LEGO went back to the brick, and its films and games finally rhymed

At the turn of the century LEGO believed the brick had peaked. Children were moving to screens, so the company moved with them: theme parks, video games developed in-house, clothing, media, and new toy lines such as Galidor that used very few bricks. The number of distinct elements in production grew into the thousands, each with its own mould and its own cost. In 2003 the group posted a heavy loss, and in 2004 a bigger one, the worst in its history. Accounts of the period describe a company close to running out of cash.

Jørgen Vig Knudstorp, a former McKinsey consultant who had joined LEGO a few years earlier, became chief executive in 2004. The rescue that followed was mostly subtraction. LEGO sold a majority of the Legoland parks to Blackstone in 2005, stopped developing games in-house, cut the catalogue of elements sharply and retired lines that had drifted from the brick. The company returned to profit in 2005 and spent the following decade growing faster than the toy market, until it became the largest toy maker in the world by revenue.

The parks were never the problem

It is tempting to read the story as “LEGO stopped diversifying.” The later facts do not support that. Today LEGO has films, video games, theme parks (the founding family’s holding company bought back into Merlin, Legoland’s operator, in 2019), books and a huge adult fan business. The categories of the 2000s came back. What changed was the relationship between each launch and the rest of the portfolio.

We read this through rhyming: every launch is a dot on a score, and a healthy portfolio is one where each new dot echoes something the company already plays and sets up the next echo. In the early 2000s the dots answered nothing. A Galidor action figure did not teach anyone to build, an in-house game did not send anyone back to a box of bricks, and a branded jacket only borrowed the logo. Each line had to win on its own, in a category where LEGO had no advantage. In the method’s vocabulary, those were orphans: launches that rhyme with nothing.

After the turnaround, the same categories rhymed. LEGO Star Wars: The Video Game (2005), made by an outside studio under license, turned sets people already owned into a story they could play, and gave them a reason to buy the next set. The films did the same at a larger scale. Each dot pointed back to the brick.

An inventory before a strategy

The rescue started with a question about assets. What did LEGO own that no competitor could copy? The System of Play, the idea from the 1950s that every brick fits every other brick, so each new set adds value to the ones already in the house. Then parents’ trust, built over decades. Then a community of adult fans the company had largely ignored.

Those assets became the source of LEGO’s core values: building, creativity, quality you can hand down. The best values are extracted from what you truly own, and here they were sitting in every child’s bedroom. The diversification years had invested in things LEGO did not own while neglecting what it owned outright. The book puts it bluntly: diversification that ignores the inventory is the most elegant way to fail.

The dormant community

The adult fans are the part of the story we find most instructive. For years they were treated as a curiosity. After the turnaround LEGO started listening to them, and in time gave them a formal route into the product: the platform that became LEGO Ideas lets fans submit designs, and the best supported ones become official sets. A community that buys, designs and promotes is an asset that keeps paying, and it had been there all along. Almost every company we look at has one asset like this, owned and unused.

Licenses such as Star Wars and Harry Potter worked the same way. They brought outside stories into the system, and the system made them buildable. The value stayed with the brick.

If your portfolio keeps growing and your margins keep shrinking, the useful question is which of your launches rhyme with the thing you own and which only borrow your name. Helping teams answer that is a large part of what we do.