Why Can't Lego Click?

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."