Once the bleeding stopped, he tried to make the company healthy again in 2006-07 by restructuring manufacturing. The final stage, begun in 2008, was a push for growth. Lego made a big effort in markets where it was under-represented: in the US, as well as emerging markets such as China, Russia and Brazil.
It also launched new product lines. Lego had always been preferred by boys, so it started the Friends range aimed at girls. Despite controversy, it was a big seller. Other successful homegrown launches were Ninjago, based on Japanese warriors, and Legends of Chima, featuring animals fighting in a magical land. Those successes were all the sweeter because Lego does not have to pay the royalty it does for third-party sets such as Star Wars or Harry Potter. It also has full control over the characters, what they look like and can do.
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The result of these efforts was a company that made an operating profit of DKr8.3 billion last year on sales of DKr25.4 billion – up from DKr8 billion in 2007 – from a product with global appeal. "Kids in Afghanistan and Jordan, kids in Boston, Beijing and Berlin, they have the same perception of the product. So what we're dealing with here is one of these few companies in the world that are a bit like Airbus or Boeing or Coke or Pepsi or Apple or Samsung [and] have a global product assortment," Mr Knudstorp says.
Yet he cautions that the challenges Lego faces today are very similar to the ones a decade ago. "I think one of my huge jobs over the next 20 years is to be able to adjust to globalization and digitization and not be taken hostage by our past success, not being tied by earlier decisions which then limits your ability to adapt to what is required from the future."
One criticism made of Lego is that it has missed the chance to move decisively into the digital world. Minecraft, a highly popular Lego-like computer game in which players build or destroy virtual landscapes made of building blocks, was instead created by the Swedish start-up Mojang.
Some Lego executives privately regret that they failed to develop such a game but Mr Knudstorp praises Mojang, with whom the toymaker is developing several big Minecraft sets for release later this year. "What we're finding is that if you are very good at writing books, you are not necessarily the best to turn that book into a great movie. You need somebody who makes movies . . . and in our case we need partners who can translate the physical Lego experience into the digital experience," he says.
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So Lego teamed up with TT Games, a British games developer, to make video games from Lego ranges such as Star Wars and Chima. Many became bestsellers and Lego has had success, too, with online games. It also partnered with Warner Bros to make The Lego Movie, which is the seventh-highest grossing film of the year, generating close to $500 million globally.
Mr Knudstorp says Lego will never become a fully digital company: "The one thing is that we never leave the physical brick. Our standpoint is that physical play is extremely important. Then I see digital as an extra experience layer."
He adds: "I guess we could be closer to a Nike, which is trying to obviously sell a very physical product like a sneaker or golfing equipment but may add an app that improves your golfing performance."
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That digital layer is making Lego's product launches more complex. WhenThe Lego Movie was released, it was not just the film: construction sets, a video game and a website in partnership with Google all launched at the same time. Such merchandising tie-ins have long been a lucrative part of film releases by Disney and DreamWorks.
"This movie signals they continue to want to expand from a construction toy to a content company. They can leverage that safe brand," says Prof Robertson.
A sequel to The Lego Movie is set for 2017 but Mr Knudstorp is keen to take it slowly rather than rushing out films based on its various products.
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Mr Knudstorp acknowledges that complexity is growing and says he has revamped Lego's management structure precisely for that, stripping out a whole layer.
But he adds: "I have a little picture of 25 minifigures each turning Chinese plates on a bamboo stick. I show it to the guys and I say: 'I know it's difficult. That's why we spent 20 years learning it and that's why we are so difficult to imitate.' So don't be sorry that we do something that's very hard to do. It'd be worse if we could only spin one plate."
One concern today is that history may be repeating itself. Lego were in a mess at the end of the 1990s for several reasons that sound familiar. Prof Robertson points to examples, including a dizzying array of product launches and recruiting workers who lacked sufficient understanding of the company and its culture.
Some of those issues are now returning. Lego's website lists 30 product ranges, while in February the company said it would focus on increasing staff in Connecticut, London, Shanghai and Singapore.
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Mr Knudstorp says: "I worry about it all the time but I think we are in a very different place."
First, he points out that all Lego's growth is self-financed, meaning the payback for investments is quick and a failure is not a disaster. The
Kristiansen family are committed owners.
Second, what he calls "health metrics" – such as customer and retailer satisfaction, shelf positioning, employee motivation – are at "a completely different level" compared with a decade ago. Finally, he says, underlying profitability is far better.
Alook at the recently released Simpsons house, based on the cartoon TV series, shows why. The $200 set includes minifigures of the entire family, including mother Marge with her distinctive blue beehive.
"The big blue hair. That is a bit of a costly element to manufacture to be quite honest but it is also a very special element," he says. "So the designer is basically told: 'You get that, but in the rest of the set we want to see a fairly standard execution'." That means the designer needs to use bricks from other sets to keep costs down.