Will Lego be victim to disruption? – what the board can do about it.

3 rules to prepare for disruptive innovation

The responsibility to set up the organization for future challenges and manage downside risk is a task for the non-executive board. This calls for active and technologically affluent non-executive directors. Being a board member is in today’s industry far from honorable seats for the “good-old-boys-club”, neither it is the eligible platform for PR-heavy demonstrations of gender diversity. The board-room shall be one driver for an organisational transition to secure agility and adaptiveness to future market conditions.  Lego is iconic. Blocks, in multiple colors and sizes, have been the basis for the castles, cities, and starships evolving from my childhood fantasies. The floor of my kid’s room was all in one, construction plant, creative office, and foreign terrain, to be explored by the most extraordinary rovers. Still, in a well-preserved box in my mother’s house, the treasures of those days are kept, as a legacy for my own children, once they reach the age, to become, architects, engineers, adventurers, and explorers on the floor of their playroom…..yes, of course, PC gaming,…. but before they’ll start with that.

Another wave of disruption is about to hit the industry.

3D printing has been invented in the recent past. At this point in time, the industry appears to be rather clueless, how to commercialize this technology. Except for some PR stunts and some more nerdy applications, mass utilization is not here yet. Facing the truth, inevitable things will happen:
  • technology will evolve further
  • the incremental cost will decrease
  • the useful application will arise (either from industrial masterminds, or nerds, without commercial interest)
For any company, distributing relatively simple plastic-made products, with very low production costs this holds a serious threat of substitution. This goes for e.g. Lego, Play-mobile, Kinder Surprise, and many others. The premium e.g. Lego demands in excess of its actual production costs is a combination of monetizing IP, brand, and innovation. With access to (mass-) technology, which will allow consumers to produce “their own” – which will be most likely initially copies of Lego, Playmobile et al. at very low / no marginal costs, IP and brand as a fundament of a revenue stream will erode. The overall business model of companies in that market space is compromised.

This scenario is too extreme?!

By far not. Not for the first time in recent years, we observe the diminishing of the whole industry.  The music industry struggled with this before, software and movie firms are well aware. The difference is, in the past virtual goods were effected whereas tangible goods still had to be distributed to the consumer. Hence monitoring and controlling the distribution channels limited the inflow of substitutes, and also provided a clear picture of competitive propositions and the overall economic environment. 3D printing is in this sense the wild card, we were not expecting. Just as the music industry did not expect the Internet to be their technological Armageddon, we simply don’t know tomorrow’s technologies. Just once, new technology is presented, with rather scrappy initial appearance, no real use cases, and no mass-market relevance, for strategists, the alarm bells need to be ringing.  The point is not, “what is this piece of engineering doing?” but, “What could it possibly be capable of? What needs to come together, to make that happen? What might be the impact on my business model?” This holds two critical aspects.
  1. Strategy and innovation are the two sides of the same coin. A senior R&D officer, not caring about the long term strategy of the firm, or a strategist, not caring about recent technology (the firm’s and elsewhere), should start looking for a new job, as they potentially cause more harm to their firm than anybody else. Getting strategy wrong is very often a lethal mistake – if in doubt, ask the music industry.
  2. There is no such thing as a safe area anymore! Innovation evolves rapidly. Today it’s maybe Tel Aviv, Berlin or Silicon Valley, but do we really know, what some gifted nerds create at this moment in some Shanghai backyard? Of course not.

The 3 rules, how to deal with roller coasting innovation!

There are three rules, which will help to deal with accelerating innovation.
  1. Reality bites! Challenge, challenge, challenge…and when done, challenge again your own business model, as well the dominant models in the industry. We have all the concepts and tools, to review our value chains, thoroughly understand our value proposition, and translate this into production and product development. Though it hurts, to give up business ideas or even revenue streams, agility beats legacy! It was Steve Jobs, who was quoted: “Cannibalise yourself before someone else will do it.”
  2. Rippling waters will announce a freak wave. Innovative technologies might be created anywhere, but the targeted markets are known and channels are transparent. Just like the 3D printer (or the Internet), initial applications are scrappy, monetization lacks behind. It still takes time from the first announcement before the wave of disruption hits the beach of the industry. This provides plenty of time, for agile organizations to adapt and prepare.
  3. Re-invent and adapt! As for Lego, the brand and IP may diminish as the basis for a premium; product innovation is still in place as a driver for value. New technologies might challenge the full business model or only parts of the value chain. For Lego, one possible option could be, to start selling 3D printers, eligible to produce their products, and start selling licenses. to consumers, to print out certain parts. Hereby, the firm will reorganize its distribution channels and focus on innovation for value creation. Cutting off, production, distribution, and trade partners, possibly margins might increase, whilst consumer prices could even decrease. Even this new business model itself will “only” be a re-interpretation of the “Nespresso + iTunes case”. Adapting in this way, would include a serious change project, to switch the firm from production & distribution to information technology and IP-monetization.  We have all the right tools, do we have also the right mindset? Finally, Lego management has the right mind-set. In March 2014, they have been reported to have awarded a 3D printing patent, which may allow users to print their own bricks (http://3dprint.com/1383/lego-awarded-3d-printing-patents-may-allow-users-to-print-own-bricks/).
Who is in the driver seat?!  Business re-invention is not an easy task, with a high impact on the organization. Obviously it needs buy-in from all senior managers. Breaking it down to its blocks, responsibility for product development is assigned to R&D executives and the C-Suite. To foresee possible risks and ensure the agility of the organization to be able to adapt to the future market environment is a major task for the boardroom.  In times of rapid change, the board room needs to play an active role in forming the organization. This calls for active and technologically affluent members of the board.  To form a future organization under the threat of disruption takes more than nodding of the annual report and meeting the good-old-boys club. Also, it is more than a platform to demonstrate gender equality and the sense of diversity. With the acceleration of innovation and the – so far demonstrated inability of many well-known firms, to adapt to this, the boardroom shall be one driver for organizational transition, to ensure agility and adaptiveness for future challenges. Coming next: The Game is on – acquisition in the Swiss media industry

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