The family-owned and family-run global toy firm LEGO had spent around a decade reinventing itself, launching new products, committing to continual innovation, employing top designers. It switched from a hierarchical structure to teams. It introduced robotics and computer games, diversified into theme parks, and pursued new profit lines from licensing and from partnering with major movie franchises. It was quick to see the internet’s potential for marketing purposes as well as for interactive games and products, and enabling customers to network with one another.
The COO of the late 1990s/early 2000s implemented newly fashionable approaches to business innovation. The “seven truths of innovation” he identified were: hire diverse and creative people; head for “blue-ocean” (unexplored) markets; be customer-driven; practice disruptive innovation; foster open innovation or “wisdom of the crowd”; explore the full spectrum of innovation; and build an innovation culture.
Yet in 2004 the company almost went bankrupt. Sales fell around 30% in 2003, and the company was running a negative cash flow of DKr 1 billion (US$160 million). Total debt had reached DKr 5 billion ($800 million). This was not just a case of cash-flow delays, it was an existential crisis that asked big questions of governance, strategy, management, approach to product development, manufacture and distribution processes. There were also pressing issues to attend to in the product mix, quality of senior management, the cost base, logistics, success rate and speed to market of innovations, adherence to founding values and “brand stretch.”
On governance and leadership, they had to decide whether to appoint a non-family chief executive: a strong candidate had emerged with a plan for a turnaround based on greater discipline and simplification of a complex global empire. Recovery, even survival, was not guaranteed and the owners faced major strategic decisions that had to be taken under the pressure of urgency.
The case provides a number of points for family businesses to consider:
- Is it possible to be “too innovative”?
- How can communication be improved?
- How to introduce new ideas and promote non-family executives?
- If a market is being squeezed by new inventions, how do you judge if it is becoming obsolete or will find a new niche?
- How to maintain confidence while guarding against hubris?
- How to test operational assumptions against qualitative and quantitative measures?