Child’s play

Since 1932 Lego has entertained generations of children and was run as a tightly knit family firm. But when the company came close to collapse five years ago it took an outsider to save it from collapse. Diana Milne meets the company’s CEO and saviour Jørgen Vig Knudstorp.

“My job was to look at how to stop the bleeding, how to stabilise sales and how to cut costs dramatically to deal with the new reality of selling 40 percent less than we did two years earlier”
-Jørgen Vig Knudstorp

Despite having been responsible for his company's dramatic reversal of fortunes aged just 34-years-old, Lego CEO Jørgen Vig Knudstorp, is disarmingly modest. "I don't need to brag," he says. "I'm not the kind of CEO that boasts about how well we've done because I've learnt that it's other people who do the majority of the work to get there anyway." It's not the kind of admission you'd expect from the head of one of Europe's biggest toy makers. But then Knundstorp is not your typical CEO. He came to the role in 2004 with no previous CEO experience, having graduated with a PHD in business in 1998. At the time his appointment was greeted with scepticism by the press and Lego employees alike. Indeed Jurgen says that even he doubted his own credentials: "Six years after graduating I became CEO of one of the biggest companies in Denmark. Since I felt I was slightly underqualified for the job, I took a humble approach to the team, the organisation and the customers. I said to them 'look, I'm not going to pretend I have all the answers. So why don't you help me out'. And that in fact, has become a trademark of the way I run the business." By 2008 that low-key approach combined with Knudstorp's sharp business acumen had more than made up for his lack of management experience and produced results, which soon silenced his critics.

Reversal of fortune

At the time when Knudstorp took up the role, Lego was in the midst of the biggest crisis in its history and close to complete collapse. At the time the previous CEO, Kjeld Kirk Kristiansen, who is also the owner of the company relinquished his post and took a gamble by employing a young, gifted business graduate in the hope that he would see a light through the tunnel where others had failed. Describing the company he inherited, Knudstorp says: "In 2003 we pretty much lost 30 percent of our turnover in just one year. The decline continued in 2004 with another fall of 10 percent. So one year into the job, the company had lost 40 percent of its sales. And of course we were producing record high losses and cash flows were negative. My job was to look at how to stop the bleeding, how to stabilise sales and how to cut costs dramatically to deal with the new reality of selling 40 percent less than you did two years earlier. On top of that the US dollar had declined dramatically in value, which is a key currency for us. We had too much capacity, it was sitting in the wrong countries, our products weren't sharp enough and the retailers were very unhappy" Knudstorp set about creating a seven year strategy for the company, Shared Vision, to restructure and stabilise the business, boost sales and reduce debt. "To describe what we did we use the slogan, 'we changed everything but the brand'," says Knudstorp. "We really revamped the business and the product portfolio, and we dramatically increased Lego's profitability." By 2008, Knudstorp's efforts had paid off. Lego grew at 20% and in the first half of this year, it had increased its sales by 23 percent over the previous year, achieving profit of €124 million.

Lego's achievements are all the more impressive given the tough global economic conditions and the fact that the toy market is currently suffering heavy losses. Knudstorp believes that the fact that Lego's own financial crisis preceded the credit crunch meant that it was in a far better condition to weather the storm than many of its competitors: "I think we were extremely lucky to get our financial crisis at a time when it was possible to go through restructuring. We restructured the debt and sold off assets such as businesses and properties. And of course at that time we sold at the top of the market. It would have been a lot harder to sell commercial properties today. So I think we were fortunate that we got that crisis and it sharpened our senses of how to operate the business." He goes on to say that the long term decline of the world toy market means that Lego and its competitors are not hit as hard by the downturn as companies in other industries: "The toy market over the last ten years has been flat to declining by one or two percent. And we're talking about an IMF forecast for the world economy this year to decline by 1.3 percent. And in that sense we can say to the world economy 'welcome to our world', because we are used to operating in a declining industry."

Sentimental value

Where Lego differs from many of its competitors in a declining market however, is in the strength of its brand. The Lego Group has existed for 77 years since Ole Kirk Kristiansen started his wooden toys business in 1932. Although the toys have evolved considerably - in particular recently to embrace robotics and computer technology – the iconic Lego bricks are still enjoyed by generations of children around the world. This continuity, in terms of Lego's products and brand values, gives it an even greater advantage in times of economic uncertainty, says Knudstorp: "A brand like Lego is very iconic but also nostalgic and well established and it's something that the consumers understand. They also understand the play value - the number of play hours associated with the toy – is very high. And I think that in times of crisis we hark back to something we know has a lasting value." Knudstorp's original strategy of changing everything about the company but the Lego brand itself, reflects the fact that its traditional product lines have retained their popularity despite the introduction of many new product lines, including the Power Miners, Bionicle and Racers ranges. Indeed during the first half of this year it was the classic product lines, such as LEGO City and LEGO Star Wars that remained the best sellers, says Knudstorp. "These two product lines represent two very classic patterns of play," he explains. "Lego City is all about the real world and your role in it. You can pretend to be a hero such as a policeman or a fireman and it's a familiar environment where you create your own towns and so on. That is an evergreen of children and especially boy's play. Star Wars is what I would describe as a modern day fairy tale. It is so iconic in the way it portrays the conflict between good and evil. There's an immense number of fantastic characters in it and Darth Vader in particular is a classic modern character." He goes on to say however that the company is keen for its toys not to glorify violence or warfare: "The Lego of my childhood was the one that appeared to be more naive and containing less violence and conflict," he says. "Today we're definitely trying to break some barriers in how far we're willing to go in terms of the characters being evil and having weaponry. We still have a view that we don't want to glorify warfare and we don't make any war toys."

Striking a balance between making its products relevant to the modern child and retaining the look, feel and simplicity of Lego's traditional toys has been an important part of Lego's business strategy, says Knudstorp. It has achieved great success in this area through its collaboration with Warner Bros on the launch of the Lego Star Wars video games, which, according to Knudstorp, are currently the best selling video games globally. This foray into the digital world, was done with trepidation by Lego, according to Knudstorp, who says the company was concerned that the company's traditional product portfolio could be put at risk by the move: "I have to admit that we had our fears that the video games could cannibalise the physical play experience," says Knudstorp. In the event however, the video games have boosted physical toy product sales and vice versa: "With boys of that age there's a strong synergy between the gaming experience we offer and the physical play experienced. We have learned that just as children still want to read books and not just watch movies they still want to have that physical Lego building experience that can not be replaced by digital play."

Growth strategy

As well as diversifying its product portfolio, a major cornerstone of Lego's Shared Vision strategy has been to reexamine its core markets and consequently re-think the location of its production facilities. In terms of its global markets, although the North American and Central and Eastern European markets recorded the strongest growth in the first half of 2008, it still experienced its strongest demand from Continental Europe. The European markets where it hopes to achieve stronger growth are; Southern Europe, the UK and Ireland. "We have invested a lot in strengthening our operation, our retailer relationships and our marketing in those markets and that seems to be paying off very strongly right now," says Knudstorp. "Now I think it's a matter of us catching up to a more natural share of these markets where we have, for various reasons, been underpenetrated in the last ten to 15 years." The US however is the one where Lego most hopes to grow its market share, and in the last three to four years, it has succeeded in doubling the size of its business there: "I think the big creature we have in our minds is the US market just because that is the world's biggest toy market and Lego has a very strong brand in the US. We believe that from here onwards we will aim for a growth of at least seven to ten percent a year." With these strategies in mind Lego re-evaluated its manufacturing footprint four years ago and set up new production facilities in Mexico, the Czech Republic and Hungary, close to the markets it was targeting. To cut costs, last it phased out an existing outsourcing agreement with the manufacturing firm Flextronics and decided to focus instead of internal production, taking over production at its Mexican and Hungarian facilities:

"The sweeping changes enacted by Knudstorp are all the more impressive given the fact he came to Lego, an organisation that had been exclusively family-run for 75 years) as an outsider. The previous CEO, Kjeld Kirk Kristiansen (Check if it's C or K), was the grandson of Lego founder Ole Kirk Khristiansen and had been in place for 25 years. Luckily, said Knudstorp, he supported the changes that were necessary to ensure the Lego heritage could continue: "I was fortunate enough to have an extremely supportive and patient owner which was quite amazing because he had been the CEO for 25 years before that and it was his business. A lot of people imagined it (the Shared Vision strategy) was a revolution against the way that he had been running the business. But the truth is it could not have happened without his very direct support. This was also the case in terms of long-term employees who know him and would not have followed my proposals unless they knew that he was supporting them. So in fact it has not been a case of contradiction and fighting each other. It's been a matter of actually supporting each other along the journey."

But despite having successfully turned his company from an outdated and loss making business, into a profitable global toy maker, Knudstorp says this journey is by no means over. In a typical show of modesty he says he is still some way off from tackling the company's two biggest challenges: globalisation and digitalisation: "If I'm a little bit blunt, I'd say we are a traditional toy manufacturer with a strong base in Europe that's really starting to drive its exports to the US. That would hurt some feelings in the company but that's the truth. I'm talking about how little we sell in Asia or South America and about expanding in the US. That seems a little late for a lot of companies to start thinking about. And I'm talking about the fact that we are just starting to become a player in the digital space, or on the internet. This company was founded on wooden toys. Then moved to plastics after the Second World War. I think we missed out a bit on transistors and microchips and computers when that emerged. But we're not going to miss out on digitalisation. I'm committed to bringing this business into the 21st century by globalising it and bringing in digital technologies. And judging by the high profile achievements of this low key CEO so far, Lego's future is in very safe hands.

Happy days

Being the CEO of Lego may be hard work, but according to Knudstorp the joys of running Europe's favourite toy maker far outweigh the downsides:

"Lego is one of those brands where you get on an aeroplane and you tell people what you do and instantaneously most of them say to me, 'wow you must be so happy'. They smile when they hear about the brand and they share the experiences they've had with Lego in their childhood or with their children. And it's great for me because truth be told it's not always fun. Sometimes it's just plain hard work and there are a lot of issues to address on a daily basis. But it makes me happy to hear people say 'wow you're so lucky'. And I think yes I actually am and I cannot think of any other job I would dream of having. In this day and age we all want a job we can be proud of where we're not manufacturing something we feel bad about that has a bad environmental impact or it's making people ill or whatever. I truly feel, in some ways, that the more we sell, the more we do for the world. Because we do teach children how to think creatively and that they all have opportunities in life, that they can all invent something. And we teach them how to think in a very structured mathematical fashion. So I'm very happy in my job."

Toy story

Knudstorp describes how his childhood memories of playing with Lego helped to inspire his career:

"As a child I actually had a big Lego collection. My dad was an engineer with Shell Oil and he was a very structured and systematic person and my mother was a kindergarten teacher who was very creative and really emphasised all my creative skills. They both really loved Lego; my father liked it because it suited the mindset of an engineer and involved constructing stuff in a very systematic fashion; my mother liked it because it offered the freedom of creative expression. This combination of systematics and creativity still inspires me today. I truly believe it's the foundation of problem solving that on the one hand you have the hard skills of science and maths and logic but on the other hand you also have the soft skills of story telling, role playing, creativity and critical thinking. And I really think that is what Lego is all about."

Watch a further interview with 'The Man Who Rescued Lego' - CEO, Jørgen Vig Knudstorp.