)
It is not enough to just develop a new product; one has to develop other complementary innovations, Robertson tells Ankita Rai
Toy company LEGO turned around its fortune around by putting in place a management model that struck the right balance between creativity and control. What can other businesses learn from LEGO's experience?
What LEGO does very well is to strike a good balance between creativity and discipline. The company does this through a combination of processes, roles, tools, committees, and structural changes. This has helped LEGO give its teams enough space to be creative and enough direction and focus to be profitable.
LEGO has also developed an ability to do different types of innovation: what I call a 'full spectrum' innovation. A good product is only a minimum requirement to compete in an industry. It may get temporary sales, but won't get the company any sustained competitive advantage. LEGO has been very good at pairing new products with TV shows, comic books, games and complementary merchandise like T-shirts and backpacks. The result is a set of products that are more likely to go viral and generate more revenue.
More From This Section
The management challenge of full spectrum innovation hasn't been addressed well. It's not enough to just develop a new product, one has also got to develop other complementary innovations. That changes the management challenge dramatically. For example, consider the iPod. The iPod was a nice little device, but the reason it has remained so successful is that it was paired with iTunes. iTunes had a great copy protection system (Fairplay) - the $0.99 per song business model. These innovations together made Apple successful in the online music business.
But consider this: What if Apple had been a more traditional company, and had rewarded the division responsible for building the music sales business based on the profitability it generated. The division wouldn't have been motivated to pursue the $0.99 per song business model, nor held down the price to only $0.99 per song, so the whole result could have been much different. It's difficult to coordinate different types of innovations and it is difficult to get the reward system right and encourage the right behaviour.
The biggest challenge to innovation perhaps is investment - investme-nt in management time and in terms of real money. How can companies inculcate a culture of continuous innovation? Are CFOs responsible for killing innovation?
The key is a disciplined system of innovation management, one that focuses attention on the full spectrum of innovations that will lead to market success. Continuous improvement requires a system of processes, roles, tools, and leadership structures that give teams the space to be creative and the focus and direction to be continuously innovative.
CFOs can certainly kill innovation, if they focus only on short-term ROI and not on the benefits of long-term platforms and the options they provide. On the other hand, they need to provide the focus and discipline to ensure that incremental innovations are profitable. In other words, if CFOs don't get involved in innovation, then innovation efforts can spin out of control and lead to losses and destruction of shareholder value.
Disruptive innovations such as a revolutionary business model, or a new spin on an existing product or service, have the potential to alter entire industries, but it can be very risky. How should companies manage the risk of disruptive innovation?
New-to-the-world innovations are divided into two categories: disruptive innovation, which change the dynamics of existing markets, and 'blue ocean' innovations, which finds a set of underserved customers and creates a new untapped market. One of the interesting parts of the LEGO story is how it has swung between different approaches to innovation. During the period between 1999 and 2002, it went on an innovation binge, exploring many different 'blue ocean' and 'disruptive' innovations. While it had a few successes, the overall result was a close brush with bankruptcy. Focusing only on out-of-the box innovation almost put LEGO out of business. The company forgot about the fire trucks and police stations that kids love, and that had been so profitable for the company.
After the crisis of 2003, it refocused innovation on its core brick-based products. This back-to-the-brick strategy has been very successful. Since 2007, the company's sales have grown by 24 per cent per year and profits by 40 per cent per year. But, injecting this discipline back into the company had a price. It has lost that ability to do the big new-to-the-world innovations that they once had. For example, in 2010, after years of development and a $30 million investment, LEGO launched its massively multiplayer online game LEGO Universe. It was a failure.
LEGO learnt that one has to separate the development of incremental new products from the development of new-to-the-world innovations. It has put together an innovation management system that is superb at continuously producing incremental products. While LEGO hasn't perfected the art of developing the big new innovations, its financial performance shows the power of the little idea.
Innovation is almost impossible when the goal of a firm is improving bottomline and maximising shareholder value. How should this dilemma be addressed? Any answers from the LEGO experience?
LEGO has become a superb innovator, and by doing so has created a tremendous amount of shareholder value, including a number of billionaires among the extended Kristiansen family (which control most of the equity of the LEGO Group).
It's an interesting thought to speculate what would happen if LEGO had been a US-based publicly held company. Would the quarterly pressures have led to a different approach to turning around the company? Probably. Putting in place an effective innovation management system was only possible after some of the core executional systems were in place.
For example, LEGO in the 1990s had such a complex structure that simple analysis like product line profitability or market success was very difficult. The supply chain was a mess and the production operations were drowning in complexity. Before LEGO could innovate, it had to get the basics right.
So, if the focus is on quarterly performance and not long-term value creation, then innovation can suffer.
INNOVATION EXPERT
- Robertson is a professor of practice at the Wharton School where he teaches Innovation and Product Development
- From 2002 through 2010, Robertson was the LEGO Professor of Innovation at Institute for Management Development, Switzerland
- Robertson has consulted wide range of companies including EMC, Credit Suisse, HSBC, Georg Fischer and Banco Santander
- Prior to IMD, Robertson was a post-doctoral research fellow at MIT Computer Science and Artificial Intelligence Laboratory, a consultant at McKinsey for 5 years, and an executive at three startup companies
