A window on rebuilding Lego's empire of bricks

Walk round the original Legoland, in the tiny Danish town of Billund, and it is easy to believe one is in a child's idea of heaven. Miniature replicas of Copenhagen's waterfront andthe Millennium Falcon, Han Solo's spaceship in Star Wars, compete with all manner of rides to keep Lego's target group - boys aged five to nine - happy.

This Legoland draws about 1.5m visitors a year, all attracted by the seemingly simple idea of interlocking tiny plastic bricks. Little wonder that the family-owned group is the world's most profitable toymaker and the second-largest by sales. But just 10 years ago Lego was on its knees.

Its decline and resurrection form the narrative of Brick by Brick, by David Robertson, a former Lego professor of innovation and technology management at IMD, but now at the Wharton School, with Bill Breen. The raw material he deals with is every bit as durable and gripping as Lego bricks.

In the 1980s and early 1990s, the company enjoyed a fantastic period of growth as it introduced new ranges, such as castles and space, as well as figures with facial features. Its first licensed product - Star Wars, in 1999 - seemed the crowning glory.

But some of its top managers feared the brick was no longer chic. Children seemed keener to play video games or take up fads such as Tamagotchi, the handheld digital pet.

Prof Robertson tells the resulting rollercoaster tale mainly from the angle of innovation. In 1998, panicking as the group experienced its first loss since being founded in the 1930s, the Kristiansen family owners turned to Poul Plougmann, formerly an executive at Bang & Olufsen, the television and hi-fi maker.

The thesis of the book is that Plougmann adopted all the main tenets of the innovation playbook - such as hiring diverse and creative people and fostering open innovation - but executed many of them wrongly. Lego not only started too many different projects, but also seemed to lose confidence in its core concept of building toys, embracing an easier-to-construct series around a character called Jack Stone.

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The result was a company that was losing money and bleeding cash, fast. Jrgen Vig Knudstorp, a former McKinsey consultant who was asked for a diagnosis, told directors: "We are on a burning platform." The problem was not lack of innovation, but lack of profitable innovation.

Knudstorp became chief executive and set about - in Prof Robertson's telling - doing innovation correctly. Jack Stone was binned and a fire engine, part of the Lego City line, was reintroduced as was the Duplo brand for toddlers. Lego staunched the losses and sales grew fast: its compound annual growth rate in recent years has been above 20 per cent.

Prof Robertson tries to tease out the differences in approach between the two CEOs, but parts of the tale read very similarly: new innovations and product lines failed under both men. He is mostly successful, but some of the explanations turn on distinctions that are not always easy to grasp.

Another problem is that Lego is saved largely by two lines from Plougmann's time: Bionicle and Star Wars.

And a big part of the turnround seems to have had little to do with innovation: Lego lacked basic financial controls and churned out too many different parts. A simpler Lego, where each line had to make a profit turned out to be much healthier than an opaque business with insufficient control over what was developed and at what cost.

Still, Prof Robertson's take on Lego's success holds plenty of lessons for companies pondering how to remain innovative in a fast-changing world. With new lines such as Ninjago, products such as board games, and open in�novation through fan-designed sets via its Cuusoo platform, Lego is showing how far you can take one simple yet brilliant idea.

The writer is the FT's Nordic correspondent