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.

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.

 

 

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

  1. 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.

  2. 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.

  3. 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

    1. 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.”

  4. 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.

    1. 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.

  5. 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!

    1. 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.

  6. 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.

  7. 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

  8. 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.

  9. 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?

  10. 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.

  11. 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..

  12. 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?

  13. 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.

  14. 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.

  15. 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.

  16. 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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