Product development and portfolio management processes at LEGO
Developed by Bálint Pénzes
LEGO as a well-known company has a great challenge to keep their role on the rapidly variable market, as the developer of one of the most innovative toy world-wide. The name of the company, LEGO was adopted from the Danish phrase “leg godt”, meaning “play well” in 1934. The main product from 1949 is their interconnected plastic bricks and brick sets, which are sold in more than 130 countries . Throughout of these decades LEGO released a wide-range of different brick sets and made an extremely large product portfolio within this type of toy. In the meantime, a unique product development process and organization of the project teams has developed, which is also called as the LEGO model. Moreover, the extensive product portfolio is around 250 different brick sets which are continuously optimized and renewed, as LEGO`s initiative is 60% novelty in their portfolio year by year.
Therefore, in the frame of this study the focus is on these special processes and models regarding the product development progress, the decision making process in the frame of portfolio management and also the design for manufacturability at LEGO. The relation of the organizational structure and the product development is also analysed in order to define how the different projects are relating to the existing and new product platforms.
The so called Stage-Gate Model is also an important part of the study, which is used by LEGO to ensure the process of ideation until the project implementation and the commercialization of the product. This portfolio management approach is a significant tool to support the project prioritization and early key decisions. Within this process the manufacturability will be also examined as one of the major requirements of the product development.
In addition, the portfolio management and its alignment of the LEGO main strategy is investigated regarding the product variety, market trends, expectations of retailers and the customer satisfaction as significant aspects.
Keywords: Portfolio management; LEGO; Product development; Platform production; Manufacturability; Product portfolio; Stage-Gate model
The LEGO model and the development process
As it was mentioned above the requirement of a renewable, optimized portfolio year by year means a huge challenge for LEGO in case of product development  and portfolio management. To understand how the LEGO model works and answers to this challenge the understanding of their organization in relation of project management and development process is indispensable.
In general, LEGO has a matrix organization profile as it is illustrated in Figure 1.
This organization structure means, that employees are grouped into teams, which are relating to those projects that they are involved. In the meantime, because LEGO develops platform products, these teams are also organized around various platforms. Therefore, this structure defines that the project and portfolio management is highly relating to these platforms and the incorporation of them is a key issue to ensure the appropriate performance of the project.
The existence of different portfolios always raises challenges for an organisation across different product programs, which is the case at LEGO. However, this might be motivated by the possible economic advantages in production . Timing also can be crucial, namely because of the dilemma between to develop a solution by a particular platform team or to wait for the other platforms. Therefore LEGO applies a highly synchronized development process through different projects to avoid the above detailed problems. Between the different platforms the developers are shuffled and changed, thus employees can gain various experiences from different projects and platforms as well. This ensures an integrated knowledge about the different platforms and their tasks for every developers, which helps to design suitable products and to prioritize the possible projects.
At the beginning of each projects there are different core roles, namely the designer, the project manager and the marketing participant. The objectives and goals are developed along these key roles and their perspectives. The possible conflicts are also good opportunities for a better solution and to take into consideration different aspects. However, the marketing department has the main influence whether to initiate a solution or project.
In connection of Wheelwright and Clark work  (Figure 2.) LEGO`s heavyweight matrix organisation is appropriate regarding their platform projects.
This matrix organisation ensures for LEGO to be faster and more flexible in case of information sharing and handling different conflicts. The performance is mostly based on the overall success of the project, than the individual participants . However, the influence of the project manager is significant. A possible challenge within this organization is the information sharing between different projects. In one hand, this learning process on the employees’ level is ensured by the shuffling of the developers between the different platforms. On the other hand, the appropriate documentation of the particular project can grant the relevant know-how for the next projects.
The highly synchronized and centralized development process of LEGO is supported by the fact, that the development is located in Billund. Therefore, the above detailed allocation of teams and advantageous interactions of the platforms are easily performed. This local development means that LEGO can avoid problems from global development, such as cultural differences and communication issues.
Stage-Gate Model and its application
LEGO uses the Stage-Gate Model (or Phase-Gate Model) as a strong tool of portfolio management in order to identify relevant ideas, development processes and to prioritize the possible projects until production .
Mainly, this model is a product development process, which can be divided into different phases. These stages are separated by the so-called, gates. In case of the LEGO practice the model includes 5 phases and the whole duration is two years, in which one year is dedicated for development and the other one is for the production (Figure 3.).
After that some ideas and pre-decisions are made in the Discovery stage, as the zero step in the product development the following process takes place.
Stage 1 is the planning phase or the so-called scoping, which includes the first strategic meetings with the management teams and boards to identify the overall goals and directions with the necessary resources and demands.
Stage 2 is the build business case, which is more likely an opportunity phase at LEGO. At this stage all the different teams from the various platforms share their ideas and suggestions. The selection of the relevant and valuable concepts are further developed by the teams. The main stakeholder`s requirements and perspectives are also taken into consideration, which is an important part of the portfolio compilation. At this step the main selection and strategical alignment of the possible projects and portfolios are performed.
Stage 3 is the product development phase, where the final selection is made about those projects, which will be included in the next portfolio. The relevant platforms and competent teams are involved here for the further development. At this step all the different requirements, namely the manufacturability, design, different production requirements are taken into account to ensure the most suitable product with the most economical cost.
Stage 4 is the phase of the testing and validation, in which the prototypes are tested in case of assembling by the possible customers with the defined age range. At the end of this phase, means the end of the product development as well.
At stage 5 the production and the market launch take place. After the positive validation the production starts immediately and the market launch with the new portfolio as well on 1st of January . In the meantime, after the product launch takes place a review is necessary to evaluate the launch itself and to gain valuable experiences.
As it is represented above the development process is structured and routinized at LEGO. The platform production type is highly standardized, which routine gives flexibility and quick adaptability for the different product portfolios. Also this standardization of the production is a great requirement for the product development.
The Stage-Gate model, which integrates different product development groups is not a usual model. With this process the portfolio management of platforms during the development process is highly efficient. LEGO can quickly identifies problems at an early stage, the prioritization of projects is also well established in this practice. A possible disadvantage of such a well-structured scheme is the limitation of innovation and flexibility. But the shuffling of the developer participants between the teams and within the particular projects helps to reduce this drawback. In the meantime, this model excludes most of the internal iteration processes, which are mostly time and resource consuming parts of the development progress .
Within the frame of this integrated model, LEGO profits from both methods, which leads a healthy portfolio composition.
Portfolio management and arrangement
Portfolio management in general is a methodology to identify, evaluate and prioritize projects and opportunities and/ or to propose valuable upcoming product development tasks. Thus the major role is to coordinate the main strategic processes and decisions to achieve an effective business balance .
In case of new product development, which is the scope of this study in relation of portfolio management, the projects can be decided based on the commercial value, the business strategy or to gain a balanced portfolio. With the right combination between derivative and breakthrough products can ensure competitive advantages and to satisfy a wide range of customers with goods . Because of that, to develop a valuable, renewable portfolio is the matter of balance.
In addition, the appropriate product portfolio is crucial to achieve not just the customer needs, but also the expectations of stakeholders and product retailers, which requirements appear in the product development as well.
Portfolio management of LEGO
In case of the portfolio management of LEGO it is very much likely that it is based on not just alone the commercial value, the business strategy or to gain a balanced portfolio, but on all these three together.
The alignment of the core strategy with the portfolio takes place in a quite early stage of the product development (Figure 3.), which ensures the key values to be presented in every product and to keep high the reputation of the LEGO brand as well.
Moreover, there is a key strategy at LEGO, namely to increase and to achieve around 60% of new products in their portfolio . The main reason of such a requirement is to match the portfolio with the current trends and through this way with the expectations of the customers as well.
In the meantime, to achieve the best profit, during the product development phase (Figure 3.) the expectations of the stakeholders and retailers are also significant parameters of the decision making and project prioritizing for the portfolio management board. However, these new products have great influence on the whole portfolio based on the new and current trends of the market , which describes how LEGO implements new products with commercial value.
As it is recognized the current trends and timing to launch the product are major parameters of the balanced portfolio. As it was mentioned previously, marketing representatives have significant influence during the product initializing. The main reason behind is the fact, that the evaluation and mapping of the new trends and market changes is the responsibility of the marketing team. LEGO uses their own score chart and special workshops in order to identify projects which can be prioritized for production. Through this process LEGO can facilitate a balanced portfolio, which corresponds to the actual trends .
Portfolio optimizing and risk
The usual portfolio of LEGO includes around 250 different brick sets  and as it was mentioned above it is continuously renewed and optimized year by year. The proposed novelty of 60% near by the great product development challenges also means a large risk of which products should be replaced and kept in the overall portfolio. This selection process is also a significant part of LEGO`s portfolio management. The identification of the risk of a radically changed portfolio is always a key issue and it should be considered upon the market launch regarding the different expectations of customers and retailers.
The other part of the optimization and risk management of the portfolio is to ensure a balanced range of product complexity to satisfy all different type of the customers regarding their age and gender. The defined risk in this process is to keep the developed product suitable for the production and make it still complex for the assembling, which is a part of the game.
In case of production, regarding the theory of product variety  LEGO uses a modular architecture to enable high variety manufacturing. Therefore, their portfolio is developed around the product architecture, which allows enormous product range without large changing in the production complexity or in the manufacturing system.
The standardized production of the bricks and different LEGO elements results a highly cost efficient production and also ensures to use the same brick within a wide range of products. These elements are mainly produced by injection molding.
Therefore, this production system requires an extremely integrated product development with the manufacturing system. The manufacturability of a product is such a key parameter, that it has to be considered as early stage of the development as possible , . How the portfolio management practice of LEGO supports the project selection process can be detected at the second phase of the Stage-Gate Model in which stage the project is evaluated regarding the producibleness.
After the carefully arranged development and production process the entering into the market with the new portfolio is the upcoming step.
The main part of LEGO`s portfolio is dedicated to global market, based on the actual trends and the previous successful portfolio . Every brick sets have a specific story and theme, which can correspond to a movie or book, etc. These stories can define and separate the particular brick sets within the large product portfolio of LEGO. In the meantime, it also helps in the market launch and to target the adequate age range with the different brick sets.
Within this study the world leader brand of LEGO is analysed regarding the relationship of its product development and portfolio management practice. The company builds up his own best practice based on its eighty years of experience.
The heavyweight organisational matrix of LEGO is examined relating to LEGO`s special platform product development practice. The development process is detailed within the frame of the Stage-Gate Model as a strong tool of LEGO`s portfolio management. The different phases and the role of these stages in the whole portfolio composition are also observed and explained.
The key strategy of the significant novelty within every new portfolio is described with the challenges of stakeholder, retailers and customer expectations. The demand of matching the product portfolio with the actual and future trends is a key parameter in LEGO`s portfolio management, which leads a well-structured project prioritizing and portfolio optimizing management. This practice is also detected in every stages of the product development process.
Within the performed study the role of manufacturability is highlighted also with the importance of integrated product design and development. This is concluded through the fact, that in LEGO`s product development process every stages are carefully treated and considered from the ideation through the project selection, development and production, until the market launch with the new product portfolio. In the meantime, assembling as a main factor of customer satisfaction is a key parameter equally like the unique stories, which are created for each products. These are the fundamental core features of LEGO`s management, brand and of course its portfolio.
The whole process is framed and supported through LEGO`s portfolio management practice, which is just as integrated and complex as the LEGO game itself.
Ulrich, K. and Eppinger, S. (2012) - Product design and development. New York: McGraw-Hill.
This book is mainly a great overview of several product development methods and their details. It is rich with case studies and explanations, which development processes were applied in the specific examples. Namely, that the authors are well-known professors from MIT, the book itself has unexceptional quality within the topic. The text is highly logic and the whole book is well-structured. That helps a lot to understand the enormous topic of product development. In my study it is a highly important resource, namely that in case of LEGO, product development and portfolio management have a strong connection.
Dr. Cooper, R. G.; Dr. Edgett, S. J.; Dr. Kleinschmidt, E. J. (2001) - Portfolio Management for New Product Development: Results of an Industry Practices Study. R&D Management (Industrial Research Institute, Inc.) Volume 31, number 4.
This study is a result of a survey questionnaire made by IRI (Industrial Research Institute) about different companies best portfolio management practice. The main focus is to define the consequences of a poor portfolio management. They highlight the role of portfolio management in different type of businesses and include some results of various case studies. Also some popular tools are examined and introduced in the paper. The study is rich with statistic data and examples, which give a great overview about portfolio management in practice. The so-called stage-gate model as a useful tool of portfolio management is also described, which is important in my case study.
Jenner, S.; Cilford, K. (2011) – Management of Portfolios. Office of Government Commerce (OGC). The Stationary Office (TSO), ISBN: 978-0-11-331294-8.
“The guide provides practical guidance for managers of portfolios and those working in portfolio offices as well as those filling portfolio management roles outside a formal PfMO role. It will be applicable across industry sectors. It describes both the Portfolio Definition Cycle (identifying the right, prioritized, portfolio of programs and projects) and the Portfolio Delivery Cycle (making sure the portfolio delivers to its strategic objectives)." The book is really well-structured and it helps to understand the basic and the advanced terms as well regarding to portfolio management. It is also mentionable, that some of the abstract terms are described and explained through short examples and hints. In my case it is a main literature to understand the essential of portfolio management and to discover the connection of the terms and the business practice.
- ↑ Lego (2015) - The Lego history. [online] http://aboutus.lego.com/en-us/lego-group/the_lego_history. [Accessed 09. September 2015].
- ↑ 2.0 2.1 2.2 2.3 Ulrich, K. and Eppinger, S. (2012) - Product design and development. New York: McGraw-Hill.
- ↑ Meyer, M. H.; Lehnerd, A. H. (1997) - The Power of Product Platforms. New York: The Free Press.
- ↑ Mikkola, J. H. (2001) - Portfolio management of R&D projects: Implications for innovation management. Technovation, v. 21, n. 7, p. 423-435.
- ↑ 5.0 5.1 Hsuan, J., & Hansen, P. K. (2007). - Platform development: implications for portfolio management. Gestão and Produção, Vol 14, Iss 3, Pp 453-461.
- ↑ 6.0 6.1 Wheelwright, S.; K. Clark (1995). Leading Product Development, New York, The Free Press.
- ↑ Dr. Cooper, R. G.; Dr. Edgett, S. J.; Dr. Kleinschmidt, E. J. (2001) - Portfolio Management for New Product Development: Results of an Industry Practices Study. R&D Management (Industrial Research Institute, Inc.) Volume 31, number 4.
- ↑ Cooper R. G., (2001). Winning at New Products, 3rd ed., New York: Basic Books.
- ↑ 9.0 9.1 9.2 LEGO Group. (2013) - Annual Report 2013 (online) http://cache.lego.com/r/aboutus/-/media/about%20us/media%20assets%20library/progress%20report/lego_group_responsibility_report_2013.pdf?l.r=-468849679. [Accessed 09. September 2015]. .
- ↑ 10.0 10.1 10.2 Jenner, S.; Cilford, K. (2011) – Management of Portfolios. Office of Government Commerce (OGC). The Stationary Office (TSO), ISBN: 978-0-11-331294-8.
- ↑ Project Management Institute, PMI (2008) – The Standard for Portfolio Management. Project Management Institute, ISBN: 978-1-933890-53-1.
- ↑ 12.0 12.1 Lindholm, M.; Stokholm, F.; Hildebrandt, S.; Schultz, M.; Klausen, K.; Nikolaj B., P; Jenster, P. (2011) - Lego: Globaliseringen af den gode ide. Gyldendal, København. Den danske ledelseskanon, nr. 3.
- ↑ Boothroyd, G.; Dewhurst, P.; Knight, W. (1994) - Product design for manufacture and assembly. New York: M. Dekker.