One of my favourite talks of SXSW this year was ‘Rebuilding LEGO’ by Prof. David Robertson of The Wharton School, Pennsylvania where he teaches innovation and product development. The talk was a cautionary tale of how dangerous innovation can be if it isn’t managed.

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It might come as a surprise to many that as recently as 2002, LEGO was in a dire financial situation.

Founded in 1932, LEGO enjoyed meteoric growth that lasted over 60 years. But by 1993, things began to go badly for LEGO - ill-health of the company head, intense competition from console games like Nintendo’s Super Mario Brothers and Sega’s Sonic the Hedgehog, retailer consolidation, increased cheap imports from the East and a saturation of it’s existing marketplace meant that sales growth began to plateau.

LEGO attempted a series of innovations as it sought to kickstart growth again. They followed the advice of leading academics and consultants of the time - ‘Find Blue Ocean Markets’, ‘Practice Disruptive Innovation’ and ‘Explore The Full Spectrum of Innovation’ were followed with gusto.

LEGO’s list of products exploded as their newfound innovation engine hit a rich creative seam. But as LEGO’s product range ballooned, sales didn’t and profits went through the floor.

After 10 years of this, LEGO was almost broke. In 2002, ex-McKinsey consultant Jørgen Vig Knudstorp wrote a study outlining why 2003 would be a bad year but 2004 would be worse.

The board made Knudstorp CEO and he lead them with a very simple 2-step plan to transform LEGO.

Step 1. Discover the core essence of the brand

Knudstorp wanted first to understand what it was that made LEGO unique, why did it exist at all? This wasn’t something to be set by the management team, it was something to discover from the LEGO fans themselves - what did they really want LEGO to be? They discovered that this essence was about the joy and pride of creating - systematic creativity.

Step 2. transform the business to power the core essence

Knudstorp's team then embarked on a long process of business process transformation. With the help of partners from outside the organisation - ?whatif!, ReD Associates, IDEO and PARC, they developed an innovation model that dramatically changed the way LEGO functioned. They created an incremental approach which systematically improved production, product experience, communications and business models. LEGO began to sell off assets, outsource production of its bricks and streamlined it’s basic brick offering. They carried out ethnographic studies to better understand it's customers, test ideas with customers and involve them in the development of new products.

Despite it’s enormous sales, LEGO is not mass-market - it’s niche, high-end and it targets highly educated, critical and creative thinking families - families that value independence and play.

LEGO’s bailout was a rediculously simple strategy - find out why people love LEGO then transform the business to do this even better.

Look out for David's forthcoming book 'Rebuilding LEGO'. But in the meantime, here's a comic strip from David that tells more of the LEGO story. There's also an excellent Q&A session with  Knudstorp on the Monocle website (registration required).

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