Paal Smith-Meyer is waving a BusinessWeek article in front of me about LEGO's resurgence. "The Brick is Back," reads the headline, and Smith-Meyer, who runs LEGO's New Business Group, is reveling in the positive press, particularly happy to share the story from the magazine for which I wrote for nearly a decade. LEGO, which struggled mightily in the early to mid-2000s, leaned heavily on design to turn its financial fortunes around. In the article, LEGO's executive vice-president for markets and products, Mads Nipper, says: "With our arrogance, we thought being LEGO allowed us to do anything." Great quote, I think.
But here's the odd thing: In all my days working for BusinessWeek, I can't for the life of me recall an article in the magazine about the revival of the Danish toy company. I'm a pretty avid BusinessWeek reader, and I'm certain I'd remember a piece, particularly one with juicy, self-effacing quotes from senior executives like this one.
As I look more closely, something seems off. The article is written by Patrick S. Mitchell. I know most of the writers at the magazine, and there has never been a journalist on the staff with that name. At least no one I can recall. A freelancer? The layout doesn't look quite right, either. The color of the border at the top of the page is pretty close. But there aren't any of the creative touches that my former colleagues in the graphics department used to make the articles more navigable.
And then I catch it. The issue date of the magazine is March 22/29, 2010. At the time, that was more than a year into the future. I look up at Smith-Meyer, who just smiles. Turns out he wrote the piece himself in 2005 and used a graphics program to mimic BusinessWeek's layout. He distributed it to LEGO's senior managers back then to tell the story of LEGO's turnaround—before it happened. He wanted to give the company's leaders a road map, albeit one that describes the route from the rearview mirror. And that byline? Smith-Meyer came up with what he thought was a BusinessWeek-y name, instead of his Norwegian one, using his initials.
The Galidor Disaster
The company's problems began in the late 1990s, when it stopped focusing on design. Back then, company executives wanted to extend the brand, venturing off on wild forays into new product development. The prototypical example: Galidor, a legendary bomb inside the walls of LEGO. The Galidor line, launched in 2002, was all about action figures, like the hero Nick Bluetooth. The figures could barely be taken apart and reassembled—arms, for example, could be interchanged. But the figures were little different than toys offered by scores of other manufacturers. They didn't require building skills or much in the way of imagination, the hallmark of the more traditional LEGO construction toys.
Worse still, LEGO branched into a whole new business about which it knew little. The company co-produced a kids' TV show called Galidor: Defenders of the Outer Dimension. The story line was meant to add detail to the action figures, giving kids more reason to buy them. But the shows sparked little interest. It was a Saturday morning cartoon cliché, a predictable action adventure story easily dismissable as a 30-minute advertisement for the toy line. The show, which ran in the U.S. on the Fox network, lasted two seasons. When it went off the air, sales of the action figures faded.
Even within its core construction toy business, LEGO was foundering. LEGO managers had given designers free rein to come up with ever more imaginative creations. And they took it. Left to their own devices, designers conjured up increasingly complex models, many of which required the company to make new components—the various bricks, doors, helmets, and heads that come in a rainbow of colors and fill every LEGO box. By 2004 the number of components had exploded, climbing from about 7,000 to 12,400 in just seven years. Of course, supply costs went through the roof, too.
Designers Run Wild
Even more troubling was that the new designs weren't resonating with kids. That freedom to create elaborate new designs had a price. "It was making us more stupid," Smith-Meyer says. All you needed to do was look at the fire truck in its LEGO City line. It went from being a conventional hook-and-ladder rig to a futuristic hot rod. Its cockpit-like pod for a driver was nearly twice the size of the back of the truck, where presumably all the firefighting gear was stored.
The truck looked cool to the adult designers, but kids hated it. "It totally failed," says Nipper, the executive vice-president. The design free-for-all turned the LEGO City line, once among the largest pieces of LEGO's business, into a shell of its former self, accounting for just 3 percent of the company's total revenue, down from roughly 13 percent in 1999. "It literally almost evaporated," Nipper says.
Looking back, Nipper doesn't find fault with the designers. "Management was to blame," Nipper says. "The same people who were doing crappy products then are making world-class products today." Managers, rather, let those designers go wild. And, Smith-Meyer says, they did. "We almost did innovation suicide. We didn't do a lot of clever components. We did a lot of stylized pieces," Smith-Meyer says. "We wanted to be Philippe Starck"—the French industrial, interior, and furniture designer famous for everything from juicers to motorcycles. LEGO had assumed it would flourish by giving its designers whatever pieces they asked for in order to unleash their creativity. Instead, costs soared as the models veered toward the esoteric.
Just as design pushed LEGO to the precipice, it helped bring the company back. But here's the paradox: Instead of giving designers free rein to conjure up their most brilliant creations to save the company, LEGO tied their hands. Instead of rubber-stamping nearly every request for a new component, LEGO put each one to a vote among designers. Only the top vote getters—the ones other designers imagined they could use—would be added to the palette. And it eliminated rarely used pieces, slashing the total number of components to about 7,000, the same number as in 1997.
LEGO also forced designers to come out of their cocoons and work with noncreative staff. At the earliest stages of product development, marketing managers, who had detailed research on the types of products kids wanted, helped guide development. Manufacturing personnel weighed in on production costs before a prototype ever saw the light of day. Gone were the days when designers could go wherever their imaginations took them.
It was particularly challenging because design is LEGO's key competitive advantage. Over the years, various rivals have emerged, making bricks that snap together with LEGO blocks at a fraction of the cost. Montreal-based MEGA Brands is the current thorn in LEGO's side. Companies such as Tyco Toys came before it with a similar strategy. But kids and their parents keep buying LEGO, and not simply because of their belief that the quality is better. They buy LEGO because the company offers the most creative collection of models, not merely a collection of bricks. Confining designers ran the risk of diminishing that competitive advantage.
Creative Within Parameters
Except it didn't. The changes started in 2004, gradually reshaping the product lines. In 2005 the futuristic LEGO City fire truck got an overhaul. Gone were the cockpit and the tiny rear section. It looked like a fire truck again. "A five-year-old doesn't need to be told who are the heroes," Nipper says. "He projects it onto [the toy]." Sales of the City line started perking up, leading LEGO to update the police and construction models, too. By 2008, City reclaimed its spot at the top of LEGO's portfolio, accounting for 20 percent of the company's revenue. "It has refound its identity," Nipper says.
It was an "aha" moment. It may sound counterintuitive, but LEGO found that design—at least within its walls—thrives with some constraints. That might send chills up the spines of some in the design world. The idea of fencing in designers, forcing them to play in a confined space, runs counter to the notion that design needs to be set free. But the component limits gave designers just enough direction to come up with some of the company's most successful products to date. "If you put guiding principles in place, you empower people to make the right decision," Smith-Meyer says.
Not many toy companies in the world have more brand power than LEGO. Three generations of kids have built cars, cities, and spaceships with LEGO's iconic bricks. Its logo—the red square with the rounded white letters—is immediately identifiable to most of the developed world and to a bunch of developing nations as well.
But Nipper is sanguine about the power of the brand. It opens doors, getting kids and parents alike to consider LEGO products. But if those products don't engage them, kids will quickly move to the next toy. "Children are ruthless in that they are very demanding about what they want to buy," Nipper says. "If your offer does not stack up, they will go somewhere else." Brand is important, but as LEGO learned, design is crucial. "If LEGO is the Catholic Church, then design is the Sistine Chapel," Nipper says. "It is the holiest of the holy."
From Design Is How It Works, to be published in August 2010 by Portfolio/Penguin Group.