Learning from LEGO: When Brand Innovation Goes Awry

Conventional wisdom says that being more innovative is critical for enterprises looking to enhance competitiveness and improve financial performance. However, the reality for many firms is very different. An ill-conceived innovation strategy or poor implementation of said strategy carries significant business risk. Case in point is LEGO, the iconic 56 year old Danish manufacturer of educational toys. The company’s innovation-induced brush with bankruptcy carries some poignant lessons for managers who see innovation as the magic bullet.

A recent issue of the Knowledge@Wharton newsletter documents the LEGO saga. During the 1990s, the company faced a number of challenges including slowing market growth, mounting competition from lower cost Chinese manufacturers and changing customer needs – triggered in part by the rapid growth in electronics and themed toys. To respond to these threats, management went on an innovation binge. They added to an already large product portfolio LEGO-branded: interactive video games, jewelry, education centers, an amusement park, plus marketing alliances with the Harry Potter franchise and the Star Wars movies.

Around 2000, innovation became a strategic priority in the company. The firm became a best practice for fostering a culture of innovation. LEGO listened carefully to customer feedback. They proactively searched for unexploited markets where its brand could dominate. And, management actively recruited a diverse and creative staff and actively engaged a variety of external stakeholders. Overall, the goal was to become one the world’s strongest brand families by 2005

However, things did not turn out as expected. Ironically, "LEGO followed all the advice of the experts," says Wharton Professor David Robertson, "yet it almost went bankrupt." By 2003, the business was virtually out of cash. It lost $300M that year, and the projected loss for 2004 was up to $400M, with a bankruptcy looming in the not-to-distant future. Robertson would know: he is the author of an upcoming book on the company’s innovation travails (Brick by Brick: How LEGO Reinvented Its Innovation System and Conquered the Toy Industry). Below are some of the company’s missteps, based on Robertson’s research and our firm’s best practices:

Don’t bring a knife to a gun fight

LEGO’s innovation strategy was bound to fail. The company underestimated the severity and permanence of the changes underway in their markets and with their consumers. As a result, the plethora of un-inspiring new products was unable to mitigate fundamental trade, consumer and cost challenges. In many cases, it made the situation worse by bloating the product portfolio and reducing focus on core categories.

Success is fleeting

Initially, many of LEGO’s innovations generated positive market results and customer feedback. Problems arose when the myriad of products failed to hit their volume targets in the medium term, particularly the blockbuster-centric Harry Potter and Star Wars toys. This unexpected ‘boom-bust’ performance led to inventory problems, an inflated cost base and added organizational complexity.

Know where you are going

In 2003, LEGO was enjoying early market success – but was flying blind and making decisions haphazardly. The management had not addressed key questions needed to sustain profitable growth, such as: What are our innovation goals and how will we get there? Little attention was paid to how the large and expensive innovation effort fit into key corporate goals. According to Robertson, "If you are going to accelerate innovation, you need to know which way you are going," Robertson said.

Getting back on track

The strategic pivot came in late 2003. Importantly, LEGO did not jettison itsinnovative culture. Instead, it learned from its failures. The most valuable lesson was that a disciplined organization and management system was critical to guiding and supporting an innovative culture. Going forward, the company created a more rigorous decision making process for evaluating and implementing its creative ideas. For example, it developed a vetting process that required each new innovation to be financially sound and aligned with LEGO’s goal of being recognized as the best company for family products.

Furthermore, the firm abandoned its search for category-creating (but high risk) ‘blue ocean’ products. Instead, LEGO reframed its innovation strategy. They refocused their attention back to its core, large and well-understood markets. Recognizing the futility of competing on price and fighting with its retailers, the company attacked its competitors across multiple fronts by opening retail stores, creating LEGO-themed board games and straight-to-DVD films.

The turnaround worked. By better managing its innovative tendencies, LEGO has grown to become world’s third largest manufacturer of play materials. Since 2009, sales have gone up an average of 24% annually and profits have grown 41%.

LEGO may no longer make the list of the most innovative companies, but it is moving forward at a time when many of its competitors are suffering. The LEGO story underscores the moral that leaders should be wary of blindly following innovation dogma. Robertson concludes, "Controlled innovation has clearly worked. That is the lesson learned at LEGO — just in time."

Mitchell Osak is managing director of Quanta Consulting Inc. Quanta has delivered a variety of winning strategy and organizational transformation consulting and educational solutions to global Fortune 1000 organizations. Mitchell can be reached at mosak@quantaconsulting.com