LEGO: Building a more sustainable future—brick by brick
LEGO's supply chain accounts for 90% of the total Co2 emission produced by LEGO bricks– now LEGO is taking action to help suppliers reduce their Co2 footprint
Is the business of business simply, business? Or can a profit-seeking entity create shareholder value by engaging in activities that promise no immediate monetary return for investors, but might contribute to a better world in the future? Poles haves suggested that there is a positive relationship between a company’s CSR (Corporate Social Responsibility) actions and consumers’ reactions to that company’s products.[i] A growing body of academic research also concludes that consumers generally react positively to CSR initiatives in all stages of the decision-making process.[ii] Thus, many companies have institutionalized CSR programs and are—if not directly seeking to achieve a sustainable competitive advantage—then at least complimenting their corporate strategies through these initiatives. Moreover, companies that carelessly contribute to the climate change these days are increasingly encountering negative publicity, hurting their overall businesses.[iii]
Hence, the case for consumer-oriented companies to invest resources in reducing their global Co2 footprint is straightforward: reduce it and consumers might buy more of or pay more for your products.
This year, The LEGO Group (hereafter referred to as “LEGO”), a Danish plastic-toy manufacturer, achieved its ambition to balance 100% of its energy use with energy from renewable sources—3 years ahead of time.[iv] Only one month after achieving this remarkable milestone, LEGO extended a partnership with WWF to reduce the global Co2 footprint of its suppliers by 10,000 tonnes per year towards 2020.[v]
This move indicates a remarkable shift in the way some firms think about CSR initiatives from focusing on the impact of the firm to the impact of its supply chain. In the case of LEGO, the potential is huge: over 90% of the 1.1 million tonnes of Co2 produced annually from sourcing, producing, and distributing LEGO bricks is produced by LEGO’s extended supply chain and not by LEGO itself (see illustration on the left). LEGO plans to include 80% of its suppliers in its Engage-To-Reduce (E2R) program to help them reduce their Co2 footprint through dialogue and cooperation.[vi]
LEGO has also made mid-term and long-term commitments to address the climate change: In June 2015, LEGO announced its decision to invest USD 150 million[vii] to identify and implement even more sustainable raw materials and packaging solutions by 2030. As part of this initiative, the company is setting up a Sustainable Materials Centre, which will employ more than 100 FTE’s who will work full time on researching, developing and implementing sustainable raw materials to manufacture LEGO elements as well as packaging materials.[viii]
To further address the climate change and stay true to its Danish roots (Denmark emits the least Co2 per capita of all countries in the world[ix]), my recommendations for LEGO and its management team would be to:
- Extend the E2R program so that it becomes a non-profit arm, providing consulting services on how to reduce Co2 emission for manufacturing firms. In accordance with LEGO’s mission of creating a better world for the builders of tomorrow, a consulting service that leverages the know-how within LEGO will achieve an overall greater impact in terms of total Co2 emission reduction than if the focus is only on LEGO’s supply chain.
- Educate the consumers on the science of climate change in a way that is playful and engaging. LEGO characterizes its consumers as the builders of tomorrow. These builders of tomorrow are also the leaders of tomorrow and LEGO can help institute a set of values that emphasize the importance of Co2 reduction. Moreover, this effort can serve as a communication tool to inform consumers about why LEGO is engaging in CSR activities and how it provides value to the consumers.
LEGO’s latest actions on the CRS front is a testimony to the fact that some companies are moving towards an ecosystem CSR approach to maximize their Co2 reduction efforts. In this approach, rather than just assessing the company’s Co2 emission, they are assessing the whole supply chain’s Co2 emission. From my perspective, two key questions remain unanswered:
- Will LEGO be able to capitalize on its efforts to reduce its supply chain’s Co2 footprint? That is, will it be able to create value for the consumers, communicate that value, and capture some of it?
- What is next? If LEGO is successful in capitalizing on its efforts, will other companies follow this ecosystem CSR approach and try to reduce the Co2 emission of their supply chains?
Looking forward to reading your thought on this.
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Sources
[i] Creyer, Elizabeth H., Ross Jr., William T., The influence of firm behavior on purchase intention: do consumers really care about business ethics? (1997)
[ii] Bhattacharya, C.B., Sen, Sankar, Doing Better at Doing Good: When, Why, and How Consumers Respond to Corporate Social Initiatives (2004)
[iii] http://fortune.com/2017/07/10/climate-change-green-house-gases/
[iv] https://www.lego.com/en-gb/aboutus/news-room/2017/may/100-percent-renewable-milestone/
[v] https://www.lego.com/en-gb/aboutus/news-room/2017/june/wwf-partnership-extension/
[vi] https://www.edie.net/news/6/Lego-launches-new-carbon-efficiency-plan-in-partnership-with-WWF/
[vii] 1 DKK billion roughly 150 USD million according to http://www.xe.com/currencycharts/?from=USD&to=DKK&view=2Y
[viii] LEGO 2016 Annual Report
[ix] http://www.telegraph.co.uk/travel/maps-and-graphics/co2-emissions-per-capita-ranking/
Thanks Philip for sharing the story of LEGO!
While I agree that there is a positive relationship between a company’s CSR and consumers’ reactions to the company’s products, such does not necessarily imply that CSR programs are worthwhile for that business. In “Corporate Social Responsibility and Profits: A Tradeoff or a Balance,” Thuy Tran argues that social impact initiatives (e.g., Pepsi Refresh Program) often do not support profitability. While I am not a member of the target market, I worry that LEGO’s CSR initiatives are not well known and do not drive incremental sales. For that reason, I appreciate your suggestion of LEGO educating consumers about climate change to help increase awareness of its initiatives. That said, I would still like to better understand whether toy purchasers (e.g., parents) care about CSR initiatives. For example, my siblings do not consider CSR affiliations when determining which toys to purchase for their children; accordingly, and in response to the first parting question, I would not expect LEGO to experience sufficient incremental sales to outweigh the costs from the CO2 initiatives. Furthermore, to the second parting question, if other companies see an unsuccessful CSR campaign from LEGO, they are less likely to pursue similar initiatives.
I really enjoyed this essay, as I didn’t know LEGO was at the forefront of redesigning the supply chain to help reduce its global environmental impact. I agree with you on the increasing importance of CSR in generating positive brand awareness and consumer acceptance. Yet, I wonder how much of this is actually done for genuine reasons versus image concerns and at the same time, whether this is actually helping them competitively.
I think LEGO’s view of the supply chain, as its partner in reducing its carbon footprint, is a great and collaborative way of achieving its goals. I like their ecosystem approach and think other companies should operate similarly when it comes to developing new sustainable initiatives to improve their environmental footprint. Although the company might not be the direct culprit, understanding how everyone in the chain is responsible and contributes to the problem is the first step in making wide-reaching changes.
I think your suggestion to extend their E2R program is an interesting idea and a way that LEGO can become a leading advocate of reducing CO2 emissions in other companies who see it as an insurmountable issue.
While I think LEGO’s mid and long-term initiatives sound great on paper, I wonder if these investments, which are pretty substantial as you mention in your essay, will pay off in the future. How much do consumers actually care about the sustainability of their products if prices increase as a result? Especially, LEGO, which is a toy that people often buy for others as gifts, how much are consumers considering the company’s CSR when they are considering the purchase? Even more, I am concerned about the quality of their products as they and others continue to switch over to sustainable raw materials and packaging (https://www.wired.com/2015/07/sorry-perfect-lego-brick-may-never-eco-friendly/).
Your question is about whether or not LEGO will create value for their consumers with their reduced CO2 emissions, but I question whether or not value is created for the consumer in this case. I see the data about how consumers respond to Corporate Social Responsibility initiatives and I agree that value is created there, but I think a lot of companies have assumed that their own consumers find value in sustainability programs without properly segmenting their customers segments. Particularly in this case, LEGO needs to do a better job of segmenting these consumers and understanding if their own consumer cares about CSR or not. For example, a high-income technology employee in California may care a lot about social responsibility, so he or she buys a Tesla. Does the typical buyer of cheap plastic children’s toys care as much about sustainability? Possibly, I can’t be sure that it’s not true, but I think companies need to better understand whether this is a marketing advantage or not. I recognize that companies can implement these initiatives for their own altruism, that they want to help the planet, but there’s a different question in understanding the ROI and sales increases from their efforts. In order for LEGO to understand whether or not consumer value is created, I believe they need to understand the buyer, and then make the decision based on whether the efforts are worth it on their own if indeed the consumers do not find value there.
Thanks for sharing the update on LEGO!
In response to some of the comments above, I do believe that LEGO’s commitment to sustainability will benefit them in the long-run. Per Nielsen, millennials are increasingly willing to pay more to purchase items that are sustainably created. As millennials increasingly become parents, this trend will likely extend to products like toys (source below). Alternatively, in the toy space, I believe there is a brand “halo effect” that influences the purchasing decisions of the purchaser (i.e., parent). While some products (e.g., Barbie) have mixed societal perceptions, LEGO’s commitment to sustainability – amongst other things – has the potential to influence purchasing decisions.
To your second question, I believe the corporate response Co2 response will be limited. LEGO is a unique company which generates ~$6B USD in revenue selling essentially one product – its famous plastic brick. Due to the massive volume of relatively standardized production, LEGO likely has a great deal of influence with its suppliers, in addition to their ability to streamline their owned supply chain. Ultimately, other companies that have similar leverage in their supply chain, due to large volumes, will have to lead the charge on CSR, in my opinion.
Source: http://www.nielsen.com/us/en/insights/news/2015/green-generation-millennials-say-sustainability-is-a-shopping-priority.html
After the IKEA case we discussed in class I have gotten a lot more skeptical (maybe also cynical) towards CSR programs. I agree with Fred that most of the customers (parents) as well as end consumers (kids) probably do not care as much about the sustainable production of LEGO. When making the purchasing decision, what matters the most is most likely primarily quality and safety. When googling LEGO’s sustainability initiative I found some articles that talked about how difficult it will be to actually find a suitable material that, in all its features, is equivalent to the plastic currently used. And I imagine LEGO does not want to increase sustainability at the cost of lowering quality or safety standards. Given that the time horizon LEGO has given itself for actually implementing this strategy and introducing new materials is 15 years, it makes me doubt (1) how realistic it is and (2) how serious the company is about the initiative, or whether they are primarily hoping for positive PR.
Philip,
Thanks for your thoughtful exposition of LEGO’s sustainability efforts.
I would first like to call attention to your suggestion that LEGO should consider extending its Engage-to-Reduce arm into a fully fledged not-for-profit consulting practice that could potentially help other companies in their carbon reduction efforts. This initiative, though creative and thought-provoking, is a step to far in the context of LEGO’s core competencies and historical areas of focus. Though it is clear that LEGO has developed expertise in managing its carbon footprint and, to a lesser extent, those of its suppliers, I am not convinced that they have significant know-how in doing this beyond the realm of their specific production processes and value chain. I would argue that the very reason their existing sustainability initiatives have been so successful to date is precisely because they have been focused on a business they know very well: their own. They have intimate knowledge of their own cost structure, their own customers, and the particulars of their own vision of the future of the company. Notably, they would be starting from scratch as it relates to other businesses. Moreover, they are a business that is accustomed to thinking about delivering value in the context of a consumer-oriented business model; it is quite difficult for B2C companies to morph or diversify into B2B business models and doing so would create significant execution risk. Most importantly, although LEGO remains a family-owned private company today, meaning it need not respond to the demands of the market at-large, its basic organizing principle is still one of profit maximization. As the saying goes, mixing business with pleasure can make for unsavory outcomes, and I suspect mixing a profitable play materials business with a carbon-footprint consulting non-profit would likely lead to similarly unwanted results, causing distraction, reallocating focus away from delivering on the core customer promise, and orienting the company in an area where it is by no means globally expert. We have to recognize that there are a variety of approaches to achieving sustainability objectives, with many corporates experimenting with a range of initiatives resulting in a wide distribution of outcomes: caution is warranted in thinking about the next leg of the LEGO sustainability program. [1]
I think one helpful framing for your question around whether carbon elimination would pay dividends for LEGO on the customer side, be it through customer willingness-to-pay or loyalty to the brand, is to think about the potential differences between short- and long-term effects. In particular, it is possible to imagine a world with an end state in which consumers of LEGO products (both parents, with purchasing power, and children with toy preferences) become more informed about climate change and, in turn, become hyper conscious of the carbon content of the products they consume. To the extent that this (enlightened) state of the world is sufficiently close, then I would agree that these initiatives serve as rightful investments that will generate economic value in the form of incremental top-line over the next few decades. There is good evidence from public opinion surveys that, in fact, consumer views are moving in this direction. For example, in 2017, 58% of Americans believed that global warming is caused by human activity, which compares to only 47% who believed this in 2011. [2] Nonetheless, this education process, even if helped along by LEGO itself, will take time and result in an uncertain impact on the top-line. I would argue that in the short-term, the more important benefit of conducting these sustainability exercises is the potential for material innovation to transform the global landscape of plastics globally. LEGO has innovation in its DNA — bringing new and cutting-edge products to keep up with consumer expectations year-after-year — and it has an opportunity to leverage this culture and know-how of innovation to make breakthroughs in material science that could then be the new inputs for companies around the world. Of course, this breakthrough is by no means guaranteed, but it represents a significant upside to the initiative and given that LEGO is an inventive first-mover in the space, I would not dismiss the possibility of success. Of course, like the non-profit idea, this too would require them to shift customer bases, but it would still be a for-profit endeavor focused on their industry and part of the value chain, materials manufacturing, which better positions them for success.
The ambitions of Rick Cohen’s Symbotic, which aims to provide best-in-class warehouse automation technology to other warehouses, strike me as interesting analogue to the embedded potential of this sustainability initiative. In Cohen’s case, the technology development started as a mechanism for improving his own warehousing business and eventually resulted in a realization that selling the technology more widely could give Symbotic access to a much larger profit pool.
[1] Tim Smedley, “Every Little Helps,” The Guardian, May 2014, https://www.theguardian.com/sustainable-business/every-little-helps-distraction-making-sustainable-business, accessed November 2017.
[2] “Half of Americans Think Global Warming Mostly Human Caused,” Yale Program on Climate Change Communication, http://climatecommunication.yale.edu/visualizations-data/half-americans-think-global-warming-mostly-human-caused/, accessed November 2017.
The statistics presented by LEGO should inspire other companies to aim to achieve higher use of renewable energy. The resources allocated to comply with a more sustainable supply chain are evidence to how important it is for LEGO to stay true to its Danish roots. LEGO characterizes its customers as the ‘builders of tomorrow’ and in my opinion, its high capital investment in sustainability motivates these customers to also give attention to sustainability in the future.
Your idea of LEGO building a non-profit consulting is too ambitious in my opinion. I would more likely see LEGO as a beacon guiding other manufacturers in regard to ways they can implement to reduce CO2 emission. At the end of the day, LEGO has additional responsibilities to children, stakeholders, society and the environment such as upholding highest ethical business ethics with respect to labor rights and children’s safety and I think all together it is managing a good balance between them all.