Isegoria

What happens when a McKinsey alum takes over Lego?

Jorgen Vig Knudstorp, 40, a father of four and a McKinsey & Company alumnus who took over as Lego’s chief executive in 2004, made it clear that results, not simply feeling good about making the best toys, would be essential if Lego was to succeed.

“We needed to build a mind-set where nonperformance wasn’t accepted,” Mr. Knudstorp says. Now, “there’s no place to hide if performance is poor,” he says. “You will be embarrassed, and embarrassment is stronger than fear.”
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Founded in 1932 on the principle of “play well,” or “leg godt” in Danish, by a local carpenter, Ole Kirk Christiansen, this privately held company had a very Scandinavian aversion to talking about profits, much less orienting the company around them.

Mr. Christiansen’s family still owns Lego and its business may still be fun and games, but working here isn’t. Before Mr. Knudstorp’s arrival, deadlines came and went, and development time for new toys could stretch out for years; in 2004, the company racked up a $344 million loss.

Now, employee pay is tied to measuring up to management’s key performance indicators (K.P.I.’s, in Lego-speak). And cost-saving touches are encouraged when it comes to designing new toys.

That has helped to lower development time by 50 percent, with some new products moving from idea to box in as little as a year. Mr. Knudstorp’s bottom-line-oriented team, meanwhile, has shifted some manufacturing and distribution from Billund to cheaper locales in Central Europe and Mexico.

Lego is following Apple’s lead:

Last month, it opened its first “concept store” in Concord, N.C., where parents can bring children for birthday parties and classes with master builders; another concept store is set to open near Baltimore this fall. It’s all part of a broader retail expansion that will give Lego 47 retail stores worldwide by year-end, up from 27 in 2007.

They’re also moving “beyond the brick”:

In 2010, the first board game designed by Lego will go on sale in the United States, while its new virtual reality system, Lego Universe, will make its debut on the Web, with children able to act out roles from Lego games and build toys from virtual bricks.

Video games — yes, Lego is there, too — are increasingly important to the company, as are Lego’s legions of adult fans, who can now buy kits to build architect-designed models of Frank Lloyd Wright’s Fallingwater and the Guggenheim Museum. What’s more, the company is in talks with Warner Brothers about a mixed live-action and animation Lego-themed movie that would move the company and its Lego brand even further into the Hollywood orbit.

“Developing a movie doesn’t come cheap,” says Soren Torp Laursen, a 23-year Lego employee who heads its North American operations. “But five years ago, we were in the midst of a crisis, and now we’re in a growth phase. We are definitely taking bigger risks than we previously did.”

Those bigger risks seem to be paying off, at least so far:

Amid a 5 percent drop in total United States toy sales last year and the industry’s worst holiday season in three decades, according to Sean McGowan, an analyst at Needham & Company, Lego’s sales surged 18.7 percent in 2008. And despite a worsening global recession, Lego powered through the first half of 2009, with a 23 percent sales increase over the period a year earlier. It earned $355 million before taxes last year, and $178 million in the first half of 2009.

The numbers are all the more impressive given the sales declines this year at the two biggest toymakers, Mattel and Hasbro.

It looks like everything about the company has improved, including its supply chain:

John Barbour, a former top executive of Toys “R” Us, recalls “a series of truly frustrating meetings” with Lego officials in Billund and New York at the beginning of the decade, which climaxed when Mr. Barbour bluntly told them that Toys “R” Us cared more about the Lego brand than they did.

The most popular toys would run out, he recalls, and Lego was simply unable to ship more or manage the complex process of producing the plastic pieces for its most complicated sets.

That began to change in 2004, after Mr. Knudstorp took over in Billund and Mr. Laursen arrived at Lego’s regional headquarters in Enfield, Conn. Besides reaching out to top retailers and cutting costs, they untangled a supply chain that churns out 29 billion pieces a year.

The changes also filtered down to the ranks of Lego’s toy designers, says Paal Smith-Meyer, head of Lego’s new-business group. The number of different bricks or elements that go into Lego toys has shrunk to less than 7,000 from roughly 13,000, and designers are encouraged to reuse parts, so that a piece of an X-wing fighter from the “Star Wars” series might end up in Indiana Jones’s jeep or a pirate ship.

That’s very different from when Mr. Meyer joined Lego a decade ago. Though creating a mold to make a new plastic element might cost 50,000 euros. on average, he recalls that 90 percent of new elements were developed and used just one time.

Nowadays, Mr. Meyer says, “you have to design for Lego. If you want to design for yourself, go be an artist.”

Why are we storing all the stuff we accumulate?

The first modern self-storage facilities opened in the 1960s, and for two decades storage remained a low-profile industry, helping people muddle through what it terms “life events.” For the most part, storage units were meant to temporarily absorb the possessions of those in transition: moving, marrying or divorcing, or dealing with a death in the family. And the late 20th century turned out to be a golden age of life events in America, with peaking divorce rates and a rush of second- and third-home buying. At the same time, the first baby boomers were left to face down the caches of heirlooms and clutter in their parents’ basements.

But by the end of the ’90s, there seemed to be almost limitless, pent-up demand for storage around the country, more than life events readily explained. Storage was seen as an invincible investment and became the go-to solution for developers with awkward, leftover scraps of land. After an industry report found that Hawaii ranked among the states with the least amount of storage space in the nation, storage barons rushed in, almost doubling the available square footage there between 2004 and 2007. One man converted a network of caves on Oahu, used to house munitions during World War II, into a storage facility. (The caves are naturally climate-controlled, perfect for wine.) Around the United States, newcomers to the industry were building even against the advice of their expert consultants. “We were cranking these things out at exponential rates,” an industry veteran named Tom Litton told me. “It was just nuts.”

Litton’s parents owned one of the earliest storage facilities, in Tucson. He now has two of his own, both in California, and manages 23 others. Among the ones he built and has since sold is a stunning 1,000-unit glass-fronted complex in Antioch. It could pass for a small corporate headquarters and is one of seven storage facilities within five miles of Statewide in either direction along Highway 4.

Across America, from 2000 to 2005, upward of 3,000 self-storage facilities went up every year. Somehow, Americans managed to fill that brand-new empty space. In June, Public Storage, the industry’s largest chain, reported that its 2,100 facilities in 38 states were, on average, still about 91 percent full. It raises a simple question: where was all that stuff before?

“A lot of it just comes down to the great American propensity toward accumulating stuff,” Litton explained. Between 1970 and 2008, real disposable personal income per capita doubled, and by 2008 we were spending nearly all of it — all but 2.7 percent — each year. Meanwhile, the price of much of what we were buying plunged. Even by the early ’90s, American families had, on average, twice as many possessions as they did 25 years earlier. By 2005, according to the Boston College sociologist Juliet B. Schor, the average consumer purchased one new piece of clothing every five and a half days.

Schor has been hacking intrepidly through the jumble of available data quantifying the last decade’s consumption spree. Between 1998 and 2005, she found, the number of vacuum cleaners coming into the country every year more than doubled. The number of toasters, ovens and coffeemakers tripled. A 2006 U.C.L.A. study found middle-class families in Los Angeles “battling a nearly universal overaccumulation of goods.” Garages were clogged. Toys and outdoor furniture collected in the corners of backyards. “The home-goods storage crisis has reached almost epic proportions,” the authors of the study wrote. A new kind of customer was being propelled, hands full, into self-storage.

“A lot of the expansion we experienced as an industry was people choosing to store,” Litton told me. A Self Storage Association study showed that, by 2007, the once-quintessential client — the family in the middle of a move, using storage to solve a short-term, logistical problem — had lost its majority. Fifty percent of renters were now simply storing what wouldn’t fit in their homes — even though the size of the average American house had almost doubled in the previous 50 years, to 2,300 square feet.

Consider our national furniture habit. In an unpublished paper, Schor writes that “anecdotal evidence suggests an ‘Ikea effect.’ ” We’ve spent more on furniture even as prices have dropped, thereby amassing more of it. The amount entering the United States from overseas doubled between 1998 and 2005, reaching some 650 million pieces a year. Comparing Schor’s data with E.P.A. data on municipal solid waste shows that the rate at which we threw out old furniture rose about one-thirteenth as fast during roughly the same period. In other words, most of that new stuff — and any older furniture it displaced — is presumably still knocking around somewhere. In fact, some seven million American households now have at least one piece of furniture in their storage units. Furniture is the most commonly stored thing in America.

The marketing consultant Derek Naylor told me that people stockpile furniture while saving for bigger or second homes but then, in some cases, “they don’t want to clutter up their new home with all the things they have in storage.” So they buy new, nicer things and keep paying to store the old ones anyway. Clem Tang, a spokesman for Public Storage, explains: “You say, ‘I paid $1,000 for this table a couple of years ago. I’m not getting rid of it, or selling it for 10 bucks at a garage sale. That’s like throwing away $1,000.’ ” It’s not a surprising response in a society replacing things at such an accelerated rate — this inability to see our last table as suddenly worthless, even though we’ve just been out shopping for a new one as though it were.

“My parents were Depression babies,” Litton told me, “and what they taught me was, it’s the accumulation of things that defines you as an American, and to throw anything away was being wasteful.” The self-storage industry reconciles these opposing values: paying for storage is, paradoxically, thrifty. “That propensity toward consumption is what fueled the world’s economy,” Litton said. The self-storage industry almost had to expand; it grew along with the volume of container ships reaching our ports. (Some storage facilities I visited in California are, in fact, made of shipping containers, which became surplus goods themselves as our trade deficit grew.)

By 2007, a full 15 percent of customers told the Self Storage Association they were storing items that they “no longer need or want.” It was the third-most-popular use for a unit and was projected to grow to 25 percent of renters the following year. The line between necessity and convenience — between temporary life event and permanent lifestyle — totally blurred.