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 5. Becoming Customer Driven
The Rebirth of LEGO City
Children and drunks are the last honest people left on the face of the Earth. And children will never buy a product that isn’t fun.
—Mads Nipper, executive vice president for markets and products, the LEGO Group
IN EARLY 2004, WHEN THE LEGO GROUP WAS STILL DEEPLY mired in its financial crisis, Mads Nipper got a video conference call from Kristiansen. Recall that Nipper, who was based in Munich, where he oversaw the company’s all-important central Europe markets, was not at all shy about prodding Billund to kill off LEGO Explore and swiftly revive DUPLO. He had directly relayed to Kristiansen himself the frustrations that were welling up from Germany’s largest retailers, who were alarmed by the company’s hot pursuit of distinctly un-LEGO-like play themes such as Galidor and Jack Stone.
Kristiansen might well have been tempted to banish the bearer of such relentlessly negative news. Instead, he offered Nipper a promotion: return to Billund and head up the company’s marketing and product development. Kristiansen and Knudstorp had concluded that LEGO had lost its way in part because it had lost touch with retailers and customers. As Knudstorp later put it, LEGO suffered from a “lack of realism. There was no dialogue with the world outside LEGO, which is one of the most dangerous signs that the corporate culture is not working.” In their view, no other LEGO executive had tighter ties with retailers—or a better capacity to see the world through the eyes of the brick’s core customers—than Mads Nipper.
Having joined LEGO in 1990, Nipper first headed up the company’s trade marketing department for Europe, where he worked closely with retailers to improve in-store marketing and sales. He then went on to make the first case for creating a direct-to-consumer business; as a result, he led the creation of LEGO.com. Soon thereafter, as the chief of the company’s toy business for nine- to sixteen-year-olds, he oversaw a vital core business, LEGO Technic, as well as the launch of two of the company’s greatest successes, Bionicle and the Mindstorms robotics set. From his perch in Munich, he had witnessed firsthand, during the first years of the previous decade, the collapse of LEGO lines targeted for kids ages five to nine, which he called “the rock-solid core of our business since the 1970s.”
Nipper believed that LEGO had to become far more adept at letting customers help the company determine what the market wanted, instead of relying on executives such as Plougmann and Ciccolella to decide what customers should want. As the year unfolded, he and other leaders would go on to unleash an array of initiatives—from engaging directly with customers at fan events to working with representatives from the global network of LEGO user groups to testing concepts with kids—all of which aimed to translate customer insights into growth opportunities.
But all Nipper knew when he took the call from Kristiansen was that he was about to shoulder a weighty responsibility. As the overseer of all of the LEGO Group’s product lines, he would be the point man for resetting the company’s direction. He believed that if the company was to rediscover what was authentically “core,” LEGO had to reengage with its legions of passionate fans. But setting up a process for brainstorming with adult fans and testing toy concepts with kids would take time. Until that happened, Nipper and a handful of other empathetic, customer-centric managers would have to act as surrogate fans and try to divine what twenty-first-century kids really desired from LEGO.
Nipper’s many years of working with retailers, engaging with customers, and overseeing designers and marketers told him that despite all the research showing that children had fallen under the thrall of video games and had far less time for the open-ended play that LEGO stood for, there still remained a great swath of kids who loved to build. The key to attracting those children, he believed, was to revive the classic look and feel of iconic LEGO and yet still find a way to make the toys contemporary and, above all, fun.
Nipper was convinced that the path to those core LEGO customers led out of the confines of Billund. Having worked and lived in Germany, the company’s most enthusiastic and loyal market, he saw how isolated the company had become and how much its developers and marketers could learn by forging a deeper, more insightful understanding of those kids who find joy in building.
“Children and drunks are the last honest people left on the face of the Earth,” he quipped. “And children will never buy a product that isn’t fun.”
Because of its financial crisis, LEGO lacked the time and the resources for launching an extended program of field research and product testing. Until they could get such a program up and running, Nipper would have to stand in for the prototypical LEGO kid and forcefully demonstrate to designers how they might create compelling new lines out of what amounted to a contradictory brief: make it new, but keep it classic. It was a back-to-the-future moment. Nipper wanted parents who came across a new LEGO City kit to recognize a fresh version of the toys they remembered from their childhood. At the same time, Nipper knew his developers had to make City modern enough so six-year-olds would sense that LEGO reflected the police stations, hospitals, cement mixers, and garbage trucks that they saw every day.
It was a supremely knotty design challenge. How could Nipper push his veteran designers to create more brick-based models without simply repeating past successes? How could he help his new-to-LEGO designers discover what was quintessentially LEGO? And how could he meld those two seemingly antithetical directions?
An answer began to emerge in late February, during a design review for LEGO City. The City line had long been a robust moneymaker for LEGO, accounting for more than one-eighth of the company’s sales in 1999. But during the Plougmann era, the Jack Stone line had largely pushed City aside. Looking for a way to spark City’s revival, Nipper spotted a prototype for a fire truck fashioned by a designer named Henrik Andersen. Inspired by the 1980s City fire trucks that he had built in his youth, Andersen had given the two-decade-old truck a modern yet classic makeover. The kid in him told Nipper that Andersen’s truck was a winner. “When I saw that fire truck, I knew it would be the icon for the entire City turnaround,” he exclaimed. A couple of days later, he used Andersen’s truck as the centerpiece of a town hall meeting that aimed to point the way back to the brick.
The LEGO fire truck from 1997.
That March, in two separate sessions, Nipper called his six hundred developers and marketers together to reset the design teams’ direction. He kicked off his talk by underlining the stomach-churning fact that LEGO was in a deep financial crisis; its ability to survive as an independent company was very much at stake. The first, most immediate objective was to achieve stable annual growth of 3 to 5 percent by returning to the classic construction play themes that had long defined LEGO. To viscerally illustrate what was core, he showed them photos of three LEGO City fire trucks.
First, Nipper put up a slide of a chunky, somewhat stale 1997 truck from LEGO City. “This is where we forgot to innovate,” he announced. “Even though it’s an iconic product, not having newness and freshness in a classic toy is a deadly sin.”
He next flashed an image of a 2001 fire truck from Jack Stone, the futuristic, theme-based line that had supplanted City. With its bubble cockpit, oversize tires, and blocky rear section, the Jack Stone creation “looks like a spaceship, not a fire truck,” Nipper asserted.
The Jack Stone fire truck from 2001.
Henrik Andersen’s 2004 fire truck.
He then put up a slide of Andersen’s newly reinvented truck, which would soon launch under the revived City brand. Like the best LEGO toys, the truck was strikingly realistic, with more than enough detailing to hold a savvy seven-year-old in its sway. Yet it was also classic LEGO, with the studs prominently protruding from the top of the truck. “This is what a fire truck should look like,” Nipper announced. And then, pointing to the Jack Stone toy, he added, “We will never again make a fire truck like that one.”
Nipper’s declaration resonated powerfully with the company’s staffers, especially with the developers and marketers for LEGO City, who had been neglected and unloved during the Plougmann era. Nipper’s explicit message to them was, “You guys are back. Development teams that make products that sell with little to no advertising support are this company’s real heroes.”
Nipper believed that returning to such fundamental touchstones as the brick and buildable, creative play experiences might give designers enough focus and freedom to breathe new life into venerable lines such as City and thereby begin to revive the company’s sales. But despite Nipper’s explicit, direction-setting entreaty to his developers and marketers, there remained a tough snarl of skepticism over whether gut instinct and this back-to-the-future path were enough to return LEGO to the black. So many veteran designers had been swept out during the 1998 layoffs that LEGO had lost a good bit of the institutional memory of what was authentically core. As for the younger designers who remained, they couldn’t be expected to roust that classic LEGO look by simply riffing off Andersen’s fire truck.
“There were so many people who hadn’t been around when the core was building with LEGO bricks,” recalled Paal Smith-Meyer, who heads the company’s new business group. “They didn’t know who the core consumer was and they didn’t understand the core business logic. It was very, very hard.”
Nevertheless, resetting the company’s direction around classic play experiences such as LEGO City proved both clarifying and liberating. The hot air had leaked out of the previous management regime’s overinflated declaration that LEGO would be the world’s strongest brand among families with children. Now it was time to make a virtue out of necessity. “In essence, we saw ourselves as a unique niche player in the toy industry,” recalled Knudstorp. Echoing the founder’s motto, he continued: “We would never be the biggest, but being the best was good enough.”
Although Knudstorp had thus far refused to formulate a long-range strategy for sustained growth—opting instead to keep people focused on rescuing the company—the implications of striving to be the best were clear. Any future strategy would be founded on a quest for continuous excellence, which LEGO would achieve in part by forging a deeper affiliation with its legions of fans and by collaborating with enterprises that possessed expertise and technologies that LEGO lacked. Going it alone was no longer an option.
“If you’re going to be a global player operating in a niche, you need to be a networked player,” said Knudstorp. “You need to leverage partnerships.” Thus the newly minted CEO and other senior leaders began a series of initiatives that aimed to help developers migrate to ever-deeper collaborations with customers and even enlist them to help define the brand’s future.
Face-to-Face with Customers
As LEGO began to revitalize its core product lines, Knudstorp realized that managers and associates needed to clarify and agree on what the brand really stood for. As he put it, they had to “rediscover what LEGO was all about.” LEGO had launched so many new initiatives that Knudstorp believed it had forsaken a “crisp sense of identity”; the end result was a “loss of confidence” in the company’s direction and its capacity to execute. It was one thing to get back to the brick and reconnect with five- to nine-year-old boys. It was quite another to dig deeper and try to discover the company’s unshakeable, inviolable core.
The new CEO tapped Tormod Askildsen, a veteran manager, to lead a team that would define the attributes that made LEGO unique. The team posed a set of fundamental questions—“Why does LEGO exist? What would the world miss if LEGO went away?”—which aimed to prompt people to define what mattered most for LEGO. Remarkably, for an organization famous for its insularity, Askildsen extended those conversations to some of the brand’s most loyal adult enthusiasts, whose numbers were rapidly expanding.
Since the brick’s inception, many kids outgrew LEGO when they hit their teens and never returned. But beginning in the late 1990s, a sizable number of adults (mostly men) were once again beckoned by the brick. Two developments lured these prodigal LEGO fans. One was the launch of LEGO Star Wars—which appealed to adults’ nostalgia for the movie classic—as well as the release of Mindstorms, a LEGO robotics kit that tapped into grown-ups’ inner geek. Second, the Internet allowed adult LEGO aficionados from across the globe to come out of the closet and connect as never before.
In 1996, eight years before Flickr flamed to life, adult fans created Brickshelf.com, which today features upward of two million LEGO images—including scans of instructions for countless LEGO kits—all of them posted by fans. Another fan-created site, Bricklink.com, offered a vast online shopping mall for more than 2.5 million LEGO pieces. With the rollout of the aforementioned MOCpages.com, droves of fans found a vast virtual stage for showcasing their most distinctive LEGO models. As those user-created sites took off, so did online clans of fans. In 1999, there were eleven LEGO user groups; by 2006, that number had swelled to more than sixty.*
Askildsen, who was troubled by the company’s turn away from classic LEGO play themes during the Plougmann era, had already begun connecting with adult LEGO enthusiasts online and attending fan-sponsored LEGO events. There he had face-to-face meetings with many AFOLs, those adult, hard-core LEGO customers. A good percentage of those fans, he recalled, were mighty unhappy. Many resented the “juniorization” of so many LEGO sets; in their view, easy-to-build kits diluted the creative experience. And parents complained about the dreaded “LEGO bins.” These were boxes of disassembled LEGO models, invariably found at the back of a nine-year-old’s closet, which were filled with one-of-a-kind LEGO pieces that couldn’t connect with pieces from other LEGO kits. The bins signaled a gross violation of the LEGO System, which required that LEGO components should be compatible with other LEGO components. Because the pieces worked only with one model, they failed to live up to that core LEGO promise of “unlimited play.”
Above all, there was the sense among the brick’s most loyal enthusiasts that they and LEGO had always been on the same wavelength. But in recent years, the connection had broken—and the developers in Billund were too blinkered to notice.
Among the unflattering (and not atypical) comments Askildsen took in was this one, from an adult enthusiast who was still fuming over the Galidor debacle: “What good is Galidor to LEGO fans? Galidor appeals to kids who don’t like construction toys. The LEGO name on a nonconstruction toy is a contradiction in terms to a casual consumer and outright blasphemy to AFOLs.”
In August 2005, Askildsen convinced Kristiansen and Knudstorp to attend BrickFest, a fan-organized event that was held at George Mason University near Washington, D.C. That in itself marked a change in the company’s culture. In previous years, when Askildsen had tried to convey the adult fans’ criticisms to senior managers, he had been rebuffed, as many LEGO veterans believed adult fans were few in number and not worth listening to. LEGO even actively discouraged direct contact with adult fans, adopting the mantra “We don’t accept unsolicited ideas.”
“We were walled off from the fan community,” recalled Jake McKee, formerly the company’s global community-relations specialist. “LEGO really didn’t recognize the outside world.”16
But following the launch of LEGO Star Wars and Mindstorms, the outside world was far more difficult to avoid. Although the growing AFOL community accounted for about 5 percent of the company’s total market by the early 2000s, the average adult fan outspent the average family with kids by a margin of roughly twenty to one. These black-belt LEGO hobbyists also were a potent marketing machine for LEGO. It was not at all unusual for four or five AFOLs to show up at a LEGO fan event and build a jaw-dropping creation, such as a nine-foot-tall replica of Chicago’s Sears Tower, which would draw upward of twenty-five thousand kids and their parents, as well as local media. To Askildsen’s way of thinking, if LEGO was to find its true core, it had to connect with its most hard-core fans. The grandson of the LEGO Group’s founder and the new CEO agreed with him.
At the LEGO jamboree that was BrickFest, Kristiansen and Knudstorp engaged in a three-hour question-and-answer session with five hundred AFOLs. Knudstorp later called it a “crucial meeting,” his first face-to-face encounter with the adult fan community. In his conversation with the group, Knudstorp revealed how his understanding of the company’s future direction had begun to crystallize. He cited research demonstrating that kids were spending more time with video games and TV and growing up faster, but he shrugged it off, declaring, “We must remain true to who we are and not what others want us to be.” Of course, many companies that clung to their core were left behind because they ignored changing consumer tastes—Kodak and its film-based camera business comes to mind, as does Research in Motion, the maker of the no-longer-loved BlackBerry. But LEGO had only recently endured the losses that came from chasing kids who were in thrall to digital toys and indifferent to the brick. He promised LEGO would “navigate across those trends,” and he bluntly asserted the brick “is not a toy for everyone. It is a toy about the LEGO way of playing, of being creative.” In the months and years to come, he wanted LEGO to conceive toys that felt fresh and new, “yet fit completely within the LEGO System.”
The conversations resurfaced the notion that LEGO creativity, at its core, is all about the brick. At first glance, it seems remarkable that the company needed to embark on a series of wide-ranging conversations with customers to rediscover that the System and the brick are the essential features of the LEGO play experience. But in almost any business crisis, the first casualty is clarity. The LEGO Group’s former leaders had heard from so many consultants that the brick was passé, and they were so stunned by the financial meltdown and the forfeiture of their leadership positions in all of their most critical markets, they had largely lost sight of the fact that the brick was beloved the world over. If LEGO went away, what the world would miss most wasn’t the brand or the trademark, the theme parks or the retail stores. They’d yearn for the brick.
Those talks with fans convinced Knudstorp that Nipper’s instinct to get back to the brick was the right course of action. Moreover, the fans’ critiques of recent LEGO offerings helped give the rookie CEO the courage and the ammunition he needed to face down internal skeptics who doubted that going back to the future with the brick and the System would sustain the company over the long run.
“We debated whether we should lower the quality of our products” so as to also lower the price, Knudstorp recalled. “We debated whether creativity was still a key word for LEGO. We asked the [fans], and they were very clear. ‘Creativity is what sets you uniquely apart. And if you lower the quality, we’ll leave this brand.’ ”
The dialogues at BrickFest and other venues left Knudstorp with an insight that continues to resonate: “Your most valued customers will tell you what can be done with the brand.”
Keep the Conversations Going
In his talk at BrickFest, Knudstorp underlined the notion that working with fans would prove beneficial for LEGO. “We think innovation will come from a dialogue with the fan community,” he told the gathering. And he made good on his declaration, as LEGO took its first tentative steps toward directly engaging with customers. Within a matter of months, LEGO unveiled three initiatives that sought to solicit ideas for potential products from adult users and gather feedback from kids on products that were under development.17
✵ To engage directly with fans, in 2005 the company introduced a new crowdsourced line of toys, to be marketed under the aforementioned LEGO Factory brand. Søren Lund, who was then a LEGO marketing director, recruited ten AFOLs to create enticing models that would inspire kids to give Factory a whirl. LEGO challenged the ten fans to create LEGO models for a theme, code-named Micro City, “the biggest little LEGO city in the world.” The adult fan team leader set up a secure Web forum, where the expert amateurs could critique and improve one another’s designs. In a matter of weeks, the volunteer developers devised scores of dazzling microscale models of cityscapes. “I was overwhelmed by the quality,” said Lund. In 2005, the best of the designs—an airport, an amusement park, and a cluster of office buildings—hit the market. The project team’s professionalism and creativity, Lund added, “sent shockwaves through our development organization.”18 Although the Micro City experiment ultimately failed to grow into a thriving business, it delivered irrefutable evidence that LEGO could successfully open up to its fans.
✵ As more senior managers such as Lund began to see the potential in soliciting ideas and feedback from customers, LEGO sought to fashion tighter ties with the fan community by launching its Ambassador Program. Comprised of scores of representatives drawn from more than thirty user groups spanning the globe, the program gave voice to the worldwide community of LEGO fans. Ambassadors relayed questions and requests from the community directly to LEGO managers. And LEGO managers, in turn, tapped ambassadors to cast about for ideas or solicit feedback from user groups on projects that were under development. Moreover, the program gave LEGO managers a vast window into the amazing creations that were always bubbling up from the fan community.
✵ The LEGO Group’s outreach wasn’t limited to adult fans only. To better understand the lives and interests of children who loved the brick, LEGO dreamed up Kids Inner Circle, a kid-centered test panel for toys. LEGO enlisted two thousand children from across the globe. With their parents’ permission, the kids logged on to a Web forum where they commented on photographs of designers’ concepts for future toys and critiqued kits that were headed for the market. They also filled out questionnaires about their own purchasing patterns, as well as their wish lists for toys. When LEGO developers wanted unfettered feedback on an early-stage prototype, they’d simply post their renderings to the Inner Circle forum, where the kid testers would issue their verdicts within twenty-four hours.
Taken together, these first-step efforts at gleaning the experiences, desires, and opinions of fans who were kids and fans who were kids at heart began to signal a far more inclusive attitude at LEGO. The company that had refused to accept ideas from the outside was finally going out of its way to solicit them.
Back Up Customer Dialogues with Customer Data
In parallel with its fan dialogues, LEGO conducted one of its most sweeping customer research studies. In March 2005, Askildsen launched a project dubbed Core Gravity, which aimed to identify the brick’s biggest fans, especially those kids who exuded enough enthusiasm—or, to put it another way, magnetism—to spread the gospel of LEGO and pull other kids into the brand’s orbit. This psychographic exploration of “buzzworthy” kids gleaned fifty-six thousand responses through online surveys, which were then followed up with market tests and kid focus groups.
The study centered on two crucial, direction-setting areas for LEGO. First, it identified and described the “MVCs,” or most valuable customers—kids who not only loved LEGO but were viewed by their peers as opinion leaders who unabashedly advocated for the brick. Second, the project aimed to rediscover what, from the true fans’ perspective, was the essence of the LEGO play experience. Though it took a year to complete the project, Askildsen produced an interim report in August, right around the time that Kristiansen and Knudstorp were meeting with adult fans at BrickFest.
One of the study’s most critical takeaways was that core LEGO kids were “normal.” They watched slightly more TV and read a few more books, but in other significant ways they were just like other kids. They played sports and video games; they listened to music and hung out with friends. Another insight kicked over a big assumption from the Plougmann years: for LEGO kids, video games and bricks weren’t mutually exclusive. Just because a kid loved to power away on Xbox, it didn’t mean he wouldn’t dig into LEGO Star Wars.
Most important, even though LEGO kids played with little plastic blocks, they weren’t social pariahs. The study suggested that LEGO kids were smart and often well regarded by their peers. That sounds like stating the obvious, given that LEGO is loved the world over. But back at Billund, more than a few folks felt—after years of hearing that the brick had lost its allure—that LEGO was at best a solitary play experience. “The study took away the fear that LEGO kids were nerdish and didn’t have any friends,” said Askildsen. “That was a very important finding, which told us we shouldn’t be afraid of focusing on them.”
Core Gravity also revealed a key differentiator for LEGO. Although they expressed it in different ways, core LEGO parents and kids loved to build, and with LEGO they could build anything they wanted. Their message: LEGO is a catalyst for creativity and imagination precisely because it delivers a buildable play experience, an insight that adult fans at BrickFest shared repeatedly with Kristiansen and Knudstorp.
Finally, the study showed that while LEGO was competing in a niche market, it was a sizable niche, with a LEGO-connected community of more than two million households. And the market for creative, buildable play experiences was by no means waning, as LEGO had feared during the late 1990s. As Knudstorp asserted at BrickFest, it wasn’t unreasonable to expect that the outer circle of the LEGO fan base could easily be two, five, even ten times as large as those two million registered customers. Additionally, the study underlined the notion that LEGO should compete in just the high end of the toy market. By putting a high level of quality into everything it did, there was an opportunity for LEGO to attract customers who found tremendous value in its products and were willing to pay premium prices.
The notion that LEGO would compete only in the premium part of the toy market by delivering high-quality, buildable play experiences was both narrowing and liberating. “By defining LEGO as niche, Jørgen provided focus,” said Askildsen. “We’d focus on kids who loved to build and we’d build a premium brand. Anything outside those boundaries, we didn’t need to worry about.”
If the first victim of the LEGO Group’s crisis had been clarity, the second had been confidence. The company’s overexpansion and loss of focus, which sparked the 2003 meltdown, had badly shaken its spirit and spunk. By helping to define the brick’s most impassioned customers and declaring there was a big opportunity to turn many more casual users into acolytes, the Core Gravity study began to brighten staffers’ sense that LEGO had a future.
Reduce the World to Those Customers Who Matter Most
Buttressed by the Core Gravity’s findings, Nipper and his team shut out all the chatter about the majority of kids who disliked construction toys and instead eyed the smaller but profitable group of kids who still were drawn to the brick. Executives defined the company’s defend-at-all-costs markets, those where LEGO still was king—Germany and Scandinavia (back then, the United States was more of a growth opportunity)—and tamped down any design initiatives that wouldn’t immediately appeal to those regions. At times, they resorted to a blunt but effective shorthand for the prototypical LEGO customer profile: five- to nine-year-old German boys who loved construction toys. As a result, they narrowed the product lines that LEGO “would do more of” to a very short list of four: LEGO Technic sets for older, more experienced builders; the Mindstorms robotics kits; DUPLO themes for preschoolers; and a relaunch of City.
“We needed to edit down the world we operated in,” Nipper asserted. “We edited everything down to something that was manageable, overseeable, and relatively easy to act on. Of course, we knew the future of the LEGO Group could not only be Germany. But unless we were successful in those markets, we would never have a future.”
The result was a dramatic change from the previous era. Designers could no longer go off in any direction they pleased. Instead, they had to focus on developing a specific toy, such as a LEGO City fire truck, for a clearly delineated market—five- to nine-year-old German boys who were enthralled with LEGO and wanted more. For veteran designers such as Henrik Andersen, who’d been shunted aside for years because he preferred replicating real-life buildings and vehicles, the return to creating brick-based building experiences “was like a pat on the back.”
Direction from the Top
Mads Nipper knew that under ideal circumstances, it shouldn’t be solely up to him and a few other executives to select the look and feel of the next round of LEGO City products; that was best left to designers and marketers who could base their decisions on insights gleaned from deep ethnographic research and extensive focus testing with kids. It’s a hoary adage, but still true: before you can earn, you’ve first got to learn. But in the crisis years of 2004 to 2005, there simply wasn’t sufficient time to dig into kids’ lives and work with them to discover toys that would propel LEGO into a robust future.
At the conclusion of his “fire truck” talk, Nipper put up an unsubtle slide predicting that people would react to his call to rally around the core in one of two ways: some would “stop working until all details are clarified and complain that top management will probably also miss the point this time,” and others would “trust that what we’re doing now is right for the company … The choice is yours.”
Nipper’s intent was to inject a sense of urgency into the organization and spur people to “fight harder than ever to help the LEGO Company survive.” But in challenging people to “trust” that those perched at the top of the company’s leadership pyramid had settled on the right strategy, he was implicitly declaring that until the crisis abated, LEGO would depend on a command-and-control approach to innovation. Forget about grassroots innovation or inventions that would work their way up from the design ranks. Instead of freeing people to pursue their passions and develop creative play themes that would define a “new” LEGO, innovating for survival meant that the company’s leaders would set clear, action-oriented goals. It was up to the company’s developers and designers to follow through on those targets and, as Knudstorp had earlier put it, “get stuff done.”
Such a hierarchical approach to managing innovation, where an authoritarian group at the top sets targets and hands them down to product-focused business units, runs counter to the popular notion that innovation thrives when it functions like a democracy, where everyone has a vote. But Knudstorp and Nipper concluded that for LEGO to return to profitability, their first priority was to restore discipline and direction. And that would come only from a series of goals passed down through a chain of command.
Knudstorp formed an Executive Innovation Committee, comprising the heads of all the product development groups, the market heads from the different regions, and a representative from manufacturing and supply chain operations. The group’s brief was to oversee and coordinate innovation efforts across the entire company. The committee decided on the mix of innovation projects that LEGO took on, allocated resources, assigned clear lines of accountability, and monitored the development process. Recalling the mind-set that characterized LEGO during 2004, Knudstorp called it “only one truth and black-and-white thinking.”
Cocreate with Kids
One of the catalysts of the LEGO Group’s financial crisis was its remarkably high mortality rate for toys that were under development. All through the Plougmann years, developers were encouraged to follow their muse and pursue revolutionary designs that would take LEGO far beyond the brick. But freedom carried a price. Designers worked tirelessly to evolve concepts for newfangled LEGO models, only to see management kill most of them off.
“If a designer worked on ten ideas, only one or two made it to market, because we were experimenting a lot, exploring new things,” recalled Per Hjuler, senior vice president of consumer marketing and innovation. “Most ideas seemed to go nowhere.”
The cascade of constant setbacks took a toll on designers’ morale, as well as the company’s returns on its R&D expenditures. The fact that it required, on average, three years to develop a concept and bring it to market only added to the sense of futility. It was not unusual for designers to spend months or even years developing LEGO kits that would never find their way into a child’s hands.
Seeking to improve the hit rate for toy concepts, in 2005 Hjuler and his team led an overhaul of the LEGO Development Process (LDP). Conceived in 1995, the LDP consisted of a step-by-step series of management reviews of developers’ prototypes, wherein executives decided which ideas LEGO would actually cultivate and launch. But in the decade since the LDP’s inception, each product group had adopted its own version of the process.
For example, the group that targeted five- to nine-year-olds had created an LDP that worked well at first but eventually grew overly bureaucratic. “It got too dense,” recalled Hjuler. “Each step of the way, people had to fill out multiple forms and checklists.”
The product group for nine- to sixteen-year-olds, on the other hand, ran with more of a freewheeling LDP, with fewer check-ins but far more elaborate mock-ups of concepts. Their logic: by devising extravagant presentations, developers hoped to sell executives on their designs. Regardless of the approach, under the old system less than 20 percent of developers’ ideas made it to launch. As for those ideas that evolved into finished products, growing numbers of them—such as Galidor, the Spielberg MovieMaker, and the Jack Stone and Explore lines—ultimately flopped.
The company’s solution was to create one universal development process that every product group would adhere to. The new LDP was built around four stages: product teams would brainstorm ideas, select concepts for further development, test business plans for each proposed product, and ultimately allocate resources and lock in the design and business strategies for those toys that LEGO would take to market. Because each stage lasted just a few months, the new process slashed the average development time for a new product from three years to eighteen months.
The core of the new development process consisted of constant, empathetic contact with customers. At every stage, teams met with small groups of children and showed them their ideas for new toys, watched them engage with the prototypes, and looked for play themes that really resonated with kids. No idea could progress to the next stage without a big thumbs-up from kid testers.
To be sure, there are wildly successful innovators who’ve cast a skeptical eye on focus testing. Henry Ford famously quipped, “If I had asked people what they wanted, they would have said faster horses.” Steve Jobs was equally disdainful. “It’s really hard to design products by focus groups,” he once told BusinessWeek. “A lot of times, people don’t know what they want until you show it to them.”19
LEGO, however, took an inside-out approach to testing. Instead of asking kids what they wanted, developers would show kids illustrations or prototypes of what they might want, such as a space theme or a Mars Mission Crystal Reaper, and then gauge their reactions. The goal was to trigger a child’s imagination. If the Reaper, with its “spinning harvester blades” and detachable spaceship, inspired kids to dream up battle scenes, tell stories, and play with the set for an extended period, the team knew it had a winner. But if the kids’ storytelling fizzled out after a few moments, it was time to push on to the next option. Such an approach meant that designers still bore the responsibility for imagining what would turn kids on. But working with kids helped them identify, develop, and refine the ideas that stood the best chance of succeeding in the marketplace.
The LEGO City design team was one of the first groups to embrace the new approach. Although Henrik Andersen’s fire truck and the rest of the 2004 City line were mostly designed in-house, the team began venturing out in search of inspiration and ideas for ever more realistic play experiences. The team took firefighter training, rode in police cars, and got locked in jail cells, and they brought their insights from those experiences to the look and feel of City toys.
The 2005 City edition of construction and police sets, which were developed with children’s input, more than tripled the line’s revenue, to DKK 350 million ($60 million). As the line continued to expand, revenues doubled and doubled again, reaching DKK 1.5 billion ($275 million) in 2007. The City team’s morale also got a boost. What had been a beaten-down group that was relegated to the company’s back bench was now the new star.
The insight sessions with kids, combined with the revamped development process, resulted in a radically improved hit rate for toy concepts. The wide-ranging exploration of the 1990s resulted in a low hit rate, with only 10 to 20 percent of designers’ ideas developed into toys that found their way onto store shelves. Now, according to Hjuler, “if a designer works on ten ideas, about nine will make it to market.”
While some designers chafed under the new restrictions and ultimately left LEGO, others reveled in their newfound productivity. No longer did most of their ideas and prototypes end up in a circular file, never to see the light of day. Under the new system, if they could show that kid testers loved the concept and they could present a persuasive business case for the idea, they could be reasonably certain that they’d see their creation on toy-store shelves throughout the world.
Other teams followed City’s lead. The team charged with bringing back the DUPLO brand saw the new approach’s power when it redesigned the Intelli-Train Gift Set, which came out in 2002 as part of the Explore line. Priced at $99.99, the original train was “stuffed with electronics,” the designer Allan Steen Larsen recalled. “People didn’t understand what they were getting.” The set, which LEGO had never bothered to pretest with customers, was a spectacular flameout that cost LEGO 13 percent of its train business in its core markets.
In 2005, Larsen was a member of the team that gave the Explore train an overhaul. Under the revised LDP, this time the team tested with kids. Among its other discoveries, the team found there was no point in including gear mechanisms for reversing the train. When the preschoolers wanted the train to reverse course, they simply picked it up and turned it around. “That’s the logic of a three-year-old,” said Larsen. Such head-slapping observations let LEGO halve the production cost of the new train. The Train Starter Set, which was relaunched under the revived DUPLO brand, sold so well that it remained a mainstay of DUPLO’s offerings for more than seven years.
What should we take away from the LEGO Group’s bid to become a truly customer-first company? Let us suggest four essential lessons.
In a crisis, act first; then plan. Before it could get the new LEGO Development Process up and running, the company relied on deeply experienced and engaged executives such as Mads Nipper to point the way. Until they developed an approach to testing with kids, designers essentially tested their ideas on Nipper and other veteran managers. Their ready-fire-aim review sessions were far from ideal, but they were good enough.
Mix it up. LEGO didn’t attempt to find one “right” solution. It launched a wide array of ventures to reconnect with customers—from small, no-risk efforts such as the Ambassador program to experimental approaches such as tapping adult fans for LEGO Factory and big structural initiatives such as remaking the LDP. As time went by, managers culled what didn’t work, even as they sought new ways of engaging customers.
Let customers walk in your shoes. LEGO grew adept at finding creative ways to use the Web to connect with kids and adult fans. But the most far-reaching changes came out of its face-to-face interactions with customers at events such as BrickFest and at testing sessions with kids. LEGO found that it’s not enough to walk in customers’ shoes. Sometimes you have to let them walk in your shoes, by letting them create stories, characters, and building experiences out of ideas that you show them.
Set the course; then get out of the way. As the LDP took shape, the company’s leaders began to take less of a top-down approach to innovation. Managers still decided what customers they wanted to target. And they still allocated resources, enforced processes, and set priorities. But when the development teams started engaging with kids, the execs let the teams take on far more decision-making authority. (We’ll delve into this point in Chapter Ten.) The teams and the kids, not the managers, ultimately predicted what the market wanted.
A Shared Vision
By the summer of 2005, right around the time he was meeting with fans at BrickFest and getting his first look at the Core Gravity research results, Knudstorp was deep into drafting a document that would spell out the direction in which the LEGO Group was moving and how the company would achieve its goals. It was time to shift from identifying must-win battles to mapping out the bigger journey that lay ahead.
LEGO was still very much in its survival phase, but it was close to turning a corner. By the end of 2005, it would boost its sales by 15 percent. Of course, that increase is less impressive than the number suggests, given that LEGO was coming off the worst year in its history. Moreover, the company had used up many of the “structural options” for cutting costs and generating cash—selling off assets, pink-slipping employees, jettisoning unprofitable product lines, and reviving core lines such as LEGO City—and would soon need a set of guiding principles for the far harder work of restarting growth. Thus Knudstorp was under pressure from other senior executives, and especially the board of directors, to deliver a long-term innovation strategy, as opposed to the past year’s tactical initiatives.
“Kjeld said the board was very depressed with me—they thought I wasn’t optimistic about the future, and at that point, I probably wasn’t,” he admitted. “They felt like I was short-term focused and didn’t have a vision.”
In fact, Knudstorp did have a strategy for transforming LEGO, which he captured in a document that came to be called “Shared Vision.” Its intent was to identify a common identity among the LEGO Group’s owners, leadership, and employees, and from there build a platform for putting the company back on a growth path.
“Shared Vision” was born out of several workshops that Knudstorp held with his network of veteran LEGO associates, which included executives as well as front-line folks. Just as Askildsen had done with the AFOLs and internal gatherings of LEGO staffers, Knudstorp put a big, philosophical question to the group: what is the company’s shared identity? He got a range of answers, each a variation on what was really vital to LEGO. One answer was that it was about profiting from the core; another was the understanding that LEGO needs a premium positioning. For one executive, it was Nipper’s slide of the fire trucks. At first, people worried that they’d all come up with disparate definitions. But to Knudstorp’s ear, they were saying the same thing in slightly different ways, and that was encouraging.
“You want to make sure the company’s direction can be expressed by everybody,” he explained. “It’s not about using exactly the same words. Because if people are really going to share this [direction], they have to be able to state it their own way.”
The immediate purpose of “Shared Vision” was to align on where to look for growth. But it was also an ideology; a philosophical piece that aimed, in principle, to give LEGO a robust sense of identity that would guide it for many years to come. And that meant reconnecting with one of the LEGO Group’s most animating values, Ole Kirk’s dictum that “only the best is good enough.” In recent years, LEGO staffers had grown to disparage the motto, believing it had significantly slowed the development process by encouraging designers to dither over products, overcomplicating and overdesigning them. Perfecting had gotten in the way of acting. But Knudstorp revived the motto and gave it more of a direct translation from the Danish: “even the best is not good enough.”
Knudstorp’s reinterpretation worked on several levels. It signaled that at the center of the LEGO Group’s core was a shared vision of excellence: no matter what the company accomplished in the future, it would ceaselessly strive to do better. Additionally, the revision was another reminder that LEGO had reset its direction and now aimed to be the best, not the biggest. But the revision also tapped into the company’s heritage, so as to create a tough-minded cultural identity. Having “broken the culture’s back” during its survival phase, Knudstorp called people’s attention to the fact that the company’s values would guide their pursuit of the long-term goal: to build a sustainable business.
Knudstorp believed that to transform LEGO into an organization that was as resilient as the brick itself, he and his team would have to seize on those “assets and capabilities” that had sustained the company for so many decades. His notion of what was truly core to LEGO wasn’t limited to products, customers, and markets. As outlined in the “Shared Vision” strategy, the company’s core also resided in its chief assets, which Knudstorp and his team defined as the LEGO brick and the building system, the brand, and the company’s unique relationship with its stakeholders (read: owners, retailers, business partners, and customers). The company’s core capabilities consisted of its capacity to use the LEGO System to innovate products, its molding and manufacturing expertise, and its direct dialogues with customers, which ranged from conversations with fans at events such as BrickFest to cocreating with kids and enlisting skilled LEGO hobbyists to improve offerings such as LEGO Factory.
By focusing managers and associates on the company’s prime assets and capabilities, Knudstorp signaled that returning to the core was really a matter of “becoming more of what we already are.” According to “Shared Vision,” that process would unfold in three stages over a seven-year period.
In the first phase, “fight for survival,” Knudstorp and Ovesen had aligned the company around the must-win battles of setting a clear direction, restoring competitiveness by refocusing on retailers, and concentrating only on those product lines that showed a good chance of turning a profit. The key to winning those battles lay in mastering two of the seven truths. LEGO had to create a culture that was truly innovative—one where developers focused on cost and profitability as much as creativity, where people championed operational excellence and “getting stuff done.” And LEGO had to reach out, connect with its core fans, and become authentically customer driven. By engaging with five- to nine-year-old boys who loved to build and the adult fans who were returning to the brick, LEGO stood a far better chance of getting control of its future.
By 2006, Knudstorp anticipated that LEGO would commence with the second stage outlined in “Shared Vision,” which was to build a “defensible core” of profitable products. To make the most of its core business, LEGO would have to master two more truths. First, it had to explore the full spectrum of innovation. LEGO couldn’t substantially improve its margins solely through product innovation. It had to develop a broad range of complementary innovations, pioneer new channels to market, conceive new business models, and restructure the way it worked internally and with outside partners. Second, LEGO would have to open up its innovation processes through crowdsourcing. Because the company was still stretched for resources but nevertheless was blessed with legions of hard-driving, hyperskilled fans, LEGO had both the need and the means to seek out new ways to work with its most creative customers to invent new play experiences.
If LEGO managed to achieve a healthy balance sheet and a profitable core business, by 2008 it could roll out the final phase set out in “Shared Vision,” which called for discovering entirely new growth drivers. To achieve organic growth—that is, growth (not just profits) from its core business instead of through acquisitions—LEGO would have to unleash the final set of truths: head for blue-ocean markets and practice disruptive innovation. Once the company began generating profits and growing again, it would have to learn how to harness the skills of its diverse and creative people.
Knudstorp summarized the “Shared Vision” strategy in a single slide. When he unveiled the plan in 2005, it gave people a sense of direction and a plausible notion of how the future would unfold (assuming all went according to plan). Like Plougmann, Knudstorp also sought to make LEGO a great global brand. But through conversations with people such as the strategist and author Chris Zook and LEGO CFO Jesper Ovesen, the new CEO concluded that continuous innovation required a certain sequencing and cadence. Before they could renew the brand, they first had to turn around the business. If LEGO didn’t restore its balance sheet and restructure its operations, contended Knudstorp, the brand would never again shine.
By the summer of 2005, people had begun to believe in Knudstorp. Tellingly, he finally succeeded in convincing Kristiansen to sell the four LEGOLAND theme parks to a British operator of amusement parks, Merlin Entertainments Group, a move that silenced some of the doubters within LEGO and the chatter in Billund. (LEGO retained a 30 percent stake in the new venture.) A photo caption of the owner and new CEO at BrickFest dubbed the pair “master and apprentice.” Kristiansen would always retain his mastery of the LEGO experience. But with Knudstorp’s ascent, now there was a new man in charge.
Even so, many challenges remained. The LEGO Group’s leaders still had to return the company to profitability and restart sales growth. They still had to transform LEGO into a faster, nimbler, and more cost-conscious innovator. All this had to be done at a time when the toy market was contracting, big retailers were increasing their bargaining power, kids were “getting older faster,” and the company’s return on sales, as it closed out 2005, was still an anemic 7 percent, far short of the 13½ percent target that had been set the year before. LEGO was on the verge of winning its first big battle. But the war was far from over.
* As of February 2012, there were more than 150 LEGO user groups with more than 100,000 active adult fans worldwide.