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How LEGO re-assembled its innovation strategy

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How often does a toy company's products become a metaphor for innovation in enterprise information technology systems? Many proponents of service-oriented architecture and cloud computing, for example, talk about services and components fitting together "like LEGO blocks" to map solutions to ever-changing business processes.

So LEGO is synonymous with innovation in corporate circles. But innovation is something that has to be rekindled every few years, even at the LEGO company itself. Famous for its plastic, interlocking toy blocks, the company was started back in 1932 in Denmark, and has been known for its spirit of innovation.

In a recent interview published in Knowledge@Wharton, Wharton practice professor David Robertson, author of Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry, describes how LEGO shook off a period of stagnation and became a model for innovation again.

In 1998, "LEGO suffered the first loss in company history, so the company laid off 1,000 people," Robertson recounts. In response, the company accelerated its innovation efforts to get ahead. But what happened was things spun out of control.

LEGO was not suffering from a lack of innovation, but too much innovation, Robertson explains. "'Out of the box' thinking almost put them out of business," he says. "They came out with a lot of different toys. Some of those toys were hits like LEGO Star Wars, LEGO Harry Potter and Bionicle. There were a couple of really big hits, and in a way, those were really dangerous for LEGO because [they created] a thick layer of cosmetics that hid a pretty ugly business underneath."

The lesson learned is that it's not enough to simply boost innovation. With the pursuit of innovation needs to come more focus and control, says Robertson. In 2001, LEGO designers were encouraged to go after any and all new ideas. "What you got was toys that weren't very LEGO-y, toys that weren't very profitable and, occasionally, a big win."

After 2003, the company recognized it needed to get back to basics, Robertson continues. Now, the message from LEGO's management is: "Work on a great police station. Work on a great fire truck. Give us a great LEGO race car. And by the way, don't use 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. We're going to be pretty much guaranteed of that because we have a limited platform that we work from, a limited system of play."

As a result of this better-focused innovation, 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.

The key takeaway is that fostering a successful innovation culture means providing a common vision that everyone in the organization shares and contributes to. LEGO didn't attempt to rein in or restrict the innovation spirit it built and enabled among its workforce; rather, it sought to bring everyone on board with a renewed focus on the core values that made it great in the first place.

Thumbnail: Flickr/Joe Shlabotnik

— By on July 2, 2013, 1:58 PM PST

Joe McKendrick

Contributing Editor

Joe McKendrick is an independent analyst who tracks the impact of information technology on management and markets. He is a co-author of the SOA Manifesto and has written for Forbes, ZDNet and Database Trends & Applications. He holds a degree from Temple University. He is based in Pennsylvania. Follow him on Twitter. Disclosure