Couch analytics #141. Designers at work, or how to kill the LEGO company

One of the most common stereotypes about big corporations is: they are huge and their capitalization is so high that these guys are definitely not stupid, they know what they are doing, and if it looks stupid, then it means that we do not understand something . Unfortunately, every company consists of people, and they are not always smart people, these people do not always see the market correctly or understand what they are doing and how. At the moment when the company realizes that they are in a systemic crisis, there is not always time to correct the situation, everything goes upside down. On the other hand, the construction business and large infrastructure projects are always a systemic crisis; in my memory, not a single large construction project could meet the originally planned budget, and this is a global practice. For example, the new Berlin Willy Brandt Airport was estimated at 1.6 billion euros in 2011, the total cost of all systems did not exceed 2 billion euros. The German long-term construction has already been postponed many times, 7 billion euros have been spent so far, the airport is still not working. An optimistic opening date is called October 2019, realists talk about 2023.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

But the airport in Berlin is not the most striking example of a construction failure, for example, the famous Sydney Opera House began to be built in 1959, the budget was calculated for four years and amounted to 7 million Australian dollars, in the end the building took 14 years to build, and it cost 102 million. The scale is impressive, and it seems that this is due to the inability to get the estimate right, because there are so many variables in construction. But something similar happens in many areas, including the production of ordinary consumer goods, and is in no way connected with fluctuations in the cost of components, this is a human factor, or rather, the unprofessionalism of people hired by companies to work. The canonical example of such bungling is the story of LEGO, which clearly demonstrates that "professionals" can ruin any company, and the lack of understanding of what people are doing leads to any consequences other than those predicted. Let's take a look at how LEGO went bankrupt and what saved the company.

On the verge of bankruptcy, or the history of plastic bricks

The LEGO company has existed since 1932, colored bricks and sets of them appeared in 1949 and became popular in a short time. More than one generation of children grew up on LEGO toys, it seemed that nothing threatened the company, and its positions were unshakable. In 2003, LEGO had one foot in the coffin, the company's prospects were negative, although previous decades did not suggest that this could happen. But there was just a change in the generations of designers, when the “outdated” designers, who from year to year created houses and sets of toys from bricks, were replaced with modern and progressive 30-year-olds who understand what children and youth want.

Any company needs fresh blood, but this does not mean that it is necessary to abandon traditions and what constitutes the main value of the brand. What was the value of LEGO then and today? The ability to create and assemble different designs from bricks, both by buying sets that come out, and simply using the parts that you already have. The beauty of LEGO is that you are only limited by your imagination and the building material is the same, no matter when you buy your set, it will be compatible with what is being produced today.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

There were no pests in LEGO, the company's management acted in good faith, the company's HR department hunted for the best young designers, they were graduates of the best schools in Europe. They were recruited, and they began to give out their projects, not limited by almost anything. Actually, they were given the task of creating LEGO for the new generation. And they did. But they had no experience in the LEGO world, no understanding of the LEGO business and the limits of what was possible.

Later LEGO designers Mark Stafford described the period with extreme frankness, the company was six months away from bankruptcy, and the reasons were because of what the hired designers did, as well as the lack of control over their actions within the company. For example, when creating new LEGO sets, new wave designers did not limit themselves to existing bricks and elements, they created new ones. In a few years, the number of elements has grown from 6,000 to 12,000 pieces, that is, it has doubled. For designers, this was a simple task, they created elements for their ingenious sets and did not think at all how this could affect the cost of products.

Expanding the number of SKUs (Stock Keeping Units) and this can be not only different model, but just a different color of the same model, etc.) complicates logistics, these are overhead costs that hit the company's pocket. With more or less the same sales volume, expanding the number of SKUs is always the cost of storage, logistics and the like, not to mention the costs of production and development.

In the electronics market, one can give an example: Apple and Samsung. The cost of operating costs per SKU unit is higher for Samsung, since the number of these SKUs is much higher, and it doesn’t matter which device we have, a flagship or a cheap model, the costs are plus or minus comparable. You can discuss the cost of logistics, which depends on the size and weight of the box, but here you can ignore this difference, for us it is not important. The fewer SKUs a company has, the easier it is to manage them. And the example of Apple proves this well, the company for many years tried not to increase the number of SKUs, but eventually gave up and began to increase it, since there was nothing else left. But, for example, increasing the number of SKUs to the level of Samsung is possible, but at the cost of increasing costs, which Apple sees as a highly unpopular measure. In part, this can be seen as a desire not to release new models in the middle price segment, but to extend the life of old devices.

Back to LEGO. In addition to inflating the number of items in the kits, which led to higher costs, this also led to the destruction of the company's image, the choice became too large, people did not know what to buy and how to assemble certain kits. The cost of LEGO ownership went up, you had to buy rare pieces to build things, it was confusing. The parallels with the current smartphone market suggest themselves - before the choice of iPhone was as simple as possible, it was one iPhone. Then the Plus version appeared, and the choice became more difficult. Now the iPhone X has arrived, and it's already a choice of three models. And here it is important to take into account that once the presence of one iPhone model was an advantage for Apple, and not only in terms of minimizing the SKU, but also in terms of choice. If you want the newest device - the choice is obvious. Other companies initially did not live in such conditions, the presence of a wide range is a minus in the sales of flagships, younger models delay demand for themselves, provide an alternative. What Apple faced in 2015, when for the first time new iPhones did not take even half of the sales of the total number of devices sold.

Cost of production, or brilliant finds

What I like about the LEGO example is that it's very curious in its simplicity. Designers who created kits in the 90s did not think about many things, they were narrow specialists, creators. For example, the cost of sets was calculated by the cost of bricks, this was a standard procedure. When designers began to add motors, LEDs and other components to the kits, they did not bother to change the calculation formula (!). It sounds like pure idiocy, but it's a fact!

For example, in 1996, the Lego Technic Fiber Optic Multi Set hit the shelves.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

In addition to the usual bricks, the kit contains illuminated plastic tubes and batteries that are responsible for lighting, hence the word fiber optic in the title. The cost of this component turned out to be higher than the full price of the kit. But who counts such trifles? This set went on sale and was sold for a long time, until the new management was puzzled by the question of where the money was flowing and what was happening with sales, why when they grow, the loss immediately grows.

When you have one such product in your line, you can somehow survive, but LEGO had a lot of such products, these are almost all sets that used electric motors, for example, Znap, which was released for two years - 1998 and 1999 .The same motors were used in almost the entire Technic series, and they caused a loss.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

Lego's salvation came in 2004 when Jorgen Vig Knudstorp, previously at McKinsey, took over as CEO and put things in order. He estimated costs and revenues, and for the first time in more than eight years, the company calculated the exact cost of the kits and all related expenses (including logistics, advertising, and so on). A huge company suddenly found that it was generating a loss for many years in a row, as employees did not understand this and simply created. The salvation for the company was the Bionicle line, as well as the fact that Lego signed a contract to create the Star Wars universe, although inside the company many old employees were negative and believed that this would not bring any success.

Those who are interested in the history of LEGO can be advised to read David Robertson's book "Brick by Brick", it is in Russian translation.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

Do you think the LEGO example is unique and no one else does the same? You are mistaken, similar stories happen every year, the only question is how companies hide the ends in the water, or rather, people working for the company. Look at the device below, it's the Sony Ericsson Xperia X1, the company's first smartphone to run on Windows Mobile.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

This device was created in the strictest secrecy, it was believed that cooperation with Microsoft would be able to bring the company a large market share and give impetus to development. Let's put aside the fact that such cooperation could not be successful, but let's look at this product in terms of cost and its capabilities. A completely new niche for Sony Ericsson, the presence of a huge number of Taiwanese manufacturers of smartphones on Windows Mobile with poor quality devices, but low prices. The company entered a segment that it did not understand and hoped to gain a foothold in it. In order for the product to pay off, it was necessary to produce it in a volume of at least 30 thousand pieces per month, subject to minimal advertising support, the break-even point was just that at the cost of components, I do not even take into account the cost of development.

Pre-orders for Sony Ericsson X1 were very optimistic, they amounted to about 50 thousand devices, which the company produced by the start of sales. But further sales got up, about 25 thousand devices were sold from the shelves, and subsequent devices were not sold. Instead of throwing up their hands and writing off the device, forgetting about it, the company did exactly the opposite - they spent all the advertising budgets on promoting this model, in fact, they burned money. In the Russian market, the cost of promotion was an impressive $3,500 per unit sold, in fact, they could be given away for free, and this would bring savings for the company. But all efforts were aimed at selling what the consumer did not want.

The above example is typical for any market and different manufacturers, as a rule, companies refuse to admit the obvious until the last moment, namely that someone spent time and resources on creating a useless product. For some reason, it is believed that the product needs additional support, then it will be appreciated and it will take off. It must be admitted that sometimes this happens, usually this is an example of large corporations that can promote their products and ideas for years. But it requires disproportionate costs and rarely pays off.

Please note that Sony Ericsson's problem was not the cost of components, but the inability to reach the production plan, as there was no demand. As a result, the model was unprofitable, and these losses were eventually written off. Offhand, we can recall the ingenious Microsoft KIN project, in which Microsoft ordered 100,000 phones from Sharp in two versions, only 40,000 devices were produced, and sales for a month and a half amounted to only 9,000 units. This is one of those products that disappeared from the shelves instantly, Microsoft did not delay the murder of the product. Cause? Each KIN cost Microsoft more than the company sold it, and the reliance on selling its own services did not stand up to market scrutiny. Of the 9,000 devices sold, most were returned to Verizon in the first month, people refused expensive services.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

And there are many such examples, for example, LG, in order to gain market share when Android was just gaining momentum, released LG Optimus One, which it sold at a loss to capture the segment. This is a normal market practice when selling at a loss is a strategy, but here it is important to follow the next steps, to offer other products that will pay off your costs in the future. LG was never able to do this, and the pernicious practice of turning a blind eye to the cost of products in small print runs led to chronic losses in the mobile division.

I hope that after this material, if it doesn’t disappear, then the stereotype that guys in big corporations always know what they are doing will weaken. This is not so, and on a small number of examples I have clearly shown this. I would love to hear about examples from this area that you know about.

Couch analytics #141. Designers at work, or how to kill the LEGO company

One of the most common stereotypes about big corporations is: they are huge and their capitalization is so high that these guys are definitely not stupid, they know what they are doing, and if it looks stupid, then it means that we do not understand something . Unfortunately, every company consists of people, and they are not always smart people, these people do not always see the market correctly or understand what they are doing and how. At the moment when the company realizes that they are in a systemic crisis, there is not always time to correct the situation, everything goes upside down. On the other hand, the construction business and large infrastructure projects are always a systemic crisis; in my memory, not a single large construction project could meet the originally planned budget, and this is a global practice. For example, the new Berlin Willy Brandt Airport was estimated at 1.6 billion euros in 2011, the total cost of all systems did not exceed 2 billion euros. The German long-term construction has already been postponed many times, 7 billion euros have been spent so far, the airport is still not working. An optimistic opening date is called October 2019, realists talk about 2023.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

But the airport in Berlin is not the most striking example of a construction failure, for example, the famous Sydney Opera House began to be built in 1959, the budget was calculated for four years and amounted to 7 million Australian dollars, in the end the building took 14 years to build, and it cost 102 million. The scale is impressive, and it seems that this is due to the inability to get the estimate right, because there are so many variables in construction. But something similar happens in many areas, including the production of ordinary consumer goods, and is in no way connected with fluctuations in the cost of components, this is a human factor, or rather, the unprofessionalism of people hired by companies to work. The canonical example of such bungling is the story of LEGO, which clearly demonstrates that "professionals" can ruin any company, and the lack of understanding of what people are doing leads to any consequences other than those predicted. Let's take a look at how LEGO went bankrupt and what saved the company.

On the verge of bankruptcy, or the history of plastic bricks

The LEGO company has existed since 1932, colored bricks and sets of them appeared in 1949 and became popular in a short time. More than one generation of children grew up on LEGO toys, it seemed that nothing threatened the company, and its positions were unshakable. In 2003, LEGO had one foot in the coffin, the company's prospects were negative, although previous decades did not suggest that this could happen. But there was just a change in the generations of designers, when the “outdated” designers, who from year to year created houses and sets of toys from bricks, were replaced with modern and progressive 30-year-olds who understand what children and youth want.

Any company needs fresh blood, but this does not mean that it is necessary to abandon traditions and what constitutes the main value of the brand. What was the value of LEGO then and today? The ability to create and assemble different designs from bricks, both by buying sets that come out, and simply using the parts that you already have. The beauty of LEGO is that you are only limited by your imagination and the building material is the same, no matter when you buy your set, it will be compatible with what is being produced today.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

There were no pests in LEGO, the company's management acted in good faith, the company's HR department hunted for the best young designers, they were graduates of the best schools in Europe. They were recruited, and they began to give out their projects, not limited by almost anything. Actually, they were given the task of creating LEGO for the new generation. And they did. But they had no experience in the LEGO world, no understanding of the LEGO business and the limits of what was possible.

Later LEGO designers Mark Stafford described the period with extreme frankness, the company was six months away from bankruptcy, and the reasons were because of what the hired designers did, as well as the lack of control over their actions within the company. For example, when creating new LEGO sets, new wave designers did not limit themselves to existing bricks and elements, they created new ones. In a few years, the number of elements has grown from 6,000 to 12,000 pieces, that is, it has doubled. For designers, this was a simple task, they created elements for their ingenious sets and did not think at all how this could affect the cost of products.

Expanding the number of SKUs (Stock Keeping Units) and this can be not only different model, but just a different color of the same model, etc.) complicates logistics, these are overhead costs that hit the company's pocket. With more or less the same sales volume, expanding the number of SKUs is always the cost of storage, logistics and the like, not to mention the costs of production and development.

In the electronics market, one can give an example: Apple and Samsung. The cost of operating costs per SKU unit is higher for Samsung, since the number of these SKUs is much higher, and it doesn’t matter which device we have, a flagship or a cheap model, the costs are plus or minus comparable. You can discuss the cost of logistics, which depends on the size and weight of the box, but here you can ignore this difference, for us it is not important. The fewer SKUs a company has, the easier it is to manage them. And the example of Apple proves this well, the company for many years tried not to increase the number of SKUs, but eventually gave up and began to increase it, since there was nothing else left. But, for example, increasing the number of SKUs to the level of Samsung is possible, but at the cost of increasing costs, which Apple sees as a highly unpopular measure. In part, this can be seen as a desire not to release new models in the middle price segment, but to extend the life of old devices.

Back to LEGO. In addition to inflating the number of items in the kits, which led to higher costs, this also led to the destruction of the company's image, the choice became too large, people did not know what to buy and how to assemble certain kits. The cost of LEGO ownership went up, you had to buy rare pieces to build things, it was confusing. The parallels with the current smartphone market suggest themselves - before the choice of iPhone was as simple as possible, it was one iPhone. Then the Plus version appeared, and the choice became more difficult. Now the iPhone X has arrived, and it's already a choice of three models. And here it is important to take into account that once the presence of one iPhone model was an advantage for Apple, and not only in terms of minimizing the SKU, but also in terms of choice. If you want the newest device - the choice is obvious. Other companies initially did not live in such conditions, the presence of a wide range is a minus in the sales of flagships, younger models delay demand for themselves, provide an alternative. What Apple faced in 2015, when for the first time new iPhones did not take even half of the sales of the total number of devices sold.

Cost of production, or brilliant finds

What I like about the LEGO example is that it's very curious in its simplicity. Designers who created kits in the 90s did not think about many things, they were narrow specialists, creators. For example, the cost of sets was calculated by the cost of bricks, this was a standard procedure. When designers began to add motors, LEDs and other components to the kits, they did not bother to change the calculation formula (!). It sounds like pure idiocy, but it's a fact!

For example, in 1996, the Lego Technic Fiber Optic Multi Set hit the shelves.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

In addition to the usual bricks, the kit contains illuminated plastic tubes and batteries that are responsible for lighting, hence the word fiber optic in the title. The cost of this component turned out to be higher than the full price of the kit. But who counts such trifles? This set went on sale and was sold for a long time, until the new management was puzzled by the question of where the money was flowing and what was happening with sales, why when they grow, the loss immediately grows.

When you have one such product in your line, you can somehow survive, but LEGO had a lot of such products, these are almost all sets that used electric motors, for example, Znap, which was released for two years - 1998 and 1999 .The same motors were used in almost the entire Technic series, and they caused a loss.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

Lego's salvation came in 2004 when Jorgen Vig Knudstorp, previously at McKinsey, took over as CEO and put things in order. He estimated costs and revenues, and for the first time in more than eight years, the company calculated the exact cost of the kits and all related expenses (including logistics, advertising, and so on). A huge company suddenly found that it was generating a loss for many years in a row, as employees did not understand this and simply created. The salvation for the company was the Bionicle line, as well as the fact that Lego signed a contract to create the Star Wars universe, although inside the company many old employees were negative and believed that this would not bring any success.

Those who are interested in the history of LEGO can be advised to read David Robertson's book "Brick by Brick", it is in Russian translation.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

Do you think the LEGO example is unique and no one else does the same? You are mistaken, similar stories happen every year, the only question is how companies hide the ends in the water, or rather, people working for the company. Look at the device below, it's the Sony Ericsson Xperia X1, the company's first smartphone to run on Windows Mobile.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

This device was created in the strictest secrecy, it was believed that cooperation with Microsoft would be able to bring the company a large market share and give impetus to development. Let's put aside the fact that such cooperation could not be successful, but let's look at this product in terms of cost and its capabilities. A completely new niche for Sony Ericsson, the presence of a huge number of Taiwanese manufacturers of smartphones on Windows Mobile with poor quality devices, but low prices. The company entered a segment that it did not understand and hoped to gain a foothold in it. In order for the product to pay off, it was necessary to produce it in a volume of at least 30 thousand pieces per month, subject to minimal advertising support, the break-even point was just that at the cost of components, I do not even take into account the cost of development.

Pre-orders for Sony Ericsson X1 were very optimistic, they amounted to about 50 thousand devices, which the company produced by the start of sales. But further sales got up, about 25 thousand devices were sold from the shelves, and subsequent devices were not sold. Instead of throwing up their hands and writing off the device, forgetting about it, the company did exactly the opposite - they spent all the advertising budgets on promoting this model, in fact, they burned money. In the Russian market, the cost of promotion was an impressive $3,500 per unit sold, in fact, they could be given away for free, and this would bring savings for the company. But all efforts were aimed at selling what the consumer did not want.

The above example is typical for any market and different manufacturers, as a rule, companies refuse to admit the obvious until the last moment, namely that someone spent time and resources on creating a useless product. For some reason, it is believed that the product needs additional support, then it will be appreciated and it will take off. It must be admitted that sometimes this happens, usually this is an example of large corporations that can promote their products and ideas for years. But it requires disproportionate costs and rarely pays off.

Please note that Sony Ericsson's problem was not the cost of components, but the inability to reach the production plan, as there was no demand. As a result, the model was unprofitable, and these losses were eventually written off. Offhand, we can recall the ingenious Microsoft KIN project, in which Microsoft ordered 100,000 phones from Sharp in two versions, only 40,000 devices were produced, and sales for a month and a half amounted to only 9,000 units. This is one of those products that disappeared from the shelves instantly, Microsoft did not delay the murder of the product. Cause? Each KIN cost Microsoft more than the company sold it, and the reliance on selling its own services did not stand up to market scrutiny. Of the 9,000 devices sold, most were returned to Verizon in the first month, people refused expensive services.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

And there are many such examples, for example, LG, in order to gain market share when Android was just gaining momentum, released LG Optimus One, which it sold at a loss to capture the segment. This is a normal market practice when selling at a loss is a strategy, but here it is important to follow the next steps, to offer other products that will pay off your costs in the future. LG was never able to do this, and the pernicious practice of turning a blind eye to the cost of products in small print runs led to chronic losses in the mobile division.

I hope that after this material, if it doesn’t disappear, then the stereotype that guys in big corporations always know what they are doing will weaken. This is not so, and on a small number of examples I have clearly shown this. I would love to hear about examples from this area that you know about.

Couch analytics #141. Designers at work, or how to kill the LEGO company

One of the most common stereotypes about big corporations is: they are huge and their capitalization is so high that these guys are definitely not stupid, they know what they are doing, and if it looks stupid, then it means that we do not understand something . Unfortunately, every company consists of people, and they are not always smart people, these people do not always see the market correctly or understand what they are doing and how. At the moment when the company realizes that they are in a systemic crisis, there is not always time to correct the situation, everything goes upside down. On the other hand, the construction business and large infrastructure projects are always a systemic crisis; in my memory, not a single large construction project could meet the originally planned budget, and this is a global practice. For example, the new Berlin Willy Brandt Airport was estimated at 1.6 billion euros in 2011, the total cost of all systems did not exceed 2 billion euros. The German long-term construction has already been postponed many times, 7 billion euros have been spent so far, the airport is still not working. An optimistic opening date is called October 2019, realists talk about 2023.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

But the airport in Berlin is not the most striking example of a construction failure, for example, the famous Sydney Opera House began to be built in 1959, the budget was calculated for four years and amounted to 7 million Australian dollars, in the end the building took 14 years to build, and it cost 102 million. The scale is impressive, and it seems that this is due to the inability to get the estimate right, because there are so many variables in construction. But something similar happens in many areas, including the production of ordinary consumer goods, and is in no way connected with fluctuations in the cost of components, this is a human factor, or rather, the unprofessionalism of people hired by companies to work. The canonical example of such bungling is the story of LEGO, which clearly demonstrates that "professionals" can ruin any company, and the lack of understanding of what people are doing leads to any consequences other than those predicted. Let's take a look at how LEGO went bankrupt and what saved the company.

On the verge of bankruptcy, or the history of plastic bricks

The LEGO company has existed since 1932, colored bricks and sets of them appeared in 1949 and became popular in a short time. More than one generation of children grew up on LEGO toys, it seemed that nothing threatened the company, and its positions were unshakable. In 2003, LEGO had one foot in the coffin, the company's prospects were negative, although previous decades did not suggest that this could happen. But there was just a change in the generations of designers, when the “outdated” designers, who from year to year created houses and sets of toys from bricks, were replaced with modern and progressive 30-year-olds who understand what children and youth want.

Any company needs fresh blood, but this does not mean that it is necessary to abandon traditions and what constitutes the main value of the brand. What was the value of LEGO then and today? The ability to create and assemble different designs from bricks, both by buying sets that come out, and simply using the parts that you already have. The beauty of LEGO is that you are only limited by your imagination and the building material is the same, no matter when you buy your set, it will be compatible with what is being produced today.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

There were no pests in LEGO, the company's management acted in good faith, the company's HR department hunted for the best young designers, they were graduates of the best schools in Europe. They were recruited, and they began to give out their projects, not limited by almost anything. Actually, they were given the task of creating LEGO for the new generation. And they did. But they had no experience in the LEGO world, no understanding of the LEGO business and the limits of what was possible.

Later LEGO designers Mark Stafford described the period with extreme frankness, the company was six months away from bankruptcy, and the reasons were because of what the hired designers did, as well as the lack of control over their actions within the company. For example, when creating new LEGO sets, new wave designers did not limit themselves to existing bricks and elements, they created new ones. In a few years, the number of elements has grown from 6,000 to 12,000 pieces, that is, it has doubled. For designers, this was a simple task, they created elements for their ingenious sets and did not think at all how this could affect the cost of products.

Expanding the number of SKUs (Stock Keeping Units) and this can be not only different model, but just a different color of the same model, etc.) complicates logistics, these are overhead costs that hit the company's pocket. With more or less the same sales volume, expanding the number of SKUs is always the cost of storage, logistics and the like, not to mention the costs of production and development.

In the electronics market, one can give an example: Apple and Samsung. The cost of operating costs per SKU unit is higher for Samsung, since the number of these SKUs is much higher, and it doesn’t matter which device we have, a flagship or a cheap model, the costs are plus or minus comparable. You can discuss the cost of logistics, which depends on the size and weight of the box, but here you can ignore this difference, for us it is not important. The fewer SKUs a company has, the easier it is to manage them. And the example of Apple proves this well, the company tried for many years not to increase the number of SKUs, but eventually gave up and began to increase it, since there was nothing else left. But, for example, increasing the number of SKUs to the level of Samsung is possible, but at the cost of increasing costs, which Apple sees as a highly unpopular measure. In part, this can be seen as a desire not to release new models in the middle price segment, but to extend the life of old devices.

Back to LEGO. In addition to inflating the number of items in the kits, which led to higher costs, this also led to the destruction of the company's image, the choice became too large, people did not know what to buy and how to assemble certain kits. The cost of LEGO ownership went up, you had to buy rare parts to build things, it was confusing. The parallels with the current smartphone market suggest themselves - before the choice of iPhone was as simple as possible, it was one iPhone. Then the Plus version appeared, and the choice became more difficult. Now the iPhone X has arrived, and it's already a choice of three models. And here it is important to take into account that once the presence of one iPhone model was an advantage for Apple, and not only in terms of minimizing the SKU, but also in terms of choice. If you want the newest device - the choice is obvious. Other companies initially did not live in such conditions, the presence of a wide range is a minus in the sales of flagships, younger models delay demand for themselves, provide an alternative. What Apple faced in 2015, when for the first time new iPhones did not take even half of the sales of the total number of devices sold.

Cost of production, or brilliant finds

What I like about the LEGO example is that it's very curious in its simplicity. Designers who created kits in the 90s did not think about many things, they were narrow specialists, creators. For example, the cost of sets was calculated by the cost of bricks, this was a standard procedure. When designers began to add motors, LEDs and other components to the kits, they did not bother to change the calculation formula (!). It sounds like pure idiocy, but it's a fact!

For example, in 1996, the Lego Technic Fiber Optic Multi Set hit the shelves.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

In addition to the usual bricks, the kit contains illuminated plastic tubes and batteries that are responsible for lighting, hence the word fiber optic in the title. The cost of this component turned out to be higher than the full price of the kit. But who counts such trifles? This set went on sale and was sold for a long time, until the new management was puzzled by the question of where the money was flowing and what was happening with sales, why when they grow, the loss immediately grows.

When you have one such product in your line, you can somehow survive, but LEGO had a lot of such products, these are almost all sets that used electric motors, for example, Znap, which was released for two years - 1998 and 1999 .The same motors were used in almost the entire Technic series, and they caused a loss.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

Lego's salvation came in 2004 when Jorgen Vig Knudstorp, previously at McKinsey, took over as CEO and put things in order. He estimated costs and revenues, and for the first time in more than eight years, the company calculated the exact cost of the kits and all related expenses (including logistics, advertising, and so on). A huge company suddenly found that it was generating a loss for many years in a row, as employees did not understand this and simply created. The salvation for the company was the Bionicle line, as well as the fact that Lego signed a contract to create the Star Wars universe, although inside the company many old employees were negative and believed that this would not bring any success.

Those who are interested in the history of LEGO can be advised to read David Robertson's book "Brick by Brick", it is in Russian translation.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

Do you think the LEGO example is unique and no one does the same? You are mistaken, similar stories happen every year, the only question is how companies hide the ends in the water, or rather, people working for the company. Look at the device below, it's the Sony Ericsson Xperia X1, the company's first smartphone to run on Windows Mobile.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

This device was created in the strictest secrecy, it was believed that cooperation with Microsoft would be able to bring the company a large market share and give impetus to development. Let's put aside the fact that such cooperation could not be successful, but let's look at this product in terms of cost and its capabilities. A completely new niche for Sony Ericsson, the presence of a huge number of Taiwanese manufacturers of smartphones on Windows Mobile with poor quality devices, but low prices. The company entered a segment that it did not understand and hoped to gain a foothold in it. In order for the product to pay off, it was necessary to produce it in a volume of at least 30 thousand pieces per month, subject to minimal advertising support, the break-even point was just that at the cost of components, I don’t even take into account the cost of development.

Pre-orders for Sony Ericsson X1 were very optimistic, they amounted to about 50 thousand devices, which the company produced by the start of sales. But further sales got up, about 25 thousand devices were sold from the shelves, and subsequent devices were not sold. Instead of throwing up their hands and writing off the device, forgetting about it, the company did exactly the opposite - they spent all the advertising budgets on promoting this model, in fact, they burned money. In the Russian market, the cost of promotion was an impressive $3,500 per unit sold, in fact, they could be given away for free, and this would bring savings for the company. But all efforts were aimed at selling what the consumer did not want.

The above example is typical for any market and different manufacturers, as a rule, companies refuse to admit the obvious until the last moment, namely that someone spent time and resources on creating a useless product. For some reason, it is believed that the product needs additional support, then it will be appreciated and it will take off. It must be admitted that sometimes this happens, usually this is an example of large corporations that can promote their products and ideas for years. But it requires disproportionate costs and rarely pays off.

Please note that Sony Ericsson's problem was not the cost of components, but the inability to reach the production plan, as there was no demand. As a result, the model was unprofitable, and these losses were eventually written off. Offhand, we can recall the ingenious Microsoft KIN project, in which Microsoft ordered 100,000 phones from Sharp in two versions, only 40,000 devices were produced, and sales for a month and a half amounted to only 9,000 units. This is one of those products that disappeared from the shelves instantly, Microsoft did not delay the murder of the product. Cause? Each KIN cost Microsoft more than the company sold it, and the reliance on selling its own services did not stand up to market scrutiny. Of the 9,000 devices sold, most were returned to Verizon in the first month, people refused expensive services.

Armchair analytics #141. Designers at work, or how to kill a company LEGO

And there are many such examples, for example, LG, in order to gain market share when Android was just gaining momentum, released LG Optimus One, which it sold at a loss to capture the segment. This is a normal market practice when selling at a loss is a strategy, but here it is important to follow the next steps, to offer other products that will pay off your costs in the future. LG was never able to do this, and the pernicious practice of turning a blind eye to the cost of products in small print runs led to chronic losses in the mobile division.

I hope that after this material, if it doesn’t disappear, then the stereotype that guys in big corporations always know what they are doing will weaken. This is not so, and on a small number of examples I have clearly shown this. I would love to hear about examples from this area that you know about.

Couch analytics #141. Designers at work, or how to kill the LEGO company

One of the most common stereotypes about big corporations is: they are huge and their capitalization is so high that these guys are definitely not stupid, they know what they are doing, and if it looks stupid, then it means that we do not understand something . Unfortunately, every company consists of people, and they are not always smart people, these people do not always see the market correctly or understand what they are doing and how. At the moment when the company realizes that they are in a systemic crisis, there is not always time to correct the situation, everything goes upside down. On the other hand, the construction business and large infrastructure projects are always a systemic crisis; in my memory, not a single large construction project could meet the originally planned budget, and this is a global practice. For example, the new Berlin Willy Brandt Airport was estimated at 1.6 billion euros in 2011, the total cost of all systems did not exceed 2 billion euros. The German long-term construction has already been postponed many times, 7 billion euros have been spent so far, the airport is still not working. An optimistic opening date is called October 2019, realists talk about 2023.

But the airport in Berlin is not the most striking example of a construction failure, for example, the famous Sydney Opera House began to be built in 1959, the budget was calculated for four years and amounted to 7 million Australian dollars, in the end the building took 14 years to build, and it cost 102 million. The scale is impressive, and it seems that this is due to the inability to get the estimate right, because there are so many variables in construction. But something similar happens in many areas, including the production of ordinary consumer goods, and is in no way connected with fluctuations in the cost of components, this is a human factor, or rather, the unprofessionalism of people hired by companies to work. The canonical example of such bungling is the story of LEGO, which clearly demonstrates that "professionals" can ruin any company, and the lack of understanding of what people are doing leads to any consequences other than those predicted. Let's take a look at how LEGO went bankrupt and what saved the company.

On the verge of bankruptcy, or the history of plastic bricks

The LEGO company has existed since 1932, colored bricks and sets of them appeared in 1949 and became popular in a short time. More than one generation of children grew up on LEGO toys, it seemed that nothing threatened the company, and its positions were unshakable. In 2003, LEGO had one foot in the coffin, the company's prospects were negative, although previous decades did not suggest that this could happen. But there was just a change in the generations of designers, when the “outdated” designers, who from year to year created houses and sets of toys from bricks, were replaced with modern and progressive 30-year-olds who understand what children and youth want.

Any company needs fresh blood, but this does not mean that it is necessary to abandon traditions and what constitutes the main value of the brand. What was the value of LEGO then and today? The ability to create and assemble different designs from bricks, both by buying sets that come out, and simply using the parts that you already have. The beauty of LEGO is that you are only limited by your imagination and the building material is the same, no matter when you buy your set, it will be compatible with what is being produced today.

There were no pests in LEGO, the company's management acted in good faith, the company's HR department hunted for the best young designers, they were graduates of the best schools in Europe. They were recruited, and they began to give out their projects, not limited by almost anything. Actually, they were given the task of creating LEGO for the new generation. And they did. But they had no experience in the LEGO world, no understanding of the LEGO business and the limits of what was possible.

Later LEGO designers Mark Stafford described the period with extreme frankness, the company was six months away from bankruptcy, and the reasons were because of what the hired designers did, as well as the lack of control over their actions within the company. For example, when creating new LEGO sets, new wave designers did not limit themselves to existing bricks and elements, they created new ones. In a few years, the number of elements has grown from 6,000 to 12,000 pieces, that is, it has doubled. For designers, this was a simple task, they created elements for their ingenious sets and did not think at all how this could affect the cost of products.

Expansion of the number of SKUs (Stock Keeping Unit - that is, stock keeping units, and it can be not only a different model, but just a different color of the same model, etc.) leads to complication of logistics, these are overhead costs that hurt the company. With more or less the same sales volume, expanding the number of SKUs is always the cost of storage, logistics and the like, not to mention the costs of production and development.

Expansion of the number of SKUs (Stock Keeping Unit - that is, units of stock keeping goods, moreover, it can be not only a different model, but simply a different color of the same model, etc.) leads to complication of logistics, these are overhead costs that hit the company's pocket. With more or less the same sales volume, expanding the number of SKUs is always the cost of storage, logistics and the like, not to mention the costs of production and development.

In the electronics market, one can give an example: Apple and Samsung. The cost of operating costs per SKU unit is higher for Samsung, since the number of these SKUs is much higher, and it doesn’t matter which device we have, a flagship or a cheap model, the costs are plus or minus comparable. You can discuss the cost of logistics, which depends on the size and weight of the box, but here you can ignore this difference, for us it is not important. The fewer SKUs a company has, the easier it is to manage them. And the example of Apple proves this well, the company tried for many years not to increase the number of SKUs, but eventually gave up and began to increase it, since there was nothing else left. But, for example, increasing the number of SKUs to the level of Samsung is possible, but at the cost of increasing costs, which Apple sees as a highly unpopular measure. In part, this can be seen as a desire not to release new models in the middle price segment, but to extend the life of old devices.

Back to LEGO. In addition to inflating the number of items in the kits, which led to higher costs, this also led to the destruction of the company's image, the choice became too large, people did not know what to buy and how to assemble certain kits. The cost of LEGO ownership went up, you had to buy rare pieces to build things, it was confusing. The parallels with the current smartphone market suggest themselves - before the choice of iPhone was as simple as possible, it was one iPhone. Then the Plus version appeared, and the choice became more difficult. Now the iPhone X has arrived, and it's already a choice of three models. And here it is important to take into account that once the presence of one iPhone model was an advantage for Apple, and not only in terms of minimizing the SKU, but also in terms of choice. If you want the newest device - the choice is obvious. Other companies initially did not live in such conditions, the presence of a wide range is a minus in the sales of flagships, younger models delay demand for themselves, provide an alternative. What Apple faced in 2015, when for the first time new iPhones did not take even half of the sales of the total number of devices sold.

Cost of production, or brilliant finds

What I like about the LEGO example is that it's very curious in its simplicity. Designers who created kits in the 90s did not think about many things, they were narrow specialists, creators. For example, the cost of sets was calculated by the cost of bricks, this was a standard procedure. When designers began to add motors, LEDs and other components to the kits, they did not bother to change the calculation formula (!). It sounds like pure idiocy, but it's a fact!

For example, in 1996, the Lego Technic Fiber Optic Multi Set hit the shelves.

In addition to the usual bricks, the kit contains illuminated plastic tubes and batteries that are responsible for lighting, hence the word fiber optic in the title. The cost of this component turned out to be higher than the full price of the kit. But who counts such trifles? This set went on sale and was sold for a long time, until the new management was puzzled by the question of where the money was flowing and what was happening with sales, why when they grow, the loss immediately grows.

When you have one such product in your line, you can somehow survive, but LEGO had a lot of such products, these are almost all sets that used electric motors, for example, Znap, which was released for two years - 1998 and 1999 .The same motors were used in almost the entire Technic series, and they caused a loss.

Lego's salvation came in 2004 when Jorgen Vig Knudstorp, previously at McKinsey, took over as CEO and put things in order. He estimated costs and revenues, and for the first time in more than eight years, the company calculated the exact cost of the kits and all related expenses (including logistics, advertising, and so on). A huge company suddenly found that it was generating a loss for many years in a row, as employees did not understand this and simply created. The salvation for the company was the Bionicle line, as well as the fact that Lego signed a contract to create the Star Wars universe, although inside the company many old employees were negative and believed that this would not bring any success.

Those who are interested in the history of LEGO can be advised to read David Robertson's book "Brick by Brick", it is in Russian translation.

Do you think the LEGO example is unique and no one else does the same? You are mistaken, similar stories happen every year, the only question is how companies hide the ends in the water, or rather, people working for the company. Look at the device below, it's the Sony Ericsson Xperia X1, the company's first smartphone to run on Windows Mobile.

This device was created in the strictest secrecy, it was believed that cooperation with Microsoft would be able to bring the company a large market share and give impetus to development. Let's put aside the fact that such cooperation could not be successful, but let's look at this product in terms of cost and its capabilities. A completely new niche for Sony Ericsson, the presence of a huge number of Taiwanese manufacturers of smartphones on Windows Mobile with poor quality devices, but low prices. The company entered a segment that it did not understand and hoped to gain a foothold in it. In order for the product to pay off, it was necessary to produce it in a volume of at least 30 thousand pieces per month, subject to minimal advertising support, the break-even point was just that at the cost of components, I do not even take into account the cost of development.

Pre-orders for Sony Ericsson X1 were very optimistic, they amounted to about 50 thousand devices, which the company produced by the start of sales. But further sales got up, about 25 thousand devices were sold from the shelves, and subsequent devices were not sold. Instead of throwing up their hands and writing off the device, forgetting about it, the company did exactly the opposite - they spent all the advertising budgets on promoting this model, in fact, they burned money. In the Russian market, the cost of promotion was an impressive $3,500 per unit sold, in fact, they could be given away for free, and this would bring savings for the company. But all efforts were aimed at selling what the consumer did not want.

The above example is typical for any market and different manufacturers, as a rule, companies refuse to admit the obvious until the last moment, namely that someone spent time and resources on creating a useless product. For some reason, it is believed that the product needs additional support, then it will be appreciated and it will take off. It must be admitted that sometimes this happens, usually this is an example of large corporations that can promote their products and ideas for years. But it requires disproportionate costs and rarely pays off.

Please note that Sony Ericsson's problem was not the cost of components, but the inability to reach the production plan, as there was no demand. As a result, the model was unprofitable, and these losses were eventually written off. Offhand, we can recall the ingenious Microsoft KIN project, in which Microsoft ordered 100,000 phones from Sharp in two versions, only 40,000 devices were produced, and sales for a month and a half amounted to only 9,000 units. This is one of those products that disappeared from the shelves instantly, Microsoft did not delay the murder of the product. Cause? Each KIN cost Microsoft more than the company sold it, and the reliance on selling its own services did not stand up to market scrutiny. Of the 9,000 devices sold, most were returned to Verizon in the first month, people refused expensive services.

And there are many such examples, for example, LG, in order to gain market share when Android was just gaining momentum, released LG Optimus One, which it sold at a loss to capture the segment. This is a normal market practice when selling at a loss is a strategy, but here it is important to follow the next steps, to offer other products that will pay off your costs in the future. LG was never able to do this, and the pernicious practice of turning a blind eye to the cost of products in small print runs led to chronic losses in the mobile division.

I hope that after this material, if it doesn’t disappear, then the stereotype that guys in big corporations always know what they are doing will weaken. This is not so, and on a small number of examples I have clearly shown this. I would love to hear about examples from this area that you know about.