By Mark Rowland Run your business How Lego almost wiped itself out 2 Sep 2016 Lego is one of the most popular toy brands in the world. But, in the 1990s and early 2000s, a series of surprisingly terrible ideas brought the Danish company to the brink of collapse. In 2003, Jørgen Vig Knudstorp, then strategic head of development for Lego Group, was asked to find out what had gone awry. The company had reported a DKK 1.4bn ($210m) pre-tax loss in earnings – the biggest in its history. Something was going horribly wrong and no one quite knew what it was. What Knurdstorp found out was worse than he ever could imagine… Blocks in the system “When Jørgen first analysed the company… he almost had a heart attack,” recalls Lego designer Mark Stafford. At this time, Lego Group had no idea how much it cost to manufacture the majority of its products. Certain motorised and fibre-optic kits contained parts that cost more to produce than the kit cost to buy. The company had run on the same principle since the 1930s: deliver great products, and profits will follow. In reality, this meant there was no working accounting system or indeed any way to monitor the company’s financials. “They didn’t know where they made money,” remembers Jesper Ovesen, who took over as chief financial officer in the immediate aftermath of the crisis. “They didn’t know if they made money on the product side. They didn’t know product profitability.” Strong sellers versus new ideas In the 1990s, the company let go of large numbers of its experienced designers and replaced them with top graduates from the best European design colleges. “Though great designers, they knew little specifically about toy design and less about Lego building,” Stafford says. Lego had been producing its Duplo brand of bricks since the mid-1970s. The new creative teams decided that this line – then the second bestknown toy brand in Europe – needed to go. In its place, they launched the Explore range of electronic learning toys, which were about as far removed from the usual Lego products as you could get. Parents didn’t recognise it as Lego, and it didn’t sell. Lego had taken a strong seller and replaced it with a dud, costing the company DKK 500m ($75m). “Explore was a smoking disaster – our least fine moment of all time,” says Mads Nipper, then head of Lego’s central Europe operation. Then there was Znap, a range rushed out to compete with US rival K’Nex. Basically the same as K’Nex but not as good, the range failed to sell. The fact that some sets included massively costly Technic motors added to the loss. Lego had taken a strong seller and replaced it with a dud, costing the company $75m Worst of all – at least in the eyes of purists such as Stafford – was Galidor. A range of action figures that bore no resemblance to the core Lego product, Galidor was based on a TV show funded by the company. The strategy relied heavily on the success of the programme, which by all accounts was disastrously bad. Lego designer Niels Milan Pedersen recalls: “We were gobsmacked with disgust when we saw the first episode. It was terrible.” Everything is awesome Knudstorp took over as Lego chief executive in 2004, and has managed to completely turn the company around. Movie tie-ins and a focus on core products have helped to boost the brand, and the company reported a 23% increase in revenue in the first six months of 2015. If it hadn’t been for his and Ovesen’s rescue, however, we could be living in a much less colourful, Lego-free world. Mark Rowland is a journalist and former editor of Accounting Technician and 20 magazine.