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How Lego Almost Lost It, Doing Everything Right

Filed by KOSU News in Business.
July 24, 2012

Lego Group, maker of those iconic plastic building blocks, inspires an almost fanatical following in some quarters. But as a business, it turns out, it came close to going bust by following the hot advice of the day — and then recovered by turning to a more prosaic playbook.

The story is told by David Robertson, a professor of operations and information management at the University of Pennsylvania’s Wharton School of Business. He’s written a book on the topic, and the condensed story is part of the business school’s Knowledge@Wharton feature, detailing its faculty’s research. (Robertson, his bio tells us, was previously “LEGO Professor of Innovation and Technology Management at Switzerland’s Institute for Management Development.”)

His account traces the history of Lego’s Danish founder, and his company’s transition from wooden toys to plastic, in particular the iconic plastic blocks, after World War II. The company rode the toy-buying wave of the baby boom.

As Robertson tells it, Lego ran into a sales slump in the 1990s, thanks to the rising popularity of computer games and other “more sophisticated” toys. So the company did what so many experts in the early 2000s were advocating: It went on an “innovation binge.”

For example,

“the firm found relatively competition-free markets where Lego could dominate; management sought the participation of a number of different constituencies from both inside and outside the firm and hired a diverse and creative staff; it tried to create new products that disrupted existing markets; and it listened to customer feedback.”

But results were limited, and the company began running low on cash. Ironically, the case study says Lego found its solution in recommendations from a different expert — a management consultant who soon became Lego’s chief executive.

Most of the solution will be familiar to anyone watching the economic world over the last 20 years: The company sold off parts of itself to private equity investors (including most of its stake in the Legoland theme parks), and “outsourced the overwhelming majority of its plastic-brick production to cheaper facilities in Mexico and the Czech Republic.”

Voila, cheaper labor and refocusing on the company’s core products made up for what innovation hadn’t. The company also opened retail stores and straight-to-DVD movies. Sales and profits have risen nicely.

In the end, the story seems to be one of taking more conventional expert advice over the trendy approach of the moment. Either way, it offers some insight into how companies can wind up following the most conventional business models, despite their best efforts. [Copyright 2012 National Public Radio]

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