The Lego Story

 
 
By Faisal Hoque  |  Posted 2009-02-17
 
 
 

We are living in a transformative age, and no industry is immune to waves of change. The automotive and energy industries are racing to find the next stage of their evolution in a world that is—if it hasn’t already—passing the tipping point where there is less easily accessible oil in the ground than the global market demands. The media is grappling with the democratization of information resulting from the Internet that has completely eroded the business models of film studios, music producers and traditional journalism publishers. And the U.S. government’s massive more than $700 billion intervention into the financial services industry to clean up the chaos resulting from bad risk taking and regulatory oversight failures will forever transform banking, stock trading and investments.

The fear permeating boardrooms and executive suites is that of disintermediation. Businesses can operate well and see healthy revenue and profit streams even during the challenging times. Today, however, lurking in the background is a new threat--a new entrepreneur, a new delivery model or a new idea that can and will rip the legs out from underneath an otherwise stable and profitable industry. The newspaper and television industries were completely disrupted by the Internet. Software as a service is challenging software giants such as Microsoft, IBM and Oracle to their very core. And social networks such as LinkedIn, Facebook and Twitter are revolutionizing business-to-business and person-to-person communications.

Michael Dell reflected on his sudden adoption of an indirect sales model after years of building his computer empire on a purely direct sales relationship with customers. Why change? The founder and chief executive of the company that bears his name said it was “a monolithic strategy that worked well until it stopped working.” In other words, he chose to change his business model before some other disruptive force made that decision for him.

Henry Ford once said, “Failure is the opportunity to begin again, more intelligently.” Perhaps that was true in the early 20th century, but the modern economy is far less forgiving. Enterprises are beginning to understand that change is becoming a permanent way of life, that the status quo will never again be good enough and that the biggest risk is not taking a risk at all. Companies must continually innovate to anticipate and adapt to new market demands and adjust their business models to capitalize on new and more efficient delivery systems.

This enterprise transformation means positioning an organization to manage its current business with increasing efficiency, discarding activities that no longer make sense, and constantly investing in new products, services, processes and business models. It is not tweaking at the edges. It is creating a new organization, one that thinks and acts differently. It is a continuous process.

At the end transformation or change is a management challenge. Agile firms are able to improve existing practices and innovate new ones on a regular basis.

The notion that companies must continually renew themselves has appeared in management literature, with increasing frequency, since economist Joseph Schumpeter introduced the term “creative destruction” in his 1942 book Capitalism, Socialism and Democracy.

Schumpeter noted that every industry advances on technological progress—farming, manufacturing, power and transportation—and organizational innovation. The old ways are destroyed incessantly and new ways given life. Economists, he wrote—and this should apply to business executives, as well—have traditionally focused on price and quality when thinking about competition, but such variables give an incomplete picture. On this, he wrote:

    “In capitalist reality, as distinguished from its textbook picture, it is not that kind of competition which counts, but the competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”

Now, 65 years after Schumpeter wrote those words, we find ourselves in this exact situation. Competition over price is competition in commodities. Such competition is adequate but not acceptable. The new thing, which we cannot see, will come along and make our commodity passé—and then we must compete with this intruder. It is the automobile to the buggy-whip makers, and file sharing and YouTube to the music labels. It’s Saleforce.com to Oracle and IBM. It is entire economies: China and India to the United States and the European Union.

Management guru Peter Drucker noted that Schumpeter was much less known than John Maynard Keynes, his contemporary, and yet predicted that his ideals would influence business and management thinking into the 21st century. He wrote:

    “The innovator is the true subject of economics. Entrepreneurs that move resources from old and obsolescent to new and more productive employments are the very essence of economics and certainly of a modern economy. Innovation makes obsolete yesterday's capital earnings and capital investment."

The Lego Story

This is precisely what happened at Lego, the privately held Danish toy company that has delighted innovative and imaginative children for generations.

By the time Jorgen Vig Knudstorp took the reins as chief executive in 2004, Lego was bleeding more than $300 million annually. An attempt to reverse the slide by introducing a complementary children’s clothing line failed. The company was facing the unthinkable prospect of selling the family-owned business to a larger conglomerate. Rather than running away from the challenges, Knudstorp and Lego decided to embrace the new world order and change their business model.

For years, Lego enjoyed a licensee relationship with Lucas Films for adapting the wildly popular Star Wars characters and models to the Lego universe. Knudstorp expanded licensee relationships with other children’s brands, including SpongeBob SquarePants, Indiana Jones, Speed Racer and Batman. When Mindstorm hacked Lego’s robotics products and released better versions, the company resisted suing and endorsed the superior product—this led to more sales for both companies. And Lego embraced the digital revolution by selling its toys online and developing video games with the look and feel of its plastic blocks.

Knudstorp explained:

    “Yes, we're creating a new business model. Lego grew out of a carpenter's store. Plastic revolutionized toys in the 20th century. Digital breakthroughs will do the same for the 21st century. We won't stop manufacturing plastic bricks. By 2015, about 20 percent of our total business will come from digital products. Today, two of the 10 bestselling video games include our Lego-branded Star Wars games. Connectivity has had a major effect on how today's children live. Some 6-year-olds have cell phones. Teenagers like to use their cell phones to send text messages to each other. Eventually wireless broadband will be everywhere. A computer will replace the television. For all of these reasons, the Lego Group needs to be in the digital space.”

Additionally, Lego adopted new management and manufacturing processes. It has trimmed its work force from 10,000 to 6,000 today, and will slim its employee rolls by another 3,000 by 2010. It’s outsourcing more of its manufacturing to third-party partners and has optimized its supply chain to ensure raw materials are reaching factories at the right time and in the right quantities. Lego’s journey has resulted in returning the company to profitability, securing its future and ensuring its family ownership for years to come. (“Transforming One Lego at a Time,” Inside BTM, March 2008)

Lego is undergoing transformation. Transformation is the single idea that unifies governance, investment and agility. It is a mindset, a strategy and a set of tactics. It is a continuous, enterprisewide process that keeps the organization tuned to opportunities and threats in its environment.

The Process

Transformation can be boiled down to three core elements: innovation, efficiency (optimization) and abandonment.

Innovation is simply the adoption of and execution on new ideas; efficiency (or optimization) is making the most of your assets; is the discontinuation of products and lines of business in favor of new innovations, opportunities and markets.

An enduring transformation requires a management framework that unites the company vertically—from boardroom to project team—and horizontally—across all divisions and including external partners and customers. The organization must delineate its structures, processes, information and automation required to make this unity work in practice.

Transformation is a process with no true resolution or end. It is the enemy of commoditization and stagnation. Innovation and productivity are the fuel that drives a transformative company. Convergence of business and technology management into a holistic framework is what enables transformation. Ultimately, its product is the continued health and viability of the organization.

Transformative enterprises have consistent processes with integration across the organization, a fully developed business and technology architecture, and the means to simultaneously address a broad array of issues. In the area of strategic investment management, they have consistent processes for sponsoring, selecting and managing initiatives. They have a standardized means of structuring programs and ensuring that they are managed in accordance with enterprise standards. They have established standards for determining the demand and the supply of resources—human, financial, fixed and other—for future initiatives. They have management entities that actively monitor and manage the performance of all initiatives according to commonly accepted frameworks, and serve as the “early warning” system for elevating issues to upper management and the board. And they have fully developed structures with defined roles consistently executed.

In addition, leading enterprises consistently have governance bodies that place the responsibility for making decisions on business technology into the hands of both business and technology professionals.

For these organizations, data has become information. They manage information effectively across the enterprise and can make decisions based on that information. And, in large measure, this information is available through and managed in an integrated, enterprisewide automated system that facilitates decision making.

They now engage in continuous process optimization: They learn, adapt, implement and improve, in an ongoing cycle. Their organization structures are optimized, so that they have the right structures in place at the right level, and they make decisions appropriate to their status. They conduct fully data-driven decision making enabled by consistent, coordinated, integrated use of automation. Every professional has an appropriate level of access to enterprisewide information, analysis and management tools, and the enterprise makes this uniform, knowledge-driven model fundamental to its way of doing business.

These management practices are a practical, proven response to the process of creative destruction all about us. As Joseph Schumpeter said so presciently, “Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it.” While that may be difficult for Iowa farmers, Detroit autoworkers and Wall Street investment bankers, the reality is that transformative business technology management processes will result in strong, healthier companies and, ultimately, a stronger national economy.


Faisal Hoque is an internationally known entrepreneur and author, and the founder and CEO of BTM Corporation (www.btmcorporation.com). His next book, The Convergence Scorecard, is expected later this year. BTM innovates business models and enhances financial performance by converging business and technology with its products and intellectual property. © 2009 Faisal Hoque | info@btmcorporation.com