Why Can't Lego 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.