lego case study pdf

HBS Cases: LEGO

Although it isn't part of the admissions criteria, experience playing with LEGOs can come in handy at Harvard Business School.

When Stefan H. Thomke teaches his new case about the iconic toy company, he gives students eight-studded LEGO building bricks to figure out how many different ways they can be combined. Thomke's experience goes back a long way—as a kid growing up in Germany he participated in a LEGO competition. As an adult, though, his interests lie more in the business behind the bricks. "When you've written many cases you have a gut feeling that one like this could be really great," he says.

Thomke, the William Barclay Harding Professor of Business Administration, wrote the case with Harvard Business School's Jan W. Rivkin, the Bruce V. Rauner Professor of Business Administration, and Daniela Beyersdorfer, associate director of the HBS Europe Research Center.

LEGO explores how the company-one of the most profitable toymakers in the world-grew to global dominance from humble beginnings; the mistakes that led it near bankruptcy; and why one turnaround attempt failed while a second succeeded. LEGO executives were unusually supportive about the case-writing process, Thomke says. "We had access to everybody; they wanted the story to be told truthfully, with all the good and the bad."

Building At The Start

Part of that access included a visit to a wood craftsman's workshop in the small town of Billund, Denmark, where LEGO began, in 1916. Carpenter Ole Kirk Kristiansen eventually shifted the business from making houses and furniture to crafting wooden toys. He based the name of his new venture on the Danish words for "play well" (and, as it turned out, the Latin words for "to assemble"). His motto "Only the best is good enough" would later be carved into a wooden plaque and hung in the workshop. These themes of good play and quality products were both bedrocks and touchstones for future generations of LEGO toy makers.

Godtfred Kirk Kristiansen represented the second generation, working alongside his father at age 12. The LEGO brick played with by kids and adults around the globe came into being during Godtfred's tenure. He considered it a unique, sturdy, simple product—a system—that offered endless opportunities for creative fun, and drew up a list of product characteristics including "long hours of play" and "quality in every detail" that was distributed to everyone in the company.

Like his father, Godtfred paid careful attention to every aspect of the business, applying, for example, his knowledge of material science and production technology to the brick-manufacturing process. It's because of these precise specifications that bricks made under his watch are interchangeable with those available today. Godtfred's cautious nature extended all the way to the profit margins: he championed slow, steady growth. Because of this, it could take years for a new product to go to market. Green bricks, for instance, appeared in play sets only after a decadelong decision-making process-and the idea to include them came from Godtfred's son (and third-generation toymaker), Kjeld.

The snail's pace served the company well, as did the grandson of its founder. Under Kjeld's management, product demand was so high at times that executives actually found themselves discussing ways to slow sales.

A Shock To The System

That all changed in the early 1990s as seismic shifts pounded the toy market. Big Box toy discounters trampled mom-and-pops and lowered prices dramatically. Meanwhile, birth rates declined, children had less time to play and not much interest in toys that didn't offer instant gratification. "These changes did not play well to our strengths," observed current CEO Jørgen Vig Knudstorp in the case.

Serious jolts were also taking place in the LEGO Group. Out of work for a year following a serious illness in 1993, Kjeld appointed a five-person management team to help him run the company when he returned. The group focused mainly on driving growth. When a benchmarking study revealed LEGO's global name recognition was on par with industry giants like Disney, the team started churning out new products and ideas to leverage the brand's untapped value. A line of LEGO-branded children's wear was created and a division of the LEGO Group was charged with pitching book, movie, and TV ideas. LEGO building sets became increasingly complex with more unique components.

While the number of LEGO-branded items grew, sales did not, and in 1998 the company suffered its first financial loss. "Their top-line growth was slowing down but their cost was accelerating, so they were starting to lose some significant money," says Thomke.

Danish turnaround expert Poul Plougmann was hired to reassemble LEGO and staunch the red ink. "He comes in and … does things by the book," says Thomke. "He lays people off, he streamlines some things, he globalizes." And yet the financial picture grew worse. "He's basically going by the turnaround book, but it doesn't work."

One continuing problem: the company's growing complexity was choking it. Adding more bricks made products harder to assemble, forecasts harder to determine, and inventory harder to manage. Depending on the kit, there was either too much inventory, or no inventory at all, and restocking could take months.

"You had this multiplier effect of added complexity that went through the entire supply chain," Thomke says.

The LEGO Group had also gotten too far away from the core values it had been building on for the better part of a century. The toymaker found itself needing to turn around its turnaround.

Outside The Family

Enter Jørgen Knudstorp. He was just 35 years old when Kjeld promoted him from director of strategic development to CEO in 2004. (Kjeld retired that same year.)

Like Plougmann, he had no family ties to the company. Unlike Plougmann, his turnaround attempt succeeded. Knudstorp's slow-it-down approach of careful cash management, focusing on core products, and reducing product complexity certainly contributed to that success. It would also take re-engaging with customers, many of whom passed a love of LEGOs to their children while still connecting with the toys themselves. "One of the insights Jørgen had when he became CEO was that he needed to reconnect with the community [of loyal LEGO fans], one of the most powerful assets the company had," says Thomke. "It was a huge part of the comeback."

Knudstorp worked hard to define the core business of the company. "How you work with, and experiment outside of, the core of your business is part of that balance," explains Thomke.

Knudstorp recognized that innovation was part of that core, but he'd also seen the result of unconstrained creativity, so new product design began to be informed by market research, user feedback, and how well the toys matched the vision of quality creative play laid out by its founding fathers. Putting parameters on how people innovate had the paradoxical effect of making them better at it.

Reining in the creative process was part of a larger push by Knudstorp to reduce overall complexity within the organization. On the supply chain side, he did away with many of the unique brick components added during Plougmann's tenure, and eventually decided to bring brick manufacturing back in-house to ensure quality control.

Finally, Knudstorp made big changes to the management team, firing five of seven manufacturing executives and appointing a new leader for the team. A psychoanalyst was brought in to teach the management team how to identify decision-making made by logic versus emotion.

Sustainable And Balanced

It turns out that LEGOs promote lifelong learning. While the bricks themselves teach children the fundamentals of construction and creativity, the company's almost century-old history of management change has important lessons for businesspeople. "Managing sustainable growth is also about managing a balanced business system," says Thomke. "Complexity is something you need to watch very closely."

Controlling complexity, clarifying the core of its business, and engaging the larger community helped save the LEGO Group. Although he was not a Kristiansen by birth, Knudstorp's management style and business ideals closely mirrored those of its founding fathers. Only the best was, and is, good enough.

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Innovating a Turnaround at LEGO

• David Robertson and Per Hjuler

Five years ago, the LEGO Group was near bankruptcy. Many of its innovation efforts—theme parks, Clikits craft sets (marketed to girls), an action figure called Galidor supported by a television show—were unprofitable or had failed outright. Today, as the overall toy market declines, LEGO’s revenues and profits are climbing, up 19% and 30% respectively in […]

Reprint: F0909B

Though the overall toy market is declining, LEGO’s revenues and profits are climbing—largely because the company revamped its innovation efforts to align with strategy.

Five years ago, the LEGO Group was near bankruptcy. Many of its innovation efforts—theme parks, Clikits craft sets (marketed to girls), an action figure called Galidor supported by a television show—were unprofitable or had failed outright. Today, as the overall toy market declines, LEGO’s revenues and profits are climbing, up 19% and 30% respectively in 2008.

• DR David Robertson ( [email protected] ) is a professor of innovation and technology management at IMD. Per Hjuler ( [email protected] ) is the LEGO Group vice president of product and marketing development. For more, visit www.innovationgovernance.net.

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By: Jan W. Rivkin, Stefan Thomke, Daniela Beyersdorfer

LEGO has emerged as one of the most successful companies in the toy industry. The case describes LEGO's gradual rise, rapid decline, and recent revitalization as it is keeping up with a changing…

• Length: 23 page(s)
• Publication Date: Jul 7, 2012
• Discipline: Strategy
• Product #: 613004-PDF-ENG

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LEGO has emerged as one of the most successful companies in the toy industry. The case describes LEGO's gradual rise, rapid decline, and recent revitalization as it is keeping up with a changing market place. Central to LEGO's management model is the ability to find the right balance among growing through innovation, staying true to its core, and controlling operational complexity.

Learning Objectives

-The case allows students and instructors to cover a wide range of topics in strategy, operations management, and innovation. It is particularly suitable for analyzing managerial issues that arise at the intersection of these topics.-

Jul 7, 2012

Discipline:

Harvard Business School

613004-PDF-ENG

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• Format: Print
• | Language: English
• | Pages: 23

About The Authors

Jan W. Rivkin

Stefan H. Thomke

Related work.

• July 2013 (Revised February 2014)
• Faculty Research

Jørgen Vig Knudstorp: Reflections on LEGO's Transformation

• LEGO  By: Stefan Thomke and Jan W. Rivkin
• Jørgen Vig Knudstorp: Reflections on LEGO's Transformation  By: Stefan H. Thomke

Brick by Brick: A Case Study on LEGO’s Culture of Innovation

by Carla Johnson

December 6, 2022

How does a company swing from scrapping together toys from actual scraps in the Great Depression to becoming a household name to nearly filing for bankruptcy to being one of history’s greatest innovation superstars?

By being really good at building, and rebuilding, one brick at a time.

I’m talking, of course, about LEGO . 

LEGO wasn’t always an innovation success story. Like all large companies, they’ve gone through more than a few ups and downs. But somehow they always managed to turn things around.

Let’s take a look at how they consistently innovated their way into the hearts of kids and adults alike.

How LEGO built itself from nothing

LEGO bricks actually began as scraps of wood in 1932 by Danish woodworker Ole Kirk Kristiansen. Before making toys, he made practical objects like ladders, ironing boards, and farm equipment. The Great Depression made work scarce, so he switched to making toys since scraps were easier to come by than large bits of lumber. But even resourcefulness and innovation didn’t immediately save him. People considered toys a luxury in the Depression, and many of the folks in town couldn’t afford them. Ole often traded toys for food just to survive. 

Fast forward to the 1940s and when the Nazis occupied Denmark. Not only was lumber crazy expensive, but Ole’s workshop also caught fire, and he lost his entire inventory and blueprints.

He managed to hold on to the business until the early 1950s when he met his next roadblock. World War II had made lumber nearly impossible for Ole to get his hands on. Instead, he used a new material: plastic. This is when he developed the patented interlocking system that made the LEGO bricks famously stackable.

LEGOs became wildly successful shortly after.

Success meets a brick wall

By the 1990s, LEGO’s popularity took a hit. The digital era began eeking its way into kids’ games and quickly caught the eyes of the brand’s curious customers. Nintendo was the sexy new stud on the block. (Yes, I’m absolutely going to fit in as many puns as I can.) Small toy shops closed their doors thanks to heavy competition from big box stores like Toys ‘R Us.

LEGO tried to keep up with the new trends in toymaking, even getting into the video game business to keep up with Nintendo. But it quickly became a case of trying too many things, getting away from its core business, and stretching itself too thin.

Teetering on the edge, LEGO barely avoided bankruptcy in the early 2000s. But a few emergency loans kept it afloat long enough to simplify its business and get back to its roots. By chasing every trend in the world of toys, LEGO had lost sight of what they were good at. They recentered their business on their iconic building sets, launching franchise sets including Star Wars, Harry Potter, Indiana Jones , and many other cult favorites.

That one move saved the company.

More renovations

The success of LEGO franchise sets gave the company enough liquidity to experiment again. But this time, they tried something they hadn’t done in years: openly accepting feedback from their fans. The relationship between customers and small toy shop owners used to be their main avenue for customer feedback. But thanks to competition from big box stores, small toy shops were closing and that invaluable feedback was lost. Until 1998.

In 1998, LEGO launched the Mindstorms robotics kits, a combination of hardware and software that let fans build robots using the iconic LEGO bricks. Just hours after the launch, thousands of hackers hijacked the software to make unauthorized modifications that gave new functions to the robots.

LEGO had a choice: prosecute the hackers… or embrace them.

LEGO recognized that they could collaborate with fans for feedback, and that would turn out to be invaluable.

They took a gamble and it paid off. Big time.

Using an open innovation strategy, LEGO re-launched the Mindstorms NXT series in 2006 which went on to become one of their biggest successes of all time. Why? They co-created with their customers.

LEGO used the feedback ecosystem they developed around the Mindstorms products as a model to create their now-famous culture of innovation. They started the LEGO Ambassador Program, which allowed fans to engage with the company around its kits. This continuous feedback loop gave LEGO tons of new ideas and partnerships, while making fans key decision-makers in the process.

Around the same time, LEGO started the crowdsourcing platform LEGO Ideas . The platform encourages fans to submit their ideas, and fellow fans can vote on which products they’d like to see put into production. Once an idea hits 10,000 votes, it moves on to a LEGO review board. If selected, the original creator receives 1% of the product’s revenue.

Building on success

Using feedback from their fans, LEGO consistently churns out great idea after great idea. Go to their website and, besides ordering products, you can build things, share them with friends, and watch videos. Five times a year they publish a magazine that kids go crazy over. They produced Beyond the Brick: A LEGO Brickumentary – a documentary for adult fans of LEGO bricks. They’ve released Hollywood feature films that grossed hundreds of millions of dollars. Their YouTube channel has millions of subscribers. They have eight amuse ment parks . There’s even a game you can download from the app store.

All from a company that sells little rectangular pieces of plastic.

LEGO’s 4 building blocks of success

Not every company has the massive innovation budget of LEGO, or the decades of experience as an industry giant, or the rabid (and vocal) fan base. So what are some lessons any company can learn from LEGO’s giant success?

1) Respect why your customers fell in love with you in the first place

LEGO became famous for its iconic bricks. But over the years, chasing too many trends drove them away from their core business model. While sometimes shifting the entire company makes sense – especially when technology deems old product lines extinct – in LEGO’s case, it was unnecessary. It wasn’t until they recommitted to their building sets in the early 2000s that LEGO was able to become an innovation legend.

2) Listen to your customers, including your biggest critics

From bringing hackers on board in the 90s to LEGO Ambassadors to crowdsourcing ideas, LEGO became a model for open innovation. The constant feedback loop with their fans tuned LEGO into exactly what their customers wanted and sparked endless ideas. It doesn’t have to be complicated. If you listen to your customers, they’ll tell you what they want to buy.

3) Develop complementary offerings instead of reinventing the wheel

LEGO only really started becoming the innovation darling we know today once they started listening to their customers. And what did their fans want? More ways to enjoy LEGOs! From movies to theme parks, LEGO created tons of new ways to enjoy the brand that didn’t compete with their core products. And that last part is key. Not only are you competing with your rivals, but your company might also just be competing with itself.

4) Create a culture of innovation

Google’s corporate campus has nothing on LEGO’s. Little toy bricks are everywhere . LEGO encourages all its employees to play regularly and submit ideas. So not only do they source ideas from their fans, but from everyone at the company, as well. From Frank in Accounting to Nadia in HR, everyone is invited to make the company better.

Want to know more about how to create a culture of innovation like LEGO? Check out:

The Museum of Play: The Connection Between Play and Innovation

How to Create a Culture of Innovation

Why Innovation is Your Competitive Advantage

How to Innovate

Photo credit: Jason Leung via Unsplash

About Carla

Carla Johnson helps leaders who are often paralyzed by traditional thinking. They suffer from slow growth, an eroding competitive advantage, low employee engagement, and depleted investor confidence. Their teams lack purpose and progress and constantly battle a resistance to change and new ideas.

As the world’s leading innovation architect, Carla’s spent 20 years helping leaders shatter limits and discover undiscovered possibilities. Through years of research, she’s developed a simple, scalable 5-step process that teaches people how to consistently produce inspired ideas that lead to uncommon outcomes.

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The LEGO Case Study 2014

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LEGO Case Study