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[Music]
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[Music]
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we're here today with Wharton professor
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of practice David Robertson author of
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the new book Brick by Brick how Lego
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rewrote the rules of innovation and
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conquered the global toy industry David
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thanks for being with us today thanks
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for having me um well I had a chance to
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read the book and the story of LEGO's
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Inception from a small company that just
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made wooden toys into kind of a
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worldwide giant is pretty interesting
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could you briefly discuss its Origins
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sure uh it was actually a failed
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Carpenter in
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1932 uh Denmark was in the midst of a
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recession like much of the world and um
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a carpenter named Ole Kirk Christensen
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was having trouble getting the wood he
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needed to make furniture so he took
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scraps of wood and made toys for kids um
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which actually did pretty well he turned
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that into a business and and started
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Lego in
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1932 and where did the iconic brick come
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from like how did he go from wooden toys
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to the Lego that we kind of what to the
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toy that we kind of all identify Lego
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with so when uh so he he makes wooden
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toys for the first 15 years of the
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business um he's got four young boys um
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and actually his wife dies a year or two
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after he starts the business um and he
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continues to grow and do well um and
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then in 1947 against the wishes of his
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then grown sons he invests in this
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really risky uh technology called in
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plastic injection molding and starts
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making plastic toys which initially do
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pretty badly um there's a lot of uh the
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department stores say who tell him that
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that kids will never want um toys made
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out of this cheap plastic stuff that
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wooden toys is what kids will always
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want um but he uh uh experiments with
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different types of plastic toys he
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builds some stack able although not
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really interlocking bricks um and then
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passes control of the of the company to
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his son godfred Kirk Christensen who
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experiments with different
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configurations and finally comes up with
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the interlocking brick with those studs
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and tubes um and patents that in 1958 um
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along the way uh godfred does something
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really interesting he uh he is talking
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to a um a department store owner from
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the major department store in Denmark
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and the the guy uh tells him he says
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what we need is not another toy but a
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system of play something where if you
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buy a second set you don't add to your
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toys you multiply what's possible that
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these things can interlock and do do um
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you can do more U much more as as you
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buy more sets that the opportunities
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multiply and uh godfred Kirk Christensen
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he uh goes back and he looks at all the
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different things that he's um offering
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and he realizes that 90% of the things
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don't fall in this category of a system
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of play and it really is only these
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stackable bricks that do and so he makes
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a pretty big strategic decision to
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actually cut out 90% of his product
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inventory and focus on the brick and
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that's a pretty big move but turned out
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to be pretty successful right I mean I
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was really struck by I mean just this
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idea in that part of the book about how
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you know you know you buy a package of
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Legos and it fits with all the other
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packages of Legos and it doesn't matter
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if you're combining pieces from the
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space set with pieces from the castle
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set I mean what do you think I mean what
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are some of the key decisions in Lego's
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early years that kind of stand out to
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you for in cementing the firm's initial
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success and also where you maybe other
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firms could take the bet the let lessons
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from well I think one of the early
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decisions that um really made a huge
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difference was the development of the
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minifigure back in 1978 the first of
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these little Lego people uh came out and
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and that really took the whole idea of a
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system of play to a new level that
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before 1978 um I have a picture in in
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the book of three different really
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popular sets from the mid-70s one is a
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family and they stand about 10 bricks
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tall and then next to them is a train
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which stands about eight bricks tall but
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there's no way the family could fit in
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the train and then next to them is a
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house which stands about five or six
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bricks tall and so that the family is
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towering over like some 50s monster
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movie is towering over this house um and
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so that there's some good toys in the
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70s but they weren't at the same scale
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at all when um when the Lego uh company
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comes out with the mini figureure they
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standardize all the sets around that
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scale and so they make the the system of
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play um even more of a system and that's
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when things really start to take off for
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the company uh from 78 through 93 the
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company grew at 14% per year every year
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for 15 years basically doubling in size
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every 5 years for 15 years and it was
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this kind of golden period in in Lego's
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history where they expanded into North
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America and other other geographies um
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they explored different types of sets so
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they did theme sets around space and
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castle and Pirates and Western and uh
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and everything worked for about 15 years
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and now I mean then comes Lego went
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through a decline in the 1990s and the
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2000s now there are plenty of stories
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out there about companies that you know
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they responded too late to changes that
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would significantly impact their
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business or how their customers lived I
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mean is that what happened with Lego or
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was there something different at work
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there when the company kind of
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experienced this decline yeah there's
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two phases to that decline um the first
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one was from 93 to 98 they went through
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this stagnant period where really they
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they'd reached the end of a natural
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growth cycle um they were there there's
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only so many feet of toy space in so
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many toy stores around the world and
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Lego was on those shelves already and so
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you know it it it kind of reached the
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end of a natural growth cycle but what
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they did is to try and keep the growth
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going they tripled the number number of
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new toys that they offered between 93
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and 98 um but sales didn't go anywhere
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costs on the other hand you can imagine
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if you triple your your number of of
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products without changing your sales
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your costs go up your profits go down
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and they suffered the first loss in
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company history in 1998 so they lay off
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a thousand people the grandson of the
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founder kill Kirk Christensen who's now
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been leading the company for 20 years he
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steps aside he says maybe I'm not the
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right person to lead this company in the
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Next Generation
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he brings in a turnaround expert that
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guy finishes the layoff his name is Paul
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Plowman and he realizes that Lego is
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actually operating in a very different
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world than than it was just 10 years
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before that he goes out and he starts
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looking at the market and finds that
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kids are getting older younger um that
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uh the the whole market for uh Toys is
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changed with um companies like Toys R Us
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and Walmart being much more
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sophisticated much more powerful in
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terms of their their Market power and
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lastly um a lot of other toys had
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switched their production to China um
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and so their toys the other toys you
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could buy for your kids were getting
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cheaper Lego on the other hand the
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Danish croner had had um increased in
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value against the dollar and Legos were
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still made in Denmark and so Legos were
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getting more expensive while other other
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toys were getting less expensive it's
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kind of a double hit and so the company
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realized that it it it really needed to
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do something different and that when
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they embarked on this this experiment
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with Innovation right and I mean you I
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think in the book you might refer to it
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as an innovation binge in a way that
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they came up with a lot of products that
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I guess I mean when I was reading about
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them they seemed like they could be in a
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way like C Miss products I mean there
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was collaborations with Star Wars with
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Harry Potter there was some really
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innovating sounding work with
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computerizing the the trademark blocks
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and kind of putting them into a virtual
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world but where did the company go wrong
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I mean what was leadership missing
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when they were embarking on this you
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know I mean campaign of innovation I
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mean do you think they really could have
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seen the problems if they'd been paying
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attention to different things yeah the
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um the short answer to that question is
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um that they lost they lost control of
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the Innovation that um they tried to
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innovate in lots of different ways and
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they did they came out with a lot of
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different toys um now some of those toys
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were hits um like Lego Star Wars Lego
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Harry Potter Bionicle there's a couple
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of really big hits and in a way those
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were really dangerous for Lego because
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they they hid uh you know we call them
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the book The it's a thick layer of
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Cosmetics that hide some a pretty ugly
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business underneath um some of the other
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toys um there was a toy called uh
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explore it was a line of toys for
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toddlers And they were actually pretty
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good toys and you know just from my my
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point of view um but they weren't very
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legoy they you know they didn't have
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much construction as part of it um they
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uh you know leg go tried to listen to
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its customers you know what you're
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supposed to do and they came out with a
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line of toys called Jack Stone which is
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kind of this mini figure crossed with g.
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Joe you know this this hero that would
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save the day um and the the thing is
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they were really built for that that
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child that didn't like Lego you know
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which was the majority of kids they
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found in from one study and so they
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would snap together in about 10 minutes
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and the kids would start playing well
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you know a lot of us as parents the
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reason we buy Lego for our kids we may
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not admit it to ourselves but it's that
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rainy Sunday afternoon the kids are
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driving us nuts we want a couple hours
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of quiet and so we get the Lego set well
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if you bought the jackstone set you'd
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have 10 minutes and then the kids are
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running around screaming again you know
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so so it drove away some of the fans of
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the brand um and then lastly um you know
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one of the experiments that Lego did
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during that time was something called
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galador a huge expensive failure um and
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what it was a a buildable action figure
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which there was a big market for um and
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what they tried to do is something that
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we we uh suggest here still at at
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Wharton um is to try and do a full
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spectrum of innovation a whole set of
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complimentary Innovations that'll
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reinforce each other and so it wasn't
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just a toy but it had Electronics in it
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that you could play games in it had an
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accompanying video game it had a TV show
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that would tell kids the story behind
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the toy um they did all kinds of
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marketing so there'd be galador toys and
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McDonald's Happy Meals and you know lots
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of different innovations that would all
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build to create this unbeatable offer in
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the market well they kind of got away
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from what they knew how to do um the TV
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show for example was so bad and I looked
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at this up on IMDb um that nobody who
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ever acted in it acted in anything ever
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again um it it destroyed careers it was
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it was just stunningly bad because Lego
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drove that show and really you know
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didn't know how to do that um it uh um
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it it took him a while to figure all
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this stuff out
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uh and and the problem was that they had
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these successes from um Star Wars and
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Harry Potter but those successes um were
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were really only successful in years in
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which there was a movie so there was a
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Star Wars movie in 99 and 2002 there was
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a Harry Potter movie in 200 uh 1 and
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2002 there was no movie from either
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franchise in 2003 or the first half of
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2004 sales of those two toys fall off a
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cliff Lego was left with one profitable
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product Bion
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everything else is losing money and Lego
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Lego is a fixed cost business so if you
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get above a certain level then you start
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making money very fast if you fall below
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a certain level you start losing money
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very fast and Lego started losing money
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very fast in 2003 and now I mean that
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would be I mean the time that I would
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think a lot of firms would have
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completely abandoned an innovation
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strategy have said you know we don't
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have the money we don't have the time to
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innovate we have to concentrate on
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survival
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but Lego didn't really do that and I
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mean what Why didn't it do that and what
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did it do instead and where do you think
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the lesson is there for other firms well
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they really had no choice uh they had to
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innovate I mean they're in a market
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which is you know vicious Global
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competition fickle customers rapidly
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changing tastes you you if you're in the
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toy industry like in many Industries you
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have to renew your product line every
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year or two and so they had no choice
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but to innovate but they cut it way back
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um what they real realized is that um
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not the these ideas about how you should
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innovate all the things that drove them
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from 99 to 2003 had drove them out of
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control you know that out of the box
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thinking almost put them out of business
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um and what they did after 2003 is they
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kind of went back in the Box um they
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went back to the brick and they focused
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more on the police stations and fire
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trucks and other things that um not only
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that their fans wanted but were also
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pretty profitable for them you know when
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they went back back in the Box they
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found that there was a lot of money in
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the Box um and uh and the fans returned
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to the brand so the book and Lego story
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they seem to some extent to be a
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cautionary tale about blindly following
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sort of this textbook map for Innovation
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a lot of people talk about but I mean
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how do you think companies should use
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those principles when trying to develop
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a strategy for themselves I mean what
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should Lego how should Lego have maybe
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looked at this at the
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beginning in order to have a better
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outcome at least initially yeah so we we
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um the book we talk about the seven
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truths of innovation or the seven deadly
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truths because they they almost killed
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Lego and the problem is not that they
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don't work the problem is that they do
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uh that that they boosted Innovation so
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much that uh that Lego lost control of
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of innovation and so uh you know there's
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a couple lessons in the book um the big
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one being don't do what Lego did right I
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mean don't go almost going out of
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business almost going into bankruptcy is
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marvelous for focusing attention um but
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it's not really necessary and not not
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what we would advise at all in terms of
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how you should approach this um but
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instead you know what what to take away
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from Lego is that it's not enough just
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to boost Innovation that as you boost
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the amount of creativity and and
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Innovation you've also got to boost the
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amount of focus and control and I think
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Lego is the reason I decided to devote a
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book to the Lego story is I think they
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are wonderful at achieving that balance
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between um giving their people the space
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to be creative but the direction and
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focus to deliver profitable Innovation
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um that the big difference between Lego
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Now versus Lego in 2001 and 2002 is back
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in 2001 if you were a Lego designer
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you'd be told you know create a great
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toy do something really cool do
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something that's really going to excite
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kids and what you got was you know toys
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that weren't very legoy toys that
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weren't very profitable and occasionally
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a big win um now if you go to work for
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Lego it's very likely you'll be told
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work on a great police station work on a
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great fir truck give us a great Lego
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race car and by the way don't use any
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kind of piece or shape that you want
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color that you want use this very
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limited pallet of of pieces um because
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we can use these pieces in lots of
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different sets and make them in very
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high volume and so make a lot of profit
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as as uh from from every set that you
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make we're we're going to be pretty much
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guaranteed of that because we have a a
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limited uh platform that we work from a
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li a limited system of play um and what
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they found is that a lot of the
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designers they'd hired in 1999 and 2000
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weren't happy with the new Lego they
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they didn't like that narrowing of the
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freedom but on the other hand there are
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some designers who really liked the fact
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that number one if they were working on
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a toy it was very likely that that toy
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would get into the hands of kids and
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number two they're working for a company
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that was profitable and growing and
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would you know th those toys would be
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around and that company would be around
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and their jobs would be around in a
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couple of years so it's it's a different
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kind of creativity and it's a different
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kind of reward but I would argue it's
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just as great a creative challenge that
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you know I would say if more so I think
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yeah um if what you're looking for is
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how to do the next Big Industry changing
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Innovation you know the next big
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disruptive innovation or blue ocean
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Innovation I don't know that Lego's a
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great model but on the other hand if
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what you're looking for is how to make a
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lot of money doing lots of small
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Innovations lots of small ideas but
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integrating them really well and
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focusing them very well on what your
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customers want and need then Lego is a
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great model and the results show it I
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mean Lego's been growing sales at 24%
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per year every year for the past five
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years and 40% per year every profits
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growing profits at 40% per year every
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year for the Last 5 Years so they're
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doing something right right now it also
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seems to me I mean with this sort of new
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strategy at Lego that they're almost
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like it seemed like before in a way they
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were almost saying well we have this
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niche of customers but now we have to
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get those people who aren't there but it
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almost seems now like they've kind of
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embraced that Niche a bit like making
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things for the people that are these
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just very devoted Lego fans who kind of
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stay that way even after they're adults
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yeah and and they do they they focusing
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on their their Niche um but they are
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moving out um they in the book we talk
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about um Lego games where they moved
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from the toy shelf to the games shelf
00:17:30
pretty successfully in created these
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games that you build like Lego and you
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can rebuild each time you play it and it
00:17:36
comes with directions not just for the
00:17:37
first time you play but the second third
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fourth time as you snap different faces
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off the dice and and put different faces
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on the game plays differently each time
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or they just came out with a Lego
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Friends line which is Lego for girls
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that's been a little controversial but
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very successful in terms of bottom
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bottom line profitability but um now one
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thing you also make the point in the
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book that despite this product being
00:18:00
pretty ubiquitous at least for anyone
00:18:01
who has kids and probably even a lot of
00:18:03
people that don't that Lego isn't often
00:18:05
mentioned in articles about the world's
00:18:07
most innovated companies I mean it's not
00:18:09
a company that immediately comes to mind
00:18:11
when there's talk of innovation why do
00:18:12
you think that is oh you know I was
00:18:15
surprised by that too that if you look
00:18:17
at Fast Company which has a list of the
00:18:19
most Innovative companies if you look at
00:18:21
business week if you look at the
00:18:22
technology Review magazine that comes
00:18:24
out of MIT they have an annual list of
00:18:27
the most Innovative companies in the
00:18:28
world and Lego has never made the top 50
00:18:32
of any of those lists but here's a
00:18:34
company that's dominating its industry
00:18:36
you know again like like we talked about
00:18:38
with with vicious Global competition
00:18:39
fickle customers um and they've lost the
00:18:42
patent the the patents for the Lego
00:18:44
brick were were issued in 1958 and have
00:18:47
all expired so anybody can Lego make a
00:18:49
Lego brick and half a dozen companies do
00:18:52
and sell it for much less than Lego does
00:18:54
you know this is a recipe that you know
00:18:56
our strategy colleagues tell us is is is
00:18:58
a recipe for a bad industry and yet Lego
00:19:01
is making great profits and doing
00:19:03
tremendously well doing it it's it's a
00:19:05
it's a wonderful story and that's
00:19:07
another reason why I wanted to tell it
00:19:08
in the book is that I think uh it's it's
00:19:10
this great untold story now finally I
00:19:13
mean you spent a lot of time with Lego
00:19:15
Executives at Lego headquarters while
00:19:17
you're doing this I mean what do you
00:19:19
think it is about the Lego brick that
00:19:21
has kind of made it become just so
00:19:23
ubiquitous and such a sort of intrinsic
00:19:25
part of a lot of people's childhoods I
00:19:27
mean what's helped it Endor despite the
00:19:29
Advent of kind of video games and iPads
00:19:32
and tablets and I I think it's two
00:19:35
things I think there's two reasons why
00:19:36
the Lego brick has been so successful um
00:19:39
there there's the point of view from the
00:19:41
parents and the point of view from the
00:19:42
kids um from the point of view of the
00:19:45
kids I think what Lego learned from Star
00:19:47
Wars is the power of the story um that
00:19:51
if you have this Rich world with a story
00:19:53
that plays out in that world then kids
00:19:55
love to build that world and then play
00:19:57
the story out in in that with their
00:20:00
little Minifigures and then rebuild it
00:20:02
and try things in different ways and and
00:20:04
um and and Lego's learned to tell
00:20:06
stories around the bricks um I think
00:20:09
very well um from the parents point of
00:20:11
view I'm convinced that investing in
00:20:13
Lego is a great investment in your
00:20:14
kids's ability to support you when
00:20:16
you're older and and so it does teach
00:20:18
those creative building skills and those
00:20:21
3D visualization and construction skills
00:20:24
that I I I think that it clicks a switch
00:20:26
in the kids and even if they move away
00:20:28
from the brand which I think many kids
00:20:30
do when they're teenagers it's not cool
00:20:32
to play with Lego that that switch stays
00:20:35
clicked and I think it's it's
00:20:36
fundamentally good for kids um and so as
00:20:39
you can imagine my kids did not suffer
00:20:41
from a lack of
00:20:42
Lego thank you so much for being with us
00:20:44
today thanks for having
00:20:50
[Music]
00:20:57
me
00:20:58
[Music]
