Block by Block: Harnessing Open Innovation at The LEGO Group

Between 1999-2003 The LEGO Group was on a burning platform [1]. Children were abandoning traditional toys at earlier ages, turning to more sophisticated alternatives such as video games. Retailers were becoming more complex, as the phenomenon of big-box stores made it tougher for Lego to negotiate prime shelf space. Competitors also began outsourcing toy production to China, producing at a fraction of the cost. Lastly, patents for Lego‘s infamous plastic brick had expired. These unfavorable dynamics, along with a substantial debt load pushed Lego to the brink of bankruptcy.

At the time, Lego responded to these challenges by going on an innovation binge [2]. While LEGO had always looked for new products, the company overextended itself by tripling its product offering. During this period, Lego’s design process was managed by a team of ~600 developers. Developers would come up with new products, and management would make launch decisions based on which products seemed most promising. Management was very focused on turning Lego around by pushing developers to generate ideas as quickly as possible. One detrimental result of this over-innovation was the numerous Lego elements it produced. In technical terms, an element refers to a piece of a specific shape and color (e.g. a black 1×1 plate is a different element than a blue 1×1 plate) [3]. At the verge of bankruptcy, in 2003, the company’s innovation binge had produced a library of ~14,000 elements. This irritated all stakeholders in the supply chain, drove up costs at Lego, and the company was burning cash.

Fed up with the situation, Lego appointed its first non-family member CEO, Jørgen Vig Knudstorp. Knudstorp led Lego’s resurrection by implementing two major design changes. First, he began incorporating input from groups of young children in the design process [1]. Designer’s would present ideas in picture form to the children groups, ask questions, and observe the children’s reactions. Through an iterative process with children’s groups, Lego was able to shift the design decision-making process from its developers and management to the consumer. The first ninja themed playset that came out of this process was a massive hit. Second, Knudstorp had developers reduce the number of elements in the Lego portfolio by half, deciding that minor variations across similar pieces added little value to the consumer experience.

This open innovation experiment helped Lego realize the value of collaborating with its user community. Over the next decade, Lego would continue to open the design process to the wisdom of the consumer. Some standout initiatives include “Lego Ideas” and “Lego Ambassadors”. Lego Ideas is a website that allows users to submit ideas for Lego products to be turned into potential sets available commercially, with the original designer receiving 1% of the royalties [4]. Lego Ambassadors consists of around forty representatives in over twenty countries around the world among the community of fans that had naturally developed over various internet forums. The ambassadors representing these communities are responsible for transmitting information and are completely integrated into the design of new products [5].
Lego’s customer centric innovation strategy spurred substantial revenue growth from 2004-2016. Between 2010-2016 profit doubled, and, at one point, the company decided to scale back marketing activities because it couldn’t keep up with demand [6]. Ultimately, open innovation allowed Lego to understand much more clearly the potential and limitations of new product ideas.

In the short term, Lego wants to focus on digitizing its innovation management system [7]. Management’s view is that children’s obsession with screens has left physical toys less popular. Fresh products, such as Lego Boost (an app that allows children to build their own toys), will enable Lego to collect data that will help drive the design process of new Lego building block sets [8]. While I agree with the digitization initiative, I believe it’s also important that Lego doesn’t overengineer it’s innovation programs. The company experienced supernatural growth over the last decade and the current business is more complex. I’d caution management not to repeat the early 2000’s over-innovation binge. I believe there are diminishing returns with each new program, and programs are not free to implement.

In the medium term, Lego wants to apply its innovation practices to markets outside of North America and Europe [9]. I largely agree with management’s focus to expand operations in China, the Middle East, and Africa. However, I would caution management to carefully assess whether current innovation management models can directly transfer to these growth markets. Lego should consider partnering with a local company that’s already using open innovation on the same target market.

Questions to consider
1. How should Lego manage the technological risks (e.g. cyber-attacks, data fraud/theft, IT infrastructure) associated with digitizing it’s innovation practices?
2. Is Lego over-reliant on the external knowledge of it’s users? Should Lego have concerns about key knowledge control?

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[1] David Robertson, “LEGO’s Innovative Path to Success,” YouTube, published August 2018, https://www.youtube.com/watch?v=bDiQBSyPi0c, accessed November 2018

[2] Knowledge@Wharton, “Innovation Almost Bankrupted LEGO — Until It Rebuilt with a Better Blueprint”, http://knowledge.wharton.upenn.edu/article/innovation-almost-bankrupted-lego-until-it-rebuilt-with-a-better-blueprint/#, accessed November 2018

[3] LEGO Glossary, https://www.brothers-brick.com/lego-glossary/, accessed November 2018

[4] The LEGO Group, “Product Idea Guidelines”, https://ideas.lego.com/guidelines, accessed November 2018

[5] The LEGO Ambassador Network Forums, https://lan.lego.com/topic/8-welcome-start-here/, accessed November 2018

[6] Nikolaj Skydsgaard, “Toy maker LEGO builds more plant capacity to revive growth in U.S. sales”, Reuters, September 2016. https://www.reuters.com/article/us-lego-results/toy-maker-lego-builds-more-plant-capacity-to-revive-growth-in-u-s-sales-idUSKCN11C15I, accessed November 2018

[7] Christian Wienberg, “Lego’s New CEO Wants to Combine Apps With Legendary Building Blocks”, Bloomberg, March 2018. https://www.bloomberg.com/news/articles/2018-03-06/lego-s-new-ceo-to-combine-apps-with-legendary-building-blocks, accessed November 2018

[8] The LEGO Group, “The LEGO® BOOST Creative Toolbox FREE app”, https://www.lego.com/en-us/themes/boost/apps/the-lego-boost-creative-toolbox-free-app, accessed November 2018

[9] The LEGO Group full year financial results for 2017, https://www.lego.com/en-us/aboutus/news-room/2018/march/annual-results-2017/, accessed November 2018

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31 thoughts on “Block by Block: Harnessing Open Innovation at The LEGO Group

  1. I really enjoyed this post, given that I would not have considered LEGO ripe for open innovation before reading this. I am impressed by LEGO’s decisions to open up innovation to customers, particularly kids, and I think the “LEGO Ideas” and “LEGO Ambassadors” programs were perfect conduits for doing this. I definitely think LEGO should pursue LEGO Boost to capitalize on the shift to digital in a way that remains true to the brand. I would not worry as much about cybersecurity risks or about where knowledge resides, because at the end of the day, the toy blocks themselves are simple products anyone can imitate. I would assume LEGO derives most of its value instead from releasing sets relevant to popular culture at a given time.

  2. Building on the point about the shift to digital, I wonder whether Lego would benefit from additional use of open innovation to determine their digital strategy. For example, Lego Boost is just a digital vehicle to collect data on how costumers use their physical bricks. However, the real question I think Lego should be asking is how do customers want to use Lego in the digital world. What does “digital” Lego look like? Perhaps Lego should be entering the programmable robot kit or coding kit segment.

  3. I like the idea of open innovation with LEGO – especially since the product is so brilliant in its simplicity. Consumers are children; the beauty of the product is that children get to use their imaginations when playing with the toy. Instead of passively consuming media, they interact and develop. It’s funny to think that over-engineering happened with LEGO based on what the product itself is, so I think the open innovation move was quite smart from a marketing perspective. I would caution LEGO against moving too far from its roots – I think that open innovation is helpful in product development, but moving the toy/product to a digital platform may cause it to lose some of its essence. That is, the open innovation should be carefully managed by the product development teams.

  4. One potential answer to the question “What does digital LEGO look like?” is Mixed Reality (MR). MR will play a big role in LEGO’s products in the future and I see huge potential to extend digital open innovation initiatives into the MR experience. Somewhat in the vein of a “coding kit” users could be given the tools to create MR experiences associated with LEGO sets and submit them to LEGO for review and potential inclusion into the main product.

  5. It is really surprising that LEGO had 600 developers! That figure is much higher than I would have expected. It made me curious about the magnitude of open innovation’s impact on the amount of R&D labor required for simple consumer products like LEGO.

    I also think you make a good point about the power of putting some guardrails in place around innovation (i.e. to incorporate the consumer’s perspective, to prevent product proliferation). It seems that many organizations would benefit from segmenting their innovation teams and processes based on type of innovation.

    I was also impressed by the LEGO Ideas and LEGO Ambassadors programs. It seems like there is opportunity for contests, as well?

  6. After reading this, I wonder if the future of LEGO is now shifting towards a customized / “design your own” sets model? This would be in a similar fashion of how consumers can customize and build their computers, sneakers and jewelry. It would further reinforce the aspect of LEGO leveraging their user base to help them drive product innovation — and they could charge premiums prices for these customized sets. While I acknowledge your concern of the risk that this would pose in terms of controlling its “knowledge base” (especially with the loss of the patent), I think it could be mitigated by patenting the new designs that come from the users. This way, users can feel accomplished, helping with a design and earning royalties, and LEGO can continue to protect its assets.

  7. I really enjoyed this post. It was nostalgic, interesting, and gave insight to the ways that LEGO has stayed relevant for decades. Your question on over-reliance on open innovation is a thought-provoking one. Given the success of open innovation thus far, and given the main users of the product, children, I think it will be key to LEGOs success moving forward. To answer it directly, I do not believe that they are over reliant, so long as internal teams continue to sort and analyze with future priorities and trends toward web-based content in mind. As you’ve noted, LEGO has brilliantly utilized the knowledge of the customers they care most about in a genuine and authentic way. Where I think LEGO can improve/continue progressing, is through thoughtful and intentional success metrics within their open innovation structure. Is it always cost effective? Are the ideas sourced and used radically different from strategy teams? I think structured evaluations of the process are key to solidifying the points you noted about internal guardrails.

  8. I agree with so many of the points you make! I would also argue that it’s important for LEGO to innovate its product offering via digitization given the rapidly increasing use of 3-D printing techniques. Today’s 3-D printers are able to print LEGO pieces that look and function exactly like the real ones. And as 3-D printing becomes more common and cheap, LEGO will face the threat of people easily printing their own toys at home. In the light of this new technique soon taking over the toy industry, I agree that this shift towards open innovation is necessary for LEGO to remain competitive.

  9. I think that Lego success is linked to 1) licensed products that need little creative input i.e. Harry Potter products and 2) internal creativity. I think the traditional innovation model limits the company’s ability to reach more creative ideas and subsequently lower its ability to compete. I think open innovation could definitely boost the creativity of the R&D process, delivering products that are more aligned to what the market is requesting. Also, I think opening the innovation process would engage users with the brand by giving a voice to the user, this is highly valuable in the digital era.

  10. Love this article – especially since I loved playing with LEGOs as a kid! I slightly disagree with your concerns about open innovation in other markets. I actually think open innovation may be the key to success in growth markets – allowing LEGO to tap into the cultural differences and needs of each group. This goes for digitization as well. I believe digitization is probably not a one-size-fits-all solution either and requires open innovation to determine how to best deploy it to growth markets as well.

  11. I disagree with some of the comments above; part of the beauty of LEGO (at least, in parents’ eyes) is that it is a totally offline, screenless activity that builds fine motor skills. I think it’s possible to continue to crowdsource ideas for LEGO products while still keeping the product 100% physical. I hope LEGO continues to learn from children and build products that interest them – it will save LEGO both time and money.

  12. Awesome post. I am intrigued by the idea of LEGO moving into the digital realm. I understand your concern about owning knowledge in an open innovation environment, and how that knowledge leak might affect their brand and sales, but I think LEGO is well positioned to combat this. First, they are THE brand. Parents and kids alike know LEGO and associate LEGO with childhood fun, as long as they continue meeting demand in ways that align with their target market (which they have taken steps to ensure through Open Innovation), the market is theirs to keep. Second, I think they are well positioned to maintain superiority in the Digital Age. They already have a leg up, based on your essay, and they should be able to digitize their LEGO experience by using VR and AR technology… which lines up well with their target market’s interests. I look forward to reading more about Digital LEGO in the future!

  13. Thanks for these insights, beaverpaw2020! I think the open innovation model is very congruent with LEGO’s key tenant of creativity. I can recall being in elementary school receiving a box of LEGO’s not too dissimilar with the one linked below: simply a box of bricks with which to let your imagination run free. Some of my best LEGO memories are making houses, cars, and trains completely without a script. Not dissimilar for what was described above, it would be cool if there was a centralized forum, similar to a subreddit, where you could post your innovations, and LEGO would publish the guides or put together sets. I think this would be good in engaging adolescents. I think this public approach would also serve as a great marketing tool for LEGO.

    https://www.target.com/p/lego-174-classic-medium-creative-brick-box-10696/-/A-16747750?ref=tgt_adv_XS000000&AFID=google_pla_df&fndsrc=tgtao&CPNG=PLA_Toys_Priority%2BShopping&adgroup=Toys_Priority+TCINs&LID=700000001170770pgs&network=s&device=c&location=9001999&ds_rl=1246978&ds_rl=1248099&ds_rl=1246978&gclid=CjwKCAiAz7TfBRAKEiwAz8fKOMmyGKZvqy7jL64PNmSnK2tuLArmX_jyd06X0VKFZVHWtb2qSTebWxoC0fUQAvD_BwE&gclsrc=aw.ds

  14. This was a really interesting post! Your concern about risk that LEGO might over-engineer their open innovation programs really resonated with me. I would also be concerned with over-indexing on consumer feedback as there can be a selection/input bias on the ideas they are sourcing. I’m sure that LEGO has strong design processes and protocols internally, but the knowledge base of consumers should be discounted for as well. There might also be legal & costs risks associated with such open innovation programs and LEGO should maintain a balance between depending on open innovation and internal designs.

  15. The use of open innovation at LEGO was surprising, particular as it is a product company rather than a technology company. To tie it to another key theme, it will be interesting to see how they deal with additive manufacturing / 3D printing. If they are already outsourcing innovation and enabling their customers to develop their own product sets, how can they defend themselves from those customers just printing the components themselves rather than purchasing them from LEGO? Presumably, customers can completely cut LEGO out of the equation, both designing and producing the toys themselves. It will be interesting to see how they address this dynamic and if it affects how they manage open innovation currently.

  16. Lego seems to have used open innovation in the best possible way – by getting ideas directly from its customers i.e. the children. As you mention in your article, they started taking input from groups of young children in the design process. This not only ensures that the product development aligns with the demands of its customers, but also helps market the product. I, however, have reservations on moving to the digital world. I believe that part of the reason that this became popular is their ability to engage “today’s children” outside the screen world! I would love them to continue with this idea of open innovation to continue bringing in non-digital new products for children.

  17. Thanks for an intriguing post – I thought this was a very interesting example of open innovation. I liked how Lego is, in your words, “incorporat[ing] design changes from groups of young children”. It appears to me that “Lego Ideas” provides an outlet for fans to both contribute ideas and vote upon the ideas of others (I especially enjoyed looking at the ideas the commnuity has submitted, FYI: https://ideas.lego.com/howitworks#productideas).

    That said, I would be keen to understand to what degree a product’s success potential can be measured accurately by the enthusiasm of fans. They are likely not thinking about complexity or cost, but rather expressing their unfettered enthusiasm and imagination for what kind of products they would be interested in. I’d be curious to learn how Lego sifts through what gains popularity among its open innovation community vs what products have the most revenue potential (it is not obvious to me whether there is a precise 1-to-1 correspondence).

  18. I liked your article, but disagree with the continued push for “over-innovation” — I fear that Lego may be over-thinking what made it great in the first place. As the world has gone almost completely online, I think Lego’s value proposition to parents is that it is totally offline; it builds skills that “screen” toys cannot. I think Lego should keep their products physical and incorporate ways to use innovation to source their product ideas.

  19. This article is so popular, congratulations! I think Lego was very smart in reacting to a decline in sales and realizing it has to connect more deeply with its customers to develop new business ideas.

    Regarding your question: “Is Lego over-reliant on the external knowledge of it’s users? Should Lego have concerns about key knowledge control?”. I don’t think so: choosing the right idea to develop and having the right decision and testing process is something extremely difficult to replicate. Any other company can grab the thousands of ideas that LEGO probably receives but wouldn’t know how to execute on them. They should only be careful with keeping patents on everything they are developing and establishing clear royalty rules for each new product, but my guess is that they are handling that part of the process quite well!

  20. There are many LEGO-like toys being sold in toy shops, but they don’t sell as well. I think LEGO has tapped into something special with it’s consumer base by pursuing open innovation. A simple toy that inspires creativity almost creates the demand for innovation from its customers (“What else can I build?!”). By allowing for this feedback to go directly to the company, LEGO remains relevant, interesting, and fun!

  21. In terms of your second question, no I don’t think that Lego is over-reliant on external knowledge. The product has a very specific consumer which that needs to be involved in the innovation process. Having adults, that don’t use legos, have complete control over designing the product is ultimately detrimental to the end consumer. In order to create the best products, the company has to leverage external resources.

  22. In response to your second question, I don’t believe that Lego is over-reliant on the external knowledge of it’s users. If anything, I view their adoption of open innovation as a shift from an insular design process to one that incorporates feedback from users. Companies already gather user feedback in a myriad of ways (e.g. surveys, focus groups), so I see open innovation in this case as just a further step in that direction. Last year, I saw the news that Lego has developed a Boost kit that lets kids build five different smart toy models, including a cat, robot and guitar, with the help of sensors and motors – so it seems that they are now linking feedback from users (kids) with demand from customers (parents / educators).

  23. I think Lego’s first use of open innovation with their physical products sounds really compelling as they used feedback from their key customers- kids. I think inclusion of this demographic as they move to digitization will also be key. I found your idea of “over-innovation” very interesting—I wonder if in this case, they simply pushed to production too many unsuccessful ideas and did not have an efficient vetting process.

  24. Thanks for writing such a though-provoking article! I’ve always enjoyed Lego and it makes sense that they used open innovation to create their new concepts. In that vein, I actually think that Lego should contniue to utilize it’s users to build it’s concepts. This strategy almost guarantees that its new concepts will be great hits and customers who have previously liked or generated the products become agents who will also help market their designs.

    On your point about geographic expansion, I believe that expansion into those areas requires even more open innovation as many concepts might not transfer over to other countries. Lego needs to be extremely thoughtful in its approach to entering these new markets.

  25. Thanks for the great post! It struck me while reading this article that LEGO is in some ways the perfect candidate for open innovation. They have the brand recognition and the association to toy blocks, which was built over decades of success. Since their biggest issue became design (which was exacerbated by some poor decisions, as you highlight), what better way to solve this than to become more customer-centric and open the doors of their sourcing process to the public? They need input for toys which children want to build based on the end result! They want to be able to build their favorite heroes, cars, planes, structures, etc. Rather than conduct expensive research and guess as to what may or may not be received well, it is smart to directly let them opine.

    To your question on technological risk, I think this is valid but minimal – LEGO’s edge is mostly its brand, and knock-off competitors have (and will likely always) exist. As long as they continue to focus on high product quality and design with the help of their newest contributors, I do not see a need to erect an impenetrable information wall to protect their data.

  26. Someone else said in their comment that this article made them nostalgic for their childhood – I had the same reaction! I actually like the idea of using digital channels to execute open innovation programs. While I hope that LEGO’s focus remains on the physical toy, I do think it could be advantageous for them to have a stronger online presence, if not just to make the “crowd sourcing” element of their innovation process more powerful. For example, LEGO could create an online community specifically to engage users around the topic of product design. Parents and children alike could use the forum to share what LEGOs mean to them, and react to one another’s ideas. LEGO can easily reach a broad base this way, enforce brand loyalty, make customers feel important and collect data on what users want.

  27. I really like the article, super informative. I have 2 concerns with the over reliance of Lego on Open innovation –
    1. Does this limit to Lego being able to produce only incrementally different products and not a ground breaking product?
    2. We often say that often consumers don’t even know what they want, so how will Lego get to those subtle consumer insights?

  28. Very interesting read! I was a huge LEGO fan as a kid and will definitely buy them again for my kids in the future. I have read about their financial challenges that you mention as well as the successful turnaround of the company with the new products and initiative; however I did not know that it was driven by this open innovation in the design process and collaboration with kids. One other company that comes to mind is Ikea which also asks kids to draw animals / objects and Ikea would turn them into actual stuffed toys which has been a very successful move for them. I would think that going forward many other consumer product companies would also work more closely with their customers in the design process given the growing trend of customization and personalization.

  29. It’s fascinating to hear how LEGO leveraged open innovation via customer feedback to reinvigorate growth at the company. This speaks to the value of being customer-centric and how important it is to build in natural feedback mechanisms within your business model. Though I see the value in this strategy with regard to building incremental positive products, I think relying on such a strategy would make it incredibly difficult to do breakthrough innovations. Does Lego have a separate team that is focused on making profound changes to their product offering? Or are they looking mostly to do incremental product changes as they look forward? How do they balance their focus between these two?

  30. Great topic! I’m pretty inspired by the success that Lego has had to-date with open innovation. One additional potential future idea that they could consider to innovate further without over-simplifying would be to take the open innovation offline (esp. in developing countries).

  31. The second question is very interesting – It seems unrealistic that Lego would understand the external knowledge of it’s users in perpetuity. It seems much more sustainable to rely on the actual end-users (who you know will always be there) rather than a product visionary (who may easily guess things incorrectly). Although releasing control to user feedback may appear as weakness, it seems as though it is the necessary and sustainable path.

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