Cruel cuts saved failing toymaker
It was an empire on the verge of crumbling.
Danish toy giant Lego was in serious danger of being relegated to toy heaven forever.
But according to trends forecaster and business analyst Michael McQueen, Lego’s near- death experience was actually the best thing that ever happened to it.
McQueen, who has helped some of the world’s most successful brands navigate change, said if Lego hadn’t gone back to basics and rebuilt itself brick by brick a decade ago, it would have failed forever.
The author of Momentum: How to Build it, Keep it, or Get it Back said there were t wo big factors which contributed to Lego’s near- demise: the rise and competition of video games and over- innovating.
In 2001 the grandson of Lego’s founder and the company’s then president Kjeld Kirk Kristiansen admitted the company was struggling so embarked on what he called a pursuit of innovation. But just two years later and despite a 17 per cent rise in sales “the Lego empire began to crack”.
“Retailers such as Target and Walmart were choking on a backlog of unsold Lego sets from Christmas 2002,” McQueen said.
He said while the innovation was great, the problem was only 6 per cent of those ideas were making money.
“Lego saw this threat and started to compete in the video game market,” he said but this had come at a massive cost.
“The company began to overinnovate. It began to over- produce and this affected its core business.”
By 2004, Jorgen Knudstorp was named as CEO and realised what had to be done: a back- to- basics prune and a return to its core products.
“Knudstorp quickly identified that the Lego group had over- innovated, spread itself far too thin and had launched so many new initiatives that the company had lost a ‘ crisp sense of identity’,” McQueen said.
“It was a case of too many products and not enough profit.”
He said another issue that needed addressing was the manufacturing cost which had skyrocketed as Lego increased its colours from six to 50- plus along with the number of components. The result of the shift back to basics was soon obvious.
“By the end of 2005, Lego rebounded from a US$ 292 million ($ 395m) loss the previous year to a pre- tax profit of US$ 117 million,” McQueen said.
“That same year, the company would post sales of US$ 1.2 billion but, more importantly, profitability would more than triple.”
McQueen said how Lego had saved itself was not only remarkable but also served as a lesson for other companies which had lost their mojo.
Just two years ago, Lego had overtaken Mattel to become the world’s biggest toymaker and is now the most popular toy of all time.
This week Lego revealed that its
Michael McQueen.
sales have continued to grow in the first half of 2016, thanks to strong demand in Europe and Asia.
The privately- held company recorded a net profit of US$ 689m and revenue increased by 10 per cent with sales growth driven by lines like its Lego City and Lego Ninjago toys.
“Every second, seven Lego sets are sold somewhere on the planet, with Lego’s extensive network of factories churning out a staggering 22 billion plastic bricks each year — roughly 500 bricks per second,” he said.
“The reality, though, is that Lego is only enjoying this staggering level of momentum because it was willing to prune.”
McQueen said other major companies including Sony, Adidas and even Boeing had taken a leaf out of Lego’s book. “Innovation is vital if companies are to succeed,” he said. “But the trick is to innovate intelligently. If you’re trying to chase too many rabbits you’ll end up catching none.”
The business analyst said workers could also learn a lesson from the Lego approach.
“Be ruthless with what you’re about and what you’re good at,” he said. “Pick your battles and what you can do rather than spread yourself too thin.”