Brick by brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry - BusinessNews Publishing (2014)

Introduction

When the Bricks Click

BEHOLD THE LEGO BRICK, THAT HARD-EDGED, CANDY-colored bit of plastic that’s bedeviled barefoot parents the world over. By itself, a single discrete, modular brick is inanimate, lifeless—or at least dormant. Only the eight little knobs atop the rectangular block and the three hollow tubes underneath hint at its potential.

Snap two of those inert, inorganic blocks together, however, and suddenly you open up a world of nearly infinite possibilities. Just six bricks yield more than 915 million potential combinations. With an unlimited supply, you could build a supercomputer made up of sixty-four Raspberry Pi PCs and a thousand LEGO bricks, a full-size Rolls-Royce aircraft engine (152,000 bricks), a lovingly detailed recreation of the 2012 London Olympics (250,000 bricks), or a life-size two-story house with a working toilet and shower (3.3 million bricks), as others have already done. In the fifty-plus years since it was patented, the little LEGO brick has ignited the imaginations of millions of children and adults—and become a universal building block for catalyzing creativity.

With the possible exception of Apple, arguably no brand sparks as much cultlike devotion as LEGO. Über-nerd Jonathan Gay credits the LEGO brick for helping him invent Flash animation and thereby light up the Web. Google cofounder Larry Page once built a fully functioning inkjet printer out of LEGO bricks; Google managers now use bricks in some of their Mensa-level hiring tests. Maestro clothing designer Eileen Fisher has praised the brick for its capacity to fuel creative play. In his BBC series Toy Stories, British TV raconteur James May gushed that the brick embodies “geometry, mathematics, truth.”

LEGO lust isn’t limited to famous alpha creatives. Thousands of LEGO acolytes come together at conventions that are held every month of the year in cities around the globe. These tribal assemblages range from the mainstream (the Netherlands’ LEGO World, which annually pulls in more than seventy-five thousand kids and their families) to the fringe (Munich’s LEGO Graffiti Convention, a freak-and-geek-fest of brick-themed street art). The Internet abounds with LEGO gathering places such as LUGNET (aka the LEGO Users Group Network), a global forum for LEGO fans; MOCpages, where builders show off more than 350,000 LEGO “My Own Creations”; Brickshelf, a fan-created site that features close to two million images as well as a thriving market for LEGO kits and pieces; and Brickipedia, a LEGO wiki that encompasses nearly twenty-four thousand pages of reviews and forums. YouTube alone is stuffed with more than nine-hundred thousand clips showcasing over-the-top LEGO creations, with robots that solve Rubik’s Cube in mere seconds and a LEGO-based animation of English comedian Eddie Izzard’s hilarious send-up of Darth Vader, which has drawn more than nineteen million views.

Along with Coca-Cola and Disney, LEGO has ranked at the top of a Young and Rubicam survey of the world’s most recognized brands. In 2007, the Reputation Institute declared LEGO the world’s most respected company. In 2010, a wide-ranging survey of more than three thousand adults between the ages of twenty and forty declared the LEGO brick “the most popular toy of all time.”

Nearly everyone, it seems, loves LEGO. Or at least, everyone seems to know it. When Fortune decreed LEGO the toy of the century, the magazine half joked that with more than two hundred billion bricks scattered across the globe, “it seems safe to assume that at least ten billion are under sofa cushions [and] three billion are inside vacuum cleaners.” That number has since tripled, as billions of new pieces pour out of LEGO factories every year (approximately thirty-six billion in 2010 alone). LEGO factories annually churn out bricks at the rate of more than five times the world’s population. There are now some eighty LEGO bricks for every man, woman, and child on the planet.

And yet, although most everyone has encountered LEGO, far fewer are familiar with the organization that stands behind it. Wall Street largely ignores the family-owned LEGO Group, which is headquartered in Denmark’s hinterlands. Given that LEGO is closely held, the Street’s disregard is somewhat understandable. What’s more perplexing is that aside from those in the toy industry, a surprising number of business journalists and analysts have paid scant attention to one of the world’s most creative companies.

Over a four-year period, from 2009 to 2012, Fast Company magazine’s annual accounting of the “50 Most Innovative Companies” cited the unimpressive (Microsoft), the unsurprising (Facebook), and the unsung (MITRE), as well as corporations based outside the United States (Samsung, Nissan), but not the makers of the iconic brick. Likewise, the LEGO Group didn’t crack the “most innovative” lists at Bloomberg Businessweek, Forbes, or MIT Technology Review for 2010 through 2012.

Why should they—and we—give LEGO and its innovation strategies a closer look?

By any measure, LEGO has been relentlessly innovative for much of its eight decades. First and foremost there was the creation of the brick, which found its way into the hands, heads, and hearts of four hundred million people the world over. And then, year after year, the LEGO Group’s idealistic, imaginative approach to play helped it conjure compelling toys that rarely retreated to the back of kids’ closets. The company’s values and creativity put it in an unmatched position within the toy industry: kids loved the brick because it was fun, and parents loved it because it was educational. That combination helped LEGO amass decades of unbroken sales growth.

But as LEGO approached the end of the twentieth century, changes in kids’ lives challenged the brick’s primacy. Toyland became a far less forgiving place to do business, as aggressive competitors fought fiercely for the growing legions of kids enamored with video games, MP3 players, and other high-tech wonders. LEGO, largely an analog enterprise, found itself fading in a faster-moving, far more competitive digital world.

To catch up, LEGO rolled out an ambitious growth strategy that was built upon some of the past decade’s most widely heralded theories for sparking innovation. It sailed for untapped, “blue-ocean” markets; it concocted “disruptive” innovations; and it opened up its development process to the “wisdom of the crowd.” But while those prescriptions for twenty-first-century innovation might have worked wonderfully for other companies, they almost sank LEGO. In 2003, just three years after both Fortune magazine and the British Toy Retailers Association had crowned the brick the toy of the century, the LEGO Group announced the biggest loss in its history. Its extraordinary collapse led many observers to wonder whether LEGO, one of the world’s most cherished brands, would survive as an independent enterprise.

Transforming LEGO

In fact, a new leadership team pulled off one of the most successful business transformations in recent memory. One by one, LEGO reinvented those academic prescriptions for innovation, synthesized them into a world-class management system, and reemerged as a powerful, serial innovator. LEGO created the world’s first line of buildable action figures, fueled by a riveting story line that played out over a nine-year span. It launched a line that included an “intelligent brick,” allowing kids (as well as many skilled adults) to build programmable LEGO robots. In another first, LEGO rolled out a series of board games that could be built, broken apart, and rebuilt. LEGO opened up its development process, enabling legions of fans to go online and post their own customized DIY LEGO sets. And it reimagined its core lines of classic LEGO sets, keeping them real while making them modern enough for twenty-first-century kids.

The result: LEGO emerged from its near-death experience as the world’s most profitable and fastest-growing toy company. From 2007 to 2011, all through the worst of the global recession, the LEGO Group’s pretax profits quadrupled, far outstripping the titans of the toy industry, Hasbro and Mattel, which were mired in the single digits over the same period. From 2008 to 2010, LEGO grew its profits faster than Apple, despite competing in an industry with few barriers to entry, aggressive global competition, fickle customers, a production cost disadvantage, and no patent protection on its core product—the LEGO brick. LEGO achieved those results not by breaking with business convention but by building within it.

Business literature is rife with examples of daring, rule-busting outfits whose heretical management practices are celebrated for unleashing organic growth. For example, there’s Google, where developers are free to devote up to 20 percent of their time to any project of their choosing. There’s Gore-Tex maker W. L. Gore, whose boss-free work environment, where almost no one has a title, has helped it produce a profit for more than fifty consecutive years. And then there’s the Brazilian manufacturer Semco, whose radical (and often successful) experiments in employee self-management—like those of Google and W. L. Gore—have been studied by legions of consultants and academics.

No doubt these business renegades are inspirational. But their precedent-breaking management systems are not easily transferable. For many companies, building a newfangled innovation model from the ground up—while struggling to nail quarterly performance targets and fend off competitors—is not a viable option.

LEGO is an inspired innovator, but it doesn’t operate out on the fringes of business experience. There’s no 20 percent time at LEGO, and there are plenty of titles. Having seen how some of the business world’s most popular strategies for unleashing innovation almost destroyed their company, the LEGO Group’s leaders instead built a clear framework for guiding every kind of innovation effort, from improving today’s offerings to inventing tomorrow’s markets.

The LEGO system for managing innovation also stands in stark contrast to Apple’s (or at least to the way that Apple’s is portrayed in the business press). Where Apple’s innovation management system was built around the brilliant but often difficult Steve Jobs, with Jobs the final arbiter of when a product was good enough to take to market, the LEGO system is far more decentralized. The Apple model, while inspiring, is hard to follow: find a peerless innovator, promote him to the top of the company, and give him the power to make the big decisions. LEGO CEO Jørgen Vig Knudstorp asserts that he could leave his company for three months and its innovation process would continue unabated; although he was intimately involved in many decisions early in its development, he and other executives designed the process to work smoothly without significant input from him.

This book digs into the LEGO Group’s practical approach to everyday innovation and shows how it helps the company’s leaders resolve the seemingly irreconcilable trade-offs confronting every organization: How can a company give people the room to innovate while retaining focus? How can it allow autonomy while ensuring accountability? How can it deliver over the short term while building for the long term? Above all, how can it work within the limits of business orthodoxy and still deliver a no-nonsense plan for expansive growth? In other words, how can a company innovate inside the box? By deftly managing those tensions, LEGO has consistently created breakout products, even in especially challenging times.

We’ve also set out to trace the LEGO Group’s extraordinary journey—from humble toy maker to a giant on the brink of collapse and back—which offers lessons both salutary and cautionary on the savviest ways to innovate, lead, and win. Along the way, we recount the creation of some of the LEGO Group’s most iconic toys and introduce you to the designers and developers who are imagining the next generation of LEGO play experiences.

Additionally, we unveil the stories behind the company’s most successful recent launches, as well as the management innovations that gave the toys’ creators the freedom and the responsibility to live up to their full potential. And we show how LEGO took the most widely heralded prescriptions for managing innovation, reinvented them, and integrated them into a system that has sent its sales and profits soaring.

By chronicling the LEGO Group’s reinvention of innovation, our aim is to help you yoke your organization’s disparate innovation efforts into one all-encompassing system. Whether you’re leading a start-up, a business unit, or a multinational corporation, we believe the LEGO Group’s innovation-management system can help you coordinate the different types of innovation initiatives you take on and work more effectively with your most passionate customers and outside partners. Our goal is to make continuous innovation less of an abnormality and more of the new normal.

Having devoted a few words to describing the book’s major themes, we want to offer a few brief thoughts on what the book is not about. Although the pages that follow offer many details and takeaways, we have purposely avoided laying out a blueprint for innovation and goading you to follow it. You won’t achieve similar results by simply grafting the LEGO Group’s innovation system onto your company’s operations. And we absolutely don’t recommend repeating the toy maker’s mistake of waiting until a brush with bankruptcy forces management to embrace deep-seated change. No doubt, when it comes to shaping the future of your team or company, you would rather avoid the wrenching pain of a turnaround and instead blaze your own, trauma-free trail. Our intent is to identify signposts and guide your efforts, not direct them.

Like every LEGO enthusiast, you must bring your own imagination and experience to the game and figure out what’s best for you and your company. After all, it’s up to each of us to make the bricks click.