Management of Innovation in LEGO - Case Study Example

MANAGEMENT OF INNOVATION IN LEGO By Location Management of Innovation in LEGO Introduction In recent times, growing interest has been devoted to the theory of “Open Innovation”, both in practice and academia. This essay is going to discuss critically what open innovation means in the corporate world. With reference to Lego Company, this essay will discuss the extent to which “Open Innovation” plays a role in the firm’s processes of innovation. It will converse about the specific open innovation strategies and platforms employed by Lego Company. Definition of Open Innovation What is open innovation? Davis (2013, p. 1), defines the term as the process of innovating in partnership with those outside of a firm through sharing the perils and rewards of the process. Conventionally, the development of new business processes and the marketing of new products took place within the boundaries of the firm. However, due to the significant increase in venture capital, it makes the further development of promising and good ideas outside the firm feasible. Not all first-class ideas, develop within the firm, and certainly not all ideas should automatically be developed further within the company’s boundaries. Open Innovation consequently can be described as combining external and internal factors in addition to internal and external paths to advance the development of new technologies. With reference to LEGO Company, this essay will illustrate the importance of involving external parties when budding new technologies and products. Foremost is a brief history of the firm. Brief History of LEGO Company LEGO is a Danish firm whose name loosely translates to “play well”. It marks its roots to a carpenter, who in 1932, decided to use his skills to create wooden toys. In the late 50’s, Kirk Christiansen started moulding toys using plastic to make blocks. His son, Godtred, came up with the stud-and-tube interlocking design that eventually made the firm a domestic name. From 1978 through to 1993, the company expanded at an average rate of 15% annually, for fifteen consecutive years. To the LEGO, this was the golden period. It expanded to other geographies like North America (Robertson & Breen 2013, p. 35). Financial Dilemma (1993-2003) In spite of this golden period, LEGO experienced a decline in the 90’s to 2000s. The refuse happened in two phases, first from 1993 to 1998. LEGO firm hit a stagnated growth because almost all the shelves had their products, so they had no sales at all. The firm tried to triple the number of new toys it offered, but sales did not recover. Manufacturing and delivery costs inflated without sales to match the costs. Consequently, LEGO suffered its first loss in 1998 (Robertson & Breen 2013, p. 46). The company laid off more than a thousand people. To augment, the Chinese had introduced into the market cheap toys that were availed in almost all the kids’ stores. They provided an alternative to LEGOs’ customers, enticing them to buy their competitors products. At the same time, mergers among the big-box stores and some retailers made it hard for LEGO to negotiate for prime space on the shelves for LEGOs. The LEGOs’ potential market was further reduced by new entrants in the market; video games and computer games. The result was “boys” abandoned LEGOs for more sophisticated and advanced play things. By 2003, the company had run out of cash. That year, it lost three hundred million dollars and the projected value for the next year was 500 million. To turn the firm around, Christiansen heeded the advice of Jorgen Vig Knudstorp. He stepped aside and made him the chairman of the company to better control the goals and organize the firm. He organized a structure that would help the company get back on its feet. These were not just financial structures, but also open innovations (Lindegaard 2010, p. 65). In order to stabilize financially, the company sold 70% of its stake to the Blackstone Group, closing the Danish headquarters and moving management into a nearby factory. By effectively managing LEGO’s innovative strategies and processes, the firm’s sales improved by margins of up to 30% annually. Profits perked up by averagely 42% annually. In addition, the company now has over ten thousand employees worldwide. LEGO is ranked third in the category of the world’s largest manufacturer of play items (Lindegaard 2010, p. 78). Through open innovation, Jorgen Vig Knudstorp turned around the fortunes of LEGO. The next section of this paper will delve into how open innovation plays a role in LEGO’s innovation processes. Open innovation in LEGO and its role in the firm’s innovation processes Collaboration with Movie Producers Through open innovation, LEGO has managed to build functional ties with the creators of movies and books. Good examples are the creators and producers of Star Wars and Harry Potter. New items like these had received positive responses from their users and the industry as a whole. Erik Hansen, the Open Innovation Director at LEGO, assessed and spotted an opportunity in creating functional relationships with movie producers. To him, computerizing LEGO’s toy products and putting them in a virtual world could help the firm beat competition from video and computer games. During the release of these two major movies, all the other toys either failed to gain traction or were popular among very small a populace (Schlagwein 2014, p. 755). Thus, Erik knew that the development of new products was the only path to redemption. Consequently, by means of these collaborations, fresh products were formed. Toys like LEGO Star Wars, Bionicle, and LEGO Harry Porter were born. These toys were major hits. LEGO also began producing a line of toys known as Jack Stone, which were tiny figures crossed with G.I Joe. G.I Joe was this hero who would come to save the day. This hero was so common among children because they watched G.I Joe on the television, so created massive interest in the toys. In other words, these toys were created for that child that had lost interest in Plain LEGO products (Schlagwein 2014, p. 764). Through a wide spectrum of innovation, LEGO created products that complemented and reinforced each other. It is clear that it is through open innovation that LEGO re-established itself by availing new unbeatable toys in the market. By consulting movie producers, LEGO moves out of its boundaries to look for ways and means of improving their production processes. It opened retail stores to sell DVD films and created LEGO themed board games (Lindegaard 2010, p. 41). It is evident that open innovation plays a huge role in the innovation processes at LEGO. Interaction through LEGO Cuusoo LEGO Cuusoo is a web-based Crowdsourcing and Open Innovation platform where consumers can submit and vote for their favourite ideas for new LEGO products. LEGO Cuusoo is a platform through which millions of LEGO products fans get to interact. It is here that they get to share their personal experiences, criticisms and give suggestions as to what exactly needs to be done to make the LEGO products better. For those that have awesome new ideas, they are allowed to air their perspectives through this platform. If a suggested idea gets more than fifteen thousand votes, it gets the chance to be reviewed by LEGO design specialists for a feasibility analysis on the potentiality of becoming an official product of LEGO. When an idea is successfully commercialized, the originator is rewarded with up to 2% of the net sales of that specific line of product. The LEGO Cuusoo greatly enhances the process of Open Innovation. By considering the views and ideas of the users, LEGO is placed at an advantage. LEGO breaks the traditional mode of “closed innovation”, where all the ideas are born and bred within the boundaries of the firm. By considering the consumer’s opinion on their products, LEGO has been able to respond adequately by creating the necessary changes. LEGO has re-designed and introduced new product lines in response to the needs of the customer, which translates to improved customer satisfaction and consequently more sales. Open sourcing, thus, plays a huge role in the innovation process of LEGO. Interaction through LEGO Ambassador The LEGO group implemented a program dubbed “LEGO Ambassador” so as to continue the dialogue and relation with its customers. The program has over forty ambassadors in more than thirty countries all over the world. LEGO Ambassador is majorly concerned with the cluster of fans that has naturally grown on the internet. These ambassadors represent these communities. Since they are physically located in diverse geographical positions, the Ambassadors are responsible for transmitting relevant information to the headquarters (Robertson & Breen 2013, p. 61). It is the duty of these ambassadors to transmit sensitive and relevant information that in one way or the other could be amalgamated into the design of new products. For example, an Ambassador in Europe can collect first-hand information from the users of LEGO’s products. Similarly, another ambassador in Africa can amass useful data on the customer’s view of the firm’s products. In the same fashion, all the ambassadors in all represented countries gather crucial information about LEGO products. It is this information that they transmit to the head office, which is thoroughly scrutinized to create a clear picture of the customer views on the products. After carefully perusing these views, they are categorized and forwarded to the design team to implement the necessary changes (Robertson & Breen 2013, p. 54). Defects in old products are sorted, while new ideas are exploited and commercialized with the proposers being given monetary rewards for their efforts. Through LEGO Ambassadors, the company has been able to improve on their products from the consumer’s perspective. Consequently, it is clear that the innovation process of LEGO is greatly influenced by the views of people outside of the company; the consumers. They come up with new product lines, based not only on their views, but harnessing the intelligence and creativity of a large number of users. Product differentiation through Open Innovation is one of the major contributors to the recovery of LEGO because they came up with new products and technologies that impressed the target market (Robertson & Breen 2013, p. 49). The result was more sales, more revenues and consequently a healthier LEGO. Interaction via LEGO Architecture Adam Reed Tucker, LEGO Architectural artist, views worldwide architectural landmarks using just the bricks. Establishments like a White House, Sydney Opera House, the Rockefeller Centre and many more other buildings are some of them. Thanks to LEGO Architecture, the users of LEGO have had the opportunity to learn about such buildings. Furthermore, users can suggest seeing some of their favourite monuments all over the world through LEGO Architecture eyes (Ringen 2015, p. 77). Thus, this process of Open Innovation does have an impact on the innovation process in LEGO as a firm. LEGO Mindstorms LEGO Mindstorms are LEGO fully equipped with sensors and are programmable. After it had been introduced, the users of Mindstorms began to hack into the system. They were trying to customize the game and use it in a manner that was not designed by the Danish company. After trying hard to fight the hackers, LEGO management eventually became aware of the potential that lay beneath them. Ultimately, LEGO allowed such “coerced collaboration”. It is through the actions of these hackers that LEGO benefited by harnessing the intelligence of a colossal number of consumers. The information gathered was closely considered, revolutionizing the innovation process at LEGO. The process of “crowdsourcing” led to the collection of vital product upgrade possibilities. Crowdsourcing led to the upgrade of LEGO innovation processes to encompass the views of people outside LEGO (Ringen 2015, p. 73). It is evident, then, that Open Innovation plays a major role in LEGO’s processes of innovation. Figure 1. Organizational Learning with Crowdsourcing at LEGO (Adapted from Schlagwein 2014, p. 768) Brickstructures platform Brickstructures. Inc is a platform through which LEGO interacts with other manufacturers, store owners, distributors, suppliers, and wholesalers. Brickstructures is a business platform, through which business personalities can share information on production, manufacturing processes, raw materials prices, distribution channels and much more sensitive information (Davis, 2013). On this platform, the management of LEGO picks relevant information regarding good manufacturing practices, packaging services and much more information relevant to their line of business. From this insight, LEGO gets to be in the light of the risks, rewards and the implications of venturing into a certain new production line. Considering these facts, LEGO conforms to the necessary ground rules so as to stay afloat in the challenging business environment. LEGO’s willingness to consider the opinions of other stakeholders in the same industry does influence its innovation processes directly because they have direct implications for the costs (Ringen 2015, p. 75). Open Innovation, therefore, affects the Innovation process of LEGO as a company. Conclusion In summary, LEGO firm was saved from a near-death experience by embracing the concept of Open Innovation. After many years of unsuccessful attempts to revive sales, LEGO had to act fast so that it could survive extinction. The company found itself in this situation because it was using the wrong approach in its innovation process. Initially, there existed the traditional “closed innovation” process where the formulation of ideas was within the boundaries of the firm. Because of this, the company ventured into the production of toys that could not match up to the competitors products. Consequently, they went into making colossal losses in terms of inflated costs. In addition, the management changed, and the innovation process changed as well. The new management advocated “open innovation” that considers both internal and external factors in the advancement of new technologies and products. Open innovation is what saved the day for LEGO. Open innovation is the combining of internal and external factors of the firm, in order to enhance the development of new technology. The combination of both the internal and external factors enabled LEGO to get back on its feet with great results. The profit margin and sales improved for several years in a row; all because of open sourcing. To enhance its innovation process; LEGO used certain platforms as links to the “external community”. It used the movie platform, where it was virtually created to match up to video games and movies. LEGO also used the Ambassador approach where it sent its representatives to countries to monitor the trends. On the internet platform, LEGO used Mindstorms, Brickstructures. Inc and Cuusoo to gather sensitive information from the outside world. It is this information that LEGO shared the risks and benefits of the industry with all the relevant stakeholders. Once analysed, the internal and external factors are both considered in the development of new products and the advancement of new technology. The outside world consists of consumers, users, and competitors. LEGO goes the “Open Innovation” way, and this turned out to be beneficial to the firm. The advancement of innovation processes of a firm, therefore, is dependent on the level of open innovation. The implication is that, for any firm to be successful, it has to acknowledge that Open Innovation plays a pivotal role in its success. Companies need to consider more than just the internal factors of the firm when developing new products. For example, company A wants to start producing doughnuts. To know whether the innovation would be worthwhile, the manager of company A has to seek for external information. The process involves reviewing the opinions of the customers, competitors, users of other products, just to mention but a few market stakeholders. The above is wise because this process will shine light on exactly what is to be done and how. It clears the cloud of doubt, saving time and resources by pinpointing what is expected from the innovation process. Consequently, the innovation process will be customized to suit the needs of both the internal and external communities. Hence, Open Innovation plays an important role in a firm’s innovation process. Bibliography Davis, S 2013, How LEGO Built Up From Innovation Rubble. Forbes, accessed 23 Feb, 2015, . Lindegaard, S 2010, The Open Innovation Revolution. [Electronic Resource] : Essentials, Roadblocks, And Leadership Skills. Hoboken, N.J.: Wiley, c2010., OhioLINK Library Catalog – LR, EBSCOhost, viewed 24 February 2015. Ringen, J 2015, When It Clicks, It Clicks, Fast Company, 192, pp. 72-98, Business Source Complete, EBSCOhost, viewed 24 February 2015. Robertson, D, & Breen, B 2013, Brick By Brick : How LEGO Rewrote The Rules Of Innovation And Conquered The Global Toy Industry, New York : Crown Business, 2013., UF/Winebrenner Catalog, EBSCOhost, viewed 24 February 2015. Schlagwein, DN 2014, Organizational Learning with Crowdsourcing: The Revelatory Case of LEGO, Journal of The Association For Information Systems, 15, 11, pp. 754-778, Computer Source, EBSCOhost, viewed 24 February 2015. Read More