Lego - The Turnaround
How an outsider dragged the legendary toymaker back from the brink
Welcome to the first edition of Second Acts, a weekly breakdown of a business turnaround or transformation, a story of a company that has come back from the brink.
First up, Lego.
In 2004, on the brink of bankruptcy. Today, by most measures, one of the world’s most successful companies.
“We are the most reputable brand in the world”
So says Niels Christiansen, LEGO’s current CEO, reflecting on the challenge of maintaining the legacy of the world’s largest toy maker.
A bold statement, but LEGO has earned its reputation as a global symbol of creativity, learning, and fun. It is also one of the most financially successful companies globally, with a profit margin of 28%, surpassing luxury brands like Hermès (27%) and Ferrari (26%).
The Danish company’s journey began in 1932 when Ole Kirk Kristiansen started as a maker of wooden toys. Its name, derived from the Danish phrase “leg godt” (play well), reflects its core philosophy.
In 1958, LEGO invented the synonymous interlocking brick design—a simple innovation that has shaped generations of creativity.
Today, LEGO’s numbers are staggering:
Over 400 billion bricks exist worldwide.
The company produces 75 billion pieces annually.
Seven LEGO sets are sold every second.
But this success hides a story of survival. In 2004, LEGO was on the brink of bankruptcy.
2003/04: Competition & A Crisis of Overreach
Lego's 2003 annual report indicates how bad things were. It's one of the most self-critical annual reports you’ll find.
2003 was a very disappointing year for Lego.
That’s the opening line.
The year's result can only be described as unsatisfactory.
A bit of an understatement.
The negative development reflects an unsuccessful growth strategy with a consequent loss of market shares.
Ouch.
Strong words to include in your own annual report. But there was no sugarcoating the 26% decline in net sales and $300m loss.
The forecast for the following year wasn’t any better, and with growing debts, the company was staring down the barrel.
There were specific references to the intensified competition from traditional toy competitors, unsatisfactory sales from movie tie-ins and mixed performance of their theme parks.
So, how did they get here?
Kids and parents alike loved the blend of education and fun and Lego used this position to expand in the late 1990s. Leveraging the iconic brick sets and mini figures, they opened parks and stores. They partnered with popular franchises such as Harry Potter and Star Wars.
Between 1932 and 1998, the company never recorded a loss. According to some, a culture of complacency had set in. In the early 2000s, the business began to face the combination that all businesses dread: falling revenues and rising costs.
Revenues were falling as market share declined. In the 2003 annual report, Lego mentioned competition multiple times:
The intensified competition in the traditional toy market resulted in a loss of market share in most markets—partly to competitors who chose to pursue a strategy of aligning themselves with LEGO Company's products and marketing and partly to new trendy products and retailers' own private labels.
Mega Blox, Playmobil, Mattel, and Hasbro were indeed real competitive threats to Lego. However, a new threat to these companies was perhaps the most significant disruptor and contributor to Lego's falling sales. One that wasn’t mentioned anywhere in the annual report.
The early 2000s was the prime video game era. In 2000, the Sony Playstation 2—the most successful console ever—was released. Microsoft replied in 2001 with the Xbox, Nintendo launched the Gameboy Advance and the Gamecube that same year. Lego was no longer only competing with traditional toy makers.
Toys have always competed for children's attention. This attention was now being consumed by Pokemon, Halo and Grand Theft Auto.
Lego's response was to go on the offensive.
The Lego Group's investments in new factories, product lines, and expansive marketing campaigns began to weigh heavily on the company's financial health. They even set up a Strategic Unit named Darwin—a 3D brick software platform, a project the company spent hundreds of millions on. According to some reports, they had more silicon graphics computers than any other company in the world.
Again, directly from the 2003 annual report:
For several years, LEGO Company has invested substantial funds in expanding its product portfolio. This commitment and the consequent cost increases have not produced the desired results. In some cases, new products have even cannibalised the sales of LEGO Company's core products and thus eroded earnings.
Costs were rising and debt was mounting as the company sought to do more and more. At the same time, revenue was declining as kids spent less and less time playing with physical toys.
Bleak.
In response, Lego did something they hadn't done since the business's inception.
Jorgen Vig Knudstorp: The Outsider
Since Ole Kirk Kristiansen founded the company in 1932, leadership had been a family affair. Every CEO for the first 70 years of the company had been a Kristiansen.
In 2004 Jorgen Vig Knudstorp was chosen to lead the company going forward. He joined the company as Director of Strategy in 2001 and in 2003, he presented a damning report to the board. A year later, he was trusted with the top job.
Here’s what he said about what he inherited:
By 2004, when I became CEO, things had gone awfully wrong at Lego Group. To survive, the company needed to halt a sales decline, reduce debt, and focus on cash flow. It was a classic turnaround, and it required tight fiscal control and top-down management. At the same time, I had to build credibility. You can make a lot of things happen if you are viewed without suspicion, so I made sure I was approachable. In Danish, we have an expression that literally translates as "managing at eye level," but it means being able to talk to people on the factory floor, to engineers, to marketers—being at home with everyone.
The Action Plan
"Companies don't die from starvation; they die from indigestion."
Knudstorp is cited as likening the situation to a heart attack. The company had overstretched itself and needed a lifestyle change.
Alongside ensuring he was approachable, Knudstorp attempted to connect to the essence of Lego and what had made it so successful. He spoke with AFOLs (adult fans of Lego) and with friends and ex-colleagues who reminded him Lego is the ideal way to learn how to think systematically and creatively—something that was confirmed by a cover story in Time, in which the Google founders said that it was Lego that had shaped their young minds.
This made Knudstorp realise that there was nothing wrong with the product. It was the company's attempts in the 1990s to diversify and broaden its appeal—with theme parks, clothing lines, and watches—that had caused its heart to become unhealthy, its arteries to become clogged.
Lego had strayed too far from its core appeal.
Knudstorp would later say:
I think we found there were basically two fundamental challenges that grew out of that period - over stretching and over expansion. Focus had been lost on basic execution, simple things. We didn't know really what we produced on a weekly basis. There was a lack of transparency. We didn't know where we made money and where we lost money.
It was obvious that the strategy was wrong, but we didn't know what the right strategy would be, largely because the old one had looked like it was the right strategy. So we actually, for the first two years of this new transformation of the company said, “we don't have a strategy. We just have an action plan", which is a detailed plan of back to basics, serving the retailers really well, making the products children really cared about, getting back to the core of what Lego had always been about, sort of a rediscovery.
The Action Plan that Knudstorp implemented can be summarised in three components: Cost Cutting and Divesting of Non-Core Assets, Refocusing on Core Products, and Culture Shift.
The first element of the action plan was simple: pay off the company's debts. In his 2003 report, Knudstorp described the company's debt as a "gun to our head."
They tackled this via Cost-Cutting and Divesting of Non-Core Assets:
Divesting Theme Parks: LEGO sold four Legoland parks to Merlin Entertainment, generating cash while retaining licensing rights.
Streamlining Operations: LEGO outsourced manufacturing to reduce costs but brought critical processes back in-house to maintain quality.
Reducing Headcount: The company reduced its workforce by 1,000 employees globally, including 500 jobs in Denmark.
These steps stabilised Lego’s finances, allowing it to pay down its debt and refocus.
Lego then went back to basics by Refocusing on Core Products. The revival hinged on returning to the essence, emphasising the Lego Brick in everything the company did.
In the early 2000s, Lego had over 12,000 different brick types, which resulted in inefficiencies in manufacturing, logistics, and inventory. The new leadership team reduced the number of unique pieces by nearly 50%. This meant fewer unique moulds, saving on production costs. This didn't burden the imagination of builders, it will always be true that 6 2x4 Lego bricks can produce 915m unique combinations!
Finally, Knudstorp drove a Culture Shift. He fostered an innovation culture, balancing creativity with disciplined management and aligning innovation with the company's core.
The company moved from "innovation for the sake of innovation" to purposeful development. This purposeful development included collaboration with fans via the Lego Ideas platform, embracing user innovation by launching platforms that allowed fans to submit designs.
Knudstorp had simplified, streamlined, and set a clear direction. He initiated a focus on the core product and a focus on financial targets. Whereas previously, the company's employees had not spoken much of profits or targets, the company now had clear targets and a plan to hit them.
A focus on the brick and a system of developing a core product for a clearly defined group of customers was critical. Lego as a brand had often been lured into many adjacencies. Knudstorp changed this, saying:
One of the rules I stick to is that you can only really build an adjacency to your core business every 3-5 years because it is such a major undertaking... rather than doing one adjacency every 3-5 years, we did three to five adjacencies every year. So I think that's what nearly killed us.
The Results Speak for Themselves
This successful refocus on the core enabled Lego to revitalise the brand through measured, creative adjacencies rather than the scattergun approach of the 1990s.
The Lego Movie, released in 2014, confirmed Lego's position as a cultural phenomenon. The film reinforced the brand's emphasis on creativity and created a halo effect that boosted sales of the core Lego products. Oh, and it generated $460 million at the box office.
Lego is now an incredibly strong business with margins achieved typically by luxury brands or software businesses. The recovery and improvement in profit can only be appreciated with cold, hard numbers:
Based on financial and non-financial metrics, Lego is now one of the most successful companies in the world. With movies, partnerships, and museums worldwide, Lego is the envy of all toy makers and many entertainment businesses.
However, this was only possible by focusing on the one thing that makes Lego unique. The brick. When watching the Lego movie, the one thing you want to do when it finishes is to go and build something using the bricks. That's very intentional and sat at the heart of the turnaround that Knudstorp oversaw.
Conclusion: The Lessons
In Second Acts, we’ll always end with three lessons to take away from the story. Lessons that aren’t restricted to business.
Lesson One: Focus on what makes you unique. It wasn't the theme parks, the clothing lines, or the movies. It was the brick and the creativity that fostered. The decision to divest and refocus is the foundation of the Lego turnaround. When faced with challenges, start by reconnecting with what you do best.
Lesson Two: You don't always need a strategy. You can imagine that many CEOs, faced with a situation like Lego's in 2004, would spend months devising a fancy and elaborate new strategy. As Knudstorp identified, "We don't have a strategy; we just have an action plan." I can imagine this being the right approach in many other scenarios, in business or otherwise.
Lesson Three: Leadership needs transparency. In Lego's example, one individual's leadership was instrumental. He openly acknowledged the problems (he highlighted most of them in his internal report the year before taking charge) and emphasised building trust and ownership. Authentic leadership is about being approachable and straightforward. Acknowledge, communicate, empower and move forward.
Thank you for reading. Next week, we look at the multiple turnaround attempts of a British fashion icon. See you then!
Sources:
Trung Phan’s Caffeinated Deep Dives (Episode 4: Lego)
https://www.coolest-gadgets.com/lego-statistics/?utm
https://knowledge.wharton.upenn.edu/article/innovation-almost-bankrupted-lego-until-it-rebuilt-with-a-better-blueprint
https://www.slideshare.net/slideshow/the-lego-case-study-the-great-turnaround-2003-2013/33496623?
https://www.bcg.com/publications/2017/people-organization-jorgen-vig-knudstorp-lego-growth-culture-not-kid-stuff
https://www.dailymail.co.uk/home/moslive/article-1234465/When-Lego-lost-head--toy-story-got-happy-ending.html
https://padandpixel.com/inside-the-lego-groups-secretive-strategic-product-unit-darwin/
https://hbr.org/2009/01/lego-ceo-jorgen-vig-knudstorp-on-leading-through-survival-and-growth
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