Sustainability and Sustainability driven Innovation in case of LEGO

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Wassie Tsegaye Mezgebu (820925T654)

Getahun Melkamu Firesibhat ( 841014T470)

Sustainability and Sustainability

driven Innovation in case of

LEGO

Business Administration

Master’s Thesis

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Acknowledgement

We, the researcher like to take this opportunity to thank those who have helped us in every single minute of preparing this research paper. First of all we would like to thank our families who gave us courage, strength and advice during our research they are the iron angels in our stay here in Karlstad University. We also like to thank LEGO group because they have provided us reports and documents immediately when we request their cooperation.

We would like to extend our grateful thanks to our tutors Samuel Petros Sebhatu Ph.D. and Bo Enquist Prof. for your time, politeness, patency and support. We always feel like home when we come to Samuel Petros Sebhatu‟s office thank you again for your cooperation. Above all we would like to thank almighty God justification for our existence.

Wassie Tsegaye Mezgebu

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Abstract

Sustainability has obtained greater consideration than any time before. Large international companies need to implement sustainability strategies and create solutions how sustainability strategies and business activities can go hand in hand. Sustainability drives innovation and Innovation has also served as a means to solve the sustainability problem nowadays.

Our research title is “Sustainability and sustainability driven Innovation in case of LEGO Group” and we will look sustainability issues and the effect of sustainability on innovation in case of LEGO group. We will see how sustainability drives innovation activity of the company. In order to determine the scope of our research we have raised two research questions: Is LEGO group work on creation of sustainable society, environment and business? And we will also consider were sustainability practice drives service and/or business innovation activity of LEGO group.

We have reviewed different literatures, books and articles in order to understand the concept behind sustainability and service and business innovation. We have also collected data from the company‟s website. However our research is limited to secondary data obtained from the company and articles written about LEGO group.

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1. Introduction

Business organizations always need to obtain sustained large of amount profit for shareholders. Entities are subject to different types of constraints while doing their businesses. Natural resources are reducing and non renewable energy sources are also declining due to this fact recently, Government and Non Government organizations are expecting a lot from business organizations in the creation of sustainable society, environment and business. Sustainability is now therefore becoming the burning issue in whole world.

Hence sustainability issues take the attention of business entities to consider environmental and social responsibilities into their strategic business plans. Indeed making business activity sustainable requires huge investment as Ram et al (2009) said but business organizations need to change or improve their method of production in order to manufacture sustainable goods and services. Innovation has a constructive impact on the achievement of sustainable development and corporate social responsibility goals. Therefore companies which work extensively on sustainability invest huge amount of money on research and development. Companies are using service and business innovation as a tool for achieving their sustainability objectives.

In this thesis our main objective is to make an empirical study on the sustainability activities of LEGO group and also we will asses if sustainability drives service and business innovation. In order to support our analysis we will collect data from various articles, literatures and the company‟s website.

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1.1. Company background

LEGO group is the world fourth producer of play materials and fifth largest producers of toys. The LEGO Group was established in 1932 in Denmark by Ole Kirk Christiansen; he introduced to the market the most successful product of the group “LEGO bricks” in 1949, and in 1957 manufactured a tube system to connect LEGO bricks. The company is still owned by the fourth family of Ole Kirk Christiansen and it was managed by the grandson of the founder until 2004 but the late crises forced the company owners to transfer the management to externals. Since 2004 the company is managed by Jorgen Vig Knudstorp who is external from the family member. The transparent management system is inherited from the Danish system which helped LEGO group for its continuous success (Mary and Majken 2010). The word LEGO is an abbreviation of two Danish words “Leg godt” it means “play well” the company interprets it as “it is our name and it is our ideal”.

The company is now working on development of children‟s creativity through playing and learning‟s. LEGO group produces toys, play and teaching materials for children in more than 130 countries. Currently it has about 9,000 employees.

1.2. Research question

Service and business innovation has contributed a lot in the creation of sustainable business, environment and society. So that companies are motivated to have innovations in order to attain their sustainability objectives. In this research paper we will assess whether LEGO group is working in sustainability activities or not and we will also look if sustainability drives innovation. In brief our research questions in our journey throughout this paper are described below:

 Is the group work on creation of sustainable society, environment and business? and

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1.3. Purpose of the study

Our objective in this research paper is to see LEGO group‟s sustainability activities and the impact of its sustainability practices on the innovation activities. Generally we will look various literatures and compare it with the company‟s data in order to help us answer the above research questions.

1.4. Limitation of the study

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2. Research Methodology

In this part of the thesis we will explain briefly how we get data for analyzing and the methods we chose to analyze the collected data. Scientifically conclusion about the research question can be done in two ways: it can be performed deductively or inductively.

Deduction as Pervez and Kjell (2010) discussed conclusion is made through logical reasoning. The fact we reached about should not be perfectly true in reality but it needs to be logical. The researcher draws his conclusion from large available literatures or his own knowledge. It is usually applicable in quantitative research methods (Pervez and Kjell 2010).

Inductive research is based on empirical evidences i.e. a conclusion is made based on the empirical data. In this method the research process is goes from observation to findings and then to theory building (Pervez and Kjell 2010). In this type of research process theory is the final result of the research (Bryman and Bell 2003).

In this thesis we made purely qualitative research based on theoretical data collected from LEGO group‟s website. Perhaps primary data is more valuable than secondary data during the research process some times more reliable and credible second hand data can be obtained from some companies. LEGO group has put all the relevant empirical data in its website and in to various reports including sustainability report, progress report and annual report. The research method we have used to make our analysis and reaching on conclusion based on the qualitative data is an inductive research method. This chapter generally deals with research methodology employed throughout this thesis in order to tackle the research questions is discussed.

2.1. Research Method

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can be put in terms of numerical and the analysis can be done with the use of some statistical models. Qualitative research is based on understanding from people idea, opinion and believes. We have chosen this research method because we want to see the topic in detailed form the opinion of others and theories rather than statistical figures.

Qualitative research is about producing of new theories it is not about examining existing theory. However as Bryman and Bell (2007) stated some time it is also possible to use qualitative research to test or analyze existing theories. In other words qualitative research is formulating of concepts and understandings by observing the structure of data. This type of strategy allows the researcher a flexible research design for instance the researcher can formulates unstructured questioners (Taylor & Bogdan, 1984). Trochim (2006) recommends in order to understand the very point of qualitative type of research design it is enough to take the fact contextually. As described above we made a qualitative research to explore the company‟s data over the time.

In our research, because of the shortage of time to make an interview or making direct observation we have not go beyond the theoretical interpretation of the empirical data obtained from the company‟s website.

2.2. Data Source and Collection

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Our main object in this study is to see the effect of practicing sustainable business on service innovation. In order to see that we have considered various relevant literatures and cross checked with the companies data uploaded in its website. By collecting relevant data and analyzing it qualitatively based on various literatures and researchers knowledge and experience this study look the benefit obtained by LEGO group from its sustainable driven service innovation.

All we have used is secondary data. Secondary data mean where during the data collection process the researcher is not take part. He uses data previously gathered by others for similar of different researches. Bryman and Bell (2007) said the researcher is not part of the data collection process during use of secondary source of data but others have collected this data. The secondary data we collected is from the Company‟s webpage our main objective while collecting data was to understand and examine the sustainable development and service innovation activities; and to see the relationship between sustainable development and service innovation.

We have used various documents issued by the company in different times including annual reports, sustainability reports, progress report code of conduct and leaflets. We have also collected information from previous researches and articles. These documents have helped us to get deep understanding of the industry in general and the LEGO group in particular. It is also important to understand basic concept about the research topic: Sustainability and service innovation. LEGO group has started to issue sustainability report in 2006 and we have deeply assessed all the reports till 2010.

In order to support our empirical part we have also collected information from other external sources such as book, articles, online resources newspapers and previous master thesis which are related to sustainability and service innovation issues.

2.3. Research Approach

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hypothesis. In this method the researcher develops an approach to test the hypothesis. Where as in the case of inductive approach the researcher first collect relevant data and constructs theory based on the analysis made during the research process. There can also be the third type of research approach which will be developed based on the combination of the two methods (Saunders et. al 2003). As we previously stated we have used inductive research approach.

2.4. Data Analysis

In the previous part of this chapter we have explained how data is obtained and collected now we will show how the analysis is done in order to reach a conclusion. There are different ways of analyzing or processing of a raw data. As we described in the previous sections raw data can be analyzed either qualitatively or quantitatively. In this research we have used qualitative data analysis method.

There are different ways of analyzing qualitative data. Saunders et al. (2003) said analyzing of qualitative data due to the vast nature has no specified way we need to follow. Data analysis in qualitative research is affected by the research method used either deductive or inductive and it also affected by the data structure. Once data is collected in order to analyze we need to restructure it in the form of small parts or sentences without changing the meaning of the original text which is helpful to understand relationships and important to make comparisons with the underlined theories and the method is terms as meaning condensation (Steinar 1996). We have used this method throughout the analysis process in order to make the data easier to understand and simple to compare and contrast.

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Generally our main intention in the analysis part of our research process is to compare the empirical data obtained from the company‟s website and other documents with the theoretical framework we put under chapter three and point out similarities and deviations to reach good conclusions. Specifically we have seen if there is a relationship between sustainable development and service innovation and how sustainable development drives service innovation.

2.5. Validity and Reliability

Both these terms refer to the existence of some credibility for user who are interested to read the underlined research paper. The author must bear in mind a responsibility in order to produce a thesis with its conclusion is based on valid and reliable source of data and free from bias and have good analysis.

We have deeply looked the data regarding sustainable development and service innovation especially during the years from 2006 to 2010 and taken all data and presented and interpreted concepts in credible and reliable manner. We have put all the data in its original form. Validity of a research as Bryman and Bell (2007) stated is the truthfulness or accuracy of the conclusion made based on the data gathered from the study. In the previous part of this chapter we have mentioned that we have used only secondary sources of data so that we have critically considered the data in order to assure its validity and reliability and we analyzed the company‟s history in relation to sustainable development and service innovation. In our understanding this helped us to have valid empirical data.

A research is said to be reliable when the finding and result can be applicable in other researches and it is consistent with change in different variables. Generally when the reflection made based on the finding is repeatable and applicable for future researches it is said to be reliable (Bryman and Bell 2007). Reliability also measures the level of stability of the research result. It deals about the strength of data measurement it dictates the result of the study should be consistent with different measurements (Merriam 1994).

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3. Theoretical background

The main purpose of this thesis is to look the sustainable practice of LEGO group and effect of practicing sustainability strategies on service innovation. In order to answer our research question and to see the link between sustainability and service innovation we have examined various literatures.

Sustainability and service innovation are highly interrelated in many aspects. The need for innovation can be derived from sustainability demand in which companies always want to satisfy their customers and stakeholders need along with sustainable development goals. In other words if a company need to have sustainable business it has to shift from the current or traditional to new energy efficient and eco friendly way of production both requires innovation. Therefore we can say that sustainability brings or increases the demand for service innovation.

Usually when we hear the concept of sustainability or sustainable development as Hart (2005) said we start think of about renewable, responsible, environment, society, clean, zero waste and financially feasibility circumstances. Most of these concepts are closely related with getting new or improved ideas which are part of innovation. So that recently innovation and sustainability cannot be seen separately.

Much has been talked about sustainability but little action is taken so far. For example the Copenhagen, 2010 and Cancun, 2010 meeting expected to bring more changes than the previous years‟ meetings on sustainability before the meeting was held but it was ended up without answering key question about regulations of carbon emissions and environmental protection and sustainability in general (Knut et al 2011).

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of benefit and cost of sustainability practices and difficulty of formulating a formula to measure the impact of sustainability.

These days sustainability is associated with innovation. Companies who give more attention for environmental consideration always focus on the innovation of effective production processes and utilization of resources. Business entities which give more emphasis on sustainability also invest large amount of funds on innovation more than those companies which give less emphasis for sustainability (Knut et al 2011) this implies that sustainability can have effect on innovation strategy of a company.

In the subsequent parts of this chapter we will first explain the concept sustainable development and corporate social responsibility, and then we will look at innovation in two different perspectives: service and business innovation and finally we will see sustainable driven innovation.

3.1. Sustainable development and corporate social responsibility

Usually these two terms can be used to represent the same thing but conceptually they are different. Corporate social responsibility refers to the triple bottom lines dictated by the WBCSD i.e. economic, social and environmental prosperity of the business however sustainable development give more emphasis to societal and environmental development.

WBCSD (1996, p,3) defines sustainable development as:

Sustainable development involves the simultaneous pursuit of economic prosperity, environmental quality and social equity. Companies aiming for sustainability need to perform not against a single financial bottom line but against the triple bottom line.

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Humanity has the ability to make development sustainable – to ensure that it meets the needs of the present without compromising the ability of future generations to meet their own needs.

The Brundtland has put sustainable development in clear terms which looks the demand of the present society by reducing the impact on social, environmental and economic effect of the future generation. This point is further explained by Brown (1992) as sustainable development is intergenerational in which it sets a limit for the excessive utilization of energy and resource so as to give emphasis to the future uses.

Sustainable development is the act of improving human life at the same time by considering environment-is the most significant but difficult issue to achieve in the mean time (Massachusetts Institute of Technology 2003).

Sustainable development is a framework which connects the humankind with the natural system. They argue that human beings livelihood is highly dependent on nature. Development by considering nature is the key for the creation of healthy social and environmental places (William and Kim 2008).

During the early times most companies perceives business activity only in terms of an increase in wealth and net income for shareholders. Shareholders‟ investment can be increases just by engaging in profitable business, that might be by considering effect on environment and society or not. So companies need to differentiate the cause for an increase in wealth.

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interested groups dictated development should be sustainable. The WBCSD (1996) has framed three bottom lines for a sustainable business (business activity considering society and environment) which are economic prosperity, environmental quality and social equity. In short they are considered as the „Triple P‟ (People, Planet and Profit) principle by Elkington (1997).

Corporate social responsibility defined by World Business Council for Sustainable Development as a business activity which behaves ethically and involves economic development by simultaneously improving the livelihood of the society. The relationship between these three bottom lines can be seen in Figure 2. This model depicts the relationship between economic, social and environmental activities of a company.

Figure 2.1 Model of sustainable development (Johann Dréo/Wikimedia Commmons2007, p 3.)

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empirical evidence which links these two elements that means wealthier is not necessarily mean cleaner. But they agree the triple bottom lines are critical for sustainability.

3.2. Innovation

We have discussed sustainability in the previous part of the chapter here we will see innovation in brief. Innovation is always associated with creation of new thing which can be converted in to monetary terms. It means producing of new materials, products, processes or introducing of something new which can perform task where human being were unable to do it before (Jim 2002).

Innovation helped a lot for the creation of new business opportunity for investors and it has contributed for the development of a country. These days it serves as a means to overcome the sustainable development problem. The work innovation can be defined as:

Innovation is a focused application of the human mind to the world that yields an original creation with practical use (Massachusetts Institute of Technology 2003, p, 9).

Innovation can also be defined as the introduction of goods or services that may not be entirely new but it is creation of products in a better way. It is a continuous and necessary process which resulted from research and development activities. Its ultimate objective is making of business from the invented products or services. Innovation is creation of entirely new product or service or it can be modification of either functionally or conceptually currently existing product or services (Jim 2001).

OECD (2007) identifies four ways of classifying and defining innovation. This thesis deals with the effect of sustainability on service and business innovation which is in one or another way included in each part:

Product innovation: is characterized by the creation of new or genuine products

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improvement of production techniques, inputs, materials, software and other functional characteristics.

Process innovation: is innovation of completely new or partially improved

production or delivery system.

Marketing innovation: it consists of implementation of a new marketing system such as changes in product design, packaging, product placement, product promotion or pricing.

Organizational innovation: is introducing of a new organizational structure,

business practices, workplace and also practicing of new ways of conducting external relation.

We will see innovation from two perspectives: Service innovation and Business innovation. Service innovation is introducing of new services or improvement of existing service in a business process.

Innovating of service is very important for business improvement but the process of innovating is not as such simple. It is logical to invest in service innovation activities for business organizations because it is helpful for profitability and differentiation. Innovating service is a problem for the entire companies both in developing and developed nations. The main problem in developed nations is a lack of knowledge for innovating of services than innovating of new tangible products (Henry 2011). The globes large companies are moving towards services providing that physical products. The 2008 statistics in the member countries of Organization for Economic Cooperation and Development (OECD) shows 70 percent of gross domestic product and employment is from service companies (OECD 2005).

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Business innovation is wider than service innovation it includes innovation of products or services by changing the entity in general or business processes in particular or by giving new product or service for customers and creating constructive value for the business. So the ultimate objective of business innovation is creation of new value for customers and investors (Koki 2007).

Koki (2007) identifies two reasons why companies must involve in business innovation: to maintain strong competitive advantage in the existing market and to enter and create new markets by introducing new items. Business innovation is somehow different from invention. Invention is introducing or generating of new ideas however business innovation is using of these new ideas to create new market in order to crop cash. Hence invention is a single step in the process of business innovation in which it consists of conversion of new ideas in to new goods or services (Mark 2006).

Therefore innovation in a business entity can hold innovation of services associated with the whole production process; or it can be business innovation which is bringing new concepts to the production process to expand market share. In the next part we will see the relationship between these two forms of innovation with sustainability.

3.3. Sustainability and Service Innovation

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effectiveness. Therefore innovation is inevitable as far as an entity is willing to possess sustainable business activity.

Innovation for sustainable business is mostly practiced in developed countries rather than developing countries. It is natural to observe that because it is only after primary needs of individuals or companies are satisfied the need for safety or protection will emerge. We consider profitability is the primary need for the developing and new companies so they will give less consideration for environment and society. In western countries as Nidumolo & Rangaswami (2009) stated most entrepreneurs demand to see sustainable business which can assure reduced waste the so called green production.

Service innovation can be motivated by different factors especially it is highly driven by demographic factors and sustainability demands. We will focus on sustainability driven innovation. If the population is continues to grow it will impose pressure on utilization of natural resources and available energy sources so that companies will demand to involve in innovation of new types of services or need to improve the existing service in resource and energy efficient way. There are varied types of stakeholders in the developing as well as developed countries so it creates different need in the service quality. Sustainability issues also affect the design for services delivery. Service innovation is expected to achieve high quality of service and productivity by considering environment and society as well (University of Cambridge 2008).

Environmental impact of aggravated industrialization and modernization can be determined as a function of three variables: population, per capita consumption and technological efficiency of consumption. Every increase in population and resource consumption has an influence on the expectation on technology and innovation (Vidhya and Chris 2004). The UK government highlighted the role of innovation for sustainability in its innovation report (2003, p, 9) as follows

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waste. We need to find new ways to break the link between economic growth and resource depletion and environmental degradation.

Here we can understand that innovation can serve as a tool to achieve sustainability, hence sustainability can be driven by service innovation. The relationship between sustainability and service innovation can also be seen from another angle as Knut et al (2011) discussed. Sustainability means different for different managers who are in different management positions of a company. C suite managers (Lower level managers) perceives sustainability as Knut et al (2011) writes is a means to create new sustainable business opportunities by using innovative solutions. In other words the primary objective of implementing sustainability is not environment rather creating of sustainable driven new revenue by using innovation as a means.

Data collected from survey made by Knut et al (2011) from interview response of managers in different companies show sustainability brings innovation because sustainable driven business encourages the optimal utilization of resources, efficient production with less energy consumption, innovation of improved product as well as process and better relation with suppliers in terms of developing of new efficient products. These all activities require creation of new ways of innovative mechanisms which are in line with sustainable business.

Companies whether they are driven by sustainability or other business factors they usually involve in innovation activities. They invest huge amount of time and money in order to encourage their research and development department so as to have innovative solutions (Julian 2011).

In the view of Jean-Marc and Bjorn (2004) sustainability is a guiding principle for economic development. It is a means of fulfilling the needs of today‟s generation without affecting the interest of tomorrow‟s generation (World commission for environment and development 1987).

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energy sources are reducing rapidly like fossil energy sources. That means innovation is a must for sustainable growth and development. Here we can observe that sustainability strategies drive the innovation path of an entity.

Sustainability led innovation is also important for economic performance of a company. If a company is focusing on reducing environmental effects by using resources in an efficient way its financial performance will immediately increases because profit is a function of cost and revenue. Consequently innovation can be initiated by implementing business goals which have implicitly or explicitly give more consideration for social and environmental protection and economic prosperity (Jean-Marc and Bjorn 2004).

While a company is implementing sustainability goals it needs to involve in rigorous innovation activities which ultimately require investment of ample amount of money. So that environmental protection and economic development sometimes may have inverse relationship i.e. in order to use resources optimally and reduce negative environmental effects the company need to invest high amount of money on innovation. Fussler (1996) stated sustainability need huge continuous improvement on goods and services. Goods and services should be produced in a way that reduces environmental effect and at the same time by offering high satisfaction for the final users. On the other hand he stated high amount of production and process improvement have also high impact on the environment. Therefore companies need to make tradeoff between the extent of investment on product improvement and its side effect on the environment.

In simple words innovation involves the creation of new products, production process or services. When innovation considers or derived from the need of implementing environmental protection it is considered as eco innovation. Eco innovation is aiming to create improvement in the environment (European commission 2009).

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implementing high technologies which can use inputs efficiently and by reducing energy consumption during the production process.

Tidd et al (2005) show the effect of sustainability on innovation as innovation comes from day to day interaction of social, political and cultural issues. For example global warming and treats, people health, environmental pollution, population growth, climate changes and reduction of input availability have posed great challenge to human beings. Due to this fact sustainability is compulsory which in turn requires innovation so as to eliminate or at least reduce social and environmental challenges (Tidd et al 2005).

The relationship between sustainability and service innovation becomes strong in the long run plan of business entities. Because in their long run plan companies need to think about sufficiency of resource and energy availability. If companies improve resources consumption and increase capacities which can address the problem of clean technology and eco effectiveness they can achieve long term sustainability. So that in the long run the demand for sustainability will initiate the demand for innovation (Hart 2005).

Sustainability is mostly associated with getting cleaner operations system which is attained by minimizing of industrial wastes, using of efficient production system and by involving innovation to improve energy or resource consumption. Sustainability designing is expressed as strangle between white and black: it means that good biological life cycle and bad industrial product life cycle respectively. As we previously said development can be brought in different ways but white development is the best. Companies can use innovation to create sustainable business which should have reduced impact to the atmosphere (Hopkins 2010).

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through efficient management systems which are concerned about innovation and sustainability (Mclntosh & Arora 2001).

3.4. Sustainability and business innovation

Business innovation as we described in the previous part of this chapter aims to create new ideas in order to enjoy lucrative profit by increasing market share and it is also affected by sustainability. As population continuous to grow the consumption of natural resources will also increases finally we may end up with imbalance between demand and supply of resources. The effect of this is overwhelming according to Ozor and Igbokwe (2007) which includes pollution, loss of genetic diversity, soil degradation, desertification and deforestation.

It can be argued that continuous consumption of natural resources will have high impact on the environment as well as the social well beings. The existence of climate change issues and the problem of non renewability of fossil energy resource demands new energy source (Nelson 2008). Teresko (2006) recommends use of science based technology as a solution for the innovation of efficient or new energy sources to reduce the impact on the environment.

Most industries and consumer good suppliers get energy from petrochemical companies (Siham and Stephen 2010). In this respect innovation plays dominant role by introducing Biotechnology in replacing fossil related energy sources (Nelson 2008). Biotechnology, as Nelson (2008) stated helps to produce energy by using inputs which are renewable, environmental friendly and usually characterized by consumption of less energy when change in design occurs. So companies can sustain their business by using new eco friendly energy sources and new technologies.

Mostly business innovation is affected by customers demand for environmentally friendly products and shareholders interest to collect large possible return from investment.

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fulfilled by integration of different factor of productions including use of improved ongoing technologies, well talented human power, sufficient capital, natural resources and effective distribution channels. Therefore business innovation can serve as a toll for transforming one society to new sustained way of living (Elzen et al 2004).

3.5. Sustainability driven innovation

We have seen that innovation, either it is service innovation or business innovation or any other form can be driven by sustainability. Therefore we will consider the impact of sustainability on innovation without considering the different types of innovation we explained before. Business entities invest high amount of money on research and development to make business from new technologies or just to give emphasis to environmental effects or to make sustainable business. Therefore they always want to get new methods of production which have fewer side effects on the environment and society.

Innovation as we discussed before can be driven by sustainability practices. These days the extent of sustainable driven innovation has increased. Big companies has increasingly make high spending on product and process innovation which will consider both existing and future stakeholders interest however the stage of development for sustainable deriving innovation is in its primary level (Little 2006).

Cecile et al (2001) classifies companies in to three groups based on their approach to innovation and use of innovation for sustainability objectives.

Large companies: This group includes companies which are large in terms of

size and financial capacity and their involvement in the international memberships. These companies include sustainability in their long term strategies and invest large amount of money in sustainable innovation activities (Cecile et al 2001).

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reducing the environmental effect of production process and output by building good environmental and social responsibility. They include innovation in to their business strategy in order to minimize competitors influence on the market share and sustainability is also one of the main agenda of their business strategy (Cecile et al 2001).

Large companies consider service associated with the underlined products is a key for sustainable growth. When services are included in the production process waste to the environment will reduce because it allows the reuse of products. Hence increase in servicing of products requires innovation which is derived by sustainability. Companies also become advantageous by incorporating innovative services to their business activity because it will reduce the impact of competition in to their business (Cecile et al 2001).

As Cecile et al (2001) stated these groups of companies usually have a communication strategy with stakeholders who are affected by the environmental impacts. They will receive feedback from clients, employees, environmental groups and others to have innovative solution in order to reduce environmental pollutions. They make a lot of lobbying activities in order to convince others to environment protection issues.

Small innovative companies: These are groups of companies which have a small

share in the market but they believe they are considering the environment in to their products and production process. They think all stakeholders are not in the position to take enough measures to protect the environment and these groups of companies are in short of raising money to make lobbying actives. However as Cecile et al (2001) pointed out they are doing as much as they can to protect the impact on environment.

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Other companies: Unlike to the about two groups of companies these groups do

not consider sustainability at least in the short run. Sustainability is not a primary issue to be included in the business strategy but it is one simple aspect to be considered. Generally sustainability driven innovation is not usually visible in these types of companies compared to the above mentioned groups (Cecile et al 2001).

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4. Empirical study

LEGO group has a large market share in the supply of toys and children play materials. It distributed its products almost in 130 countries. Due to its large market share and its activity the company can affect the environment as well as the society. In this part of our thesis we will briefly look the actual data from the company‟s website and various articles concerning sustainability, service and business innovation and their relationships in case of LEGO group and we will see if sustainability drives innovation in general.

4.1. Only the best is good enough

The company has implicitly started implementing of sustainability goals since the start of its business. “Only the best is good enough” is the company‟s motto towards its business and its sustainability goals. When a given company is starting to launch its business activity it is obvious to expect high income for the shareholders, however consideration to take responsibility to other stakeholders is also compulsory because the company‟s activity will have impact on the local peoples and the environment. The interest of stakeholders including local communities, employees, customers, suppliers and others can be met by providing them sustainable products and by reducing the negative impact of the company on the environment and society. LEGO group believes only the best is able to meet both the interest of shareholders and stakeholders. This is the reason LEGO group defines its motto as “Only the best is god enough” (LEGO sustainability report 2006).

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The environmental policy is formed by taking in to account of the entire surrounding environment. The LEGO group‟s ambition with respect to the environmental objective is to maintain a high environmental standards and it also considers as a minimum requirement to respect national and international laws which LEGO accepts. It considers the effect or impact of its business activity on the global environment. While companies are doing their business in line with owners‟ interest (maximization of profit) it does not usually consider the negative effect on the society and environment. The entity incorporates the global environmental principles in to its environmental policies. The people and cultural policy determines LEGO group‟s interaction with various societies and defines organizational culture and leadership (http://aboutus.lego.com/en-us/corporate/responsibility.aspx).

4.2. Environmental policy and Innovation

In this research paper the main intention of the researchers is to look the effect of implementing sustainability strategies on service innovation in LEGO group. Sustainability motivates the innovation activity of a company because sustainable business requires care for the environment and society along with satisfying the owners‟ interest and our study further looks the corporate social responsibility activity of LEGO group.

LEGO group considers the environmental promise during the manufacturing process of toys and play materials. It is stated under the LEGO group‟s 2010 sustainability report that due to the increase of population and demand for its products the need for energy and raw materials has considerably increased. The increase in demand will pose in three fold challenge for the environment: “scarcity of inputted resources, high energy demand and an increase in waste”. LEGO group considers these challenges as highly important for the protection of environment.

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and waste to the atmosphere. The company has focused on two strategies in order to tackle this problem i.e. use of long durable products and assessing the existence of unique compatibility however it believes these are not enough to cope up with the increase in demand and consumption of resources. Hence in 2010 LEGO group decided to implement new ways of sustainable driven innovative production methods (LEGO progress report 2010).

The new method LEGO group adapted to sustain its business is called “Design4Planet” (D4P). It is initiated by the idea Cradle to Cradle means “… a

production process where products are developed for closed-loop systems in which every output ingredient is safe and beneficial…” and Life-cycle assessment

is “a process of evaluating the effects that a product has on the environment over

the entire period of its life thereby increasing resource use efficiency and decreasing liabilities…” (LEGO progress report 2010, p 11) It gives more

attention for product design because production process and input used have a material influence on the environment. It has set up new standards in the design of production process by including environment and climate effects and opens transparent dialogue with stakeholders. D4P program has been structured in five projects which allow continuous adjustments throughout the project life and here under we will discuss each part in detail (LEGO progress report 2010).

4.2.1. Material chemistry

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The project work in cooperation with the existing manufacturing system which focused on product safety, quality, legal compliance, technical and input problems there by provide economic solutions (LEGO progress report 2010).

4.2.2. Environmental certification

Environmental certification project is used to check whether products are environmentally friendly or not. In the coming ten years LEGO group has planned to comply with voluntary environmental certification standards for all its products (LEGO progress report 2010).

4.2.3. Reduced and compostable print and packaging

When LEGO group uses printing and packaging materials during production process or for its products primary consideration for environmental effects is given. D4P program looks for packaging and printing items used in the production process which are long durability and easily recyclable (LEGO progress report 2010).

4.2.4. Design for disassembly

This project works to maintain zero level of waste by reusing of disassembled products in the production process as a row material. Components are manufactured by considering the reusability after their disposed. In this respect LEGO group works in cooperation with suppliers of inputs to innovate reusable materials (LEGO progress report 2010).

4.2.5. Return solution

LEGO group works to find solution for customers who want to dispose used items in environmental friendly manner. LEGO products are structured to have long durability. The return solution project deals with customers who want to dispose of LEGO products after they are using them in environmental friendly manner (LEGO progress report 2010).

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development of environmentally friendly innovations. LEGO group has launched new environmental policy in 2006 aiming of continual environmental improvements through innovation. Innovation strategies include reduction of energy and raw materials consumed in the production process and invention of recyclable raw materials. These policies are laid up on employee empowerment and considering environmental protection. LEGO group environmental protection as the company says starts with the assessment of raw materials and chemicals used in the production process in order to reduce the negative impact on environment. To protect the environment LEGO group has used various innovation mechanisms in which we will discuss them in detail below (http://aboutus.lego.com/en-us/corporate/environmental.aspx).

Recycling: Plastic materials which are used in the production process or removed

by any reason are sorted out by plastic type and almost all is granulated and sent to the recycling department to be used as a raw material in the production process. Discarded plastics items which LEGO group is unable to recycle are sold to other companies which have the capacity to recycle them. Only about 1.1% of the discarded plastic materials are not being recyclable and it is forwarded to the CHP plant for incineration

(http://aboutus.lego.com/en-us/corporate/environmental.aspx).

Selecting chemical substances: While in the process of production of toys and

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working in the glue production and for the protection of the environment (http://aboutus.lego.com/en-us/corporate/environmental.aspx).

Energy consumptions: The global sustainable development challenge is mainly

caused by the carbon emission from various industries. The extent of emission could vary from industry to industry or the type of energy used during the production process. LEGO group uses extensive amount of electrical energy in the manufacturing process- plastic raw materials should be melted, casted and cooled in the production of LEGO bricks which requires use of high amount of energy which will contribute to the global warming problems. The effect may vary with the type of energy source used. Renewable energy source are better than non renewable energy source in terms of emissions. LEGO group uses renewable energy sources in some factory site for example in 2005 28.5 per cent of electricity utilized were produced from renewable energy in Denmark. LEGO group also work with external forwarding companies which transports its raw materials and products because it considers the emissions of logistic companies is high (http://aboutus.lego.com/en-us/corporate/environmental.aspx).

Continues long term improvement: - Sustainability requires investment on

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Products: - LEGO group considers the environmental impact throughout the

product development process until the disposal stage of the products. It gives due consideration to the manufacturing process and to products when they are in the hands of users. Finally it has considered the environmental impact by looking further the disposal of used toys and play materials (http://aboutus.lego.com/en-us/corporate/environmental.aspx).

Our environment can be affected by the direct output of companies or through their production processes. Basically some outputs are not easily decomposable or are not recyclable after their disposal; this would have destructive impact on the global environment. Inherently some production process eject large amount of carbon to the atmosphere compared to others. These days innovation has contributed for the creation of products and production processes which could have less effect to the environment. Therefore, if every business organization takes due consideration on the design of products or production lines the environment can be protected

Suppliers: - Environmental issues are the concern for all stakeholders as far as

LEGO group is concerned. Both big as well as small companies could bring environmental influence perhaps the major contributors of carbon to the atmosphere may be large manufacturing and energy producing companies. The day to day interaction with suppliers and customers, production processes, distribution of products and disposal of old or used products of entities can have a material influence on the environment. Hence companies could affect the environment in different ways.

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Responsibility: - Each employee of LEGO group has the right to call attention in

case if he believes that the activities of the company are in such a way that affects the environment. LEGO group takes consideration for the environmental issues in all its production process and in its activity in general. It involves employees at various levels to take environmental responsibilities and participate in environmental protections. An employee can report his comment directly to the local environmental protection authority or the responsible managers of the company (http://aboutus.lego.com/en-us/corporate/environmental.aspx).

4.3. Social policy and Innovation

The world can be the safest place to live if individuals or groups of individuals and companies work to protect the environment and the society. LEGO group work to protect employees, customers, local communities and other stakeholders from any harm it might happen during its business undertakings. The group considers as a minimum requirement all national and international regulations regarding issues of corporate social responsibilities.

Safety and health environment for employees: - It continuously inspects work

place for the well being of employees and management staffs. It takes as a minimum requirement the national laws of a country where it operates and international regulations concerning employee safety. The LEGO group always strives to create the most favorable working environment for its employees. LEGO group believes that it is its responsibility to implement a healthy working condition for its employees. As employees being the major stakeholders of the company it is compulsorily to create a healthy working environment (http://aboutus.lego.com/en-us/corporate/healthsafety.aspx).

Work planning: - A company can create conducive working environment for its

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improvement is made when it is required. Every quarter the working condition for employees should be checked against the rules and regulations of the company or any national or international laws where LEGO group is operating. Each employee has the right to comment on working condition and give his opinion either directly to the local safety and health authority or the respective line manager (http://aboutus.lego.com/en-us/corporate/healthsafety.aspx).

Relation with other stakeholders: - The expectation from the society increases

when the company gets bigger and bigger. The responsibility of the company to the society is high when it operates in a large scale because it uses large amount of resources, it will also have large output and it will have a lot of day to day interactions. The final output of all manufacturing processes ultimately produces the main product and byproducts. Both main products and byproducts could have an impact to the society well beings because in the production process there will be a use of chemicals as raw materials or any other forms. So that entities should have a lot to do for the society in order to sustain their livelihood. This in turn creates high expectation by the society and requires companies to assume high responsibility.

LEGO group undertakes responsibility to the society when working its businesses and also considers all manufacturing places it operates. The company explicitly states in its sustainability report, as “We will continue to be responsible,

trustworthy and adhering to the principles of Global Compact” (Sustainability

report 2006, p 27).

Support children learning:-LEGO group innovate a new learning system for

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to be used in group therefore it will encourage team work. It also focuses on children at their early development stages and it gives high consideration to mathematics and technology fields which LEGO group believes it is the most difficult field of studies to understand for minors. As LEGO group pointed out children give more attention for activities which are accompanied with funs and challenging works. The company works with different international educational institutes in different parts of the world for example in USA it works with Carnegie Mellon University‟s Robotics Academy in Pittsburgh and Tufts University‟s Center for Engineering Outreach (CEEO) in Boston (LEGO sustainability report 2006). LEGO group products are designed to help children creativity by encouraging them to use their hands and develop their motor skills (Datamonitor 2010).

Robot competition and education centers: - Children are the main focuses of

the company; LEGO group gives high emphasis for the development of children especially in science and mathematics fields. It has set up LEGO mind-storms Robot competition and LEGO education center in different countries for the recreation and development purposes. In the first league Robot competition children of age 9-16 are involved and it is organized with the support of US non-profit organization to boost interest of children to the fields of science and mathematics by inspiring them with challenging robot games. Every year the competition is held in different parts of the world for instance in 2006 the competition was titled as “Nanotechnology” 9,000 teams were involved in 37 countries (LEGO sustainability report 2006).

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Charity: - LEGO group involves in charitable activities to promote the right and

living condition of children and opens opportunity for children creativity and learning. It also works by evolving its employees on charitable activities in case of natural disasters and helping others who are in trouble. For instance in USA 2006 it has helped the activities of rehabilitation of schools and children affected by the hurricane Katrina. The LEGO group has donated 1.6 million Lego bricks in New Orleans (LEGO sustainability report 2006).

Employees of LEGO group are actively participating in the charitable activities. LEGO Italy employees have participated in distribution of Charity boxes for L‟Aquila residences affected by the 2009 earthquake (LEGO sustainability report 2006). We can take as an example also the donation of 1,000 LEGO sets to orphans in Russia by the children of LEGO employees in Hungary and Denmark (LEGO progress repot 2009).

4.4. Innovation and Business activity

Large international companies have enjoyed a lucrative profit through different means such as innovation, increasing sales level, price or engaging other line of businesses. Innovation in the business has contributed a lot for the development of the company. It has also contributed for the protection of the environment by reducing the resource used in the production process and by reducing the wastes through innovation of recyclable products.

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The major share of the company‟s income is generated from the sale of LEGO City, LEGO DUPLO and LEGO star wars. The income from these diversified products is increased considerably.

LEGO group in this respect involves its customers in the business innovation activity. This helped the company to have more business success especially in US market. One of the most popular products of LEGO group is LEGO mined storms. The company included programmable motor in this product with plastic parts. This program helped customers to customize their own LEGO design which could move. Later the program was hacked and unauthorized modification was made to make LEGO to do other tasks. At that time the group‟s personnel was decided to stop the action on the ground of an illegal action. However the company by reconsidering its decision it launches the software to clients so that enables customers to make their own program and watch what they like. This program was an entirely success for LEGO group‟s service innovation activity (Henry 2011).

This innovative open approach brought implementation of new middle school curriculum in United State to help children understand robotics by using LEGO group‟s products. “Students were now learning about programming and design,

building LEGO vehicles to follow a track on the floor or shoot a ball through a basket”, p, 88. In the software clients were given different challenges to compete

each other by developing their customized program. In such a way LEGO group have innovated a system which is contributing a lot on the creation of middle school science and technology teaching program. An open innovation system LEGO group used to succeed in service innovation in United State market is called Bringing the Outside in approach (Henry 2011).

4.5. Code of conduct and sustainability

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vendors work is in compliance with International Labor Organizations (ILO) manual. The company also requires vendors to give written assurance about their suppliers‟ compliance with the LEGO group‟s code of conduct (LEGO code of conduct).

The code is also serving as a guideline for the proper implementation of sustainability activities of the company because LEGO group sets its social and environmental responsibility by considering its moral and ethical values of the code.

In 1999 UN has issued a Global Compact initiative to support the business community in the making of sustainable business. LEGO group is the first toy manufacturing company to join this initiative in 2003. The group strictly follows the initiative and recommends its vendors to follow it consistently. The Global Compact initiative comprises of ten principles which are categorized in to four parts: human right, labor right, environment and anti-corruption (LEGO code of conduct).

As this initiative focuses on ethical protection of both social and environmental goals it is important for LEGO group to practice it for its sustainable development and CSR strategies. The group strictly adhere the initiative for its own practice as well as for its vendors.

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The code of conduct also talks about the environmental protection. It instructs both the company and its supplier‟s compliance for local laws and regulations regarding environmental protections. The code explicitly dictates for the existence of a system both in LEGO group and its suppliers to reduce waste, energy and emission, use inputs in environmentally friendly way, dispose wastes in safe way, help for reuse and recycling of products and innovate environmental friendly technologies (LEGO code of conduct).

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5. Data Analysis

This chapter deals with the analysis of the data collected from the company‟s website or from articles wrote about LEGO groups activity regarding sustainability and innovation in general and service and business innovation in particular. As we have seen in theoretical part both service innovation as well as business innovation are affected in the same way by sustainability so we will make no distinction between the two when we analyze the data.

We will analyze the empirical data collected about the company‟s sustainability and service innovation by taking various articles and literatures described under our theoretical part as a frame of reference.

5.1. Sustainability in LEGO group

LEGO groups business activity is guided by an interesting motto which can be applicable to any sort of human activity: Only the best is good enough, In LEGO groups perspective any activity including business, sustainability, innovation, charity or any other will be achieved if we are exerting to use our resources and energy in the best way possible. The company‟s profit is increasing continuously, its market share is also getting bigger and bigger and its innovation has helped to create brand loyal customers since it is managed and operated by best creative people throughout its live for 80 years. During the recent recession the company is getting large amount of income when other companies are affected badly due to loss of market this happens as LEGO group‟s thinking because of the existence of innovation and the existence of best way of thinking and management in the company.

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expresses sustainable development and corporate social responsibility as existence of ethical responsibility of the environment and society by simultaneously engaging in value adding business activities. LEGO group‟s motto “the best is good enough” and inclusion of environmental responsibility as one of the ingredient in its code of conduct are the implication for its responsibility. When LEGO group involves in sustainability it consider its effect to the environment and society in the best way possible in order to respect its motto: the best is good enough. The people and cultural policy shows the strong work of LEGO group towards corporate social responsibility.

The company‟s work on philanthropic activity is so much motivating because it also involves its employees in the charity program when natural disaster affects some areas. In United States in 2006 societies were affected by hurricane Katrina and in Italy in 2009 there were an earthquake affecting many people during all these times LEGO group staffs and the company itself were the major contributor of charitable items. This is important example of LEGO group‟s activity towards corporate social responsibility.

5.2. Innovation for Environment

Here when we say innovation we are referring to service and business innovation but as we stated in the previous parts we will not make any distinctive difference between the two parts because we have seen in the previous part that they are driven in the same way by sustainability.

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and input energy. To produce LEGO products which have long durability and to associate unique compatibility it needs creating of new ideas and implementation. Sometimes therefore innovation becomes the only solution to implement sustainable development and corporate social responsibility. We have observed that LEGO group corporate social responsibility need drives the need for innovation.

Design4Planet (D4P) is the activity to innovate solution for the sustainability problems LEGO group implemented. One of the determinant factors for the implementation of innovation is ambition to formulate clean environment. The five projects under Design4Planet program are the response to environmental protection demand of LEGO group. As LEGO group becoming giant company operating in global market its interested groups are too many. So that its sustainability activity is affected by internal demands for implementing environmental responsibility and external stakeholder need the LEGO group to compensate its side effect to the environment.

One of the projects under the Design4planet which focuses about restructuring of materials and resources used in the production process is material chemistry. This project is mainly aimed to identify and innovates inputs which can have the least side effect to the environment. This can show the increasing trend of LEGO group towards sustainability driven innovation. LEGO group consulted resource suppliers about how to innovate inputs which could have less damage to the environment. This will help the company to construct innovative solutions for sustainability.

Sustainability and Sustainability driven Innovation in case of LEGO

Wassie Tsegaye Mezgebu (820925T654)

Getahun Melkamu Firesibhat ( 841014T470)