1:48 PM Tue Sep 20 o o o a? @ 18% (*3. Done LLego case goup B.pdf Open in Office Q Q um\" Members of the LEGO product groups began to show up. They interviewed customers to seek their impressions of new products, but also to learn what they wanted for the future, i.e. the vision they had of what the company could do. In addition, the product groups observed how participants played with their latest kits, to discover what worked and what didn't. It was a new kind of consumer research for the company, a laboratory that provided direct interaction in a setting outside of LEGO headquarters that allowed designers to test prototypes and their most advanced ideas on consumers. Even LEGO suppliers were testing prototype . W devices at the 2007 event. For example, Hermann Hainzimaier, the founder of ' CODATEX, tested a new kind of Mindstorrns sensor at the event, in cooperation with the Mindstorms team. Linking with Outside Innovation: Design DNA and Style Guides Another change lay in making greater use of the skills of outside inventors. The company developed a network of inventors, coordinated by Concept Lab personnel but charged with developing both incremental and revolutionary ideas for new products. To use these inventors effectively as well as to guide their internal efforts, the company needed to communicate to them the characteristics of each toy line. To do so, it developed the concept of the \"Design DNA.\" Each toy line had a specic DNA, which specied the target audience, the play experience desired, the \"expression\" of the toy (how realistic vs. ctional, light vs. dark, timeless vs. trendy), and other details. (Refer to Exhibit 8 for Exoforce Design DNA and to Exhibit 9 for examples ofExoforce toys.) The company also needed to develop a means for coordinating with companies that made complementary merchandise such as books, T-shirts, games, movies and other products. One toy line that used these outside companies extensively was Bionicle. From its invention in 2001, Bionicle was a character-based game set 1:48 PM Tue Sep 20 . . . @ 18% % Done Llego case goup B.pdf Open in Office Q IM 2 of 25 One of the first steps in the turnaround had been to restructure the company to give each part of the business clear responsibility for achieving its profitability targets. Until mid-2005, the LEGO Group's innovation efforts had been broken down according to age groups, but the activities of each designer had not been connected to any individual statement of profit or loss. Knudstorp and his team recognized that they needed to establish profitability as a core goal, so they reorganized the designers into product groups, each of which would have sales and profit targets . "We had to align structure with value creation," said Knudstorp. In addition, he decided to publicize the results, comparing the performance of the various product groups: We began to put the sales figures on the web. And every week, we sent out a newsletter to explain what it meant and what we wanted to do. One of the changes in structure was the separation of the Concept Lab, which had been integrated into the main product development organization. As part of the restructuring, the company separated the development of revolutionary play experiences and assigned them to the Concept Lab. They challenged the Lab to develop new experiences that were "obviously LEGO, but never seen before." The Concept Lab was also restructured geographically - innovation hubs were located in some of the company's most important markets, including Japan, Germany, the US and Spain. LEGO employees in the markets developed a network of local inventors who were charged with developing new play concepts for the LEGO Group The LEGO Innovation Matrix But this was only the first step. Knudstorp knew the company needed to coordinate the different types of innovation more effectively. For example, the LEGO Factory service required the creation of a new development environment (LEGO Digital Designer) and the implementation of a warehousing system that could assemble and ship custom kits - both significant innovations in their own right. To improve coordination, the team defined eight innovation types, liffe1:47 PM Tue Sep 20 o c o 6? 17% C43 Done Lego case group A.pdf Open in Office Q Q ...., \"'\"i'f \"What,\" Knudstorp asked, \"makes us unique? Why are we here?\" While \" ' Knudstorp posed this question to his inner circle, it also sparked a debate throughout the company. \"If there is a quick answer to these questions,\" he said, \"we know what we were doing. If not, then the brand is too vague.\" After intense discussion, both within the company and through focus groups with customers, the answer emerged: The core assets of the LEGO Group were: (1) the brick, which was instantly recognizable; (2) the building system, which amounted to a platform for innovation; (3) an emotionally appealing brand, perhaps the world's W best for children; and (4) the unusually devoted LEGO community. According to Knudstorp: In essence, we saw ourselves as a unique niche player in the toy industry. We would never become the biggest, but being the best is good enough. Our products should transmit the joy of building, generate pride in creation, and help to equip children for the future through playful learning and education, in other words make children the builders of tomorrow. From this base, they formulated the company's next strategic direction. They decided that any new product family from the LEGO Group had to be true to this identity; a new play experience should be \"obviously LEGO, but never seen before.\" While this did not rule out the extension of the LEGO brand into new media and experiences, it did mean a return to the iconic brick as a focal point. Phase 2: Prot from the Core By the end of 2005 the LEGO Group was out of immediate trouble. Although sales were at due to the elimination of some products, the company was in a solid cash position, costs were down 35% and it was debt free. As Phase 2 of Shared Vision began, the company turned its focus toward revitalizing its product ~~~~ lines and restoring protability. The product groups were called upon to 1:48 PM Tue Sep 20 o o o a? @ 18% (*3. Done LLego case goup B.pdf Open in Office Q Q . 'dDUUl mat. um Not only did a higher percentage of projects result in new toys on the market, but the toys on the market were also more successful. For the LEGO City line of toys, which the company had considered dropping, sales increased dramatically. From revenues of DKK 350 million in 2005, they doubled the next year, and reached DKK 1.5 billion in 2007. The LEGO City team, which had been concerned about losing sales because of the reduction in the LEGO elements available, found that by clarifying the brand, following a disciplined process, and focusing more resources on marketing, they were able to achieve the increased sales with fewer models. The new process also used the Innovation Matrix (refer to Exhibit 4) to ensure that the different types of innovation were coordinated and appropriately staffed during development. The new process required each team to chart on the innovation matrix the level of innovation needed for each type of innovation. For example, for the development of the next generation of LEGO Mindstorms, the robotics development kit, the company decided to leverage the talents of outside enthusiasts. Mapping the overall development task on the Innovation Matrix showed the Mindstorrns development team that, while the product would represent a major new conguration, the greater challenge for the company was ~77 going to be the changes in the way it communicated with its lead customers, and the processes it used to develop the product. (Refer to Exhibit 6 for the Mindstorms innovation map, and see pages 68 below for more on the Mindstorms development eort.) This document is authorized for use only by Irene Nwachukwu in Product Management Fall 2022 taught by ANTHONY DI BENEDETTO, Temple University from Sep 2022 to Mar 2023. 1:49 PM Tue Sep 20 o o o a? @ 18% (*3. Done LLego case goup B.pdf Open in Office Q Q um in a fast-moving narrative. Every year, as the story line changed, so did LEGO's product offerings: One year it might occur in space, while the next year the narrative would take place under water. The team found that coordinating the development of new toys with the development of complementary merchandise was difcult and often chaotic. \"We were unstructured and that cost us time,\" recalled Birthe Jensen, marketing director, which translated into lost opportunities: 7of25 It was so fast-moving that we had to put everything out at the same time. Everything had to look like it came from the same place, even when suppliers were producing Tshirts and books on their own. While Jensen and her team were searching for a way to achieve that kind of multimedia consistency on a limited budget, she was struck by the potential of the LEGO Development Process. \"We needed some kind of governance or coordination mechanism,\" she explained. Then she realized that the LDP could ,_,_,,,,_ incorporate a \"guide,\" in which all information was gathered for dissemination in an orderly way. To do so, she noted: We had to foresee what would be hot in the story and then brainstorm. . .to come up with the M right models and graphics for the style guide, right down to the lettering. While the internet enabled her group to communicate instantly with Bionicle's partners and suppliers, of which there were nearly 50, Jensen recognized that her group had to get their buy-in at least one year in advance. This meant developing a consensus during the LDP, in effect allowing their collaborators to contribute to the style guide via suggestions and critiques. \"That wasn't an easy task,\" she admitted, \"because everyone wanted to control their portions.\" (Refer to Exhibit 1 0 for selected images om the Bionicle Style Guide) The result was a substantial expansion of licensing revenues. With the partners, each of whom paid 10% to 14% of their sales revenue to LEGO for use of the Bionicle brand, Jensen explained, \"We created a new business model for LEGO, based on licensing. It has become one of the biggest sources of revenue to the company.\" 1:47 PM Tue Sep 20 . . . @ 17% 14 Done Lego case group A.pdf Open in Office Q IM to save the company, was appointed president and CEO. He was only 35 years old. The New Plan: Shared Vision With a PhD in economics, Knudstorp began his career at Mckinsey & Co. He worked there for three years, then joined the LEGO Group as director of strategic development in 2001. As the LEGO Group slid into the most serious crisis in its history, Knudstorp and his team began to formulate a plan to save the company. It was a very tough problem. On the one hand, the company's previous leaders had already tried to "innovate" and by any measure had produced an impressive set of new, revenue-generating products and play experiences. However, too many of these were not profitable. What, he wondered, could they do differently? Given the challenges facing the company - limited cash, increasing price pressure, powerful retailers, high fixed costs and, in particular, the shift away from traditional play and the consolidation of retail-outlet power - it was unclear what options remained for them. Knudstorp and his team titled their new plan "Shared Vision." Knudstorp characterized it not as a new strategy, but as "an action plan for survival" that built on LEGO's traditional strengths. The plan had three parts. The first phase, "Stabilize for Survival," to be carried out in 2004 and 2005, focused on reducing costs, eliminating debt and returning the company to profitability. The second phase, "Profit from the Core," to be carried out in 2006 and 2007, aimed to improve the profitability and growth of the company by revitalizing the core product lines and transforming the business platform (e.g., through outsourcing of manufacturing and strengthening the IT platform). The final phase, "Achieving Vision," scheduled for 2008 and 2009, focused on developing innovative new play experiences to profitably grow the company. The LEGO Group immediately began the effort to reduce debt and cut costs. In 2004 it announced a decision to investigate outsourcing of the majority of its plastic brick manufacturing to external suppliers or its own factories in low cost LLL countries, an effort that despite a target of reducing the overall workforce by more1:47 PM Tue Sep 20 no v.3 @17%C4:" Done Lego case group A.pdf Open in Office Q Q IM) demonstrate protable results. They were also asked to start thinking of how they would implement the third phase of the Shared Vision new ideas for organic growth that was scheduled to begin in 2008. One product line that needed revitalization was LEGO City. Long one of the traditional and best-selling product lines of the company, LEGO City sales had been declining since 2000. Some believed that the product line should be phased out. Its share of the company's gross revenues had dwindled from over 15% to about half that gure in 2003. In 2004 LEGO City marketing director, Birthe Jensen, asked her team to reassess where they were going. Their products, Jensen concluded, were not differentiated enough and had become overly simplied, that is, dumbed down for easy assembly. Moreover, they appeared undistinguished and unrealistic, somehow lacking focus or relevance. \"We were doing space stations and race tracks,\" she recalled, \"but not things that children saw everyday.\" To move ahead, Jensen and her team decided they would develop more realistic products, with convincing details, for a limited number of products with which children had direct experience. \"We would make re engines that look real,\" she explained (refer to Exhibit 4 for examples of LE GO City toys). But the team, like the rest of the LEGO Group, had to contend with a reduced product line necessitated by the reduction in complexity. Future Challenges At the end of 2005, with the company on a solid nancial footing, Knudstorp and the management team considered what to do next. Sales had fallen by 35% in the previous two years, and the company was still adjusting to the dramatic cutback in ._ personnel. The reduction in LEGO components was also being felt, inside and . M. outside the company. Designers complained that their creativity was being ' reduced, and some passionate users complained when their favorite components or gures were eliminated. The team wondered how LEGO's designers would react to a reduction in the number of components available to them. If the toys , were constructed only from the components available, would the cut in manufacturing, supply chain and inventory costs be worth the loss of creativity? 1:47 PM Tue Sep 20 o o o v.3 @17%Ci3' Done Lego case group A.pdf Open in Office Q Q um \"M: Another new direction in play experience was represented by the narrative-based H ' product series called \"Bionicle,\" Bionicle, whose name combined biological with chronicle, were embedded in an evolving multimedia story. This narrative, renewed regularly, was supported by books, cartoons, movies and later a website. Each new episode introduced new characters and contexts in which the characters interacted, similar in some ways to Pokemon (refer to Exhibit 3 for examples of Bionicle toys). This move to toy sets driven by story telling was seen as a major growth driver. The sudden infusions of cash from the Star WarsTM and Harry PotterTM kits, coupled with the ability to push back the boundaries of what a LEGO play experience was, allowed designers to experiment in increasingly diverse directions. The LEGO Group, some believed, should become a \"family lifestyle\" company with a greatly expanded portfolio of products, from entertainment experiences such as the LEGOLAND amusement parks to fashionable clothes and computer games. Between 1996 and 2002, three new LEGOLAND parks (in addition to the original park near the LEGO Group's headquarters) were opened in the US and Europe, at a cost of nearly DKK 1.5 billion each. LEGO Mindstorms, a sophisticated building set with motors, sensors and a programmable \"brain,\" was introduced in 1998 and targeted an older audience. Some designers even argued that the LEGO brick was passe, and that it was only a matter of time before the LEGO Group would go virtual, providing play experiences predominantly through CDs and the intemet. This expansion in the range of offerings not only affected the identity of the LEGO Group but also altered its cost structure. The LEGO Star WarsTM building sets and other customized toys demanded the creation of new, specialized elements. Each new element had to have its own mold, production method and inventory, which added to the xed cost of the company. As the range of elements - \"f' expanded, the costs did as well.3 1:47 PM Tue Sep 20 no a? @17%C*:" Done Lego case group A.pdf Open in Office Q 69 Q in, "slums, wmpwuow am. c w\" Awuwuluum. u u as this legacy mi clam\"! , creative play, community and experimentation that Christiansen passed on to hIS sons, who contlnued to own and run the company. IM) Growth For the next 20 years, the LEGO Group grew slowly and steadily, reaching approximately 1 billion Danish kroner (DKK) in sales in 1978.2 During those years, the LEGO play experience was based on freeform play: Children constructed worlds of their own choosing; they did not follow elaborate instructions or systematic blueprints. Over the next 10 years the company operated on an increasingly global scale, growing sales to DKK 5 billion in 1988. Growth slowed in the mid1990s, including a loss of DKK 300 million in 1998, despite expansion into several new categories that were more than \"just toys\" such as books, TV, watches, etc. But in 2000 the company began a period of explosive growth as it saw sales increase with licensed products, including LEGO based on popular intellectual properties (such as the Star WarsTM movies) and growth driven by a steep increase in the value of the US dollar (vs. Euro). The sales growth begun in 2000 was the result of the aggressive expansion in the . range of play experiences that the LEGO Group offered. No longer content with ' offering building sets, the company had expanded into computer games, clothing, amusement parks and movies. To accomplish this expansion, it hired many designers of a \"new breed\" from design schools, whose ideas went beyond modeling with the traditional bricks. With the support and encouragement of their management, these new designers challenged and pushed back the boundaries that had previously dened what a LEGO product was. For example, in 1999 Lucaslm Ltd. convinced Christiansen's grandson, Kjeld, to create a partnership based on the Star WarsTM lms. The result was a series of elaborate kits, each representing machines and characters from the Star WarsTM universe (refer to Exhibit 2 for examples of LE G0 Star WarsTM toys). The LEGO 1 It was onlv vears laWGO means \"I out together.\" 1:49 PM Tue Sep 20 u. a? @18%C'jr Done LLego case goup B.pdf Open in Office Q a] .m ::~ agreement with LEGO. Vangbo's team then began sharing the toy concept and sending them prototypes for feedback. She explained: This was legally sensitive, because the price information was secret and they were hackers 7 we had no idea what they might do. Fortunately, none of our fears [of intellectual property or trade secret losses] were realized. After playing with the prototype systems, the fab four offered many useful suggestions, including the creation of entirely new components. In late 2005 the group was expanded to 11, who were sent a \"Christmas present\" to test a more nished \"beta kit.\" According to Canvin: We wanted them to try out the hardware and software, identify problems, propose solutions for the bugs they found, and offer additional suggestions. The product was announced at the Consumer Electronics Show (CBS) in January 2006. The set had over 500 pieces, including four sensors (for light, motion, distance and touch), three motors and the NXT programmable brick (refer to Exhibit 11). It came with a powerful programming language that had a simple visual interface4. At the CES they expanded the development team to continue the testing and renement of the kit and to create models that customers could build. Canvin recalled: We asked for 100 volunteers, expecting only about 1,000 to come forward. Instead, almost 10,000 applied, and they had to pay us to join! 4 The programming language, while not open source, allowed users to create new functional modules and post them for others to use. For example, the creator of a new RFID or magnetic compass sensor could easily create and distribute the new programming block needed to control the sensor. 1:47 PM Tue Sep 20 no v.3 @17%C4:" Done Lego case group A.pdf Open in Office Q 69 Q \"if"? agreed that there was still an opportunity to generate income by licensing the LEGO brands to external partners. These partners could produce books, movies, computer games, T-shirts and other products around brands such as Bionicle, Exoforce and LEGO Star WarsTM. The company also wished to explore whether it could augment its internal development team with outside inventors. But in both cases, it needed to ensure that the products generated were consistent with the brand image of each product line, and were delivered to the market at the same time as the products they were designed to complement. Based on its research, the company also knew that it had a unique asset that it had not been leveraging its passionate customer base. For example, LEGO had recently released a computeraided design tool called LEGO Digital Designer, which allowed users to create new LEGO toys virtually. After building a Virtual toy a user could check the price of the new creation, upload it to the LEGO website, and order exactly the pieces needed to build it. The new service, called LEGO Factory, also allowed users to purchase other users' creations. While the logistics of the packing and shipping of these kits was still under development, the company saw great potential in the service and wondered how it could grow the idea more. (Refer to Exhibit 5 for screenshots of the LEGO Factory website and the LEGO Digital Designer design environment.) Anther opportunity to leverage the company's customer base was for the development of the toys themselves. For example, in the previous generation of LEGO Mindstorms, users had hacked the code for the programmable brick and developed other programming languages that many in the community felt were better. Should the company prevent this from happening in the future, or should it develop its next generation of LEGO Mindstorms as an open source product? 1:48 PM Tue Sep 20 u. a? @18%C'jr Done LLego case goup B.pdf Open in Office Q '] m" \"dead\" chefs and some of the other discontinued elements and created a memorial site for them (refer to Exhibit 7 for pictures of some of the \"dead LE G0 chefs). Opening Up Knudstorp and his team knew that they had to re-orient the company to seek and accept input from the outside as an integral part of their product development and marketing processes. This represented a fundamental shift in the company's culture, which had been more inwardly focused. Many feared that opening up the company would slow down development and could result in ideas for new toys leaking out, allowing competitors to copy the ideas. Hjuler and his team experimented with a number of ways to directly approach customers for input, including: 0 Customer research in LEGOLANDS and LEGO retail stores. 0 The creation of focus groups. o Surveys of education professionals who use LEGO products. - Structured play events, in which children were invited to play with new product concepts while LEGO developers watched. - Condential product testers , families that signed condentiality agreements, received toy concepts to play with, and provided feedback to the LEGO Group. 1:49 PM Tue Se . . . @ 18% 14 Done Llego case goup B.pdf Open in Office Q A IM would cooperate to design a robot to complete some challenge. All the school needed, Bonnstein explained, was "a Mindstorms NXT kit. We then sent them materials on what they needed in the classroom, software for the teachers to use, and parts" when needed. The contests culminated in an international competition. LEGO Factory In 1999 LEGO employee Mark Hansen created an interactive computer film of a LEGO world that could operate online. With the support of his boss, Tormod Askildsen, his idea was to extend the LEGO experience into the online world. Hansen was convinced that he could create a personalized - or "mass customized" - virtual three-dimensional building environment, where construction could take place without physical bricks, yet nonetheless accurately duplicate the real-world experience. Their first experiment in customization was a product called "Mosaic," a two-dimensional image composed of colored bricks. "All you needed," Askildsen explained, "was a digital photograph, and we would create an image from it." Hansen began to nurture a vision that LEGO users might enjoy a computer-based system to experiment with, to produce and even market their own designs. Though the intervening crisis almost killed Hansen's idea, he kept pushing it with top LEGO managers. The idea had grown into a system that would enable LEGO designers and engineers as well as fans to have a building tool that all of them Canvin's initial role, as user community coordinator, was created in response to an email from one of the initial user panel members, Steve Hassenplug. Hassenplug emailed the Mindstorms development team, suggesting that if the 100 new user panel members were not listened to and managed well, they could become a source of very negative press.1:49 PM Tue Sep 20 u. a? @18%CJ' Done LLego case goup B.pdf Open in Office Q Q IM) 8 of 25 kit. She was determined to create a new kind of LEGO product. She explained, \"We wanted to do for robotics what the iPod did for music make it easier for kids to use.\" In the atmosphere of experimentation, they decided to try a new method of product development that would harness the energy of the fan community. According to Canvin, who became the business manager of Mindstorrns NXT: We wanted to engage the [Mindstorms] lead users in the development phase as co-creators, prototype testers, and perhaps even its marketers. That would tap into their enthusiasm and talents. It would also create buzz. In 2004, during the earliest development phase, Vangbo's team found four \"hard core adult fans\" in one of the online communities. Canvin recalled: We did a covert search to nd real leaders, and we found them among the hackers that played with the rst Mindstorms kit. It was a hobby to them. Dubbed the \"fab four,\" they immediately agreed to sign a non-disclosure agreement with LEGO. Vangbo's team then began sharing the toy concept and sending them prototypes for feedback. She explained: This was legally sensitive, because the price information was secret and they were hackers 7 we had no idea what they might do. Fortunately, none of our fears [of intellectual property or trade secret losses] were realized. After playing with the prototype systems, the fab four offered many useful suggestions, including the creation of entirely new components. In late 2005 the group was expanded to 11, who were sent a \"Christmas present\" to test a more nished \"beta kit.\" According to Canvin: We wanted them to try out the hardware and software, identify problems, propose solutions for the bugs they found, and offer additional suggestions. ,, , The product was WES Show (CBS) in January 1:48 PM Tue Sep 20 o o o '? Ci) 18% C43 Done LLego case goup B.pdf Open in Office Q Q .M,~>~::r~ levels and types of innovation (refer to Exhibit 4 for the LEGO Group's 30f25 innovation matrix). The matrix became a key tool in the redesigned LEGO Development Process. The LEGO Development Process In addition to new product ideas, the Concept Lab was also charged with _ my improving how LEGO should innovate, including the LEGO Development Process (LDP). The poor success rate of development projects had become a source of frustration to LEGO employees. According to Per Hjuler, vice president of product and marketing development,2 \"most ideas seemed to go nowhere, and designers were unhappy about it.\" Improving the success rate, he reasoned, would boost morale, as well as saving a at deal of energy and time. Hjuler and his team began to transform the LDP. Conceived in 1995, the LDP had evolved into an excessively bureaucratic process. According to Hjuler: At rst it worked well, but then it got too dense. Each step of the way, people had to ll out multiple forms and checklists, which they understood in their own ways. To simplify the process, the check list was eliminated and virtually all authority delegated to product teams. We focused on gates and deliverables; the rest was left to the teams to sort out on their own. The new LEGO Development Process had four major gates: 0 P0: Scheduled for February of each year, this gate was a two-day workshop in which the major trends and inspirations from the market would be combined with ideas from inside and outside the company to determine the direction and emphasis for two years out (e.g., the February 2008 workshop ~~~~ focused on the toys to be delivered in 2010). 0 P1: Scheduled for June of every year, team members from some of the toy lines3 presented briefs that outlined general trends, themes, and toy concepts for their area. The result was the selection of concepts to develop further. 0 P2: ScheduleWaaihn-piedum estimated sales gures and Lego case group A.pdf Open in Office History Established in 1932 by Ole Kirk Christiansen, the LEGO Group at first crafted wooden toys in the founder s carpenter shop 1n Billund, Denmark. LEGO was a shortened form of the Danish phrase, \"leg godt\" (play we.ll) Over the next 15 years, Christiansen built a business based on offering high quality products that encouraged creative play. He designed his toys to captivate the imagination of the local children; through building, they were supposed to develop a sense of pride in accomplishment and learn while playing. In 1947, convinced that he had found the ideal new material for his growing company, Christiansen bought his rst plastic injection-molding machine. The eventual result was LEGO's iconic product, the plastic brick with eight studs, which the company patented in 1958. It became the focus of a tight-knit community of devoted enthusiasts, with their own newsletters, competitions and even conventions. It was this legacy for quality, creative play, community and experimentation that Christiansen passed on to his sons, who continued to own and run the company. Growth For the next 20 years, the LEGO Group grew slowly and steadily, reaching approximately 1 billion Danish kroner (DKK) in sales in 1978.2 During those years, the LEGO play experience was based on free form play: Children constructed worlds of their own choosing; they did not follow elaborate instructions or systematic blueprints. Over the next 10 years the company operated on an increasingly global scale, growing sales to DK 5 billion in 1988. Growth slowed in the mid19905, including a loss of DKK 300 million in 1998, despite expansion into several new categories that were more than \"just toys\" such as books, TV, watches, etc. But in 2000 the company began a period of explosive growth as it saw sales increase with licensed products, including LEGO based on popular intellectual properties (such as the Star WarsTM movies) and growth driven by a steep increase in the value of the US dollar (vs. Euro). The sales growth begun in 2000 was the result of the aggressive expansion in the range of play \"Wed No longer content with '.'-'17%'}'- Q69 ['3 1:47 PM Tue Sep 20 o o o 6? 17% E4) Done Lego case group A.pdf Open in Office Q g ml) expressions, each represented by a separate component; only one, the team reasoned, should sufce. Reducing the current number of 12,500 components by as much as 50%, the team speculated, would force the designers to focus. Clarifying the Group's Identity As the company executed the rst phase of Shared Vision, Knudstorp began to think about the next phases. Successfully revitalizing the core product lines and inventing new ones would require a better sense of what LEGO stood for. Knudstorp believed that LEGO had lost a \"crisp sense\" of its identity. The LEGO brand, he felt, had been stretched almost beyond recognition. More focus was needed to prevent the company from repeating its mistakes. He explained: Every year we started at least ve major new initiatives: TV, lm, huge theme parks. We expanded so fast that it was harder and harder to execute anything properly. . .If an initiative failed, we would just drop it and start something else. The end result, he said, \"was a loss of condence\" in the company's direction and abilities: It was unsure of what to do and its execution was weak. \"What,\" Knudstorp asked, \"makes us unique? Why are we here?\" While Knudstorp posed this question to his inner circle, it also sparked a debate _ throughout the company. \"If there is a quick answer to these questions,\" he said, \"we know what we were doing. If not, then the brand is too vague.\" After intense discussion, both within the company and through focus groups with customers, the answer emerged: The core assets of the LEGO Group were: (1) the brick, which was instantly recognizable; (2) the building system, which amounted to a M, platform for innovation; (3) an emotionally appealing brand, perhaps the world's ' best for children; and (4) the unusually devoted LEGO community. According to Knudstorp: In essence, we saw ourselves as a unique niche player in the toy industry. We would never become the biggest, but being the best is good enough. Our products should transmit the joy L4H. of building, genemmmmmildren for the future through 1:47 PM Tue Sep 20 o o o v.3 @17%Ci3' Done Lego case group A.pdf Open in Office Q Q um ' Star WarsTM kits were very controversial within the company: For the rst time, the LEGO Group introduced \"modern\" weapons into its universe, which had never been part of any LEGO toy (hitherto the weapons in LEGO sets were pirate guns, swords, and the like). The LEGO Star WarsTM also offered a different play experience they came with complicated sets of instructions and produced fragile models rather than active playthings, another rst for the LEGO Group. This new type of play, which fostered a \"right way of doing things\" mentality regarding the play experience, made many of LEGO's longtime designers uneasy. The trend toward models based on licensed characters continued in 2001 with the introduction of the rst series of LEGO Harry PotterTM building sets. Another new direction in play experience was represented by the narrative-based product series called \"Bionicle.\" Bionicle, whose name combined biological with chronicle, were embedded in an evolving multimedia story. This narrative, renewed regularly, was supported by books, cartoons, movies and later a website. Each new episode introduced new characters and contexts in which the characters interacted, similar in some ways to Pokemon (refer to Exhibit 3 for examples of Bionicle toys). This move to toy sets driven by story telling was seen as a major growth driver. f f\" The sudden infusions of cash from the Star WarsTM and Harry PotterTM kits, coupled with the ability to push back the boundaries of what a LEGO play experience was, allowed designers to experiment in increasingly diverse directions. The LEGO Group, some believed, should become a \"family lifestyle\" company with a greatly expanded portfolio of products, from entertainment experiences 7 such as the LEGOLAND amusement parks 7 to fashionable clothes and computer games. Between 1996 and 2002, three new LEGOLAND parks (in addition to the original park near the LEGO Group's headquarters) were opened - A in the US and Europe, at a cost of nearly DKK 1.5 billion each. LEGO ' Mindstorms, a sophisticated building set with motors, sensors and a programmable \"brain,\" was introduced in 1998 and targeted an older audience. Some designers even argued that the LEGO brick was pass, and that it was only a matter of time before the LEGO Group would go virtual, providing play experiences predominantly through CDs and the intemet. 1:49 PM Tue Sep 20 no a? @18%C':} Done LLego case goup B.pdf Open in Office Q Q um ' While the intemet enabled her group to communicate instantly with Bionicle's partners and suppliers, of which there were nearly 50, Jensen recognized that her group had to get their buy-in at least one year in advance. This meant developing a consensus during the LDP, in effect allowing their collaborators to contribute to the style guide via suggestions and critiques. \"That wasn't an easy task,\" she admitted, \"because everyone wanted to control their portions.\" (Refer to Exhibit 10f0r selected images from the Bionicle Style Guide.) The result was a substantial expansion of licensing revenues. With the partners, each of whom paid 10% to 14% of their sales revenue to LEGO for use of the Bionicle brand, Jensen explained, \"We created a new business model for LEGO, based on licensing. It has become one of the biggest sources of revenue to the company.\" Leveraging the Enthusiasts: The Development of Mindstorms NXT LEGO's first Mindstorms robot kit was released in 1998. By 2001, LEGO had sold nearly a million of these kits and created a devoted group of (mostly) adult fans and launched the company into sophisticated electronics products. The fans remained extremely active and enthusiastic on a number of intemet sites: They wrote dozens of books, hacked into the Mindstorms software system, developed new hardware accessories, and even invented new programming languages, some of which were considered better than LEGO's' \"They came up with ideas that LEGO designers had not even dreamed of we couldn't keep up with them,\" observed LEGO employee Steve Canvin. As the company began to transform itself in 2004, Tine Vangbo was appointed design manager of Mindstorms NXT, the next generation of the robotics building 1:47 PM Tue Sep 20 no v.3 @17%C4:" Done Lego case group A.pdf Open in Office Q 69 Q "at f?\" children saw everyday.\" To move ahead, Jensen and her team decided they would develop more realistic products, with convincing details, for a limited number of products with which children had direct experience. \"We would make re engines that look real,\" she explained (refer to Exhibit 4 for examples of LE G0 City toys). But the team, like the rest of the LEGO Group, had to contend with a reduced product line necessitated by the reduction in complexity. Future Challenges At the end of 2005, with the company on a solid nancial footing, Knudstorp and the management team considered what to do next. Sales had fallen by 35% in the previous two years, and the company was still adjusting to the dramatic cutback in personnel. The reduction in LEGO components was also being felt, inside and outside the company. Designers complained that their creativity was being reduced, and some passionate users complained when their favorite components or gures were eliminated. The team wondered how LEGO's designers would react to a reduction in the number of components available to them. If the toys were constructed only from the components available, would the cut in manufacturing, supply chain and inventory costs be worth the loss of creativity? Knudstorp and his team also realized that they needed to improve development effectiveness. It was important to develop not just breakthrough new toy ideas but also the next generation of Bionicle, Exoforce, LEGO City, Harry PotterTM, Star WarsTM and other toys. How could the product development process be sped up and improved? The company had implemented a stage-gate process in 1995, called the LEGO Development Process (LDP), to improve the ow of products to market. Over the past nine years, the LDP had evolved into a cumbersome bureaucratic mechanism. For a product to advance, elaborate checklists had to be lled out, and each person understood the requirements differently. According to Per Hjuler, vice president of product and marketing development, \"At rst it worked well, but then it got too dense.\" It also remained a sequential, linear process: 1:48 PM Tue Sep 20 o o o '? Ci) 18% C43 Done LLego case goup B.pdf Open in Office Q Q mu 4 of 25 well as allocating resources to make it happen. (For a typical product line, this step would result in 10 to 20 different toy projects.) To prepare for each gate the team went through three phases: 0 Exploring emphasized the need for outside input to ensure that customer and partner feedback was collected and incorporated into the design. 0 Developing required the development of prototypes for testing. As the process moved from P0 to P3 these prototypes became more realistic, starting from rough sketches and moving to realistic models. In the later stages of the process the models would include packaging designs as well. 0 Validating required the team to test the prototypes. [Refer to Exhibit 5 for a description of the LE G0 Development Process] The results were impressive. The revamped process, coupled with the separation of revolutionary new play experiences (now assigned to the Concept Lab), shortened the development time for new product variants from 36 months to 12. And, Hjuler saw, the new process also greatly boosted the percentage of ideas that made it to market and the satisfaction of designers: Before, if a designer worked on ten ideas, only one or two made it to market, because we were experimenting a lot, exploring new things. That's not possible any more, because the W\" designers have a stricter brief to work on. But to balance that, their hit rate is much higher. Of ten ideas, about nine will make it into market now. And the designers are very happy about that. ~~~~ Not only did a higher percentage of projects result in new toys on the market, but the toys on the market were also more successful. For the LEGO City line of toys, which the company had considered dropping, sales increased dramatically. From revenues of DKK 350 million in 2005, they doubled the next year, and reached DKK 1.5 billion in 2007. The LEGO City team, which had been concerned about losing sales because of the reduction in the LEGO elements available, found that by clarifying the-bnendfamangedm-phmdpiocess, and focusing more 1:48 PM Tue Se . . . @ 18% 4 Done LLego case goup B.pdf Open in Office Q A IM Germany, the US and Spain. LEGO employees in the markets developed a network of local inventors who were charged with developing new play concepts for the LEGO Group. The LEGO Innovation Matrix But this was only the first step. Knudstorp knew the company needed to coordinate the different types of innovation more effectively. For example, the LEGO Factory service required the creation of a new development environment (LEGO Digital Designer) and the implementation of a warehousing system that could assemble and ship custom kits - both significant innovations in their own right. To improve coordination, the team defined eight innovation types, organized into four categories (refer to Exhibit 2). And, realizing that different levels of innovation should be managed by different groups, they separated the responsibility for developing revolutionary new products from that for incremental improvements, such as the next generation of Bionicle or LEGO Star Wars toys (refer to Exhibit 3 for LEGO's three levels of innovation). By combining these two dimensions, they created a matrix that charted the different Product Group 1 had responsibility for LEGO City, LEGO Creator, Mindstorms, and Duplo product lines - products that were, with the exception of Mindstorms, oriented toward younger children. Product Group 2 had responsibility for Exoforce, Aqua Raiders, LEGO Castle, and the branded offerings such as LEGO Star WarsTM, Harry PotterTM, SpidermanTM, BatmanTM, and other licensed offerings. Product Group 3 was responsible for Bionicles, LEGO Racers, and Technic toys. A separate group called Community, Education and Direct to Consumer had responsibility for virtual toys, including LEGO Factory.1:48 PM Tue Sep 20 u. a? @18%C*:" Done LLego case goup B.pdf Open in Office Q 69 Q mu ' 5 of 25 Reducing Complexity Adding to the challenge for designers during the changes to structure and process, the company decided to stop production of over half of the 12,500 components in production. This was a controversial decision for the designers some argued that it would cut the range of toys possible and hurt sales. But the controversy was short-lived, Hjuler said: The designers turned around really quickly. They realized they could be more creative based on a smaller number of elements because the remaining elements could be applied in many different ways. In a way, they rediscovered what LEGO was all about. Or, as Knudstorp put it: \"Innovation ourishes when the space available for it is limited. Less is more.\" One thing the company was not prepared for was the reaction from outside the company. Many passionate LEGO customers were disappointed when their favorite components were discontinued. For example, when the company decided to cut the number of faces for LEGO's chef gurine from seven to one, the strong response, both from internal designers and from external enthusiasts and collectors surprised them. In response, the company held a small ceremony for the \"dead\" chefs and some of the other discontinued elements and created a memorial site for them (refer to Exhibit 7 for pictures of some of the \"dead \" LE GO chefs). Opening Up Knudstorp and his team knew that they had to re-orient the company to seek and accept input from the outside as an integral part of their product development and marketing processes. This represented a fundamental shift in the company's culture, which had been more inwardly focused. Many feared that opening up the company would slow down development and could result in ideas for new toys leaking out, allowing competitors to copy the ideas. 1:48 PM Tue Sep 20 . . . 18% % Done Llego case goup B.pdf Open in Office Q A IMD INNOVATION AT THE LEGO GROUP (B) Professor David Robertson FEBRUARY 20, 2008. The 2007 results were in. While there and Research Associate Rob remained much more to accomplish, Jorgan Vig Knudstorp felt Crawford prepared this case as that the LEGO Group's recovery was going well. By a basis for class discussion restructuring the company, redefining the innovation process, rather than to illustrate either connecting with outside development partners, and putting in effective or ineffective handling place a number of mechanisms to coordinate innovation efforts, of a business situation. the company had reversed its slide (refer to Exhibit 1 for selected results). Sales were up overall, and efforts to revitalize brands such as LEGO City and Bionicle had succeeded. The relaunch of LEGO Mindstorms - codeveloped with a passionate group of outside enthusiasts - had been more successful than expected, selling more than 150,000 units in 2007. The company had introduced some toys based on LEGO Factory designs and the service was growing rapidly. And the company had some good ideas in the pipeline that could lead to further growth, including an online multiplayer game to be called LEGO Universe.1:47 PM Tue Sep 20 o o o v.3 @17%Ci3' Done Lego case group A.pdf Open in Office Q Q mu 4 0f13 The Crisis In 2003 the risks inherent in this growth strategy became frighteningly real. The LEGO Star WarsTM and LEGO Harry PotterTM kits, while successful in years with a new movie, proved cyclical and sold less in years without a successil lm. In 2003 there was neither a Star WarsTM nor Harry PotterTM lm. The US dollar began declining from its 2002 peak, LEGOLAND parks were draining earnings, , WW and the xed costs of supporting a staggering 12,500 different components remained high. In 2003 and 2004 the company saw its biggest losses ever (refer to Exhibit I ). As its troubles became apparent and the management team began searching for solutions, they realized that the toy industry was changing dramatically in at least four ways. First, electronic games video-game consoles, hand-held games, websites and even mobile phones were reducing the demand for traditional toys. No one knew how far the market would fall, though many forecast that electronics would essentially replace old-fashioned mechanical toys in the coming years. Moreover, with children preferring to enter multimedia fantasy worlds at about the age of eight, they were losing interest in traditional toys at an earlier age, which shaved as much as four years off the projected duration of traditional toy play. Second, the retail sector was consolidating into mega-stores such as Wal Mart and Carrefour which had an increasingly large share of total toy sales. This represented a decisive power shift in favor of the retailers and away from the manufacturers, which in the 1960s had been able to impose their product lines on customers.4 In this new retail environment, toy manufacturers had to compete with each other for shelf space, often accepting marketing dictates from retail outlets or producing toys for them under license. Third, because of the new retail environment and the outsourcing of manufacturing to Asia, the toy industry faced - ~~~~ strong downward pressure on prices. And, as the US dollar gradually declined ' against the Danish krone, LEGO products became relatively more expensive in the company's most important market. Finally, the LEGO Group began to see cheaper, look-alike bricks that were virtually interchangeable with LEGO elements. These toys began to take market share away from LEGO building sets the competitors were not only cheaper than the LEGO Group but also faster, LU- , bringing products-MW LEGO Group took these 1:47 PM Tue Sep 20 no a? @17%C*:" Done Lego case group A.pdf Open in Office Q 69 Q , MUOSIOI'p anu ms ream nneu Inelr new plan onareu VISlOIl. muosrorp characterized it not as a new strategy, but as \"an action plan for survival\" that built on LEGO's traditional strengths. The plan had three parts. The rst phase, \"Stabilize for Survival,\" to be carried out in 2004 and 2005, focused on reducing costs, eliminating debt and returning the company to protability. The second phase, \"Prot from the Core,\" to be carried out in 2006 and 2007, aimed to improve the protability and growth of the company by revitalizing the core product lines and transforming the business platform (e. g., through outsourcing of manufacturing and strengthening the IT platform). The nal phase, \"Achieving Vision,\" scheduled for 2008 and 2009, focused on developing innovative new play experiences to protably grow the company. IM) The LEGO Group immediately began the effort to reduce debt and cut costs. In 2004 it announced a decision to investigate outsourcing of the majority of its plastic brick manufacturing to external suppliers or its own factories in low cost countries, an effort that despite a target of reducing the overall workforce by more than 50% was done in collaboration with LEGO blue collar employees. In 2006, LEGO announced that 80 percent of manufacturing would relocate to low cost countries in Eastern Europe and Mexico. To reduce debt and generate some much- needed cash, the LEGO Group sold a 70% share of the four LEGOLANDs to the Blackstone Group for $456 million. To reduce complexity and manufacturing costs, it began reducing the inventory of LEGO components. Knudstorp and his team knew that reducing the number of components would be controversial in LEGO's design community and could potentially hurt the company's performance. Some designers argued that it would hinder creative expression and reduce the number of products on the market, which would lower revenues. Yet a reduction in components would simplify manufacturing operations, trim inventories, reduce cost of obsolescence, reduce mold investment . m cost dramatically and unburden the distribution systems. The team tasked with the ' effort believed that many of the components were unnecessary and hurt the company's protability. For example, the chef gurine had seven different facial 1:48 PM Tue Sep 20 o o o '? Ci) 18% C43 Done LLego case goup B.pdf Open in Office Q Q mu 6 of 25 o A more systematic use of \"LEGO fan events\" as places to go to nd new ideas and test internally generated concepts. The Brick Event One such fan event which represented a valuable source of ideas and feedback , W. was the LEGO Brick Event (today called LEGO World). In 2000, Roy Cordes a ' marketing specialist in LEGO Holland wanted to create an event to display the company's latest products in a forum for both children and adults, where visitors could play and experiment together. \"I wanted them to see the products, but also to share the emotion,\" he explained. Cordes rst contacted the local LEGO fan clubs for volunteers and enthusiasts. Then, he rented warehouse space for the event, where he amassed unsold brick sets as well as new promotional kits and materials coming available. The result was a huge event, the success of which was so great that it became an annual event with more than 10,000 visitors per day over 6 days. Designed as a show case, Cordes quickly realized that information was also owing into LEGO. \"We quickly saw that we could get good information about consumer preferences,\" he said, \"which helped us to market the products better.\" Members of the LEGO product groups began to show up. They interviewed customers to seek their impressions of new products, but also to learn what they wanted for the future, i.e. the vision they had of what the company could do. In addition, the product groups observed how participants played with their latest kits, to discover what worked and what didn't. It was a new kind of consumer research for the company, a laboratory that provided direct interaction in a setting outside of LEGO headquarters that allowed designers to test prototypes and their - W most advanced ideas on consumers. Even LEGO suppliers were testing prototype devices at the 2007 event. For example, Hermann Hainzimaier, the founder of CODATEX, tested a new kind of Mindstorms sensor at the event, in cooperation with the Mindstorms team. W" 7 Linking with OuWWStyle Guides 1:47 PM Tue Sep 20 o o o v.3 @17%Ci3' Done Lego case group A.pdf Open in Office Q Q " \"a \"V \"\"\"\"\"\" 9 \"\""J. \"\"\"\"\"\"\"\"\"\" ~ """ VJ \"\"\"\"\" . "J " \"\" V\""'\"b'\"b " \"\"\"\"\"\"\"\"\" J \"' \"\" \"'\"\"'" "\"1 . four ways. First, electronic games Video-game consoles, handheld games, websites and even mobile phones were reducing the demand for traditional toys. No one knew how far the market would fall, though many forecast that electronics would essentially replace old-fashioned mechanical toys in the coming years. Moreover, with children preferring to enter multimedia fantasy worlds at about the age of eight, they were losing interest in traditional toys at an earlier age, which shaved as much as four years off the projected duration of traditional toy play. Second, the retail sector was consolidating into mega-stores such as Wal- * "W Mart and Carrefour which had an increasingly large share of total toy sales. This represented a decisive power shift in favor of the retailers and away from the manufacturers, which in the 1960s had been able to impose their product lines on customers.4 In this new retail environment, toy manufacturers had to compete with each other for shelf space, often accepting marketing dictates from retail outlets or producing toys for them under license. Third, because of the new retail environment and the outsourcing of manufacturing to Asia, the toy industry faced strong downward pressure on prices. And, as the US dollar gradually declined W! against the Danish krone, LEGO products became relatively more expensive in the company's most important market. Finally, the LEGO Group began to see cheaper, lookalike bricks that were virtually interchangeable with LEGO elements. These toys began to take market share away from LEGO building sets the competitors were not only cheaper than the LEGO Group but also faster, bringing products to market before LEGO could. The LEGO Group took these competitors to court in many countries, arguing that the LEGO brick was an iconic form that should be covered by trademark protection (which does not expire), not patent protection (which had expired in all major markets). The courts disagreed, leaving markets open for lowerpriced competition. In 2003 the LEGO Group lost nearly DKK 1 billion kroner and its cash dwindled dangerously low. This was the largest loss in the history of the company, a sign that many observers believed indicated bankruptcy and perhaps even the breakup and sale of the company. The losses for 2004 were projected to nearly double (refer to Exhibit 1). It was at this point that Knudstorp, who had developed a plan 1:49 PM Tue Se . . . @ 18% 4 Done LLego case goup B.pdf Open in Office Q A Ion TAT CHAICCIIANS IM The first customer-designed kits became available in the summer of 2007, in a pilot project to test profitability; the winners were named on every package. Askildsen concluded: If we can make money, we plan to set up a design workshop for fans, who will vote on what is best. We will also create a way for fans to share in the profits of the designs that sell well, to give them an incentive. [Refer to Exhibit 12 for images of the two toys. ] LEGO Universe Building on the Factory concept, Hansen and his colleagues began to create an online multiplayer gaming environment, the LEGO Universe, which they envisioned to be an entire virtual environment that customers could enter. Once inside, customers would be able to build entire worlds - pirate ships, space stations, cities - with anonymous players or restricted to a list of friends. "It will be a place to create custom content," Hansen explained, "which they can then order from the LEGO factory." Every LEGO product group, he said, was cooperating to put its latest products into the Universe, where they would be interconnected. LEGO Universe would also give LEGO employees the opportunity to observe how customers use and behave with featured products, as well as to introduce and market new ideas. Knudstorp was so impressed that he designated LEGO Universe as one of the 3 potential growth areas for release in 2009, an entirely new departure, but one that was still tied to the LEGO brick. (Refer to Exhibit 13 for pre-release images from LEGO Universe.)1:49 PM Tue Sep 20 . . . @ 18% % Done Llego case goup B.pdf Open in Office Q IM 9 of 25 This allowed the group to enlist a much more diverse group: The new volunteers were divided according to interests, including academics, writers, programmers, website designers, builders, and the like. "They were going to be our evangelists," Canvin said, "and though they signed an NDA, we planned to allow them to speak freely once it was on sale." As anticipated, after offering valuable suggestions and observations, these volunteers transmitted their enthusiasm to the Mindstorms community. Launched for sale in August 2006, Mindstorms NXT sold 150,000 units during the first year, well beyond expectations. According to Canvin: It was the first LEGO product to use the [customer] community to develop and create buzz. Now, other LEGO projects are attempting to do the same thing, from their early development phases. In addition to fan sales, Mindstorms NXT became an important vehicle for the LEGO Education Group, whose mandate was "to make a difference in education with unique building experiences, but also in other dimensions, such as team work," according to its creative director, Hanne Bonnstein. The group, founded in 1980, had been seeking new ways to create markets. The Mindstorms NXT, they recognized, was the ideal medium for a team competition, in which students would cooperate to design a robot to complete some challenge. All the school needed, Bonnstein explained, was "a Mindstorms NXT kit. We then sent them materials on what they needed in the classroom, software for the teachers to use, and parts" when needed. The contests culminated in an international competition. LEGO Factory In 1999 LEGO employee Mark Hansen created an interactive computer film of a LEGO world that could operate online. With the support of his boss, Tormod Askildsen, his idea was to exte