From brink to brilliance: Unearthing business insights from Lego’s turnaround to boost your profits

ILLUSTRATION BY RUTH MACAPAGAL

For many, the name Lego evokes fond childhood memories of creating fantastical worlds with colorful, interlocking bricks. Yet, behind this treasured brand lies a compelling narrative of the rise, fall and triumphant resurgence of a family business. It’s a story that offers CEOs and business owners invaluable insights into navigating the complex dynamics of the business world.

The dark side

Over a decade ago, Lego, a brand synonymous with creativity and innovation, was on the brink of bankruptcy. The company was grappling with fierce competition from a globalizing economy, video game entrants and the mass adoption of the internet. In response, Lego implemented various innovation strategies that ironically exacerbated its predicament. For instance, Lego brought on board a team of talented young European designers lacking toy-making expertise, leading to a severe escalation in the number of parts, from 6,000 to over 12,000. This led to logistical and storage nightmares without a corresponding increase in sales.

With this crisis, Lego had to reevaluate its strategy and undergo a transformative process that would turn its fortunes around. This transformation provides a rich source of lessons for today’s business leaders.

Lesson 1: Return to core competencies

In 2004, under the new leadership of Jørgen Vig Knudstorp, Lego embarked on a comprehensive operational overhaul. One of the critical steps was a conscious return to the company’s core competencies. Lego streamlined its product line, reducing the number of bricks produced, eliminating those costly to source and standardizing their design. This resulted in enhanced flexibility to react swiftly to consumer trends. Additionally, the company shed noncore, underperforming business lines.

The takeaway: Focus on what your business does best and do not hesitate to abandon activities that drain resources without yielding commensurate benefits.

As we always tell our clients when we create their growth and expansion strategies: Relevance creates response. Even the most brilliant companies and business leaders are only smart in spots. It usually pays to stay around those spots.

Many times, diversification is for people who still need to do their homework. This means: only pivot or branch out if you can achieve a high level of certainty that you will not lose money. Or get experts who know what they are doing to allow you to branch out.

Most of the world’s largest companies have created their success on one or very few well-calculated big bets. This is also the case for Berkshire Hathaway, Warren Buffet’s investment vehicle with a current market cap of over $700 billion.

Your risks need to be well-calculated. You only diversity if you are almost sure you cannot go wrong.

I was born in Germany. There is a German saying: Schuster, bleib bei Deinen Leisten—loosely translated: “Stick to what you know.”

Lesson 2: Innovate with prudence

Lego’s creative roots are undeniable, yet the company learned that unchecked innovation can lead to disastrous outcomes. In response, Lego established the Future Lab, a team dedicated to generating exciting concepts for the company, albeit within precise cost and feasibility constraints. The lesson here is to balance fostering creativity and controlling costs. Encourage idea generation, but ensure guidelines are in place to mitigate the risks of loss-leading ventures.

A lot of CEOs and business owners fall prey to the “kid in the candy store phenomenon.” They constantly start new businesses or projects without proper checks and balances. As a consequence, profits suffer.

A few months ago, we turned away a famous several decades-old Filipino family business because the owners wanted to diversify just for the sake of diversifying and because they got bored with the highly profitable core business. That is not the right reason to diversify.

Lesson 3: Constantly evaluate and adapt

Despite Lego’s remarkable turnaround, the company continues to assess its operating and business model efficiencies. After failing to foresee a surge in demand in Europe, the company had to improve its customer demand forecasting capabilities. This serves as a potent reminder that success is not a destination but a journey of continuous learning, adaptation and improvement.

As we always teach to our CEO and business owner clients: “You need to have a healthy sense of paranoia about what you might be missing.”

Lesson 4: Persistence is more important than talent

Lego’s story is a testament to the resilience of the family business model and its ability to adapt in the face of existential threats. It also illustrates the power of clear vision, sound strategy and diligent execution. Lego’s journey from near bankruptcy to global market leadership provides a playbook for CEOs and business owners striving to navigate their companies through the complexities and challenges of the business world.

Lesson 5: Embrace change but stay true to Your roots

Lego’s journey is a clear testament to the fact that businesses need to evolve to stay relevant. However, while embracing change, remaining true to your roots is critical. In Lego’s case, the company returned to its core business of brick toys while also adapting to the digital age. It managed to strike a balance between preserving its essence and embracing innovation.

Lesson 6: Make strategic partnerships

Lego’s partnerships with popular franchises like Star Wars significantly affected the company’s turnaround. Such collaborations not only increased brand visibility but also expanded its customer base. Strategic alliances can provide a much-needed competitive edge in today’s interconnected world. Look for partners who align with your company’s values and can help extend your reach or enhance your product or service offerings.

Lesson 7: Prioritize Customer Satisfaction

Lego has kept its customers at the heart of its business throughout its journey. It continually seeks to understand and anticipate its customer’s needs and preferences and adjust its offerings accordingly.

In an age where customer expectations constantly evolve, businesses must maintain a customer-centric approach. As we always emphasize to our clients: “As a business leader, you need to have one obsession, and that is the needs and wants of your clients.”

Lesson 8: Never rest on your laurels

Complacency is the kiss of death of success.

Despite its remarkable recovery, Lego continues to evaluate and adapt its business strategies. It constantly identifies areas of improvement and takes proactive steps to address them. This relentless pursuit of excellence is a critical factor behind its sustained success. As a business leader, fostering a culture of continuous improvement in your organization is crucial.

As CEOs and business owners, let’s take inspiration from Lego’s journey and apply these lessons to our businesses to build lasting, sustainable success, one brick at a time.

Tom Oliver, a “global management guru” (Bloomberg), is the chair of The Tom Oliver Group, the trusted advisor and counselor to many of the world’s most influential family businesses, medium-sized enterprises, market leaders and global conglomerates. For more information and inquiries: www.TomOliverGroup.com or email [email protected].

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