The Lego Innovation Story

This blog post is about Lego, the popular toy and the company making it. It is about how the company overstretched in the 1990s. How it was challenged by competition and how it survived and returned to success.

I used to love Lego. When I was a kid, I had a large blue wooden box with Lego pieces that I had inherited from relatives. Often on my birthday and on Christmas I got new kits from my parents which I  added to my unsorted box.

This was in the early 1970s when there was a limited supply of models. One kit I had was the tanker ship on the right from 1973, the year of the first OPEC petroleum crises. At the time there was of course no computers and a limited supply of other toys that could be as creative to play with as Lego was. So there I was, creating new models from my imagination. The popularity of Lego bricks can be attributed to the amount of imagination a child can use to build something with them.

Lego, consists of colourful interlocking plastic bricks and an accompanying array of gears, minifigures and various other parts. Anything constructed can then be taken apart again, and the pieces used to make other objects. Lego pieces of all varieties constitute a universal system. Despite variation in the design and purpose of individual pieces over the years, each remains compatible in some way with existing pieces. Lego bricks from 1958 still interlock with those made in the current time, and Lego sets for young children are compatible with those made for teenagers.

Today modern Lego kits can be assembled and connected in many ways, to construct such objects as vehicles, buildings, and even working robots. The bricks are so versatile that just six of them can be arranged in 915,103,765 ways. It is still the same basic building blocks but the toy kits have come far from when I was playing with Lego forty years ago. The mission statement of the company reads:

Lego Mission statement:
Our ultimate purpose is to inspire and develop children to think creatively, reason systematically and release their potential to shape their own future – experiencing the endless human possibility.

So today Lego is not really a simple toy anymore. Today it is about helping children learn creative problem solving, which is a crucial 21st century skill. What are parents not prepared to pay for that?

But how did Lego get to where it is today? Lets travel back in time for a fascinating journey of innovation, success, fall and recovery.

The history of Lego

It all started out 80 years ago in a carpenter’s workshop in Billund, Denmark. In 1932 as the global economy collapsed into depression, the Danish carpenter Ole Kirk Kristiansen started to supplement his income by selling wooden toys.  He called his company "Lego", from the phrase leg godt, which means "play well" in Danish.

Following World War II, plastics became available in Denmark, and Lego purchased a plastic injection molding machine in 1947. In 1949 Kristiansen developed the idea to make toy bricks. He and his son and grandson developed the construction of these bricks and they shifted from wood to plastic and over time, they made their idea a global toy brand.

In the mid-1990s Lego expanded horizontally into theme parks, television programmes, clothes, watches and learning labs.

In 2000, LEGO was named "Toy of the Century" by Fortune magazine as well as by the British Toy Retailers Association. Gerry Masters, spokesman for BATR, said: "The brick has been developed for each generation and the toy has never stood still, but fundamentally the classic building brick still remains." The award was presented at a dinner in London, attended by 600 guests from all areas of the toy industry. What a feeling of success it must have been for the Kristiansen family!

Below is a video published by Lego in 2012, about the company´s 80 year history:

By the turn of the millennium, Lego was the worlds fifth largest toy manufacturer:

Then the company hit a wall made of bricks, not plastic. In the autumn 2003 the company was virtually out of cash and Lego´s very survival was at risk. After six years of slowing sales and falling profits, Lego’s crisis peaked in 2003, when the company made a DKr1.6 billion ($240m) operating loss on sales of DKr6.8 billion and was sitting on some DKr5 billion in debts.

What had happened? Well, too much success can often cause a mighty fall. Lego had pushed innovation and diversification so hard with its new products that it had disrupted its own core model. The situation in 2004 was:

• Demand was decreasing, through competition from games, movies and merchandising
• The company had become over-diversified, into theme parks, clothes, accessories, etc.
• Manufacturing had a lack in quality and poor distribution logistics
• Lego was slow in market adoption to new trends
• The company had (like many market leaders) fallen into simplistic leadership and a laid-back culture

The total innovation makeover

After years of dismal results, the Kristiansen family hired a new CEO who took Lego back to its roots. The new Chief Executives name was Jørgen Vig Knudstorp. A former McKinsey consultant, he was 36 at the time. Knudstorp very quickly initiated a set of innovation and execution projects that in just one year took Lego back to profitability.

Lego’s turnaround plan was painful. Around 3,500 of the firm’s 8,000 employees were laid off, with more than 1,200 workers in the firm’s hometown of Billund losing their jobs. Factories in Switzerland and America were closed and production moved to Eastern Europe and Mexico. A majority stake in Lego’s four Legoland theme parks was sold to the the private-equity firm Blackstone Group. Assets in America, South Korea and Australia were sold off.

The new CEO also simplified the management structure and tried to foster a more commercial culture through a performance-based pay scheme and frank communication between management and employees. The Knudstorp cure was working. In August 2006 reported pre-tax profits of DKr 238m for the first half of 2006. Sales were up by 20%.

Key achievements included:

• New and clear Raison d’être: “we help children learn systematic and creative problem solving—a crucial twenty-first-century skill”
• Focus on profitability and lean production
• Gaining consumer insights by direct sales to consumers through the BuiltByMe without competing with existing distribution channel
• Co-Branding with strong and selected partners such as Star Wars and Harry Potter
• Reduced lead time from manufacturing to store, 45 to 3 days
• Cost saving through offshoring non-core competencies
• A new supplier interface
• Implementation of a quality assurance system
• Open Innovation, 120,000 people involved in external innovation work – DesignByMe, DreamtByMe, BuildByMe
• Community driven approach; the open platform Mindstorm encouraging customers to design and develop their own LEGO-robots systems

The lessons

In 2004, Lego had over-diversified, looking to use its well-known brand to find new untapped demand in “Blue Oceans” in business areas far from its core. However these areas of theme parks, clothing etc. were already occupied by other businesses that were experts in those fields.

Most really successful companies share three virtues:

1. They have a highly distinctive core business.
2. They make great efforts to keep their business model as simple as possible.
3. And they apply their core business model relentlessly to new opportunities.

Many of the world’s best-known brands focus on simplicity: look at IKEA with its flat packs, McDonald’s with its burgers or Berkshire Hathaway with its buy, improve and hold approach to investing. Apple applies the same formula to its iProducts. Companies that diversify too much tend to fail, until they return to their core. Starbucks was one such case, where each café started selling everything from CD´s to take-away lunches, until the founder retook the reins and brought Starbucks back to focusing on serving coffee.

Simplicity is a useful counterbalance to growing complexity. Businesses have a natural tendency to grow more complex as they mature. This tendency is getting worse as the pace of business increases. Companies establish matrix-management systems to deal with globalisation, appoint task-forces to examine new technologies, and managers spends ever more time in long meetings.

Returning to Lego, the company now has about 6% of the global toy market. That makes it the world’s fourth-largest toymaker. It is increasing profitability, through actions such as the decision in 2006 to outsource 80% of its manufacturing to Flextronics.  Meanwhile, the world’s biggest toymakers, Hasbro and Mattel, are struggling.

Through a 360-degree set of innovation projects, Lego reinvented itself and went back to focusing on its basic products and historical success factors.

The real challenge which LEGO managed lied in achieving a strategically balanced portfolio between the exploitative and the exploratory business. The company managed to simplify and reinvent itself, so it could shift the S-curve to a new location. Central to this was the company´s ability to find the right balance among growing through innovation, staying true to its core, and controlling operational complexity.

Below is an interview with Jørgen Vig Knudstorp.