LEGO Nearly Went Bankrupt While Innovating. Are Leaders Asking the Wrong Questions?
Written by: Jessica Low
What LEGO's remarkable turnaround teaches senior leaders about innovation, business value and the Third Way of Innovation.
What if your organisation is innovating more than ever, but becoming less competitive?
More ideas. More products. More innovation workshops. More investments in emerging technologies. More ambitious transformation initiatives.
From the boardroom, these activities may look like progress.
After all, innovation is important for business growth and survival.
But I wonder how often senior leadership teams pause to ask a different question.
Are we innovating to create meaningful business value, or are we simply creating more innovation activity?
This question brings me to the fascinating story of LEGO®.
Today, LEGO® is recognised as one of the world's most successful toy brands. Yet in the early 2000s, the company came dangerously close to bankruptcy.
The surprising part?
LEGO was not suffering from a lack of creativity or innovation.
In fact, its aggressive pursuit of innovation had contributed to the very crisis threatening its survival.
When More Innovation Created More Problems
LEGO® began in 1932 in Billund, Denmark, when carpenter Ole Kirk Kristiansen started producing wooden toys.
The modern LEGO® brick was introduced in 1958. Its brilliance lay in its simplicity: children could build, dismantle and rebuild countless creations using the same interlocking bricks.
For decades, this approach worked remarkably well.
Between 1978 and 1993, LEGO® achieved average annual sales growth of 14%.
Then growth stalled.
Competition intensified. Cheaper alternatives entered the market, and digital games competed for children's attention.
Faced with these challenges, LEGO® did what many organisations would consider logical.
It innovated more.
Between 1994 and 1998, the number of new toys introduced annually increased from 109 to 347.
That is more than three times as many new products.
Yet sales remained flat, manufacturing complexity increased, and costs escalated.
In 1998, LEGO® recorded its first loss.
When incremental innovation failed, the company pursued more radical changes, expanding into electronic toys, digital entertainment, theme parks and new experiences beyond traditional construction play.
Some initiatives succeeded, particularly movie-themed products such as Star Wars and Harry Potter.
However, sales became vulnerable to movie-release schedules, while other initiatives generated significant losses.
By 2003–2004, LEGO® was fighting for survival.
The problem was not that LEGO stopped innovating. The problem was that innovation had become disconnected from sustainable business value.
A Question Senior Leaders May Not Be Asking Enough
Imagine reviewing your organisation's innovation dashboard.
Twenty new ideas approved. Ten projects launched. Five new products introduced.
The numbers look encouraging.
But what do they actually tell us?
How many initiatives have improved the customer experience? How many contribute to profitable growth? How many reinforce the organisation's competitive advantage?
And perhaps the most uncomfortable question:
Which initiatives should we stop because they consume resources without creating sufficient value?
I believe this is where leadership accountability becomes essential.
Senior leaders are not only responsible for encouraging innovation. They are responsible for making strategic choices about where innovation should happen, why it matters and what the organisation must prioritise.
Encouraging people to generate more ideas is relatively easy.
Deciding which ideas not to pursue requires considerably more courage.
BIONICLE: Rediscovering the Value of the Core
Amid its financial difficulties, LEGO® discovered something important.
One product line was performing exceptionally well: BIONICLE.
At its heart, BIONICLE remained a construction toy. Children still assembled plastic pieces to create characters.
But the product offered something beyond the bricks.
LEGO® surrounded BIONICLE with original stories, heroes, villains, comics, books, video games, films and merchandise.
Each complementary element enhanced the play experience.
Children were no longer simply constructing a character. They were participating in an imaginative world.
According to David Robertson's The Power of Little Ideas, LEGO® sold more than 190 million BIONICLE figures over the product line's nine-year lifespan.
BIONICLE revealed an important possibility.
Instead of constantly improving or abandoning its core product, LEGO® could innovate around it.
Of course, BIONICLE was not the company's only solution. LEGO® also had to simplify operations, reduce costs, refocus its product portfolio and make difficult restructuring decisions.
But the experience contributed to a fundamentally different understanding of innovation.
The Third Way of Innovation: Creating Value Around What Already Works
LEGO's experience later helped inspire David Robertson to articulate the Third Way of Innovation in his 2017 book The Power of Little Ideas, written with Kent Lineback.
Traditionally, organisations often view innovation through two approaches.
The First Way: Incremental Innovation
Improve existing products through new features, better performance, more variations or greater efficiency.
The Second Way: Radical Innovation
Introduce fundamentally different products, technologies or business models, potentially transforming the organisation or industry.
The Third Way: Innovating Around the Core
Keep an important product largely intact while developing complementary innovations around it to make the overall offering more valuable to customers.
The Third Way involves three essential principles:
Complementary innovations: Develop different products, services, experiences or processes that enhance the core offering.
A compelling customer promise: Ensure these innovations work together to fulfil a meaningful customer need.
Coordinated execution: Manage these innovations as an interconnected system, often involving multiple departments and external partners.
The Third Way is not simply about adding more products.
It is about creating a system of innovations that strengthens the value of an existing business.
Neither is it a replacement for radical or incremental innovation. It is another strategic option, often involving less risk to the core business than radical reinvention.
Why the Third Way Matters to Leaders
What interests me most about the Third Way is that it changes the conversation.
Instead of immediately asking, "What else can we invent?", we begin asking, "What do our customers truly value, and how can we make that value greater?"
This requires leaders to look beyond product development.
Customer service, operations, marketing, finance, technology and external partners may all have opportunities to contribute.
And this creates an important leadership challenge.
Different departments often have different objectives, priorities and measures of success.
Without shared understanding, even good ideas can become disconnected initiatives.
As a facilitator, I believe this is where purposeful, facilitated conversations can make a meaningful difference.
Not another brainstorming session designed merely to produce more ideas.
But conversations that help teams challenge assumptions, explore customer needs, connect different perspectives, make decisions and establish accountability.
Because innovation without alignment risks becoming activity without impact.
Four Questions Worth Bringing Into Your Next Leadership Meeting
Drawing from Robertson's Third Way framework, I would encourage leadership teams to explore four questions.
1. What is the core of our business?
What products or services do customers genuinely value, and what deserves our strategic attention?
2. What promise are we making to our customers?
Beyond the product itself, what meaningful outcome are customers expecting us to deliver?
3. How can we innovate around that promise?
What complementary services, experiences or processes could strengthen our offering without requiring us to reinvent the business?
4. How will we deliver the innovations?
Who owns the outcomes? Which functions need to collaborate? How will we ensure the initiatives reinforce one another and deliver measurable value?
The challenge is not merely answering these questions.
It is having the leadership discipline to act on the answers, especially when that means redirecting investment or stopping initiatives that no longer serve the business.
Perhaps Better Innovation Begins With Better Leadership Questions
LEGO's story reminds us that innovation is not about producing the greatest number of ideas.
Sometimes organisations need radical transformation. Sometimes incremental improvements are enough.
And sometimes the greatest opportunity lies in looking at what already works and discovering how to make it more valuable.
The responsibility of leadership is to recognise the difference.
So, before approving the next innovation initiative, perhaps we should ask:
If we stopped measuring the number of ideas generated, products launched and projects completed, what evidence would remain that our innovation efforts are genuinely strengthening the business?
This may be a more difficult conversation than another brainstorming session.
But perhaps it is also a more valuable one.
Because ultimately, the goal is not to innovate more. The goal is to create more value through innovation.
Inspired by David Robertson with Kent Lineback, The Power of Little Ideas: A Third Way to Innovate for Market Success (Harvard Business Review Press, 2017).
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