Original: SABRE Simulation, please give sources if someone likes to quote

Volume 12 Letter 8

You've stepped on them, played with them and if you have kids you probably have a bucket or two of them at home. The now ubiquitous, interlocking toy brick, Lego, was founded by a wooden toy maker, Ole Kirk Christiansen in Billund Denmark the 1930's. After WWII Christiansen bought a plastic injection molding machine and by 1949 had developed the now famous Lego play system. With boys as its target market, Lego continued to grow into a worldwide brand. However, in 1993, a sales slump caused Lego to rethink their strategy. Low cost imitators from China had entered the market and store amalgamations and the emergence of big box outlets made it hard to compete for shelf space. Adding to their misery, computer games were gobbling up young boys' time and imaginations. In response, Lego launched a flurry of product variations resulting in elevated manufacturing and distribution costs. In the end, there were no additional sales and Lego's costs were rising faster than revenues.

By the year 2000 and after reading way too many management books on innovation Lego went on an innovation bender. They added theme parks, electronic games, a jewelry line (can't image) and made alliances with movie franchises like Harry Potter and Star Wars. The goal was to create the world's most recognized Family Brand by the year 2005. To reach this goal Lego created products that would disrupt existing markets and play in so called "Blue Ocean" spaces, areas with little or no competition, thereby dominating the market. Turns out management books written by academics can make better reading than business sense. In Lego's case, desperately following various academic versions of the value of innovation led them almost to bankruptcy.

Lego had created an enviable innovative business culture but, like others before them (Bell labs, Xerox Parc Centre), they forgot to ask the real hard questions needed with any sound business strategy. Where are you now? Where do you want to go? How will you get there? Lego also came to realize that there are valid reasons to play in the competitive "Red Oceans" because that's where the market is!

What can we learn from Lego:
1.Unbridled innovation can be euphoric but, like Icarus flying too close to the sun, unrestrained creativity often ends in a big crash (which Lego narrowly avoided)
2.New products must return a profit: calculate the ROI before commercializing Innovation in itself is not a strategy
3.Don't shy away from a fight. Markets are competitive for a reason; that is where the business is. If it looks like clear sailing, proceed with caution.

To fix the problem Lego hired a new CEO who immediately sold off the theme parks. To reduce costs they moved manufacturing to cheaper countries, specifically, the Czech Republic and Mexico, and closed down the corporate headquarters moving execs back into one of the shuttered factories. Lego didn't throw innovation out the window but rather channeled it into specific areas namely three dimensional toys and video. To that end, Lego opened their own retail stores, developed board games and produced straight to DVD Lego themed films. Over the last three years Lego sales are up 24% annually and profits have grown 41%. Channel innovation and go build something!

Brick by Brick: How LEGO Reinvented Its Innovation System and Conquered the Toy Industry David Robertson forthcoming book.