Advances in Economics, Business and Management Research, volume 648

Proceedings of the 2022 7th International Conference on Financial Innovation and Economic Development (ICFIED 2022)

Incorporating History into Innovation: A Case Study of

LEGO
Lukuan Zou
1
Harrow International School Beijing
*
Corresponding author. Email: [email protected]

ABSTRACT
In the current global economy, innovation is a key factor for a company to survive and grow on the long run. However,
few research has looked into the proper application of innovation strategies. In this paper, I propose a 2 by 2
theoretical framework in how to apply the concept of incremental innovations and drastic innovations given good or
flawed business fundamentals. This paper aims to demonstrate the theoretical frame by a series of extensive case
study discussion of Lego. The case study examples range from consumer responses to new products to organizational
changes. This paper contributes to the literatures by building on innovation theories and discussing the application of
innovation strategies in a generalized way. This paper contributes to managerial insights by outlining a generalized
innovation application framework for managers’ day-to-day decision making.

Keywords: “incremental innovations”, “drastic innovations”, “ risk”, “consumer response”

1. INTRODUCTION and survived business downturns because of innovation.

It has successfully overcome drastically changes in the
In the current global economy, innovation has market environment and still remains the top toy
become a key for businesses especially for those manufacturer with the largest revenue today. These
businesses who have a long history and want to compete challenges are not only faced by Lego, but also by many
in this hyper-competitive market environment. However, of the brands with similar history. Many of these
there are rarely researchers systematically examining companies were replaced by other companies due to
how businesses can apply the concept of innovation into lack of innovation or slow response towards the market
their big-picture business strategy. Each business might change. Without any innovation, current industry
face different challenges at different timings or in incumbents are likely to slowly lose profits due to the
different departments of its own. Aiming to connect fast-changing consumer taste.
innovation and business strategy and provide wide
applications, this paper proposes a theoretical What can we learn from Lego’s success and failures?
framework providing a perspective for businesses to How do they apply innovation onto their business
think about how to adopt innovation strategies strategies successfully? In this paper, I propose a
regardless of whether they are thriving or facing theoretical framework in how to apply the concept of
challenges. It’s also applicable when each organization incremental innovations and drastic innovations on
within the firm is facing different challenges. business strategies ranging from consumer-faced
marketing strategies and organization strategies. This
Lego is a well-known toy company originated in paper aims to answer the research questions: when
Billund Denmark in 1932. The firm still functions well should firms adopt incremental innovations and when
due to its successful application of innovation strategies. should firms push for drastic innovations? In the form of
Lego group has released different types of products a case study, this paper discusses how Lego utilized
targeting at different groups of consumers. However, the different innovations strategies to achieve business
innovation process is not without challenges. Similar to growth. This paper is the first to propose a generalized
other firms, Lego faced an increasingly competitive framework on innovation strategy adoption.
market environment, the threat from the growing
adoption of internet, and other substitutes and the loss of To be more specific, in this paper, I discovered the
patent. Nonetheless, it has revived from these struggles successful transformation of Lego from a mature brand

Copyright © 2022 The Authors. Published by Atlantis Press International B.V.

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with declining competitiveness in the toy markets to services that companies are going to deliver toward
nowadays biggest toy manufacturer around the world by customers. The innovation strategy to be adopted should
adopting innovative marketing strategy. To illustrate align with the corresponding core values in order to
this process, I used a series of case studies of Lego to maximize its chance of success (Oliver and Roos 2003)
discuss the application of corresponding innovation [15]. We develop a theoretical framework based on this
strategies. I discuss innovation application with ample argument: whether the firm’s original strategy has good
examples, such as the case of consumer responses and foundations or flawed foundations and how
organizational changes. The examples ranging from corresponding innovation strategy can help the firm
collaboration with Star War to the market entry strategy grow.
of Lego for stabilizing or increase its revenue. This case
We propose a 2 by 2 framework, shown in Figure 1.
study integrates the Lego’s success in fighting with
On X-axis, we have whether the existing strategy is
recent emerging brands, and this can provide essential
flawed or good. On Y-axis, we have innovation level:
and useful information to marketers.
incremental innovation and drastic innovation. A
This work contributes to several research streams business is likely to be successful if it falls on the
including innovation and business strategy literatures. diagonal line. If previous strategy performs well,
Previous research has defined innovation as the adopting a drastic innovation strategy might introduce
generation, development, and adaptation of an idea or unnecessary risks and might shake the foundation of the
behavior, new to the adopting organization (Damanpour, business. If the previous strategy is severely flawed,
1996; Higgins, 1995) [7]. One important research adoption incremental innovation might not result in
stream classify innovation levels into incremental enough improvement and thus sufficient business
innovation (Martínez-Ros & Orfila-Sintes, 2009; growth. Therefore, it is natural to think that for a
Tushman & Anderson, 1986) [22] and radical previously flawed business strategy, the firm should
innovation (Assink 2006) [5]. This paper builds on this adopt drastic changes. If the previous strategy performs
stream of literature to discuss the application of well, incremental innovation is great for the firm to keep
innovation strategies. However, few research studies the up with the ever-changing market space. Our theoretical
application of innovation strategies. Previous theories framework helps with articulating the logic of
have focused how organizations should allocate integrating innovations into business strategies and we
available resources (Prahalad and Hamel, 1990) [16], used case study examples from Lego to demonstrate
but not on innovation strategies. In addition, it is how to apply this theoretical framework.
traditionally hard for business to gauge when to apply
innovation strategies (Souto 2015) [17]. Our paper
contributes to this stream of literature by proposing a
theoretical framework in innovation strategy application.
This study also has substantial managerial
implications. For managers, they can apply this
theoretical framework into their daily decision marking.
The framework can help the managers with deciding
how to incorporate innovations into business strategies.
Furthermore, this paper can be perceived as an in-depth
case study of Lego. This paper uses examples to help
managers in incorporating brand and firm history into
their innovation strategies. It also contributes industry-
specific insights to managers who work in the related
industries, such as toy industry, entertainment industry,
creator community, etc. Fig. 1. Theoretical Framework

2. PROPOSED THEORETICAL 3. LITERATURE REVIEW

FRAMEWORK
This work contributes to several research streams
A good innovation is not without solid foundations. including innovation literature and business strategy
The formal LEGO core values included: ‘idea’ literature. Most notably, this paper combines innovation
(creativity, imagination, unlimited, discovery, and theory with business strategy literature and uses LEGO
constructionism), ‘exuberance’ (enthusiasm, spontaneity, case study materials to propose and illustrate a new
self-expression, unrestrained), and ‘value’ (quality, theoretical framework. This novel approach helps with
caring, development, innovation, and consistency). The shedding lights into understanding how to apply
core value of a firm has a crucial impact in every aspect innovation strategies on business practices. Specifically,
of its operation, including what types of goods or the proposed theoretical framework has two dimensions:

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innovation level and original strategy success level. We Few research has looking into how business should
use LEGO case study to show that, when the current include innovation strategy into their business strategies.
business strategy works well, it is optimal to apply The realization of business strategy has significant
incremental innovation strategies to continue the impacts, from influencing the successfulness of
success with minimum risk. When the current business innovation application to changing the course of a firm.
strategy is severely out-of-dated, the potential benefit of Innovation strategies are mainly realized through the
adopting a drastic innovation strategy is worth the generation, acquisition, combination, application, and
significant risks. While there is a large literature on each exploitation of knowledge, as well as by making it more
topic of innovation and business strategy, few papers difficult to imitate these innovations (Information
have look into how business should apply innovation Resources Management Association, 2010). There is a
strategies at a higher level. This is an important topic to limited amount of research describing how
consider as it can provide business practitioners organizations initiate the changes. Capability-based
significant insights. theory is one of the most prominent theories describing
and explaining how organizations change and develop.
Innovation is a key factor for a company to survive
In general terms, organizational capabilities signify
and grow on the long run (Tidd, 2001) [20]. Innovation
what an organization is (or is not) able to do.
is defined as the generation, development, and
Organization theory has a bond with the firm’s potential
adaptation of an idea or behavior that is new to the
to allocate available resources (Prahalad and Hamel,
adopting organization (Damanpour, 1996; Higgins,
1990) [16]. Once firm could be clear about the number
1995) [7]. In other words, innovation can be perceived
of resources and what it can achieve utilizing the
as a commercialization of an invention. The innovation
resources, firm can develop in a right path, being
level in our theoretical framework has two levels:
successful.
incremental innovation and drastic innovation. The
drastic innovation can be used in both describing the From a business strategy perspective, it is hard for
improvement in performance of or a drastically competitors to copy incremental and drastic innovation
reduction in cause of this a product, process or services, strategies, especially when the innovation strategy is
letting company itself become a market changer (Assink based on business concept or business models (Souto,
2006) [5]. In our case study, a good example is Lego’s 2015) [17]. The business strategy dimension is the other
reorganization of departments, cutting the number of important dimension of our theoretical framework. Our
departments from 21 to 7 and adopting the cutting-edge framework contributes to this stream of research by
supple chain software. The other innovation concept is proposing a new theory in how firms should initiate
called incremental innovation, which is defined as an changes and adopt innovation strategies.
innovation with a low degree of novelty with less risk
With regard to the application of innovations,
and cost than drastic innovation, remaining within the
Assink (2006) [5] notes that “the more radical the
boundaries of the existing market and technology or
innovation, the more difficult it is to estimate its market
processes of an organization, but eventually, a
acceptance and potential.” Building on this argument, it
consecutive incremental innovation toward a product
is natural to infer that the risk of adopting the drastic
could result in a drastic, even disruptive innovation
innovation strategy is high and thus the appropriate
(Martínez-Ros & Orfila-Sintes, 2009; Tushman &
application scenario must have potential high payoff to
Anderson, 1986; Assink, 2006) [5][22]. In our case
justify the high risk. We contribute to the literature by
study, a good example is Lego collaborating with
using Lego’s numerous examples to analyze both
Disney extending their product line with Star War series.
successful innovation examples and failed innovation
Our work builds on classic innovation theories and
examples to demonstrate our theoretical framework. In
provides corresponding Lego’s facts relating to the
the last century, Lego launched lots of products with
products it launched and the strategies it adopted.
high novelty which some of those products had faced an
Despite the importance of innovation unprofitable situation due to both the sales and costs
implementation, only a few companies have come to factor. We leveraged the uncertainty naturally coming
understand what is necessary for successful innovation with innovations to analyze the appropriate business
(Christensen, 2003) [6]. Innovation usually happens in strategy given the circumstances and the market
one of the two scenarios: when companies respond to environment. Lego have launched highly innovative
changes in the external environment, and when products which did not exist in the market before with
companies preemptively act to make influence the success stories and failures. Lego also succeeded with
environment (Damanpour, 1996) [7]. This work operating the incremental innovation on launching new
contributes to the literature by synergizing two products in a bigger market which makes it relatively
application scenarios of innovation and providing a easier for Lego to predict the innovation outcome. Thus
theoretical framework in when to use innovation we are able to showcase how Lego’s examples
concept for companies. demonstrate our theoretical framework.

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4. CONSUMER RESPONSE TO the market in European and Australia. Then this product
SUCCESSFUL INNOVATION line made a great success in mid 2001, earned £100
million for Lego when sets from that IP sold in North
4.1. Star war (co-brand) America. Also, it ranked at the first place in 2003 and
2006, in terms of the sales and popularity, becoming one
Innovation won’t be successful without positive of the greatest themes that Lego had launched.
consumer response. For Lego, positive consumer Especially in 2003, it accounted for around a quarter of
response comes from innovative products. One of the the Lego’s turnover, during this decade Lego’s survive
success innovation stories comes from “Star War” series. would largely depends on the existence of this IP [28].
The collaboration started from 1998. Lucasfilm Bionicle case elaborates several key elements of a
signed the licensing agreement with Lego with the successful new product launch. First, Lego conducts the
American International Toy Fair in New York in 1999. innovation through the product format. The demand for
[9][21]. At the time, there were more than 1000 a similar toy function was likely consistent. In addition,
different minifigures and around 700 sets related to star they developed the product with known desirable
war launched by Lego. In addition, Lego took risk and product feature based on previous success product
launched products that did not exist previously, collaboration. Second, Lego tested the market and when
including the modern weapon, a controversial product, the initial launch is successful, Lego expanded this
and the first minifigure with the real skin color, the product line into multiple markets. This case study
molded short leg and the special shape of head. This is a elaborates how Lego applies the concept of incremental
hugely successful innovation in product collaboration innovation as it takes small steps in product line
and design. Since there are a large fan base in Star Wars, innovation and test the market with minimum risks. The
there were 25 million Lego Star Wars sets that been sold benefit from such strategy has a large up-side and
all around the world within one year just after the limited risks.
introduction of the collaboration between Lego and
Lucas Film. And in 2008, Star was one of the key 4.3. Lego movie, video games
contributors together with Indiana Jones which boosted
Lego sales with 32% [21][27]. With Lego as a successful IP and the overall market
trends in moving digitally, it’s natural for Lego to want
Star War line is a successful example in extending to expand their footprints into movie industry and video
the product lines: Lego group doesn’t completely re- game industry.
invent the product. They incorporate this popular IP into
their high-quality products and make a win-win scenario. In 2014, “The Lego Movie” created under the
When it comes to product lines, Lego has reputable collaboration with Warner Bros giving Lego a
product quality and substantive experience in toy- considerable big box office with more than 469 million
making. This example shows that, when the business worldwide, becoming the fifth grossing film during that
aspect operates well, a strategy base on incremental year [2]. After that, more Lego films and TV series in
innovation is likely to have a success with minimum extending its original toys, including the The Lego
risks. Batman Movie and The Lego Ninjago Movie [8][25].
Starting from 1995, there are 85 video games has
4.2. Bionicle (original product) been created by Lego, including both Lego’s original IP
(e.g. Chima, City, Ninjago etc.) and licensed properties
Another example of product line success extension
(Lego Star War, Lego Bat Man, Indiana Jones),
story comes from Bionicle. As a new product line, the
dabbling in wide range of forms of game (e.g.
main innovation aspect is in the format of the product.
simulation strategy game, real time strategy game,
Lego’s success in launching co-branded Star War series
racing game, action adventure game and MMORPG etc.)
had proven making modern weapons could be a
LEGO games performed well in terms of market share
potentially great selling point. Despite the potential
on Nintendo DS/ Sony PSP platforms [24]. Its games
concern that this line of product may not be perfectly
regularly make the top 10-30 rank in Western Europe
align with Lego’s value proposition, this product is a
and the US. It is a successful strategy for Lego to couple
success as it possesses previous desirable product
with well-known media property has proven successful.
characteristics.
Pirates of the Caribbean is one of such examples [12].
Apart from the Star War co-branded product, this
The high boxing revenue from the movies and high
Lego’ s original product also made a great contribution
rankings from the video games show that collaborating
toward Lego’s survival in the competitive market. In the
with reputable media companies to extend IP and create
early 2000s, when Lego was suffering immensely due to
new products with current good brand equity is a
the reduction in cash [10], one of Lego’s original IP
successful application of incremental innovation
called the Bionicle initially launched its first set to test
strategy. Movies and video games might be perceived as

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a different form of entertainment compared with Lego site not only works as a crowdsource platform, but also
bricks. The new entertaining format provides a digital allows the company to be informed with current
experience of Lego bricks. The collaboration safely consumer trends and interests [3].
extends Lego’s IP conforming to the market trend and
On the one hand, Lego strives to innovate the offline
thus showcasing a successful business strategy in
shopping experience to create a differentiation in
incremental innovation. By developing movies and
shopping experience and to attract all generations. On
video games, it allows the company to continue its focus
the other hand, young-generation consumers are not the
on its physical product while diversifying into
only consumer group, adult market is also considerably
alternative revenue sources, as manufacturers of
large as more popular elements are added in Lego toys.
traditional games have struggled to appeal to children
More adults might purchase Lego sets for gifts to others
who play more and more digitally.
online. Thus, Lego carefully designs the online
shopping portal with the adult consumer group in mind.
4.4. Digitalization There are more reasons for Lego to prioritize online
Besides extension in product line and entertainment sales channels. Online sites are generally less costly
formats, extension in consumption space showcases than physical store. In addition, the consumer demand
another Lego’s success incremental innovation strategy. generated by physical stores are declining, especially
The digitalization process, the transforming of Lego during the prevalence of the pandemic. Therefore, the
society and sales channel, also brought a substantial online shopping experience may attract more consumer
benefit toward the recent growth. in this special period.

Starting from late 1990s, Lego begin its The above examples showcase the successful
digitalization, producing several generations of fan- application of the incremental innovation concept. This
based interactive websites and digital games [12]. For innovation strategy is an incrementation innovation
the online application for individual consumers, they strategy because underlying infrastructures are not new.
received 5.3 million downloads in 2020 for a Lego When Lego started to build up an online system, there
Building Instructions App [11]. At the same time, they was already a big ecommerce market, a market change
improved the LEGO® MINDSTORMS® and in form of purchasing and a previous existed online
relaunched it with better accessibility for children. For community in Lego product design. There is no drastic
the transformation of shopping form from physical to change within its core product, the underlying
digital, the change in consumer shopping habits with the technology, nor the toy industry. However, the profit
development of digital economy is one of the key from this incremental innovation application would be
driving factors. More and more consumers start to shop more than most of these drastic innovations due to the
online. This means that there are significant changes in end products’ widely desired characteristics. As a toy
sales channel landscape. Since the late 2019, due to the brand, “experience” is important and offline retailers
outbreak of the pandemic, although many physical Lego can provide more physical experience for consumers.
stores cannot operate normally, more consumers are With proper strategy and development, online sales
motivated to buy Lego products online. As a result, the channel may even provide better shopping experience in
sales increased by 21% in 2020 and overall revenue some cases.
increased by 13% compared with 2019. The number of
visits to Lego.com last year doubled from the year prior, 5. CONSUMER RESPONSE TO FAILED
as many of Lego’s physical stores were forced to INNOVATION
temporarily close. It was increasingly common for
consumers to do online shopping, and the pandemic The path to success is not without failures. There are
accelerated this online shopping tendency [23]. plenty of failed examples due to insufficient innovation
from Lego to demonstrate the proposed theoretical
Those online communication platforms not only framework. Prominent examples include Fiber Optic
provide opportunities for consumer to interact with each Multi Set from Technic product.
other, but also provide Lego many useful information
from consumer interactions. These online platforms also The Fiber Optic Multi Set came from Technic
promote consumer spending. The Lego Ideas, an online product lines. This set contains special technology that
platform for consumer themselves to design and vote for is able to transfer the solar energy into the kinetic
the potential fan-made products, is launched by Lego energy, allowing the blade on the top of helicopter to
Group in 2008. If the consumer design received 10,000 rotate in a normal condition. The innovative concept is
or more votes, the design would be reviewed by an good and was attractive to fan customers initially.
official LEGO review board. As a result, this type of However, the management team was not aware the cost
products would be more likely to be welcomed by of making this optic fiber and eventually there is a
consumers due to its crowdsourcing nature. This considerable loss per set of this product being produced.
innovation strategy performed well in the market. This Lego soon recognized the failure of this product line and

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stopped the production and the development of this Jiaxing) positioned Lego to supply products not only for
product [26]. the Chinese market, but other Asian markets too,
including Japan and South Korea [14].
The Scala from Belville series for girls is also a
failed product [9]. Scala is a product line was developed This is an application of extending concept/
to target girls’ market, failed to succeed with a poor sale. incremental innovation because some cities in China
The reason why Scala didn’t success is likely that it did share similarities with other regions (e.g. some cities in
not inherit desirable product features of Lego. It didn’t US) and LEGO can apply their market entry strategies
have the component of Lego’s famous key “bricking” and achieve success in a new market. Apart from the
experience. It drastically innovates on both product similarity, the psychic different is still a common
format and entertainment values. It didn’t continue phenomenon which will affect consumer demands
Lego’s strength in product values. Since the shapes of toward Lego’s products. In addition, with the support of
Scala series are different, children find it hard to the local factories, Lego is able to reduce transportation
incorporate them into Lego ecosystem. As a result, these cost and allows for more localized product designs.
types of products were unpopular with disappointment
sales. In addition, its incompatible size and shape with 6.2. Change in Strategy, Improve efficiency
Lego’s traditional bricks increase the manufacturing
cost. Due to the expansion of the variety of Lego’s The heavy cost in supply chain and major issues
products, the requirement for the molding machines in across the company motivates Lego to completely
different kinds surged, and for the common popular reorganize the firm and improve cross-group
bricks’ machines, on average there are usually cost communication. they have multiple issues across the
around $50,000, for the more special and complicated company.
one, the cost would soar up to $30,000 [1]. Lego was facing a few major issues given its
As mentioned, the common traits among the above inefficient operation system. First, the supply chain
failure examples is that Lego enters into an area they are management is not up-to-date and thus caused a few
not traditionally good at with limited profit potential. In failed product lines and wasted more-than-necessary
the Fiber Optic Multi Set example, the brick component cost when producing some of the toys. Second, with the
with high technology is not Lego’s strength and this promotion of technologies, Lego’s internal
innovation is too costly with a small market demand. communication is burdened by its out-of-dated tech
The Scala series didn’t leverage Lego’s key “bricking” interface. Consumers are spoiled to have new things at a
experience. Lego failed to test these innovative ideas faster speed. With delayed communication, Lego’s
and carefully evaluated the strategy before launching innovation speed cannot keep it up. Thirdly, there are 21
these projects at a large scale. The innovative products organizations. With a large number of internal
may not always have a positive correlation with the organizations, the cross-group communication becomes
revenue as the Fiber Optic Multi Set has a great inefficient. To make the matter worse, these three major
innovation but failed due to cost. As for the cost, to issues are correlated with each other.
attain the high profit, Lego needs either the mass To overturn the situation, beginning in 2004,
production to reach economies of scale or the limited LEGO restructured its Enterprise IT system in order to
molding machine to reduce the cost. These two improve data-sharing across the company [12]. The
examples all have their own drastic part of innovation complicated user interface is replaced with a simple,
component without continuing the fundamental Lego app-styled model which ensured each employee only
experience. The above examples support our proposed operated apps applicable to his/her specific job. This
theoretical framework that it is risky to conduct drastic decluttered the internal company site and allowed
innovation strategies when the original strategy or employees to quickly access required information. The
product experience is good. major reorganization happens when Lego decides to cut
the number of organizations from 21 to 7, which makes
6. ORGANISATIONAL AND ENTRY the communication easier and more efficient. It also
STRATEGY promotes the communication of ideas and thus the speed
of innovation. LEGO also adjusted its IT hiring policies
6.1. Entering the new market and implemented a system of rotating its employees
throughout the organization in order to build wider
Lego also largely depends on internationalization in industry exposure. The inclusion of cutting-edge
previous decades to expand its business away from the technology also helps with supply chain management
brink of bankruptcy in the turn of century. Although, as and inventory management, which helps with reducing
a result, it experienced a double-digit growth, there is a the cost and improve profitability directly (Andersen
concern of saturation of the market emerged in recent and Ross 2016) [4].
years due to the psychic distance. To break this dilemma,
Lego opens its third-largest global factory (in the city of

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The decision of heavily reorganizing the firm and [7] Damanpour, F. (1996), “Organizational complexity
adopting cutting-edge IT system is necessary in this and innovation: developing and testing multiple
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Technology and Operations Management.
importance of innovations, many businesses would need
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