Wednesday, September 06, 2017

Innovation lessons from Lego

In television, an outlandish episode that seeks to introduce revive a series often signals the eventual downfall of the show.  Those old enough to remember the TV series Happy Days will remember the episode when Fonzi jumped the shark on water skis.  This gave us the expression that something had "jumped the shark", an event signalling an inevitable downfall.

Today I'm wondering if making a movie about toys is a signal that something has "jumped the shark".  In strange and disappointing news, Lego announced that it was facing dire sales projections, with growth slowing from over 25% per year to low single digits.  Strange, when just a few years ago Lego was on top of the world, with great new toys, Lego kits, Lego Robots and the Lego movies.  While the management team blames internal complexity for the slowdown, those factors don't necessarily contribute to slowing sales.  Rather, I suspect that a company that had been on the brink of bankruptcy only a little over a decade ago discovered how to innovate in desperation, and began to neglect innovation as growth accelerated.  What we are seeing now is the aftermath of too little innovation and too much marketing.

What lessons can we learn?

Of course I should admit I'm doing this analysis from a distance, without complete information since Lego is a private company, but over the last few years Lego hasn't done nearly the innovation or introduced nearly the range of products and services that it did from the mid 2000s until 2012 or so.  Lego management turned the company around in the mid to late 2000s, and growth accelerated, only slowing in the last year or so.  The signals were out there, of course.  A new CEO was hired and let go within only 8 months.  What can we learn from Lego's example?

Growth can lead to bureaucracy and risk avoidance
Lego may be challenged by its aggressive growth, and with that growth came size and complexity.  However, and complexity isn't necessarily a factor in its innovation success, unless Lego allowed complacency and bureaucracy and risk avoidance to grow as sales grew.  Innovating at the brink of bankruptcy clarifies the mind (Steve Jobs would agree) and forces companies to focus on what's really important.  Getting large and perhaps bureaucratic can mean that concerns grow about taking new risks.  Internal bureaucracy didn't cause slow sales growth unless it blocked new innovative products or redirected investments.  Lego probably just lost some of its edge and taste for risk and innovation.

Only the paranoid survive
To me, one of the most important take aways should be, you simply cannot become complacent.  Good innovations from just a few years ago will only sustain your growth and differentiation for so long.  Customers are hungry for new solutions, rapacious in their research and unforgiving in their quest for new stuff.  In the past products and solutions had long shelf lives.  You could create an interesting product and merely tweak it, adding a handful of new features every few years.  Those days are over.  Customers demand and expect new capabilities and features on a regular, recurring basis.

Companies need to gin up a consistent innovation program which aims for incremental and disruptive innovations to occur all the time.  Lego is just an extreme example of desperate but winning innovation to avoid bankruptcy followed by a period of less interesting or less successful innovations while harvesting the profits of the prior innovations.  Lego and companies like this are particularly subject to this boom and bust cycle because of their target audience (children and teenagers primarily) who age out and don't want the same toys their siblings or parents had.  But while Lego is an extreme example, companies in every industry should take note.  From the peaks of profitability and industry acclaim to laying off 8% of its workforce in a period of only a few years.

Explore the adjacencies
I had hopes for Lego when they built some of the early Lego robots, because 1) the robots were cool 2) the robots extended Lego's audience into older kids, teens and even adults and 3) they were more expensive and had pull through.  But more importantly the robots were an exploration of an adjacent market or customer group.  Good innovators must constantly evaluate the adjacent markets and customer segments and provide new capabilities, features and products that entice new customers.  The apocryphal story is that Lego discovered lead users building robots with basic Legos and entered the market with their own product.  If that story is true, perhaps it's time for Lego to go back to evaluating what users are doing with Legos and capitalizing on new adjacencies.

The quote from the Lego chairman that he wanted to simplify the business model in order to reach more children suggests that Lego isn't reaching for new adjacencies, but doubling down on a fickle core market.

Grow up but don't grow old
Lego's problem mirrors Disney's problem in a way.  The business scales, but only so far.  Both attract children and young adults, but have difficulty really capitalizing on the adult market.  Disney has made forays into music and movies with some success, but they should be able to win more share and more business from adults.  Both of these firms need to grow up (expand their customer base using their trusted names and capabilities) but not grow old (build sclerotic bureaucracies that resist innovation).

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posted by Jeffrey Phillips at 7:43 AM


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