Innovation Under Constraint: Constructing a
Turnaround at Lego
Lego has been helping children piece together dreams and develop
imaginations for decades, becoming one of the world’s most popular brands in
the process. But the company lost its way in the 1990s and has stood on the
brink of bankruptcy a few times since.
Professor Jan Rivkin discusses his case study of Lego and how it
innovates to meet the changing needs of young users in the digital age.
Brian Kenny: According to Time magazine, just six
Lego blocks can be combined in 103 million ways. The name Lego comes from two
Danish words that mean "play well," and so they have —the colorful
building blocks have remained a top seller since hitting stores shelves in
1949, flexing and adapting in an ever-changing landscape of toys. Today, we'll
hear from Professor Jan Rivkin about his case entitled Lego: The Crisis, co-written with Stefan Thomke and
Daniela Beyersdorfer. I'm your host, Brian Kenny, and you're listening
to Cold Call.
Professor Rivkin is an expert in business strategy whose
teaching and research examines the interactions across functional and product
boundaries within a firm, and that sounds perfectly suited to our conversation
today. Jan, welcome.
Jan Rivkin: Thank you, Brian. It's a pleasure to be here.
Kenny: I can't imagine there are many people who don't know
the name Lego. Probably, most didn't know that it means "play well,"
which I think is a great little insight that comes from the case. And the Latin
translation of that is?
Rivkin: “I assemble.”
Kenny: So, just start us off by telling us how does the
case begin? Where do we start?
Rivkin: Sure, as the curtain rises on the case in 2004,
Lego stands on the brink of bankruptcy. It looks certain that this iconic
toymaker will be taken over by Hasbro, or Mattel, or some other large company,
or maybe a private equity shop that will break it down into pieces, and Jorn
vig Knudstorp, a fresh-faced 36-year-old has just been given the helm of the
company, and he has one last shot to save the company. It is do or die.
Kenny: What prompted you to write this case? You played
with Legos as a child, I assume, as many of us did.
Rivkin: I played as a child and I played with my kids, and
sometimes I still play with them. Sometimes I share with the kids as well. My
co-author on this case is Stefan Thomke and Stefan and I had the opportunity to
get to know the Lego executives. We were interested in the company for a while,
and they were interested in Harvard Business School, as well. So, we had an
exchange with their CEO, and with the head of North America, and one of our
alums who works at Lego, and they were interested in perhaps understanding more
about what they might learn from Harvard Business School. They invited us out
first to their North American headquarters in Connecticut, and then onward to
the headquarters in Denmark.
Kenny: What was that like? Did you get to see behind the
scenes as they make these, the bricks?
Rivkin: It was magnificent going into the Lego factory.
Imagine a half-kilometer-long factory filled with injection molding machines,
every few seconds churning out new Lego bricks. It was like going into Willy
Wonka's factory. I kept looking for the oompa loompas.
Kenny: That's great. Many people probably don't realize
that Lego is part of an enormous, ever-changing toy industry. Can you talk
about the landscape that the case takes place in?
Rivkin: Yes, that is one of the first things the students
discuss when we teach this case. They're looking at Lego on the brink of
bankruptcy and asking, "Is this an industry problem? Is it a problem with
the company's position? Is it somehow a change in the industry that has
undermined the company's position?” And I don't want to ruin the case
discussion, but I will say that not all is well in toyland as the case opens
There are changes in the customers. There is a threat of substitution. There
are threats of new entry. Kids’ play habits are changing in ways that make the
industry as a whole more challenging, but also in ways that particularly
undermine the Lego value proposition.
Kenny: Which is?
Rivkin: It’s an interesting question. For Lego, there's a
combination of construction and play and education, as well. The company views
itself as not simply being a toymaker. They realize, of course, kids love their
product and they are making toys, but they also think of themselves in terms of
making a difference in the creativity and imagination of children.
Kenny: Can you talk about the origins of the company? It
goes way back, 1916, Ole Christiansen.
Rivkin: If ever there were a company with humble origins,
it would be Lego. It starts with Ole Christiansen in 1916. He's a carpenter,
opens a wood-working shop in rural Denmark. It is not until the 1930's when he
actually adds toys. He starts with furniture and household products and his
son, Gottfried, is actually the one who gets them in, first into plastic in the
late 1940's. Legend has it that he was on a ship traveling with a purchasing
agent for department stores and other stores and this agent complained that
there was no systematic way of thinking about toys. The toys departments were a
mess in stores. That got Gottfried thinking about a system of play which is
what led to the Lego system.
Kenny: Break down the system for us.
Rivkin: It all goes back to the brick. Because each brick
is interlocking with each other, and because the bricks have been the same
sizes since, I believe, the 1950s, each brick can combine with others in many,
many ways. As you mentioned at the outset, very quickly, with a handful of
bricks, you've got an astronomical number of ways to make a toy.
Kenny: They stuck with their original model for a long
time. Change was hard to come by. I loved the insight that it took 15 years to
introduce a green brick into the mix.
Rivkin: The family owners were very resistant to any sort
of change.
Kenny: Talk about the culture of the company as they grew
and expanded and really came into their own.
Rivkin: Going into, say, the 1990s, the company had decades
of success. They literally had to limit how quickly they wanted to grow and it
was a culture of investment in new products, but really not so much discipline
around thinking about how they would react to the future if the market were to
change. There was an assumption that they would grow at a pace that they
dictated, and the market would buy as many Lego bricks as they could produce.
But then, market conditions started to turn in the 1990s, the early 1990s.
There was a decline in birth rates in their core markets in Europe and North
America. There was a change in the retail situation as mom-and-pop stores gave
way to discount retailers who started to charge lower and lower prices for
toys, including Legos. The big players like Hasbro and Mattel pushed production
to the Far East while Lego was still very much a Danish company. Kids’ play
habits changed. Kids had less time for structured play, they were more
attracted toward electronic products, their attention spans seemed to have
gotten smaller, and all of these things probably made it hard for any
traditional toymaker, but particularly for Lego.
Kenny: So, Lego chose to respond in some interesting ways.
When they started to face these challenges, they began to extend the brand into
different lines of business.
Rivkin: What is really helpful from a teaching perspective
about the Lego story is there were actually two efforts to turn around the
company prior to the one in 2004. Moreover, each of those efforts, on their
face, had some things about it that made sense. The first effort, starting
around 1993, was to extend the brand of the products. They looked to other
companies with great brands like Disney, and said, "Look, Disney is in so
many things. The product line we're currently in seems to have stagnated. What
makes sense? Let's take that core asset of the brand and expand into diversity
of products." So, they opened amusement parks. They started making video
game software, children's clothing, wristwatches. Moreover, in the bricks
themselves, they responded to children apparently having less time to play by
making it easier to get through the stage of constructing the products and get
more quickly to the stage where you play with it. On the surface, these things
all made sense. But, in fact, they led to disastrous outcomes. So, a key part
of the class discussion is to understand why these things, that on their
surface look reasonable, backfired in this context.
The second attempt at a turnaround was bringing in a mister
fix-it who did many of the things that you would expect someone to do, right?
The restructuring of the organizations bringing in a series of layoffs,
streamlining production, producing layers, moving managers around more often,
moving design centers out of sleepy old Billund in Denmark into London, Milan,
and San Francisco, consolidating the sales force. They start to sell directly
to customers. Take that last move, selling directly. It kind of makes sense,
right? The retail situation is getting tougher. The mom-and-pop stores are
going out of business. You're having to sell through the Walmarts of the world.
Surely, it makes sense to go direct to the customer.
Kenny: You've got other brands that have done it. Apple has
made that move. Disney has made that move.
Rivkin: Yeah, and once again, this turns deeply, deeply
south and so the case discussion centers on why do these things that, on their
surface, seem to make some sense, not make sense in this context?
The last part of the case discussion has students struggle to
put together a plan to turn the company around. They are put in the position of
Jorn, and asked what would they do, and they've got to make decisions about
every single function of the company. How will the product line change? How
will marketing change? How will sales change? How will they approach their
retail partners differently? How might they manufacture differently? To do all
that, they'll have to change how they prefer inputs, how they hire people, who
they hire, how they train them, and how they manage the company. So, it really
is a challenge to come up with an integrated strategic option that will respond
to the challenges in the marketplace, will make use of what is unique about
Lego, and will avoid the mistakes that the previous two efforts, which seemed
sensible, fell into.
Kenny: So, you put the students to work on that. Do you
find that there are any students that you have in class who are unfamiliar with
Legos?
Rivkin: I cannot remember ever having the student who did
not know Lego. Right now, they calculate they serve roughly 80 million
children, which is only a small fraction of the world's population of children.
But I think among the students, among the children who wind up coming to our
business school, we've got a large share who are Lego fans.
Kenny: That's good, so they all feel a connection to the
case and so forth.
Rivkin: They do, and we try to reinforce it. Have I shown
you the Lego Baker Library?
Kenny: I've seen that; I've seen it in your office. Describe
that for our listeners.
Rivkin: The designers at Lego were very, very gracious.
Near the end of the case-writing process, they sent to us a Lego model of Baker
Library [at Harvard Business School]. It is remarkably detailed. There are
features of the library that I had not noticed in walking by the library for
two decades until I saw it on the model.
Kenny: We might have to put some pictures of that on the
podcast website.
Rivkin: I would be delighted to share my model. At some
point, it will be bequeathed to Baker Library itself.
Kenny: Be really careful, I guess. Don't bump into that
either; you don't want to take down a wing of the library inadvertently.
Rivkin: So, it turns out that the model is, in fact, glued
together.
Kenny: They didn't trust you.
Rivkin: The other thing, you know, I'll share with you,
Brian, is (I don't think he'd mind) it turns out that the executives of Lego
have unique business cards. They are Lego mini-figures that look like them. And
have their names and contact information on the mini-figure itself.
Kenny: That's fabulous. That's great branding, carrying it
all the way through.
Rivkin: It is.
Kenny: Can you talk a little bit about the way that Lego,
as a culture, manages innovation? People familiar with the toys might just say,
“Well these things haven't changed forever. It's the same toy.” You mentioned
the system and how it works, but in fact there's a strong innovation engine
within Lego.
Rivkin: It is innovation within certain constraints. Each
year, roughly 60 percent of Lego sales come from products that are brand new.
On the other hand, zero percent of their products, roughly, come from
components, or pieces, that are brand new, right, they're the same bricks. And
so they need an innovation system that allows them to innovate within the
constraints of using the same things. They're also very careful to separate out
different types of innovation. They have a very small group that thinks about
brand new, out-of-the-box things, but they've got a larger group which thinks
about, “Wow, will we create the next Lego brick-based product for our core
customer?” They also have engaged in a bit of open innovation. There are large
numbers of adult fans of Legos, so called AFOL, adult fans of Lego, who because
they love the product, are innovating with the product all the time, and
they've got a system by which they reach out to those users of Legos to bring
in new innovations. If people are innovating with your products, you know,
voluntarily, you'd be nuts not to learn from that innovation.
Kenny: So, the future is bright. They continue to be, by
the way, one of the top-selling toys. In fact, on eBay, they were among the top
10 toys that people are reselling consistently.
Rivkin: After the turnaround, their returns skyrocketed
quickly, above one 100 percent return invested capital, and they've seen very
rapid growth, which continues to this day, so far.
http://hbswk.hbs.edu/item/innovation-under-constraint-constructing-a-turnaround-at-lego?cid=spmailing-13556370-WK%20Newsletter%2010-05-2016%20(1)-October%2005,%202016
No comments:
Post a Comment