How Inside-the-box Innovations Saved LEGO

Did you play with LEGO? LEGO had to innovate end of the 20th century. All their outside-the-box innovations failed. Their inside-the-box innovations saved the company. There are at least 3 important lessons learned from the innovation journey of LEGO.

The origin of LEGO began in a carpenter’s workshop in the town of Billund, Denmark in 1916.  Ole Kirk Kristiansen switched from building houses and furniture to crafting wooden toys, which he named “lego” from the Danish “leg godt,” meaning “play well.” In 1947, Ole Kirk Christiansen expanded his product line with the purchase of the first plastic injection-molding machine and started manufacturing plastic toy building-block bricks. His son, Godtfred Kirk Kristiansen, worked at his father’s side from the age of 12. By 1949, LEGO had developed the now-familiar plastic building blocks with circular interlocking studs. This was considered a great improvement over traditional wooden blocks. Now, children could create a greater variety of shapes held together with LEGO’s unique interlocking blocks. By 1951, plastic blocks represented half of LEGO’s output. The company continued to grow steadily throughout the sixties and seventies. By the 1980s, LEGO had become really trendy with sales surging and profits doubling every five years.

LEGO’s growth was followed by a long period of stagnation lasting over a decade.  The 1990s marked the end of a natural growth cycle. Birth rates declined in the Western world, children had less time to play and LEGO toys didn't offer the same instant gratification as video games. Another factor was that the Chinese were now able to copy the LEGO concept and manufacture the toy bricks at a fraction of the cost.

Between 1993 and 1998, LEGO had hoped to keep growing by tripling the number of new products to its line. Unfortunately, rather than increasing sales, this strategy only increased costs. Thus, resulting in 1998 in the first loss in the company history of LEGO. In response to this crisis, the company announced the lay-offs of 1,000 employees. Kjeld Kristiansen, the third generation of the Kristiansen family stepped down after heading the company for 20 years. He brought in turnaround manager Poul Plougmann to succeed him. Plougmann understood that the children’s toy market was rapidly changing, with big retailers like Toys R Us and Walmart dominating the market and pushing prices down. Meanwhile, LEGO was still being produced in Denmark; making it unable to compete with the much cheaper toys produced in China. Plougmann knew LEGO had to do something major to change its course.   

LEGO needed to innovate. And off they went; heading in lots of different directions. LEGO created its own children’s clothing line and put a division of the LEGO Group in charge of pitching new ideas for books, movies and TV shows; all of these represented completely new territory for LEGO. They introduced lots of different toys, some of which were big hits like LEGO Star Wars, LEGO Harry Potter and Bionicle. In addition, LEGO building sets became increasingly complex with intricate components. Adding more bricks meant products were harder to assemble, forecasts harder to determine, and inventory harder to manage.

Innovating LEGO in a variety of directions only led to increasing risks and costs.

It soon became apparent that the company's growing complexity was becoming a huge problem. Innovating LEGO in a variety of directions only led to increasing risks and costs. LEGO lost control of its innovative initiatives.  In his book “Brick by Brick”, Professor David Robertson describes how the failed launching of LEGO’s new product, Galidor, exemplifies just how vulnerable LEGO had become during this period of misguided innovation.

“This was one of the company's attempts to develop a full spectrum of innovation -- a family of complementary new products that reinforce and support each other. It featured a Power Rangers-like line of action figures that came with its own ecosystem of branded accompaniments. The toys themselves were intended to take Lego into new aisles of the toy store; a risky journey, as only one in five action figures ends up a success. But the toys were only the beginning of Galidor's intended cross-pollination. There would also be Galidor Happy Meals at McDonald's, Galidor video games and Galidor DVDs. To cap it all, there would be that ultimate in toy marketing: a TV show serving as an extended commercial for the Galidor line. But when trying to fill an entire spectrum, it doesn't help if there's a gaping hole in the middle. The TV show that was supposed to be the foundation of the line's appeal turned out to be so bad that, in the words of Niels Milan Pedersen, one of Galidor's designers, top executives were ‘gobsmacked with disgust’. Lacking an effective vehicle to publicize the toys, Lego watched as sales essentially went nowhere. Less than a year after it was launched, Galidor was gone.”

Similarly, sales of the successful LEGO sets from Star Wars and Harry Potter turned out to be very dependent on the release of new movies, leaving LEGO in 2003 and the first half of 2004 with only one profitable product, Bionicle. By 2003, LEGO was virtually out of cash and had lost $300 million.

The original turnaround needed to be reconsidered. Jørgen Knudstorp, the 35-year-old director of strategic development, was appointed CEO in 2004. Acting swiftly in order to survive, LEGO sold a majority stake in its successful Legoland theme parks for $460 million, moved management out of their Danish headquarters building into a nearby factory and outsourced the majority of its plastic brick production to cheaper plants in Mexico and the Czech Republic.

Knudstrop realized that more innovation was still needed. In a toy market with intense global competition and rapidly changing trends, you have to renew your product line every one or two years. And so, LEGO was left with no other choice than to innovate, but this time it needed to be effective and well thought out. The consensus at the LEGO headquarters was that the same outside-the-box-thinking that had driven them from 1999 to 2003 was also responsible for nearly driving them into the ground. LEGO’s management gave everyone within the company room to ideate and create new growth-initiatives. This time though, all the ideas contributed went through rigorous testing beforehand and needed to comply with the LEGO company mission to be universally recognized as the best company for family products. LEGO then developed a design process model around this and named it “Design for Business” (D4B) to ensure the continual linkage between innovation and its business plan. D4B marked a shift in strategy for innovation from being product-focused to being company-focused.

Innovate closer to the company’s core. LEGO went back to the original LEGO brick.

In essence, everything LEGO did from 2003 onwards evolved from the choice to go back in the box and innovate closer to the company’s core. They went back to the original LEGO brick. They focused more on the police stations, the fire trucks and all the other things related; not only because that’s what their fans wanted most, but also because it was the most profitable. When they went back in the box, they not only found that there was a lot of money in that box; they also found that LEGO fans were returning to the brand.

LEGO brought the creative team out of its silo and connected it to the company’s business goals, allowing it to create under the umbrella of a company-wide strategy. The move brought LEGO’s strategy back to life, with products that met both creativity and business needs.  In his book “Brick by Brick”, Professor David Robertson credits LEGO for their approach, “They are wonderful at achieving that balance between giving their people the space to be creative, but the direction and focus to deliver profitable innovation.”

Now if you work for LEGO in an innovation project, it’s very likely you will be told: “Work on a great police station. Work on a great fire truck. Give us a great LEGO racecar. And by the way, don’t use just any kind of piece or shape that you want or color that you want. Use this very limited palette of pieces. Because we can use these pieces in lots of different sets and make them in very high volume and make a lot of profit from every set that you make.”

LEGO Friends is one example of LEGO’s innovation success. In 2011, boys made up 90% of LEGO consumers. It took LEGO four years of research to figure out how to address the girls' market. LEGO Friends, the new line developed for girls, turned out to be one of the biggest successes in LEGO’s history. LEGO friends consists of five distinct little dolls with names like Andrea, Mia, Olivia, Stephanie and Emma. Their LEGO sets encourage girls to build karate studios, beauty parlors and veterinary offices. The line doubled sales expectations in 2012, the year it was launched. In that year alone, LEGO tripled its sales to girls.

LEGO made good money from their inside-the-box-innovation-approach by integrating small ideas and small innovations into their operation and by listening to their customers. In a 2013 interview, LEGO researcher Professor David Robertson summed up LEGO’s recent results, “LEGO has been growing sales at 24% per year every year for the past five years and growing profits at 40% per year every year for the last five years. So they’re doing something right.”

Nowadays, LEGO has fully embraced the principles of open innovation and is recognized as one of the best practices in this field. On the LEGO Ideas platform (http://ideas.lego.com) LEGO fans create proposals for new LEGO sets. It’s the fans who make the proposals who have to look online for supporters for their new concepts. When a proposal attains 10,000 supporters, the project qualifies for review by LEGO’s set designers and marketing representatives. Once LEGO’s criteria are met, the new LEGO set proposal can go into production, where the concept creator continues to provide input to the LEGO designers, whose job it is to create the final set. Once complete, it goes to the factory for manufacturing before being shipped around the world and released for sale. The concept creator is featured in set materials, receives a royalty on sales of 1% of the total net sales of the product, and is recognized as the product creator. Since the start in 2011, there have been 13 new LEGO sets introduced through this platform.

The LEGO Group continued its global expansion and reaches 100 million children in all regions of the world in 2015. This was enabled by strong performance of new product innovations, such as LEGO DIMENSIONS, LEGO Star Wars, LEGO NINJAGO and LEGO Elves, and a continued high interest in core LEGO themes such as LEGO City. The revenues in 2015 increased by 25% to DKK 35.8 billion against DKK 28.6 billion in 2014. The year's operating profit in 2015 increased to DKK 12.2 billion against DKK 9.7 billion in 2014 – an increase of 26%. LEGO is still doing great. Its strategy of innovating close-to-the-core really paid off.

There are many lesons learned from the ups and downs of innovation at LEGO. I like to emphasise the following three:

1. Unguided innovation is risky.
2. Achieve a balance giving people the space to be creative, and the direction and focus to deliver profitable innovation.
3. Innovate close-to-the-core first.

 I wish you lots of success on your innovation journeys.

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Sources: 1. Brickipedia, http://lego.wikia.com/wiki/LEGO_Ideas. 2. “Learning More About Creativity And Innovation From LEGO”, Smashing Magazine, Rafiq Elmansy, August 8th, 2014. 3. HBS CASES: “LEGO”, Maggie Starvish, March 18th 2013, http://hbswk.hbs.edu/item/7170.html. 4. “How LEGO Stopped Thinking Outside the Box and Innovated Inside the Brick” http://knowledge.wharton.upenn.edu/article/how-lego-stopped-thinking-outside-the-box-and-innovated-inside-the-brick/. 5. “Innovation Almost Bankrupted LEGO — Until It Rebuilt with a Better Blueprint “, Knowledge@Wharton, July 18, 2012. http://knowledge.wharton.upenn.edu/article/innovation-almost-bankrupted-lego-until-it-rebuilt-with-a-better-blueprint/ 6. “Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry”, David Robertson and Bill Breen, Crown