WHEN PRODUCT INN OVATION GOES WRONG
Misapplied innovation and over-diversification nearly destroyed Lego. The story is a good lesson in what happens when new product development and financial insight don’t go hand in hand.
It’s the world’s largest toymaker and one of the top 10 most recognised brands in existence; but just a decade ago Lego was on the brink of bankruptcy.
Dane Ole Kirk Christiansen founded the family-owned company in 1949. Today, it still uses decades-old injection moulding technologies to make its plastic bricks. Compatibility is key – any Lego brick manufactured since 1958 can be combined with any Lego set on the market.
In the 1970s, the introduction of Mini Figures unlocked the brand’s true potential. Not only could children build things, they could use the characters to act out stories in their imagination.
But as the new millennium dawned, Lego’s growth flattened off. Children had less time to play, digitalisation was exploding into their lives, and competitor brands introduced an influx of construction toys. Lego responded by shifting its focus, diversifying into theme parks and clothing, and creating its own in-house digital games capability.
While these were all massive new consumer markets and a great opportunity to expand the Lego brand, executive vice president John Goodwin says this innovation-led expansion was characterised by an absence of financial insight around the decision-making table. Despite a subsequent growth in sales, profit did not follow suit, and a massive amount of underlying value was destroyed. While each new innovation in itself made sense, no one was looking at the overall impact on the company.
“The company failed to capture the cost of complexity that was being introduced as a consequence of the innovation,” he says. “What wasn’t being picked up was the deterioration in asset utilisation and the fundamental shift in risk profile linked to this new strategy.
“Financially, Lego was being managed through the rear-view mirror so there was no awareness that they were approaching a bankruptcy cliff.”
In late 2004, new CEO Jorgen Vig Knudstorp brought a new level of financial vigour.
“It was a classic turnaround situation,” says Goodwin. “They sold off non-performing assets, refinanced the company straight from the balance sheet, refocused on core activities and started to listen to what consumers really wanted out of their Lego products.”
By 2008 Lego’s leadership had reset the company onto a solid footing for growth. Over the last decade, thanks to well-applied innovation, the company has quadrupled sales and generated 10 times more profit than it did 10 years ago. Of the 300 new products Lego produces each year, 60% are new to the market.
Goodwin says the finance team now works closely with every player in the innovation chain to understand how R&D, manufacturing and marketing translates into sales, and activity on shelf – and how consumers use Lego products.
“They’re in a much better place to assess new innovation and how it will either enhance or detract value from the company’s total proposition. It’s crucial to get beyond the big idea and see how we can create a valuesustaining impact for the company.”