Thinking inside the box

This book, to use the words of authors David Robertson (a member of the Wharton School's faculty) and Bill Breen (a former writer for Fast Company magazine), tells the story of the "near death, remarkable rebirth, and stunning recent success" of Denmark's family-owned Lego Group, creator of the eponymous brick loved by generations of children. Innovative for much of its eight decades, Lego lost its way when, seeking to renew itself in the late 1990s, it turned its back on its history and began competing for the attention of a new generation of children enamoured of video games, cable TV and computers.

By 1993, when 15 years of double-digit growth came to an end, Lego went on a development binge, tripling the number of new toys it launched between 1994 and 1998, in a desperate bid to kick-start sales. Many of them failed, while production costs soared. By the late 1990s, interactive games had Lego's core customers in their grip. When Lego experienced the first loss in its history, in 1998, and a tenth of its workforce had to be laid off, a turnaround expert named Poul Plougmann was brought in as chief operating officer and promised a hefty bonus if he doubled sales by 2005.

Mr Plougmann put innovation at the top of the agenda and boldly declared that, in five years, Lego would be the world's biggest brand among families with children. He rolled out an ambitious strategy that entailed addressing hitherto-untapped "blue-ocean" markets and launching "disruptive" innovations, much like Procter & Gamble, Southwest Airlines, Canon and Apple. But it all went horribly wrong, leading to Lego's biggest loss in its history, in 2003.

Mr Plougmann pushed Lego away from its core and into every conceivable new market, pursuing "new channels, new customer segments, new businesses, and entirely new categories of products" (software, theme parks, retail stores, TV series, for example). In trying to expand on so many fronts, Lego lost its focus and sense of direction. The new innovation strategy was poorly implemented; many of Lego's bets went bad and by 2003 it was hurtling towards bankruptcy.

The return to profitable growth - under a new management team headed by Jorgen Vig Knudstorp (a former McKinsey consultant) - took seven years, and has been brilliantly reconstructed by the authors after interviews with dozens of senior managers and designers.

Lego reduced costs by halving the company's product portfolio as well as the time taken to develop an idea and bring it to market; won back the confidence of retailers; and raised cash by selling assets such as theme parks. Mr Knudstorp set a clear direction: back to the brick, which meant focusing on core assets, core products and core customers. He also laid down a 13.5 per cent return-on-sales target, which "pushed everyone to concentrate their efforts on just those product lines that promised profits". Resource-draining lines were dumped and earlier money makers revived, leading to a return to profit in 2005.

Managers introduced an innovation matrix that helped grade innovations on the degree to which they were incremental or radical, and map those that they would pursue. A system of quarterly reviews for product development teams helped weed out projects that failed to deliver a distinctive play experience, enabling the company to focus on launching only the most promising concepts. The product development process was also opened up to the Lego fan community, giving the company access to entirely new insights. By 2008, both sales and profit growth were impressive.

Thereafter, Lego began taking on riskier challenges, asking its designers to create an "obviously Lego, but never seen before" play experience, in a bid to tap wider markets. In achieving this fine blend in its new products, the company revitalised the Lego brand. While the sales of other toy companies such as Mattel and Hasbro grew at annual rates of one per cent and three per cent, respectively, between 2007 and 2011, Lego's sales surged by 24 per cent a year and its profits by 40 per cent a year.

The authors offer three takeaways from the turnaround. First, it is time to "reconsider our headlong rush to think 'outside the box'" and instead follow Lego's example and "climb back into it" (which means innovate within a discipline and a focus imposed by management). Second, sequence matters in innovation: "It's highly unlikely that a company will possess the wherewithal to discover a whole new market if it first hasn't built a core business" that delivers results. Third, Lego puts as much premium on incremental innovations to a classic bestseller "as it does on creating a revolutionary line that 'redefines' an entire toy category".

The origin of this book was a case study on Lego that Mr Robertson taught in 2008 and 2009 at the Swiss business school IMD, and hoped to later include in a book on the innovation practices of 56 US and European companies that he had surveyed. He decided to devote the entire book to Lego when he realised that its management "had fundamentally rethought what 'innovation' meant and how it should be managed and, by doing so, had rescued the company and boosted its performance to new heights". Brick by Brick makes compelling reading.

BRICK BY BRICK
How Lego Rewrote the Rules of Innovation and Conquered the Global Toy Industry

David Robertson and Bill Breen
Random House; xii + 305 pages; £18.99