When David Robertson set out to write a business book, he began with an approach that’s common in the genre. The Wharton practice professor, who teaches innovation and product development, had done case studies on Best Buy, McDonald’s, CarMax and the like, and he figured they’d add up to “a typical business book, where every chapter is a piece of my framework and a case study from a different company.”
But then Robertson found a company whose history contained everything he wanted to say about the tricky business of managing innovation. It had confronted major technological disruptions, coped with vast changes in its consumer marketplace, braved leadership transitions, and embraced the gospel of innovation so enthusiastically that it nearly put the firm out of business—before orchestrating a do-or-die comeback resulting in huge profits.
The company in question might come as a surprise, depending on how recently you’ve shopped for a six-year-old’s birthday: LEGO. In Brick By Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry (Crown Business), Robertson makes a case for the importance of what he calls “innovation governance,” one Lego toy at a time.
If your last contact with LEGOs involved building a moon base in 1978, the company’s history since then might come as a surprise. That year marked a turning point for the Danish company, which had begun as a maker of wooden toys in 1932 before patenting its iconic plastic brick in 1958. Kjeld Kirk Kristiansen, grandson of LEGO’s founder, took over the firm and unleashed a wave of innovation.
“For one, he put some marketing weight behind Duplo—you know, the bigger bricks for smaller hands,” Robertson says, giving a thumbnail sketch of a story told in more detail in his book. “On the other end, he introduced a sophisticated system of beams and pins and gears and motors—the idea being that kids leave LEGO around 10 or 12, and if you make a more sophisticated set, that teenagers will play with it.”
The latter experiment failed to hook teenagers, but succeeded in an unpredictable way: “Twenty-five- to 55-year-old men love it,” Robertson says. “So that does well.”
Combined with the introduction of the mini-figure, which enabled children to more easily create narratives around their constructions, these innovations put the company on a growth path “where it doubles in size every five years for 15 years.”
And then, disaster. The company’s patents expired in one country after another. Their expansion into North America reached a saturation point. “Between 1993 and ’98 sales stay flat, “ Robertson recounts, “but they triple the number of toys that they offer per year—so their costs go up. And they end up making their first loss in company history in 1998, having to lay off 1,000 people.”
This is where things got interesting for Robertson.
“It’s in this little town of Billund, Denmark, which is really small. So you’re laying off people whose kids go to school with your kids, and you see them at the grocery store every day. It’s really a traumatic thing.”
Kristiansen left the company. The consultants came in—bearing bad news and a buzzword. The bad news, Robertson says, was that “they think that kids are leaving traditional toys sooner—not just LEGO, but Barbie and Hot Wheels and Lincoln Logs and Erector sets and everything else—kids are leaving those toys for videogames and online experiences.”
Worse still for LEGO was the conventional wisdom that children simply no longer had the attention spans to actually build things. “They decide that there’s a good chance that the plastic brick may be passé, and what LEGO should be exploring is just different play experience,” Robertson says.
The buzzword, of course, was innovation—which LEGO began doing with a vengeance. “They come out with one big idea after another. They’re constantly challenging their designers to come up with new play experiences. So they get into theme parks. They get into electronic toys. They get into movies and videogames and jewelry, watches, clothing, educational toys, all kinds of different things.”
What it all added up to was an unwieldy product line marked by a couple of big hits: LEGO Star Wars and LEGO Harry Potter. “But the problem is that they only do well in years in which there’s a movie,” Robertson points out. “There’s no movie from either franchise in 2003 or the first half of 2004—and what happens is sales of those two toys fall off a cliff.
“And what LEGO is left with is a lot of toys that aren’t very popular. They aren’t very LEGO-y. A lot of them don’t have much construction as part of the experience. And they aren’t very profitable. Parents see stuff on the shelf that doesn’t involve much building, and they get confused and walk away from it.”
In short order, the company began “draining cash” and found itself on the edge of bankruptcy.
“The problem was not that all those theories about how to boost innovation didn’t work,” Robertson contends. “The problem was that they did work—and they boosted it beyond what LEGO could control. I think a lot of companies are really wrestling with how to get more innovation. But LEGO showed that, once you get more innovation, that’s only half the story. How do you guide it is the other half.”
The meat of Robertson’s book is the story of LEGO’s belated success in building systems to govern innovation.
Among the things LEGO did was to reign in their toy designers, who had previously had the license to make virtually any sort of toy, and create no end of specialized blocks—to the point where the company was manufacturing more than 14,000 shape-and-color combinations. “They cut that in half,” Robertson says. “And that really boosted profitability because, as you can imagine, LEGO was a fixed-cost business. So if you could make things—the same piece, out of the same color—in higher volume, you’re going to make a lot more money.”
LEGO also imposed narrower limits on designers’ creativity. “If you were a designer in 2001, you were brought in and you were challenged to create a great play experience—the sky was the limit,” Robertson says. “If you’re a designer in 2012 or 2013, you’re challenged to come in and create a great police station or fire truck, and to only use a limited palette of pieces.”
As the red ink turned to black, the firm encountered other sorts of innovation challenges—like how to resurrect their Mindstorm series, which featured programmable robotic components, after having fired all the employees who were knowledgeable about it. LEGO went about it by recruiting Mindstorm fans to share their expertise and help shape a second iteration of the toy that could take advantage of advances in computer hardware and software. Here too, the company had to learn how to govern innovation.
“They started out with a really elite little clique of people,” Robertson says, “and they learned a lot from them. But then they expanded the crowd. They got 100 people involved. And they didn’t know how to manage it. And the crowd started to become kind of a mob—and was turning against them at one point.”
As the inboxes of LEGO’s product managers flooded with frustrated emails sent by these 100 volunteers—who couldn’t exactly be held in line with a memo from the boss—the company hit on the idea of hiring a community organizer, “somebody whose job it was to work with the fans and set this thing up and make sure it functioned.”
“If you’re going to have crowd sourcing, you need crowd control,” Robertson says. LEGO also learned “that a crowd isn’t the appropriate partner, especially in the early phases of the design,” he says. “You want to tap more of the wisdom of the clique.”
Today, LEGO’s approach to interacting with its customers reflects that lesson. On the LEGO Cuusoo website (lego.cuusoo.com), enthusiasts can propose their own ideas for future LEGO sets. “Cuusoo is Japanese for wish,” Robertson says. “So if you put your idea for a kit and 10,000 people ‘wish’ that LEGO would make that kit, then you get 1 percent of the revenues from the sales of that kit. So again, it’s a very structured way of getting ideas from the community and bringing those to market.”
Robertson thinks that managers from all kinds of companies can learn a lot from how LEGO has attached governors to its innovation gears.
“If I can talk about LEGO and how they have created their own governance system … and how companies can design their own governance system to get the same kind of results as LEGO, then that’s really useful.”
He’s found that the toys are useful, too, in boosting classroom morale.
“One thing I do is, for my classes I make up little mini-figures with the name of each student on the mini figure, and then I decorate it,” he says. “I’ve got lots of hair and faces. And then I make a class photo, and I give it to my students. And I’ve got to say, even the 30- and 40-year-old executive-MBA students love it.” —T.P.