Between 1999-2003 The LEGO Group was on a burning platform . 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 . 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) . 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 . 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 . 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 .
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 . 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 . 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 . 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 . 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?
[Word count 798]
 David Robertson, “LEGO’s Innovative Path to Success,” YouTube, published August 2018, https://www.youtube.com/watch?v=bDiQBSyPi0c, accessed November 2018
 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
 LEGO Glossary, https://www.brothers-brick.com/lego-glossary/, accessed November 2018
 The LEGO Group, “Product Idea Guidelines”, https://ideas.lego.com/guidelines, accessed November 2018
 The LEGO Ambassador Network Forums, https://lan.lego.com/topic/8-welcome-start-here/, accessed November 2018
 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
 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
 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
 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