In his recent webinar, What If a Great Product Isn’t Enough?, MIT Sloan Senior Lecturer David Robertson used LEGO as a case study on innovation—the good, the bad, and the common missteps to which organizations commonly fall prey when trying to stay competitive and think outside the box.
Robertson has spent over 15 years researching the process of how LEGO almost went bankrupt, learned important lessons, and then bounced back stronger than ever. These lessons can be applied across other organizations and industries—and is in fact something discussed at length during his Executive Education Course, Innovating in Existing Markets: Reviving Mature Products and Services.
LEGO was thriving through the late 70s to early 90s. In 1978 they unleashed a “wave of innovation”— they created technique sets, introduced the first mini figure, and made fantasy sets. They entered the North American market and doubled in size every five years. There was a steady 14% annual growth over this 15-year period, and then it just … stopped.
No innovation lasts forever, but some additional factors contributed more rapidly to LEGO’s decline:
- Disease of More: To restart growth, they flooded the market with a proliferation of product – or a “disease of more” as Robertson calls it. (In 1994 LEGO released 109 sets. By 1998, that number more than tripled). This is a common default response for many businesses, but it doesn’t mean it’s a good one. Companies think if one product is good, two must be better! What inevitably happens is that cost structure and supply chain complexity increases, but the sales don’t follow.
- Digitalization: In 1998, LEGO brought in an outside “turnaround expert” to better understand their customers, assuming maybe they had lost a sense of who they were. Market research indicated a changing play experience, with kids moving from physical to digital play (e.g., Nintendo, PlayStation) – a trend affecting (or disrupting) all toy manufacturers.
- Big Box Retailers Dictate the Rules: Previously, toy companies would approach individual businesses and tell them which of their products they should be selling. With the rise of the big box retailer, the balance of power changes. These stores have a lot more data on what their customers want and are now the ones dictating to toy companies what they should be making and putting on their shelves.
- Competition: The LEGO brick was patented in 1958. When its patent expired in the 80s, it ushered in a wave of knock offs. Many of these toy makers had also moved their production to China, making the cost cheaper, while LEGO was still operating its manufacturing out of its home country of Denmark.
The market was getting trickier and LEGO’s prior strategy of simply putting out another box of bricks wasn’t working. So they fell prey to the next common mistake—the idea that disruptive innovations and technologies (like video games) would change the industry and the nature of play to such an extreme that they would need to disrupt themselves before someone else did. This approach did not go well, and by 2003 they were nearly bankrupt.
"The way we should think about innovation is dating our customer, not fighting our competitor"
LEGO introduced a variety of new initiatives, including action figures that correlated to a TV show with an immersive experience, less complex construction kits, electronic toddler toys, a digital designer toolkit, licensing Star Wars and Harry Potter, and even opening Legolands. Unfortunately, says Robertson, they were trying to solve the right problem, but chose the wrong solutions, resulting in a near 40% drop in growth from 2001-2004.
Luckily, a crisis of this nature is a great focusing mechanism and a tool to convince people to take a different approach. The success that ultimately kept LEGO afloat was their Bionicle toy line, an action figure that snapped together and was supported by cinematic stories and comics. Each year a different story with different characters were introduced, creating a collectible frenzy. When they introduced Bionicle PC games, they realized that the games only increased the desire to collect more Bionicle figures, not less. Digital did not disrupt Bionicles—it complemented it.
LEGO realized that while it wasn’t enough to simply offer a box of plastic pieces, they still needed to offer the cornerstone (or brick) of their brand when innovating around the construction experience. They explored what they could do to make their product more compelling, useful, and valuable while continuing to honor the initial product that made them great. LEGO innovated around the box.
“The way we should think about innovation is dating our customer, not fighting our competitor,” Robertson explains. You don’t want to expend all your energy constantly keeping an eye on your competitor and trying to out-maneuver them. Instead, it’s better to redirect those efforts towards better understanding your customer to provide them with innovative products and experiences they’ll continue to value.
LEGO is not the only company to use this “third way to innovate.” In Robertson’s course, Innovating in Existing Markets: Reviving Mature Products and Services, he reviews other companies across a variety of industries—both B2B and B2C to demonstrate the principles and the processes necessary to successfully implement this approach to innovation in your own organization.
Following his presentation, Robertson answered additional questions from the audience. You can watch the full recording and share with your network here.
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Courses taught by Robertson
Innovating in Existing Markets: Reviving Mature Products and Services
Additional Resources
Guest post by Elaine Santoyo Goldman