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The impact of digitalization on international companies: a case study of LEGO

Working Paper · February 2017

DOI: 10.13140/RG.2.2.23095.01448

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 Master of Business Administration (2015-2017)
European University for Economics & Management
Luxembourg

INTERNATIONAL STRATEGY AND SALES MANAGEMENT

THE IMPACT OF DIGITALIZATION ON INTERNATIONAL COMPANIES

A CASE STUDY OF LEGO

By
Name: Thibaut Wautelet
Matrikel-Nr.: 393538
E-mail address: thibautwautelet@gmail.com

Submitted to
Lecturer: Dr. phil. Christoph Georg Hartmann
Date: 02/19/2017
E-mail address: christoph.hartmann@quarterly-crossing.com
Table of contents

Table of contents ................................................................................................................................................ i

List of figures ...................................................................................................................................................... ii
List of tables ....................................................................................................................................................... ii
List of abbreviations .......................................................................................................................................... ii
Introduction .......................................................................................................................................... - 1 -
Setting the background ..................................................................................................................... - 2 -
Defining digitization vs digitalization in the business context ........................................... - 2 -
The digital globalization era and its impact on business................................................... - 4 -
Digitalization of a business ............................................................................................................... - 7 -
Digitalization moves at the LEGO Group ...................................................................................... - 8 -
Brief history of LEGO Group and its development strategy ............................................ - 8 -
Digitalization moves at the LEGO Group .......................................................................... - 10 -
4.2.1 Digitalization moves around products............................................................................ - 11 -
4.2.2 Digitalization moves in marketing ................................................................................... - 12 -
4.2.3 Digitalization moves around enterprise platforms ...................................................... - 14 -
A financial perspective .......................................................................................................... - 14 -
Conclusion .......................................................................................................................................... - 16 -
Appendix A – Opportunities and threats arising from digital disruption .............................................. iii
References.......................................................................................................................................................... vi

i
List of figures
Figure 1 – Key enabling digital technology trends .............................................................................. - 5 -
Figure 2 – Framework to identify opportunities and threats arising from digital disruption........ - 6 -
Figure 3 – Digital strategy framework ................................................................................................... - 7 -
Figure 4 – Brief LEGO development history .......................................................................................... - 9 -
Figure 5 – The LEGO strategy ............................................................................................................... - 10 -
Figure 6 – Digitalization Moves at the LEGO Group ........................................................................ - 10 -
Figure 7 – The Affinity Pyramid Engagement Map ........................................................................... - 13 -
Figure 8 – LEGO Group: revenue and EBIT (in DKK billions) ........................................................... - 15 -

List of tables
Table 1- Digitalization moves around products.................................................................................. - 11 -
Table 2 – Opportunities and threats arising from digital disruption ..................................................... iii

List of abbreviations
ICT Information and Communication Technologies
IT Information Technologies

ii
 Introduction
Digitization has affected almost every industry during the past decade. Although the impact of
digitization is not new, the unprecedented pace at which digital technologies spread and penetrate
society, consumer life, and businesses is dramatically changing market transactions and is
jeopardizing existing business models. Digitization breaks down industry barriers and creates
opportunities for new business models, which in turn give rise to new and potentially disruptive
markets entrants. For example, Uber via a “simple app” has disrupted the entire mobility industry
and has become the biggest transportation company, all without owning any cars! Moreover,
digitization affects the entire value chain and emphasizes the importance of business ecosystems,
provoking significant changes in the way companies build their competitive advantage.
While digital technologies have unlocked new business opportunities, they have given rise to
challenges, which has triggered the digital transformation of companies. The digital shift is
compelling established organizations to decide whether or not they want to be able to use digital
technologies as an enabler and initiator within the development and transformation of existing and
new businesses. Although many executives and managers in a wide range of industries acknowledge
the strategic imperative of digital transformation, few companies are responding (Fitzgerald et al.
(2013, p. 2)). On the one hand, they lack urgency due to poor understanding of the digital threats
and the business vulnerability to digitization. On the other hand, they are struggling to develop a
vision for digital transformation as they face difficulties to identify the digitization opportunities.
While the phenomenon of digital transformation has received increasing attention in strategic
management literature over the last years, focus has been predominantly put on the development
of framework to identify digitization opportunities and to build a digital strategy. In addition,
examples of successful business digitalization are mainly referred to companies operating in
industries such as media, entertainment and publishing (Apple, Google, Amazon, etc.). However,
there is a lack of understanding how companies which need to rely on physical elements as a core
element (e.g. automotive OEMs) can leverage digital technologies to seize the business opportunities
and reduce their exposure to the threats of the digital disruption.
Therefore, the goal of this assignment is to investigate how digital transformation manifests itself in
an established international company whose core product is primarily physical and to which extent
digitalization impacts its dominant business model. For the purpose, the paper will address the
research question through the case study of LEGO Group and is structured as follows. The first part
defines the terms digitization and digitalization in a business context and explains how digital
technologies are impacting consumer behavior and reshaping the market structure of demand and
supply. Then, the concept of digitalization and digital business is described. The third part is
dedicated to the case study of LEGO Group, including a brief history of LEGO Group development,
an analysis of the digitalization moves and a financial perspective. Finally, the conclusion
summarizes the key learnings from this case study.

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 Setting the background
Over the last years, the digital phenomenon has been intensively discussed in applied managerial
literature and in a broad range of business articles: ‘digital’ has been increasingly associated with
technology, transformation, strategy and business while digitization and digitalization are, now,
frequently used. But surprisingly, an all-encompassing and enough commonly accepted definition of
these concepts is still missing (Hanelt et al. (2015, p. 1314)). While digitalization is often mistakenly
used as a synonym for digitization, executives have very diverse perspectives as what “going
digital” really means, ranging from focus on technology, to new way of engaging customer and
new entirely way of doing business (Dörner and Edelman (2015)). Consequently, it is important to
define these concepts within the scope of this assignment and this section provides a solid conceptual
basis to understand the concept of digitalization and its impact on business industry.

Defining digitization vs digitalization in the business context

While information and communication technologies (ICT) have greatly improved over the last
decade and have diffused in many aspects of our lives, they are often assimilated to digital
technologies. Accordingly, digital technologies are defined as “combinations of information,
computing, communication, and connectivity technologies” (Bharadwaj et al. (2013, p. 471)).
Digitization can be defined as the technical process of embedding digital artifact into technological
objects (e.g. an iPhone application used on an iPhone) and the results are called digitized artifacts
(Pfeiffer and Jarke (2016, p. 4)). At a fundamental level, digitization can also be understood as
the creation of a digital (non-material bit strings) version of analog/physical things such as paper
documents, microfilm images, photographs, sounds, etc. (Oxford English Dictionary (2017))
Consequently, digitized artifacts can be defined as “the assemblages of digital and physical
artifacts that are recognized as an end product to meet customer needs” (e.g. smartphones and e-
books, but also a full range of industrial equipment, textile or car production robots) (Pfeiffer and
Jarke (2016, p. 4)).
In business, digitization is often used from the perspective of processes: it refers to “the automation
of existing manual and paper-based processes through the digitization of information from an
analog to a digital format” (i-scoop (2016)). In this regard, companies should go beyond simply
automating an existing business process by reinventing it, including cutting the number of steps
required, reducing the number of documents and developing automated decision making
(Markovitch and Willmott (2014))! By digitizing information-intensive processes, companies could
achieve up to 90 percent of costs reduction and improve turnaround times by several orders of
magnitude. For example, by digitizing its mortgage application and decision process, a bank cut
its costs per new mortgage by 70 percent and reduced the time to preliminary approval from
several days to just one minute. More generally speaking, by digitization, PwC refers to a digitized
world in which digital technology has been massively adopted through connected services and
devices (Friedrich et al. (2013, p. 4)).

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By digitalization, Yoo et al. (2010, p. 3) mean “the transformation of sociotechnical structures that
were previously mediated by non-digital artifacts or relationships into ones that are mediated by
digitized artifacts and relationships”. Accordingly, digitalization goes beyond the technical process
of encoding diverse types of analog information in digital format (i.e. ‘digitization’): it affects
individuals, companies, economies and societies by individual habits, organizational as well as
operational structures through the adoption of digital technologies, including digital artifacts
themselves. From a business perspective, digitalization can be defined as “the use of digital
technologies and of data (digitized and natively digital) in order to create new offerings and
sources of revenue, improve business, replace/transform business processes (not simply digitizing
them)” (i-scoop (2016)).
The digitalization of a business (i.e. the elements of its value chain) leads to digital business. As a
consequence, a business is considered as digital when it delivers growth and revenues “by creating
unique customer experiences through new combinations of information, business resources and
digital technologies that produce innovative outcomes designed to meet the new expectations of
the digital world.” (McDonald and McManus (2014, p. 5)) On the one hand, digital technologies
change the business environment and the competitive landscape, which threatens companies’
sustainability. On the other hand, new business opportunities, which are enabled by the use of
digital technologies, can be leveraged. In order to seize these opportunities and to stay competitive
in the digital world, companies have to fundamentally rethinking their business model, especially in
the way business is carried out and revenues are generated (Veit et al. (2014, p. 48)). This leads
to the creation of digital business model.
While the digital disruption is reshaping the business industries, an increasing interest has been
given to digital business strategy which can be defined as “the organizational strategy formulated
and executed by leveraging digital resources to create differential value” (Bharadwaj et al. (2013,
p. 472)). The digital business strategy provides a guide for growth in the digital world and aims at
achieving the digital transformation. Applied managerial literature describes digital
transformation as “the use of new digital technologies (social media, mobile, analytics or embedded
devices) to enable major business improvements (such as enhancing customer experience,
streamlining operations or creating new business models)” (Fitzgerald et al. (2013, p. 2)). While
digitalization and digital transformation are often understood synonymously, a digital business is
only a piece of the digital transformation which encompasses all aspects of a company, including
business model, customer experience, operational process and organizational capabilities
(Capgemini Consulting (2017)).
In summary, there is no digitalization and no digital transformation without digitization. In general,
digitalization is seen as the road of moving towards digital business and digital transformation, as
well as the creation of new revenue streams and offerings while doing so.

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 The digital globalization era and its impact on business
Digitization is not anymore just an emerging trend, and it is changing the economics of globalization
in several ways: who is participating, how business is done across borders, and where the economic
benefits are flowing. This digital shift is reflected in the figures depicting the evolution of the global
flows of trade goods, finance and data over time. Accordingly, while flows of goods and finance
have lost momentum over the last decade, global data flows have grown 45 times larger since
2005 (Manyika et al. (2016, p. 4)). In this regard, as the economy is shifting from industrial-based
towards knowledge-based, cross-border data flows are now generating more economic value than
traditional flows of traded goods.
Digital platforms (e.g. eBay, Amazon, Facebook and Alibaba) are ones of the key actors
participating in the digital globalization. On the one hand, they change the economics of doing
business across borders, minimizing the cost of international interactions and transactions.
Accordingly, they enable small businesses to reach new markets, which supports economic growth
everywhere. On the other hand, 360 million people take part in cross-border e-commerce while
around 900 million are active on social media. In overall, McKinsey & Company estimated that
global flows have contributed to an increase of 10 percent of the world GDP over the last decade
(Manyika et al. (2016, p. 10)).
Among the biggest emergent digital technologies, one can cite cloud computing, social media,
mobile technology and big data. As illustrated by Figure 1, digital technologies enable to unlock
opportunities (which were not accessible previously) such as improved performance of the supply
chain, enhanced customer experience, faster decision-making and responsiveness and real-time
interaction from everywhere. Moreover, the key digital technology trends are driving dramatic
changes in the society as well as in the infrastructure of many companies operating in different
industries and sectors (Hanelt et al. (2015, p. 1315)). On the one hand, the increasing adoption of
digital technologies is re-shaping the way people live, interact, consume and work, breaking
barriers of time and space (McDonald and Rowsell-Jones (2012, pp. 84–86)). While home working
was almost impossible 20 years ago, digital technologies have enabled the creation of co-working
office spaces, building creative hubs where start-ups, entrepreneurs, free-lancers can work and
interact. Moreover, as digital is embedded in everyday activities such as running, driving and
communicating, the perception of these technologies is changing (Yoo et al. (2010, pp. 3–4)). For
example, this digital lifestyle impacts consumers’ expectations for new functionalities and features
in the car (mobility services like car sharing, increased safety with emergency control system, etc.).
On the other hand, digital technologies have boosted product and service innovations, shortened
product life cycles, and enabled cross-boundary industry disruptions. For example, in the financial
sector, internet and mobile technologies have fundamentally altered the traditional way of investing
in stocks, moving the user experience from phone call to a full electronic brokerage service.
Moreover, e-commerce through the digital platforms such eBay, Amazon and Alibaba have
disrupted the structure of retail industry by offering a direct and customized channel to the

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customers at lower transactions costs. These platforms have also enabled small businesses to enter
the retail market, reshaping the competitive landscape. While the media, publishing and
telecommunication industries have been highly affected by digital technologies, the digitalization is
increasingly impacting industries in which products are primarily physical (e.g. manufacturing,
automotive). For example, General Electric is embracing the industry 4.0, by connecting machines
via remote sensors, mobile communications and analytics. By doing so, GE business model is being
reshaping, as the digital information flow leads to the implementation of advanced products and
services with a higher performance.
Figure 1 – Key enabling digital technology trends

Source: Accenture (2014)

Key digital technology trends presents dramatic opportunities for new players and real threats in
all industries. Accordingly, digitization lowers the barriers to entry industries and new actors are
putting at risk the existing business models of established companies (Mühlestein (2016)). For
example, the automotive industry has recently witnessed the entries of ICT companies such as
Google, Apple and Microsoft, as vehicles are increasingly getting connected. As digitization is
reshaping the competitive landscape of the companies, it is crucial to understand how vulnerable
are their existing business model to digital disruptions and how they can leverage the digital
technologies to address it. In this regard, McKinsey & Company has developed a framework1 (see
Figure 2) to help established companies to identify the opportunities and the threats in the increasing
digitized world, as well as to define the biggest digital priorities (Dawson et al. (2016)).

1 The Appendix A provides a detailed explanation of the framework components, including a matrix of the
opportunities and the threats.

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 Figure 2 – Framework to identify opportunities and threats arising from digital disruption

Source: Dawson et al. (2016, p. 4)

Digitalization can disrupt industries when it modifies the nature of demand, supply or both. Demand
refers to the consumer behavior and needs while the supply should be understood from the company
perspective (delivery of products, services, solutions to customers). The top half of the framework
illustrates the modest changes in market demand and supply. Digital technologies enable the
creation of new markets, by combining newly exposed supply with newly undistorted demand. For
example, Uber has disrupted the mobility industry by creating a new market “ride/sharing
mobility”. Through its App and its algorithm, Uber has brought onto the roads the cars which were
underutilized previously (“unconstrain supply”) while increasing the ease of getting a ride (“undistort
demand”). The lower half of the matrix explains more extreme shifts, either through new and
enhanced value propositions for customers, or through reimagined business systems, or through the
creation of entirely new value chains and ecosystems by implementing platforms. For example, as
customers’ expectations are rising in the digital world, it seems natural to expect to buy insurance
only for the precise use and location of a car and no longer be happy with just a discount for having
it parked in a garage. In this regard, the company which has the best access to information will be
able to underwrite insurance and disrupt the market. It could be an insurance company, or OEM
company or ICT companies like Apple or Google.

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 Digitalization of a business
As defined in section 2.1, the digitalization of a business implies the digitization of the elements of
the value chain as well as the creation of new sources of revenues enabled by the use of digital
technologies. In this regard, Accenture has developed a comprehensive digital strategy framework
with two strategic options: partial digitization of the existing value chain and definition of new
business models (see Figure 3).
Figure 3 – Digital strategy framework

Source: based on Gissler et al. (2016, p. 3)

The partial digitization of the existing value chain is considered as a crucial prerequisite to create
and capture the full potential of digital value. In this regard, two dimensions need to be considered.
On the one side, companies can increase their revenue and profitability by digitizing the customer
experience in marketing & sales (e.g. predictive and personalized offers, online sales, etc.) and
aftersales (e.g. predictive maintenance, 3D printing of spare parts, digitization of face2face
experience, etc.). On the other side, by moving towards a digital enterprise, organizations optimize
their internal costs and gain efficiency through the digitization of their operations and processes.
However, being a digital business is “more than equipping the field sales force with iPads or striving
for “Likes” on Facebook or even putting more of the organization’s data in the cloud.” (McDonald
and McManus (2014, p. 2)) As a matter of fact, deploying customer mobile apps may increase
transaction activity without growing revenues because customers continue old behaviors using the
new channel.

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As a consequence, companies have to develop new business models which can create and capture
value by leveraging the digital technologies. While digitization is a crucial prerequisite for the
digitalization of a business, information is the key factor in digital business models. Information is
usually the basis to develop differentiated customer experiences and to improve the efficiency of
the operations which deliver these experiences (McDonald and McManus (2014, p. 8)). While
Accenture’s framework puts a focus on the enterprise’s value chain, companies should extend the
scope of their digital business strategy “beyond firm boundaries and supply chains to dynamic
ecosystems which cross traditional industry boundaries” (Bharadwaj et al. (2013, pp. 474–475)).
The importance of multilateral cross-company cooperation is further emphasized by the fact that
most companies currently lack the necessary competences to succeed in an increasingly software-
and IT-dominated environment. For example, the digitization of Nike’s product development was
supported by Apple’s iOS and automotive OEMs are seeking for partnership with Google,
Microsoft and Apple in order to drive the race to autonomous vehicles.

Digitalization moves at the LEGO Group

Brief history of LEGO Group and its development strategy
The LEGO Group is a Danish family-owned business whose history started in 1932 in the city of
Billund in Denmark. Its founder, Ole Kirk Kristiansen, was a carpenter who started out making
wooden toys. The brand LEGO was established in 1934 and the name LEGO comes from two Danish
words “leg godt”, which means “play well” (The LEGO Group (2017)). While LEGO was initially
making wooden toys, it is only in 1958 that Godtfred Kirk Christiansen, son of the company founder,
created the LEGO brick. Since then, LEGO Group has become one of the world's leading
manufacturers of play materials for assembly, selling LEGO products worldwide in more than 140
countries. Its headquarters are located in Billund and the main offices in the USA, UK, China and
Singapore. Over the years, it expanded its manufacturing capacity by implementing new factories:
Czech Republic (2000), Hungary (2008), Mexico (2008) and China (2017). While now more than
15,000 employees are working at LEGO Group worldwide, the company is still owned by the Kirk
Kristiansen family.
While the LEGO Group has enjoyed a double-digit growth in revenues over the last years, it was
not an easy journey to get there! A brief graphical LEGO development history is shown in Figure 4
in which three main development phases have been identified. Up to the 1990s, the LEGO Group’s
development strategy has been focusing on developing new products (LEGO Duplo in 1967 and
LEGO train system in 1966) and new thematic series (LEGOLAND Space in 1979 and LEGOLAND
Pirates in 1989), on expanding internationally to new markets (e.g. it started operations in USA in
1973) and then on implementing new technology (e.g. optimization of operational activities in
factories). Between 1993 and 2004, the brick company started to face some general troubles with
sales (Elmansy (2014)). On the one hand, LEGO toys were already on every shelf as the company

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was reaching its natural growth cycle. On the other hand, the toy company was facing growing
competition from video games and the internet. In order to keep growing, the company produced
more different products, but the sales did not grow as expected. This leads to an increase of
complexity and production costs, which were far above the competition manufacturing in Asia at
much lower cost (Ringen (2015)).
In response to this financial crisis, LEGO has focused on diversifying its products offering with moves
into such areas as theme parks, apparel and video games. Moreover, the toy company started to
collaborate with production companies of famous movies such as Star Wars and Harry Potter in
order to create new bricks. While the themed products were a short-term success, the diversification
strategy appeared to not actually solving the company’s problem. After several financially difficult
years in a row between 1998 and 2004, the toy brick manufacturer was on the verge of
bankruptcy in 2004. “Lego Group executives estimated that the company was destroying
€250,000 ($337,000) in value every day.” (Oliver et al. (2007)) A major organizational
transformation and a new business strategy were needed to save the LEGO brick. This
transformation was set off by a replacement of the CEO, Kjeld Kirk Kristiansen, (grandson of Lego
founder) in October 2004. Jørgen Vig Knudstorp, who had initially joined the LEGO Group as a
business strategist in 2001 from McKinsey & Company, became CEO at the age of 35 years old.
Figure 4 – Brief LEGO development history

Source: author

Knudstorp established a new strategy named “Shared vision” with the vision to rebuild the LEGO
brand identity as a creative toy-manufacturing enterprise. One pillar of this new strategy was to
come back to the basics, meaning the LEGO brick which represents the identity of the company. In
this regard, the company “lost faith in the brick” through its diversification strategy (International
Trade News (2016)). However, at the beginning, the focus was mainly on surviving and reaching
financial stabilization. Accordingly, several key moves have been done: production costs reductions
through reduction of complexity and optimization of supply chain, closing non-profitable product

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lines (e.g. LEGOLAND parks sold to Merlin entertainment), and internal restructuration (downsizing
the organization from 8500 to 5000 employees). After achieving its stability in 2008, the company
shifted the focus of its strategy on growth. Since 2009, leveraging digitalization has been a critical
strategic priority at the LEGO Group, as illustrated by Figure 5 which depicts the core pillars of
LEGO business strategy.
Figure 5 – The LEGO strategy

Source: El Sawy et al. (2016, p. 145)

Digitalization moves at the LEGO Group

As mentioned in the previous section, the LEGO Group has identified digitalization as one of the
core pillars of its business strategy. This section aims at describing the main digitalization moves
implemented by the LEGO Group over the recent years, which are classified in three focus areas
and summarized in Figure 6.
Figure 6 – Digitalization Moves at the LEGO Group

Source: author

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 4.2.1 Digitalization moves around products
As part of its digitalization initiative, the LEGO Group has been focusing on the combination of
physical and digital play while still keeping the focus on its core business, the brick. These
digitalization moves around products are summarized in Table 1. The percentage of these hybrid
products has been growing over the last years and is expected to continue to raise (Milne (2015)).
In 2011, LEGO Life of George, the first product combining digital and physical play, was launched:
it allowed customers to construct physical LEGO designs which then were scanned into the game (PR
Newswire (2011)). It was followed by LEGO Fusions and LEGO Dimensions, which allow also the
combination of real building experience with bricks and virtual games. But, as part of these new
product offerings, the digital component is seen as an extra layer enhancing the play experience.
Table 1- Digitalization moves around products

Challenges Digitalization Move

Combining Physical and digital Play in Products
New customer needs (e.g. LEGO fans wanted Hybrid products combining the digital and physical
to build their own creations); play experience (e.g. LEGO Life of George in 2011,
Gap between digital media and physical LEGO Fusion in 2013 and LEGO Dimensions in 2015)
LEGO bricks.
Crowd-Sourcing Innovation and Developing LEGO Community Platforms
Challenge to ensure that LEGO products are Digital platforms for communities of LEGO fans for
“loveable” and fit the target customer needs each customer segment:
which are constantly changing. - LEGO ideas
- LEGO Club for children aged 4-13
- LEGO Network (social networking site for children
to share LEGO creations)
- ReBrick and Teen Fans of Lego (TFOL)
- Adult Fans of LEGO (AFOLs)
Source: author

Furthermore, LEGO Group has leveraged digital technologies to “crowdsource” its product design
through communities of fans on the internet. Accordingly, since the launch of LEGO MINDSTORMS2
in 1998, the company has launched numerous digital platforms to strengthen its connections to the
large communities of LEGO fans and to build up the collaboration and involvement of passionate
builders into the development design process of new products. “By tapping into the knowledge and
enthusiasm of thousands of longtime users of its products, Lego has been able to enhance its product
offerings — without increasing long-term fixed costs.” (Antorini et al. (2012, p. 73)) For example,
the platform LEGO Ideas was launched in 2008 and allows users to create and submit product

2 LEGO MINDSTORMS is the robotics platform created in collaboration with MIT’s Media Lab and is considered as the
first hybrid digital/physical LEGO experience.

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designs which are subsequently voted on by their peers. If the design received 10,000 and more
votes, it goes to a LEGO review board. If the project is chosen, it will be developed in collaboration
with the creator who receives 1% of net sales. One of the latest example of such project is The Big
Bang Theory Apartment set.

4.2.2 Digitalization moves in marketing

In the digital world, marketing is not anymore a push activity for product information (i.e. sell more
products), rather plays a pull role. It is more about engagement and interaction with customer
communities through the use of social media, website interaction and community platform. Moreover,
in a digital environment, marketing is about improving both digital and physical product experience.
Overall, the goal is to leverage the digital technologies in order to engage more its different
customer segments, to enhance brand affinity and customer experience, which leads to increase
customers’ satisfaction and loyalty as well as revenues.

4.2.2.1 Omni-channel marketing

“Becoming truly omnichannel is demanding for an organization.” (Bianchi et al. (2016, p. 8)) But it
is worth the efforts as the return on investment can be high. Customers are far more diverse than it
seems, not only in their needs but also in how they want to meet those needs. Therefore, in order to
build a truly omni-channel customer experience, companies have to deeply understand the journey
their different customers follow among the channels. By doing so, it enables to better integrate
digital channels into traditional physical channels, which leads to an increase of customer satisfaction
and also sales revenues. As a consequence, in its digitalization efforts, the LEGO Group has stepped
up the use of various digital channels, with the goal to increase brand awareness and customer
engagement as well as to enhance customer experience. By doing so, LEGO Group committed to
embrace the complexity of omni-channel marketing. As the toy company continues to discover new
ways of using digital marketing channels as part of its digitalization, the following describes an
exhaustive list of the main physical and digital channels used to reach out the LEGO customers:

• Physical channels: retail stores, owned LEGO stores and brand presence through
LEGOLAND parks and LEGOLAND Discovery Center;
• Digital channels:
o Social media, company website, dedicated website designed for fan groups;
o Interactive story telling within trailer online games to engage with fans around new
characters;
o Augmented reality product catalog: via a mobile app, the customer can scan a
product box and visualize an animated rendition of the construction set being
assembled to completion;
o Partnership with Warner Animation for the realization The LEGO Movie in 2014. The
animated adventure comedy film based on LEGO construction toys became a $486
million global blockbuster. In addition to enhance brand affinity, it has provided

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 additional source of revenue through the sales of the collection of LEGO sets in
connection with the movie.

4.2.2.2 Increased Digital Engagement with the LEGO community

As mentioned in the previous section, LEGO Group has invested considerable resources to develop
community platforms for each of its customer segments, from young kids to grown-up fans. By
maintaining a culture of engagement for its communities, the toy company aims at encouraging
LEGO users to move up the affinity pyramid (see Figure 7). “The more they move up that affinity
pyramid through digital engagement, the more effective personalized micromarketing becomes”.
(El Sawy et al. (2016, p. 148)) Collecting micromarketing data enables the company to better
understand the path to purchase of its digitally-connected customers and fans. It leads to the
development and implementation of advanced services (mentioned earlier) to provide a unique
customer experience. Therefore, increased engagement with a customer community drives both
innovation and revenue growth.
Figure 7 – The Affinity Pyramid Engagement Map

4.2.2.3 Globalizing Digital Assets

While the LEGO Group is founded upon its own intellectual property, its licensed property business
model has become increasingly important to the company since the 1990s, which enables to enhance

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product offerings and to increase brand awareness. Its licensing business is considered as one of
the key contributor to its profitability and its continuous growth since the 1990s (Cioletti (2014)).
Moreover, as combined physical and digital play has increased, the LEGO Group is seeking to
globalize the digital assets in order to take advantage of economies of scale and scope around
the world (El Sawy et al. (2016, p. 148)). However, it has brought up challenges of global
governance around the digital assets. For example, trailer online games (mentioned previously)
may need to be deployed to several major markets around the world with multiple languages.

4.2.3 Digitalization moves around enterprise platforms

The initial digitalization move has been focusing on improving the efficiency of operational activities
by continuously improving the enterprise system platform. In this regard, one of first key milestones
was to develop and bolster the existing LEGO Enterprise IT platform which started in 1999 with the
implementation of a company-wide ERP system in order to increase the efficiency of business
processes. However, in 2004, the LEGO Group decided to restructure its Enterprise IT system in
order to improve data-sharing across the company. LEGO Corporate IT augmented the enterprise
platform by replacing the complicated user interface with personalized simple apps for employees
to ensure that they only get what they need in their tasks according to their individual jobs. These
more friendly intuitive graphical users interfaces allowed employees to quickly access required
information.
While the IT function has traditionally been considered as a support function, all the digitalization
moves for product ecosystems as well as those for marketing (outlined in previous sections) require
a restructuration of the IT organization and a new set of skills. In order to improve the business
responsiveness, the Corporate IT has been organized into four line functions from which three work
directly and very closely with the business: Business Enabling, Marketing, Operations and Technology
and Security. Each of the three business-oriented application functions has its own CIO and the more
internally and technologic oriented function has a CTO. Moreover, due to the strategic need for
increased digitalization, the LEGO corporate IT organization has expanded its staff by 100 people
in the last three years to more than 600 employees (El Sawy et al. (2016, p. 151)). In addition,
LEGO adjusted its hiring policies to help the flexibility needed in dynamic digitalization: these
policies were adapted towards a high preference for people who are adaptable to task and
position changes. Accordingly, rotation programs of the employees throughout the organization
were implemented in order to build wider exposure in terms of knowledge and expertise. Finally,
LEGO IT corporate encourages open innovation and co-innovation activities with external partners
to bring complementary expertise.

A financial perspective
While it is difficult to evaluate the direct financial impact of LEGO’s digitalization moves, no one
can deny that they have contributed to its recovery and growth (El Sawy et al. (2016, p. 154)).
While the company had reported losses of $228 million on sales of just over $1 billion in 2003, the

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company achieved $4.5 billion of revenues and profits of $1.5 billion in 2013 (Ashcroft (2014,
p. 22)). Moreover, as illustrated by Figure 8, since 2009 when the LEGO Group started its
digitalization initiatives, the company has enjoyed a double-digit growth in revenue and EBIT.
Furthermore, while LEGO was only the 4th largest toy manufacturer in sales volume in 2011, after
Mattel, Bandai-Namco and Hasbro, the brick company is currently the second largest toy company
in the world just before Mattel. This recent growth is even more remarkable, considering that Mattel
sells a huge range of products (e.g. Barbie, Hot Wheels, Fisher-Price) while Lego mostly sticks to
variations on a single toy.
Figure 8 – LEGO Group: revenue and EBIT (in DKK billions)

Source: author based on Ashcroft (2014, p. 26)

Note: Please note that the financial figures of LEGO Group are reported in Danish Krone (DKK). On 02/19/2017, 1
Danish Krone (DKK) was equal to 0.14 U.S. dollars ($).

- 15 -
 Conclusion
As the society and the economy are becoming increasingly digital, the rules governing the market
demand and supply are entirely changing. While digitization is affecting the business environment
and the competitive landscape of every industry and sector, the digitalization of the business aims
at not only surviving, but at thriving in this new social and business reality. However, becoming a
digital business is not just digitized marketing or digitized operations! Accordingly, the leverage of
digitalization opportunities implies creating of new customer value propositions, remodeling business
operations and enlarging business model scope and scale by identifying new customer channels
and entering new markets. Therefore, digital transformation is complex, especially in the case of
established companies whose core product is primarily physical.
The case study of LEGO Group has emphasized the importance of thinking digitalization
comprehensively. LEGO’s digitalization has moved on many fronts, both in terms of products,
marketing and their own organization. This combination makes them strong! While maintaining the
physical LEGO brick as their core business, LEGO has made it even more attractive and exciting by
integrating physical and digital play. Although digital component is seen as an extra layer on the
top of the physical product, it enhances the customer experience. Furthermore, by maintaining a
culture of engagement for its diverse community platforms, LEGO Group has gained insights of the
marketplace and a deeper understanding of the customer journey. This customer-oriented approach
has driven innovation and revenue growth. On the one hand, LEGO integrates the best ideas of
their community users into future products. On the other hand, the toy company develops advanced
digital services to enhance the customer journey and to build customer loyalty.
The implementation of these digitalization moves around product and marketing would have been
almost impossible without a reorganization of LEGO’s corporate IT. While IT capabilities are often
neglected when discussing the digitalization of a business, a closer collaboration between IT function
and the business is crucial for successful digitalization. In this regard, LEGO has restructured its
Corporate IT organization to increase the business responsiveness and its Enterprise IT platform to
improve the efficiency of internal operations. Furthermore, an effective digitalization initiative
requires conscious effort in building up the right skill set and making mind-shifts. Therefore, LEGO
has changed its hiring policies and has implemented internal development programs, in order to
build an attractive and creative work place.
Finally, despite the hype around innovative digital technologies, most organizations still have a long
way to go in their digital transformation journeys. In this regard, leadership is essential, as illustrated
by LEGO’s case study! Through his vision to rebuild LEGO brand affinity after its near-death in
2004, Jørgen Vig Knudstorp has given a strategic priority to leveraging digitalization. This digital
transformation has enabled the Danish family-owned company to recover and to benefit from a
double-digit growth over the last years. Therefore, the key to digital transformation is re-envisioning
and driving change in how the company operates! It is not just a technology challenge, but more
importantly a management challenge.

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Appendix A – Opportunities and threats arising from digital disruption
The Appendix A provides a detailed explanation of the framework developed by McKinsey & Company (see Figure 2) introduced in
section 2.2. The Table 2 describes each component of the framework as well as the corresponding opportunities and threats.
Table 2 – Opportunities and threats arising from digital disruption

Threats Opportunities
Changes in demand and supply
The business is vulnerable to these changes if: The business can leverage these changes by:

Unfulfilled demand and growing - Cross-subsidization of customers
expectations:
As digital technologies affect all aspects of the
consumer life, today’s consumer enjoy newly
empowered behaviors. People are growing
accustomed to having their needs fulfilled,
where and when they want it, and often gratis
(or at the lowest price available).
- Customers have to buy the whole
product/service although they only need one
part of it (e.g. whole album vs individual
songs);
- Customers face difficulties to get what, where
and when they want it.
- More accurate and transparent pricing system
(e.g. Major League Baseball deployed
dynamic pricing of tickets to better reflect
supply and demand for tickets to individual
games);
- Improved buying process “to make it now and
easy” (e.g. enhanced search and filter tools,
streamlined and user-friendly order
processes, smart recommendations engines);
- Custom bundling of products (e.g. buy
insurance only for the precise use and location
of a car).

Exposing new supply: - Customers use the product only partially; - Digitize physical resources (e.g. Number26, a
- Production is inelastic to price; digital bank, replaces human labor by digital
Digital technology makes accessible sources of
- Supply is variable or unpredictable; processes);
supply which were previously impossible (or at
- Fixed or step costs are high. - Engage in the sharing economy.
least uneconomically) to provide. It allows to
optimize the utilization rate to its maximum.
(e.g. Airbnb unlocked the supply of lodging)

iii
Make new markets: Existing markets are vulnerable if transactions - Real-time and transparent exchange of
are difficult for customers: information (Uber took a large part of market
By connecting unused supply with latent
of taxi fleets due to their lack of price
demand, market makers cut into the market - High information asymmetries between
transparency);
share of established companies. customers and suppliers;
- Disintermediation & automated transaction
- High search costs, fees and layers from
processes;
intermediaries;
- New transparency through search and
- Long lead time to complete transactions.
comparison tools (e.g. iFixit makes costs of
providers more transparent).

New and enhanced value propositions:
Due to rising customer expectations in the
digital, companies have to create smarter,
seamless and secure customer experiences.
- Information and social media could enrich the - Combine physical and digital experience, by
offering (product or service); embedding/improving the connectivity of
- The offer consists of a physical product which physical devices, by layering social media on
is not yet “connected” (e.g. thermostats); top of products/services, and by extending
- Long lag time between products or services the offering through digital features; (e.g.
purchase/order and delivery; Nest’s next-generation thermostats with
- The customer has to go and get the product remote real-time Internet capabilities)
(e.g. rental cars, groceries). - New delivery and distribution models.

Hyperscaling platforms:
Platforms enable the creation of entire new
value chains and ecosystems. They enjoy huge
operating leverage from process automation,
algorithms, and network effects (Examples:
Google, Apple, Tencent).
- Existing business models charge customers for - Platforms enable to upsell and cross-sell
information; products and services without human
- Interactions between users and suppliers in an intervention, which offers financial
industry are governed by multiple different advantages;
tools; - Build new entry barriers, such as the
- Potential for network effects in the industry is information barrier created by the platform
high. (e.g. GE Healthcare’s platform, Centricity
360, which enables patients and third parties
to collaborate in the cloud).

iv
 Reimagined business systems: - Redundant value-chain activities (e.g. - Digital channels and virtualized services
repetitive manual work); enable to go direct to customers, removing
New value propositions require rethinking of
- Well-established physical distribution or retail intermediaries and value-chain redundancies
business systems. Digital technologies alter the
networks. (e.g. New York Times virtualized its
way value chains work, enabling companies to
newspapers to provide new user experience
modify their supply structure. It enables to
and reduce distribution/production costs).
reduce both fixed and variables costs.

Source: based on Dawson et al. (2016) and Mühlestein (2016).

v
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