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Digital Transformation Strategy: The LEGO Case

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DOI: 10.51659/josi.20.139

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 Journal of
Organisational Studies and Innovation
Vol. 8, no.3, Autumn, 2021

Digital Transformation Strategy: The LEGO Case

Tugba Gurcaylilar-Yenidogan1* and Saba Gul**

Faculty of Economics and Administrative Sciences, Department of Business
Administration, Turkey*
Faculty of Economics and Administrative Sciences, Department of Business
Administration, Akdeniz University,Turkey**

Received: March 3, 2021; Revised: April 15, 2021; Accepted: July 27, 2021
Abstract: The purpose of this paper is to shed light on the digital transformation of LEGO
and to figure it out in innovation-oriented growth decisions. To this end, the study here
examines the transformation process of the company from diversification to smart
specialization strategy in more detail. Besides, where digital architecture for toys requires
many innovations at the same time, authors discuss what LEGO does to add value. More
importantly, the typologies of innovation strategy elucidate the changes and improvements
that foster digital transformation.
Keywords: Digital transformation, smart toys, corporate strategy, innovation, LEGO.
Introduction
The digital revolution keeps reshaping and transforming the whole industrial landscape
tremendously. Organizations deal with a difficult struggle on how to ride the wave of
digitalization to business success. Likewise, the toy industry also seeks to attain a successful
digital business strategy to take advantage of the new age of innovations. Since connecting
players over the internet, the video game industry has seriously threatened the toy industry
(Grecu, 2013; Sawy et al., 2016). However, this situation never seems as if it will take
forever. Internet of Toys (referring to the Internet of Things) has already started to close the
distance between the toy industry and the gaming industry by creating a digital bridge
between physical toys and online games (Holloway and Green, 2016; Manches et al., 2015).
Technologies such as augmented reality, virtual reality, and voice recognition have
completely changed the play experience and enabled interactive toys to be launched (Curtin,
2018; Tippenhauer et al., 2012). Despite the more common adoption of new video games,
children still have some sort of attachment with their toys and are even proud of their toy
collection (Manches et al., 2015). Therefore, the digital play has merged with traditional play
instead of entirely replacing it (Marsh, 2017). On the one side, parents are more interested in
such kinds of educational toys (Plowmann and Luckin, 2004). On the other side, learning by
play is extremely expensive and hence it may take some time for smart educational toys to
completely take over the traditional toy market until cheaper versions are available (Brito et
al., 2018). But it is quite obvious that new generation toys that serve for both entertainment
and education are merging into a seamless blend of games and electronic media (Goldstein,
2013). Despite some challenges and disruption threats traditional toy manufacturers have
faced through time, there are only a few toy manufacturers available that held their ground

1
DOI: https://doi.org/10.51659/josi.20.139

Vol. 8, no.3, Autumn 2021 36

firmly. Depending on the digital revolution, LEGO became one of the leading businesses that
completely changed the nature of play (Robertson and Breen, 2013).
LEGO, catalyzer of the widespread use of plastics in toys, was founded in 1932 in Denmark.
During such large corporate longevity, LEGO did face difficulties but never gave up the race,
and even kept its position of the runner-up ranking in the worldwide marketplace (Statista,
2019). The company is also capable of successfully transforming digitally while keeping its
traditional business intact. Hence, LEGO undoubtedly represents a good precedent of the
digital business model with sustained innovation strategies. Successful digital transformation
of LEGO does not only come from product innovation but rather ensue from its digital
infrastructure such as Horizon and BICF (Business Intelligence Concept Foundation)
initiatives. Beyond digitalization efforts, the victory of the firm depends on a complex yet
efficient blend of different types of innovation. This study aims to unveil how digitalization
initiatives shape innovation strategy over time. To this end, the authors refer to the digital
transformation of the traditional toy industry by addressing the LEGO case. In sum, this
paper contributes to ongoing work in understanding the link between digital strategy and
innovation employing a case study. This paper answers a few critical questions that could
contribute to better understanding in the field of strategy and innovation:
- How digitalization drives innovations in low-tech industries?
- When and to what extent digital innovations may have an impact on the business
market?
- How business success can be accomplished with distinctive and harmonic bundle
blocks of innovations in structural configuration, offerings, and customer
experiences?
- What is smart specialization? How does it contribute to innovation and firm survival?
The Evolution of Digital Transformation
Looking over the earlier applications of new technologies in production systems, it is
noticeable that the time interval between technological inventions and their subsequent
widespread use has been declining constantly (Charlesworth, 2009; Giedd, 2012; Makridakis,
2017). 200 years had passed from the first affordable car, as performed by steam power. 90
years after its discovery, electricity was first used in factories. On the other hand, the radio
was in use only 38 years after breakthroughs in information and communication technology.
In a shorter time, personal computers considered as the technical backbone of the internet,
and digital platforms became apparent some 20 years later (Muhleisen, 2018). And in just a
decade, technology was transmitted into mobile phones. Nowadays people have pocket
computers dubbed as smartphones embedded with the internet, without which daily activities
seem impossible. Along with the further developments in the internet and smartphones,
digital technology then evolved into social media platforms and websites to cater social needs
of the human being (Charlesworth, 2009). Smartphones together with the internet and other
digital platforms have opened infinite doors to the online world. Today, people use the
internet to do research for assignments (Google), to stay in touch with friends
(Facebook/Instagram/WhatsApp), to apply for a new job (LinkedIn), to watch videos and
movies (YouTube/Netflix), to find a way (Google Maps), to shop anything and everything
(Amazon/AliExpress), to order a cab (Uber), to book accommodation for next holidays
(booking.com), to read reviews about different products and services (TripAdvisor).
The Internet of Things- IoS (Manches et al., 2015) appears to have further extended the
presence and usage of digital technology. Examples of IoT based applications include shared
bicycles which can be unlocked through mobile apps, smartwatches enabling us to receive
and make calls and messages in addition to their main function, connected cars, smart homes,
and like many others (Meola, 2019). Artificial Intelligence-AL is the latest development of
digital technology holding enormous potential which has made humans worried whether they

Vol. 8, no.3, Autumn 2021 37

will be replaced by robots in near future. Unlike the previous digital technology, AL does not
only perform tasks based on programming it is encoded with, rather it shows learning
capabilities through the process of “deep learning” (Makridakis, 2017). Self-driving cars as
one of its most important applications are expected to launch soon (Frontline PBS, 2019).
Evidently, the digital and mobile revolution has been picking up the speed at which new
businesses and internet-connected new products/services are introduced to the market. For
instance, Google -the champion of the search was incorporated in 1998 and initially funded
by the founder of Amazon (Statista, 2019). Facebook, a social networking site was launched
in 2004. Facebook was not an entirely new idea; rather it took inspiration from earlier social
networking sites such as Friendster, Myspace but surpassed them soon. By 2010, the age of
mobile internet had already been started. In the year 2007, Apple was leading a new market
with products such as iPod, iPhone/IOS. Only one year later, Google entered the smartphone
market with its Android technology. In those years, Microsoft was left behind in offering an
operating system to the smartphone industry, and even when it did in 2013 for Nokia, it
failed. Facebook has emerged as the most popular social networking site, and up to date holds
that position with around 2.5 billion users. Amazon which initially dealt with books
continued adding other categories to the business portfolio. By 2007 it has been a controller
of around 80% of the e-book sales along with the introduction of its kindle e-reader (Holder
and Hern, 2018). By 2019, Amazon has been the World’s Biggest Retailer (Debter, 2019). In
a near future, Amazon might even become a threat to Google and Facebook in digital
advertising (Barwise and Watkins, 2018; Moore and Tambini, 2018; Statista, 2019). These
six leading companies at the forefront of the new economy are continuously listed among the
most valuable brands of the world by valuation companies such as Interbrand, Brand Finance,
and WPP (Barwise and Watkins, 2018).
Consequently, the rise of digitalization in carrying out commercial activities has entirely
transformed business solutions and permanently reshaped competitive dynamics in many
industries (Giedd, 2012; Charlesworth, 2009). Nowadays entire living patterns revolve
around digital technology. Hence, its sphere of influence extends beyond to include the low-
tech industries such as entertainment, education, finance, shopping, government affairs, and
others. Previous research denotes those businesses without a digital advantage are no longer
to survive. Therefore, organizations face the inevitable necessity of integrating digitalization
efforts with business strategy (Sawy et al., 2016).
Disrupting the Entertainment Industry: From Traditional to Smart Toys
The kids of the 18th century had usually enjoyed wooden toys such as dolls, stick horses,
wooden snakes (Brightonmuseums, 2012). However, the 19th century’s industrial revolution
marked a new era of manufacturing across all sectors and there was no exemption specifically
for the toys industry. In addition to the mass production of traditional toys, advancements in
cotton, paper, and printing industries fueled by the steam power triggered the diffusion of
other toys such as jigsaw puzzles, playing cards, and stuffed toys. The technological
innovations of the 20th century further contributed to the diversity of toys and the growth of
the toy industry. As the use of trains and cars became more common, the production of toy
trains and cars also came into existence (Toy Retailers Association, 2020). In 1901, the
founder of Lionel Trains sold his first electric train to a store owner. Hornby also introduced
the first electric trains to its product catalog in 1925 (Hornby, 2020). A series of those events
shows that the toy industry got its share of influence from the advancements in electricity.
Along with the technological innovations the toy industry has been impacted by the changing
social scenarios of the century including new consumption culture and the social changes it
brought (Greenfield, 1991). Consumption influence on children got stronger at the end of
WW2 (Edwards, 2013). During this period children started to be recognized as an important
market segment (Edwards, 2013). Although the great depression affected the sales of the toy

Vol. 8, no.3, Autumn 2021 38

industry, it somehow resulted in the birth of toy libraries; the need for children to have access
to toys and games was understood. Over the years, not only did the toy libraries grow as
independent organizations, but also as part of public libraries and schools (Nicholson, 2013).
The American Toy Institute was established in 1948, and then in 1975 International Council
of Toy Industries was built to further ensure safety standards and regulations in the industry.
The importance of toys in education were also highlighted. The toys fairs began to serve as a
platform not only to showcase products but also to integrate them in educational programs
(Toy Retailers Association, 2020).
Television is another technological invention that reformed the toy industry with the potential
to a great extent. Apart from serving as a focus of family entertainment, and an efficient
advertisement platform for increasing demand and awareness about the “must-have” toys
among kids, it also gave birth to numerous characters such as the world-renowned Mickey
Mouse (Toy Retailers Association, 2020). Soon after, TV connected children with video
games. Pioneer of successful arcade games such as Atari defined this new gaming industry,
and later developments from companies such as Nintendo further revolutionized the gaming
industry (Atari, 2020). In the same period dawned the sun of digitalization which, much like
the industrial revolution impacted all spheres of life, all existing industries and further found
the basis of many new industries. The toy industry, like all the previous innovational waves,
had to respond to this new age wave in order to stay attractive (Figure 1).

Figure 1. Evolution of toy industry

(Source: prepared by the authors)

Ever since the traditional toy industry has been disturbed by the video gaming industry,
leading toy manufacturers such as Mattel, Hasbro, and LEGO (Statista, 2018) started adding
technology to the play offerings in order to keep themselves alive and attractive. Although
toy companies are not the pioneers of the video gaming marketplace, they have entered the
market as secondary players (D’Hooge and Goldstein, 2001). The continual efforts of
improving traditional play with technology along with the advancements in IoS stimulated
the idea of producing smart toys. Smart toys can connect to electronic devices or the internet
and hence creates opportunities for connected toys with a play experience (Marsh, 2017).
One of the earliest smart toys is “Speak and Spell” from Texas Instruments (Tedium, 2018).
Coming forward with interchangeable game cartridges, this educational tool developed in the
1970s aimed at helping children learn and spell some 200 words. Then it has been acquired

Vol. 8, no.3, Autumn 2021 39

by toy company Basic Fun. Another, probably more famous interactive toy was Teddy
Ruxpin, produced by an American Toy Company, World of Wonders in 1985. Teddy was a
storyteller and thus was able to develop a friendly relationship with the children. It was an
instant hit both financially and culturally and became the best-selling toy of the year. Its
founder is called “the father of animatronic toys” and is also credited for sowing the seeds of
innovation in the industry (Jones and Meurer, 2016). However, despite all the success, the
company could not have a bright future. Just after a year of setting a record as one of the
fastest-growing companies, the company filed for bankruptcy protection in 1987 (Pollack,
1987).
The late 1990s carried out the boom of smart toys. Furby- an American electronic robot toy
was first released in 1998 and 40 million units of which were sold within the first three years.
The later versions of Furby were updated with the technologies such as voice recognition
containing “respond to commands” and with mobile apps (Jones and Meurer, 2016; Marsh,
2017). In 1998 a remarkable network innovation was actualized between Mattel, the toy
leader, and Intel, the technology leader (D’Hooge and Goldstein, 2001). These companies
combined their forces to launch the Intel Play brand and introduced new toys with the
characteristics of educational and fun to the market. The early products of this collaboration
were revealed at the New York toy fair in 1999. The first one was the Computer Microscope
enabling users to view magnified images on their computer screen and, the other was
“Me2Cam” with a special feature of which transports moving images of a child to the game.
Both of these products have received very positive feedback. Interestingly, LEGO’s first
successful digital move came in 1998 with the launch of MINDSTORMS (Robertson and
Breen, 2013). The robots of MINDSTORMS consist of traditional LEGO components
augmented with sensors, motors, intelligent bricks. They can be connected to the software
and programmed to perform complex tasks. Overall, smart toys support educational purposes
and help children learn coding, programming, 3D printing, etc. (Holloway and Green, 2016).
Hence, the new generation devotes keen interest to buy them (Brito, et al., 2018). As a result,
the smart toy industry is expected to grow at a compound annual rate of 15.5% from 2017 to
2025 (Business Insider, 2019).
Linking Strategy to Innovation: The LEGO Case
This case study focuses on the concepts of sustainable growth and digital transformation to
understand the link between innovation and strategy. To have a deep understanding of
innovation-driven growth, here we intend to shed light on the selective specialization strategy
of LEGO. The selected case study illustrates that strategic shift from diversification to smart
specialization is the strongest driver of recovering business success. To unveil the underlying
reasons for strategic change, we conduct a strategic analysis on decisions made and actions
taken by the managerial team of LEGO throughout the lifecycle phases. In nearly 90 years of
business life, we analyzed its corporate strategies related to products, markets, and business
areas. Finally, we elucidated its innovations that support the decision on specialization. To
this end, data from secondary sources were collected, carefully synthesized, and linked to the
context of innovation-corporate strategy.
The 88 Years of Business (1932-2020)
LEGO was founded by a master carpenter- Ole Kirk Christiansen in 1932.The company was
producing wooden toys during its foundation years (The LEGO Group, 2019, 2020;
Robertson and Breen 2013). Kirk’s passion to experiment with new ideas resulted in the use
of plastic materials in toys. Back in 1946, LEGO was the first toy manufacturer who gets a
plastic injection molding machine and produces plastic toys in Denmark. Therefore, the
company faced heavy criticism that plastic would never be able to replace the preferred
wooden toys. But it was not at a standstill. LEGO made subsequent improvements in plastic
components that eventuated in the perfect clutch power design of standard bricks, and then

Vol. 8, no.3, Autumn 2021 40

patented this platform-based innovation. A six 8-stud LEGO brick can be combined in
approximately 915 million different ways. Besides, all LEGO elements manufactured since
1958 are fully compatible with each other regardless of when or where they were made (The
LEGO Group, 2011). Different sets can be combined for creating more interesting play
scenarios. Here is one of the most important reasons why the LEGO brick is known
universally and well-liked by children, teens, and adults.
Until the end of the 1980s, the company’s sales had steadily increased. Everything was
looking good at first glance. But in the 1990s, the digital revolution began to change the
dynamics of competition. This new wave of change in technology and economy made play
offerings of traditional toys outdated for children. To maintain its competitive position,
LEGO had to take the plunge into the digital world. This situation pushed LEGO to diversify
its product range (Lauwaert, 2018). The company launched a new initiative with Darwin
(1994), a product that stemmed from the idea of converting LEGO bricks into digital bits.
This important strategic move could not enable company involvement in digital and software
technology. The first attempt was entirely a failure because LEGO was trying to do too much
too soon (Robertson and Breen, 2013). Hence it was ended up in 1999. Despite the frustration
it brings, the Darwin project provided a considerable experience for future products such as
LEGO Island- a computer game launched in 1997, and the very successful LEGO
MINDSTORMS launched in 1998. MINDSTORMS was probably the company’s first
successful digital move. Once again LEGO encountered a great loss of 48 million $ in 1998.
However, this time, digitization was not responsible (Company Man, 2018). The company
was on the brink of bankruptcy in 2004, with a threat of being acquired by Mattel. And all
though, LEGO was still the toy of the century.
If so, what went wrong at LEGO? The company was implementing a growth strategy to
develop new markets (Bloomberg Markets and Finance, 2017; Robertson and Breen, 2013).
Beyond opening new stores, the company launched into new businesses such as video games,
clothing lines, stores, and theme parks (Figure 2). It sailed vertically into the blue oceans with
products such as movie maker sets, Legoland resorts, and education learning centers. All of
them were outside the realm of LEGO’s core assets and capabilities. Unfortunately, none of
these diversification initiatives around non-core business efforts proved successful for LEGO,
and sooner or later most of these projects were shut down. It seems that the core business
function was miscomprehended and thus the company underestimated its own capabilities.
Building with bricks was the major attraction for LEGO fans, but the aforementioned
products were lack of these main characteristics or functions.
Over-diversification not only harm the main customer segment but also harmed the
component suppliers due to the increased costs. Fortunately, it was not too late to turn back
and reshape the corporate strategy around core business (Ashcroft, 2014; Monaghan, 2017).
At the end of 2003, the company completely restored its corporate strategy to achieve the
position it has today. LEGO ensured the act in the children’s best interest by mixing digital
and physical play in a much-admired way but staying at the core. LEGO now focuses on a
narrow range of products within the core business and globally expands along with optimal
leveraging of digitalization (Aljazeera English, 2016). It is certain that the successful digital
transformation of LEGO did not happen overnight, rather LEGO learned its lessons through
constant experimentation and failures. As of now, LEGO enhances its offerings by adding
intelligence, creativity, behavioral and educational aspects to its system of play.

Vol. 8, no.3, Autumn 2021 41

Figure 2. Corporate-level strategy of LEGO: From diversification to smart specialization
strategy

(Source: prepared by the authors)

Growth Strategy of LEGO

Growth strategy is strongly associated with the decisions a company takes on regarding the
set of businesses that it would operate in (Furrer, 2016). Due to the limited resource
endowments, small companies broadly follow a single-segment strategy and penetrate the
current market with a single product available. On the other side, bigger ones can operate by
offering the same product to different markets (product specialization) or different products
to the same market (market specialization). Some of them are even diversified over a wide
array of product-market combinations with full coverage. But ultimately these growth
strategies are all about concentration on a single business. Unlike such concentrated
strategies, others operate in different business areas. Accordingly, diversification is not a
yes/no decision (Furrer, 2016) and regards with substantial changes in business definition
along the three generic dimensions of customer groups, customer functions (/needs), and
(product) technologies (Abell, 1980). In this situation, a single business firm with
multimarket or multiproduct activities is more concentrated but still said to be diversified. In
the broadest sense, diversification contains the composition of a company’s portfolio of
business units (Bartlett and Ghoshal, 1993; Goold and Luchs, 1996; Puranam and Vanneste,
2016).
As of the latest status, LEGO seems to be more concentrated on its core business (i.e., toy
industry). This is a prominent result of a collaborative initiative that promotes efficient
sourcing, and collective action. LEGO transferred the whole or exclusive part of ownership
rights associated with the non-core businesses. Thereby, the company aimed to earn money
by charging for the use of its licensed asset (Figure 3). The new shared vision included

Vol. 8, no.3, Autumn 2021 42

selling Legoland theme parks to Merlin Entertainment, halting all unprofitable products,
restricting manufacturing budgets, introducing rules for a minimum return on sales, and thus
reviving the core business (Smout and Gronholt-Pedersen, 2019). After the corporate
decision taken on “innovate inside the box”, the year 2005 marked a slight recovery from the
LEGO loss, and afterward the LEGO revenue curves constantly grew upward till 2017.
Following the restructuring process, LEGO has more concentrated on the toy business but
diversified its main products into the three product categories including themes, advanced,
and education.
Figure 3. Revenue stream of LEGO

(Source: prepared by the authors)

A new series of brick blocks, LEGO DUPLO, was launched for pre-school children in 1969
(Figure 4). These products of the Themes Category were compatible with the classic LEGO
bricks. DUPLO series, also used in educational institutes, is one of the most famous product
categories (Robertson and Breen, 2013). LEGO had been a male dominant consumer base
until the launch of LEGO FRIENDS. It enabled the company to reach out to the little girls as
well. “LEGO FRIENDS” offers a more buildable experience for girls who enjoyed
constructing. LEGO went on to expand its customer segment by introducing LEGO
TECHNIC in 1977, targeting older children. This new line of the advanced product category
achieved great success in a short time and some elements of which were also used in the later
blockbuster lines of LEGO such as MINDSTORMS.

Vol. 8, no.3, Autumn 2021 43

Figure 4. Product portfolio of the LEGO toys

(Source: The LEGO Group, 2018)

Another appealing product line of the advanced category is architecture themed products.
LEGO ARCHITECTURE was launched in 2008. The sets designed by famous architects are
sold at premium prices. The product line is not only successful financially, but also denotes a
new market for LEGO as 15% of their enthusiasts had never bought any LEGO kit before.
Like LEGO Architecture and LEGO Creator Expert, LEGO MINECRAFT has attracted
enthusiasts by combining physical play experience with the virtual games (Stuart, 2012).
LEGO has further enhanced each product category by adding digital extensions. For instance,
LEGO added the digital experience “Create and Connect” in the DUPLO series as well by
striking a partnership with Amazon’s Alexa in 2018. The target of DUPLO STORIES was to
develop the programming skills of kids from a young age. Similarly, some sets of the
secondary level education line consist of newer technologies such as LEGO MINDSTORMS
EV3. Furthermore, LEGO MINDSTORMS equipped with new robotics, and LEGO
UNIVERSE of massively multiplayer online gaming are the latest products that create new
markets for LEGO. The new versions of MINDSTORMS are not only attracted teens and
adults but also become a part of STEM education in some countries. Overall, it is possible to
find many differentiated products and product lines embedded in the product range of LEGO.
Each of them targets different market segments (Figure 5). LEGO’s product portfolio clearly
shows the diversity and the digital trends it follows, but at the same time, we can see that they

Vol. 8, no.3, Autumn 2021 44

all are centered around the core of LEGO: Bricks and the building experience. Most of the
theme sets come with instructions or ideas, but they are for building what is on the box.
Children can use their own creativity and make whatever they want.
Figure 5. Market segments of LEGO

(Source: prepared by the authors)

Innovation Strategy of LEGO

How to diagnose innovation strategy(/ies) in business? Diagnosing innovation strategy needs
assessment for change an innovation creates in technology and the market. These two
dominant parameters of innovation may stand somewhere along radical (/discontinuous)- and
incremental (/continuous) - change in the spectrum (Gurcaylilar-Yenidogan and Aksoy,
2018). Drawing upon the general acceptance of defining innovation strategies and appraising
innovation capacity (innovativeness) of an organization, Norman and Vergani (2004) identify
four types of innovation strategy (market-pull innovation, technology-push innovation,
meaning-driven innovation, and technology epiphanies). According to this classification, the
technological aspect that drives innovation regards the magnitude of technological change
and indicates the novelty degree (newness) of technology compared to the existing products.
On the other hand, the market driver of innovation refers to the meaning change in how
people interact with a product. The innovation capacity of an organization (/innovativeness)
expands with significant changes in both innovation parameters.
Technology epiphanies happen when consumption attitudes drastically change with
fundamental product differentiation that serves as a catalyst in purchasing behavior and hence
reshape the rules of the competition (Verganti, 2011). This kind of innovation emerges in a
radical change in customer benefit package and a different or wider meaning behind it
(Kortelainen et al., 2010). Technology-push innovation occurs when a radical change in
technology does not bring significant changes in the meaning of a product in use. Meaning-
driven innovation is driven by radical changes in socio-cultural structure that leads to new
meanings of consumption. On the contrary, market-pull innovation endures with existing
sociocultural regimes but helps us gain a better understanding of how people interact with
existing products. Consistently, the case study here, an endeavor to implement the
appropriate coupling of LEGO products and innovation strategy in new product development,
adopts the technology and meaning change typology developed by Norman and Vergani
(2004). We use this typology because the newness or novelty of the production technology of
toys is closely related to the lifestyle and societal changes. The three major structural changes
in the social system are as follows (Klemenovic, 2014; Mao et al., 2019);

Vol. 8, no.3, Autumn 2021 45

High-performing working parents: Families and especially mothers today spend more time in
performing their professional career and work-life and less of it doing leisure and
communication with their children. Therefore, toys gifted by adults are often seen as a
compensation remedy for the neglected children. Due to the obstacles of playing with family,
the meaning of toys has expanded to include technical devices that allow children to interact
with them. Under these circumstances, parents also had to rely upon the skill-development
aspect of toys such as stimulating imagination, problem solving and developing creativity in
children. And in end, the meaning of “play for fun” has changed and expanded to play toys
for “interaction/communication and skill-development”. It cannot be said that LEGO acted
early in this attempt. LEGO Duplo Stories can be given as an example of voice/image
recognition toys. This product combines storytelling with LEGO’s Duplo sets and aims to
develop the interactive skills of children.
Play in education: In the 1990s, the knowledge-driver economy has reconfigured social
systems significantly. The world has entered a period of rapid and profound change.
Innovation, creative thinking, and transformation have become key performance indicators
for sustainable growth and organizational survival in all systems. Similarly, traditional
methods have changed in the education system. Alternative education promotes a play-based
approach for active learning instead of traditional schooling. Hence, plays with creative toys
have a prominent role in the education of children. In addition, out of school learning is
gaining ever more importance in the life of human beings. It means that toys serve for
education not only limited to formal schooling but also to a lifelong pursuit.
As a result of this second restructuring process, toys started to make sense of being
educational devices that develop physical, cognitive, and artistic skills of children and adults.
In response to this new market expectation, the LEGO Group, with the motto of being more
than a toy, established a department (now dubbed as LEGO Education) to develop
educational material in 1980 (the LEGO Group, 2020). The task of LEGO Education was to
collaborate with educational institutes and design products suitable for learning through
integrating digital and physical forms of play.
Highly connected people and digital society: Nowadays, the vast majority of teenagers
devote huge amounts of time to playing computer games, the internet, and online social
networks rather than participate in outdoor activities. While digital technologies made many
analog technologies obsolete, social systems began to be restructured by creative destruction
in technology. This is the era when a toy as a smart machine which consists of miniature
electric motors and chips. The use of toys for entertainment, education, skill development,
and special interest is not unprecedented for the existing market. However, integrating
physical toys with digital dimensions for educational intelligence continues to be disrupted
the existing market.
LEGO teamed up with MIT, for introducing intelligence and behavior; digital technology
such as programming languages in the play. MINDSTORMS was one of the results of this
collaboration. MINDSTORMS, released in 1998, was the first robotic coding adventure of
LEGO (Robertson and Breen, 2013). The toy series of MINDSTORMS involved radical
technology and opened a new market with 70% of MINDSTORMS buyers from the adult age
range. This type of LEGO series is also used for STEM (science, technology, engineering, or
math) education in curricula. An additional contribution of MINDSTORMS was to engage
customers in product development. When the software got hacked through reverse
engineering posing a challenge, LEGO opened its doors to the fans and encouraged them to
submit new product ideas, support existing ones, and share their reviews on social media. At
the same time, LEGO launched LEGO Digital Designer which would allow fans to make
customized sets using 3D Bricks. It provided an essential foundation for LEGO Factory, later
renamed LEGO Design by Me. The ultimate activities of the fan community are executed

Vol. 8, no.3, Autumn 2021 46

under the initiative of LEGO Ideas. LEGO also launched the first-ever community platform
for children under 13, named LEGO Life, available as a digital app. All these initiatives for
customer engagement point out the effective content of crowdsourcing (Schlagwein and
Bjorn-Andersen, 2014).
In a nutshell, the meaning of toys in society has expanded from fun (/entertainment) to
include skill development and education at all ages (Figure 6). While the way of
communicating with toys changes over time, analog toys have largely been supported by
digital technologies. For this reason, today toys that entertain while serving for skill-
development and education throughout life can speak, move, tell stories, interact, or be
encoded.
Figure 6. Innovation strategies of LEGO

(Source: prepared by the authors)

In an alternative vein, Kalbach (2012) assesses the impact of technological change in the
marketplace and thus identifies four zones of innovation such as incremental, breakthrough,
disruptive, and game-changer. A company in the pursuit of game-changer innovation
produces really new products by making radical changes in technology and disrupting the
existing markets. When modest changes in existing products sustain the current market, it
results in incremental innovation. If radical technological changes breed new ideas in
business offerings without disrupting an existing market, breakthrough innovations happen.
On the other side, disruptive innovation with incremental change in product technology
generates new revenue streams by either providing solutions to a new set of customer needs
or significant improvements in product performance. Consistent with the typology of Kalbach
(2012), the change and diversity in the innovation strategy of LEGO can be traced in Figure
7.

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 Figure 7. The change and diversity in the innovation strategy of LEGO

(Source: prepared by the authors)

Distinctive Innovations of LEGO

In this section, the prominent innovations of LEGO are categorized according to the
innovation types of Keeley et al. (2013) (Table 1). The company has initially differentiated in
the product system. After a retailer’s recommendation to create a system of play in which
different toys are interrelated and compatible with each other in 1954, this new idea has
gained great attention due to its potential to increase repeat sales (Robertson and Breen
2013). Thereupon LEGO acts immediately to build its own system of play around the bricks.
Based on the key characteristics of creativity, simplicity, affordability, infinity of
opportunities, etc., the interconnected system of LEGO is established in 1955. Due to the
interconnected toy bricks with a perfect clutch power, LEGO considerably differentiates from
its peers in offerings (i.e., product system and product performance). The company also
supports its offering with communication elements and a business system. This kind of
innovation regards breakthroughs in experiences. For example, platforms such as LEGO
Ideas and LEGO Life further enhance customer participation and customer experience. In
turn, results in forming a strong “LEGO FAN” identity and gives an opportunity for having
customized sets. In addition, this also creates an additional communication and sales channel.
LEGO is the capable of using many channels in an integrated way. These include physical
stores, online channels, social media, educational institutions, and movies.

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Table 1. Distinctive innovations of LEGO

(Source: prepared by the authors)

LEGO has introduced new services like LegoLand and LegoHouse by extending its well-
known brand among the new target markets (e.g., families). On the other hand, successful
character designs in TV series and cinemas have opened new channels by expanding the
boundaries of the existing market to those who were previously non-users. In this endeavor,
the company often benefits from network innovations. Cooperation with Lucasfilm can be
given as an example to create connections between different brands. Another network
innovation made with MIT serves to realize the company’s new business “smart toys
project”.
Discussion
Today’s companies confront the challenges of digital disruption more than ever before. In the
era of the digital economy, innovation and digitalization have become inseparable concepts.
Therefore, in the struggle to stay competitive in the marketplace, companies need to make
innovations that support digital transformation and an entirely new business model. In other
words, digital transformation is what a firm needs today (Mithas and Lucas, 2010;
Lichtenthaler, 2018; Peter et al., 2020). Especially, in the current circumstances where the
whole world order is disrupted due to a deadly virus COVID-19, more and more firms would
resort to digitally transform their business models.

Vol. 8, no.3, Autumn 2021 49

In order to accomplish a transformation from traditional to digital, companies should initially
determine the extent to which digitalization proceeds in the sector. Integrating digital strategy
into the business strategy might be enough for some firms. However, others must completely
transform the business to digital (Cordon et al., 2016). The first solution entails a strategy
where digitalization is integrated into the entire corporation but does not replace the core
business (Cordon et al., 2016). That does not mean that digitalizing the play offer was never
on LEGO’s agenda. The digitalization at LEGO indeed revolves around products along with
marketing and enterprise (Sawy et al., 2016). However, LEGO never replaced its core
entirely i.e., physical plastic brick and the joy of buildable toys, rather it also focused on ways
of merging physical and digital (Cordon et al., 2016; Rpark, 2018)
Undoubtedly, companies make numerous choices and take various risks in the process. They
might even end up disrupting their own traditional core, or in the pursuit of diversifying
digitally might even face serious losses. This research has presented a positive case, where
despite the initially failed experimentations, LEGO was able to successfully transform
digitally while also keeping its traditional business intact. LEGO can be looked upon as an
example, and significant lessons could be learned from its business models and strategies.
Almeida et al. (2019) identified the building blocks required to develop a business model
integrated with IoT practices. According to their findings, the most frequently building blocks
for manufacturing business are equity, customers, value propositions, data, digital
architecture, stakeholders, and smart objects. All these building blocks can be spotted in the
business canvas of LEGO as well. Besides, it is very important to mention here that
companies cannot produce a great impact just by innovating the products they are offering,
rather a complex and sophisticated mix of different types of innovation is required for
boosting the overall performance of the firm (Keeley et al., 2013). LEGO well knows what
should be done to achieve the marbling of innovations.
Finally, sustainability initiatives indeed add to the firm reputation and competitive advantage
(Cavaleri and Shabana, 2018), and LEGO wins once again. LEGO has clear sets of principles
directed towards Ethics, Children, People, and Environment. LEGO has remarkable
initiatives of producing LEGO elements using sustainable materials and has a target of
reaching zero waste in operations by 2030 (The LEGO Group, 2020). LEGO ranked first in a
2019 Global Corporate Responsibility study, and it was remarked that “The core strength in
corporate responsibility translates into 57 percent of consumers saying they would definitely
buy The LEGO Group’s products” (Global RepTrak, 2020). Nevertheless, the future of smart
toys often suffers from some serious concerns such as privacy issues, health dangers, data
invasion, addiction of internet, electrical smog, etc. (Brito et al., 2018; Grecu, 2013). Apart
from catching up with the technological trends, smart toy manufacturers need to come up
with sustainable solutions to address these issues.
Implications for Theory and Practice
This case study provides some important implications for diagnosing the link of digital
innovations to corporate strategy. First, this study illustrates how digitalization in low-tech
industries can be used to improve main product technology, enriching the meaning of change.
Besides, digitalization enables offering different value propositions for different customer
segments via different communication, sales, and distribution channels. The LEGO case is an
example of the renewed business model created by adding digitalization to product and
marketing programs together. It does not regard the strategy development all over again but
enlarging the source of innovation to achieve the business strategy. In the toy industry, this
means adding intelligence to entertainment, development, and education. In a related vein,
digitalization is one of the most important sources of innovation and its integration into
business strategies is vital today. Second, this case study is a story of a strategy change in
direction from differentiation to specialization by exploiting digital technologies for

Vol. 8, no.3, Autumn 2021 50

product/market extensions. Digital integration certainly functioned to restore painful failures
arising from divergence away from core business. Smart specialization, therefore, seems like
a good option for successful growth. Third and the last, this study demonstrates that
digitization alone is not about technological breakthroughs. As well, this concept lies behind
the sense we attributed to it. The LEGO case teaches us that digitalization not only augments
the function of business but also provides social and emotional connected value.
Conclusion
LEGO is often called the Apple of toys when it comes to innovation, but LEGO has a longer
history than Apple and has been enduring all the challenges efficiently. In a world, where
every kid has a smartphone in the hand, staying attractive as a toy company indeed is a huge
achievement. There are many lessons that we can learn from the case of LEGO:
 Companies should be very careful when they are looking to diversify their businesses
and expand the existing customer segments. If diversification needs different resources
and capabilities than the core business comprises, the performance results are not more
likely to be favorable.
 Companies with empowered teams and dynamic research can explore the potential of
their own core, and hence come up with concentric diversification tactics.
 Crowdsourcing can open a world of opportunities, not only will it bring the company
closer to its customers, but significantly improve existing products as well as marketing
campaigns. The praise of customers has more value than the praise company does for
itself.
 Successful digital transformation is not only about product innovation, but also comes
from enterprise-wide digitization efforts. Therefore, digital infrastructure should be
encouraged as such in the Horizon and BICF initiatives of LEGO.
 Partnerships are becoming more and more important to expand towards new markets.
Building strong partnerships with suitable agents (e.g., LEGO and MIT) helps diversify
investments beyond the core business.
 A complex yet efficient blend of different types of innovation is required for the
success of the firm. Most of the highly innovative firms have different types of
innovations in their models, so does LEGO.
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