Nearly everyone, it seems, loves LEGO. Or at least, everyone seems to know it. When Fortune decreed LEGO the toy of the century, the magazine half joked that with more than two hundred billion bricks scattered across the globe, "it seems safe to assume that at least ten billion are under sofa cushions [and] three billion are inside vacuum cleaners." That number has since tripled, as billions of new pieces pour out of LEGO factories every year (approximately thirty-six billion in 2010 alone). LEGO factories annually churn out bricks at the rate of more than five times the world's population. There are now some eighty LEGO bricks for every man, woman, and child on the planet.
And yet, although most everyone has encountered LEGO, far fewer are familiar with the organization that stands behind it. Wall Street largely ignores the family-owned LEGO Group, which is headquartered in Denmark's hinterlands. Given that LEGO is closely held, the Street's disregard is somewhat understandable. What's more perplexing is that aside from those in the toy industry, a surprising number of business journalists and analysts have paid scant attention to one of the world's most creative companies.
Over a four-year period, from 2009 to 2012, Fast Company magazine's annual accounting of the "50 Most Innovative Companies" cited the unimpressive (Microsoft), the unsurprising (Facebook), and the unsung (MITRE), as well as corporations based outside the United States (Samsung, Nissan), but not the makers of the iconic brick. Likewise, the LEGO Group didn't crack the "most innovative" lists at Bloomberg Businessweek, Forbes, or MIT Technology Review for 2010 through 2012.
Why should they — and we — give LEGO and its innovation strategies a closer look?
By any measure, LEGO has been relentlessly innovative for much of its eight decades. First and foremost there was the creation of the brick, which found its way into the hands, heads, and hearts of four hundred million people the world over. And then, year after year, the LEGO Group's idealistic, imaginative approach to play helped it conjure compelling toys that rarely retreated to the back of kids' closets. The company's values and creativity put it in an unmatched position within the toy industry: kids loved the brick because it was fun, and parents loved it because it was educational. That combination helped LEGO amass decades of unbroken sales growth.
But as LEGO approached the end of the twentieth century, changes in kids' lives challenged the brick 's primacy. Toyland became a far less forgiving place to do business, as aggressive competitors fought fiercely for the growing legions of kids enamored with video games, MP3 players, and other high-tech wonders. LEGO, largely an analog enterprise, found itself fading in a faster-moving, far more competitive digital world.
To catch up, LEGO rolled out an ambitious growth strategy that was built upon some of the past decade's most widely heralded theories for sparking innovation. It sailed for untapped, "blue-ocean" markets; it concocted "disruptive" innovations; and it opened up its development process to the "wisdom of the crowd." But while those prescriptions for twenty-first-century innovation might have worked wonderfully for other companies, they almost sank LEGO. In 2003, just three years after both Fortune magazine and the British Toy Retailers Association had crowned the brick the toy of the century, the LEGO Group announced the biggest loss in its history. Its extraordinary collapse led many observers to wonder whether LEGO, one of the world's most cherished brands, would survive as an independent enterprise.
In fact, a new leadership team pulled off one of the most successful business transformations in recent memory. One by one, LEGO reinvented those academic prescriptions for innovation, synthesized them into a world-class management system, and reemerged as a powerful, serial innovator. LEGO created the world's first line of buildable action figures, fueled by a riveting story line that played out over a nine-year span. It launched a line that included an "intelligent brick," allowing kids (as well as many skilled adults) to build programmable LEGO robots. In another first, LEGO rolled out a series of board games that could be built, broken apart, and rebuilt. LEGO opened up its development process, enabling legions of fans to go online and post their own customized DIY LEGO sets. And it reimagined its core lines of classic LEGO sets, keeping them real while making them modern enough for twenty-first-century kids.
The result: LEGO emerged from its near-death experience as the world's most profitable and fastest-growing toy company. From 2007 to 2011, all through the worst of the global recession, the LEGO Group's pretax profits quadrupled, far outstripping the titans of the toy industry, Hasbro and Mattel, which were mired in the single digits over the same period. From 2008 to 2010, LEGO grew its profits faster than Apple, despite competing in an industry with few barriers to entry, aggressive global competition, fickle customers, a production cost disadvantage, and no patent protection on its core product — the LEGO brick. LEGO achieved those results not by breaking with business convention but by building within it.
From Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry by David C. Robertson with Bill Breen. Copyright 2013 by David C. Robertson. Excerpted by permission of Crown Business.