It’s all about the brick: LEGO’s modular system

It is 1932 when Danish master carpenter Ole Kirk Christiansen founds LEGO in Billund, Denmark. The company is initially focused on manufacturing wooden toys for children, but soon switches to plastic fabrication. During the 1950s, Christiansen and his son, Gotfred Kirk, put a new idea for a plastic construction brick into the test. Then, in 1958, they introduce the “stub-and-tube coupling system” that defines the legendary LEGO brick.

Their brick patent leads to the creation of a modular system, which allows LEGO to take a step away from the traditional production of standalone toys. This modular system is a set of basic building blocks that can be combined in different ways to build numerous varying creations. Moreover, leveraging modularity here means that the bricks in any toy set can be combined with the bricks of any other toy set, increasing the possibilities of creativity. By constantly introducing new sets that consist of the same bricks, LEGO leverages huge economies of scale in product development, in brick production and in retail.

A single brick can bring about endless expansion! LEGO enters the preschool market with the DUPLO line of bigger bricks that can be easily handled by toddlers. It also expands its town-themed offerings as well as its outer space, pirate and castle kits. In the 1970s, the company introduces mini figurines of small plastic people.

At the end of the 20^th century, after eight decades of accelerating growth, the company faces the challenge of incremental competition. Children at that time began embracing electronic and digital entertainment – video games, computers, VCRs – and LEGO’s longstanding portfolio of plastic construction bricks lost its oomph.

To compete with digital and electronic toys, LEGO set off on a journey of incessant, untamed innovation. From 1994 to 1998, its offerings tripled and new markets were approached. Nevertheless, the desirable growth was not achieved. Sales grew only 5%, while production costs rapidly rose. In 1998, the company reported a loss of $48 million.

The losses did not stop LEGO from stepping up the innovation attempts. However, in the process of trying to attract new audiences and to break into new markets, development projects of that era markedly downplayed the brick. Approaching the educational toy market and introducing products such as Darwin, a digital version of LEGO bricks, constitute representative examples of the prominent brick devaluation that occurred during that period and a move away from the modular system. Unfortunately, the innovation attempts did not bring about expected outcomes, and in 2003, the company almost collapsed in the face of a 30% drop in sales and a $800 million debt.

After a period of serious loss, it became time for radical action and LEGO initiated a three-phase rebound strategy. The first phase, in 2003, included rigorous restructuring for survival via imposing constraints. Practices included closing offices as well as eliminating workforce, unprofitable factories and products.

In 2006, LEGO initiated the second and most important phase of its rebound strategy. This was basically a “return-to-the-brick” initiative with the main goal to regain profitability. They emphasized building a core set of products that would allow unlimited expansion and innovation. Following the crowdsourcing trend, the company turned to its fans for ideas by introducing the Digital Designer, where users could design and upload their own sets of LEGO.

Finally, the third phase involved drawing the growth path. LEGO pursued new markets by building on its core and capitalizing on the diversity and skillfulness of its staff and fans. A famous example was to introduce the “intelligent brick”, as part of updating the Mindstorms’ robotics set, which allows users to program their robots.

Even in the face of global financial crisis, the rebound strategy followed resulted in incredible growth. From 2007 to 2013, LEGO displayed a 24% growth in sales.

Much has been written about LEGO and many explanations have been given for its fall and upturn. Some gave emphasis to the discipline and limits its innovation culture required, while others discussed the qualities of its different leaders.

We at THNK postulate that in the end, it is all about the brick – it is all about the concept of a modular system both for its users to endlessly recombine, as well as for the company itself to maintain synergies in development and production. A modular system enables independent portfolio development without added costs. It also allows for consistency, by maintaining a portfolio of related products, as well as allowing for efficiency, by avoiding one-solution-fits-all common platform.

Practically speaking, actualizing a modular system is a two-plus-one-steps process that starts by defining your value proposition; namely, by making a clear, creative and simple statement of the benefits your organization provides to your customers. The second step involves separating your value proposition into independent parts or modules that can be treated as logical units and can interoperate. It is therefore important that the modules display similarity and one-to-one correspondence between their physical and functional architectures. Once a modularized design of the value proposition is introduced, stepping into the final phase of continuous development is what remains. This final phase entails experimenting with various combinations of the basic elements and introducing new lines of products and services.

The lesson learned from LEGO’s story is that creating the conditions that allow for infinite possibilities is indeed attainable. Let LEGO inspire us to create a modular system; providing products or services that our customers can recombine and base our products on common components that can be reconfigured.