little boogie. Yeah, maybe there's
some like some abu laying in the background, although that's
not Danish anyhow. In the early sixties they stopped making
wooden toys because they had another fire that destroyed them. All.

(08:12):
Think you're going to ask me, Jonathan, No, I was
just thinking, like, why would you stop making wooden toys? Well, gosh,
darn it, these things sure are flammable. Yeah, yeah, And
they were up to four and fifty employees, and they
opened up their first amusement park called Lego Land. Yeah.
The first year that it existed they had six thousand visitors,

(08:33):
so not too shabby. On the first day there were
three thousand people who showed up. They were all put
to work to build the park out of little bricks,
I believe it. They also created do blow bricks, which
are you know, the nice big bricks so babies don't
choke on the for the little kids. Yes, And they
made their first Lego wheel, which also got its own patent,
and they ended up signing a licensing agreement with samsu Night,

(08:59):
and they started to create their little Lego mini figs,
the little figurines that you would get with different playsets.
So without those, there'd be no Lego movie, there'd be
none of the Lego games. I mean, you know video
games it is. But by the time I was born,
we had little Lego people. Didn't stop me from building

(09:19):
Lego people. Sure, yeah, you could have made little blocky
Lego people. Yeah. And they also started doing things like
making castle sets and astronauts sets and then killed killed
Christiansen took over the company. Who has grandson, Yes, so
still keeping it in the family, and uh, by the
nineteen eighties, we started seeing surveys that showed that Lego

(09:43):
had reached an incredible saturation in the European market, that
Western European families that happened to have children who were
fourteen or younger of them owned Lego, like a Lego
set or just random Legos or whatever. I mean, Like technically,

(10:04):
technically you could pick up a Lego on the street
and say, hey, our own Legos. Yeah, but that probably
didn't know. That's probably a factor into it. Also, they
started crossing promotions with McDonald's and then a lot of
their patent expired and a lot of knockoffs emerged, like Tycho. Yeah.
So now they suddenly had a lot more competition, including

(10:25):
competition from less expensive sets that started coming out. That
would continue to be a problem, especially with competitors that
were emerging out of Asia, specifically China, where where the
manufacturing process could be incredibly cheap. And Lego was still
doing quite well on its own, but but there was

(10:46):
this rising kind of concern that there were some competitors
just looming red, getting ready to pound, and they did,
they did try to combat the competitors. They did file
lawsuits in several countries for patent infringement, but they weren't
all success full, and by the nineties they were in
the top ten for largest toy manufacturers. Uh, they were

(11:09):
doing really well with some licensing agreements. I like that
you have here that they got a record in the
Guinness Book of World Records. Yes, they built a track
five of track with three separate locomotive trains on it. Goodness. Yeah,
there was also a period of chaos a bit of

(11:30):
where they had to do a recall because some of
those little pieces were a little too little. Yes, they
were deemed a choking hazard. They also started a partnership
with Star Wars. They actually checked with their consumer base
first to make sure that it wasn't too violent because
it has the name Wars. Lego for a very long time,
tried to make sure it was not associated with any

(11:51):
sort of violence. Yeah, they didn't even want to make
any sort of modern day weapons in their lego figures.
But while this was all going on, their parks weren't
really growing yet. They're doing okay, but they weren't growing
in attendance. And while they had weathered several storms and

(12:13):
two major fires, the really big, big challenge was just
around the corner, and we'll talk about it in just
a moment, but first let's take a quick break to
thank our sponsor. Alright, So, Ariel, things seem to be

(12:37):
going more or less pretty well for Lego. They were
really on an incredible trajectory. They were getting into lots
of different areas. What exactly was the tipping point? What
was the problem that ended up really shaking the company? Okay,
so in the mid to late nineties, they found out

(12:57):
they were having a declining interest in instruction play. Kids
were losing interest in traditional toys for more technologically advanced toys,
and they were failing at something called differentiation. According to
the Brand Asset Valuator test, which was done by an
advertising agency Young and Rubegan, when you're failing a differentiation

(13:18):
as a company usually means you're failing as a brand.
It means that you haven't expanded your product line enough
to appeal to the number of people you need to
appeal to to make your profits. And it may mean
that you are not diversifying in a way that is
identifiable to your breath. Right, So let's say that you

(13:38):
are known for making action figures, and you you're you
make a line of action figures that are fairly popular,
and then you think, all right, we're gonna make a
totally different line. It's not really to the action figures,
but we're gonna make a totally different line of toy vehicles.
Those two things, they're fairly related. You can see where
there could be some brand recognition. But if you went
from action figures to like hula hula hoops or aquariums

(14:01):
or something that doesn't seem to be as connected, then
it's harder to make that connection where the customer has
an idea of what your company is about. If you
make tons of different, apparently disparate and disconnected things, no
one knows what you're about other than they make stuff. Yeah. Well,
Lego found out that they weren't diversifying enough, and so

(14:24):
they said, we want to be more than just bricks.
We want to go from this building model to a
just imagine creativity model. And they tried to add lifestyle
elements like clothes and watches and TV shows and it
just wasn't really hitting. Yeah, they weren't seeing a reflection
in the sales that would show that this was a

(14:45):
working strategy. So they decided to retire some of their
employees that they referred to as designers, and they decided
to hire on a bunch of younger folks that they
called innovators. And this was a part of their diversifying strategy.
They wanted to get a lot of different things out

(15:05):
at once, very quickly. And one of the things they
also did was they said, well, you know what, let's
let's add so much more variety. We're we're gonna change
up how many different types of lego you can get.
And they went from having six thousand different pieces, which
is already blowing my mind that there were six thousand

(15:25):
different types of lego, and they doubled that. But the
problem is that they weren't six thousand more pieces that
could just play with any piece in your set. There
were six thousand pieces that were made specifically for very
specific places, like a Star Wars speeder or a walk
villagees or something like that. And so that whole sort

(15:46):
of manifesto that they had created years earlier, where they
had defined their philosophy, seemed to be out the window. Yeah,
they were no longer sticking to their system of play structure.
And then they were also looking at integrating with other
brands beyond things like Star Wars. Star Wars had been
a real success, but then they started really hitting that

(16:07):
super hard. And you see this today too again with
like all the Lego video games and the Lego movie.
You see a lot of of incorporation of different intellectual
property within those things. This is kind of where that
all got started. Yes, but when they started, they didn't
know how to do this. So they had really high
licensing fees because they had all these specialized sets. They
had really high production costs because they had to, you know,

(16:31):
use specific machines to get specific pieces that were not
necessarily the same mold Jerry using for everything else, right,
the right. They couldn't just use like, oh, turn the
switch to Batman. It wasn't like that. So anytime they
had to make a specialized piece, it would require new
processes because they couldn't just make it out of the
regular bricks. So they started having issues with that. I mean,

(16:52):
you start seeing rising costs of production. We mentioned early
in the episode about how they would start selling product
us for less money than it costs to actually make them.
One of the crazy crazy things is at this stage
they didn't know how much some of these playsets were
costing them. No, they were basically anybody who had an

(17:14):
idea that they thought was good. They're like, cool, let's
make it, without really researching the costs or the time making.
They didn't put a lot of specific processes together for
their production. So they have this enormous, enormous inventory, enormous
variety of pieces, all these different playsets, all these different
branded playsets with various licensed characters, some of those licenses

(17:36):
costing thousands and thousands of dollars just to be able
to use them. All these things going on, they find
out that thirty of their products are responsible for eighty
percent of their revenue. Yeah, and that's that's gotta be tough.
You know, when you sit there and say, like, you
have thousands of products and thirty of them make up

(17:57):
eighty percent of of your revenue, then the natural thing
to ask is, why the heck are we making everything else?
If you consider the expense of making everything else, and
then you compare that to how much money it's bringing in,
and you say, there's no justification there. So that was
another huge wake up call. The bigger wake up call

(18:17):
is that they hit a huge financial deficit and loss
between two thousand and two thousand four, specifically in two
thousand three and two thousand four, despite the fact that
in two thousand they were named the Toy of the Century. Yeah,
so in two thousand they had a loss of a
hundred four million dollars. That's a huge chunk of change.
And they also had to do reorganizations and restructuring. And

(18:40):
this is before they were even able to address the
actual problems. This was them saying, we have to cut costs,
and when we say cut costs, we usually mean layoffs. Yes,
so they laid off two thousand employees in two thousand one,
and that wasn't enough because in two thousand three their
self dropped by resulting in a three million dollar loss.
So yeah, that and four million was bad, but it

(19:01):
was just a hint of what was to come, and
it was four hundred million by the following year. So
this was a point where it was getting so desperate
that there were rumors that some of the executives were
at Lego were even putting feelers out to see if
possibly there might be a buyer to acquire the company,

(19:21):
including Ah. The big target was Mattel, but that didn't happen.
We did, however, have Lego right there on the verge
the brink, as we say, and um, they were ready
to fall apart. But what would save them from turning
into rubble and guarantee that for generations parents would know

(19:44):
the joy of walking barefoot on a Lego brick in
the middle of the night. Well, we'll tell you after
this brief word from our sponsors. Oh ok, So Legos
grown dramatically. Lego has perhaps reached beyond its grasp. It

(20:07):
has suffered massive losses. It has found that there is
a huge void where a strong infrastructure needs to be,
very dangerously close to becoming Icarus. What did they do?
What do they do to turn things around? Well, in
two thousand four they put a plan into motion to
repair their brand damage that they had caused trying to
over diversify. This process had an estimated seven year span.

(20:32):
The higher a guy named Organ Vig Nudorp. But he
became the first CEO of the company who was not
related to Old Christiansen, the founder of the company way
back in the early twentieth century. And so he was
the first quote unquote outside CEO of Lego. And he
would still work with Christiansen the grandson Yes to kind

(20:56):
of put things together. They set up a war room
with lots of various senior executives and and they decided
that they were going to figure out how to fix
the company, no matter how dramatic the reorganization was going
to have to be. Yeah, and they realized that one
of the big things they needed to do is go
back to their core concept, to go back quote unquote
to the break um. So they reorganized and consolidated their company.

(21:21):
They fixed their outsourcing issues, which meant that they were
picking cheaper places to manufacture, and they made sure to
continue to let all their staff give them ideas of
new products, but they made sure that those products, if
they produced them, fit within their company goal, and that
they made sure that they had a good grasp on

(21:41):
how much it was actually going to cost to make
and how much they should charge for the product once
they was going to hit store shelves. They created a
new inventory system so they could keep track of stuff
and not end up producing more pieces than they needed
at any given time. They really were focusing on addressing
that mess of an infrastructure that they had had. Yeah,

(22:03):
they fixed their supply chain issues, so they analyzed the
materials they needed in the prices and put together pilot programs,
and then narrowed their chain of contracted suppliers, which allowed
them to get better pricing and do planning for all
of their production. They reduced the amount of colors they
had in the number of unique pieces back from twelve
thousand to seven thousands, so still a little more than

(22:26):
what they were at when they did that dramatic doubling,
but significantly fewer pieces than what they had been doing,
so also creating less of a strain on the manufacturing
system because they were making fewer of those unique pieces.
And so all of this obviously took a lot of time.
That's why they said this is going to be like
a seven year plan. But while this was going they

(22:48):
were starting to see results fairly quickly, like they were
starting to see that these efforts were already paying off.
They continued to work on fixing things by selling off
some of the divisions that they had under their umbrella
when they were trying to diversify but hadn't really been
a huge success. So they sold off things like their

(23:12):
computer game division. They would still work with licensing and everything,
but they weren't developing in house. Yeah, so with Lego
Lands and with the computer games, other companies run them
and they're just partnered with it. And they also started
to get a better feel for when they should release
licensed properties, because one of the problems they were running

(23:32):
into is that they would release play sets that were
connected to licensed characters, but they wouldn't time it with
important events that were involving those characters. So, for example,
if you have a new Marvel movie coming out, that's
when it makes sense to release a superhero set. In
other words, they're they're improving efficiencies, they're cutting their costs,

(23:55):
they're putting in the systems that should have been there already.
And by two thousand five, which was early on in
this whole process, you know that they were planning, they
were already starting to see some reversals of fortune. The
company was starting to edge toward profitability again, and they
continued to edge towards that profitability the following year as well,

(24:16):
and they started doing things like pushing retro legos because
retro is totally a thing. Yeah, retro is totally hot. Yeah,
and um, you know, tools that enabled more creativity and
relaunching their classic lines like Lego Duplo or their city
sets um to balance out all of these theme things

(24:36):
like Star Wars. But they did make sure that as
they're balancing out their more creative play with their more
theme sets, that they would interact together, yes, so that
you wouldn't have these special pieces that could only work
one way, because as people were pointing out, they said,
you know, some of the fun is really just this experimentation.
Like part of the appeal is that there's endless possibility

(24:58):
in the ways you could put these bricks together to
make different stuff, and there's a good chance that you
can make something that wasn't even remotely on the box
but is just as cool. Yeah. So yeah, like if
I want to combine the Ghostbusters Ghostbusting Station with the
Millennium Falcon, I mean, there's nothing that should stop you
from doing that. Uh yeah, no, I think that sort

(25:20):
of thing is really cool. They also got into really
focusing on how to work with media companies. This is
why we got the Lego movie. And they also realized
the popularity of retro blocks and stuff like that reminded
them that there's an entire generation of adults out there
who have fond memories of Lego apart from stepping on

(25:42):
them with your bare feet, where um, that's it's a
part of their childhood. And some of them don't even
have kids, but they still like to play with the
Lego bricks on the I didn't, but yeah, yeah, So
they decided that they would also specifically target that audience,
not just you know what, if you find out they

(26:02):
too have customers in a specific demographic, there are a
couple of things you could do. You could just say, oh, well,
that's nice, or you could say, well, what can we
do to foster that relationship to make sure that we
acknowledge that they're there and that we're thankful for them,
And that's kind of the direction Lego. Yeah. They worked
on viral marketing strategies and user created content so that

(26:24):
people who said I've got this great idea for Lego
felt like they were listened to and it gave them
extra investment in the toy. And they worked on community
building with things like Lego Factory dot Com and their
Lego Ambassador program, which they're very picky about. Anybody can apply,
but not anybody can become an ambassador and then like
their Lego Certified professionals. In two thousand twelve, they became

(26:44):
the second largest toy company after Mattel. They bumped Hasbrow
down to third place, and they did have a bit
of a slump in two thousand fourteen, but that was
largely due to an overall slump in the market, not
specifically Legos performance, but an overall market effect. And they've

(27:07):
continued pushing forward with this plan and this new approach
since they had this rebranding effort, and it's done pretty
well for them. Well, that wraps up this episode of
The Brink. It's about time for Ariel and I to
go and hit the bricks, but you guys stay tuned.

(27:27):
We're going to be covering lots more companies and entrepreneurs
who met with that big moment of where things could
have gone one way or the other and why did
it turn out the way it did, And we look
forward to talking to you soon. Until then, I have
been Jonathan Strickland and I have been aerial casting. If
you would like to learn more about what we've talked about,

(27:49):
as well as keep track of all of our episodes,
make sure you visit our website at The Brink Podcast
dot show, or you can email us at, feedback at
the Brink podcast show,