Three years ago Danish toy brand LEGO was in financial dire straits and takeover vulture were circling. Now the company’s going strong with 2006 net profits of €192m. How did they do it? look tough decisions and creativity says. LEGO’s knight in plastic armour Jorgen Viq Knudstorp
words by Scott Berman
Jørgen Vig Knudstorp, the chief executive officer of the LEGO® Group, sometimes strokes his short beard thoughtfully when he speaks, whether the topic is corporate management or the stress he’s learned to master while steering the iconic Danish toy brand away from troubled waters
Troubled indeed. Owned by the Cristiansen family since its founding in 1932, the company was recently struggling to sell its traditional plastic bricks in a market increasingly dominated by video games and computers, losing as much as ¤257m in 2004.
But just three years since that disastrous year, Knudstorp – a tall, personable 38-year-old with owlish eyeglasses – may very well have in LEGO the building blocks of a 21st-century capitalist success story. In fact, the company has undergone what has been called by at least one international newspaper, “an astounding turnaround”.
Four years after Knudstorp was named CEO, LEGO may still be a nurturing, educational toy for toddlers to teens, but first and foremost its goal is to make money. And it is doing just that: in 2006 the company reported net profits of ¤192m on revenues of about ¤1bn worldwide.
Knudstorp’s formula has been to cut jobs, outsource manufacture, sell off LEGO’s theme parks and other tangential enterprises, and make lucrative licensing agreements for new toys and video game spin-offs of popular titles like Star Wars, Batman and Harry Potter, among others.
Knudstorp is a former management consultant and a native of Frederica, Denmark, close to LEGO’s Billund headquarters in Jutland. He comes across as friendly, intelligent and just plain interested in things generally – not just in LEGO, although he clearly is fascinated with that.
He is a thinker and, while gathering his thoughts, is apt to put his head down and place his hands in his pockets. He is good at answering and asking questions, greeting people with a friendly smile and chatting with colleagues.
Knudstorp does not cultivate a standard public corporate image of invincibility. Instead, he speaks candidly – and in terms that many other professionals would echo privately if not publicly – about his recent, victorious battle with work- and stressrelated depression, and the challenge of balancing his high-powered, demanding career and life with his wife, Vanessa, and their four small children.
One of the most fundamental things he’s learned about helming a big international company, he says, is that CEOs need to confront a very wide variety of tasks on a daily basis. In quick turns, a CEO must flick from being genuinely enthusiastic to being “hard on people in a credible, personal type of way.” Knudstorp admits that the prospect of constantly meeting such demands can be “a little bit scary”.
Knudstorp acknowledges that managers, scared or not, must be thick-skinned if the company is to survive. Cutting jobs is perhaps the hardest thing to do. Take the situation at LEGO, for example. By early 2004, the company’s survival was at stake, morale reportedly was low, banking covenants were broken and rumours of a takeover were in the ether.
Once Knudstorp was on board, he hammered out a tough recovery plan with LEGO owner Kjeld Kirk Kristiansen and chief financial officer Jesper Ovesen. The plan, as noted, was highlighted by the shedding of peripheral LEGO businesses and job cuts, which have reduced the number of employees on the payroll from 8,300 at the end of 2003, to 4,500 today, to a projected 3,000 in 2010
The cuts have not been the fault of “the key stakeholder group, the LEGO employees – they were innocent bystanders,” emphasises Knudstorp, praising them as “loyal, skilled and hard-working”. Managers informed the workforce early that all options were being explored, and labour representatives helped prepare the workforce and implement job-training programmes and severance packages.
Significantly, a resurgent Danish labour market has helped ease the way for a number of affected employees, says Knudstorp. He calls the cuts a very tough business decision that was nonetheless “the responsible thing to do for the business and the employees”.
During the past three years, the other, aforementioned components of Knudstorp’s plan have been rolled out: that is, gradually outsourcing most of the production from Denmark to less expensive manufacturing centres in Mexico, Hungary and the Czech Republic.
The overall goal is to reduce the company to its essence, and then build from there a new inventory, with computer-linked toys as well as those popular theme toys.
What have such big changes done to the LEGO brand? The CEO believes that he’s helped return the company to its roots by reconnecting its business model with its brand.
Knudstorp says his action plans have not been about changing fundamentally what the brand is, but making that brand highly relevant to today’s parents and children across the globe. The 2006 financial results show that LEGO is still a top choice – probably, he believes, because the toy system is about “creative problem solving and the ability to think creatively”, skills that Knudstorp argues will be crucial in an increasingly demanding global marketplace.
Demanding is right. While out of the woods financially, the company recently reported that it expects that 2007 will not be a stroll in the park. Costs connected with the outsourcing, as well as IT and various innovations may couple with pressure on the American and German toy markets to mean slightly less revenue than in 2006 – but still a far cry from the troubles of just a few quarters ago.
Be that as it may, the broader process of rediscovering the essence of LEGO and recognising its relevance, as Knudstorp sees it, has been akin to what TS Eliot described about broader contexts. He pauses for a moment to quote Eliot’s 1942 poem, Little Gidding, which deals with spiritual renewal: “We must not cease from exploration / And the end of all our exploring / Will be to arrive where we began / And to know the place for the first time.”
Perpetual exploration: as kids do with LEGO. And that’s just the way Knudstorp likes it.
jorgen knudstorp’s business building blocks
Create a sustainable business model by thinking through your core assets and identity, building a structure that aligns performance with value creation, and re-configuring your assets and finances accordingly. Then repeat the above.
Consider using what’s called the ‘Alpine style’ of organisational change. That is, utilise a small team of a few key people to reach your goal. Use fast strategies and tactics that turn new ideas into ‘impactful’ ideas.
Recognise that downsizing and outsourcing are not ends in themselves. Instead, the point is to reduce assets and investment-risk in order to get to the core of your business. In other words: don’t downsize, rightsize.
Let enthusiastic customers ‘run with the brand’ and have input in developing products.
Be willing to sacrifice short-term profit for longterm loyalty to all the key stakeholders, including employees and consumers.
Control your emotions, not the other way around. Learn how to be aware of and shift your mindset and mood in order to meet the moment and accomplish the task at hand.
Don’t expect a perfect balance between your busy professional and personal lives. Such perfection does not exist. Instead, remember what’s essential to you and reserve time in your life for those things.