Fast Company

Why Can't Lego Click?

The giant Danish toymaker has a history and a reputation that most companies can only dream of. Yet its efforts to change and grow with the times just won't click.

In a land that gave birth to fairy tales and conquerors, there is a peaceful village that seems unfazed by the impatience of the modern world. For almost 70 years, the people of this village have specialized in one thing: making toys.

At first, therewere only two toymakers: a carpenter and his son. Now the carpenter's grandson is the chief toymaker, and he has thousands of others working for his global company.

Lego has a history that most companies only dream about. Yet its efforts to grow with the times haven't worked out. Here's a story -- a fable, really -- of a noble company and its difficult encounters with a fickle, fast-moving world.

The toys that the villagers make are special, and they are known around the world. Since the days of the carpenter, each toy -- from the simplest to the most elaborate -- has left the workshop unfinished. To come to life, each one needs the touch and the imagination of a child.

The people of this Danish village are proud of their heritage: both the global company that they have helped create, and its impact on millions of children in faraway lands. Most of the people of the village smile through their days. But they are worried. For reasons that the toymakers haven't been able to discover, the toys they make seem to be losing their magic.

Peter Eio, who this summer retired after 20 years with Lego, remembers his first visit to Billund, the Danish village that has always been the world headquarters of Lego, and his first meeting with Godtfred Kirk Christiansen, the carpenter's son, who was then running the business. It was 1981, and Eio had just been hired to run Lego's United Kingdom operations. "I was invited to meet the owner," he says. "He asked what I noticed was different about Lego from the other firms where I'd worked.

"When I joined Lego, I'd worked for American companies my whole career. I told him that during the four interviews I had to join Lego, the word 'profit' was never mentioned," says Eio, 53. "Godtfred smiled. 'If we do all things right, the profit will come,' he said."

Godtfred died in 1995. Profits for Lego peaked the next year. In 1997, profits fell precipitously. In 1998, Lego lost almost 300 million Danish kroner before taxes. In 1999, Godtfred's son, Kjeld, laid off 1,000 people -- the first big layoffs in company history. After a brief respite in 1999, Lego last year lost 1 billion Danish kroner -- or roughly $120 million, on sales of about $1.1 billion. "Godtfred's philosophy worked in 1981," says Eio. "But it's a totally changed environment since then."

Lego's recent struggle is an instructive story, a fable, about an admirable company and its encounters with a fast-changing world. The lives of middle-class children have been revolutionized in the past 20 years -- time compression, relentlessly programmed days, career-minded parents, electronics. Says Leah Kalboussi, head of sales for some of Lego's electronics and software products: "Kids these days are busy people."

Play itself is different today. A generation ago -- with just a few TV channels, no computers, and primitive video games -- children grew up in a play economy, of which entertainment was but a small, easily contained part. Today's children grow up in an entertainment economy saturated with media, in which open-ended, self-guided play is a shrinking part.

Lego's struggle is also a story about the power -- and the limits -- of deep-seated corporate values. It would be hard to imagine a global corporation with employees who so clearly understood their company's values, that produced more admirable products, and that had a more basic respect for its customers than Lego. But the business of engaging children has changed so much that Lego's core value, inspiring and nurturing creativity and play, doesn't seem to be helping the company succeed. If you look at what children and their parents are buying (Lego hasn't had a toy in the list of top 20 U.S. sellers any year in the past seven), it's hard not to conclude that Lego finds itself in a fight for relevance, perhaps even for survival, for which the company's 70-year history may not have prepared it.

Most companies have little relationship with their history, let alone with their core values. At Lego, the company's history is alive in the halls every day. The basic eight-stud red Lego brick was first sold in 1949, it was refined and patented in 1958, and it hasn't changed -- including the recipe for the plastic used -- in almost four decades. Almost every office and conference room at Lego contains a bowl of loose Lego bricks so that people can play during meetings.

Kjeld Kirk Kristiansen (his last name was accidentally misspelled with a "K" on his birth certificate) is the grandson of Ole Kirk Christiansen, the carpenter who founded Lego -- and Kjeld, 54, is now CEO and the man whom employees call "the owner." The house where his father, Godtfred, grew up -- a brick building with lions flanking the front steps -- is now nestled amid Lego's corporate buildings. When the owner visits the group that develops toys for preschoolers, he climbs the stairs to his father's childhood bedroom.

The only thing more vivid for Lego than the bricks and the history are what are known universally within the company as "Lego values." Not just the importance of free-form play. No Lego-designed toys are allowed to portray weapons from the 20th century -- although a recent exception involved a new, advanced kit for building a Sopwith Camel, the Allies' World War I biplane fighter. Long before the invention of software, Lego made all of its toys backward compatible. Bricks produced in 2001 work seamlessly with bricks from 1971. And every toy that Lego offers -- even the simplest ones, given away with McDonald's Happy Meals -- requires construction, the touch of a child.

You can't have a conversation of 10 minutes without staff members making an unself-conscious reference to those "Lego values." Even the small band of hip, cynical New Yorkers posted in Lego's new SoHo office, a group busy creating online product features and a Web-based Lego community, talk about bringing Lego values to areas desperately in need of them: the Internet, games, and kids' software.

But history and values haven't helped Lego avoid turbulence. The company has been trying to find its footing for a decade. Kjeld described last year's billion-kroner loss as "disastrous." His handpicked deputy, Poul Plougmann, described the performance as "miserable." And in the wake of 2000, one of the first things that Kjeld and Plougmann did was write a "go-get-'em" booklet for employees. The cover is Lego-brick red; the title is "Remembering Why We Are Here."

For Lego -- an influential, beloved company -- the question is whether there is any way to adapt its history and values to the hypnotic world of Game Boy, Xbox, instant messaging, and Pokémon. Can the past be a guide to the future?

Long ago, in the Danish village, there was another time of worry. During the Depression, the carpentry business of Ole Kirk suffered greatly. The carpenter decided to focus on making things he thought nearby farmers would need to buy, even in difficult times: household goods like stepladders and ironing boards, and wooden toys like ducks, fire engines, and buses. The toys started as a sideline, but they became well known for their quality.

In 1947, Ole Kirk discovered a new material, plastic, and he brought a plastics injection-molding machine to his village -- the first such machine in the entire country. Plastic toys were a strange idea, and many of Ole Kirk's toymakers were astonished and upset: "We're a wooden-toy company, Ole Kirk!"

But Ole Kirk would not be turned aside. One of his early plastic toys was a set of small building bricks that snapped together, first called "automatic binding bricks." Ole Kirk was so intrigued with them that he often carried one in his pocket.

Everyone who has ever played with Lego blocks knows the secret of their success, if only intuitively. What makes Legos work is something the company calls "clutch power." When you snap two Lego pieces together, they stay snapped. They go together with a satisfying sense of solidity, and they resist coming apart. Without adequate clutch power, you wouldn't be able to build anything complicated. It is clutch power that makes Legos such a flexible, adaptable toy. And it is that plasticity that makes playing with Legos -- in the right setting -- as absorbing as reading any book or playing any video game.

People who study children and how they play can't speak highly enough about these classic Lego elements. "The thing that is so compelling about Legos is their flexibility," says Lynn Galle, who is the director of the 75-year-old laboratory preschool at the University of Minnesota's well-regarded Institute of Child Development. Unlike, say, a video game, says Galle, there is no right or wrong way to play with Legos.

But anyone who hasn't looked at Lego toys since his or her own childhood is in for a rude shock. The shelves at Kmart, Target, Toys "R" Us, and Wal-Mart, aren't stocked with bins of multicolored bricks, windows, and wheels. Indeed, the blocks sometimes can be difficult to find -- crowded out by a vast array of intricate Lego kits that look more like models than open-ended play toys. Whether or not there is a "correct" way to play with Legos these days, most modern Lego kits are so elaborate that they come with a folder of step-by-step construction instructions.

Ethan, an 8-year-old boy from New England, is standing in front of a huge display of Lego kits: arctic adventurers, jungle explorers, and the Lego dinosaur adventurers -- a series of toys that has particularly captivated Ethan. The boy gazes longingly at the Lego Dino Research Compound -- 612 pieces. The box shows a Lego scientist in a Lego jeep in hot pursuit of a Lego T. Rex. It's all inside the box.

Ethan is in one of Lego's half-dozen company-run retail stores in the United States -- this one in Orlando, at Downtown Disney. Ethan's grandmother comes up holding an enormous tub of Lego bricks -- 1,200 pieces. "With these," Grandma says, "you can do whatever you want. It gives you examples right on the front."

Grandma is funding this present. Ethan is picking. And although the dinosaur compound is $79.99, and the tub of bricks is $19.99, price isn't the point of difference. Play is. "He and I have very different ideas about Legos," says Ethan's mom, Lisa Gates, a dean at Wesleyan University, who is in Orlando on vacation. "I prefer the free-form bricks, where he can make his own universe. Ethan is most drawn to the theme-based scenarios. He has an Egyptian-pyramid-dig set and some Star Wars sets. He's fixated on the directions -- when he builds it, he wants it to look exactly like it looks on the box. That introduces a note of anxiety into playing with Legos -- did I do it right?"

The tug-of-war between Ethan's view of playing with Legos and his mother's view is a miniature of the problems that Lego itself faces -- internally and in the wider world. (Ethan, for the record, goes home with the dinosaurs.) In fact, the shelves of the store in Orlando display all of the opportunity and confusion that exists in the modern world of Lego. In the beginning, there were bricks -- and kids built whatever they imagined. The addition of roof tiles, windows, wheels, and trees allowed you to make more-realistic creations. Buckets of bricks are available in the store, but they attract almost no attention.

After the bricks came the themed sets -- town and farm first, followed by space (almost 10 years after the moon landing), and then castle and pirate lines later. The theme sets added a dimension: You built it, the theme provided inspiration (and sometimes instruction), and you could play with what you'd built in the classic role-playing scenarios that kids dream up. The construction was less inventive, the play more so.

In 1998, Lego launched Mindstorms: programmable Lego bricks. In some ways, it was a return to the earliest roots of the company: You imagined not only what you wanted to build, but also how you wanted it to behave. You could use your computer and elegant Lego software to give your crab, your rabbit, or your robot behavior as well as a body. The heart of Mindstorms is known inside Lego as the "intelligent" brick.

At each step, the natural extension of Lego's range is encouraged by spectacular sales. Wheels are a huge hit (and today, Lego rivals Bridgestone and Goodyear to produce the most tires in the world -- making upward of 175 million tires per year). When figures, or miniature people, are introduced, they are the company's biggest product. Even Mindstorms, with a starting price of $199, exceed expectations.

In 1999 came the biggest gamble of all: In partnership with Lucasfilm Ltd., Lego launched 14 Star Wars-themed kits. Here, Lego added a new facet to Lego play: storytelling. It was still Lego, but it was Star Wars Lego. The kits assembled into recognizable Star Wars vehicles, scenes, and characters. Kids knew the story that they were buying a kit for; the toy came not just with a design, but with a plot as well. The Star Wars products were the biggest sellers in company history.

It was Godtfred Kirk Christiansen (GKC, as he was known) who focused his father's company on the "automatic binding bricks," who imagined a whole system of play built around them. And it was GKC who institutionalized the value of free-form play. Each innovation tested that value.

The early space-themed sets caused some worry -- space was not "real" play. Kids had experience with towns and farms, but what did they know of space? Plenty, it turned out.

Adding directions was not done lightly -- how free-form could the building be if it required directions? But increasing the building challenges meant providing basic instructions.

The stories of two recent products, though, really show how Lego is struggling to figure out, and adapt to, the changed world of children. When Peter Eio, the recently retired head of Lego's operations in the Americas, started thinking about a collaboration between Lego and Star Wars, it was late 1997. In some ways, Lego had already let the modern toy world evolve around it. In the United States, the largest toy market in the world, almost half of all toys are licensed products -- from Sesame Street stuffed animals to Baywatch Barbie.

But Lego in the late 1990s was totally self-sufficient. It produced no licensed toys -- and never had. When Eio, worried about missing out on licensing, started to cast about for a partner, what was he looking for? "A company that reflected the same corporate and educational values we had," he says. The natural choice: Lucasfilm, keeper of the Star Wars products. Executives at Lucas, it turned out, had wanted to partner with Lego for a long time, according to Howard Roffman, president of Lucas Licensing Ltd. So when Eio and a small team approached Roffman, they found an eager audience.

Executives in Billund couldn't have been more horrified. Says Eio: "The initial reaction was, 'You guys are crazy.' " It wasn't the Lego way. "We had been such a purist company," Eio says. "We tended to want to do everything within ourselves." Even the computerized Lego pieces are produced at Lego factories.

The debate over whether to do Star Wars products took place among Lego's dozen most-senior executives over the course of six months. One board member at the time said to Eio, "Over my dead body will you be launching Star Wars in Europe."

In the end, says Eio, the only reason the Lego Star Wars products were produced was that the owner, Kjeld, decided they would be. The Star Wars products were "a blockbuster, worldwide," says Eio. "It was the biggest product launch in history." The lesson went beyond the value of licensing. What kids were buying was something that Lego had never offered: a story. Says Eio: "It led us to say, Storytelling is important."

Star Wars has paved the way for a product that in some ways is the least Lego-like ever -- something that even Kjeld Kirk Kristiansen says has a "different" look. "Parents may not identify it immediately as Lego," he says. "But kids will."

The new product line is a world of action figures known as Bionicle. The line includes six hulking heroes, six dwarflike wise ones, and five technovillains. They inhabit a tropical island called Mata Nui. Each category of Bionicle has a name (Toa, Turaga, Rahi), each individual creature has a name (Pohatu, Kopaka, Onua), and the geography of Mata Nui is carefully imagined -- right down to the creation of a new system of measurements exclusive to the world of Bionicle. The creatures look like the kinds of robots that an 11-year-old boy would draw on his math notebook during a tedious lesson in fractions.

The Bionicle series of toys -- introduced this spring in Europe, this summer in the United States -- is radical in any number of ways for Lego. But the most important departure is that none of the figures have a "play meaning" independent of their story: the legend of Mata Nui. You can buy one and build it -- but when you're done, unless you know the story, you won't have a clue as to what you've got.

Lego invented the Bionicle creatures, and a Lego product-development team wrote the legend of Mata Nui. Lego even invented the word "bionicle" -- a combination of biological and chronicle. Here then is a Lego product (the intricate creatures need to be assembled; the most elaborate have hundreds of pieces) that is in some ways the opposite of the basic brick. On its own, it has no appeal. Only the story invests Bionicle with fun -- and Lego made up the story as well as the creatures. What Lego does not provide is a resolution in the battle between the liberating Toa heroes and the deadly Makuta villains.

Lego is hoping that Bionicle will be a hit on the scale of Star Wars. The Toa, the heroic Bionicle toys, wear masks -- kids can collect 72 different "masks of power and knowledge." Each mask has a name as well. Can you say, "Pokémon"?

The toymakers in the village know as well as anyone that childhood is often a reflection of the grown-up world around it. Sad as it made some of the toymakers to think about, their toys had not kept up with kids. The plastic Lego pieces were beautiful and fun. But what if Ole Kirk had shrugged and said, "Sure, you are right. We are a wooden-toy company. Forget plastic"?

Admitting that childhood has changed -- and perhaps that the toys haven't changed enough to keep up -- isn't an answer to the problems, of course. It is simply the question itself. Chief toymaker Kjeld Kirk Kristiansen has many experts, designers, and advisers to help him make sense of the new world of children, to make sense of the modern child, to find ways to recapture the magic. What ultimately rescues the chief toymaker, though, is a visit from the ghost of his grandfather, Ole Kirk. "Childhood has changed," Ole Kirk says. "Children have not."

The original Legoland theme park in Billund sits adjacent to company headquarters. The thing that is instantly striking is the size of the place: Everything is scaled to children. There are even child-sized toilets. In the Legoland Hotel, there are huge cushions in the shape of Lego blocks -- and kids use them to make forts and clubhouses, right in the public spaces of the hotel. No one discourages them. Among dozens of randomly selected Lego employees from three countries, not one said a single unkind or snide word about children. Nor was there a sense within Lego that today's children are baffling or mysterious, let alone bratty or overindulged.

The people of Lego trust children. The company's slogans include lines like, "Children are our role models" and "We believe in nurturing the child in every one of us." To an outsider, sayings like that might seem cheesy. In the context of Lego's culture, though, they are part of a fundamental respect for children that is often hard for even loving parents to sustain. That appreciation for the minds of children is as important a corporate asset as the eight-stud red brick itself.

But it doesn't exempt Lego from the discipline of the market. And Lego has made a lot of mistakes in the past 20 years -- the biggest of which was confusing growth with success. The decade of the eighties was a period of dramatic expansion for Lego. Because the company is privately held, it releases limited financial data. But consider this: From its founding in 1932 until 1978, sales reached roughly 1 billion Danish kroner (about $112 million by today's exchange rates). In just the next 10 years, the slope of the sales chart rocketed upward, increasing five-fold, from 1 billion kroner in 1978 to 5 billion kroner in 1988.

The growth made Lego look great -- but through the 1980s, while VCRs, video games, cable TV, and computers cascaded in on kids, Lego was really just expanding its sales to its target market around the world. The explosion in sales represented not an explosion in innovative products but the company's (previously slow-going) globalization really taking hold. In the 1990s, with Lego available to kids from Israel to Korea, the sales curve flattened. Between 1988 and 1998, sales did not even double.

In fact, Lego had become a slow company -- if not smug, then complacent. Lego formed a partnership with MIT in 1984, and it endowed a professorship in the MIT Media Lab in 1989 -- but it didn't produce the "intelligent brick" until 1998. Despite the popularity of the programmable brick, Lego has been unable to bring the price down and turn it into a mass-market product.

Kjeld Kirk Kristiansen realized that Lego needed to change course in the early 1990s. "We became a heavy institution," says Kristiansen. "We were losing our dynamism -- and our fun also. It has taken 10 years to get things back on track."

Given the astonishing size of last year's losses, it's not clear whether things are back on track. Kristiansen is a mild-mannered man: He smokes a pipe, has the reflective manner to go with it, and has a strong will when he wants to -- he backed not only the Star Wars deal, but also Mindstorms and Bionicle. Kristiansen must juggle a three-part legacy that often seems to pull Lego in conflicting directions. His father, GKC, handed over a well-managed company poised at the edge of global scale -- a vision that Kjeld has been able to realize. But GKC also handed over a company that had become conservative -- so conservative that even as it grew, it lost touch with its audience.

The core legacy of Lego remains a toy, the basic brick, with almost universal appeal. That toy represents an important set of values about free-form, imaginative play. An association of British toy retailers, and both Fortune and Forbes magazines, named Lego the toy of the 20th century. The problem is that in this century, the brick may no longer be an effective way of inspiring that kind of play in kids older than 6 or 7.

And then there is the legacy of Kjeld's granddad, Ole Kirk Christiansen. Ole Kirk, it turns out, was the real family radical. He bought a molding machine to make plastic toys in 1947. By way of comparison, another famous plastic product made its debut just the year before: Tupperware.

Lego today is as much the result of Ole Kirk's daring as of GKC's prudence. Ole Kirk was the innovator; he set the bar for quality, and Lego has never fallen short of it. (Have you ever seen a broken Lego piece?) GKC is the one who really invested Lego with what people now think of as the company's core play values: encouraging imagination and putting the child in charge.

Kjeld tells a story about his dad: "In 1983, someone came to him and showed him video games. It was the first time he had seen electronic toys, the first game consoles. He refused to do anything with it. He was very true to the core."

Well, yes and no. Can you imagine the reaction of Ole Kirk to video games? It wouldn't have taken him 15 years to produce cool Lego video games -- games that, as it turns out, do translate Lego values from the tactile to the virtual world.

Lego has changed in just the past five years. Product cycle times are falling: In time for Father's Day this year, Lego Direct, the catalog and Internet-sales division, produced the Sopwith Camel biplane kit. The plane was designed in a single day, and the kit was approved in something like two weeks. Lego has gotten religion on licensed toys completely -- perhaps too completely. Its preschool line includes Winnie the Pooh Lego sets and Bob the Builder Lego sets -- and the company this fall will roll out extremely secret, extremely elaborate Harry Potter Lego sets.

Lego is also discovering an important aspect of storytelling: the creation of ongoing Lego characters with whom kids can identify. Beyond Bionicle, a new adventurer named Jack Stone is being aimed at younger kids. And Lego, which has often seemed to float great products onto store shelves and then wait to see if anyone notices them, is cautiously trying some modern, even viral, marketing techniques.

Kjeld is trying to remix the culture of Ole Kirk and the culture of GKC. His dad, Kjeld says, would have thought Bionicle was "going too far. But it is a good example of expressing our values in a cool, contemporary way.

"Lego values are not just in the brick," Kjeld continues. "They are in what you get out of the brick." Lego the company needs to learn to be more like its core product, Lego the brick: nimble, adaptable, plastic -- but fundamentally unchanged -- no matter what kind of creation it is a part of.

To be both fair and blunt, Lego has had only two daring, visionary moments: One came from Ole Kirk's insistence on plastic toys and the future of the brick. The other came from GKC's insistence that a whole system of play could be built around the brick. The most recent of these two moments is 40 years gone. It is time for Kjeld and his team to find a similar leap. Lego can survive a long time by making good products. But trendiness -- even high-quality trendiness like Bionicle and Harry Potter -- is not leadership. Once, for a brief moment, Lego changed the way kids played as well as the way kids learned to think. Lego hasn't been that kind of leader in a long time.

Kjeld's chief deputy, Poul Plougmann, a former VP of finance at Bang & Olufsen, sounds almost like a member of the family when he talks about Lego. The company, he points out, has a much larger presence than its business would justify. A billion-dollar-a-year business, in global terms, is tiny. But according to research that Lego follows closely, the Lego brand is the seventh most powerful worldwide among families with children, behind only such names as Coca-Cola and Disney. People take Lego seriously, which is good news; but that view has created a legacy of expectations not to be trifled with.

Plougmann explains the value of Bionicle, for instance, by way of metaphor. Many kids, by the time they are 11 or 12, no longer think Lego is cool. They've moved on to action figures, war games, video games. Plougmann describes those kids as out on a frozen lake, in need of rescue. Bionicle is a way for them to step back off that ice. "We offer them a ladder across the ice," he says. "Bionicle is a craze. It's cool. It's a great story." His eyes twinkle. "It's a recruiting tool. We need to take those kids back.

"The important thing," says Plougmann, "is that we not grow beyond our values. We are here only to develop kids. And we should be smart enough to make a business out of it."

Charles Fishman (cnfish@mindspring.com), a senior editor at Fast Company, spent many hours playing with Legos -- both as a 9-year-old and again for this story. Visit Lego (www.lego.com), or learn about the legend of Mata Nui (www.bionicle.com), on the Web.

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