HBS CASESHBS Cases: LEGOPublished: March 18, 2013Author: Maggie StarvishLEGOtoys have captivated children andtheirparentsfor80years. But managingtheenterprise has not always been fun and games.Professor StefanH. Thomke explains thelessons behind a new case on the company.Althoughit isn't part of the admissionscriteria, experience playingwithLEGOs cancome in handy at Harvard Business School.WhenStefanH. Thomketeacheshisnewcaseabout theiconictoycompany, hegivesstudents eight-studded LEGO building bricks tofigure out how many different ways they can becombined. Thomke's experience goes back along wayas a kid growing up in Germany heparticipated in a LEGOcompetition. As anadult, though, his interests lie more in thebusiness behind the bricks. "When you'vewritten many cases you have a gut feeling thatone like this could be really great," he says.Thomke, the William Barclay HardingProfessor of Business Administration, wrote thecase withHarvardBusiness School's JanW.Rivkin, the Bruce V. Rauner Professor ofBusiness Administration, and DanielaBeyersdorfer, associate director of the HBSEurope Research Center.LEGOexplores howthe company-one ofthe most profitable toymakers in theworld-grewtoglobal dominancefromhumblebeginnings; the mistakes that led it nearbankruptcy; andwhyone turnaroundattemptfailed while a second succeeded. LEGOexecutives were unusually supportive about thecase-writingprocess, Thomke says. "We hadaccesstoeverybody; theywantedthestorytobe toldtruthfully, withall the goodandthebad."Building at the startPart of that access included a visit to a woodcraftsman's workshop in the small town ofBillund, Denmark, where LEGO began, in1916. Carpenter Ole Kirk Kristianseneventually shifted the business frommakinghousesandfurnituretocraftingwoodentoys.HebasedthenameofhisnewventureontheDanish words for "play well" (and, as it turnedout, the Latinwords for "toassemble"). Hismotto"Onlythebest isgoodenough"wouldlater be carved into a wooden plaque and hungintheworkshop. Thesethemes of goodplayandqualityproducts werebothbedrocks andtouchstones for future generations of LEGO toymakers.GodtfredKirkKristiansenrepresentedthesecond generation, working alongside his fatherat age 12. The LEGO brick played with by kidsandadults aroundtheglobecameintobeingduring Godtfred's tenure. He considered it aunique, sturdy, simple producta systemthatofferedendlessopportunitiesfor creativefun,anddrewupa list of product characteristicsincluding"longhoursofplay"and"qualityinevery detail" that was distributed to everyone inthe company.Like his father, Godtfred paid carefulattention to every aspect of the business,applying, for example, his knowledge ofmaterial scienceandproductiontechnologytothe brick-manufacturing process. It's because ofthese precise specifications that bricks madeunder his watch are interchangeable with thoseavailable today. Godtfred's cautious natureextendedallthewaytotheprofitmargins:hechampionedslow, steadygrowth. Becauseofthis, it could take years for a new product to goto market. Green bricks, for instance, appearedin play sets only after a decadelongdecision-making process-and the idea to includethem came from Godtfred's son (andthird-generation toymaker), Kjeld.Thesnail'spaceservedthecompanywell,as did the grandson of its founder. UnderKjeld's management, product demandwas sohigh at times that executives actually foundthemselves discussing ways to slow sales.A shock to the systemThat all changed in the early 1990s asseismic shifts pounded the toy market. Big Boxtoy discounters trampled mom-and-pops andloweredpricesdramatically. Meanwhile, birthratesdeclined, childrenhadlesstimetoplayandnot muchinterest intoysthat didn't offerinstant gratification. "These changes did notplaywell toour strengths," observedcurrentCEO Jrgen Vig Knudstorp in the case.SeriousjoltswerealsotakingplaceintheLEGO Group. Out of work for a year followinga serious illness in 1993, Kjeld appointed afive-person managementteam to help him runthe company when he returned. The groupfocused mainly on driving growth. When abenchmarking study revealed LEGO's globalname recognition was on par with industrygiants likeDisney, theteamstartedchurningout newproducts and ideas to leverage thebrand's untapped value. A line ofLEGO-branded children's wear was created anda divisionof the LEGOGroupwas chargedwith pitching book, movie, and TV ideas.LEGO building sets became increasinglycomplex with more unique components.While the number of LEGO-branded itemsgrew, salesdidnot, andin1998thecompanysuffereditsfirst financial loss. "Theirtop-linegrowthwasslowingdownbut their cost wasaccelerating, so they were starting to lose somesignificant money," says Thomke.Danishturnaroundexpert Poul Plougmannwas hired to reassemble LEGO and staunch thered ink. "He comes in and ? does things by thebook,"saysThomke. "Helayspeopleoff, hestreamlines some things, he globalizes." Andyet the financial picture grewworse. "He'sbasicallygoingbytheturnaroundbook, butitdoesn't work."One continuing problem: the company'sgrowing complexity was choking it. Addingmore bricks made products harder to assemble,forecasts harder to determine, and inventoryharder to manage. Depending on the kit, therewas either too much inventory, or no inventoryat all, and restocking could take months."You had this multiplier effect of addedcomplexity that went through the entire supplychain," Thomke says.TheLEGOGrouphadalsogottentoofaraway from the core values it had been buildingon for the better part of a century. The toymakerfound itself needing to turn around itsturnaround.Outside the familyEnter Jrgen Knudstorp. He was just 35years old when Kjeld promoted himfromdirector of strategic development to CEOin2004. (Kjeld retired that same year.)LikePlougmann, hehadnofamilytiestothe company. Unlike Plougmann, histurnaround attempt succeeded. Knudstorp'sslow-it-down approach of careful cashmanagement, focusingoncore products, andreducing product complexity certainlycontributedtothatsuccess. Itwouldalsotakere-engaging with customers, many of whompassed a love of LEGOs to their children whileCOPYRIGHT 2012 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 1still connecting with the toys themselves. "Oneof the insights Jrgen had when he becameCEO was that he needed to reconnect with thecommunity[of loyal LEGOfans], oneof themost powerful assetsthecompanyhad,"saysThomke. "It was a huge part of the comeback."Knudstorpworkedhardtodefinethecorebusiness of the company. "How you work with,and experiment outside of, the core of yourbusiness is part of that balance," explainsThomke.Knudstorprecognizedthat innovationwaspart of that core, but he'd also seen the result ofunconstrained creativity, so new product designbegan to be informed by market research, userfeedback, andhowwell thetoysmatchedthevisionof qualitycreativeplaylaidout byitsfounding fathers. Putting parameters on howpeopleinnovatehadtheparadoxical effect ofmaking them better at it.Reining in the creative process was part of alarger push by Knudstorp to reduce overallcomplexity within the organization. On thesupply chain side, he did away with many of theunique brick components added duringPlougmann'stenure, andeventuallydecidedtobring brick manufacturing back in-house toensure quality control.Finally, Knudstorp made big changes to themanagement team, firing five of sevenmanufacturing executives and appointing a newleader for the team. A psychoanalyst wasbrought in to teach the management team howto identify decision-making made by logicversus emotion.Sustainable and balancedIt turns out that LEGOs promotelifelonglearning. While the bricks themselves teachchildrenthefundamentalsof constructionandcreativity, the company's almost century-oldhistoryof management change has importantlessons for businesspeople. "Managingsustainable growthis alsoabout managingabalanced business system," says Thomke."Complexityissomethingyouneedtowatchvery closely."Controllingcomplexity, clarifyingthecoreof its business, and engaging the largercommunity helped save the LEGO Group.Althoughhe was not a Kristiansenbybirth,Knudstorp's management style and businessideals closelymirroredthose of its foundingfathers. Only the best was, and is, good enough.About the authorMaggie Starvish is a writer based inSomerville, Massachusetts.HARVARD BUSINESS SCHOOL | WORKING KNOWLEDGE | HBSWK.HBS.EDUCOPYRIGHT 2012 PRESIDENT AND FELLOWS OF HARVARD COLLEGE 2