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Just what can our economy build on from the business model of Lego?

Economy Watch

By Esmond Birnie

Published 15/12/2015

Lego will rate highly as a Christmas gift
Lego will rate highly as a Christmas gift

Around 45 billion Lego bricks are produced every year - that's about seven for every person in the world's population. And having overcome a serious financial crisis, it won't be too long before the total number of Lego's Mini Figures in circulation will be greater than the world's population.

It is a very safe prediction that Lego will rank highly in many families' lists of Christmas gifts.

Apart from the obvious linkage to Father Christmas, Lego also offers some interesting economic lessons about the land of its creation:

Why has the Danish economy been relatively successful for some considerable time?

How can a business achieve a dramatic turnaround from financial crisis?

How can we make STEM careers more attractive to children and young people?

Denmark is usually regarded as an exemplar of what economists call a "small open economy".

As such, it is has sometimes been held up as a model which either Northern Ireland or the Republic of Ireland could follow. Denmark has a population of about 5.6m compared to Northern Ireland's 1.8m (and the Republic's 4.6m), but of more interest, is a comparison of GDP or GVA per head, making allowance for price differences between the countries.

By such measures, in 2013, Danish GDP per head was almost 16% higher than the UK average, whereas Northern Ireland's GVA per head was just under 77% of the UK average.

By implication, income per head in Denmark was a little more than one and a half times that in Northern Ireland. Some commentators would also claim it is significant that the available indicators suggest income is more equally distributed in Denmark.

However, to say that Denmark has outperformed Northern Ireland is not enough. How far is it conceivable that Northern Ireland could copy Denmark?

Denmark is one of four countries which exemplify the so-called 'Nordic model' (along with Norway, Sweden and Finland - sometimes Iceland is also considered a Nordic). On that basis, the Nordic model includes a number of features - high levels of government spending and personal taxation, an active welfare system and strong intervention and direction in the labour and training markets. So, could these features be adopted separately or are they inextricably linked?

In particular, Denmark may have a much more competitive private sector than its Northern Ireland counterpart.

In 2013, it was estimated that whereas Denmark was ranked 13th on the World Economic Forum's index of competitiveness, Northern Ireland was ranked 42nd.

I would argue that Northern Ireland can certainly learn from Denmark, but we cannot be naive about this. The presence of so many world class, exporting businesses in Denmark leads us back to the particular example of Lego.

By late 2014, Lego, which began to make its distinctive bricks back in 1949, had risen to become the world's largest toy manufacturer.

However, that rise to number one position was not without challenges. Lego lost the patent protection on its bricks in 1983 and after that, the company pursued a policy of aggressively diversifying its products, services and geographical markets. Unfortunately, by the early 2000s, these policies had resulted in a major financial crisis.

The way in which Lego reacted to this crisis provided the basis for its recent success and also shows how the competitive basis for the Nordic model in Denmark cannot be taken for granted.

In 2004, the Lego chief executive, the grandson of the company's founder, was replaced and the new chief executive, Dr Jorgen Vig Knudstorp, has played a key role in the subsequent revival.

A strategist (with economics and business degrees and a background as a McKinsey consultant), Dr Knudstorp halted the diversification into Legoland parks, pruned back its number of components and suppliers (including removing the more difficult-to-make bricks from the product lists).

At the same time, Lego added digital to its physical products - this gave it some more success with teenagers and the games market.

So, what are some of the lessons for Northern Ireland from Lego's business model? Building and then maintaining a competitive private sector is not easy. At the same time, turnarounds are possible and they are also possible in companies which have grown out of a previously strong system of family control.

Part of Kundstorp's strategy for Lego has been to been to re-emphasise Lego's core business - building toy(s). To the extent that Lego does indeed inspire creativity, this reminds us of the STEM agenda. How can we inspire children and young people, both girls and boys, that building houses or aircraft wings or whatever can form the basis of a good career?

In the interests of full disclosure - PwC audited Lego's accounts in 2014.

In next week's Economy Watch, we hear from Neil Gibson of the Northern Ireland economic policy centre

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