Transforming from a traditional to a digital operating model doesn’t mean adding another department to the company with a few Machine Learning engineers and data scientists that receive data from the other departments.

Digital transformation means embracing data and AI and putting them at the company’s core.

Utilizing the benefits of the digital operating model requires a fundamental change in the company. To move beyond traditional economies of scale, we need a data-centric operating model supported by an agile organization able to bloom in a dynamic industrial and global framework.

In 1988 Lego’s patent protection for its brick expired, which led to a flood of copies entering the market. Lego introduced more designs, colors, and overall diversification in its business to differentiate itself.

Management let the designers roam freely, which increased the number of SKUs from 6000 in 1997 to over 14,000 in 2004. The designers did not consider the material cost and logistics, which led to immense complexities, a slowdown in production, and inefficiencies in Lego’s supply chain.

In 2002-2004, Lego was at the brink of bankruptcy.

Enabling Digital Potential - Brick by brick

Most of us know the Lego group for the fantastic sculptures, playing grounds, and empty canvas on which children and adults can let their imaginations roam freely.

Child playing with Lego — *LEGO as the window to our imagination - also pretty good at thinking digital first.*

LEGO as the window to our imagination - also pretty good at thinking digital first.

LEGO is a poster child of a company that embraced the digital-first mindset. How early? A few years after Bezos initiated the digital-first approach at Amazon, Lego followed suit in 2004, rearchitecting its operating model from the ground up.

In 2016, Lego started another drastic change in its operating model, changing its online and back-end presence and going from a hardwired monolith to an API-first system.

Lego on the bring of bankruptcy - 2004

At the turn of the millennium, Lego fell victim to its size, complexity, and distributed platform and data system. In my previous article - Data and AI at the Core of the Digital Transformation - I described why increasing size and complexity is the pitfall for most companies.

Lego’s leaders let designers roam freely, creating one Lego model after the other, and during the process, they increased their SKUs (Stock Keeping Units - A distinct type of items for sale) from 6,000 in 1997 to 14,000 in 2004. Lego was ordering items from more than 11,000 different suppliers because of the sheer number of colors, types, and sizes the designers implemented into their models.

Looking at Lego’s operating profit during 2003 and 2004, it made losses. It did so starting in 1997 and in 2003, Lego was at the brink of bankruptcy if Kjield Kirk Kristiansen didn’t invest his own money into the company.

In 2004, the former owner of the LEGO group and member of the founding family, Kjeld Kirk Kristiansen, stepped down as CEO and appointed former McKinsey consultant Jorgen Vig Knudstorp as his follower.

Jorgen quickly identified Lego’s supply chain and the sheer quantity of variation as one reason for its unprofitability. He reduced the variety of designs, cleaned up Lego’s supply chain, and collaborated closer with retail customers.

Jorgen went further and initiated a redesign of Lego’s underlying technology infrastructure. He tore down operational silos and implemented a company-wide tech-first approach that set platforms like SAP at the center of logistics, sales, IT, and manufacturing. He implemented an operation team consisting of members of each of the groups mentioned above that met regularly to simplify the operations and Lego’s supply chain.

The supply chain (in- and outgoing) was at the core of the change. A murky supply chain did not allow Lego to move its products to the right places at the right time.

Lego’s new leadership team improved revenues by 11% by digitizing supply chain processes, centralizing information streams, collaborating with retail customers, breaking down company siloes, and promoting team interoperability.

Lego Made Digitization Part of its Culture

Lego created the Lego Enterprise platform, a central hub for resource planning, HR, hardware, software, supply chain, and more. It became the foundation of Lego’s business processes and allowed effective planning and execution based on data.

Also, to further break down company silos, Lego reorganized from five business areas to three. Namely:

Operations → Procurement, planning, manufacturing, distribution, and operations
Marketing → commercial functions like product development, innovation, marketing, and sales
Business Enabling → support the overall business of LEGO Group

While the components remained the same, Lego underwent an architectural innovation.

Architectural innovation enables new communication streams throughout the company, which allows people to exchange information that was previously filtered due to the architectural needs of the siloed company.

We emphasize collaboration, cohesiveness, and coherent choices to a very large extent - to such a large extent that many of our employees call it extremely complex. When you strive for coherency, it sounds so nice in theory. But the reality is that it means people really need to include many more variables in the equation when they make a decision because they can’t make decisions in isolation. But we actually stress to our managers that you can’t run a manufacturing site in China or a business in China without considering what the global operating model is and what the global system requirements are.

Jorgen Vig Knudstorp, CEO Lego Group

The changes Knudstrop initiated turned Lego’s operations around and made it profitable by centralizing governance and making data-based decision-making easier.

In 2011, Lego extended it Enterprise Platform with a product lifecycle management (PLM) system. The PLM system within Lego’s enterprise platform allowed them to accelerate product launches.

The enterprise platform and PLM system supported better master data management in the supply chain. They increased the automation of product launches and lifecycle management, which improved product output by an estimated 50%. A better overview and data system exposed the costs and manufacturing structure of new products and allowed for better decision-making.

Embracing the Digital Enterprise - Service-Oriented Architecture

Lego was already a digital-first company, but Knudstorp knew that embracing the digital operating model meant more than just putting a common platform at the company's core.

While the manufacturing, logistics, and supply chains were all brought under the hood after the digital-first principles, Lego’s online presence was lacking.

Contrary to the real world with Lego bricks, in the digital world, services and applications turn obsolete quickly and have a much higher turnover. To faster adapt to customer demand, services need to be inserted and deleted from Lego’s platform and must be accessible around the clock

Between 2017-2018, Lego introduced its Collector’s Edition Star Wars Millennium Falcon Set. During the launch, Lego’s website crashed, managing just 7 orders/second.

Knudstorp and its team realized that the traditional on-premise data center approach, with a monolithic platform on top, was a nightmare to scale and support for peak demand.

Moving away from this monolithic system design, Lego adopted a headless architecture that separates back-end processes from the front-end UX. Using an API-first approach, Lego can innovate quickly, have shorter development cycles, and have faster feedback loops.

This new architecture positively impacted the product development teams. Instead of a siloed approach where Lego had front-end and back-end teams, agile teams with back-end and front-end developers worked closely together to implement the services and content they wanted.

By becoming a data-centric company, Lego improved its services with an API-focused architecture.

Lego Engagement Platform

Realizing and learning how the digital world works, in 2016, Lego reached the limits of its Enterprise platform that had been developed and nourished for a decade.

Lego needed to make changes to the underlying systems to exploit new digital capabilities like high-speed internet, hyperscalers, and higher computing power per dollar.

These capabilities allow Lego to implement digital demands like continuous delivery of functionality, insert and delete functionality, and 24/7 uptime.

The engagement platform allows connecting basic functionalities coupled with microservices to allow smaller teams worldwide to develop new features, services, and applications.

Lego’s new engagement platform allowed agile teams to implement, adapt, or remove existing services on the go.

Conclusion

A hardware and manufacturing-focused company like Lego exploited digital capabilities to elevate its decision-making and business processes.

Lego went from near bankruptcy to a global imagination powerhouse powered by data and digital operating models that run the core of the business.

At the core of the change was closer collaboration and communication between Lego's departments. Creating data pipelines and a centralized platform, allowed for cost and efficiency oversight which impacted Lego's profitability and growth.

Lego embodies the meaning of digital transformation with its small and interconnected executive sweet, an API-first approach, and putting data at the core of the company. This enables teams worldwide to work on customer-facing problems instead of internally-facing problems with bureaucratic inefficiencies.

Lego’s Digital Transformation