Great Business Series // Lego on innovating the right way
When your business reaches its maturity, a natural point in the lifecycle of a business, you need to start innovating; otherwise, your business will likely suffer a decline.
In this video, I will explore how you can determine if a business has reached maturity and examine how a long-established company learned how to innovate the right way and grow in the process, and the lessons that we can learn from that.
How do you know when your company has reached maturity?
A business reaches its maturity point when it stops growing. This means that its sales volume has peaked, and it has become very difficult to find new customers and increase sales further. Or the business has evolved into a point where the existing management does not have the expertise to create and sustain growth.
Another telltale sign is when, despite a large sales volume, profits begin to slide. This is exactly what happened to Lego, the 85-year old toy manufacturer.
What went wrong?
In 1993, Lego reached its maturity and began its decline that lasted until 2003.
At that time, to increase sales, Lego tripled the number of new toy sets they produced. Unfortunately, this only increased their costs without affecting overall sales. Lego then realized that they needed to do something different—they turned to innovation and thinking out of the box.
They started offering new sets by tying up with blockbuster film series, such as the Star Wars and Harry Potter. That didn’t work because the sets only made money on the years that the movies from the franchises came out, but remained flat in the other years.
Lego then experimented with new toy lines that moved away from the brick design to attract new customers. It not only had minimal effect on its sales, but it also started to alienate their existing customers who were loyal to the original Lego bricks.
By 2003, after a series of failed innovations, Lego was on the brink of going out of business.
How did they turn things around?
By 2004, Lego brought in new management, who turned Lego around. They restructured the company and reduced its costs.
Lego went back to the bricks. They focused more on the police stations and the fire trucks that not only endeared them to the fans but were also pretty profitable for them. When they went back in the box, they found that there was a lot of money in the box and that fans returned to the brand. They restructured the company, which allowed the company to reduce its costs and improve its profitability.
Where is Lego now?
Today, Lego is the second largest toy maker, second to Mattel. It just recently reported the highest revenue in its 85-year history. In 2016, it reported a turnover of $7.2 billion, with a profit of about $1.9 billion.
It’s growth in the last decade is a direct result of innovations done right. At the core of this turnaround was its determination to innovate the right way. It isn’t enough to make sparkling new toys—it must be aided by the discipline of creating toy lines that are both innovative and enticing to the people who will buy them.
In 2008, Lego launched Cuusoo, now more popularly known as Lego Ideas. This is Lego’s crowdsourcing platform, which invites users to submit ideas for products to be turned into potential sets available commercially.
Lego released two Lego movies, which boosted both the brand and revenues. The movie was able to capture the younger generation of kids, while reigniting nostalgia for the older generation who grew up with these toys.
What can we learn from Lego’s growth?
Do not innovate for the sake of innovation—just because it’s new and different doesn’t mean it will sell. Be careful also because certain innovations may alienate your core customers, as Lego discovered. Lego thought that merely increasing their products would improve their profitability, but it did not turn out this way.
- When innovating, consider what is already working for you.
- What is it about the product that your customers love?
- When you innovate, keep your customers in mind. Will they love it? Will they continue buying it? If you’re not sure, go and find out.
- Listen to your customers and innovate to give them what they want. But further, than that, do it better.
- What is it about the product that my current customers would like to be altered?
- What can I change in the product or the services that I offer that will make life easier or better for my customers?
- Are there other customer needs or pain points that my product can address?
In 2017, Lego has reached another maturing point where their sales are stagnating again. It announced that it will be laying off 8% of their workforce because of declining worldwide sales. As they go through another challenging point in their business, it would be interesting to see what they will do and whether they can use what they learned in the past decade to move ahead and not make the same mistakes as they restructure and innovate their way to future growth.
If you are interested to know more about what a business has to go through when facing exponential growth, you can download the first chapter of the book, ”$20K to $20 Million in 2 Years” absolutely free here. The chapter talks about the differences between a good and a great business and puts out questions that make you consider how you can turn your business from good to great.