How to Rebuild Lego

MARCUS BRANDT / AFP / Getty
Playing with lego

If it hadn't been for the great depression, there probably never would have been a company called Lego. In 1932, when construction slumped in the Danish town of Billund, an out-of-work carpenter named Ole Kirk Christiansen began making toys from wood scraps. By the time the economy recovered, his business was doing so well he had given it a name after the Danish words leg godt (play well). A few years later, Christiansen changed materials, buying his country's first plastic-injection machine. And in 1958 he patented the interlocking bricks that children have been playing with ever since.

Today, in the aftermath of another economic crisis, the carpenter's company is thriving once again. Revenue jumped 22% last year, to approximately $2.3 billion, pushing net profit up 63%, to approximately $442 million. "In tough economic times, you'll often see retro products come back," says Gerrick Johnson, a toy-industry analyst at BMO Capital Markets. "Parents spend money on stuff they know works. Rather than going to Disney World or on a trip, you get a $30 Lego set."

The company's success is all the more remarkable in a virtual, Internet world. Its bricks are the ultimate in low-tech, crafted through a process that hasn't changed much since Christiansen bought his first machine, and it's up against high-tech toys that suck up Christmas shopping dollars.

In fact, it was only recently that analysts had all but written off the company as a casualty of the digital era. Lego moves 50% of its products in the two months before Christmas, but at the beginning of the decade, its supply chain was a tangle, as workers struggled to keep nearly 14,000 unique elements in stock. At headquarters, deadlines were rarely met. Model runs were kept around for sentimental reasons. Retailers found the company's agents aloof. "They thought they knew about everything: pricing, product, marketing," says Sean MacGowan, a toy industry analyst at Needham & Co. "They just had closed ears."

The man who taught Lego to listen is a former McKinsey consultant named Jorgen Vig Knudstorp. A 41-year-old Dane with an unassuming demeanor, Knudstorp succeeded Christiansen's grandson as CEO in 2004, a year in which Lego posted $350 million in losses.

Since its founding, Lego had been focused less on its finances than on nurturing and education. But Knudstorp's first lesson was this: the bottom line counts. "Cash flow is a bit like oxygen," he says. "None of us are here in this room just to breathe the air. But if there's not enough oxygen, we're going to die." Layoffs and plant closures were announced. For the first time, employee pay was tied to performance.

Knudstorp, who works in an office packed with toys, set out to rebuild the brand from the bottom up. He stopped chasing sales and refocused the product line toward core consumers: the serious builders. Meanwhile, he reworked his logistics, cutting by half the amount of unique pieces the factories produced. "Instead of growing, we actually insisted we didn't want to grow," he says. "We were lucky because we're family owned, and that means we have the time to take such an approach." Lego continued to struggle for a couple of years, but by the time the recession hit, the company was well placed to weather it. "The fourth quarter of 2008 was a horror show for most companies," MacGowan says. "And Lego sailed through like it was no problem."