Thomas White Global Investing
Global Players

Global Players

April 2012

Jorgen Vig Knudstorp, CEO, LEGO Group

“We’ve never had to recall a single LEGO brick,”

— Jorgen Vig Knudstorp, CEO of LEGO taking pride in the quality of LEGO’s iconic toy parts in an interview to the Financial Times

What can supervising a bunch of kindergarten kids and toddlers, teach anyone? Well, for Jorgen Vig Knudstorp, a 6 foot 3 inch Danish man, kids who alternate between cackling laughter and bouts of crying have taught how to listen to people and make them listen back. He has since used this skill to save the iconic toy company LEGO.

In an interview to the Financial Times, the amicable Knudstorp quipped, “My dad says that I learnt everything I needed to know about leadership (in the kindergarten). If you can be a leader with kindergarten children, you can be a leader anywhere.” The bespectacled Knudstorp adds that “they care about what kind of role model you are and how you can influence them.”

Thanks to this epiphany of his youth, Knudstorp brought in a set of much-needed values in time to save LEGO, an 80-year old company, whose hi-quality building block sets were one of the most cherished items of our early childhood and perhaps even now.

By any count, LEGO is seen as an extraordinary company not only in the eyes of parents who proudly watch their children build castles and town halls, but also in the eyes of high-minded academicians. Playing with LEGO sets is widely believed to develop motor skills and creativity in children, considered essential tools for real-world problem solving. During his university days, Larry Page, one of the founders of Google, built an inkjet printer with LEGO blocks. Donald Trump, the real-estate magnate, routinely builds LEGO towers before seeing them touch the sky. Footballer David Beckham takes some time out from the field to play with LEGO sets along with his kids. The founder of LEGO, Ole Kirk Kristiansen, a Danish carpenter who launched the company in the 1930’s, even put the philosophy of the firm ‘nourishing the child’ before profits.

The firm did well continuously. Until the late 90’s, for more than 60 years, the firm never posted a loss. LEGO became Europe’s most admired brand among all categories. Markets and profits were growing steadily for the privately-held company with down-to-earth Scandinavian values.

But by the late 90’s signs that something was amiss at LEGO started emerging. In 1998, the firm posted a small loss. By the early 2000’s, the firm was burning cash. In 2004, the firm was losing almost $1 million for every day of operation. LEGO, largely owned by the descendants of Kristiansen, was now viewed as a perfect takeover target for private equity firms. Rumors abounded that U.S. toy giant Mattel may acquire the firm. Thousands of parents across the world wrote to LEGO management ‘Please, for God’s sake, save this brand because we love it so much’.

Then in 2004, Kjeld Kirk Kristiansen, the grandson of LEGO’s founder, made a decision that was considered earth-shattering in Bilund, a small town of 6,000 people in Denmark, now only famous for housing LEGO. He stepped aside as CEO of LEGO and put his faith in Knudstorp. Until then, LEGO had seen only three CEOs, all belonging to the Kristiansen family. At 36, Knudstorp was not only young, but had only been with the firm for three years. Knudstorp had to convince the management of LEGO that he was up to the job, but he also had to win over the hundreds of senior people in the firm who were witnessing his meteoric rise.

Being Danish in a Danish firm helped. The son of an engineer and a teacher, Knudstorp grew up in a household that cherished LEGO’s trucks and building sets. At first, Knudstorp wanted to follow his mother into education and even worked as a teacher for kindergarten children for 18 months. Later, he changed his mind and decided to study business, a decision that took him to prestigious U.S. universities like MIT and Harvard. After a doctorate in economics, Knudstorp joined the Paris office of McKinsey and soon started recruiting for its European offices. Within years, he ended up in his home country to work with his favorite toy company.

We needed to build a mind-set where nonperformance wasn’t accepted because there is no place to hide if performance is poor.

— Knudstorp explained in an interview to the New York Times.

But his dream company was in a crisis. Knudstorp, in a hard-hitting presentation, highlighted the things that were very wrong at LEGO. For a Scandinavian firm that considered it impolite and even improper to talk about profits, Knudstorp emphasized the importance of performance. He ushered in a culture where results counted. “We needed to build a mind-set where nonperformance wasn’t accepted because there is no place to hide if performance is poor,” Knudstorp explained in an interview to the New York Times.

Soon other tough medicine followed. In a streamlining exercise, he cut the number of bricks or elements used to produce LEGO toys from 13,000 to 7,000. He demanded that designers be creative with existing parts because each new element was less useful in the overall scheme of things and the mold needed to produce each part cost nearly 50,000 Euros. In a firm where deadlines were set and then casually postponed, resulting in delays of months and sometimes years in the product development labs, Knudstorp demanded and achieved a newfound discipline. He even slashed nearly 1,000 jobs in Bilund and moved them to Mexico and Eastern Europe. At a time when LEGO started acting like a lifestyle brand putting its stamp on things like T-shirts and watches, Knudstorp renewed the firm’s focus on the humble eight-studded building block, the very foundation of not only LEGO’s toy buildings but the company itself. He even sold the LEGO theme parks to a private equity firm.

Not to be misunderstood, Knudstorp still likes diversification. He strongly advocates that LEGO should venture into the virtual gaming world. LEGO has introduced computer games with its building-block characters playing heroes and villains. In recent years, LEGO’s sales have largely come from theme-based building sets licensed from Hollywood titles such as Toy Story, Star Wars, and Pirates of Caribbean. Some critics of these theme-based sets and LEGO’s entry into the virtual world view these moves as a betrayal of LEGO’s core theme of ‘nourishing the child’. Still, Knudstorp counters these punches saying that LEGO’s video games are in fact complementary to its freestyle building block games. In fact, he claims that children, who play LEGO’s video games, see those characters and come to the physical set to build and enhance their imagination.

The numbers are firmly on Knudstorp’s side. Not only are the firm’s new games selling well but the time-tested building block sets of nearly five decades are also selling like hot cakes. After a near-death experience in the mid-2000’s, LEGO’s financials are thriving. Even during the great recession of 2009, sales jumped nearly 20%. In Britain, LEGO’s sales are growing by 50%. From less than 3% market share in the early 2000’s, LEGO now commands close to 6% of the world’s toy market. LEGO’s current victories are all the more sweet because firms that wanted to take over the Scandinavian company are now miles behind LEGO in terms of performance.

Rebuilding LEGO for the future block by block? Surely, Knudstorp knows the art of listening to the kindergarteners.





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