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Innovating in existing markets: 3 lessons from LEGO

Beth Stackpole

Sep 21, 2021

With the invention of the interlocking plastic brick, a favorite toy of generations, LEGO was a poster child for business innovation — that is, until it wasn’t.

The Danish toymaker’s trajectory from industry trailblazer to the brink of bankruptcy to sustained recovery shows there’s more to innovation than sheer luck or a wholesale focus on disruption.

“No innovation lasts forever,” said David Robertson, a senior lecturer in operations management, in a recent webinar hosted by MIT Sloan Executive Education. “Sometimes you get hyper growth for a couple of years, sometimes you get steady growth for longer. But innovations run their course.”

From its inception in the 1930s to its brush with bankruptcy in 2003 and its subsequent turnaround, LEGO tried every approach in the book to managing innovation, some resulting in spectacular success and others in great failure, said Robertson, author of “ Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry .”

Based on years of research and what he’s seen at LEGO and other companies, Robertson advocates for an expansive approach to innovation — helping customers get more value from existing products by offering innovative complementary products, services, and business models.

“It’s how Apple turned itself around, it’s how GoPro got five years of 90% growth, it’s how Sherwin-Williams gets twice the price per gallon of paint than other paints that are functional equivalents,” explained Robertson, who also teaches an executive education course on the topic . “Marvel Comics turned itself around in the same way.”

Among the innovation lessons to be learned from those firms: Have a variety of tools in the toolbox and don’t be afraid to use them, listen deeply to your customers, and prepare for a steady diet of continuous reinvention to remain relevant, even as an iconic brand.

LEGO’s brick-by-brick approach

LEGO was a small family business that grew steadily until the management reins were handed off in the late 1970s to the grandson of the founder and newly minted MBA, Kjeld Kirk Kristiansen, who quickly unleashed a wave of innovation.

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With the younger Kristiansen at the helm, LEGO branched out into the Technic brand — a more sophisticated building system to attract older children — and launched the first mini figure and fantasy action play sets, fueling 15 years of growth during which the company doubled in size every five years.

Growth slowed in the 1990s for a number of reasons, including a rise in digital play experiences from companies such as Nintendo and Sony, the rise of Toys “R” Us and other big box stores, the expiration of LEGO’s brick patents, and the relocation of production of Mattel’s and Hasbro’s products to China, lowering the cost of their competitive toys.

LEGO responded in 1999 by refocusing its innovation efforts on revolutionary products that would reinvent the nature of play. “They became convinced that if all they offered was another box of bricks, they would become a commodity,” Robertson said. “They believed they needed to disrupt themselves before somebody else did.”

After a series of missteps that included the rollout of electronic toys for toddlers and a digitally connected action hero, LEGO found itself nearly bankrupt in 2003. In the rush to innovate, the firm lost sight of its core — physical construction-based play. After layoffs, emergency loans, and other measures aimed at staving off bankruptcy, LEGO turned those innovation miscues into a new strategy — one that precipitated a turnaround and laid the groundwork for further growth.

Among the key lessons that companies with a mature product line can follow to innovate:

Respect what made you great. Sometimes knowing where not to innovate is just as important as knowing where to innovate, Robertson said. LEGO learned that in a new digital landscape it was no longer enough to offer a box of plastic bricks — the brick had become a commodity. But the brick was still necessary, because that’s what customers expected of the brand.

Through trial and error and a number of failed digital-only initiatives, LEGO discovered customers wanted digital experiences that complemented core offerings, rather than replaced them.

Centering innovation around the brick-based construction experience through new stories, games, and experiences, exemplified by the fan-favorite Bionicle product line, is what drove customers back to the LEGO brand and returned the company to profitability.

“You try to understand who your customer is, what they care about — that’s the way we should think about innovation,” Robertson said. “You need to be dating your customer, not fighting your competitor.”

Maintain a customer-centric development process. When the big box stores took over from its ecosystem of small toy stores, LEGO lost an important channel for getting reliable customer feedback. LEGO began to evolve product development practices to support design thinking principles, empowering experts to come up with ideas for new products based on that critical customer input.

Today, LEGO regularly engages children in the process of character development, storytelling, and providing feedback on new playset ideas. “LEGO has a great expression for why they listen to kids when developing new toys,” said Robertson.  “Mads Nipper, the former head of marketing and product development, liked to say, ‘Kids will never lie to you about whether something’s fun or not.’”

Develop a family of complementary innovations to distinguish yourself from competitors. Innovation leaders need to lean on a range of different approaches for innovation, since tactics will vary depending on the scenario and business goals. It’s important to nurture a culture that’s able to shift gears if traditional methods don't deliver desired results.

“You need to learn how to play chords, not keys, on the innovation ‘piano,’” Robertson said. “Pursuing multiple, complementary innovations that harmonize to create something is much better than any one key alone.”

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Innovation Under Constraint: Constructing a Turnaround at Lego

Lego has been helping children piece together dreams and build their imaginations for decades, and has become one of the world’s most popular toys and most powerful brands in...

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Lego has been helping children piece together dreams and build their imaginations for decades, and has become one of the world’s most popular toys and most powerful brands in the process. But the company known for great directions lost its own in the 1990s and has stood on the brink of bankruptcy a few times since. Harvard Business School professor Jan Rivkin takes listeners behind the brick and into the minds of Lego’s leadership as they tackle digital disruption, how to innovate while remaining true to their core product and mission, and engineer an impressive 2004 turnaround that positions the company for huge future success. Rivkin is the author of the case study entitled “Lego: The Crisis.”

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HBR Presents is a network of podcasts curated by HBR editors, bringing you the best business ideas from the leading minds in management. The views and opinions expressed are solely those of the authors and do not necessarily reflect the official policy or position of Harvard Business Review or its affiliates.

BRIAN KENNY: According to TIME Magazine, just six LEGO blocks can be combined in 103 million ways. The name LEGO comes from two Dutch words that mean play well. And so they have, as the colorful building blocks have remained a top seller since hitting store shelves in 1949, flexing and adapting in an ever-changing landscape of toys. Today we’ll hear from Professor Jan Rivkin about his case entitled LEGO. I’m your host, Brian Kenny, and you’re listening to Cold Call .

SPEAKER 2: So we are all sitting there in the classroom.

SPEAKER 3: Professor walks in.

SPEAKER 2: And they look up and you know what’s coming. Oh, the dreaded cold call.

BRIAN KENNY: Professor Rivkin is an expert in business strategy whose teaching and research examines the interactions across functional and product boundaries within a firm. And that sounds perfectly suited to our conversation today. Jan, welcome.

JAN RIVKIN: Thank you, Brian. It’s a pleasure to be here.

BRIAN KENNY: So I can’t imagine there are many people who don’t know the name LEGO, probably most didn’t know that it means play well, which I think is a great little insight that comes from the case. And the Latin translation of that is?

JAN RIVKIN: I assemble.

BRIAN KENNY: That’s pretty amazing. And they didn’t know that when they named it.

JAN RIVKIN: No.

BRIAN KENNY: So just start us off by telling us how does the case begin? Where do we start?

JAN RIVKIN: Sure. As the curtain rises on the case in 2004, LEGO stands on the brink of bankruptcy. It looks certain that this iconic toymaker will be taken over by Hasbro or Mattel or some other large company or maybe a private equity shop that will break it down into pieces. And Jorgen Vig Knudstorp, a fresh-faced 36-year-old-

BRIAN KENNY: I’m glad you said that name –

JAN RIVKIN: –has just, it’s taken practice, has just been given the helm of the company, and he has one last shot to save the company. It is do or die.

BRIAN KENNY: Mm-hmm. What prompted you to write this case? You played with LEGOs as a child, I assume, right? As many of us did.

JAN RIVKIN: I played as a child and I played with my kids, and sometimes I still play with them and sometimes I share with the kids as well.

So my co-author on this case is Stefan Thomke, and Stefan and I had the opportunity to know the LEGO executives. We were interested in the company for a while, and they actually were interested in Harvard Business School as well.

BRIAN KENNY: Mm-hmm.

JAN RIVKIN: So we had an exchange with their CEO and with their head of North America and one of our alums who works at LEGO, and they were interested in perhaps understanding more about what they might learn from Harvard Business School. We were deeply interested in the story of the turnaround of LEGO. And so they invited us out first to their North America headquarters in Connecticut, and then onward to the headquarters in Denmark.

BRIAN KENNY: And what was that like? Did you get to see behind the scenes as they make the bricks?

JAN RIVKIN: So it was magnificent. Going into the LEGO factory, imagine a half-kilometer-long factory filled with injection molding machines every few seconds churning out new LEGO bricks. It was like going into Willy Wonka’s factory. I kept looking for the Oompa Loompas.

BRIAN KENNY: That’s great. Many people probably don’t realize that LEGO is part of an enormous ever-changing toy industry. Can you talk about the landscape that the case takes place in?

JAN RIVKIN: Yeah, so that is one of the first things that students discuss when we teach this case. They’re looking at LEGO on the brink of bankruptcy and asking, “Is this an industry problem? Is it a problem with the company’s position? Is it somehow a change in the industry that has undermined the company’s position?” And I don’t want to ruin the case discussion, but I will say that not all is well in toy land as the case opens, right? There are changes in the customers, there is a threat of substitution, there are threats of new entry, kids’ play habits are changing in ways that make the industry as a whole more challenging, but also in ways that particularly undermine the LEGO value proposition.

BRIAN KENNY: Mm-hmm. Which is?

JAN RIVKIN: So it’s an interesting question. For LEGO, there’s a combination of construction and play and education as well.

JAN RIVKIN: The company views itself as not simply being a toymaker. They realize of course kids love their product and they are making toys, but they also think of themselves in terms of making a difference in the creativity and imagination of children.

BRIAN KENNY: Can you talk about the origins of the company? It goes way back, 1916, Ole Kirk Christiansen.

JAN RIVKIN: If ever there were a company with humble origins, it would be LEGO. It starts with Ole Kirk Christiansen in 1916, he’s a carpenter, opens a woodworking shop in rural Denmark. It is not until the 1930s when he actually adds toys. He starts with furniture and household products. And his son, Godtfred, is actually the one who gets them in first into plastic in the late 1940s. And then legend has it that he was on a ship traveling with a purchasing agent for department stores and other stores, and this agent complained that there was no systematic way of thinking about toys, the toys departments were a mess in stores. And that got Godtfred thinking about a system of play, which is what led to the LEGO system.

BRIAN KENNY: Mm-hmm. And break down the system for us.

JAN RIVKIN: It all goes back to the brick. And because each brick is interlocking with each other, and because the bricks have been the same sizes since, I believe, the 1950s, each brick can combine with others in many, many ways. And as you mentioned at the outset, very quickly with a handful of bricks you’ve got an astronomical number of ways to make a toy.

BRIAN KENNY: Yeah. And they stuck with their original model for a long time. Change was hard to come by. I loved the insight about the fact that it took 15 years to introduce a green break into the mix.

JAN RIVKIN: Green. Yeah, no, the family owners were very resistant to any sort of change.

BRIAN KENNY: Yeah.

JAN RIVKIN: Yeah.

BRIAN KENNY: So talk about the culture of the company as they grew and expanded and sort of really came into their own.

JAN RIVKIN: So going into, say, the 1990s, the company had decades of success. They literally had to limit how quickly they wanted to grow. And it was a culture of investment in new products, but really not so much discipline around thinking about how they would react to the future if the market were to change.

JAN RIVKIN: There was an assumption that they would grow at a pace that they dictated, and the market would buy as many LEGO bricks as they could produce.

BRIAN KENNY: Right.

JAN RIVKIN: But then market conditions started to turn in the 1990s, the early 1990s. There was a decline in birth rates in their core markets in Europe and North America. There was a change in the retail situation as mom-and-pop stores gave way to discount retailers who started to charge lower and lower prices for toys, including LEGOs. The big players like Hasbro and Mattel pushed production to the Far East, while LEGO was still very much a Danish company. And kids’ play habits changed, kids had less time for structured play. They were more attracted toward electronic products. Their attention spans seemed to have gotten smaller. And all of these things probably made it hard for any traditional toymaker, but particularly for LEGO.

BRIAN KENNY: So LEGO chose to respond in some interesting ways when they started to face these challenges. They began to extend the brand into different lines of business.

JAN RIVKIN: Yeah. Now, what is really helpful from a teaching perspective about the LEGO story is there were actually two efforts to turn around the company prior to the one in 2004. Moreover, each of those efforts, on their face, had some things about it that make sense. So the first effort starting around 1993 was to extend the brand to other products. They looked at other companies with great brands like Disney and said, “Look, Disney’s in so many things. The product line we’re currently in seems to have stagnated. What makes sense? Let’s take that core asset of the brand and expand into a diversity of products.”

JAN RIVKIN: So they opened amusement parks, they started making video game software, children’s clothing, wristwatches. Moreover, in the bricks themselves, they responded to children apparently having less time to play by making it easier to get through the stage of constructing the product and get more quickly to the stage where you play with it.

JAN RIVKIN: On the surface, these things all made sense, but in fact, they led to disastrous outcomes. So a key part of the class discussion is to understand why these things, that on their surface looked reasonable, backfired in this context.

JAN RIVKIN: The second attempt at a turnaround was bringing in a Mr. Fixit, who did many of the things that you would expect someone to do, right? The restructuring of the organization, bringing in a series of layoffs, streamlining production, reducing layers, moving managers around more often, moving design centers out of sleepy old Billund, Denmark into London, Milan and San Francisco, consolidating the sales force. They start to sell directly to customers.

JAN RIVKIN: And take for instance that last move, selling directly, it kind of makes sense, right? The retail situation is getting tougher, the mom-and-pop stores are going out of business, you’re having to sell through the Walmarts of the world. Surely it makes sense to go direct to the customer.

BRIAN KENNY: And you’ve got other brands that have done it. Apple has made that move, Disney made that move.

JAN RIVKIN: Yeah. And once again, this turns deeply, deeply south.

JAN RIVKIN: And so the case discussion centers on why do these things that on their surface seem to make some sense not make sense in this context?

BRIAN KENNY: I particularly found the core priorities that they sort of reestablished as interesting.

JAN RIVKIN: I don’t want to give away too much of the turnaround. The last part of the case discussion has students struggle to put together a plan to turn the company around. They are put in the position of Jorgen, and asked what would they do? And they’ve got to make decisions about every single function of the company. How will the product line change? How will marketing change? How will sales change? How will they approach their retail partners differently? How might they manufacture differently? To do all that, they’ll have to change how they procure inputs, how they hire people, who they hire, how they train them, and how they manage the company. So it really is a challenge to come up with an integrated strategic option that will respond to the challenges in the marketplace, will make use of what is unique about LEGO, and will avoid the mistakes that the previous two efforts, which seemed sensible, fell into.

BRIAN KENNY: So you put the students to work on that?

BRIAN KENNY: Do you find that there are any students that you have in class who are unfamiliar with LEGOs?

JAN RIVKIN: I cannot remember ever having a student who did not know LEGO.

JAN RIVKIN: Right now, they calculate they serve roughly 80 million children, right? Which is only a small fraction of the world’s population of children. But I think among the students, among the children who wind up coming to Harvard Business School, we’ve got a large share who are LEGO fans.

BRIAN KENNY: That’s good. So they all feel a connection to the case in some way?

JAN RIVKIN: They do. They do. And we try to reinforce it. Have I shown you the LEGO Baker Library?

BRIAN KENNY: I’ve seen that in your office. Describe that for our listeners.

JAN RIVKIN: So the designers at LEGO were very, very gracious. Near the end of the case-writing process, they sent to us a LEGO model of Baker Library. It is remarkably detailed. There are features of the library that I had not noticed in walking by the library for two decades until I saw it on the model.

BRIAN KENNY: We might have to put some pictures of that on the podcast website [inaudible 00:12:19].

JAN RIVKIN: I would be delighted to share my model. At some point it will be bequeathed to Baker Library itself.

BRIAN KENNY: Yeah, that’s fabulous.

JAN RIVKIN: But for now it sits in my office and I’m not letting go.

BRIAN KENNY: Be really careful, I guess don’t bump into that either. You don’t want to take down a wing of the library inadvertently.

JAN RIVKIN: So it turns out that the model is in fact glued together.

BRIAN KENNY: They didn’t trust you.

JAN RIVKIN: The other thing I’ll share with you, Brian, is, I don’t think he’d mind, it turns out that the executives of LEGO have unique business cards. They are LEGO Minifigures that look like them and have their names and contact information on the Minifigure itself.

BRIAN KENNY: That’s fabulous. That’s great branding, carrying it all the way through.

JAN RIVKIN: It is.

BRIAN KENNY: Can you talk a little bit about the way that LEGO as a culture manages innovation? So people who are familiar with the toys might just say, “Well, the things haven’t changed forever. It’s the same toy.” You mentioned the system and how it works. But in fact, there is a strong innovation engine within LEGO.

JAN RIVKIN: Yeah. So it is innovation within certain constraints. Each year, roughly 60 percent of LEGO’s sales come from products that are brand new.

JAN RIVKIN: On the other hand, 0 percent of their products, roughly, come from components or pieces that are brand new. They’re the same bricks.

JAN RIVKIN: And so they need an innovation system that allows them to innovate within the constraints of using the same things. They’re also very careful to separate out different types of innovation. So they’ve got a very small group that thinks about brand-new out-of-the-box things, but they’ve got a larger group which thinks about how will we create the next LEGO brick-based product for our core customer? They also have engaged in a bit of open innovation. There are large numbers of adult fans of LEGOs, called AFLs, adult fans of LEGO who, because they love the product, are innovating the product all the time. And so they’ve got a system by which they reach out to those users of LEGOs to bring in new innovations. If people are innovating with your product voluntarily, you’d be nuts not to learn from that innovation.

BRIAN KENNY: So the future is bright. They continue to be, by the way, one of the top-selling toys. In fact, on eBay, they were among the top 10 toys that people are reselling consistently, so.

JAN RIVKIN: After the turnaround, their returns skyrocket, it’s quickly above 100 percent return on invested capital, and they’ve seen very rapid growth which continues to this day so far.

BRIAN KENNY: Great. Jan, thanks for joining us.

JAN RIVKIN: Thank you, Brian. It’s been a pleasure.

BRIAN KENNY: You can find this case in the HBS case collection at hbr.org. I’m Brian Kenny, and you’re listening to Cold Call , the official podcast of Harvard Business School.

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How Lego Came Back From The Brink Of Bankruptcy

"The Lego Movie" premiered last Friday and made $69 million in its opening weekend , giving it the largest debut of the year so far. Yet only 10 years ago, the company was on the brink of bankruptcy , and such a massive undertaking (let alone a successful one) would have been out of the question.

When Jorgen Vig Knudstorp came in as Lego CEO in 2004, the company was struggling to give consumers what they wanted and effectively manage costs. Knudstorp  finally brought fiscal responsibility to the Danish toy maker. He also tried something novel — handing over creative direction to the core fans of the brand.

It worked. Creativity combined with smart management ultimately saved the company.

Lego Designer Mark Stafford , a fan who was recruited to help rethink the company's products, recently took to Reddit to share some of the behind-the-scenes details of the turnaround. 

When Stafford attended an AFOLCon (Adult Fans of Lego Convention) event in the United Kingdom a couple years ago, he heard Lego's chief marketing officer Mads Nipper speak about the terrible period between 1999 and 2003. Stafford writes of it:

The LEGO company at that stage had no idea how much it cost to manufacture the majority of their bricks, they had no idea how much certain sets made. The most shocking finding was about sets that included the LEGO micro-motor and fiber-optic kits — in both cases it cost LEGO more to source these parts then [sic] the whole set was being sold for — everyone of these sets was a massive loss leader and no one actually knew.

Here's an image from eBay of one of those motorized kits. The "fiber optics" are actually clear plastic tubes that connect to a battery-operated LED-light pack:

Stafford continues:

This was combined with a decision to 'retire' a large number of the LEGO Designers who had created the sets from the late 70's through the 80's and into the 90's and replace them with 30 'innovators' who were the top graduates from the best design colleges around Europe. Unfortunately, though great designers they knew little specifically about toy design and less about LEGO building. The number of parts climbed rapidly from 6000 to over 12,000 causing a nightmare of logistics and storage and a huge amount of infrastructure expansion for no gain in sales. Products like Znap, Primo, Scala and worst; Galidor all came out of this period.

That "Galidor" series he mentions with such disdain was based off a kid's show of the same name. It involved so many new parts exclusive to each individual set that it resulted in awkward kits that did not comfortably fit into the Lego brand. Here's one being sold on eBay :

The only reason Lego survived during this difficult time was due to the success of the Bionicle and "Star Wars" series. The first "Star Wars" Lego kits launched in 1999 and represented the company's first foray into licensed series, many of which became integral to the company, as this infographic from Wired illustrates. But Lego could not survive on several big sellers alone.

Knudstorp, a former McKinsey consultant, took charge of the foundering company in 2004 and immediately got to work. Stafford explains:

Jorgen Vig was put in charge, he made the hard call and made redundancies, they slashed the number of parts down to 6000 (a figure that has grown, but we're still below well below the 2003 total) — the company reorganized and analyzed all costs, design was finally linked to manufacturing cost and re-focused on the core business of making construction sets. The unprofitable LEGO Computer games business was shut down. (Some of these guys returned to the UK and started their own company called Travellers Tales, they then licensed the LEGO computer game business and freed from LEGO management (who know nothing about computer games) they still make the LEGO computer games today — making good money for all involved — including LEGO.)

After consolidation and streamlining, Knudstorp led a charge to put creative control into the hands of hardcore fans of the brand rather than in those of top designers who had skills but lacked a real understanding of Lego's history. The company held its first designer recruitment workshop in Sept. 2006. Writes Stafford:

I was one of the 11 designers hired at that time, new managers were in place in the Design building, all developed inside the company, these guys loved the product, they knew the customers as they had grown up playing with LEGO and they had ideas that had been restrained for years. They hired several kid focused design graduates and a few AFOLs (adult fans of LEGO), of which I was one.

Stafford is one of the designers of the "Legends of Chima" series, which has an accompanying animated television show. The kits feature plenty of new parts and characters but never venture beyond the classic Lego "feel" that designers like Stafford helped bring back to the brand. Here's an example, from Lego's website :

For Stafford, the best proof of Lego's turnaround is captured by the new movie:

For me it's been an absolutely fantastic seven years so far and I see all of the work and principles these guys have created as the message of The LEGO Movie, it's not just a toy, it's a tool for creation and imagination and getting LEGO bricks into the hands of kids is the only aim of everything we do. I'm so proud of being even a tiny bit involved in it!

 Here's a trailer for the film:

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The cautionary and inspirational story of how LEGO rebuilt itself

How the toy titan went from the verge of bankruptcy to being named the world’s most powerful brand in just 12 years.

LEGO is the world’s biggest toy company, with a market value exceeding US$9 billion and seven toy brick sets passing through the world’s checkouts every single second – that’s 600,000 every day. In 2021, a group of international business researchers found that investing in LEGO was more lucrative than gold, stocks, art or wine.

However, in the over 100 years since its Danish Founder, Ole Kirk Christiansen, opened his first woodworking shop, the company has been built up and fallen to pieces more times than one of its Millennium Falcon replica models.

Among financial analysts, it has also become a textbook example of how a failing, mature brand can revitalise its fortunes and become relevant for a new generation. In fact, there are lessons every business can learn from its spectacular missteps and incredible triumphs.

Ole Kirk’s enterprise

Christiansen’s business didn’t exactly get off to a promising start. Both his shop and family home in Billund, South Jutland burned down and when he invested in new premises, he had few customers and slipped into bankruptcy.

Undeterred, he continued carving yo-yos, pull-along animals and small, wooden bricks until the war when, once again, his workshop was burned down, this time by the occupying Nazis.

Two business principles kept him going – a passionate belief that despite sales evidence to the contrary, children would love the interlocking bricks and an ability to see new possibilities.

In his case, the possibility he saw in 1947, after decades of working with wood, was plastic. The LEGO brick was born and, when Christiansen died in 1958, his son took over the hugely successful company.

Even when the company completed its hat-trick of fires and lost its warehouse two years later, nothing could stop the momentum. Children did indeed like building up bricks. A lot.

In the late 1970s, Kjeld Kirk Kristiansen, became the third generation of his family to run the business and revolutionised its approach. He introduced the Technic brand aimed at older kids, action sets with mini figures and more elaborate and ambitious models.

Brick innovation

MIT’s Beth Stackpole identified three of LEGO’s successful tactics that, she says, any mature brand can utilise: respect what made you great; listen to your core customers; and utilise a range of innovation approaches.

“Through trial and error and a number of failed digital-only initiatives, LEGO discovered customers wanted digital experiences that complemented core offerings rather than replaced them. Centring innovation around the brick-based construction experience through new stories, games and experiences is what drove customers back to the LEGO brand and returned the company to profitability.”

Diluted vision

During the following 15 years, the company doubled in size three times and became one of the world’s top 10 toy manufacturers. But the carefree brick-meisters were about to hit a brick wall.

Cheaper copycat products and the rise of computer games in the 1990s unnerved the senior management, who knee-jerked into making the humble LEGO sets flashier and more electronic. Action figures, fashion lines and jewellery were launched and the sets of bricks had new-fangled components, motors, lights and sound effects.

Suddenly it was no longer about Christiansen’s vision of young kids using their imagination to press bricks together into rockets, castles and jet fighters.

A cascade of more and more sophisticated and diverse products diluted the brand as LEGO flailed wildly, convinced by multiple teams of consultants that a box of plastic bricks was no longer sufficient to excite tech-obsessed children with their Tamagotchis, Nintendo 64s and Game Boy Colors.

Sales plummeted to such an extent that, by 2003, the company was mired in debt to the tune of US$800 million and facing bankruptcy. By rights, that should have been the end of the story – an outdated toy from a bygone era that wilfully inflicted intense pain on any parent who stepped on a brick in the dark.

There was no actual factory fire this time round, but LEGO still appeared to have gone up in smoke. Incoming CEO Jørgen Vig Knudstorp seemed to agree, declaring with some irony: “We’re on a burning platform, We’re running out of cash … [and] likely won’t survive.”

Back to basics

Not exactly the morale-boosting pronouncement the 36-year-old’s colleagues may have wished for, but at least he was being honest.

Or was he? The former McKinsey consultant actually had a comprehensive plan to rebuild the troubled toymaker one brick at a time and turn it into ‘the Apple for toys’.

How he achieved it has been described as the greatest turnaround in corporate history, with a book on the subject, Brick by Brick by David Robertson becoming an essential text for global business academics.

Vig Knudstorp’s strategy was to go back to basics. He immediately halved the number of LEGO pieces produced, cut 1,000 jobs and sold off the Legoland parks so they could concentrate on what they did best.

“Kids will never lie to you about whether something’s fun or not.” – Mads Nipper, former LEGO CMO

He also analysed every single expenditure and aligned design to manufacturing cost, having discovered to his horror that some sets were being sold at a loss.

Crucially, he switched his research team’s focus to the core audience, a group he knew he could trust. As Mads Nipper, LEGO’s former Marketing Chief, said: “Kids will never lie to you about whether something’s fun or not.”

But there was another significant demographic they’d been ignoring – the highly motivated adult fans of LEGOs (AFOLs).

AFOLs were given their own platform to submit ideas and vote on new products, many of which became very successful. Nostalgia among parents led to sets themed around Home Alone , Ghostbusters and even The Golden Girls .

In his book, Robertson identifies five ways that the company’s approach was transformed:

• Becoming customer-driven by getting actual kids to help invent new products.
• Leveraging a full-spectrum approach to innovation that wasn’t just about individual products.
• Harnessing the ‘wisdom of crowds’ approach to innovation that trusts public opinion more than experts.
• Opening up unexplored ‘blue ocean’ markets.
• Overhauling the culture of its design teams to let profitable innovation flourish.

They’re strategies any stagnating, mature brand can employ to revitalise itself.

“It’s how Apple turned itself around,” Robertson told an MIT webinar. “It’s how GoPro got five years of 90 per cent growth, it’s how Sherwin-Williams gets twice the price per gallon of paint than other paints that are functional equivalents. Marvel Comics turned itself around in the same way.”

A tonne of bricks

• 318 million tyres LEGO produces every year, making it the world’s biggest tyre manufacturer
• 400 billion LEGO bricks on Earth
• 27% rise in revenue in 2021 as kids (and adults) stayed home during lockdowns
• 11,695 pieces in the LEGO Art World Map, the most of any LEGO set
• 915 million different ways six eight-stud bricks can be combined

Everything is awesome

Vig Knudstorp certainly achieved his dream of becoming ‘Apple for toys’ as LEGO’s profits quadrupled during the 2008-2010 financial crisis, rising even faster than Apple’s.

In 2014, The Lego Movie , with its appropriately named anthem Everything is Awesome , grossed US$500 million (delivering a similar dollar value in free publicity). One year later, Brand Finance declared LEGO had toppled Ferrari to become the world’s most powerful brand, with profits soaring from US$311.5 million in 2009 to US$1.9 billion in 2021.

In essence, Vig Knudstorp had pared back the unnecessary clutter, listened to the right people and, like Christiansen decades earlier, put his faith in the imagination of children.

Despite VR video games, endless streaming services, social media, toy drones and artificial intelligence robots, kids big and small still like playing with bricks.

Read next: Famous companies that are secretly pioneering the future of packaging

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• Assignment: RC TOM Challenge 2018

Open Innovation at Lego – The Back Beat in “Everything is Awesome”

After avoiding bankruptcy in 2003, LEGO has effectively used open innovation to align with customer demands and to become a global leader in toy innovation. Now, can LEGO’s use of open innovation maintain its growth with increasing digital competition?

The Interdependency Between LEGO’s Success and Open Innovation

In the face of digital competition, LEGO’s journey defending its market share has not been all fun and games. With 2017 revenues declining 8% (first decline in over a decade) and layoffs totaling 1,400 [1], LEGO needs a new growth strategy to compete in a slowing industry (the global toy market grew 1% in 2017) [2]. When faced with these pressures in 2003, LEGO’s initial response was to offer variety through new products, such as computer games and theme parks. However, these introductions had unintended consequences, adding complexity for the customer, inventory challenges for LEGO, and supply delays for retailers. [3]

LEGO’s famous turnaround strategy came from engaging its expansive customer base. LEGO utilized The Future Lab to develop low-risk, low-cost innovation techniques that led to rapid creation of minimum viable prototypes. [4] The goal was to generate customer feedback on a small scale before making substantial investments, illustrating LEGO’s philosophy that, “people don’t have to work for us to work with us.” [4] To further this practice, the company launched, LEGO Ideas , an online crowd-sourcing platform, allowing customers to share and to vote for ideas they wished to see as additions to the product line. LEGO Ideas yielded hundreds of suggestions annually, employing social media to generate actionable data. Focusing on products that would sell, LEGO was able to reach new audiences through its extensive physical footprint and brand awareness. Two successful efforts were LEGO Architecture (iconic building sets), which increased LEGO’s popularity with adults, and LEGO Friends, increasing its female presence. [5]

Open Innovation – Still the Answer

Now, to understand its next growth phase, LEGO is using open innovation to strategically increase its global footprint, widen its target audience and define its long-term product strategy.

Pathways to Just Digital Future

In the short-term, LEGO is expanding in China by partnering with Tencent (Chinese internet company) to create a safe digital platform for children, allowing LEGO to experiment with digital in a region where it has found some digital success. [6] At its Shanghai stores, LEGO is also launching its exclusive “Future of Shanghai” product. Utilizing a small-scale launch, LEGO offers four different spaces for consumers to build their own future city, generating immediate feedback. [6] Additionally, LEGO is utilizing Indiegogo Enterprise (an innovation validation platform) to test ideas through pilot projects, the first is LEGO FORMA , targeting adults looking for a creative outlet. [7] These pilots are being run in limited batches to crowdsource, to rapidly iterate and to ascertain demand.

In the long-run, LEGO is attempting to build a bridge between traditional toys and the digital world. [8] To lay the foundation for this middle ground, LEGO’s red Duplo train is an opportunity to test the market’s appetite for products that offer this in-between, with an optional mobile app. [8] Beyond bricks and toys, LEGO has been experimenting with a variety of play experiences in digital  – LEGO Life (children social media network) and LEGO Fusion (virtual mobile app) – and a variety of movie, television series and LEGO-themed playgrounds. [9] LEGO’s initial entry in the digital category has largely failed, while the later initiatives have found commercial success. [9]

Recommendation for the Future

With that lesson, LEGO needs to remember that while digital offerings not only increase competition, they also create a point of difference. LEGO’s value proposition to parents, the purchasers, is to provide children with an alternative to video games and to “do something physical that is good for fine motor skills, 3-D spatial realization, and creative construction.” [5] LEGO can leverage this in the short term and utilize open innovation to understand how it can better penetrate the educational market, increasing products targeted at developmental skills.  In a similar vein, Lego Serious Play , LEGO’s innovation seminars, use 3D models to help business professionals uncover deeper insights and increase performance. [10] LEGO can diversify its growth by expanding these non-play services.

To deepen its open innovation strategy long-term, LEGO should increasingly focus on outbound innovation, generating ideas with suppliers and retailers to foster successful partnerships. [11] This will combat the typical problem with open innovation and rapid prototyping – as products quickly enter the market, there is little time to innovate downstream processes. [12]

What’s Next?

While open innovation holds great promise for LEGO, the question remains – how do you consistently and effectively incentivize your partners to engage with your efforts? [13] Upon success in finding the right incentives, the question then becomes – what impact will virtual reality have on the toy industry and will open innovation be enough?

Word Count: 799

1)      The LEGO Group, 2017 Annual Report (Denmark: The LEGO Group, 2017), p. 5-6.

2)       “Toy Industry Sales Grew by 1% in 2017,” press release, January 25, 2018, PR The NPD Group, https://www.npd.com/wps/portal/npd/us/news/press-releases/2018/toy-sales-globally-and-in-the-us-both-grow-by-1-percent-in-2017-reports-the-npd-group/, accessed November 2018.

3)      Mocker, Martin and Ross, Jeanne. “The Problem with Product Proliferation.” Harvard Business Review . (May-June 2017): 5.

4)      The Leadership Network, “5 Sustainable Innovation Practices that Saved Lego,” Innovation Management, November 7, 2016, [https://theleadershipnetwork.com/article/lego-sustainable-innovation], Accessed November 10, 2018.

5)      Robertson, David. Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry (New York, NY: Random House, 2013), p. 8-39.

6)      “Lego Video Zone Goes Live on Tencent Video,” press release, May 25, 2018, on LEGO website, [https://www.lego.com/en-us/aboutus/news-room/2018/may/lego-group-and-tencent], accessed November 2018.

7)      “Lego Creative Play Lab Takes Pilot Project to Indiegogo for Open Innovation,” press release, September 27, 2018, on LEGO website, [https://www.lego.com/en-us/aboutus/news-room/2018/september/lego-forma], accessed November 2018.

8)      Milne, Richard, “Lego’s Niels Christiansen: picking up the pieces,” The Financial Times, August 19, 2018, [https://www.ft.com/content/955ec4de-8f3f-11e8-bb8f-a6a2f7bca546], accessed November 2018. – duplo

9)      Robertson, David. “Lessons from LEGO: What do you do when your current growth phase ends,” The Leadership Network – Innovation Management, June 1, 2018, [https://theleadershipnetwork.com/article/lessons-from-lego-what-do-you-do-when-your-current-growth-phase-ends], Accessed November 10, 2018.

10)   Dann, Stephen. “Facilitating co-creation experience in the classroom with Lego Serious Play,” Australasian Marketing Journal 26 (May 2018), p. 121-131.

11)   Supply Management, “Put procurement at heart of innovation, says Lego buyer,” October 16, 2018, [https://www.cips.org/en/supply-management/news/2018/october/put-procurement-at-heart-of-innovation-says-lego-buyer], Accessed November 10, 2018.

12)   Cina, Amelia and Cummings, Stephen. “Open innovation communication – improving strategy implementation in the public sector,” Policy Quarterly Volume 14, Issue 1 , (February 2018), p. 74.

13)   Bughin, Jacques and Chui, Michael. “The next step in open innovation,” The McKinsey Quarterly (June 2008), p. 3.

Student comments on Open Innovation at Lego – The Back Beat in “Everything is Awesome”

As a huge LEGO fan as a kid, I find this really fascinating. It’s noteworthy to see how LEGOs, which are predominately physical toys, have been able to leverage the digital world to get into open innovation. It’s interesting that your recommendation is to focus on the innovation with suppliers and retailers — my immediate thought would be doubling down on the connection with their end users, but I can see how the other folks in the supply chain play a big part.

To your final question, my bet is that LEGO attempts to bridge the gap between their physical toys and VR, not making the physical bricks entirely obsolete. It seems similar to the leap that was made by the LEGO Mindworks product that was released many years ago, which introduced motors and other mechanical items that allowed children to program the LEGO creations to move.

Along with Mike, I find it very interesting how this tangible product is venturing into the intangible. My main concern with VR and other purely digital platforms is that if you remove the blocks, is the product no longer LEGO? I believe part of why LEGO has continued to exist in the toy market is because of the universal satisfaction children get from the ability to physically create, destroy and create again. It’s hard to imagine how children could benefit from the motor skill development on a digital platform. To me, removing the blocks leaves you with just another digital game but with the name LEGO on it. Open innovation seems like an exciting method to learn how to better serve the interests of their suppliers, retailers and consumers, but I would caution against sacrificing what makes LEGO LEGO when exploring other digital platforms for their consumers.

Awesome article! I was also a big fan of LEGO as a kid, and was very interested to see how they’ve evolved and survived the bankruptcies of other peer companies like Toys-R-Us. As you cite that LEGO’s survival hinged upon their digital partnerships and open innovation platform, wanted to add one more consideration into the mix – as LEGO partners with more digital partners like Tencent, they should also be wary about the growing rise of anti-screen parents [1]. As kids have become more digitally dependent, parents have in turn become more strict, and we might see a decline in usage, which could force LEGO to pivot once again.

[1] https://www.nytimes.com/2018/10/26/style/phones-children-silicon-valley.html

Good point – I think this is why LEGO is targeting the middle ground between digital and traditional. Specifically, their digital offerings have been very strategically targeted in markets where they’ve previously had local success and strong partnerships, i.e the investment with Tencent and China. Additionally, in the Tencent example, LEGO is directly responding to Chinese parental desire for safer digital platforms for their children. In other offerings, LEGO has been quick to remove failed digital products from the market, keeping with the spirit of open innovation and the idea that “the customer knows best.”

Jaclyn – great work here. Though the product outsourcing seems like a great idea and it has worked well, I’m reminded of something we talked about during our Gap case in Marketing – consumers are very bad at predicting their own future preferences. The issue may be less prevalent here given tastes in toys may be less fickle than tastes in clothes. However, there will be a delay from the time LEGO sources ideas from customers to the time the products appear on store shelves. I wonder if they have much exposure to consumer preferences changing during the “throughput time” of the product. All in, though, it may still yield better results than creating products without consumer input.

That’s an interesting point. I think the beauty of LEGO’s offering is that within their traditional brick toy sets, the end design is ultimately determined by the user. LEGO should keep in might that concern as they offer more specialized products, especially in the digital area, that do not offer this original flexibility to customize output.

Awesome essay, Jaclyn! As a huge Lego fan, I found it very intriguing to see how Lego is trying to interact with the new generation of children. On your first question, I really liked your recommendation that they partner up with retailers and suppliers for further idea generation and product prototyping. That didn’t even cross my mind as I was reading this as I was so focused on the consumer. I think it would be extremely interesting to hear from toy retailers (maybe a store like Target) as they are seeing the daily reactions of children to toys and are also seeing what parents are pulled towards in the aisles.

To your second question, I worry about Lego venturing into VR for children because, as you mentioned, parents want Legos so that their children stay away from screens. Would they lose their current customer base if they moved towards VR? I think a crowd sourcing platform to hear from parents would be critical to ensure they are not losing any part of their customer base to keep up with new technology. One idea that I think could combine the best of Legos and new technology is for children to build a scene with physical Legos and then be able to explore the scene with a VR experience. I won’t lie, I am not sure if or how this is possible, but open innovation is supposed to draw out even the craziest ideas!

Thanks for the comment. I agree that VR is likely too far from LEGO’s core competencies to successfully implement and appreciate you elaborating on the point. My concern was that the impending increase in VR offerings in the video game industry more broadly may significantly increase the competition LEGO faces, challenging the capacity and resilience of Lego’s open innovation strategy to foster growth in the future.

Thanks! I think education is the front where LEGO could potentially succeed in terms of open innovation and commercial success. While LEGO seems to expand into various kids-related categories, I feel have tremendous potential to leverage on new technologies and their adoption by youth. Firstly, while 3D printing is a hot topic among adults, LEGO could easily mimic the learning potential through its existing products. By structuring the construction experience around designing and “printing” new structures with bricks, they can convey complex concepts at entry level. Secondly, LEGO has incredible resources and storytelling capabilities to move older kids into a VR-like experience where they could build larger structures and learn how things work in real life. Based on what kids end up building and learning most efficiently, LEGO can repackage this information into new products and services that tie customers closer to the brand.

I think open innovation is a very relevant alternative for mature and declining industries. The toys industry is a good example of that. The important consideration that LEGO should have in mind is that other industry players are also betting on it. For instance Mattel created My Mattel Ideas, which is a portal for people to contribute with ideas of products (see link below). This doesn’t represent a threaten per se but it is important that LEGO executes the right strategy so this can become a competitive advantage (as you mentioned above).

https://www.mymattelideas.com/ideas/myidea

This is an awesome article — also a childhood lego fan here. This is a fascinating case-study on how a company is using open innovation to grow their companies. Two things came to mind here: 1. How does Lego maintain engagement with Lego Ideas users? 2. Is Lego worried at all about competitors potentially stealing some of the ideas from the Lego Ideas platform? I’d be curious to know the distribution of people who source good ideas on the Lego Ideas platform and what kind of relationship/engagement Lego (the company) has with active users. With these open ideas platforms, how do people find these platforms and what is their average level of engagement. Presumably, you’d like to keep the active users for longer period of time but I wonder how companies incentivize users to stay engaged. On the competitor front, Lego has some unique brand qualities that other competitors cannot replicate but I do wonder to what degree competitors leverage the Lego Ideas platform for “inspiration” and what legal bounds there are about copyright/trademark -ing these open-platform ideas.

All in all, this was a fantastic move on Lego’s part that has clearly yielded positive results for the company and increased brand loyalty amongst its users.

I loved legos as a kid and would definitely consider trying out a product tailored to adults. I had no idea that they were pushing in this direction.

Do you have any insight as to how they’re handling the transition between minimally viable prototype / product –> full product release? I also recently saw that Lego was releasing products focused on teaching young kids to code. This interested me because it opened the door to partnerships with schools and local governments. Do you think that there is similar potential here where Lego could partner with organizations trying to spur creativity among children?

It is interesting that across industries, the challenge for open innovation remains long- term engagement of innovation partners. It may be than in LEGO’s case, there is a campaign or a reward they could provide their innovators (essentially their customers). Another idea is to create a platform for enthusiasts, and provide enough stimulating content to drive engagement. In addition, they may need to find new potential sources of innovation outside of their customer base.

Cool findings, Jaclyn! I’m also a Lego fan, and it breaks my heart a bit to think of them doing poorly. It would also break my heart if they steered too much in the direction of digital, and away from their physical building blocks. Though I agree with you that VR might be a stretch for them, I wonder if you could keep the blocks, and kids could one day “navigate” through the physical structures they build using VR. Or perhaps whatever they built, could be uploaded and inserted into a computer game. I mostly hope that parents are indeed steering their kids away from screens and back to physical toys, which I believe are generally better for their physical and social development. I did find it very cool that Lego let people way in on what they want to see in the future. Seems like the best way to make sure they give their customers what they want! At least the adults..

I agree with Mark’s concerns on the side of the customers not always knowing what they want. I would also like to know which customer age groups are providing this feedback. I remember loving LEGO blocks as a kid, but I am hesitant as to whether the feedback they are getting today is from kids as some of the ideas seem more as coming from adults (architecture does not sound like a child’s ask). If this were the case, I would be concerned that we would be neglecting the very customer base that has made LEGO a favorite toy brand. In this case what would you think would be the appropriate channels to ask for children’s feedback? Do you think balancing a “creative director’s” input and a customer’s suggestion would yield better toys for the future?

Great article. I think Lego has used open innovation effectively. However, from a customers perspective my inputs on innovation will typically be very marginal or in some cases not practical. Lego will have to manage the risk of listening to customers needs too easily. The company has to be rational in terms of what innovations are commercially viable. Also, Lego will need to invest in R&D to develop the next “big thing” in Lego given a customers recommendation is most likely limited to the products he or she has already seen. To really grow dramatically, Lego will have to introduce a product that the customer did not know they wanted in the first place.

Loved the article – thanks, Jaclyn! While I think that Lego has correctly identified the direction it needs to move in to keep up with the digital age and has used open innovation to produce products with known consumer demand, I also think that Lego, with it’s immense brand equity, is uniquely positioned to do something really disruptive in the toy industry. I like your idea of collaborating with the other parts of the supply chain to generate more ideas, and I think that relying on consumer feedback heavily for idea generation can prevent truly novel innovation.

Another random thought – with its digital focus, Lego has the opportunity to make its product a lot more collaborative in nature. I can envision a digital platform that allows children to team up with other children across the world in designing and building anything from a rollercoaster park to a fortress and gamifying the combined results. While I think there’s the very valid concern of Legos being the antithesis of video games, I believe Lego has the ability to add a hands on, tangible aspect to gaming in its quest to build connected toys.

Lego is a well-known brand around the world. It lends credibility on children related projects and has a large group of loyal followers. I would imagine this is why Tencent agreed to partner with Lego in China: Tencent is good at digital products in China while Lego is a major player in the kids’ market. The combination produces a powerful product for children in China. In a similar vein, Lego can seek partners in areas that both Lego and its partner wish to grow into.

As seen in the case of Toys R Us, rival manufacturing and digital distribution competition are bigger threats to brick and mortar stores than virtual reality in the near term. While VR may one day take over, it is difficult to see how parents will replace Lego products, physical toy that is proven to stimulate children’s brain activities, with virtual reality/computer, products that are traditionally known to slow down children’s brain development.

Thanks, Jaclyn. I was not aware of the troubles my beloved childhood toy went through and how they recovered. I’m a bit wary of the reliance on the strategy of crowdsourcing as the primary method for innovation. Mark B. mentioned above and was similarly my thinking as I read your story, it’s something that is exciting and working now but how is the company thinking about a potential trend away from consumer engagement? I’d be curious to see how they think of trends as an organization and how these match with the ultimate consumer. Against virtual reality, I do see the organization as insulated in some ways given their requirement for physical pieces. A move away from this would change who they are as a company and remove many of the selling points they currently have i.e. non-screen, motor development. Lastly, I thought your point regarding moving to non-play spaces would be worth exploring, I wonder how much their brand would stand in the way of business professionals taking them seriously.

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LEGO's great business model turnaround story

One of the biggest challenges large companies face is reinventing themselves and remaining successful. Sometimes they fail to do so and their business model expires like a yogurt in the fridge. Learn how LEGO escaped near-death with their amazing business model turnaround story.

In 1949 LEGO began manufacturing interlocking toy bricks in Billund, Denmark. This created infinite possibilities of imaginary worlds for generations of kids and LEGO grew over decades. Yet, LEGO almost faced bankruptcy ten years ago. Watch the video below to learn how LEGO pulled off a spectacular business turnaround, quadrupled its revenues in less than a decade and brought LEGO bricks back to households around the world.  Today, they occupy the top spot in the toy manufacturing business (take that Barbie! ;-).

How LEGO created more (value) with less (resources)

One could argue that LEGO turned its business model around by creating more value for customers while using less resources. They first reengineered their operations improving the backstage of their Business Model (Canvas) . Then, they turned to customers and boosted value creation.

Operations focus: streamlining activities and using the resources in the backstage of the Business Model (Canvas): 

• LEGO first streamlined its operations and decreased the complexity of its manufacturing processes. In particular, they reduced the number of different LEGO bricks by eliminating those that were difficult and costly to source. LEGO focused on a standard design of their bricks, which made their operations more nimble and allowed them to react quickly to market trends.
• LEGO also decided to get rid of LEGO branded products that were tangential to their business and weren’t profitable

LEGO expanded its business model only after establishing a robust operational base, ensuring a  profit on the sets they were selling. Then they turned to customers and designed new and improved value propositions that would create more value for their customers. ‍

Customer focus: creating more value with new value propositions in the frontstage of the Business Model (Canvas):

• Lego adapted their kits to the dreams and desires of kids in the 21st century  (e.g. LEGO Mindstorms include smart bricks with both software and hardware to build customized robots).
• LEGO expanded to new markets by designing sets for undeserved segments (e.g. LEGO friends targeting girls) and expanding to emerging countries where their growth was soaring.

Tools & techniques

• Business Model Canvas
• Story-telling  one sticky note at a time

Also, LEGOs are so cool that even Scotland’s police use them.

What are your favorite business turnaround stories?

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Strategic Startup Marketing

• On August 27, 2023
• In Business Strategy , Case Study

The Astonishing Turnaround of LEGO: A Comprehensive LEGO Case Study in Strategic Thinking

• Read Time 2 mins

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Introduction.

When we talk about business turnarounds, LEGO stands out as an inspiring example. This LEGO case study dives deep into how the iconic toy company transformed from being on the brink of bankruptcy in 2004, with $800 million in debt, into a global media empire. What fueled this incredible turnaround? A calculated shift in LEGO’s go-to-market (GTM) strategy is at the heart of it.

The Crisis of 2004: A Snapshot from this LEGO Case Study

Understanding the scale of the turnaround requires a look at how dismal the situation was for LEGO in 2004. Diversification had led the company away from profitability. This LEGO case study aims to explain how a well-thought-out strategy helped LEGO rise like a phoenix from its own ashes.

The Pivotal Moments in the LEGO Case Study: Back to Basics

The LEGO case study reveals that the turnaround can be attributed to crucial strategic decisions. The company decided to refocus on its core product: interlocking plastic bricks. Non-aligned product lines were discontinued, and LEGO involved their customers in new product development.

GTM Quadrant

To better understand the strategic choices made by LEGO, this LEGO case study uses the GTM Quadrant framework, based on Speed and Efficiency:

As revealed in this LEGO case study, LEGO opted for the ‘High Speed, High Efficiency’ quadrant, focusing on their core products. This decision was monumental in steering the company back to profitability.

Analyzing the Impact

Today, LEGO is more than just a toy manufacturer; it’s a media giant with movies, video games, and theme parks. The LEGO case study proves that a strong focus and strategic thinking can revive a failing brand.

Key Takeaways

• Strategic Focus : Less can indeed be more. A focus on core competencies turned LEGO around.
• Customer Involvement : LEGO’s consumer-driven approach provided invaluable insights.
• Decision Matrix Tools : Frameworks like the GTM Quadrant helped LEGO make pivotal decisions.

What Would You Have Advised? A LEGO Case Study Question

If you were in LEGO’s boardroom in 2004, what advice would you have given? This LEGO case study not only presents facts but also encourages you to engage in strategic thinking.

Strategic thinking skills are honed through practice and solving real-world business cases like this LEGO case study. If you find such analyses intriguing, don’t miss out on my weekly newsletter where I dissect similar cases to sharpen your strategic thinking skills.

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HBS Cases: LEGO

Although it isn't part of the admissions criteria, experience playing with LEGOs can come in handy at Harvard Business School.

When Stefan H. Thomke teaches his new case about the iconic toy company, he gives students eight-studded LEGO building bricks to figure out how many different ways they can be combined. Thomke's experience goes back a long way—as a kid growing up in Germany he participated in a LEGO competition. As an adult, though, his interests lie more in the business behind the bricks. "When you've written many cases you have a gut feeling that one like this could be really great," he says.

Thomke, the William Barclay Harding Professor of Business Administration, wrote the case with Harvard Business School's Jan W. Rivkin, the Bruce V. Rauner Professor of Business Administration, and Daniela Beyersdorfer, associate director of the HBS Europe Research Center.

LEGO explores how the company-one of the most profitable toymakers in the world-grew to global dominance from humble beginnings; the mistakes that led it near bankruptcy; and why one turnaround attempt failed while a second succeeded. LEGO executives were unusually supportive about the case-writing process, Thomke says. "We had access to everybody; they wanted the story to be told truthfully, with all the good and the bad."

Building At The Start

Part of that access included a visit to a wood craftsman's workshop in the small town of Billund, Denmark, where LEGO began, in 1916. Carpenter Ole Kirk Kristiansen eventually shifted the business from making houses and furniture to crafting wooden toys. He based the name of his new venture on the Danish words for "play well" (and, as it turned out, the Latin words for "to assemble"). His motto "Only the best is good enough" would later be carved into a wooden plaque and hung in the workshop. These themes of good play and quality products were both bedrocks and touchstones for future generations of LEGO toy makers.

Godtfred Kirk Kristiansen represented the second generation, working alongside his father at age 12. The LEGO brick played with by kids and adults around the globe came into being during Godtfred's tenure. He considered it a unique, sturdy, simple product—a system—that offered endless opportunities for creative fun, and drew up a list of product characteristics including "long hours of play" and "quality in every detail" that was distributed to everyone in the company.

Like his father, Godtfred paid careful attention to every aspect of the business, applying, for example, his knowledge of material science and production technology to the brick-manufacturing process. It's because of these precise specifications that bricks made under his watch are interchangeable with those available today. Godtfred's cautious nature extended all the way to the profit margins: he championed slow, steady growth. Because of this, it could take years for a new product to go to market. Green bricks, for instance, appeared in play sets only after a decadelong decision-making process-and the idea to include them came from Godtfred's son (and third-generation toymaker), Kjeld.

The snail's pace served the company well, as did the grandson of its founder. Under Kjeld's management, product demand was so high at times that executives actually found themselves discussing ways to slow sales.

A Shock To The System

That all changed in the early 1990s as seismic shifts pounded the toy market. Big Box toy discounters trampled mom-and-pops and lowered prices dramatically. Meanwhile, birth rates declined, children had less time to play and not much interest in toys that didn't offer instant gratification. "These changes did not play well to our strengths," observed current CEO Jørgen Vig Knudstorp in the case.

Serious jolts were also taking place in the LEGO Group. Out of work for a year following a serious illness in 1993, Kjeld appointed a five-person management team to help him run the company when he returned. The group focused mainly on driving growth. When a benchmarking study revealed LEGO's global name recognition was on par with industry giants like Disney, the team started churning out new products and ideas to leverage the brand's untapped value. A line of LEGO-branded children's wear was created and a division of the LEGO Group was charged with pitching book, movie, and TV ideas. LEGO building sets became increasingly complex with more unique components.

While the number of LEGO-branded items grew, sales did not, and in 1998 the company suffered its first financial loss. "Their top-line growth was slowing down but their cost was accelerating, so they were starting to lose some significant money," says Thomke.

Danish turnaround expert Poul Plougmann was hired to reassemble LEGO and staunch the red ink. "He comes in and … does things by the book," says Thomke. "He lays people off, he streamlines some things, he globalizes." And yet the financial picture grew worse. "He's basically going by the turnaround book, but it doesn't work."

One continuing problem: the company's growing complexity was choking it. Adding more bricks made products harder to assemble, forecasts harder to determine, and inventory harder to manage. Depending on the kit, there was either too much inventory, or no inventory at all, and restocking could take months.

"You had this multiplier effect of added complexity that went through the entire supply chain," Thomke says.

The LEGO Group had also gotten too far away from the core values it had been building on for the better part of a century. The toymaker found itself needing to turn around its turnaround.

Outside The Family

Enter Jørgen Knudstorp. He was just 35 years old when Kjeld promoted him from director of strategic development to CEO in 2004. (Kjeld retired that same year.)

Like Plougmann, he had no family ties to the company. Unlike Plougmann, his turnaround attempt succeeded. Knudstorp's slow-it-down approach of careful cash management, focusing on core products, and reducing product complexity certainly contributed to that success. It would also take re-engaging with customers, many of whom passed a love of LEGOs to their children while still connecting with the toys themselves. "One of the insights Jørgen had when he became CEO was that he needed to reconnect with the community [of loyal LEGO fans], one of the most powerful assets the company had," says Thomke. "It was a huge part of the comeback."

Knudstorp worked hard to define the core business of the company. "How you work with, and experiment outside of, the core of your business is part of that balance," explains Thomke.

Knudstorp recognized that innovation was part of that core, but he'd also seen the result of unconstrained creativity, so new product design began to be informed by market research, user feedback, and how well the toys matched the vision of quality creative play laid out by its founding fathers. Putting parameters on how people innovate had the paradoxical effect of making them better at it.

Reining in the creative process was part of a larger push by Knudstorp to reduce overall complexity within the organization. On the supply chain side, he did away with many of the unique brick components added during Plougmann's tenure, and eventually decided to bring brick manufacturing back in-house to ensure quality control.

Finally, Knudstorp made big changes to the management team, firing five of seven manufacturing executives and appointing a new leader for the team. A psychoanalyst was brought in to teach the management team how to identify decision-making made by logic versus emotion.

Sustainable And Balanced

It turns out that LEGOs promote lifelong learning. While the bricks themselves teach children the fundamentals of construction and creativity, the company's almost century-old history of management change has important lessons for businesspeople. "Managing sustainable growth is also about managing a balanced business system," says Thomke. "Complexity is something you need to watch very closely."

Controlling complexity, clarifying the core of its business, and engaging the larger community helped save the LEGO Group. Although he was not a Kristiansen by birth, Knudstorp's management style and business ideals closely mirrored those of its founding fathers. Only the best was, and is, good enough.

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Innovation at the LEGO Group (A)

The case tells the story of a company where innovation is tremendously important, but not working well. In 2003, the LEGO Group had a number of positive attributes: it had a well-respected brand with some very good toy lines. It had a passionate customer base that in many areas was more sophisticated than its internal designers. And it had been able to extend the brand into many areas such as toys, games, clothing, theme parks, movies, and many others types of play, earning significant revenues (but not profits). But, in 2003, the company had gotten itself into deep trouble. Over the previous 5-10 years, the toy industry had been changing dramatically in ways that did not favor the LEGO Group. These changes, coupled with some poorly planned investments and a downturn in the sales of some important toy lines, combined to almost put the LEGO Group out of business. The company lost nearly DKK 1 billion in 2003 and its cash dwindled dangerously low. This was the largest loss in the history of the company, and many analysts believed that bankruptcy and perhaps even the breakup and sale of the company were likely. The company quickly sold off assets, reduced headcount, and outsourced production to cut costs and generate cash. But it knew, to turn around the company, it had to improve its overall innovation system. It had to improve the time to market, success rate, and profitability in its innovation system. The case presents a number of representative challenges that LEGO was facing during 2004 and beyond.

• How to restructure an innovation system
• How to encourage all types of innovation (innovation in pricing, business model, channel to market, branding, customer experience, etc.) and coordinate these innovations across the company
• How to involve external parties such as customers, complementary product producers, and external inventors in your innovation system

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