Building Blocks of a Block Building Business: a heartfelt tribute to Lego Group
Our surroundings, including the toys we play with, influence our childhoods. Colourful LEGO bricks not only encoded my formative years, but have continued to inspire me even as an adult.
The emotional connection I had with LEGO in the past, as well as the rich literature surrounding the LEGO Group’s comeback from the brink of bankruptcy in 2004, along with its continued diversification, digital transformation, and market dominance, inspired me to research its ethos during my recent academic stint at the University of Exeter.
INDUSTRY REVIEW: DIGITAL ECONOMY’S IMPACT
Note: Tokyo-based Namco Bandai was the industry leader in 2019 with revenue at over 6.6 billion USD, closely followed by LEGO Group with revenue over 5.78 billion USD. Hasbro, Mattel, and Jakks Pacific complete the top five (Bedford, 2020).
Digital technology shifts have been causing widespread disruptions in most industries, including the toy industry. A summary of recent-past digital trends in the toy industry is as follows, consistent with reports from multiple sources such as Statista (Bedford, 2020), the toy association (Yacovone, 2020), and ResearchAndMarkets via Yahoo Finance (Wood, 2020):
- Influence of technology is promoting Video, Augmented Reality(AR), Virtual Reality(VR) games: Consumer spending on video content, AR/VR products, and video game tournaments have witnessed exponential growth, primarily due to the expansion of mobile and online gaming and digital distribution of software.
- Non-linear digital platforms as a source of innovation: Digital-first brands originating from non-linear platforms such as Youtube, Netflix, social media, and online communities are infiltrating the toy aisle. For example, (Bonkerstoys, n.d.) is the paradigm of YouTube-driven product creation. Bonkers makes toys from what is popular on YouTube and licenses their most significant products under Ryan’s World — one of the most popular channel for kids on YouTube.
- Social media is fuelling seamless communication from parents to retailers and brands: In the past, this kind of communication was hard to develop. Now, social media allows parents to make their needs known. They can press retailers who, in turn, can push brands to give parents what they seek.
So, What lies ahead? As per the latest research conducted by the toy association (Goldman, 2021) and re-iterated by Forbes (Kestenbaum, 2020), below are the trends that are expected to drive industry sales in 2021 and beyond:
- Rediscovering play and not just for kids: The pandemic has helped families find value in bringing play into their daily lives, while spending more quality time together. Therefore, the toys that promote togetherness and family engagement are high in demand.
- Socially conscious play: Incorporating sustainability in the business offering is challenging for toy manufacturers because toys are mostly made out of plastic. As getting plastic out of toy products is unlikely due to economic reasons, companies innovate to address sustainability. For instance, (Microkickboard, n.d.) buys used fishing nets that otherwise would end up in the ocean, from commercial fisheries to make new scooters, which allows the company to show parents that it is building products without adding to the plastic waste problem.
- Less Screen Time: Parents have used screens for decades to entertain children and distract them. But there is a backlash against electronic entertainment among parents who are now emphasising physical activity and intellectual engagement. (Plusplususa, n.d.) markets plastic building blocks as a way for kids to play and create without any electronic device. Yet another company boasts of their dinosaurs missing batteries as a contribution to the “kid-powered” trend.
The last decade saw a shifting trend from bricks to clicks (Sabine, Nov 2016), which has had traditional companies worried about their competitive advantage. On the contrary, although, Covid- 19 pandemic has accelerated pre-Covid digital trends, the same pandemic is paradoxically fuelling a resistance against digital offerings due to families spending more time with their children.
Ostensibly, a new trend is in the making where a mix of digital and physical offerings will be prominent. Consider ongoing investments in hundreds of physical LEGO stores (“LEGO Group Annual Report 2020,” 2020, p.7; Shoulberg, 2020) and new Legoland theme parks (Merlin Entertainments Limited Annual Report and Accounts 2019, 2019, p.4) across the world.
“We will continue to invest in innovative ways to blend the power of physical play with the digital world” — LEGO Group Annual Report 2020
THE LEGO GROUP: INTRODUCTION
Lego System A/S (trade name: The Lego Group / LG), founded by Ole Kirk Christiansen in 1932 in Billund, Denmark, is best known for the Lego-brand toys — mainly interlocking plastic bricks.
From the below timeline, it is evident that LG — a family business, has come a long way from being a small local carpenter’s workshop to an international manufacturer of toys for children. It also implies that LG continued conditioning its business model in order to stay competitive and, in fact, ahead of the curve.
KEY BUSINESS MODEL THEMES
- Digital Platformization & Internationalization of Business Operations: Custom SAP-based digital platform architecture has been instrumental for LEGO’s growth and internationalisation, enabling efficient digital partner network integration, responsiveness to consumer preferences, and compliance with legislation (Törmer & Henningsson, 2020)
- Digital Platform for Open Innovation — Crowdsourcing: (LEGOIdeas, n.d.) crowdsourcing platform enabled a thriving network of LEGO fans aged 13 and up to become a supporter or a creator of a new LEGO set (AK, 2015). With this crowdsourcing model, LEGO still creates excellent customer value and inevitably gets many more ideas than their internal design teams (which are still necessary for the review).
- Freemium Digital Offerings: All the mobile video games based on Lego’s physical games are free, except for games using licensed characters. The idea is to increase brand visibility.
- Digital Social Engagement: (LEGOLife, n.d.) app — In addition to having a vibrant community on social media platforms such as Twitter, Instagram, Youtube, and Facebook, the (LEGOLife, n.d.) app, a social network community with over 9 million users (Handley, 2020), encourages users to share their actual play experiences.
- Digital Education product: (LEGOBoost, n.d.) teaches children how to bring their creations to life. The kit comes with a combination of sensors, motors, and a companion app that teaches its users to program their creations.
- Products harnessing new digital frontiers & Strategic Partnerships — bridging the gap between the physical and digital worlds, Omnichannel marketing, and harnessing ecosystem capabilities: (A) Aligned with brands that share the same values like quality, imagination, creativity, and having a high degree of parental acceptance. (B) Interactive Lego Billboard (Douglas, 2020) uses Haptic technology to give shoppers at London’s Westfield Stratford mall the opportunity to build digital creations by using hand gestures to control virtual bricks (Graham, 2020). © Born out of collaboration with MIT, (Mindstorm, n.d.), targeting grown-up kids and adults, is a hardware and software programmable robot based on Lego building blocks. The kit contains programmable bricks, sensors and all paraphernalia needed to build models capable of movement. (D) (HiddenSide, n.d.) is a creative building toy and Augmented Reality game rolled into one. (E) A new university course (BCU, n.d.) offered by Birmingham City University uses LEGO to shape the future of Smart Cities. (F) (LEGOSuperMario, n.d.), in partnership with Nintendo, delivers a physical play experience with Mario. → Aimed at families with children, technologically enhanced Legoland amusement parks are owned and operated by the British theme park company, Merlin Entertainments. (G) Launched AR Clothing Store in collaboration with Snapchat (London, 2019). (H) Global entertainment franchise (Wikipedia, n.d.).
- Financing Innovation: (LEGOVentures, n.d.) anchored outside the main business and entirely off the balance sheet, invests strategically in startups; also builds new startups based on ideas coming from the ecosystem.
- Sustainability Focus : contributing to Circular and Shared economy — (A) (LEGOReplay, n.d.) programme, currently only available in US and Canada, enables people to donate their LEGO products to children’s non-profit via free shipping. (B) Joined bioplastics feedstock alliance (BFA, n.d.), a forum founded by WWF offers technical guidance on LG’s 2030 goal of switching to renewable, plant-based plastics. © In June 2020, the company encouraged children to care for the planet, by launching (ExploretheWorld, 2020) campaign in partnership with National Geographic.
- Ethics & CSR: (LEGOFoundation, n.d.) funds research into child development to understand the dynamics of toys in human evolution. Further, LEGO donated $50m to several organisations, including ‘Education Cannot Wait’, which provides learning opportunities to families in vulnerable situations (Hutchins, 2020).
Note: above aspects combined with other strategic (non-digital) factors such as proximity of manufacturing facilities, focus on large retailers, a small number of suppliers, innovation within reason, and competency-driven product line (Greenblatt, 2015) have helped LEGO standout.
KEY CHALLENGES & OPPORTUNITIES
1932–2003: Challenges of Change
The company started by focussing on making wooden toys for children. In 1958, the LG patented the famous stud-and-tube coupling system and launched the brick that became its core product. After a period of prosperity, in 1988, when patent protection for LEGO brick expired, other companies like TYCO introduced similar toys. Furthermore, electronic games and toys such as PlayStation and Xbox came out, and children became absorbed with them. Around 1995, LEGO Group’s growth stalled due to a change in kid’s preference and inclination towards technologically advanced games. Also, the US market had grown into a heavy licensed market for toys. Toys of cartoons and hit movies accounted for half the sales then.
To tackle the change monster (Patrick Forth: Technology disruption meets the change monster…who wins?, 2014), in the late 1990s and early 2000s, LEGO took massive strides into the digital space, producing several generations of interactive websites, console games, and computer media. Yet in 2003, LEGO Group reported an operating loss of $228 million on sales of just over $1 billion (Ross & Andersen, 2016, p.2) and by 2004, announced the cutting of 500 Jobs (MattM, 2016). In addition to production inefficiencies and supply chain problems, a significant contributor to this loss was the challenge posed by digital transformation, which had begun to take its toll on its bottom line.
LEGO Group was hit by disruptive innovation (Bower & Christensen, 1995) and was witnessing innovator’s dilemma (Christensen, 2011) and productivity paradox (Brynjolfsson, 1993). At the core of the problem was LEGO Group’s misapplication of digital transformation to its business model and operational model. LEGO had diversified itself into digital mediums, which distracted LG from its core product offering — the LEGO brick. Digital media and video games showed promise, but LG was not adept at developing them and saw a series of media flops with corresponding losses (MattM, 2016). As for its operational model, LG’s Press Officer in 2004 described a general lack of information flow in the company: “We had a lot of knowledge silos within the organization. One hand was doing something that the other didn’t know.” (MattM, 2016).
2004 Onwards: Digital transformation Era
In early January 2004, Kjeld Kirk Kristiansen, owner of the LEGO Group, stepped down as CEO and appointed former McKinsey consultant Jørgen Vig Knudstorp as the new CEO.
As reported by Ross & Andersen (2016, p.3–4), under a new CEO, the company began to leverage digital technology to repair its past mistakes and return to its core value proposition. It did so by focusing on simultaneous improvements to its business and operational models. Knudstorp focused initially on cost-cutting and efficiency to architect the change, i.e. on applying business fundamentals, mainly related to supply chain processes. He focused on the SAP-based single, global Enterprise digital Platform to break silos by enabling seamless information flow and collaboration within the organization. In 2005, just a year after he took over as CEO, the LEGO Group turned a profit and by 2009, while much of the world was dealing with a global recession, the LEGO Group reported surging profits.
2016 Onwards: leading the industry — digitally!
Ross & Andersen (2016, p.1) also found that in early 2016, digitalisation was benefiting the LEGO Group in several ways. The Soaring demand for digital toys boosted sales of programmable LEGO robots and LEGO bricks packaged with video games. Also, LEGO online communities saw widespread enrolment and growing fan-produced LEGO YouTube videos. Furthermore, highly integrated supply chain and product lifecycle management (PLM) systems were accelerating product to stores on an as-needed basis. Still, despite its success with digital innovation, the management felt that the LEGO Group was at risk of failing to respond quickly enough to the opportunities and threats the digital economy was posing.
The above reflects the CEO’s agile mindset, which is also evident from LG’s undertakings, accounted in table 1. LG has been able to make the most of its size by inculcating the agility of a start-up, however, with the added caution of creating LEGO Venture that helps create independent entities for strategic initiatives — an approach well captured by Ross (2019). Further, having developed a massive fan following over the years, LG has lately been in a unique position to not worry about crossing the chasm (Moore, 2007) and instead bank on shark-fin adoption (Downes, & Nunes, 2018) of its offerings.
CONCLUSION
LEGO Group offers fitting examples of challenges posed by digital technologies to a physical products’ business and opportunities that can be created by effectively applying digital trends across the company’s business and operating models. The above shows that even traditional companies that have grown large and cumbersome can adapt to rapid change and re-emerge as market leaders.
As explored in key business model themes section above, by consistently adapting and applying a business model that is not only about doing well (points 1–7) but also about doing good (points 8–9), Lego Group has been able to secure its place in our hearts and homes. No wonder LEGO Group is thriving.
REFERENCES
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