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 11. Transforming LEGO
The Rebirth of a Brand
To make the LEGO brand vital again, you first need to transform the whole business system.
—Jørgen Vig Knudstorp, CEO, the LEGO Group
LOOKING BACK AT THE LEGO OF THE LATE 1990S AND early 2000s, one can’t help but wonder whether it possessed the same genetic mutation as the winner of the 1995 Darwin Award, which annually commemorates those who, by killing themselves in spectacularly stupid ways, unintentionally demonstrate Charles Darwin’s theory of natural selection. That is, they enrich the human gene pool by removing themselves from it. Though later proved an urban legend, the story is irresistible: An amateur inventor attached a solid-fuel rocket engine to a Chevy Impala, motored out into the Arizona desert, and hit the accelerator. The vehicle surged to more than 250 miles per hour and achieved liftoff, hurtling nearly a mile through the air before smashing into a cliff. All that remained from the misadventure was a smoldering crater in a rock face some 125 feet above the ground.
Like that driver turned pilot, the late 1990s LEGO strapped on overamped engines of innovation and aimed for the stars, boldly declaring that in five years it would be the world’s biggest brand among families with children. Disaster soon followed. Although it broke the sound barrier with LEGO Star Wars and Harry Potter, the company lost control of its dizzying array of innovation efforts and quickly found itself hurtling toward a crash.
When Jørgen Vig Knudstorp and his management team stepped into the corporate cockpit and attempted to pull LEGO out of its tailspin, they didn’t overreact. They realized that while they had to continue to boost innovation at LEGO, they also had to turn their unguided missile of a company into a high-flying, on-target aircraft. That effort took seven years and played out in five stages.
LEGO 1.0. Throughout 2004, Knudstorp and his copilot, CFO Jesper Ovesen, engaged in a first-stage fight for survival, where the pair forced the out-of-control rocket that was LEGO into a white-knuckle emergency landing. They did so by focusing the company on three must-win battles: First, strip complexity out of the business by taking such cost-reducing steps as halving the number of components in the company’s product portfolio, as well as the time it took to develop an idea and bring it to market. Second, restore competitiveness by making retail customers (rather than kids) their primary concern—boosting retailers’ profits; speeding the rate of inventory turnover. Third, raise cash by selling off assets such as the LEGOLAND theme parks and carving costs throughout the organization.
Ovesen convinced Knudstorp that deciding what not to do was just as important as deciding what to do. By getting LEGO to zero in on just those three challenges and nothing else, they bought enough time to attempt a turnaround.
LEGO 2.0. There then came the second iteration, where the company’s leaders did the metaphorical equivalent of jettisoning the rocket’s thrusters and building a dependable, drivable workhorse of an engine. That is, they set a clear direction by taking LEGO “back to the brick.” That meant focusing on core assets (the brick and the LEGO system), core products (such as LEGO City and DUPLO), and core customers (kids ages five to nine). If it wasn’t core, it wasn’t critical.
Knudstorp and his team further simplified managers’ efforts by identifying the one metric that mattered most: the 13½ percent return-on-sales target. From a direction-setting standpoint, metrics are actionable and unambiguous. The 13½ percent ROS benchmark, prominently tracked on whiteboards in the corporate “war room” and reviewed in weekly meetings, pushed everyone to concentrate their efforts on just those product lines that promised profits—and to quickly kick over any line that was struggling. Thus, management dumped resource-draining lines such as LEGO Explore and Jack Stone and revived classic moneymakers such as DUPLO and LEGO City. By the end of 2005, LEGO could report that it had rebounded from a DKK 1.6 billion ($292 million) loss the previous year to a pretax profit of DKK 702 million ($117 million) and a 12 percent jump in sales.
LEGO 3.0. Having built a powerful yet controllable engine, Knudstorp and his team set about strapping wings and a tail on their revamped rocket and installing a navigational system that would shepherd its flight.
Managers clarified the company’s direction by drafting a matrix that defined the different degrees of innovation, from incremental to radical. They then used the matrix to map which innovations they’d pursue with each product line. Management also overhauled the LEGO Development Process by instituting quarterly stage-gate reviews, where executives conducted in-depth checkups with the product development teams. By editing out those projects that duplicated other efforts or failed to deliver a distinctive play experience, executives concentrated the company’s collective mind on launching only the most promising concepts.
And then there were those first steps toward opening up the development process to the LEGO community. By inviting the most inventive AFOLs to test and even codevelop lines such as Mindstorms NXT, LEGO gleaned insights it otherwise might never have been exposed to. With a clearly defined flight path and a navigation system informed by stakeholders as well as insiders, LEGO put itself on a track toward profitable growth. In 2008, despite a slowdown in the wider toy industry, the LEGO Group’s sales rose 19 percent over the previous year and its profit jumped 32 percent.
LEGO 4.0. Once it achieved liftoff, the streamlined LEGO rocket swiftly began to gain altitude. And so LEGO pivoted from innovations that restored a profitable core business platform to innovations that aimed to fuel organic growth. That meant managing the trade-offs between expanding the product portfolio and continuing to drive profits, between delivering higher margins for customers and lowering costs, and between pursuing short-term performance goals while sowing the seed for long-term success. As Knudstorp put it in an April 2008 email to the company’s corporate management, achieving those trade-offs would increasingly require a “bifocal perspective.”
On one hand, LEGO increasingly took on riskier challenges. It refocused the Concept Lab on creating “never seen before” play experiences, which led to LEGO Games. The company also endured some very rough turbulence with the failure of the highly ambitious LEGO Universe. At the same time, LEGO maintained its dual focus by reimagining classic product lines such as LEGO City and LEGO Star Wars, which continued to dominate the company’s top-ten list of best-selling kits.
More often than not, the company achieved a blend of “obviously LEGO” and “never seen before,” which made for a remarkably revitalized brand. In 2009, the New York-based firm BMO Capital Markets declared LEGO “the hottest toy company.” In a March 2010 email to senior managers, Knudstorp reported that after years of comparing LEGO to direct competitors such as Mega Brands (formerly Mega Bloks), Mattel, and Hasbro, the company’s auditor, PwC, had begun to benchmark the brick maker against such world-class brands as Apple and Nike. While Mattel’s and Hasbro’s sales between 2007 and 2011 grew at an annual rate of 1 percent and 3 percent, respectively, the LEGO Group’s sales surged at a rate of 24 percent per year. In 2012, LEGO reported a 27 percent increase in sales and a 36 percent increase in profits over the previous year, for a five-year average annual sales growth of 24 percent and annual profit growth of 40 percent. It’s far from certain that LEGO can maintain that pace, but neither is it inconceivable that the company might someday become the toy industry’s sales leader. Whatever happens, the LEGO brand, which was imperiled a decade ago, is closer than ever to realizing Plougmann and Kristiansen’s dream.
LEGO 5.0. Since 2011, the metaphorical LEGO rocket has morphed into a high-flying mother ship surrounded by a growing fleet of small, experimental space probes. There’s industry leader LEGO, a blockbuster machine. The majority of its revenue still comes from refining classic LEGO lines such as City and Star Wars, licensing more recent megahits such as Lord of the Rings, and inventing Big Bang themes such as LEGO Friends, the company’s latest bid to compete in the voluminous market for toys that appeal to girls. Launched in early 2012, Friends was backed by years of ethnographic market research and a $40 million marketing campaign. That year, the company went on to sell twice as much of the Friends line as it originally forecast. When it wants to, LEGO can flex its brand and throw billions of bricks at an opportunity.
At the same time, there’s the part of LEGO that has distanced itself from the mainstream and innovates from the fringe, conceiving and launching newfangled ideas quickly, systematically, and sometimes idiosyncratically. Through its cocreation effort with Adam Reed Tucker, LEGO continued to expand its Architecture line of minimalist models of iconic buildings. There was also the iPhone game Life of George, a clever mash-up of digital and physical LEGO play.
And then there was Cuusoo, another of the company’s further adventures in geek-sourcing ideas. Launched in Japan in 2008 and globally in October 2011, LEGO Cuusoo invited users to submit—and vote for—DIY ideas for new LEGO sets. If a design won ten thousand votes, LEGO reviewed it for possible production; if the design was developed and launched, its creators got a 1 percent cut of the product’s total net sales. In 2011, a Cuusoo concept for a LEGO set based on Minecraft—the online game that may disrupt the LEGO Group’s brick business—racked up the requisite ten thousand votes in just forty-eight hours, an outpouring of support that compelled LEGO to announce that it would produce the set. Six months later (one-third of the company’s average development time), LEGO Minecraft Micro World hit the market. With Cuusoo, LEGO moved from tapping the wisdom of a few elite cliques to sourcing the talents of massive crowds.
To be sure, some of those little LEGO start-ups might be wrong-headed. Some will never pay off. But that’s no excuse not to experiment. Though some will probably fail, none is anywhere near large enough to sink the company.
The LEGO Group’s leaders believe that to discover the next big growth opportunity, the company must adhere to a fundamental truth about innovation: the more experiments you launch, the more likely it is that one will strike gold. Today, LEGO continues to profit almost entirely from its core portfolio of brick-based toys. Tomorrow, the “core” might well be something that LEGO has not yet imagined. Experiments such as LEGO Architecture and Cuusoo are search strategies whose ultimate aim is to help LEGO discover unexploited markets.
The Seven Truths of Innovation and a Company That Clicks
In the late 1990s and early 2000s, Poul Plougmann and Kjeld Kirk Kristiansen defined success in terms of revitalizing the LEGO brand, declaring that by 2005, “our goal is for LEGO to become the world’s strongest brand among families with children.” That was an impossible dream even for a beloved brand such as LEGO, given that the company was in the midst of destroying economic value at the rate of almost half a million dollars per day.
For Knudstorp, the brand could never be elevated without first building a strong foundation for organic growth: that is, a financially sound balance sheet, a manageable level of debt, a defensible core business, and profitable product lines. Only then would people begin to believe that LEGO really is a rejuvenated, exciting brand. And that took time. “It starts with a financial turnaround, then it’s a business transformation, and then you get brand revitalization,” he explained. “To make the LEGO brand vital again, you first need to transform the whole business system.”
The most difficult challenge in business is not to invent an innovative product; it’s to build an organization that can continually create innovative products. Over an eight-year span, LEGO more than met that goal. The company found its way back to the brick, revived stalwart lines such as LEGO City, and concocted increasingly ambitious creations such as Mindstorms NXT and LEGO Games. Along the way, LEGO learned to control and direct the engines of innovation that once almost doomed the company—the seven truths—and turned them to its advantage.
What are some final lessons that you can take from LEGO and apply to your organization? Consider these three closing takeaways.
No Single Truth Stands Alone
The seven truths of innovation are not competing visions of what it takes to innovate successfully. Although the seven truths are usually presented as stand-alone models of innovation management, LEGO has shown that each can be integrated into a larger whole, and their joint power harnessed to create an innovation system that’s consistently profitable.
But to make that system work requires an exquisite balancing act. Giving your teams enough space to create and direction to deliver means you must leverage the types of control mechanisms—such as extensive concept testing with kids and defining the Design DNA of every development effort—that we’ve seen LEGO utilize since 2005.
Admittedly, striking a healthy tension between freedom and control is no easy feat, as LEGO itself has amply demonstrated. From 1999 until 2002, LEGO boosted its innovation initiatives without counterbalancing those efforts with sufficient discipline and focus. And so the company rolled out a number of badly executed, unprofitable products and almost went bankrupt as a result. Yet with the LEGO Universe effort, LEGO exerted too much control over its attempt at a disruptive innovation and missed an opportunity to create the kind of online multiplayer building experience that Markus Persson exploited with Minecraft.
When LEGO succeeds, as it did with a Big Bang line such as Ninjago, it innovates from the inside out. That is, the development team starts with its core capabilities—its deep expertise in leveraging the brick and the System of Play—and then moves on to experiment with “never seen before” flourishes, such as the Spinjitzu spinners. And it continually tests ideas with kids, to ensure that it’s moving in a profitable direction. However, the team never crosses over into territory that stands outside its charter. Truly revolutionary play experiences are left to the Concept Lab. Experimental efforts, such as Architecture, belong to Paal Smith-Meyer’s new business team.
Whether it’s attempting to launch a blue-ocean effort such as Games or an open innovation such as Mindstorms NXT, LEGO gives its development teams wide latitude to create, so long as they innovate “inside the box.” Given the constraints that every company faces in these economically challenging times, perhaps it is time to reconsider our headlong rush to think “outside the box.” Instead, we might follow the LEGO Group’s example and climb back into it.
Resources for Innovators
For those interested in applying the lessons from LEGO to boost innovation at your company, we’ve assembled a set of resources to help you. They include:
✵ A diagnostic survey. Would you like to compare your company to LEGO and other best-in-class innovators? Fill out the survey and receive a free report with detailed feedback on your innovation management practices. Just click on “Take the Survey” at www.robertsoninnovation.com.
✵ A generic innovation matrix. One of the first direction-setting activities LEGO did was to define its own innovation matrix. The management team created eight categories of innovations that they used to spur creativity, guide teams, and, ultimately, organize all their innovation efforts. A generic matrix can be found at www.robertsoninnovation.com/innovation-matrix.
✵ Innovation tools and techniques. We’ve assembled the best anthropological, creativity, and prototyping tools available into a free iPad app. You can get it from www.robertsoninnovation.com or directly from iTunes at bit.ly/innovationtechniques.
✵ The best books on innovation. Our favorite innovation books can be found at www.robertsoninnovation.com/favorite-innovation-books.
✵ David’s blog. To see updates on our new research on innovation, go to www.robertsoninnovation.com/category/blog.
Sequence and Cadence Matter
Why did Knudstorp and his team succeed in leveraging most of the truths even though Plougmann and his team failed? Knudstorp didn’t start by putting most of his emphasis on the more radical innovation strategies that call for disrupting the incumbents and sailing for blue oceans. And he didn’t try to launch all seven innovation strategies all at once. Instead, he built a foundation for more ambitious innovations by first describing a very clear vision of where he wanted to take the company. He also broke the strangely self-satisfied culture that had brought LEGO to the brink in 2003, and he reconnected people with the fundamental values that had sustained LEGO for decades. At the same time, he reached out to core fans. They confirmed that his instinct to “get back to the brick” was the right course of action.
Having worked to build a culture that delivered profitable innovations and a company that had reoriented itself around its core customers, Knudstorp then looked back to Bionicle, the toy that saved the company. In Bionicle, Knudstorp and his team saw the value-creating potential that came with exploring the full spectrum of innovation. They defined the types of innovation they needed and opened up the company in order to bring complementary innovations to market. They extended the conversations they’d been having with adult fans in the Mindstorms NXT development process to incorporate the wisdom of the clique.
Only then, after exploring the full spectrum of innovation and opening up its development process to outside contributors, did LEGO take on the more out-there strategies of launching a disruptive innovation with Universe and seeking out an untapped market with Games. Universe, of course, was a failure. But LEGO hasn’t given up. Some of the same strategies that work for a blue-ocean effort—adopt a start-up mentality, shield the team from the demands of other business units, realize that “good enough” is sometimes better than perfection—readily suit a disruptive effort. Having learned from its success with the blue-ocean strategy that was Games, LEGO can readily apply those lessons to its next attempt at a disruptive innovation, whatever it might be.
As with any innovation effort, seizing on the truths of innovation requires a certain sequence and cadence. It’s best to start with the core and the customer, and work out from there. And you can’t do too much too fast. It’s highly unlikely that a company will possess the wherewithal to discover a whole new market if it first hasn’t built a core business that knows how, as Knudstorp has put it, “to get stuff done.”
Every Innovation Matters—Even Though They’re Not All the Same
LEGO has demonstrated an impressive ability to recognize what types of innovation are most appropriate for a new product development effort. That’s not an accident. Although break-the-mold innovations such as Mindstorms and LEGO Games garner a lot of attention, the company’s most profitable lines are unsexy stalwarts such as LEGO City. Refreshing an evergreen line such as City won’t generate any headlines, but it significantly plumps up the company’s bottom line. Thus, LEGO puts as much of a premium on “adjusting” (to use its terminology) a classic bestseller as it does on creating a revolutionary line that “redefines” an entire toy category. Moreover, the company understands that those disparate efforts require different resources, strategies, and degrees of executive attention. To get a better sense of where and how it should marshal its assets, recall how LEGO plots its development efforts on the innovation matrix.
As we’ve seen, the matrix is especially useful in revealing the degree of innovativeness that LEGO should bring to a new initiative, depending on the overriding goal. And it prevents LEGO from ignoring the kinds of innovations that matter. Like many companies, LEGO once had a blind spot for innovation. It devoted much of its attention to product innovation, whereas the Bionicle team demonstrated that novel sales channels, a ramped-up development process, and new ways of marketing can also deliver outsize rewards. By mapping its innovation efforts on the matrix, LEGO can spy the white spaces—such as a compelling opportunity to partner with an outside company—it might otherwise have missed.
How many times has an innovation effort foundered at your company, all because the initiative lacked a clear direction and the control mechanisms that could help managers make midflight corrections? For LEGO, the matrix acts as a kind of GPS device, helping to keep most projects pointed toward their respective North Stars.
No matter how or where it’s innovating, LEGO is now driven by the same two desires. The first is to inspire imaginative play and creative expression in as many kids and kids-at-heart as possible, in as many ways as possible.
The second motivation, quite simply, is to outinnovate every company it comes up against. Or to put it another way, it’s to strive to fulfill Ole Kirk Christiansen’s founding value, “only the best.” Odds are LEGO won’t manage to continue its stratospheric growth rate, as every rocket inevitably yields to gravity’s pull. The company might yet find itself in the thrall of outsize ambition as it takes on the heavyweights in its industry, Mattel and Hasbro. And it must continue to fend off a multitude of imitators, even as it strives to keep the brick enticing enough for twenty-first-century kids. Yet whatever the future holds for LEGO, its seven-year-long transformation offers two final messages for potential innovators.
Innovating at LEGO is not unlike building with LEGO. The LEGO brick is arguably capable of delivering anything the human imagination can conceive. In the space of one randomly chosen week (in February 2012), we came across reports that an American engineering student built a fully functional, eerily lifelike prosthetic arm and hand entirely out of LEGO components. There then came word that the brick had made it to the final frontier: a Japanese astronaut built a LEGO version of the International Space Station while living in zero gravity in the orbiting station. And to think that all of this inexhaustible creativity springs out of a precisely calibrated, highly engineered block of ABS plastic.
So it goes with the LEGO Group’s approach to innovation. The company’s wildly diverse array of play experiences, from stalwart classics such as DUPLO for the preschool set to the 5,200-piece, $500 Star Wars Millennium Falcon model, is born out of its highly disciplined, tightly focused system for guiding innovation. LEGO unleashes its associates’ creativity and passion largely because its innovation process is so carefully scripted and clearly bounded. Just as you can build anything you want with LEGO bricks, you can create anything you want within the company, so long as you innovate “inside the brick.”
Our final message includes a cautionary note. Although there’s much to take from the LEGO Group’s resurgence, there’s also much to avoid. We’ve met many executives who want to emulate the company’s success but fail to consider the trauma that forced the turnaround. Our advice to them is always the same: don’t wait for a crisis to spur a drive for deep, systemic change. While hurtling toward bankruptcy, as LEGO did in 2003, focuses the mind, it’s not necessary and it’s certainly not desirable. Continuous innovation must be a product of an organization’s capacity to learn and adapt.
LEGO opened its doors to us largely because its management team wanted to remind its thousands of associates and stakeholders of the dangers of complacency and the pitfalls of a blind adherence to management nostrums. It wanted to ensure that what transpired between 1998 and 2003 “would never happen again.” We hope LEGO realizes that goal. We hope LEGO will continue to thrive, because a world with LEGO in it is a little smarter, a little more creative, and a lot more fun.
1. Portions of this chapter are based on material drawn from the following sources: 50 Years of Play (LEGO Group, 1982); Christian Humberg, 50 Years of the LEGO Brick (HEEL Verlag GmbH, 2008); Jesus Diaz, “LEGO Brick Timeline: 50 Years of Building Frenzy and Curiosities,” Gizmodo, January 28, 2008, http://gizmodo.com/349509/lego-brick-timeline-50-years-of-building-frenzy-and-curiosities; Charles Fishman, “Why Can’t LEGO Click?” Fast Company, August 2001; and Brickfetish.com’s excellent account of the history of LEGO.
2. 50 Years of Play (LEGO Group, 1982).
3. Christian Humberg, 50 Years of the LEGO Brick (HEEL Verlag GmbH, 2008).
4. Gary Hamel with Bill Breen, The Future of Management (Harvard Business School Press, 2007).
5. Brandon Griggs, “10 Great Quotes from Steve Jobs,” CNN.com, October 5, 2012.
6. Except where noted, all quotations are drawn from interviews conducted by the authors.
7. Charles Fishman, “Why Can’t LEGO Click?” Fast Company, August 2001.
8. Sonia Purnell, “Picking Up the Pieces,” Independent, December 20, 2000.
9. Nicholas Negroponte, “Where Do New Ideas Come From?” Wired.com, January 1, 1996.
10. Clayton M. Christensen, The Innovator’s Dilemma: When New Technologies Cause Great Firms to Fail (Harvard Business School Press, 1997). This is the most well known of Christensen’s books, but his ideas about disruptive technologies and disruptive innovation were first laid out in articles before this book, and in later books, particularly The Innovator’s Solution (with Michael Raynor, Harvard Business School Press, 2003)
11. Douglas Coupland, Microserfs: A Novel (HarperCollins, 1995).
12. The term “full spectrum” comes from George S. Day’s Growth Through Innovation.
13. As quoted in Rosie Murray-West, “LEGO Wobbles as Star Wars and Harry Potter Sales Tumble,” Telegraph, December 30, 2003.
14. Rosie Murray-West, “LEGO’s Blueprint for Success: Build Bigger Bricks,” Telegraph, February 3, 2004.
15. Christopher Brown-Humes, “After the Crash: LEGO Picks Up the Pieces,” Financial Times, April 2, 2004.
16. Quoted from “How LEGO Caught the Cluetrain,” presentation by Jake McKee, http://experiencecurve.com/archives/how-lego-caught-the-cluetrain-presentation-by-jake-mckee.
17. Some of the material from this section is drawn from Yun Mi Antorini, Alfred M. Muniz Jr., and Tormod Askildsen, “Collaborating with Customer Communities: Lessons from the LEGO Group,” MIT Sloan Management Review, Spring 2012.
18. Jake McKee, “Behind the Curtains—LEGO Factory AFOL Project Team,” November 16, 2004, www.lugnet.cc/lego/?n=2588.
19. Ira Sager and Peter Burrows with Andy Reinhardt, “Back to the Future at Apple,” BusinessWeek, May 25 1998.
20. Portions of Chapter Seven are based on material that first appeared in the following publications: Patricia B. Seybold, Outside Innovation: How Your Customers Will Co-Design Your Company’s Future (Collins, 2006); Brendan I. Koerner, “Geeks in Toyland,” Wired, February 2006; Quentin Hardy, “Son of LEGO,” Forbes, September 4, 2006.
21. Larissa MacFarquhar, “When Giants Fail,” New Yorker, May 14, 2012, http://archives.newyorker.com/?i=2012-05-14#folio=086.
22. Connor Wack, “Stephen Calender Talks: LEGO Universe,” MMO Fallout, July 24, 2011, http://mmofallout.com/2011/07/24/stephen-calender-talks.
23. Josh Augustine, “A Glimpse into What LEGO Universe Could Have Been,” PC Gamer, January 31, 2012, www.pcgamer.com/2012/01/31/a-glimpse-into-what-lego-universe-couldve-been.
24. Chris Holt, “LEGO Universe,” Macworld, February 19, 2011.
25. Tom Chivers, “LEGO Concept Lab ‘Like Working for CIA,’ ” Telegraph, October 22, 2009.