How "More" Nearly Killed LEGO

Last week we explored the danger of more through the lens of a crazy “Haunted” house. That at the time…each individual decision makes sense. Therein lies the danger.

Here is the meanest thing about the Winchester Mystery House version of business: you cannot see it clearly from inside it.

Sarah Winchester walked through those hallways every day for thirty-eight years. The construction workers who built the thing didn’t notice it getting weirder. Or maybe they did but were unwilling or unable to say anything. (As an aside, this is a really good reason to be vulnerable and open with your lower-level employees — they think and know and see a lot more than most people give them credit for.) The architects (such as they were) didn’t notice that staircase number 14 led directly into the ceiling. You have to be a tourist to see how strange the house has become — and you are not a tourist in your own company.

Most of the CEOs I work with are highly intelligent, working extraordinarily hard, and are surrounded by genuinely good people. So of course they are completely baffled when they can’t quite explain why the company isn’t growing the way it used to. It’s not that they’re missing something obvious. They are closer to it than anyone in the world. They are so close to it that they can’t see the architecture anymore. They see one room at a time.

Sound familiar? It’s not a personal attack. You are not the exception. You are the rule.

You don’t see how strange the house has become because you’ve been in it the whole time. Every staircase was added on a Wednesday afternoon when it seemed like the right call. Every additional bathroom solved a real problem at three in the morning when somebody wanted a glass of water. Every room you built had a reason. They still do. And yet when you add them all up, you have built something that doesn’t make sense anymore, isn’t producing what it used to, and feels harder to operate than it should — and you can’t put your finger on what’s wrong.

Welcome to the mid-market.

Let me tell you about a company that built itself a Winchester House so elaborate it nearly died inside it.

You have heard of them. You almost certainly own some of them. If you’re like our family, you locate them the hard way: barefoot, in the dark, at 2 a.m., accompanied by language the children are not supposed to know yet. Yes…LEGOs. (The LEGO brick is the most dangerous object in the modern home and for some reason we have all agreed not to do any thing about it.)

In 2004, the LEGO Group was roughly eighteen months from running out of money. Not “having a soft year.” Bankruptcy. They were losing a million dollars a day. Analysts were saying the B-word out loud. A seventy-one-year-old, family-owned institution in Billund, Denmark, and the conversation in the boardroom had quietly turned to whether the company would survive the year.

How does that happen? How does LEGO — LEGO, of all companies! — nearly go broke?

The same way a staircase ends up running into a ceiling. One reasonable decision at a time.

Through the 1990s and into the 2000s, LEGO looked around and saw exactly what every smart, ambitious company sees: threats everywhere, opportunities everywhere. Kids were trading their toys for video game controllers…so LEGO got into video games. The brand was beloved…so LEGO opened theme parks. (Theme parks. A toy company looked at its problems and concluded that the answer was commercial real estate and roller-coaster liability insurance.) It launched a children’s clothing line. It got into movies. It kept extending, kept bolting on, kept saying yes. Every one of those moves had a slide deck behind it, and every one of them made sense in the room. It was an exercise in more.

Underneath all of this, the brick itself was multiplying.

To feed every new theme and product line, LEGO’s designers kept inventing new, specialized, bespoke pieces: a custom element here, a one-off molded part there, each needed for one specific set. By the early 2000s the company was manufacturing something on the order of thirteen thousand different elements. (Sources put the peak somewhere between twelve and fourteen thousand, depending on how you count a “piece.” I am not going to litigate what qualifies as a distinct element. The point is the number had a comma in it, and it had no business having one.) Thirteen thousand unique little plastic shapes. The count had roughly doubled in a handful of years — and nobody had ever called a meeting to decide “let us double the complexity of our own factory.” It accumulated. One perfectly reasonable piece at a time.

And here is the Winchester sentence, the one you already knew was coming: nobody at LEGO could say, with any real confidence, which of those pieces (or which of the products they were built for) actually made money. Their P&L only broke down by country, not product line.

The top line had grown. The bottom line had quietly withered. LEGO had confused more with better; they assumed that because the brand was strong, every new wing bolted onto the house must be load-bearing. By 2004 the most beloved toymaker on earth was working enormously hard to make enormously less.

Then LEGO did the thing the actual Winchester House never got to do.

It got a tourist.

In October 2004, for the first time in its history, the company handed the CEO job to someone who was not a member of the founding family: a thirty-five-year-old former McKinsey consultant named Jørgen Vig Knudstorp. He had spent his first years inside LEGO doing almost nothing but studying it. His diagnosis was not a gentle one. The company was on a burning platform, he said. It had lost the plot. If it kept going the way it was going, in a few years there would be no LEGO.

Notice what he did not do. He did not launch a bold new product line. He did not chase the next trend. He did not add.

He cut. He sold off the theme parks. He shut down the in-house video-game studio, ended the side ventures, killed the distractions, and walked the company hard back toward the one thing it had been quietly best at since 1958: the brick, and the ingenious building system the brick makes possible. He took that bloated catalog of thirteen thousand elements and cut it by nearly half.

LEGO did not invent its way out of the crisis. There was nothing to invent. The Signal, aka the LEGO brick, the single most ingenious toy of the twentieth century, had been sitting there the whole time. It was never gone. It was buried. Under the theme parks and the video games and the thousands of bespoke pieces that should never have been molded and a decade of slide decks that all said the same word: more.

You know how the story ends, because you walked past their sets on the way into the store last Christmas. The company that was eighteen months from dead is now, by a wide margin, the largest and most profitable toymaker on the planet.

It got there by subtraction.

Here is the good news, which is also the inconvenient news: the clear Signal that built your company is still here. It hasn’t gone anywhere. The thing that brought you the first hundred customers, the thing that made the team show up on Monday in the early days, the thing that made the work feel like it mattered in the first place — none of that has been erased. It’s just been buried.

Buried, in most cases, under complexity. Under the staircases and the hallways and the additional wings. Under the rooms you forgot you added, where only one guy in IT even has the keys to unlock some of them anymore. (And that IT guy is close to retirement.)

Complexity is not the only thing that buries the signal. We already talked about one in Cobra Farms. We’ll cover a few more before we’re done. All of them live in the same Winchester House you’ve been walking around in.

Your incentive plans don’t just have inefficiencies; they have entire wings dedicated to behaviors that contradict the rest of the business. Your dashboards don’t just measure the wrong things; they have entire rooms of metrics that have been quietly disconnected from anything that matters.

And somewhere in your company, there is a person — possibly several — whose presence creates structural distortions that everyone has been quietly building around for years.

More rooms. More kinds of noise. Each one of them is the easy, individual decision that made sense at the time.

The work of this book is the same work that finally got done to the actual Winchester House when Sarah died and someone walked through it with fresh eyes: figure out which rooms are load-bearing, which ones are dead ends, and which ones are quietly costing a fortune to maintain.

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