230. Starbucks vs LEGO: A Tale of Two Digital Transformations

Why do some companies nail digital transformation while others just waste millions?

In this episode you'll learn from two very different case studies: Starbucks and Lego.

The founder of Starbucks, the company that pioneered mobile ordering, is now saying they went too far with tech. Meanwhile, LEGO transformed from a wooden toy maker into a digital powerhouse without losing its magic.

Why did one succeed and the other fail? Listen to this episode to find out.

You'll learn:

• Why having great tech stats doesn't mean you're winning (just ask Starbucks)
• How LEGO got digital right by being boring first 
• The real reason most transformations fail (spoiler: it's not about the technology)
• Why "going digital" without a soul is like getting plastic surgery to fix your personality 

This episode is a must listen for corporate leaders planning their digital strategy, founders building tech companies, and investors who want to spot the next LEGO, not the next digital disaster.

Timestamps 

00:00 Introduction

01:30 The Digital Transformation Dilemma

03:08 Starbucks: A Case Study in Digital Overreach

05:56 Lego: Embracing Digital to Enhance Core Values

09:47 Avoiding Common Pitfalls in Digital Transformation

15:46 Practical Steps for Successful Digital Transformation

Sources used to make this episode:

1. MIT: Transforming the LEGO Group for the Digital Economy
2. McKinsey: Common pitfalls in transformations: A conversation with Jon Garcia
3. GeekWire: As Starbucks slumps, Howard Schultz says coffee giant should 'reinvent' mobile ordering  

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Transcript 

Sophia Matveeva (00:00.534)
When the founder of Starbucks says that they went too far with digital transformation, then every business leader needs to pay attention. And also, when McKinsey tells us that 70 % of digital transformations fail, well, you know something's wrong. In this episode, you will learn why this happens so you don't have to become another transformation horror story.

Sophia Matveeva (00:31.854)
executive coach at Chicago Booth MBA, Sophia Mathieu. My aim here is to help you have a great career in the digital age. In a time when even your coffee shop has an app, you simply have to speak Turkish.

On this podcast, I share core technology concepts, help you relate them to business outcomes, and most importantly, share practical advice on what you can do to become a digital leader today. If you want to a great career in the digital age, this podcast is for you. Hello, smart people. How are you today? In this lesson, we are going to focus on business strategy and digital transformation at a corporate level.

So in the last few episodes, we've gone into the real practice of making products and why a prototype should be part of your strategy. On this episode, we are going to cover things at a bigger level. So this episode is obviously relevant if you work in a big company, but it's also really important for the founders and investors here because if you're creating a tech company or if you're investing in tech, you are working in digital transformation.

And this means that you need to learn from positive case studies and from bad examples. And doing so will help you create something successful and avoid repeating other companies mistakes. And today we're going to cover two case studies of companies that you have probably used and definitely heard of. Starbucks and Lego. And my dear smart person, before we continue, I have a question for you. Are you a subscriber to this amazing show?

If you are, then thank you for being part of the Smart Tech Fun on Techies community. I love you. And if you're not yet a subscriber, but you are serious about having a great career in the digital age, then I suggest that you hit that subscribe button now. Tech Fun on Techies is the best place for smart, non-technical professionals to learn about tech and become successful in our digital age. So...

Sophia Matveeva (02:39.626)
Let's get to these two transformation case studies. Let's begin with Starbucks. So the founder of Starbucks, Howard Schultz, is now saying that they went too far with digital. And this is interesting because Starbucks was born in the digital age and they actually pioneered mobile ordering in coffee shops. And this was a huge part of their financial success for a while. And let's look at Lego. Lego is a company that started making wooden toys

back in 1932 and now it has become a digital powerhouse. So what did one get wrong? Well, the other one got right. So let's begin with Starbucks. Well, they seem to be doing everything right, which is what's troubling. So they got 31 % of their US store transactions through their mobile app. And that's incredible.

And this drives costs down and reduces friction when ordering because basically you don't have to queue up to get your caffeine hit. But then something started going wrong. Their loyalty program dropped by over a million just in one quarter. And this is according to Geekwire. And the article is pasted in the show notes. And by the way, in this episode, I'm going to reference research from MIT and from McKinsey and from Geekwire. And all of the sources are in the show notes. If you want to go deeper.

I'm doing this because I love you. Anyway, when Howard Schultz first started Starbucks, he wanted to create what he called a third space. And basically, third space is neither home nor work, so it's a place where people can sit around, talk to each other, and basically hang out with their friends. And this third space concept was inspired by his trip to Milan, where coffee shops are community spaces, and they're not

kind of like gas refill stations where people just turn up to get their hits of caffeine and go. And I used to work in Milan and becoming a regular at a coffee shop there is just lovely because people know you and you kind of have your coffee before work and it's a wonderful, wonderful experience. I totally see why it inspired Howard Schultz. But the thing is with mobile ordering, Starbucks went from having community spaces

Sophia Matveeva (04:58.026)
into what one former employee described as a sea of customers waiting at the handoff plane next to a digital board. I that sounds soulless. So essentially Starbucks got technology right, but they lost their soul in the process. And then this had an impact on share price and revenue. Because the thing is, a business is not just a collection of tools. It is not just a collection of processes. It is also the feeling that

people get from interacting with the business. And that's true whether you're in B2B and B2C. And that's the brand. The brand is the feeling. Now let's look at the Lego story. Let's go back to 2003. So 21 years ago, Lego was in trouble. There were reporting losses of over $200 million and analysts were predicting their demise. This is so sad because I used to play with Lego when I was little. Anyway, things got so bad that the owner

Kielt Kirk-Christensen had to invest a substantial portion of his own private wealth to save the company. But instead of just rushing to digitize everything, Lego decided to focus on getting their basic business processes right, so how they design, how they make, and how they sell their toys. And by 2015, they were so successful that their CEO made a radical announcement, and he said,

No more digital strategy. Isn't that interesting? So instead, all business strategy would just naturally become digital. Hmm. So let's go deeper into what both companies did so then we can learn from them. And this is important because McKinsey research shows that 70 % of all digital transformations fail. And I've covered this in the podcast before. And I just want you to know that these are hugely expensive failures.

And often the people who are leading these transformations, well, this becomes a really serious career issue for them. So I want you to be in the 30 % that succeed. So I want you to become that case study that we cover on this show that's basically how to do things. So what did Lego do right? When Lego began their transformation after 2003, they did something that basically seems really boring, but is actually crucial.

Sophia Matveeva (07:23.49)
So they built what they call an enterprise platform. Now stop yawning and listen. Basically an enterprise platform, think of it like getting your house in order before hosting a party. So Lego simplified their supply chain. They cut down the suppliers from 11,000 to just a few hundred, which obviously was much easier to manage. And they made sure that all of their core business processes actually work.

And Starbucks, well, they took a different approach because they went all in on digital transformation, creating an excellent mobile ordering system. And so a great mobile ordering system can be kind of quite separate from the rest of the company. You you can hire great UX people to make a really good app, have gamification and so on. But while doing this, they forgot what made them special. And that was being that third place that I mentioned earlier.

When Starbucks reported less than stellar results, its founder and former CEO Howard Schultz criticized the leadership publicly in a LinkedIn post that basically everybody reported about, and he said that the company should focus on being experiential and not transactional. Now, honestly, I do not think that a former founder criticizing the new leadership so publicly is the right thing to do unless there's

an actual crime or highly immoral behaviour happening. But that's not for today's episode. The point is that Howard Schultz went on the record saying that the digital transformation at Starbucks has gone too far and is destroying the soul of the company that he built. And the thing I really want you to remember from this episode, if you forget everything else, is that digital transformation is not about becoming a different company.

It is about becoming a better version of who you already are. And Lego did that well, but Starbucks lost its way. this is totally fixable if you work on it, by the way. So what's the real lesson here for business leaders? Well, let's go back to that McKinsey research. Again, it's in the show notes. So McKinsey discovered that companies don't fail because they lack knowledge of what needs to be done. They fail because they set the wrong targets and then they forget their why.

Sophia Matveeva (09:47.16)
So what does this mean in practice? Cause that sounds very theoretical. Okay. Well, Lego success wasn't about having better technology than Starbucks. Neither of these companies are fundamentally tech companies. They are not open AI. This is not deep mind. This is not about having the top technologists in the world creating frontier tech. Digital transformation at this big corporate level is about understanding that digital transformation is not a separate

thing from your core business. It's all about how to make your core business stronger because technology is a tool to solve a problem. It is not an end in itself. So when Lego digitized, they did it to enhance what made them special. And what do you think makes Lego special? Well, it's all about creativity. It's about play. It's about fun. It's about engaging children. So for example, they created an online platform.

where fans could propose new products. So this is literally engaging fans to get new ideas, but also getting that creativity out of the fans. So on this fan platform that Lego created, there was a suggestion from one fan who said, okay, what we really want is Lego Minecraft. And there were lots and lots of other fans that basically supported this idea. within 48 hours, within just two days, 10,000 other Lego fans said, yes,

we are going to buy LEGO Minecraft, please make it for us. And that got so much fan engagement that that LEGO fan platform crashed three times in a weekend. And this is digital transformation done right. Not that the platform crashes, but basically that it amplified LEGO's core purpose, which is fun, but they were just doing fun in a digital way.

So when you're listening to this, I want to make sure that you actually have some framework so you can tell whether you're heading down the Starbucks path or the Lego path. So here are three warning signs I want you to watch out for. So number one, companies often fail in their digital transformation efforts because they set targets based on consensus rather than data. So that's literally like saying, we need an app because everyone has an app. I don't want you to do that. Have an app.

Sophia Matveeva (12:05.216)
if it is going to help your core business. Number two, they fail to give their people a compelling reason for change. And this is really important because getting technology right, in my experience, is actually way easier than actually getting people on board. So think about it. If you're asking thousands of employees to work in a completely different way, then telling them that, you need to do this to protect the bottom line of the company, like nobody's going to care, not that much.

and the Lego management understood it. They didn't just tell their staff to be digital and to use new tools because that would not have worked. They essentially showed them how digital tools could help them create better toys and reach more children. So think about the kind of people who would be drawn to working at Lego. These people are creative, they're innovative, they also really love making children happy.

So what you need to do with these kinds of people is to show them that, we now have all of these digital tools that will help you become more creative. And that is a much more attractive proposition than let's focus on the bottom line. And number three, and this is crucial, companies that don't get digital transformation right focus on activities instead of outcomes. And I see this at an individual level and at a company level too. So

Companies that don't get this right, count how many processes they've digitized rather than asking if these changes are actually making the business better. And if you want some help on how to do this, just get in touch with us because literally our company works on innovation and digital transformation strategies and education. So we can help you learn how to do this in an effective and interesting and fun way. And now my dear small person, I have some

good news for you. You can actually avoid these traps and you can learn from LEGO right here, right now in this podcast episode. So number one, think about what you do really well. So start with what you do well and build on that because LEGO did not try to become a different company. They remained focused on creativity and play. This is what they started with in 1932 and this is what they are still doing in 2024.

Sophia Matveeva (14:27.672)
So what they did was that they focused on making their core operations super good before adding anything digital. So remember how they cut down from 11,000 suppliers to just a few hundred. This is not technology strategy. This is just good operational management for what you already are. Number two, in order to succeed in digital transformation, change how decisions are made. So how did Lego do this?

Well, the CEO expanded their corporate management team from just five people to over 20. So why would having a bigger leadership team actually help you? Well, because having a bigger team would help break down silos and speed up decisions, because all of these people had decision-making capacity. And so instead of having committees about technology, they put all of the key decision-makers in one room.

And also, they even eliminated nine out of 10 formal governing boards because what they wanted to emphasize at Lego is that every business decision is a digital decision and they didn't want to just have a committee on digital sitting to the side. And here's a third point. To have a successful digital transformation, you need to build a collaborative culture before you build new technology.

So Lego's chief innovation officer actually said that if a company with different departments cannot collaborate, you will kill architecture. So basically it means that if your departments can't work together, no amount of fancy technology or expensive McKinsey consultancy is going to fix that. And this framework sounds really simple and obvious, but just remember most companies actually get digital transformation wrong and add a huge, huge annual cost to them.

And why does that happen? It happens because most of them do these three steps in reverse. So they start with tech, then they try to change how decisions are made, and then they realize that their culture isn't ready, and then they try to bring in company like ours to basically teach people the digital mindset. That is the wrong order of operations, so don't make that mistake. Start with the problem, work on the culture, and then technology. Start with the problem, work on the operations.

Sophia Matveeva (16:44.746)
work on the culture, and then add the tech tools. So let's make this super, super practical. So you can start making changes the minute you stop listening to this podcast episode. So here are three things I want you to consider. Number one, look at your recent digital initiatives. Are they making your core business stronger? Or are they just digital for digital sake? Are you making an app just because your competitor has one?

Remember what happened to Starbucks? They had amazing mobile ordering stats, but they were losing what made them special. They don't want that to be you. The second thing I want you to do is to look at your decision-making structure. Who is in the room when digital decisions are made? If your technology leaders are only brought in after the strategic decisions get made, then you've got a problem. Another thing is you might have death by committee, because if all of your digital projects need to go through separate committees,

that basically either not going to happen or by the time they get through the committee, they're going to be so watered down that there's basically going to be no creativity in there. Number three, and this is the hardest one, look honestly at how your departments work together because Legos transformation worked because they got people from diverse departments to regularly meet up and to work on solving problems together.

If you're in a situation where your departments are fighting over budgets and fighting over resources and also just like have personal battles, then no fancy platform or no fancy consultancy is going to fix that. And finally, and this is the most important point, the companies that get digital transformation right like Lego do not see it as this separate thing led by a separate department.

They see it as a way to become a better version of themselves. So they stick to their core principles and just use digital to make it better. Basically a glow up. It is not a complete change. And in today's world, there's no such thing as digital strategy versus business strategy. It is all just strategy, which is why a couple of episodes ago, I told you to include prototyping into your business strategy.

Sophia Matveeva (19:03.938)
This is an example of how what's traditionally considered as just digital or product strategy is actually now business strategy. The two things are just two sides of the same coin. Lego started as a wooden toy company in 1932. They could have looked at the rise of video games and apps and thought, okay, we are doomed. That's it, time to close up shop. But they didn't. Instead, they used digital to make their core product, which is creative play, even better.

And now they have a really super bright future and an even stronger brand than ever before. And I think that's really worth learning from. And this is the real lesson here. Successful digital transformation is not about becoming a different company. It's about using digital tools to become the best version of who you already are. So the next time that an expensive consultant tells you that you need to go digital or die, just remember these two stories because sometimes it's true, but sometimes it's not.

Starbucks, who got the technology right but lost their soul in the process, and Lego, who used digital to enhance what made them special in the first place. I want you to be Lego in this case. Now, did you find this episode interesting? Did you learn from this episode? I'm assuming you did because you are still listening. So if I'm right, then please leave this show a rating and a review because this will get you calmer points.

And also when you do this, other people can find this show. And honestly, this really helps me and my team keep making high quality, free educational content for you. So thank you in advance for leaving the show a rating and a review. I appreciate your effort. Thank you. And on that note, my dear smart person, have a terrific day and I shall be back in your delightful smart years next week. Ciao.