• “Behold THE LEGO BRICK, THAT HARD-EDGED, CANDY-colored bit of plastic that's bedeviled barefoot parents the world over. By itself, a single discrete, modular brick is inanimate, lifeless — or at least dormant. Only the eight little knobs atop the rectangular block and the three hollow tubes underneath hint at its potential. Snap two of those inert, inorganic blocks together, however, and suddenly you open up a world of nearly infinite possibilities. Just six bricks yield more than 915 million potential combinations. With an unlimited supply, you could build a supercomputer made up of sixty-four Raspberry Pi PCs and a thousand LEGO bricks, a full-size Rolls-Royce aircraft engine (152,000 bricks), a lovingly detailed recreation of the 2012 London Olympics (250,000 bricks), or a life-size two-story house with a working toilet and shower (3.3 million bricks), as others have already done… The company's values and creativity put it in an unmatched position within the toy industry: kids loved the brick because it was fun, and parents loved it because it was educational. That combination helped LEGO amass decades of unbroken sales growth. But as LEGO approached the end of the twentieth century, changes in kids' lives challenged the brick's primacy. Toyland became a far less forgiving place to do business, as aggressive competitors fought fiercely for the growing legions of kids enamored with video games, MP3 players, and other high-tech wonders. LEGO, largely an analog enterprise, found itself fading in a faster-moving, far more competitive digital world… while those prescriptions for twenty-first-century innovation might have worked wonderfully for other companies, they almost sank LEGO. In 2003, just three years after both Fortune magazine and the British Toy Retailers Association had crowned the brick the toy of the century, the LEGO Group announced the biggest loss in its history. Its extraordinary collapse led many observers to wonder whether LEGO, one of the world's most cherished brands, would survive as an independent enterprise.” - intro

1998 - LEGO’s First Year in the Red Since Founding

• “Just consider: it took LEGO forty-six years, from its founding in 1932 until 1978, to hit 1 billion Kroner in sales (about $180 million at the time). Over the next decade, the sales chart's slope rocketed upward, increasing fivefold by 1988.” → The first decade of Kjeld’s leadership was prolific, but things started to go awry in the 90s as technology competed for kids’ attention
• By aiming to make LEGO one of the biggest brands in the world, Kjeld lost focus on their true differentiator: “By 1998, in addition to Mindstorms and Cybermaster, LEGO had launched so many other forward-thinking initiatives - software, parks, PC games, children's clothes, shoes, watches, and so on - that even Kjeld started to lose track, confessing in the employee magazine that there were so many projects underway that "we're wondering whether we can prioritize a bit better." → “hemorrhaging money” pursuing all these different initiatives while their core brick business was struggling in the battle vs digital (most companies don’t die of starvation but rather indigestion)
• “For the first time in LEGO's sixty-six-year history, the company was in the red, and not in a small way! There was a 282 million kroner shortfall.” → They hired a new CFO, Poul Plougmann, to make sweeping cost-cutting changes, like firing another 10% of staff and eliminating consultants
• The power of incentives: “Plougmann, who was given the title of finance director… formulated and initiated the mass layoffs of early 1999. But LEGO was not about to hunker down and retrench. Plougmann was promised a hefty bonus if he doubled the LEGO Group's sales by 2005. He was recruited and incentivized to grow LEGO out of its malaise.” → Knudstorp: “You’re basically making something that can’t sustain itself, and you’re hoping that ah, if only I make another 100, somehow it will solve itself, but it was to the roots of the proposition not healthy… so the more we grew, the more we were losing” → like 10-15% of sales were their losses

Luke Skywalker: LEGO’s Short-Term Savior

• In 1998, they made a pivotal licensing deal with Lucasfilm, launching a series of Star Wars sets that would temporarily reinstate the company’s profits - these are now some of their biggest and least risky sets with IP from Harry Potter, Marvel, Star Wars, Spiderman etc → “On the day The Phantom Menace premiered, fifty thousand LEGO Star Wars sets were to be sold in Toys "R" Us alone, and the sum total of LEGO Star Wars products sold on American soil that year would reach 130 million dollars.”
• The financials from 2000-2002 looked good enough to keep pushing into new verticals, but getting so far away from their core focus made LEGO lose their differentiated edge - TV shows, books, new theme parks, clothing, video games, Darwin! → “I think at one point, we had more Silicon Graphics computers in Billund, specially designed to solve advanced graphics tasks, than anywhere else in the world. We spent many hundreds of millions on the project, which was named "Darwin,"

It’s Just a Thick, Fat Layer of Cosmetics

• “Buoyed by the over-the-top sales of LEGO Star Wars and Harry Potter kits in 2001 and the first half of 2002, retailers had doubled down on LEGO for the Christmas season. Trouble was, neither a Star Wars film nor a Harry Potter movie was scheduled for 2003, so kids weren't primed for repeat offerings of LEGO Yoda and Chamber of Secrets sets.” - cyclicality in their top sets - growth was great at first but the second they slowed down, now they had to deal with their higher cost structure and negative CF performance
• “In just seven years, from 1997 to 2004, the number of elements in the company's inventory exploded, ascending from slightly more than 6,000 to more than 14,200. So did its range of colors, which climbed from the original six (red, yellow, blue, green, black, and white) to more than fifty. As the number of components and colors mounted, soaring supply and production costs plundered the company's bottom line.” → A standard two-by-four brick molding machine costs $50-80k, and after being used on 60m bricks over its lifetime, the margin cost becomes super low, whereas sets with much more specialized pieces require new molds with costs as high as $1 per piece, meaning many individual sets were quite unprofitable themselves!
• “By late 2003, the LEGO Group's leaders finally began to concede that the glowing success of LEGO Star Wars… was ultimately a "thick, fat layer of cosmetics" hiding the raw blemishes of a sickly core business. By November of that year, it was apparent that all the rouge and mascara had melted away. Without a Star Wars movie, LEGO couldn't reprise the line's explosive growth, and sales rapidly lost altitude.” → Had $800m of debt that they were close to defaulting on at the end of 2003
• LEGO suffered a record 1.4B kroner loss that year… “The company's core financial assets were so eroded that LEGO might soon be unable to pay its debts.” (On the verge of bankruptcy, over-levered aka they had a gun to their head, and trying to grow their way out of their financial hole)

Jorgen Vig Knudstorp’s Action Plan - Deleveraging & Prioritizing What Makes LEGO Best