11 Notes on Lego

European Straits #161

Hi, it’s Nicolas from The Family. Today, I’m relaunching my “11 Notes” format in which I discuss specific companies and their strategy, and I’m covering… Lego.

Today is the day when the French version of my book Hedge is released 🎉 If you read French, you can now order it from Amazon 👉 Un contrat social pour l’âge entrepreneurial. Also don’t miss my next seminar Les Jours heureux next Tuesday at our office in Paris—about Europe discovering its own social contract between the US and China. Please register here and I’ll see you there.

In the meantime I wanted to follow up on my previous “11 Notes” articles (on Amazon and Goldman Sachs) and write about another fascinating company: Lego 👇

1/ I just spent three days with my 8-year old son in Denmark. We spent part of our trip walking around Copenhagen, one of Europe’s most beautiful cities. But another, more important part was a pilgrimage to Billund, a small town in Jutland best known as the birthplace of the Lego bricks—of which my son is an absolute fan. (Most of his free time is spent playing Lego or watching related content.)

It’s winter, so we didn’t go to the Legoland fun park, which is closed at this time of year. But we spent time in the Lego House, which is both a museum and a play area, as well as one night in a Ninjago-decorated room at the Legoland Hotel nearby. We also drove by the many Lego buildings in Billund, including the headquarters of the Lego Group and the giant factory adjoining it.

Since I like to read about the places I visit, I’ve been learning a lot about the Lego Group these past few days, and I thought I would share some ideas with you.

2/ In case you haven’t noticed, Lego is quite something these days. Let’s start with a full recap:

  • Manufacturing and selling toys is quite a challenge. On one hand, Lego’s is an easy market. People will always spend money on toys for their kids. That’s why Ole Kirk Christiansen, a carpenter and the founder of Lego, switched to crafting toys during the Great Depression. But on the other hand, it’s hard because you have to constantly market your product to the upcoming generation—like Sisyphus climbing up that mountain over and over.

  • This is where Lego stands out. They’ve been around for decades, and their core product (the brick) hasn’t changed at all! Having the same product around when the times comes for grown-up fans to recommend it to their own children is a unique competitive advantage. And so this kind of permanence and longevity generates the positive feedback loops that make Lego such a valuable and enduring franchise. (And bricks are valuable assets to invest in, too.)

  • Note that Brand Finance, a consultancy firm, has declared Lego the world’s most powerful brand in 2019, beating Apple and Ferrari (no less) on criteria such as familiarity, loyalty, promotion, staff satisfaction, and corporate reputation. Indeed, everyone knows about Lego (the bricks, the minifigures, the logo). We all play Lego, or know someone who does!

3/ Lego is not only an impressive franchise, it’s also a company that went through one of the most successful turnarounds in recent corporate history. I won’t go into the details (you can read more here and here, as well as this entire book), but:

  • In many respects, Lego’s turnaround is nothing original. Back in the late 1990s, Lego started to lose money because they had been veering away from their core product and ended up being overstretched while relying on a subpar supply chain. What their new CEO, Jørgen Vig Knudstorp, did from 2004 onward was slash costs, refocus the company on their core business, upgrade the supply chain, and then grow again from there. And this all sounds like strategy 101.

  • Yet strategy is a tough discipline because it’s hard to come up with simple, straightforward answers. Lego once was in the red because it had diversified too much; but now they’re diversifying again and everything seems fine. What’s the difference? It’s all about positioning! If you got the positioning right, you can diversify all you want because you’ll only make your core business stronger. If you got the positioning wrong, it will unravel very fast.

4/ To excel at positioning, you need a fixed point. For Lego, it’s all about the bricks, the system they form, and the playing they enable:

  • Why was this simple idea lost along the way? To an extent, Lego fell victim to the same fear as the music industry in the early 1980s. Back then, desperate record producers thought that teenagers were drifting away and embracing video games rather than listening to music. But look where we are now: the music industry has never been in a better shape. And as for Lego, millions of people are still playing with those plastic bricks.

  • By the way, it’s not the bricks, it’s the system. In this short animated movie made to tell the story of the Lego Group, we learn about the turning point when Lego changed from a small workshop in Jutland to a multinational operation. You could play with Ole Kirk Christiansen’s wooden toys, but you couldn’t really build new things with them. It was his son, Godtfred, who came up with that brilliant concept of a system: why not standardize the pieces (the bricks), make it easy to combine them and, above all, make them stick together?

For a while, this idea actually became the brand (“Lego System”). And by the way, because it’s a system, Lego is like software—something that you can write once, and then run everywhere. Here’s Paul Graham:

[Tech] startups exist to solve hard technical problems, but I think it will also be found to be true in businesses that don't seem to be about technology. McDonald's, for example, grew big by designing a system, the McDonald's franchise, that could then be reproduced at will all over the face of the earth. A McDonald's franchise is controlled by rules so precise that it is practically a piece of software. Write once, run everywhere. Ditto for Wal-Mart. Sam Walton got rich not by being a retailer, but by designing a new kind of store.

5/ What is the Lego system for? What’s the “job to be done” here? Some people are confused as they see Lego as a training practice for future engineers: just follow the instructions, and you’ll end up with that beautiful castle. Yet other people insist that Lego is for designers—all about fostering imagination and creativity.

Indeed a well-known early advertising campaign for Lego in 1981 (my time) stressed that the bricks were a useful tool for messy creativity. It is said that this campaign was not successful because parents were not enthusiastic about the idea of their children building imperfect things and making a mess. That is why a Lego set is sold with precise instructions, and most children will leave it at that: follow the instructions, build that castle, and then put it on a shelf to decorate their room.

But as I’m watching my son I realize that there are two stages here, just like when you are playing music or practicing martial arts. The first is to follow the instructions and to practice under strict guidance so as to acquire a strong technique. And then the next stage is about unleashing imagination and discovering your own style. That little girl in the ‘messy’ ad is an advanced Lego user, not the one you’re selling their first bricks to. She found her own Lego style. Here’s legendary bass player Marcus Miller:

At age 17, I went on a U.S. tour with Lenny White, playing in his fusion band. He had recently left Return To Forever. But some of the gigs we did were opening for Stanley Clarke’s band, so Stanley would be there listening and that was very intimidating. But, I’ll tell you, I really wanted my own style.  At that point, I had a little bit of Stanley, a little bit of Larry Graham, a little bit of Jaco and I was really searching because where I was growing up, nobody really respected that. If you didn’t have your own sound in New York, in Queens, where I was growing up, you really didn’t have as much “juice.” 

So I said, “Lenny, man, I’m looking for my sound. How am I going to find it?” We actually were coming out of seeing the first Star Wars movie. And it was so impressive. George Lucas, you know, that vision that he had. It inspired me. And I said, “Man, I’m really looking for my own sound. How do I get it?” He said, “There’s really no way to make it happen except to just play and to put yourself in a lot of different musical situations.” And he said, “Then one day, man, you’re going to hear a recording back and you’re going to recognize yourself immediately and go ‘Wow!’ That’s it! That’s me!’”

When I did that session I was telling you about with Miles, that first session, I went into the control room to listen to the playback and I remember saying to myself, “Oh yeah. Oh, that’s me!” And then laughed because it happened exactly the way Lenny said it would happen.”

6/ Being a system is what makes Lego so strong and defensible as a business. There are many positive feedback loops at work due to the standardized and interoperable nature of the bricks. But a defensible system is nothing without scale. Let me quote Nivi’s seminal article The Entrepreneurial Age:

Scale is getting easier [but it] will not be commoditized. It is as important as an organization’s product development capabilities. Why? Because the best products require unique means of scaling. The delivery of the best products is tied into the product itself. For example, look at Apple’s efforts to develop new manufacturing techniques and stores for its products.

What has Lego done to scale its business globally? Two things, mostly:

  • They’ve expanded production well beyond Billund, now with factories in Mexico (to serve the US market), the Czech Republic (to serve the European market), and China. And they’ve upgraded and streamlined their supply chain so as to ensure availability of their products every time a customer wants them, all while bringing inventory down.

  • Lego has a large network of their own Lego Stores, thus borrowing a page from the luxury industry (and Apple). Lego products are available everywhere, which guarantees broad coverage, but you need to have your own distribution channel down to the end customer, not only to burnish the brand but also to raise the bar as to what distributing your product is about.

7/ Then there’s all the content: the movies, the series, the magazines, and more. Back when Lego was in the red, the only products that sold well were the sets designed after well-known franchises, such as Lego Star Wars and Lego Harry Potter. This is what is known as the “Avengers strategy”. Pick separate franchises, each with their own brand and universe, and mix them together, and you’ll create additional value.

The only problem was that those sets only sold right after the related movie was released, confronting Lego with too many ups and downs—a mortal danger for any manufacturer. This is why Lego now produces their own movies and series. Releasing their own content, either 100% Lego or mixing up with another franchise, like the (excellent) Lego Batman Movie, frees them from excessive dependence on another franchise’s schedule and makes it possible to impose their own pace.

And there’s something else, which was explained to me by my son: watching Lego-related content is what provides him with new ideas for playing. And so it’s also about inspiring their community

8/ Is Lego a tech company? Not really. A large part of the experience they provide is exceptional (when you sell to busy parents, you really want to make their life easier and make their children happy), but the website is average at best and to my knowledge Lego doesn’t collect much data from their customers (no more than traditional retailers with their loyalty cards). However, Lego uses the whole range of options that companies enjoy in the Entrepreneurial Age when it comes to strategic positioning. To echo the idea of the stacked architecture by the BCG’s Philip Evans and Patrick Forth:

  • At its core, Lego is a traditional oligopolist: they’re a manufacturer serving consumer markets at a global scale, competing with the likes of Playmobil and Mattel. But they wouldn’t go very far in today’s world if they were just that.

  • Up the stack, Lego has partially turned into a platform. A significant part of that platform is the content; another part is the many tools that Lego has developed to engage with their community, such as Lego Ideas, and the legendary Adult Fans of Lego community (or AFOL).

  • And it works! Lego’s strength in the Entrepreneurial Age is an engaged community of networked individuals. Have a look at Master Builders, a YouTube channel with 230k subscribers and 136M+ views of which my son is a fan. Another example: a guy from Michigan actually spent WEEKS and 3,500 photo shots recreating John Landis and Michael Jackson’s legendary Thriller clip...all with Lego minifigures. What is this if not a community of individuals that contributes to fueling Lego’s growth with powerful network effects?

9/ Can Lego be disrupted? I think they’re quite safe on that front. True, Lego sets are expensive, so there might be a weakness here at the low end of the market that a low-cost competitor could use. But Lego is safe on another front: it will never be too complex. You can opt for a simple set, or you can opt for a larger, more complex set that’s made simple by following the instructions. This is Lego’s magic when it comes to their value proposition: it’s as simple (or as sophisticated) as the user wants it to be.

That being said, Lego is in the community business, and so the mighty multitude has the upper hand now: Lego is only as good as the community says it is. Indeed, when it comes to retaining an engaged community of networked individuals, you either lock them in by operating your own product, like Apple or Google; or, like Lego (which, again, is not a tech company—you can use Lego without logging into their application), you have to compete on making your brand appealing, maximizing user engagement, and constantly experimenting with new products. (Have a look at Lego Ventures, which “seeks to invest in entrepreneurs, ideas and startups that sit at the intersection of creativity, learning and play”.)

Now, can eco-friendly, anti-plastic culture eventually make Lego has-been? Probably not. The brick is anything but single-use and disposable. Indeed old, vintage Lego sets, unlike old Apple devices, sell online for as much as 10x their initial price. Also, Lego (which, again, is from Denmark, one of the most environment-friendly countries in the world) has been hedging that risk by deciding to run entirely on renewable energy—and they’ve delivered on that goal three years ahead of schedule.

10/ Finally, let me write a few words about Lego as a European company. It’s difficult for us Europeans to assess Lego’s Europeanness, since for all of us it has literally always been here. But from what I read, Americans see it as one player, among others, on the ‘weird European toys’ market. So there’s something uniquely European about Lego—that mix of traditional savoir-faire and effectiveness at doing capitalism. Therefore Lego could serve as an inspiration for any European entrepreneur who’s dreaming big. Based on Lego’s precedent, these are factors correlated with being a global player:

  • Cultivate the relationship with your home country (even though, in Lego’s case, it represents only 2% of the revenue). Lego feels like it’s Danish from head to toe, and it makes them stronger.

  • Preferably start your business from a small place, just like Michelin in Clermont-Ferrand or Walmart in Bentonville. The smaller your base, the stronger the incentive to go out (note that Billund, which only has 6,000 inhabitants, has the second largest airport in Denmark).

  • You need to embrace a spirit of tradesmanship. In Lego’s case, Denmark is yet another example of a former thalassocracy that reveals great potential for doing business at a global scale. Trading with the whole world is nothing new there.

  • Embrace English as your working language. It helps that Lego grew out of a country that doesn’t dub English-speaking movies.

11/ The 11th note is always a reading list 👇 But before that, have a look at this letter that my son wrote to share an idea with the “Lego engineers”. We posted it yesterday and he REALLY hopes he will get an answer 😉

Here are more readings about Lego:

From Paris, France 🇫🇷