How LEGO Rebuilt its business by embracing the 4Cs
By Michael Anderson and Miranda Jefferson
Can you imagine a childhood without LEGO? How the Scandinavian toy maker survived a near-death experience.
LEGO, the Scandinavian toy manufacturer, owns a global brand that is synonymous with childhood for many people. Its popularity seems like an unassailable fact of life. But there was a time when LEGO’s future was at risk, as new competitors emerged to threaten the company’s market share. What LEGO did next demonstrates how the 4Cs can lead to organizational transformation and success.
Perhaps like you, one of my fondest memories of childhood was playing in a seemingly bottomless bucket of LEGO. I remember the almost endless combinations I tried to build depending on what had caught my imagination that week, from superheroes to racing cars and castles. LEGO as a product was and still is a standard part of a kid’s first experience of play and innovation. Yet LEGO had a near death experience at the turn of the last century.
Like so many other companies, new competitors and innovations in the toy market were threatening to displace a brand that for so many years had been a standard part of childhood play. The legendary LEGO, which had a steady and successful history, was now facing sales losses of 26 per cent in 2003 and 20 per cent in 2004.
LEGO was looking at almost certain annihilation. The situation was summed up dramatically by the CEO Jørgen Vig Knudstorp at the time: ‘We are on a burning platform, losing money with negative cash flow, and a real risk of debt default which could lead to a break- up of the company.’
In 2004 LEGO acted. It created a diverse team of internal and external specialists to collaborate and re-imagine the organization in order to head off catastrophe.
The collaborators considered all aspects of the organization from supply chain to deliveries and customer satisfaction. In 2005, the team created a ‘war room’ to enact the ‘shared vision’ strategy with drastic effect. The company reduced their colours by half, and the stock units from 12,500 to 6,500.
The company also communicated directly with its customers to critically reflect on its assumptions about the business. Discussions with the top twenty clients revealed 24-hour delivery was not essential. This change alone brought significant cost savings to the business.
In 2015, although some of the product options were reduced, customers saw on- time delivery improve markedly. Because of these changes, between 2005 and 2008, sales increased by 35 per cent and fixed costs reduced from 75 per cent to 33 per cent. In 2016, the company reported record revenue largely due to their investment in digital products and innovation. LEGO’s CEO said of this transformation in 2016:
Innovation is critical to our success and each year around 60 per cent of our portfolio is new products. We are constantly challenging ourselves to engage and inspire children with the most relevant, exciting and fun play experiences. This year we have strengthened our efforts around digital engagement and found new ways to connect with children online and through a range of digital platforms.
In addition, LEGO is now participating in partnerships with UNICEF to protect the rights of the child, and developing programmes for cyber safety and refugee education initiatives. In 2016 LEGO’s employees organized play experiences for more than 100,000 children around the world in partnership with local children’s charities.
LEGO as a learning organization
The story of LEGO’s transformation is probably familiar to many. The key feature of this story for us is that this company learnt. It learnt through focused processes that built capacities in what are called the 4Cs: collaboration, creativity, critical reflection and communication.
Critical reflection is the ability to perceive and analyse situations and then formulate wise responses to complex problems. Inherent to critical reflection is an individual’s analysis of their agency. Agency is each individual’s ability to develop insight and exercise control within a context, situation or organization.
In LEGO’s case, critical reflection helped them to understand how their complex management structures and the sometimes confusing decision-making processes led to the slow decline of the organization. They were then able to act creatively to devise a strategy for transformation. Of course, reflection is not a new term to many of us, but reflection that analyses and prompts action in our experience of organizations is atypical.
Often when trouble arises, organizations tend to cut innovation and creativity rather than investing more heavily in them. In LEGO’s case the opposite occurred. They innovated their way out of trouble, relying on the capacities (creativity and innovation) to identify new products and markets that led to improvements in revenue. Companies that faced similar challenges to LEGO, such as Kodak, did not act creatively enough in the face of rapid change.
These businesses have become cautionary tales demonstrating what happens when organizations cannot reorganize and have confidence in their creativity in the face of rapidly shifting business and societal realities. Organizations who cannot build creative capacity are unlikely to connect deeply with innovation. LEGO’s history of creativity, innovation and play may have been one of the deep cultural factors that allowed it to survive and is enabling it to thrive almost two decades later.
The first instinct in LEGO’s case was not to talk but to listen. Interviewing its clients and being alert to their messages about deliveries provided them with the evidence they needed to streamline their processes. Once the organization listened it shared the vision and involved their community in the discussion. This might seem simple in hindsight but there are numerous organizational examples where communication is misunderstood as a one-way process.
Instead of appointing a hero leader who swept in and slashed the organization, LEGO trusted in collaborative processes. They developed a team who had wide-ranging expertise within the organization and worked together to make the changes. The establishment of the ‘war room’ and the ‘shared vision’ strategy situated the issue in LEGO as a shared problem with a shared solution. In the implementation of the solution, divisions within LEGO collaborated across functional areas to make systems and approaches more efficient. They also worked with their suppliers, retailers and customers to understand them more comprehensively. This kind of transformation occurs when true collaboration occurs (which is different in critical ways from co-operation and teamwork).
LEGO’s transformation experience demonstrates the 4Cs are not just vague aspirational concepts, they can be understood deeply and can be embedded in the culture of an organization. But this work takes will, energy, courage, determination, and most of all it takes an explicit understanding of how to develop and implement these sometimes elusive 4C concepts.
This is an edited extract from Transforming Organizations, available via Bloomsbury Press.
For more information, please purchase our book, Transforming Organizations