Sailing for Blue Ocean - Mastering the Seven Truths of Innovation and Transforming LEGO - Brick by brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry - BusinessNews Publishing

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

Part II. Mastering the Seven Truths of Innovation and Transforming LEGO

Chapter 9. Sailing for Blue Ocean

“Obviously LEGO, but Never Seen Before” and the Birth of LEGO Games

It was a one-in-a-million shot that we’d actually hit something. But should we hit it, we’d have done something amazing.

—Cephas Howard, lead designer, LEGO Games

IT WAS DECEMBER 2005, AND SØREN HOLM, WHO HAD helped lead the effort to create Bionicle, was on the hunt for a new senior concept designer, one of the more difficult-to-fill positions at LEGO. There’s no curriculum or career path for a job that requires people to imagine wholly original toys that are rooted in LEGO and will generate millions of dollars in sales. The company’s executives had to rely on their own intuition to recognize an untested but promising concept designer when they saw one.

Holm’s search had taken him to London, where he and Flemming Østergaard, a LEGO innovation and marketing executive, had lined up ten candidates. Their fourth interview of the day was with a loquacious, moon-faced man named Cephas Howard, a commercial design manager at the Guardian and Observer newspapers. With his spiky haircut, stubbly beard, and black-framed glasses, Howard certainly had the look of a LEGO designer. And while creating display ads and Web products for the British papers’ advertisers was a long way from fabricating dynamic play experiences out of little plastic blocks, Howard’s success inside a large corporation was a mark in his favor. So was his vivid entrepreneurial streak. Working nights and weekends, he had conceived and created two original board games and was seeking to bring them both to market.

Since he was a child, Howard and his two brothers had entertained themselves by playing a myriad of board games. They also dreamed up their own bespoke games and shared them with friends. Although he went on to pursue a graphic design career within the publishing industry, Howard never shook off his fever for inventing games. He continued to concoct games and kept detailed notes on all his ideas. His two most recent inventions held enough promise for him to solicit quotes from manufacturers and build a website to self-publish the games. Howard brought one of those games to the LEGO interview, where his zest for creating enticing play experiences burned brightly.

“Cephas seduced us completely with that game,” recalled Holm. “He had this fantastic passion that just shone through. It took all of five minutes for Flemming and me to realize that yeah, this is the guy.”

Four days later, Howard met with Per Hjuler, Holm’s boss. Whereas Howard’s session with Holm and Østergaard was full of the light and laughter that come when creative minds connect, Hjuler was all business. Howard recalled that Hjuler told him LEGO had a team whose brief was to create a line that would generate 10 percent of the company’s sales each year. That group, said Hjuler, had thus far failed to deliver on its assignment. He then fired a get-to-the-point question at the job candidate: Are you telling me that if I hire you, this team, plus you, will deliver on this brief?

Howard swallowed hard. And then he nodded. “I had to say yes,” he later recalled. “If such a man existed, I couldn’t believe he’d be any better situated than I was. It was a one-in-a-million shot that we’d actually hit something. But should we hit it, we’d have done something amazing. And that’s an opportunity you don’t often get.”

That spring Howard and his wife moved to Billund, where he joined the Concept Lab, a team of developers charged with creating revolutionary play experiences that were rooted in the brick’s DNA but amounted to a whole new kind of LEGO. Søren Holm ran the Lab’s day-to-day work and reported to Per Hjuler, who was also responsible for the product group that developed toys for older children, such as Bionicle and Technic.

Howard’s arrival came at a time when LEGO, having accomplished the first phase of its “Shared Vision” strategy—stabilize the company and manage for cash—was moving into the second phase: build a “defensible core” of products and manage for profit. There would then come a third and final phase, which would commence in 2009: revitalize the brand and manage for growth. Management had already green-lighted one ambitious project, LEGO Universe. But Knudstorp didn’t bet the house on Universe. He spread the risk by assigning the Concept Lab the formidable task of creating and bringing to market, by 2009, another entirely novel play experience—one that also aimed to spark the company’s growth for years to come. After several false starts, that product line would eventually become a collection of board games called LEGO Games.

Early on, when Games was little more than an idea, the company’s brain trust was deeply skeptical of the toy’s prospects; some executives even refused to countenance the notion of giving the go-ahead to develop the line. There was also the not insignificant matter of the Concept Lab’s abysmal track record. Though the Lab had thrown off hundreds of ideas over the years, it had failed to bring a single one of them to market. The Lab was a deeply moribund group when Knudstorp assigned it the task of inventing the company’s next growth driver. Given that the Lab’s design team hadn’t delivered by the time Per Hjuler interviewed Cephas Howard, it’s not hard to understand why the LEGO executive had nearly run out of patience.

How, then, did LEGO go on to match its ambition—to discover and claim a blue-ocean market—with sufficient discipline to conceive, design, and develop such a value-creating product? It did so by surmounting the obstacles that come with any attempt to create a new market space. How do you shield a blue-ocean team from the demands and distractions of your company’s other product development groups, which must continue to fend off attacks from red-ocean competitors? Out of the mind-bending array of possibilities you can pursue, where do you find a promising opportunity that no other competitor has explored? And when you encounter the inevitable headwinds, what’s the best navigational system for getting your initiative back on the right course?

In developing Games, the Concept Lab found a way to steer around the shoals that so often sink attempts to invent a product that creates new demand. The result was that after so many fruitless ventures, the Lab discovered a market that (at least for a time) was truly uncontested. Here’s what it did:

Assembling the Team

In 2005, when Hjuler was given oversight of the Concept Lab, one of his first moves was to recommit the Lab to its core purpose. Because the Lab had some of the most skilled designers in all of LEGO, they were often loaned out, on a temporary basis, to other project teams that were developing novelty toys. The practice leached the Lab of its most valuable asset—its talent—and left it chronically understaffed. Hjuler’s response was to ring-fence the Lab from the rest of the organization. He gave the Lab its own studio, in a building that stands apart from the main design group, and won commitments from the heads of other product development teams to look elsewhere for resources. Henceforth, the Lab was to operate solely as a front-end team that would pursue only entirely new LEGO experiences.

Another drag on the Lab’s performance was that its development team was remarkably unvaried. The group consisted solely of designers, most of them Danish men, who were deft at conjuring clever concepts. But their inability to translate those ideas into commercially successful toys was largely due to the fact that they lacked a vivid sense of what turned kids on. What’s more, they didn’t understand the competitive environments and cultural trends that shaped the many markets LEGO targeted.

Hjuler brought some diversity into the mix by recruiting designers from different cultural backgrounds, including India, Japan, and the United Kingdom. That’s when he tapped Søren Holm, who’d helped make Bionicle such a wild success, to head up the Lab. And he drafted Flemming Østergaard to create a marketing function within the Lab, which had never been done before, as well as Finn Daugård Madsen, a veteran project manager. Thus the Lab evolved from a pure design team to a fully matrixed product development team, with marketing and project management disciplines as well as design.

Note that Hjuler avoided the trap of promoting diversity at the expense of clarity. Whatever their backgrounds or skill sets, the Lab’s managers and associates had one vital thing in common: they had built with bricks since childhood and thereby had developed a deep understanding of what it took to invent dazzling LEGO creations.

“Some of the designers were self-made, some of them came from the best design schools, and some were from other countries,” said Hjuler. “But all of them understood the LEGO DNA.”

Exploring Different Directions

When Søren Holm was a senior director at the Concept Lab during the Poul Plougmann era, the Lab’s mandate was so expansive—develop entirely new product offerings that redefine the LEGO play experience—it virtually ensured that the group’s designers generated hundreds of blue-sky ideas that were so untethered as to stand almost no chance of being developed and taken to market. More often than not, the concepts weren’t backed by a compelling business case; they were poorly executed; they were too radical a departure from the LEGO DNA; or they failed to excite kids. During a 2003 review session with the company’s top executives, Holm grew so frustrated with management’s hazy focus that he blurted out a desperate question: “What do you want us to do?”

Kristiansen’s reply didn’t clarify things: “What would you like to do?”

“I really didn’t know how to answer,” Holm recalled. “But I couldn’t allow myself to admit that. So I just said, ‘We’ll try a bit of everything.’ We then took a year to develop twenty different projects, which we presented to 150 managers. We used a full day of their time and absolutely nothing came out of it.”

The Lab’s designers found the constant round of creating LEGO play concepts that management ultimately rejected to be “very disenchanting and very demotivating,” as Hjuler later put it. By 2005, he and the rest of the company’s senior management team set about giving the Lab the structure and direction it needed to succeed.

The biggest challenge resided in pushing the team to imagine new LEGO play experiences, while ensuring it didn’t lose its way among all the possibilities. Recalling the days when the Lab lacked sufficient guidance from senior management, Holm likened the experience to “standing outside on a clear night, looking up at the Milky Way. There are so many stars it’s just overwhelming. So you frame just one particular area—say, just the stars around Mars. By shutting out the gazillions of other stars, you start to get some focus.”

Such “framing,” or direction setting, began when Knudstorp wrote the Concept Lab into the “Shared Vision” document, the three-stage strategy for the LEGO Group’s turnaround. By designating the Concept Lab as a primary driver of the company’s organic-growth phase, Knudstorp signaled that the Lab would look further into the future than any other product development group. That is, it would solely focus on developing beyond-the-next-generation LEGO toys. And by assigning the Lab a sales target of 10 percent of the company’s revenue, Knudstorp ensured that even as the Lab’s designers and marketers were developing a new LEGO play experience, they were building a business case for it. Whatever concept they conceived, it had to be big enough to make a dent in the market.

Then there was the matter of coming up with language that precisely communicated the kind of toy that would take LEGO into the future. The LEGO Group’s leaders wanted a radically new play experience, but it could not be unmoored from the quintessential LEGO core. After many long conversations, the group came up with a one-sentence brief that captured the salubrious tension between classic LEGO and new LEGO. The Concept Lab, according to the brief, would conceive and develop toys that were “obviously LEGO, but never seen before.”

No one can recall who authored that line, but it didn’t matter. “Obviously LEGO” conveyed the notions that the new line must be rooted in the physical brick, must seamlessly click into the LEGO system, and must engage the core customer demographic of five- to nine-year-old boys. Within those boundaries, the Lab’s designers were free to imagine and explore “never seen before” LEGO concepts. Though the direction-setting details had yet to emerge, the brief gave the Lab’s designers enough room to roam while providing enough of a signpost to at least begin to help them find their way.

“The brief directed us to focus on the same consumers, the same platforms, the same markets,” said Østergaard. “All things being equal, whatever we came up with had to have a new play dimension. We didn’t know what it was, but we knew it had to be out there.”

The Hunt for a Blue Ocean

Although “obviously LEGO, but never seen before” cleared a pathway into the future, the Lab’s designers found that starting the journey was a struggle. Holm, in particular, was humbled by the project’s vast scope. The team felt it couldn’t simply build on what LEGO had done before. So, then, how should it begin?

Holm was wrestling with that question when he heard a lecture by Mikkel Rasmussen, a partner at a Copenhagen-based consultancy called ReD Associates, on using anthropological research methodology to deeply explore consumers’ lives and in turn use those insights to fuel innovation. (In 2005, this was still a relatively new concept in Denmark.) Rasmussen put up a slide that made a memorable impression on the Concept Lab’s leaders: “If you want to know how a lion hunts, don’t go to a zoo. Go to the jungle.”

Soon thereafter, Holm and Østergaard enlisted ReD Associates to launch an ambitious project called Find the Fun. As the title suggested, the project’s aim was to take a deep look at twenty-first-century childhood and reveal the needs and desires that LEGO wasn’t fulfilling. Working with ReD’s ethnographers, the Concept Lab’s designers logged lengthy in-home visits with families in the United Kingdom, the United States, and Germany, where they took extensive notes on the real-world dynamics of LEGO play. A designer and an ethnographer would arrive at a home early in the morning and watch as the family scrambled to get ready for the day. When the kids were off at school, the team would interview one or both parents. At day’s end, the team would play with the kids or simply step back and observe. Although the Bionicle team had used desk research and detailed consumer profiles to help create a whole new world of LEGO stories and characters, never before had LEGO designers stepped so directly into the lives of the company’s consumers.

The experience was both eye-opening and somewhat unsettling. For Østergaard, one of the more memorable visits was to a family living in a suburb outside London. The older brother, who was nine, was “totally into LEGO,” Østergaard remembered. And the younger sibling, who was six, totally wasn’t. Feeling left out, he did his best to upend his big brother’s LEGO playtime.

“The younger kid was a bit of a pain in the ass—there was all this tension,” said Østergaard. “That’s something you just don’t see in a traditional focus group setting. Coming from Denmark, where LEGO is such a big part of your upbringing, we never would have thought of LEGO in that context, where the kids end up fighting.”

As they worked through their notes and reflected on their in-home observations, the Lab’s designers realized their approach to creating new products had fallen into a deeply grooved pattern of thinking. They thought of LEGO largely as a solitary play experience, epitomized, in that London suburb, by the older brother’s struggle to immerse himself in bricks. They rarely considered a social dimension to LEGO. How could they create something that drew in the younger brother, so that both boys could participate in LEGO play?

The Lab’s ethnographic team also spied an omnipresent hierarchy in kids’ lives. Whatever the activity—basketball, math, LEGO bricks—kids were acutely aware of how they compared to their peers. The ethnographers would ask a nine-year-old what he was good at, and he’d unabashedly tell them he was the third-fastest runner in his class but one of the worst at drawing. Because hierarchy is built on competition, where for every winner there’s a loser, LEGO viewed it in a negative light. But for children, self-ranking was a natural, instinctive part of their day-to-day lives. And that surfaced another opportunistic question: how could the Concept Lab leverage hierarchy and competition in more of what it did, whether it was developing or marketing a product?

The team also observed a third characteristic, the notion of mastery, which seemed to yoke the social and competitive aspects of kids’ lives. Whether it was flipping skateboarding tricks or obsessing over the design and history of warplanes, kids demonstrated an innate desire to dig into a discipline and conquer it. As they built their skills, they’d show off the results to their peers, so they could win status and move up the hierarchy that all kids share. The greater their mastery, the more social capital they accrued.

Social play, hierarchy, competition, mastery: those characteristics of kids’ lives—or, to put it in LEGO terms, those “unmet consumer needs”—became the cornerstones upon which the Lab began to build out whole new suites of LEGO play concepts. By discarding the “LEGO knows best” aloofness that once characterized the company, and instead humbly learning from kids and their parents, the Lab’s designers and marketers revealed growth opportunities that had been ignored for too long.

Navigating the Course

To help the Concept Lab ensure that its designers’ efforts aligned with the studio’s brief, Hjuler and Holm enlisted a stakeholder group, consisting of senior executives, to review, evaluate, and make go/no-go decisions on the Lab’s projects and proposals. Realizing that the Lab’s concepts were less likely to grow into hit products without the fertilizer of top management’s attention, the pair recruited the heads of every LEGO product development unit to sit on the review panel. Thus the group benefited from the mix of different executives’ skill sets and expertise.

“We had to train them, and they had to train us, in finding a language to talk about concepts,” said Holm. “We had to make concepts tangible, and we had to create a way to discuss multiple opportunities and directions. So it came very naturally to say, ‘Let’s design a process.’ ”

That effort began when the Lab decided that it wouldn’t rely on calendar-driven reviews, a prime feature of the core LEGO Development Process. Instead of using a predetermined timetable to drive a product from concept to reality, the concept itself would determine the launch date. If a promising idea took longer to develop than the twelve to eighteen months that were standard for every other LEGO product, so be it. Freed from the clock, a promising project would bubble along until it proved it was real—that is, it could deliver a unique LEGO play experience and merit a high enough price to yield a good margin. Only in the later stages of a concept’s development, after all the important assumptions had been tested and the key uncertainties resolved, would a project win a launch date. At that point, the calendar would take over and the product would be readied for its rollout, just like every other LEGO set.

The Concept Lab also overhauled the review sessions’ format. In years past, when pitching their ideas to senior management, designers put in long hours perfecting elaborate prototypes. (Recall, for example, the extravagant volcano that Søren Holm and his designers mocked up for Voodoo Heads, the concept that later became Bionicle.) Problem was, those big productions required excessive prettifying and gilding, which bit into the designers’ time and resources without adding much value.

The Lab’s designers tossed the prototype approach and instead opted for poster boards, which featured a rough sketch of the concept, accompanied by a headline that summed up the play experience and a brief description of the market opportunity. This stripped-down approach allowed the designers to put far more time and effort into conceiving, rather than presenting, promising ideas. And by utilizing posters, designers introduced their ideas in a standardized form, which made it far easier for stakeholders to compare and review twenty-five or thirty projects during an eight-hour meeting. (Insert photo 21 shows the original poster board used to pitch LEGO Games.)

In assessing each proposal, the stakeholder group would always put a fundamental question to the design team: how is the play experience relevant to a five- to nine-year-old boy? The question aimed to determine whether the concept sufficiently appealed to that “obviously LEGO” core consumer. The group would also weigh whether the concept captured one or more of the consumer attributes—sociability, competition, hierarchy, or mastery—revealed by the Find the Fun research. If, for example, the concept appealed to kids’ competitive instincts, it stood a better chance of delivering a new LEGO play experience.

Often the review team also invoked the “100-minute rule.” They’d guesstimate the amount of excitement the proposed toy might ignite during the first minute of play, how it would engage kids through the tenth minute, and whether it would keep them coming back after one hundred minutes. Even though the concept had to reveal a “never seen before” LEGO experience, it still had to adhere to the core LEGO value of delivering unlimited play potential.

If an idea got the go-ahead and moved beyond the poster board stage, designers might build a model of the concept, so as to evolve their thinking. But even then, they put only a minimal amount of time into the effort. More often than not, the models were raw assemblages of LEGO bricks, wires, and cardboard—rough, ready, and not at all elegant. The goal wasn’t to finesse a close approximation of the finished product, but rather to create a tactile experience for stakeholders and thereby tap into their intuitive sense of whether the designers were headed in the right direction.

As the review process unfolded, it formed a kind of loop: generate lots of ideas, get feedback, and keep refining until the concept was shelved or combined with another idea for further exploration. The stakeholder group never killed an idea outright. If a proposal was too abstract or pushed the brand in the wrong direction, the Lab would instead consign the concept to its file of “101 Lost Opportunities”—promising concepts that had proved problematic and were never launched but might someday spark a glimmer of an idea for a breakthrough product.

“We have a fantastic library with all these binders, and in each binder there’s 101 opportunities that never became anything,” said Holm. “Even if the idea doesn’t work, there are still some worthwhile nuggets in there. So we’ll park it, and someday the idea might reappear in some strange new form.”

Testing the Waters

Among the thousands of proposals that had been relegated to the Lost Opportunities library, there were several concepts for board games that had been proposed in years past but never developed. LEGO designers had tried on different occasions to develop board game themes, most recently in 2004. But they never found a way to turn the concepts into viable products. Instead, LEGO licensed a line of games, which were manufactured and distributed by an arts and crafts company called Rose Art, best known for its crayons. In 2005, one of the LEGO Group’s foremost rivals, Mega Bloks, acquired Rose Art. Given the LEGO Group’s poor track record in developing board games and its uninspiring history of licensing them, no one among the company’s executives was enamored with the concept at the time Cephas Howard joined the Lab in the spring of 2006.

Although Howard had wowed Holm and Østergaard when he met them in London, he wasn’t permitted to work on games when he joined the company. “The first month that Cephas was at LEGO, he was pushing games and I thought, ‘Yeah, come on,’ ” recalled Holm. “We’ve been there before. Let’s give it a rest and try something else, which we then did.”

Howard was dispatched to develop concepts that would add a social dimension to LEGO play. Over the next few months, he and his colleagues generated dozens of ideas. Most, such as a platform for buildable outdoor toys—think of LEGO water guns—were soon shelved. Other ideas felt too familiar to qualify as “never seen before” but were deemed promising enough to migrate from the Lab to the Product and Market Development (PMD) unit, where core LEGO themes are brought to life. One such concept to come out of the Lab was Inner Earth, a germ of an idea that PMD’s designers grew into Power Miners, a popular theme that hit the market in 2009.

Despite being waved off games, Howard persisted. Working nights and weekends, he investigated countless different game mechanisms that could be built out of LEGO bricks. The first challenge was to come up with an iconic element that announced, This is a board game. He quickly homed in on developing LEGO dice. His logic: when a boy pours a pile of bricks onto a table, if there is a die in the mix, he instantly knows it’s a game. To make the die “obviously LEGO,” it had to be buildable. And so he set about piecing together the first die prototype out of existing LEGO components. He then used LEGO bricks to build something that looked like a chessboard, which further served to signal “obviously board game.”

Upon seeing Howard’s creation, Holm was underwhelmed. Like all of his early-stage prototypes, Howard’s model was remarkably unadorned. When first designing a game, he was solely interested in testing the game’s inner logic. Only later in the design process would he build in enticing details and dress the game up with stories that create a sense of narrative play for children. “The model Cephas created was so naive, just a plate with standard bricks,” said Holm. “I couldn’t see the idea, and that held me back. I was looking for something with a lot more oomph.”

Despite the rejection, Howard was undeterred, and he kept experimenting. Later, at a Concept Lab off-site in the Bavarian Alps, he unveiled another prototype. This time he’d added a castle theme, where players rolled a die to travel a challenging course and complete a mission. The game was quintessentially LEGO: buildable, changeable, and rebuildable. Players first had to construct the game, which created a greater sense of immersion and ownership. The game itself delivered a social (and often competitive) play experience, where kids could have fun with their friends and families—a marked departure from the far more typical solo style of LEGO play. And the game’s “instructions” actively encouraged players to rearrange the board and reinvent the rules—“to not just play the game,” as one reviewer later put it, “but to play with the game.” As Holm recalled, he and the other designers gave it a try and were “completely, utterly sold.”

Not long thereafter, Howard presented the concept to the Lab’s stakeholder team. The company’s senior managers were likewise taken with the idea. They believed Howard’s board game might let LEGO tap into a potent but elusive demographic: moms. Although fathers and sons are the biggest consumers of classic LEGO kits, mothers are the prime purchasers of board games, precisely because games are a magnet for family play. If LEGO could launch a winning line of buildable, eminently playable board games, it just might lure many, many more moms into its fold.

With that, Cephas Howard got the go-ahead to spend all of his time concocting game concepts. As they walked out of the meeting, Holm took him aside. “Søren reminded me that LEGO had already tried a number of times to develop games and they always shut it down,” said Howard. “He was basically saying, ‘You have this one opportunity. If you don’t nail it, you probably won’t ever get to work on it again.’ ”

Inventing a Value-Creating Product

Over the next three years, Howard and five other designers worked out of a bunkerlike, belowground studio at LEGO headquarters. Because LEGO deemed it a completely covert operation, he and the other designers were required to sign nondisclosure agreements promising they wouldn’t tell another living soul about the project. Howard couldn’t even broach the project with his wife, who had also taken a job at LEGO. In an interview with the London Telegraph, Howard was quoted as saying, “I think she wondered if my LEGO story was a front and I was actually working for the CIA.”25

Østergaard was convinced the security was necessary. He and other executives feared that if competitors learned of the company’s plan to launch a buildable board game, they’d quickly knock out a copycat, inferior product that would turn kids off and pollute the market for LEGO. “We actually managed to take the line to market without the competition knowing about it,” said Østergaard. “It became a new way of developing at LEGO.”

Howard and the other designers came up with hundreds of ideas for board games, more than thirty of which were developed into prototypes. The variety of concepts was nearly limitless: games for younger kids, games that would also appeal to grown-ups, on-the-go games, party-gift games, themed games such as pirates and ancient Egypt, and much, much more. From the outset, the concepts were play-tested on a weekly basis with groups of kids from Denmark, Germany, the United Kingdom, and the United States. The concepts were then refined and retested, whereupon some were rejected and those that made it to the next round were refined and retested some more.

Howard’s early-stage prototypes were rough and largely unfinished, usually just a die, a simple board, and a bag full of standard bricks. The big goal, in the first phase of a concept’s development, was to test the core idea. Only if the focus group gravitated to the play concept would the designers then begin to evolve the game’s theme and write the rule set. Every test group featured a fresh round of kids, so each child encountered a LEGO board game for the very first time.

One of the bigger challenges, for the twenty- and thirtysomething LEGO designers, was to create games that appealed to nine-year-olds rather than themselves. That accounted for the weekly rounds of play testing. The focus groups helped designers see the game through kids’ eyes; the kids’ unadorned feedback often revealed flaws that the designers had failed to anticipate.

“There was a lot of codevelopment with the kids,” said Howard. “They couldn’t tell you how to design the game or even how to redesign it. But they could very much tell you what works and what doesn’t, just in the way they played. And that was a massive tool for evolving our thinking and improving the games.”

Play testing in Germany soon surfaced a common flaw in many of the prototypes: the rule sets, as Østergaard put it, “sucked.” When it came to LEGO, kids expected a premium experience, never mind that they were playing with prototypes. “The rules weren’t living up to those expectations, and the kids just hammered us. It was like, ‘Guys, you really need to step up here.’ ”

The kids’ unvarnished critiques pushed LEGO to seek out a select, external group of expert advisors—including Reiner Knizia, widely regarded as one of the world’s foremost game developers—to help transform Howard’s inventions into hit products. Howard and his team first sought Knizia’s help in improving the rules and infusing his philosophy of game play: “the goal is to win, but it’s the goal that’s important, not the winning.” Knizia also worked on developing the line’s flagship titles, Ramses Pyramid (at the time, the only LEGO board game to feature a designer’s name on the box) and Lunar Command, and he served as a consultant to the entire project. (Ramses Pyramid is shown in insert photo 23.)

Before fully committing to commercializing board games, LEGO decided to take one more run at trying to capture a promising new play opportunity. The company enlisted Advance, the Copenhagen-based consultancy that had helped develop Bionicle, as well as three other design agencies. The four external firms were given the same brief—create an “obviously LEGO, but never seen before” play experience—as had been given to the Concept Lab. None of the firms had a clue as to what the others were working on. Yet three months later, all four returned to Billund and revealed their proposals, each of which included some variation on a board game. The proposals differed significantly from Howard’s concepts. Taken together, however, they powerfully validated the notion that games might well amount to a robust, wide-open market opportunity for LEGO. “Our initial take,” said Østergaard, “was that maybe this combination of LEGO plus games was really right.”

As the project gathered momentum, Howard enlisted a wider circle of LEGO designers and engineers to develop and perfect the line’s two most prominent, “never seen before” innovations, the die and a tiny LEGO man called a “microfig.” Designed to fit a single LEGO stud when placed on a game board, the microfig is an armless character that has the same knobby feet, stud-topped head, and facial expressiveness as its bigger sibling, the minifig. Because of the component’s prominence, its design went through eight major iterations before the final production microfig was fully born.

“We did rounds and rounds of challenge sketches,” said Howard. “And then when we thought we had it right, we found the decoration machine needed the figure to have slightly bigger feet. We had to battle with the engineers over tenths of millimeters to end up at a place where the feet were big enough for the machine to grab on to but still small enough to retain the figure’s proportions. It was fine-tune, fine-tune, fine-tune.”

Developing the die required even more time and effort. Howard first tried building it out of existing LEGO components. But the clunky creation lacked sufficient weight to roll well and too often landed on its edge. So he tried again. He and his team huddled around a computer and used 3-D modeling techniques to create the new LEGO element’s essential design: a die with an ABS plastic core and four LEGO studs protruding from each of its six sides, which are encased in soft rubber around the edges. The studs let players snap on decorated LEGO tiles that differ from game to game; the rubber casing abets the die’s roll. It took just a single day to concoct the first prototype, but sixteen months to perfect it. The die (see insert photo 22) would go on to become an icon. The one physical element common to all LEGO Games, its image would be emblazoned across all of the line’s packaging.

Claiming an Uncontested Market

While Howard and his design team engaged in the “create” phase of the board games project, Østergaard and a handful of marketers worked on the two other phases, “collect” and “commercialize.” Because LEGO was unfamiliar with the board games market, Østergaard embarked on a deep, almost ethnographic exploration of the category. Just as the Concept Lab’s designers had embedded themselves in families so as to generate ideas, the marketers took a long dive into retail stores and regional markets so as to collect the knowledge and insights that would help them reveal growth opportunities. They recruited the former president of Toys “R” Us, John Barbour, to help them navigate the board games category. And they put in long hours at different toy stores in and around Enfield, Connecticut (where the company’s North American headquarters is located), to get a read on the business dimensions of board games: logistics, margins, promotions, and the mix of board game offerings.

They learned that the board games business is heavily back-loaded toward Christmas, by far the category’s biggest selling season. Products that remain on the shelves after the holidays are heavily promoted and rebated. They saw how companies exploit popular evergreen products through “skinning,” where a Hasbro will spin off dozens of versions of Monopoly and even skin the game for local markets, such as its Yankees Collector’s Edition Monopoly for the New York tristate area. They found that the market varied wildly in terms of quality and profitability. And then there was the most encouraging discovery: the board game market was ripe for innovation.

“It’s a huge category, but also a pretty dull category,” said Østergaard. “They do things just as they’d done them for the past twenty years. Any newness is just in the reskinning of these evergreens. When something original does come along, like a Cranium, Hasbro would eventually buy it.”

They also discovered that board games reached a wallet that differed from the one that LEGO traditionally dipped into. Mothers make the majority of all toy purchase decisions, and mothers regard the purchase of a game and a LEGO toy as two separate “occasions” drawing from two separate “wallets.” In other words, if a boy and his mother go into a store with two LEGO toys on the boy’s shopping list, he’s less likely to get both items than if he has a LEGO toy and a game on his list. Children, exquisitely tuned to such nuances, figure this out quickly.

As the project entered the commercialize phase, where LEGO prepared to take Games to market, the team continued to test and refine. They set up a small assembly line, far from the LEGO factory, to test packaging and packing prototypes. “It was still extremely secret, so everything was done after hours,” said Østergaard. “We did an awful lot of prototyping in all directions—an extremely laborious process.”

A milestone test came when Howard gave a couple of board game prototypes to Knudstorp and Hjuler, who took them home to their families for a weekend of play. Hjuler had just bought his two young children the latest PlayStation game for kids. To his astonishment, they spent far more of their time playing with the board games. The games likewise bewitched Knudstorp’s children.

“It’s one thing to do a presentation to top management,” said Howard. “But it’s an entirely different thing when they actually experience the game with their own kids. Suddenly they’re really invested in the project. That got us a lot of traction fast.”

Once the development team could demonstrate, through its nearly endless rounds of play testing, that LEGO Games stood a good chance of landing near the top of kids’ wish lists for toys, management gave the go-ahead to launch. So it was that LEGO, in its initial August 2009 release, decided to come out with not one but ten different board games. It was all part of a bid to swiftly stake out an entirely new market, and it had the desired effect. Soon thereafter, LEGO Games was rapidly ascending the year’s list of the hottest Christmas toys. Largely through the efforts of one driven games designer and a handful of wingmen, the company had an “obviously LEGO, but never seen before” hit on its hands.

On the surface, LEGO Games and that other ambitious creation—LEGO Universe—shared several similarities. Both were rooted in the LEGO DNA of the brick and the System of Play. Both sought to deliver new types of LEGO play experiences. Both aimed to drive the company’s organic growth and further burnish the LEGO brand. The difference was that with Universe, LEGO attempted to disrupt its core brick business by creating a platform for digital play. With Games, LEGO sought out an untapped, blue-ocean market by creating the world’s first buildable and rebuildable board game—a game that nevertheless adhered to the core LEGO brick platform.

But what’s truly striking are the disparities between the two teams’ approaches to innovation. While the Universe project marshaled roughly 350 managers and associates from every part of the LEGO organization, Games took in just six Concept Lab designers led by Cephas Howard, plus a review panel of roughly a dozen LEGO executives. While inventing Universe meant that more than two thousand LEGO elements had to be rendered in digital form, 95 percent of the pieces in LEGO Games already existed. And while LEGO opened up Universe’s development to a crowd of nearly one hundred skilled fans, the development of Games was enveloped in secrecy, with the project’s professional LEGO designers working out of a tightly secured office in a building that stood separate from the offices that housed the company’s other Billund-based development teams. In fact, even though the Colorado-based Universe team was five thousand miles away from the LEGO mother ship, the covert Concept Lab was far more distant.

The foremost difference between Games and Universe resided in their performance. Universe burned through $30 million in development costs and was shut down fifteen months after its launch, generating a huge loss for the company. LEGO Games, which was launched in the United Kingdom and Germany in 2009 and globally in 2010, was an instant hit. LEGO hoped Games would take 10 percent, on average, of children’s board game markets throughout the world. It far exceeded those expectations by grabbing anywhere from 13 to 45 percent of the regional markets in which it competed. In 2009, Games “generated significantly higher sales than expected,” according to Knudstorp, and helped power LEGO to a 56 percent increase in pretax profit and a 63 percent profit jump in 2010. Games not only earned back its own development cost, it helped cover some of the loss from LEGO Universe.

With Games, LEGO invented a value-creating product line and thereby discovered an uncontested market. And yet, despite its blue-ocean success with Games, LEGO never forgot that for the most part it remained a red-ocean company. Even by 2009, most of the company’s revenue still came from such perennial bestsellers as City and Star Wars. Beginning with the turnaround effort of 2004, LEGO rediscovered and redeployed its core assets of the brick, the building system, and its globe-spanning tribes of fans, all of which helped LEGO grow into the third-largest shark in the toy industry. And with such core capabilities as its tight relationships with retailers, its direct dialogue with fans, and its varied approach to reimagining profitable product lines, LEGO tore away market share from the industry’s whales, Mattel and Hasbro, more than tripling its share of the market between 2004 and 2011.*

LEGO also understood a fundamental principle of blue-ocean strategy: no unsullied market space remains uncontested for long. The more quickly a break-the-mold product grows, the sooner it fulfills the promise of its original business model and loses its novelty. The result is that a dynamically different product such as LEGO Games eventually becomes less of an innovation and more of a commodity. In fact, in 2011 and 2012, sales of Games cooled—as is so often the case in the toy business—and then declined.

Nevertheless, commodities can still be profitable. So it was that soon after the launch of LEGO Games, the Concept Lab “loaned” Cephas Howard to the Product and Market Development group, which takes on the company’s primary development efforts. He then created versions of Games that were based on successful LEGO themes such as City, Harry Potter, and Pirates. With that, LEGO signaled that what was initially blue ocean for them would now be managed as part of a larger, red-ocean market. But by melding board games with the LEGO building experience, the company had carved out a place for itself in yet another big profitable market.

* While LEGO does not report its global market share regularly, market analysts at the NPD Group measure its U.S. market share, which rose from 1.9 percent in 2004 to 6.2 percent in 2011. The company’s global market share, when it reports it, tends to be about a point higher than its U.S. market share.