Digital Transformation - Follow the Yellow Brick Road; It's Child's Play...

In London’s design museum, an exhibition currently on display by Ai Weiwei, a Chinese artist, includes a 15-metre-long work called “Water Lilies #1” based on the triptych by Claude Monet. Look closely and it is made of 650,000 Lego bricks—which integrates Monet’s impressionism into what Mr Ai calls a “digitised and pixelated language”. That is a good analogy for Lego itself.

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The Lego-lover’s guide to preparing for digital transformation, brick by pixel! The Danish toymaker is on a long-term mission to digitise and pixelate its own fount of human creativity: the plastic brick.

Beware: the language of digital transformation is treachery to common English. It sounds more like corporate yoga than a marathon of software development. Executives need to be aligned. Teams are pods. Be agile. Define your downward-facing domains.

But to make it easier on the ear, Schumpeter (The Economist, July 2023) uses Lego as a guide to help illustrate strategic insights. Call it the yellow-brick road to generative artificial intelligence (AI).

Follow the Yellow Brick Road

First, it is a long hard road, littered with failures. Lego is a rare success story. Its journey started in 2003 with a near-death experience when, amid the rise of video-gaming, it panicked and went on a madcap innovation spree that almost bankrupted it. To fix one of the main problems, chaos in the supply chain, it introduced a single enterprise-software system globally.

The system survives to this day, scaling up as Lego expands into new markets, such as China, new formats, such as e-commerce, and new factory locations, such as America and Vietnam. To prepare for a world of pixelated play, Lego launched digital games on the “Star Wars” theme and developed franchises of its own, such as Ninjago and Chima, with video games, films and?tv?shows that turned into hits.

In 2019 Lego launched a new five-year transformation drive aimed at adapting to a world of direct-to-consumer sales, online versus big-box retailing, and digital play in the screen age. The timing was inspired. It started shortly before the world went into lockdown, as a result of the covid-19 pandemic, when having a digital strategy became a matter of life and death. It quickly produced results. Although it is hard to strip out the exact contribution of digitisation, since 2018 Lego’s sales have almost doubled, to more than $9bn, outpacing those of Mattel and Hasbro, its main rivals. In 2022 visits to its online portal rose by 38%. It has teamed up with Epic, a video-gaming firm, to explore the metaverse.

Yet the journey is still a hard one. The difficulties include moving from a system

where success is measured by sales store-by-store to one judged by how good the company is at selling online across the globe, how it is ranked on Google and Amazon, and how effective its software is.

Beware Potholes

In a recent McKinsey survey, they say, about 90% of companies had some kind of digital strategy, but they captured less than a third of the revenue gains they had anticipated. Moreover, the success rate is more uneven within industries than it is between them. The best retailer may be more digitally productive than an average high-tech firm, and the worst retailer may be as bad as the worst government entity.

To make a success of it requires learning the second lesson: having a top-down strategy and a road map (or in Lego terms, a clear instruction manual). For Lego, it helped that the family-owned business had long had a command-and-control approach to management. Its digital strategy involved a single plan, created by a 100-strong executive team and approved by the board, that encompassed the whole organisation. When transformations stall, it is often because executives talk past each other, have pet projects, spread investments too thin or have “more pilots than there are on an aircraft-carrier”, puts it. It also needs to be ambitious enough to generate momentum, with financial results measured constantly. McKinsey’s rule of thumb is that a digital transformation should aim to increase earnings before interest, tax, depreciation and amortisation by 20% or more.

Build or Buy?

Third comes the question of whether to build a new digital infrastructure or buy it. The answer is mostly to build. Rather like Lego’s eight-studded bricks—six of which can be combined 915m ways—there are many software applications on the market that can be combined to create proprietary systems. But the job of orchestrating them should not be outsourced.

Lego started its latest digital transformation with engineers making up less than 30% of staff. Since then it has increased the number of systems and software engineers by 150%. Five years ago, the trend was to hire from Silicon Valley. That was “a good way to change the company dress code, but not a great way to change the company culture”. Since then more companies have been retraining their existing tech workers and embedding them throughout the organisations in more front-line roles.

The gen-AI Weiwei way

Some of these lessons apply to generative AI. It is relatively easy to launch pilots with the technology, such as the humanlike Chatgpt. The problem is embedding the?AI?models across the organisation in a safe, unbiased way. It needs a top-down strategy that focuses especially on unmet customer need, in much the same way Apple has done consistently over recent years.

As for building or buying, it may be a “waste of time” to build proprietary models when the software industry is doing that anyway. The key is to work in-house on the things that give you a decisive advantage in the market. For Lego,?AI?is still in the future, though some of its brick enthusiasts are already using Chatgpt-like programmes to come up with new ways of building things. Mostly they fail, but one day anyone may be able to create a Monet.

The yellow-brick road is unending.?

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Adapted from The Economist, Schumpeter July 2023 based on Rewired, McKinsey & Company, 2023. Published by Wiley, SBN9781394207121

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