Most of all, he refocused the company on its core product - physical plastic bricks - using ethnographic research to add products such as the popular Lego Friends line, focused on girls.
Although the company has recently seen flat sales in the US that trimmed profits, revenue growth between 2005 and 2015 exploded fivefold. It is now the world's most profitable toy company.
As Knudstorp prepares to step down - Lego announced Tuesday it would nominate him to be chairman of the board and lead a new entity, the Lego Brand Group, which will oversee the Kristiansen family's stake - The Washington Post spoke with him about his leadership lessons from 12 years at the top of a toy turnaround.
On how he recognised that the company needed to focus on its core:
Soon after taking over, Knudstorp went on a "discovery journey" to understand what made Lego unique, visiting retailers to ask about what was missing, stopping at MIT for a reminder about how children learn, and spending three days at a Lego conference for adult fans in Washington, D.C.
"They really inspired me to go back to the creative expression of the core product," he says. So did spending lots of time with groups of children as they played with Lego bricks, he says: "We had a huge number of people writing to us saying how much the brand meant to them. That convinced me we could survive, and the brand would survive. We were just poor managers of the brand. How do we double down on what's so special to us? That was the creative building experience."
On making tough decisions:
Knudstorp made painful cuts to staffing at Lego but says he tried to connect with employees by giving them lengthy advance warning about job cuts, offering retraining and trying to be personally present throughout.
"We run five shifts on the factories, and once a year I would run through all the shifts, spending 40 hours meeting individually with those employees many times," he says. "They were asking: What does the future look like? Of course I couldn't guarantee it. But I could show I care for them. Being honest and transparent is important for morale."
On executive bonuses at Lego:
At Lego, financial metrics make up less than a third of the weighting used in determining bonuses for executives, Knudstorp says. The remainder is based on factors such as how retail customers perform and how employees rate top managers. "Do they feel engaged? Do they feel passionate? It creates a very different culture."
On one of his biggest leadership lessons:
One of the things Knudstorp says he finds most important is to say "thank you for doing all the things I never told you to do. You shouldn't run a company based on what you tell [employees] to do. You should run it based on intention. The way I put it is that 'context-setting is more important than controlling.' So many companies are based on controlling. You get punished based on what you don't do."
On customer service:
Raves about Lego's customer service went viral this year after an employee creatively responded to a 7-year-old's request for a replacement mini figure.
Knudstorp, who says he personally answers all the emails he receives, tells another story of a sick child who had been saving to buy a Lego set that was out of production.
The consumer services department "literally went around to all the offices in the building asking, 'Would you happen to have this set we no longer manufacture?' " to find an unopened set. "I say, 'Don't just do what you were told to do, do what you think is the right thing to do, because you have that mandate,' " he says. "And when it happens, you celebrate those stories."
