How LEGO got hot … again

February 27, 2014, 5:21 PM UTC

It might be difficult to recall, what with a hit movie out and LEGO sales near an all-time high, but just a decade ago the company was on the brink, bleeding $1 million in cash a day and posting record deficits.

The problem was, no one knew quite what the problem was. LEGO had tried different fixes, expanding into new product lines like Click-its (snap jewelry for girls) that didn’t look anything like its traditional bricks. Focus groups were no help, recalls Paal Smith-Meyer, who heads new strategy at LEGO, because in the drab test spaces, kids were drawn to bigger blocks, made by competitors, mostly because they thought they were supposed to react to bigger being better. The environment was “false,” Smith-Meyer says. And so LEGO set out on a radical new course: to understand the roots of play by observing its customers (kids — and parents) actually playing in the comfort of their homes.

LEGO went so anthropological on its R&D largely because of a Danish consulting firm called ReD Associates. Christian Madsbjerg, ReD’s founding partner and director of client relations, studied philosophy and political science in Copenhagen and began his career as a journalist. In 2004 he and a colleague, Mikkel B. Rasmussen, were both working for a design firm when they got the idea for ReD. It was a rebuke of sorts to traditional business consulting firms — and to the very notion that a company can understand its customers simply by crunching numbers. To understand human behavior, says Madsbjerg, you have to study humans, not spreadsheets. Bill Hoover, ReD’s chairman and a former senior director at McKinsey (where he worked for 30 years), describes ReD’s process as “messy, time-consuming — and it sure is not linear. There’s no logic tree you’re chopping branches from. The insights bubble out of the experience.”

For LEGO, so-called anthro teams fanned out across Los Angeles, New York, Chicago, Munich, and Hamburg. They made photo diaries, interviewed parents, and asked kids to tell them stories, some of which Madsbjerg and Rasmussen recall in a new book, The Moment of Clarity. When one ReD researcher asked an 11-year-old German boy to show him his most prized possession, the boy displayed a beat-up sneaker, then explained how each wear-and-tear mark reflected the accomplishment of a new skateboard trick.

The observation turned into insight for LEGO. The company, says Smith-Meyer, had fallen into the trap of thinking that play habits had changed, and that LEGO must change with them. Not at all. Kids just wanted freedom to experiment on their own with the plastic bricks and to build something masterful. Or as Smith-Meyer puts it, “LEGO takes time.”

This story is from the March 17, 2014 issue of Fortune.