Chapter One:How Little We Know How little we know, how much to discover.Who cares to define what chemistry this is?Who cares, with your lips on mine, how ignorant bliss is? "How Little We Know (How Little It Matters)"Words by Carolyn Leigh, music by Philip Springer, 1956 In January 2004, after a particularly disastrous holiday season, Lego, the Danish toy company, fired its chief operating officer. No one doubted that Poul Plougmann had to go. Miserable Christmas sales were the last straw at the end of a terrible year -- Lego's revenues were down by 25 percent, and the company lost $230 million for the year, the worst in its history. What went so badly wrong? Chief executive Kjeld Kirk Kristiansen, grandson of the founder, explained it simply: Lego had "strayed too far from its roots and relied too heavily on merchandising spin-offs, such as Harry Potter figures, which proved unpopular this season despite the continuing success of J. K. Rowling's books." The solution? Lego announced that it would "return to basics.
" Kristiansen vowed: "We will focus on profitability, especially the attractive potential of our core products." There's nothing especially remarkable about a story like this. Every day we read about companies that are doing well and someone gets promoted, and other companies that fail and someone gets the ax. Today it's Lego, and tomorrow it'll be someone else. The beat goes on. Now, I'm really not very interested in Lego. As Rick might have said inCasablanca,the problems of one family-owned Danish toy maker don't amount to a hill of beans in this crazy world. What does interest me is how we explain Lego's performance, because the way we think about what happened at Lego is typical of how we think about success or failure in countless other companies.
We don't want to read just that Lego's sales were sharply down, we want an explanation of what happened. It can't just have been bad luck -- there must have been some reason why a proud company, a fixture on toy store shelves all around the world, a faithful playtime companion to generations of children, suddenly did so badly. So how did the business press explain Lego's downfall? A few newspapers reported that Lego was hurt by the fall of the U.S. dollar against the Danish kroner, which meant that North American sales -- about half of Lego's total -- were worth less on Lego's books. Some reporters also noted that a strong new rival, Montreal-based Mega Bloks Inc., was chipping away at Lego's dominant market share. But these were side issues.
The main explanation for Lego's losses?Lego had strayed from its core. It lost sight of its roots.That's what Lego's chief executive said, and that's what the media reported, including theFinancial Times, The Wall Street Journal,the Associated Press, Bloomberg News,Nordic Business Report, Danish News Digest, Plastics News,and about a dozen others. Depending on the source, Poul Plougmann was variouslysacked, fired, axed, ousted, removed, dismissed, replaced,or simplyrelieved of his duties.But aside from the verb used to describe his departure, not much differed among the articles. Lego's big blunder wasstraying from the core. Consider for a moment the wordstray. The American Heritage Dictionary of the English Languagedefinesto strayas "to wander beyond established limits," "to deviate from a course that is regarded as right," and "to become lost.
" A guided missile canstray offcourse and hit the wrong target. A dog that runs away from home is calleda stray.A company canstray,too, if it goes off on a foolish adventure, if it wanders off course, if it gets lost. Apparently that's what Lego did -- it chased merchandising spin-offs when it should have been focusing on its core product line. It strayed. Chris Zook at Bain & Company argued in his 2001 book,Profit from.