Rebuilding LEGO | Brick to the Future | 2

0:07November 2003, LEGO headquarters, Billund, Denmark. Christmas is closing in, and as board members gather, the sense of crisis inside the company is growing. Six months have passed since Jorgen Wig-Nudstorp warned Lego's leadership that the company is headed for bankruptcy. He thought that he'd be fired. Instead, he got promoted to strategic development chief and told to find out what's gone wrong at the toy maker. Helping him is Jesper Ovesen, Lego's new chief financial officer. Ovisin spent weeks digging into Lego's finances to diagnose the issues. Now, he's about to present his assessment of the company's finances to the board members, including Kiel Kirk Christiansen, the head of the family that owns Lego.

0:56Ovisin delivers a bleak assessment. Not only is Lego losing around a million dollars a day, its procedures and record-keeping are so haphazard that the company doesn't even know which products make or lose money. For six years, under the guidance of CEO Paul Plagman, the company has spent huge sums developing innovative new products and opening new Legoland theme parks every two years. But with so little financial oversight, it doesn't know which, if any, of these projects are working. Oveson tells the board that he can't understand how Lego ended up in this mess. He used to work for Danske Bank, Denmark's largest bank.

1:39When he worked there, everyone came to work stressed and miserable, but the business made huge profits. At Lego, the company is dying, but everyone seems happy. Now, this is a perennial lesson we encounter on Business Wars. Good vibes, bad books. It's easy to mistake smiles for success, but culture without accountability is like a party on a sinking ship. Good leaders know there's much more to gauging the health of a company than internal culture alone. After absorbing Overson's dire report, Christiansen meets privately with Overson and Newtstorp. He tells them that he recognizes that Lego is now in a life-or-death struggle.

2:24The company cannot afford any kind of defensiveness, complacency, or wishful thinking. Then, he makes a shocking decision. Plagman is out. Kristiansen will return to his former position as CEO. But this will be a temporary arrangement to project stability. In reality, the business will now be run by the three of them. They will act as a shadow C-suite to circumvent opposition to change from within Lego. Newtstorp will lead day-by-day efforts to save the company, supported by Ovison. Six months ago, Newtstorp was convinced he was going to be fired. Now, he's been chosen to lead the company in its darkest hour.

3:14The future of Lego depends on them succeeding. But all three men know success is far from guaranteed. Many within Lego will try to oppose them. Company veterans will cling to the old ways. The new generation of freewheeling innovators recruited by Ploughman will resist having their freedom curtailed. And if Newtstorp can't overcome these competing internal factions, Lego will never escape its tailspin.

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6:13In the last episode, Lego tried to innovate its way out of trouble. But instead of saving the brand, the move pushed the company over the edge. Now, it's down to former management consultant Jürgen Wig-Nutztorp to rebuild the business. This is Episode 2, Brick to the Future. It's February 2004, two months after Jürgen Wig-Nutztorp's meeting with Kjell Kirk Christiansen and Jesper Overson. Lego is reeling from a devastating Christmas. Across the U.S., there are warehouses full of unsold Jack Stone and Galador toy sets. The news that Paul Plaugman is out and Christiansen is back in charge is going down well.

7:02Employees are putting up posters around Lego headquarters mimicking the Lord of the Rings movie Return of the King, but doctored to include Christiansen's face. But behind the scenes, it's not Chris Janssen, but Newtstorp, who's really the executive now on a mission to find a way to save the company. Newtstorp meets night after night with Ovison in the restaurant of the Legoland Hotel in Billund. They spitball what feels like a thousand different strategies for pulling the business back from the brink. Newtstorp knows that what Lego executives expect is an upbeat strategic program packed with promises to restore growth and other warm words about Lego's prospects.

7:46But whenever he and Ovison run the numbers, it's just not possible. This is not the moment for grand plans and big promises. Growth has to wait. Now is the time to cut back and concentrate on survival. In 2003, the company posted the worst results in its entire history, a loss of around$240 million. And the projections for 2004 are even worse. In fact, things are so grim, Lego might not even be around in a year's time. If they don't act now, there will be no company to grow. The market also senses Lego's weakness. Private equity firms are circling. Lego might be privately owned and therefore protected from a hostile takeover.

8:39But if it runs out of money, its banks and creditors may push it into a sale. In order to save Lego from the corporate vultures, Newtstorp does the unthinkable. He begins exploratory talks with U.S. rival Mattel about selling the company. No one at Lego wants that. But the situation is so dire that if Newt Storp can't turn the business around, selling to Mattel might be the next best option. But in the meantime, he's going to make one final attempt to pull the company from its death spiral.

9:22In late February 2004, Newt Storp heads to the New York Toy Fair, the annual showcase of the global toy industry. He hopes to reassure Lego's major retail partners that the company is getting a grip on its problems. But the reception is chilly. Retailers are still trying to offload unsold Lego toys that shoppers shunned last Christmas. In a tense meeting, representatives from Toys R Us, America's second largest toy retailer, tell him that the company's new lines don't appeal to kids or parents. The only new product Lego's launched that's popular is Bionicle. Bionicle is a science fiction-themed line of construction toys where kids construct their own action figures.

10:06It launched in 2001 and has become a huge hit. In its debut year, Bionicle delivered sales of more than$140 million. That's about 10 % of Lego's total sales. But Lego's failing to supply enough Bionicle toys to stores. That failure means Lego and toy retailers are missing out on millions of dollars. Problem is that instead of doubling down on Bionicle, Lego diverted resources towards other new lines like Jack Stone and Galador. As a result, Lego's distribution systems can't meet the high demand for Bionicle. There's a lesson here. You can't just chase the shiny stuff. Bionicle was printing money, but Lego still got distracted.

10:53Founders do this all the time. they abandon what's working to chase the next big thing. Sometimes you gotta focus on what clicks. You can't build a skyscraper on the foundation of a mere high-rise. The meeting ends on a sour note. The Toys R Us crew tells Newt Storp that these days it feels like they understand Lego better than Lego does.

11:20It's later that night, and Newt Storp's on the red-eye flight back to Europe. He finishes reviewing the latest sales data, closes his laptop, then slumps back in his business class seat and sighs. Rough day, huh? Newtstorp turns to the man in the next seat over, who flashes him a smile. Ah, don't worry. We've all had them. Chris Zuck. Good to meet you. The man holds out a business card bearing his name and the logo of the management consultancy, Bane. Newtstorp reaches into his own pocket and pulls out a Lego minifig that looks like himself. Every senior Lego executive carries these little toys instead of a conventional business card.

12:00Zook takes one look at the smiling yellow plastic face and bursts into laughter. Yeah, that might be the best business card I've ever seen. I love that kind of stuff about Lego. You take one look at this and you see the heart of the company you're dealing with. I might use this in my next book. Oh, you write about business? I mainly look at innovation. You know how different companies respond to changing markets. Newt Storp feels a rush of excitement. Oh, that sounds fascinating. I'd love to hear more. Zook grins, relishing the chance to talk about his favorite subject. Well, my book is called Profit from the Core.

12:36The premise is about 75 % of companies that achieve sustainable growth that do it by strengthening their core business before they try to branch out. You know, too many companies think they need to be at the cutting edge of every new trend, but actually, what you really need to ask is who are our core customers, and how can we serve them more deeply? What Zook is saying makes intuitive sense to Newtstorp. He's just never heard it articulated so clearly. Okay, but how does that work in practice? Well, my rule of thumb is that a company should only ever expand into wholly new territory once every five years or so.

13:13There's no way you can learn the ins and outs of any new market in less. Newtstorp's blood runs cold. He realizes that Lego has Zook's formula completely in reverse. They've been trying to move into five new markets a year instead of one every five years. Zook holds up the smiling minifig Newtstorp just gave him instead of a business card. I mean, just look at Lego. Everything you guys do comes down to one thing, the Lego brick. That little snap and click as the pieces fit together. People should build companies like they would a Lego set. You know, one brick clicking into another and then another.

13:52Not just scattering them across the room. Newtstorp's mind flashes back to the colossal failures of Jack Stone and Galador. Those sets didn't even use Lego bricks. In fact, they had been specifically designed not to. It hits Newtstorp like a bolt of lightning. Throughout the last few years, LEGO has been trying so hard to change and keep ahead of the curve that it's forgotten what made it great in the first place. LEGO needs to find its core again and get back to the bricks. Yep, Newt's store just had an aha moment. But let's zoom out and think about what we're learning here. LEGO was trying to conquer five markets a year.

14:39That's like speed dating with your budget. But growth doesn't usually stick unless it's paced, even under the best circumstances. Expanding too fast stretches your team, your brand, and your sanity. You also run the risk of losing your company's soul, if not the company itself.

15:04In June 2004, Christiansen steps aside as CEO and names Newtstorp as his replacement. Newtstorp starts with the lessons Zuck taught him on the Red Eye flight fresh in his mind. His plan is to take Lego back to its core business and ruthlessly cut excess costs. He cancels the Lego Explore preschool toy line and resurrects Duplo. He moves some manufacturing away from Denmark to countries where labor costs are lower, like Mexico and the Czech Republic. Lego's expensive design labs in London, New York, and Milan are shut down. Knutstorp then reviews what Lego pieces are being used in each set and is horrified.

15:50Under Plaugman's drive for innovation, LEGO's toy designers were free to create unique pieces for new LEGO sets, new swords for minifig pirates, unique gadgets for Jack Stone, and trans-dimensional spaceships for Galador. The list goes on and on. But each new plastic piece means investing upwards of$50 ,000 on creating a new mold. The genius of the original LEGO system was that one machine could turn out the same pieces for multiple sets. The Lego bricks are interchangeable whether you're building a fire truck or a Star Wars TIE Fighter. But with Lego designers running wild, there's been an explosion of the number of bespoke pieces used in Lego sets, leading to an explosion in manufacturing costs.

16:39Newt Storp institutes a ruthless call of all pieces that can't be used in multiple sets. He also clamps down on duplicate pieces after discovering that Lego makes six different chef figures. He cuts five of the chefs, leaving only one. Next, he declares that all new products must deliver at least a 13.5 % return on sales. Return on sales is a measure of efficiency, basically how much profit a business generates for every dollar it earns in sales. The higher the return on sales, the better. From now on, it's not enough for LEGO's teams to have cool ideas. Those ideas have to be capable of being produced efficiently enough to deliver the returns the company expects.

17:27Many of the designers hired under Plaugmann hate the new restrictions, but Knutstorp is internalizing another of Zook's lessons, that innovation has to be guided and disciplined so that it drives profits, not just buzzy headlines. Knudstorp also convinces Kristiansen to spin off the Legoland theme parks. The rush to open those theme parks had become a massive financial strain. Lego is a toy maker, not a theme park company. And Lego is out to stick to what it does best. But it's not just the freewheeling innovators of the Ploughman years Knudstorp needs to deal with to make progress. He's also going to have to deal with Lego's traditional wing.

18:12But to convince them to get on board, he's going to get back to basics and discover what makes Lego so beloved in the first place. And to do that, he needs to talk to the brand's biggest fans, kids.

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21:18It's 2004, and in LEGO's headquarters, Mads Nipper stands before the company's top executives and management. He's LEGO's head of marketing. He wears a sharp suit and stylish glasses with a mischievous glimmer in his eyes. As the saying goes, the only people who ever really tell you the truth are drunks and children. And we've been out getting the truth from the children who play with Lego. For the past few months, Nipper and his team have been traveling across Lego's key markets, meeting its core customers, the kids. But this time we tried something new. Instead of bringing children into our offices as part of focus groups, we went to them.

21:56We spent time in their homes, seeing how they actually play. Hey, if you want to learn how a lion hunts, you don't go to the zoo, you go to the jungle.

22:09I want to tell you about one kid I met. I asked him what his most treasured possession was, and he showed me these old scuffed up sneakers. Now, why did this kid value these old shoes so much? Because he had scuffed them up by practicing skateboard tricks over and over again. and knowing those tricks increased his status amongst his friends. Nippers sees confusion on the faces of the Lego team. They're unsure why he's telling them about some random kid's sneakers. He gives them a smile. We are told repeatedly that kids today are different, right? That children who play with video games just aren't interested in construction toys.

22:49But we've been wrong the whole time. What that kid with the shoes shows us is that children value mastery. If something catches their interest, they'll work on it hour after hour, especially if they think it can impress others. Nipper lets that sink in, then offers his takeaway from his search for children's truth. For the past five years, we've been desperate to simplify Lego, thinking kids don't have the patience for those kinds of toys. But we've been guilty of a huge mistake. We've underestimated children. One of the executives leans forward to interject. But surely video games have fundamentally changed the toy industry.

23:39Nipper smiles. He used to think the same. Sure, video games have changed things, just not in the way we thought. Kids like video games and construction toys. They'll play PlayStation for an hour, then pick up their Lego bricks. And when they do, they want real Legos. They want to be a little challenged. Nipper holds up a Lego firetruck toy. It's red plastic glinting in the conference room lights. This is the firetruck we made for the Jack Stone sets. We deliberately made those sets simpler, thinking kids no longer had the attention span to build their own toys. Well, we were wrong. Kids didn't like Jack Stone because it didn't challenge them at all.

24:26It didn't feel like Lego. We need to stop dumbing Lego down. We need to get back to what we always did best, creating toys that are fun and challenging. We need to get back to the bricks.

24:49It's August 2005, and LEGO CEO Jörgen Wichnustorp is making his first visit to BrickFest, an annual gathering of hardcore LEGO fans from across the world. He winds his way through displays of giant LEGO brick castles, and an entire room dedicated to Bionicle. These incredibly complex creations must have taken hundreds of hours to build, not to mention thousands of Lego bricks. But the fans and builders at this event aren't kids. They're AFOLs, adult fans of Lego. Until now, Lego as a company avoided engaging with AFOLs. The designers and executives in Billund assumed that they knew best, and that any insight from outside would at best be irrelevant or at worst a distraction.

25:40But Newtstorp is now following one of the key tenets from the Profit from the Core strategy. Your most valued customers will tell you what can be done with your brand. While AFOLs only make up around 5 % of LEGO's customers, they spend up to 20 times more than parents buying LEGO for their kids. And Newtstorp thinks the company needs to start listening to their feedback. The response he gets at BrickFest is emphatic. Adult fans hate the juniorization of Lego that they've seen in recent years. They want Lego to be Lego, not an imitation of G.I. Joe. Newtstorp also realizes that the adult fan community is a huge potential resource.