The Hindu Business Line : Lego: Playing by its own rules

At the Billund, Denmark, headquarters of Lego, the theme is the famed, distinctive brick with round studs. Not only can you see them in every shape, including even dust-bins, but also find the usual, handy ones every where, to build your ideas or to add to those of others on display in the reception area. This is in keeping with this still family-owned, 1-billion euro toy company’s aim of constantly connecting with users.

The Lego Group has been true to its name — derived from two Danish words leg godt meaning ‘play well’ — and successfully “putting together” — the rough Latin translation of the word Lego that was not known to the founder — quality and innovation.

Little wonder that from the wooden toys, first made in 1932 by Ole Kirk Christiansen, to the robots, now made by his grandson Joergen Vig Knudstorp, Lego toys have caught the imagination of children, youth and, increasingly, adults in more than 130 countries for three quarters of a century. Lego celebrated its 75th anniversary on August 10.

Wonder bricks

The Group is built on the bricks that it began making in 1949, based on the design of Kiddicraft Self-Locking Bricks, released in the UK in 1947. The first Lego bricks, manufactured from cellulose acetate, were developed in the image of the traditional stackable wooden blocks, only they could be ‘locked’ together. Bricks, beams, axles, mini figures, and all other elements in the Lego system, when snapped together, have a ‘clutch power’ — they stay together until pulled apart.

They are not too easy to pull apart, else the constructions would collapse; nor too difficult to separate as the very essence of the Lego idea is to constantly create by re-assembling. For, according to Wikipedia, six 2x4 Lego bricks of the same colour can be put together in 915,103,765 ways, and just three bricks of the same colour offer 1,560 combinations.

The Billund Legoland is a tribute to the endless possibilities of the Lego elements, with over 45 million of them used to create all the scenes and the props. The genius is that despite the tremendous variations in the design and purpose of individual pieces all are compatible; the 1960s bricks interlock with those made in 2007.

Innovation driven

Innovation is the game the Lego Group plays best. Thus over the years its models have explored themes as diverse as pirates, Vikings, ninjas, medieval castles, dinosaurs, wild west, cities, suburbia, holiday locations, the Arctic, airports, miners, community, boats, racing cars, trains, motorised models, to Star Wars, Jurassic Park, Harry Potter, Spiderman, Batman SpongeBob SquarePants, Avatar: The Last Airbender, and Ferrari. Now, it offers such accessories as motors, gears, lights, sensors, and cameras. There are even special bricks, such as the Lego NXT that can be programmed to perform complicated tasks. These programmable bricks are sold under the name Lego Mindstorms.

In 2006, it released Mindstorm NXT, more advanced than the RCX, with a bigger screen than the RCX, and a new array of sensors. They include touch, sound, light, and a new ultrasonic sensor technology.

There is also a Bluetooth compatible hookup that can send and receive messages from the cellphone and other Bluetooth-compatible devices. The RCX was only compatible with Windows, but NXT is compatible with both Windows and Mac OS.

All this has been possible because of Lego’s ‘clutch’ power with its users, world over. Innovation is user-driven. Though the company employs professional developers, Lego enthusiasts are encouraged to provide ideas and inputs. All this translates into some 20 billion bricks, or about 600 pieces a second, produced every year at Lego’s manufacturing locations around the world. Moulding is done at one of two plants in Denmark and Czech Republic. Brick decorations and packaging are done at plants in Denmark, the US, Mexico and the Czech Republic.

Bruising competition

As with any game, it has not been win-win, all the time. Even a niche player like Lego was caught in the bruising competition game. Hit hard by increasing rivalry from makers of electronic toys, Lego reported a loss of 282 million kroner (one euro = 7 Danish kroner) in 1998. This rose to 1.93 billion kroner in 2004. But the group re-assembled its act quickly to cut costs and bring efficiency to the supply chain.

This was achieved mainly by outsourcing production to Flextronics, an electronics manufacturer based in Singapore that operates factories in Mexico and Eastern Europe. This paid off and, in 2005, the group had a net profit of 505 million Danish kroner.

Despite forecasts that sales would fall in 2007, the Lego Group sold 5 per cent more during the first half of the year than it did in the same period of 2006. Profit before tax for the first half year was better than expected, at 173 million kroner compared with 168 million kroner in the previous period.

The Group had also divested from the Legoland amusement parks — besides in Billund, they can be seen in the US, the UK and Germany — to Merlin Entertainments, which owns a number of family attractions the world over including Madame Tussauds, Sea Life and the London Eye, Gardaland (Italy) and Heide Park (Germany). Lego Holding A/S, Kirkbi A/S and Kirkbi AG own some 23 per cent of Merlin Entertainments Group.

“We now see the contours of a new business model, where we go from traditional integrated model to a partnership model. This way we can achieve great financial advantages in a very difficult market,” Mr Joergen Vig Knudstorp was quoted by International Herald Tribune.

Pangs of transition

But the transition was not easy to make, especially as it involved job losses. Though retrenchment is not difficult in Denmark, the company has had a close bonding with the employees. Its commitment to its employees made Lego design education packages and offer counselling to ease the process. It was helped in some measure by the boom in Billund that absorbed most retrenched workers.

Indeed, when in 2003 Lego said it may retrench 900 people over the next few years, some local companies reportedly waited to pick the Lego employees, who are highly motivated, willing to take initiative and responsibility, and talented. But that has not come to pass as Lego has managed to so far avoid lay-offs.

But it can be expected to happen, says Villy Marklund, who is Senior Director of Future House, which helps retrain employees to find new work, as the focus of the Lego group is shifting from a production company to that of an innovator/developer.

Some 200 new products are under development by a multi-ethnic staff at Lego’s Billund HQ, says Head of Corporate Communications, Charlotte Simonsen, without revealing what the company spends on R&D.

After stabilising in 2004-06, the Lego Group is now in the last phase of strengthening its core product platform and supply chain, before it strives for organic growth beyond 2009. That it will do that is clear from Mr Jorgen Vig Knudstrop’s interview to the Danish Focus magazine, when he said that, “… you need to be able to mobilise the entire company through your actions. As a leader you have to show that you can walk the talk…Moreover, you need to be able to think strategically and implement people development strategies and to handle the company culture through your actions.”

Surely, one can look forward to a successful Lego NXT.

(The author is a Business Line Deputy Editor on sabbatical in Denmark.)