Lego - Turnaround through Disciplined Innovation
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Case Code: BSTR454 Case Length: 14 Pages Period: 1993-2013 Pub Date: 2014 Teaching Note: Available |
Price: Rs.400 Organization: Lego A/S Industry: Toys, Games Countries: Global Themes: Business Strategy |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
Lego's Travails with Innovation
During the period 1993-98, Lego experienced stagnation in sales. One of the primary reasons was the growth in competition after the patent of the "Lego brick" expired. Moreover, the competitors could price their products lower, as they were produced in China. Analysts also observed that the growth in interactive games and video game consoles had caused children to move away from traditional toys. They pointed out that children had very little time for elaborate and open-ended play.
Between 1994 and 1998, Lego increased the number of toys it produced by three times and introduced about five new product themes each year, so as to attract newer customers. However, sales rose by only an abysmal 5% each year and the company was left to cope with a rise in fixed costs and unsold inventory...
The Reasons for the Failed Innovation
Lego appointed Knudstorp to carry out an in-depth study on the declining financial viability of the company. Knudstorp discovered that Lego lacked profitable innovation and that the success of some of its products had effectively masked the market failure of most other Lego products. Even in the case of the successful "Lego Star Wars" and "Lego Harry Potter" sets, though the sales were good during the year the movies were released, they declined sharply later.
Knudstorp found that the design teams did not think about the business viability of their new creations. There was a distinct lack of cohesive thinking and collaboration in toy development. In several instances, Lego had failed to enable a new product line to gain wider market acceptance before extending the product line and going in for mass production. The new construction toys were too easy to build, which caused them to lose their market appeal...
Putting Lego Back on Track
Knudstorp came to understand that companies experienced growth when they concentrated on certain core products for well defined customer segments. He observed that Lego had developed products too different from its core business and this had resulted in a loss of focus. Knudstorp first formulated a survival plan whereby he cut costs, ceased production of loss-making products, raised cash, and secured new lines of credit. Over a period of two years, Lego cut 1,200 jobs (almost 30% of the workforce) and reduced the cost base by US$ 600 million. It restricted the number of new Lego store openings and got rid of the company’s theme parks and computer game businesses.
Lego went about wooing retailers through a series of measures to improve the retailers' margins, ensure product delivery (right kits, in the right volumes at the right time), and enable a "balanced" (not carrying only hit toys) portfolio of Lego products...
Fine-Tuning Innovation Processes
In order to gain market insights, Lego undertook online surveys, market tests, and kid focus group studies. Lego discovered that children loved playing with both video games and construction toys; the two were not mutually exclusive. Lego also got in touch with the Adult Fans of Lego (AFOL). This group was made up of mostly young men whose love for the Lego brick had endured even through adulthood. Lego realized that AFOLs were highly unhappy with the "Juniorisation" of Lego sets (making Lego sets too easy to build). In addition, they thought that the reduction of compatibility between different Lego versions had hampered its assurance of "unlimited play".
These insights assured Lego that there was a significant customer segment which liked construction toys and the elaborate play experience gained from it. Lego also learnt that while it was competing in a niche market that was also the premium segment (where there was higher emphasis on quality and willingness to pay higher prices); the market size was quite substantial. Over a period of time, Lego kept its communication lines with both AFOL and the children's communities open....
Innovation Through Crowdsourcing and Open Innovation
Lego had an insular culture and never invited outsiders into its product development process. However, the "Lego Mindstorms” played a pivotal role in altering its culture and encouraging crowdsourcing in Lego's innovation process.
In 2004, Knudstorp decided to revive the Mindstorms product line, by introducing the next generation robotics kit, Mindstorms NXT. For the product development, Lego decided to seek the help of a few Mindstorms enthusiasts. Careful deliberation went into the process of selecting the outside experts. Moreover, Lego laid down certain ground rules for the outside experts in order to control the innovation process....
Finding the Blue Ocean Markets
As part of the final phase in the "Shared Vision" program, Lego set out to build new growth drivers by embarking on disruptive innovation and tapping blue-ocean markets.
Knudstorp entrusted the "Concept Lab" (CL) at Lego with the task of developing a new play experience and bringing it to the market by 2009. Over a period of time, designer Cephas Howard (Howard) impressed upon the review team the potential for board games to become the future growth engine. Around the same time, Lego asked a few design agencies to come up with new play concepts. When those agencies presented some variation of board games in their proposals, the CL realized that there was potential for board games in the market and gave the go-ahead for their development. Later, the CL came up with two key innovations in board games, namely, a new kind of buildable dice 17 and a tiny Lego man called the "Microfig"...
Outlook
During the period 2008 to 2012, Lego sales grew annually at 2.5% and profits at 40%. This was remarkable considering the growth in the global toy market had remained flat in those years, due to the poor economic environment. At the end of 2012, Lego had increased its global market share from 8.6% to 8.8%, emerging as the second largest toymaker in the world...
Exhibits
Exhibit I: Innovation Process of Mindstorms
Exhibit II: Development of Lego Architecture
Exhibit III: An Overview of the Global Toy Market
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