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(From Businessweek: July 23, 2010.)
How LEGO Revived Its Brand
In an excerpt from Design Is How It Works, former BusinessWeek staff writer
Jay Greene explores LEGO’s troubles and its comeback
By Jay Greene
Paal Smith-Meyer is waving a BusinessWeek article in front of me about LEGO’s
resurgence. “The Brick is Back,” reads the headline, and Smith-Meyer, who runs
LEGO’s New Business Group, is reveling in the positive press, particularly happy
to share the story from the magazine for which I wrote for nearly a decade.
LEGO, which struggled mightily in the early to mid-2000s, leaned heavily on
design to turn its financial fortunes around. In the article, LEGO’s executive
vice-president for markets and products, Mads Nipper, says: “With our arrogance,
we thought being LEGO allowed us to do anything.” Great quote, I think.
But here’s the odd thing: In all my days working for BusinessWeek, I can’t for
the life of me recall an article in the magazine about the revival of the Danish
toy company. I’m a pretty avid BusinessWeek reader, and I’m certain I’d remember
a piece, particularly one with juicy, self-effacing quotes from senior
executives like this one.
As I look more closely, something seems off. The article is written by Patrick
S. Mitchell. I know most of the writers at the magazine, and there has never
been a journalist on the staff with that name. At least no one I can recall. A
freelancer? The layout doesn’t look quite right, either. The color of the border
at the top of the page is pretty close. But there aren’t any of the creative
touches that my former colleagues in the graphics department used to make the
articles more navigable.
And then I catch it. The issue date of the magazine is March 22/29, 2010. At the
time, that was more than a year into the future. I look up at Smith-Meyer, who
just smiles. Turns out he wrote the piece himself in 2005 and used a graphics
program to mimic BusinessWeek’s layout. He distributed it to LEGO’s senior
managers back then to tell the story of LEGO’s turnaround—before it happened. He
wanted to give the company’s leaders a road map, albeit one that describes the
route from the rearview mirror. And that byline? Smith-Meyer came up with what
he thought was a BusinessWeek-y name, instead of his Norwegian one, using his
initials.
THE GALIDOR DISASTER
The company’s problems began in the late 1990s, when it stopped focusing on
design. Back then, company executives wanted to extend the brand, venturing off
on wild forays into new product development. The prototypical example: Galidor,
a legendary bomb inside the walls of LEGO. The Galidor line, launched in 2002,
was all about action figures, like the hero Nick Bluetooth. The figures could
barely be taken apart and reassembled—arms, for example, could be interchanged.
But the figures were little different than toys offered by scores of other
manufacturers. They didn’t require building skills or much in the way of
imagination, the hallmark of the more traditional LEGO construction toys.
Worse still, LEGO branched into a whole new business about which it knew little.
The company co-produced a kids’ TV show called Galidor: Defenders of the Outer
Dimension. The story line was meant to add detail to the action figures, giving
kids more reason to buy them. But the shows sparked little interest. It was a
Saturday morning cartoon cliché, a predictable action adventure story easily
dismissable as a 30-minute advertisement for the toy line. The show, which ran
in the U.S. on the Fox network, lasted two seasons. When it went off the air,
sales of the action figures faded.
Even within its core construction toy business, LEGO was foundering. LEGO
managers had given designers free rein to come up with ever more imaginative
creations. And they took it. Left to their own devices, designers conjured up
increasingly complex models, many of which required the company to make new
components—the various bricks, doors, helmets, and heads that come in a rainbow
of colors and fill every LEGO box. By 2004 the number of components had
exploded, climbing from about 7,000 to 12,400 in just seven years. Of course,
supply costs went through the roof, too.
DESIGNERS RUN WILD
Even more troubling was that the new designs weren’t resonating with kids. That
freedom to create elaborate new designs had a price. “It was making us more
stupid,” Smith-Meyer says. All you needed to do was look at the fire truck in
its LEGO City line. It went from being a conventional hook-and-ladder rig to a
futuristic hot rod. Its cockpit-like pod for a driver was nearly twice the size
of the back of the truck, where presumably all the firefighting gear was stored.
The truck looked cool to the adult designers, but kids hated it. “It totally
failed,” says Nipper, the executive vice-president. The design free-for-all
turned the LEGO City line, once among the largest pieces of LEGO’s business,
into a shell of its former self, accounting for just 3 percent of the company’s
total revenue, down from roughly 13 percent in 1999. “It literally almost
evaporated,” Nipper says.
Looking back, Nipper doesn’t find fault with the designers. “Management was to
blame,” Nipper says. “The same people who were doing crappy products then are
making world-class products today.” Managers, rather, let those designers go
wild. And, Smith-Meyer says, they did. “We almost did innovation suicide. We
didn’t do a lot of clever components. We did a lot of stylized pieces,”
Smith-Meyer says. “We wanted to be Philippe Starck”—the French industrial,
interior, and furniture designer famous for everything from juicers to
motorcycles. LEGO had assumed it would flourish by giving its designers whatever
pieces they asked for in order to unleash their creativity. Instead, costs
soared as the models veered toward the esoteric.
DESIGN TRANSFORMED
Just as design pushed LEGO to the precipice, it helped bring the company back.
But here’s the paradox: Instead of giving designers free rein to conjure up
their most brilliant creations to save the company, LEGO tied their hands.
Instead of rubber-stamping nearly every request for a new component, LEGO put
each one to a vote among designers. Only the top vote getters—the ones other
designers imagined they could use—would be added to the palette. And it
eliminated rarely used pieces, slashing the total number of components to about
7,000, the same number as in 1997.
LEGO also forced designers to come out of their cocoons and work with
noncreative staff. At the earliest stages of product development, marketing
managers, who had detailed research on the types of products kids wanted, helped
guide development. Manufacturing personnel weighed in on production costs before
a prototype ever saw the light of day. Gone were the days when designers could
go wherever their imaginations took them.
It was particularly challenging because design is LEGO’s key competitive
advantage. Over the years, various rivals have emerged, making bricks that snap
together with LEGO blocks at a fraction of the cost. Montreal-based MEGA Brands
is the current thorn in LEGO’s side. Companies such as Tyco Toys came before it
with a similar strategy. But kids and their parents keep buying LEGO, and not
simply because of their belief that the quality is better. They buy LEGO because
the company offers the most creative collection of models, not merely a
collection of bricks. Confining designers ran the risk of diminishing that
competitive advantage.
CREATIVE WITHIN PARAMETERS
Except it didn’t. The changes started in 2004, gradually reshaping the product
lines. In 2005 the futuristic LEGO City fire truck got an overhaul. Gone were
the cockpit and the tiny rear section. It looked like a fire truck again. “A
five-year-old doesn’t need to be told who are the heroes,” Nipper says. “He
projects it onto the toy.” Sales of the City line started perking up, leading
LEGO to update the police and construction models, too. By 2008, City reclaimed
its spot at the top of LEGO’s portfolio, accounting for 20 percent of the
company’s revenue. “It has refound its identity,” Nipper says.
It was an “aha” moment. It may sound counterintuitive, but LEGO found that
design—at least within its walls—thrives with some constraints. That might send
chills up the spines of some in the design world. The idea of fencing in
designers, forcing them to play in a confined space, runs counter to the notion
that design needs to be set free. But the component limits gave designers just
enough direction to come up with some of the company’s most successful products
to date. “If you put guiding principles in place, you empower people to make the
right decision,” Smith-Meyer says.
Not many toy companies in the world have more brand power than LEGO. Three
generations of kids have built cars, cities, and spaceships with LEGO’s iconic
bricks. Its logo—the red square with the rounded white letters—is immediately
identifiable to most of the developed world and to a bunch of developing nations
as well.
But Nipper is sanguine about the power of the brand. It opens doors, getting
kids and parents alike to consider LEGO products. But if those products don’t
engage them, kids will quickly move to the next toy. “Children are ruthless in
that they are very demanding about what they want to buy,” Nipper says. “If your
offer does not stack up, they will go somewhere else.” Brand is important, but
as LEGO learned, design is crucial. “If LEGO is the Catholic Church, then design
is the Sistine Chapel,” Nipper says. “It is the holiest of the holy.”
From Design Is How It Works, to be published in August 2010 by
Portfolio/Penguin Group.
businessweek.com
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