From homebuilder to the largest toy manufacturer in the world, Lego is a family business that has a history of innovating. Learn how they adapted to the challenges to create their success.

Dave Young:

Welcome to the Empire Builders podcast, teaching business owners the not-so-secret techniques that took famous businesses from mom-and-pop to major brands. Stephen Semple is a marketing consultant, story collector, and storyteller. I’m Stephen’s sidekick and business partner, Dave Young. Before we get into today’s episode, a word from our sponsor, which is… Well, it’s us, but we’re highlighting ads we’ve written and produced for our clients. So, here’s one of those.

[Peak PPT Ad]

Dave Young:

Stephen, my wife and I raised four little kids, right? And during that time, when I think all four of my daughters were under the age of six or seven at one point, it’s a lot of little kids and there’s a lot of toys just everywhere. And the worst of them are Legos in the middle of the night when you don’t have shoes and socks on and you’re walking around in the dark.

Stephen Semple:

Nothing hurts more than stepping on those little puppies.

Dave Young:

I am so glad that I don’t have any of them in my house anymore.

Stephen Semple:

We’re talking about Lego and Lego is really quite a remarkable story, and they are one of the largest toy companies in the world.

Dave Young:

They’re everywhere, right?

Stephen Semple:

They are everywhere.

Dave Young:

They’re just ubiquitous.

Stephen Semple:

Yeah. There’s been over 600 billion Lego parts stepped on. 600 billion parts made.That’s just a crazy, crazy number. And this company was started back in Denmark in 1932 by Ole Kirk Kristiansen. And he was actually a carpenter. They didn’t start with making Lego, they started doing carpentry. And he was first of all, a home builder for local farmers and the carpentry business grew until the Great Depression happened. And basically people weren’t looking for homes any longer. But he was a wood maker. And he said, okay, well what I’m going to do is I’m going to start making small furniture. So in early 1930, he started making small furniture. And then 1932, which is basically the start of Lego, he switched to making small wooden toys.

Dave Young:

Okay. So he turned into a toy maker in the height of the Depression.

Stephen Semple:

And he was making these little wooden toys and in 1934 he switched 100% to toys and the company became Lego, which is from the word leg godt, which is play well. So Lego is a play on those two words and it’s play well. And there’s the big reason why he got into wooden toys, is up until that point most of the toys came from Germany.

Dave Young:

Okay. And he’s Dutch, right?

Stephen Semple:

Right. Dutch, 1934. Up to that point, most of the toys came from Germany. Then Germany invaded. And guess what happened? German toys became a little less popular. And also German toys were made from metal and there was a metal shortage due to the war effort. So there was this room for wood, local toys to happen. And the first one was a little wooden duck. So we’ll have a picture of that on the website. So you can see the first Lego toy, this little wooden duck. And by the end of the war, business had boomed. And by the 1940s, he was actually finding it hard to find wood. And then they actually had a problem where their factory burned down. So they had to suddenly do something different. And he kind of discovered plastic. Plastic was coming on the scene at that time and they started making little plastic bricks. You know how so many of these businesses start with these really wonderful names? They called it Automatic Binding Bricks.

Dave Young:

Oh, well that just rolls off the tongue.

Stephen Semple:

Right?

Dave Young:

Automatic Binding Bricks.

Stephen Semple:

Kind of reminds me of the Play-Doh episode, in terms of the great thing that they had that I still can’t remember. It was so good, but they weren’t the only one doing this. They also had a big competitor in UK called Kiddicraft. But what Kiddicraft was doing was making the bricks and they were very dull in color. Lego started looking around and there was, as we know, some really famous Dutch painters that were doing these really bright colors, and that inspired them to make the bricks in these colorful squares. So they got this real inspiration on the color. His son, Godtfred, one day was on a ferry with a buyer. So they were traveling around and the buyer was complaining about toys being thrown out, just being used for a short time and throwing out, and that there was real issues around this.

Stephen Semple:

And at this time the bricks weren’t made in this system, and Lego then decided it created this system. It created this idea that everything was interchangeable. So even when you were done playing that version of the toy, you could just do something different with it or you could combine it with the others. And the bricks were hollowed out, but they were hard to stack. If you flip over Lego brick today, there’s that little interior mechanism that makes it so when you put the bricks together it really sticks. They then came up with that idea and they patented that idea in 1958. So between that and the ability to stack it, suddenly you had limitless combinations.

Dave Young:

You build anything now.

Stephen Semple:

Build anything, you could reuse the toy over and over again, you could combine them all together. And at this point they stopped doing wooden toys. It was just the Lego bricks.

Dave Young:

Nobody throws away Legos.

Stephen Semple:

Correct.

Dave Young:

Right? You lose them in the sofa, the dog might eat one.

Stephen Semple:

And by might-

Dave Young:

You might throw them out the window because you’re frustrated because you stepped on it.

Stephen Semple:

And so they had this huge success with this because by 1961… So you think they started doing the tubes in ’58. By 1961, they’re selling in 11 countries. And then they decide they wanted to open up the US market, but they wanted to manufacture in the US. So they went searching for a US manufacturer and this didn’t work out so well for them because they weren’t focused on toys. They’re focused on the ability to make plastic. So they did a deal with Samsonite Luggage.

Dave Young:

Oh, okay. That’s a surprise.

Stephen Semple:

So Samsonite had a deal in the ’60s with Lego and they really struggled in the US. This point they went from selling in 11 countries to 42. It was doing great everywhere except the United States. Now, they were growing so popular that people from all over the world were coming and visiting the Lego factory.

Dave Young:

Except from the US.

Stephen Semple:

Except from the US. And this was really disruptive. Because people come and they would, okay, I guess we’ll give you a tour and whatnot. It was so populated they decided to make a park. And in the first year they had 625,000 visitors.

Dave Young:

Wow. This is the early ’60s still.

Stephen Semple:

Yes. It grew to being the second biggest theme park in the world.

Dave Young:

That’s amazing.

Stephen Semple:

And it was never, oh let’s do this other stuff. It was like, we’ve got all these people coming. We got to do something. Let’s build a park. And [inaudible 00:07:07] becomes the second biggest park in the world. And the ’70s were great. The ’70s were a super time for Lego. Lego in the ’70s grew to being 1% of all Denmark’s exports was Lego.

Dave Young:

Did they finally figure out to export them to the US market?

Stephen Semple:

They basically changed around in the US who they were doing their licensing with, and how they were positioning it in the US market. Because a couple of things happened when they got into the ’70s. So they’re doing about $300 million going into the ’70s. And by the late ’70s they started introducing the little mini figures.

Dave Young:

Okay. The little people you could put in the Legos.

Stephen Semple:

And then by the end of the ’70s, they’re doing $4 billion in sales. So they have this big explosion in the ’70s. And one of the most popular things that they ever did was the… Remember the castle set that they had? And there was the space set. And those became super popular. Because up to that point, what they’ve been doing was, it was these cityscape things. There’d be fire station and a hospital, but then they went different direction and they created this castle set and this space set with these little figurines and that was unbelievably popular.

Dave Young:

See, my own personal experience with Legos was, I was done playing with them by the time they started putting the sets together. So I was excited about little windows that opened.

Stephen Semple:

But putting together these sets with these plans were super popular because it gave kids a starting point. So profits went crazy in the ’80s. Then they had a problem and their problem was their patent expired in the ’80s. And so copycats arose that were cheaper and the market became saturated in 1998. So you want to think about this. They started in ’32, so 1998, over 60 years later, they posted the first loss in the history of the company. First loss. It went-

Dave Young:

Because they lost their patent.

Stephen Semple:

… because of the patent issue. And they entered the ’90s knowing they needed to innovate. They needed to do some other things and they saw that computer games were growing. So they came out with a version of Lego that had robotic capabilities. Not only that, they created software for running this stuff and people started making their own versions of that software and Lego sued them, initially.

Stephen Semple:

But then Lego had an aha moment. They went, wait a minute. If people are making software to make this stuff do more stuff, that’s good. Because that means people are playing with it. They backed off. They said, nope. You want to do changes of software? Go right ahead. And in 1999 they had one more really big change to happen. Star Wars came along and they did a licensing with Star Wars. And the irony of the Star Wars deal is it made them super successful and almost killed them.

Dave Young:

How so?

Stephen Semple:

They thought about Star Wars from a toy standpoint. And what they did not do was look at the experience that toy manufacturers have when they do things attached to movies. Now keep in mind, Star Wars was also a surprise hit. It was so popular that they couldn’t keep stuff on the shelf. It just flew off the shelf, flew off the shelf.

Stephen Semple:

But here’s what they didn’t understand. When you do stuff around movies, if there’s no movie what happens to demand?

Dave Young:

It starts to fall off.

Stephen Semple:

Correct. But when you’re looking at your numbers, you go, Hey, we sold X billion of this. What does almost every business and every board do? What’s their anticipation-

Dave Young:

Make more.

Stephen Semple:

We’re going to make more. So they manufactured more and guess what? Man was down. So all of a sudden they were left with all sorts of inventory. It’s a different business model. But they liked it because they said, wow, we could do these things. So they tried to create heroes. They tried to make a TV show. They did electronic toys that did all of these things that got away from the roots and was not good. In the early 2000s. Lego was almost broke from doing this. From a few years of Star Wars and trying to do the TV, and trying to do this. They were nearly broke.

Stephen Semple:

Then they launched a line called Bionicles. And Bionicles is full of stories with books and games. And that started to revive sales. And then they got lucky again in 2001, they picked up Harry Potter.

Dave Young:

Gotcha, right. And so more little characters.

Stephen Semple:

But then the same cycle happens again that in 2003, there was no movie from Star Wars or Harry Potter. So there’s this roller coaster that happened and sales fell and Lego again almost goes bankrupt. So much that they started to shop the business. And for the first time they got a CEO who was outside of the family. So they finally went and found a CEO from outside the family. The company was hemorrhaging cash, close to failing. They sold the Legoland theme park to bring in cash. And then moved back to the core business and they simplified the products back to the bricks.

Stephen Semple:

They returned back to the city plan idea, their roots. And they recognize that story behind these things is really important. So they need to look at ones that had stories. So then they did Ninjago, which is the little martial arts ones in 2011, and sales was up over 100%.

Dave Young:

Nice.

Stephen Semple:

But one of the things they did notice was, and they still struggle with a little bit, is it’s not as popular with girls. So they’re trying to create all sorts of things to bring more girls into using Lego. But in 2014 was a real breakout point for them. Another breakout point for them. This is when they became the largest toy company of the world with the Lego Movie. Lego Movie just blew everything up. I’m-

Dave Young:

I was thinking if there’s no Harry Potter movie and no Star Wars movie coming out, make your own movie.

Stephen Semple:

But on top of that, you can now control the cycle. You can look at it and say, okay, when’s there a Star Wars movie. So Lego has had these ups and downs, and things that have made them hugely successful, and also things that almost killed them. And the interesting thing here is, and to me, this is the lesson that I got from this whole thing from Lego is, the business almost failed when they changed the business model. If they had stood back and studied Hasbro or any of the other toy companies that had success doing things with movie deals, they would’ve understood-

Dave Young:

Stay tuned. We’re going to wrap up this story and tell you how to apply this lesson to your business right after this.

[Empire Builders Ad]

Dave Young:

Let’s pick up our story where we left off and trust me, you haven’t missed a thing.

Stephen Semple:

If they had stood back and studied Hasbro or any of the other toy companies that had success doing things with movie deals, they would’ve understood what they were getting into. But they said, oh, this is Lego. This is different. And it’s like, no, this is Lego being sold, attached to a movie. This is the same thing. You have to ramp up production and anticipation of the movie. And then the next year sales go down. And then when the sequel comes up, sales go up. And that is the reality of selling toys to movies.

Dave Young:

And then you’re dependent on the movie being a hit.

Stephen Semple:

Yes, you are. But look, lots of toy companies have made massive money with this. Just recognizing that’s the cycle and buying into that’s the cycle. The other thing that Lego did is when they were dicking around with moving a little bit away from the bricks, they had problems. When they came back to doing things like Ninjago and Bionicles, the issue was it was still bricks that was just figurines were added into it. But it was still part of the system.

Dave Young:

You enable storytelling when you start putting little figurines in.

Stephen Semple:

Yes, absolutely. Absolutely. But you know, while that switch to the movie almost killed them, we also have to admire Lego. Because they start off as a home builder and they went, okay, this home building thing is not good right now. Let’s do wooden toys. To let’s do plastic toys. To let’s do Legoland. To let’s sell Lego attached to stories and let’s create our own stories. So you got to also admire that you look at these little bricks and you think, well, there’s nothing really all that innovative, or nothing has really changed with Lego. When in fact they’ve been pretty innovative and done a lot of adjustments through the years that has made them the largest toy manufacturer in the world.

Dave Young:

And it seems like they they’ve had a corporate DNA from the founder of, Hey, when times get tough, we make our own opportunities. We look at, how do we pivot? What else are we going to do? Because going out of business is not an option.

Stephen Semple:

Yes. And it’s still family owned. Business is still family owned. And they’re also very defensive of the, they call it the system. Lego of the system. There’s actually a really great Netflix, The Toys That Made Us by Netflix. There’s a great one on Lego. And it’s really quite funny how they talk about the system. But that’s part of their DNA. When they’ve deviated too far away from that they’ve had problems. And to me, the thing I want to stress to businesses out there: Just because your product is the same, if you change a marketing channel, you can change both the opportunity but also the characteristics of that channel. And you need to understand the characteristics of that channel. When you’re selling toys one way and then you sell it through a movie franchise, there’s a different cycle that those sales go through that you need to understand or it can kill your business. It almost destroyed Lego. While at the same time it made Lego the most successful toy company in the world.

Dave Young:

I pictured this Hal Holbrook, Dustin Hoffman moment in the ’40s, remember from The Graduate? He takes the young college grad aside and he says, I got one word for you. Plastics. It’s like somebody took the Lego founder aside and said one word. Plastics.

Dave Young: Thanks for listening to the podcast. Please share us. Subscribe on your favorite podcast app and leave us a big fat juicy five star rating and review at Apple Podcast. And if you’d like to schedule your own 90 minute empire building session, you can do it at empirebuildingprogram.com.