Lego A/S Business Information, Profile, and History

Company Perspectives:

Children are our role models because they are curious, creative and imaginative. They embrace discovery and wonder. They are natural learners. These are precious qualities that should be nurtured and stimulated throughout our lives.

The LEGO brand is an integrated universe of experiences contributing to more fun and play. But the LEGO brand represents much more than just play. 'Play' in the LEGO sense is learning. By helping children to learn, we build confident, curious and resourceful adults. For their future. And ours.

History of Lego A/S

Lego A/S is the holding company for a global toy manufacturer that is the largest toy maker in Europe and the fifth largest in the world. Lego's core product is a line of plastic, interconnecting building bricks. Children can use Lego bricks in a variety of ways, making them into structures of their own imagining, or following the manufacturer's plans to assemble specific toys. Legos are aimed for children from birth through roughly age 14, though in some countries a significant proportion of sales are made to adults. The Duplo line of Lego bricks is aimed for preschoolers, and more sophisticated lines, such as Technics and Mindstorms, are geared towards older children. Lego Dacta is the company's educational products division, while the Lego Lifestyles division handles licensed lines of children's clothing, watches, and backpacks. The company also operates three theme parks, with a fourth set to open in Germany in 2002. Lego is one of the most recognized brand names in Europe, where it ranks with such other global sellers as Coke and Levis. Lego operates 24 subsidiary companies to cover different national markets, and runs ten manufacturing plants. The company is privately held by the family of founder Ole Kirk Christiansen.

Rough Beginnings

The Lego brand of toys was created in 1932 when Ole Kirk Christiansen, a Danish carpenter, decided to extend his carpentry business by manufacturing a line of simple, hand-carved, wooden toys. (The spelling of the family name was later changed to Kristiansen.) He called his new toy business 'Lego' as a contraction of two Danish words, 'leg godt,' meaning 'play well.' Years later when Lego construction toys became immensely popular in Europe, people pointed out that Lego also means 'I assemble' in Latin, but Christiansen always claimed that this double meaning was purely serendipitous. During the bleak years of the 1930s, Christiansen sold his simple wooden toys door to door in the tiny farming community of Billund, Denmark, where he lived. After facing near bankruptcy in 1932, Ole Kirk managed to survive by combining the production of his wooden toys with more mundane household implements such as ladders and milking stools. In one memorable year, the small woodworking firm became involved with the international yo-yo craze. Lego began large scale production of the toy only to discover that, like most toy fads, the yo-yo boom died as suddenly as it had begun. His storerooms crammed with thousands of the unwanted wooden discs, Christiansen converted yo-yo halves into wheels for a new toy truck that became very popular with Danish children.

After the turmoil of World War II and a disastrous fire that destroyed the toy factory in 1942, Ole Kirk Christiansen decided to rebuild his enterprise. A larger and more modern factory was constructed near the site of the old warehouse in Billund and the company was converted from a sole proprietorship to a private limited toy manufacturing company named Legetojsfabrikken LEGO Billund A/S (The LEGO Billund Toy Factory Ltd.). Ole Kirk took the title of senior manager and appointed his son Godtfred as junior manager. By 1947, the Lego company had matured into a prosperous family enterprise which manufactured almost 150 different kinds of carved wooden toys and employed about 40 people.

In the postwar period, good quality plastic became widely available for the first time, prompting Lego to add plastic toys to its line of merchandise. Initially, these plastic toys were coolly received by Danish consumers, with one journalist pointing out that 'plastics will never take the place of good, solid wooden toys.' Despite this early setback, Lego continued to experiment with plastic toys; in 1949, Lego made its first tentative step into toy history when the company introduced Automatic Binding Bricks, a plastic building toy in which the blocks could grip together to prevent block towers from toppling on little children. These blocks had studs on top, like today's Lego bricks, but their undersides were hollow, allowing the blocks to grip only when they were placed directly on top of one another. These bricks were not well received by toy consumers and many were returned from retailers unsold.

Birth of Modern Lego Toys: 1950s

The concept for the Lego System was born in 1954 when Ole Kirk's son Godtfred visited a local toy fair. One of the buyers at the fair complained to Godtfred that all of the toys being offered at the exposition were alike and that no toy company offered a comprehensive toy system that would encourage creativity in children. Godtfred felt challenged by this complaint and returned to the Lego toy factory determined to come up with an original toy system. He drew up a list of ten requirements that he felt were essential for a quality line of toys. Among the more obvious criteria, like high quality and good play value, were some particular qualities that would distinguish the future Lego brick system. These criteria included the requirement that the toy line be enjoyable for either sex, that it cover a wide age group, that the system include a large number of components, and that compatible pieces be available for adding on to the parts already purchased. Upon reviewing more than 200 toys already being produced by the Lego company, Godtfred decided that the Automatic Binding Bricks, which at this time accounted for only about five percent of sales, held the most promise as the basis for an integrated toy system.

In 1955, the building bricks, manufactured in bright red, yellow, white, and blue, were renamed the 'Lego System of Play' and marketed not just as building blocks but as an integrated toy system. Packaged with model street signs, cars, and trucks, the construction set encouraged children to create whole city blocks instead of just one building. The great virtue of the Lego System was that it was infinitely expandable; a parent could purchase a set with bricks and accessories and then be encouraged to buy limitless numbers of add-on sets. In succeeding years, the small Billund toy factory was deluged with orders for the Lego System of Play, due in large measure to Godtfred's insistence on extensive advertising and personal sales meetings with the major Danish toy retailers.

Although sales of the new toy system exceeded expectations, the company continued to experiment with the design of the product. A major breakthrough came in 1957 when, after testing a variety of models with local children, the company introduced the now famous Lego brick with studs on top and tubes underneath. This new design not only held the bricks together more firmly, but it allowed a child to place the bricks together in any configuration. Three eight-studded bricks could now be combined in 1,060 ways. A child could build tall structures of practically any shape or size, limited only by the number of Lego bricks at his or her disposal.

With the new and improved bricks, soaring Danish sales, and a newly renovated and expanded factory, Lego executives felt that it was time to make a serious effort at marketing their toy system internationally. Initially, Lego had exported their products on only a limited basis by means of wholesale agents in other European countries; however, by the late 1950s they began to set up their own foreign sales subsidiaries. In 1956, the first foreign sales office was opened in Germany, to be followed quickly by offices in Switzerland, Belgium, France, Sweden, and Great Britain. Through these subsidiaries, the Lego company began to consider the whole of Europe as their home market for the Lego product and to use this base to extend sales overseas. By the early 1960s, licenses for the North American production and distribution of the plastic toy had been sold to the Samsonite Corporation; further, the Lego Overseas division recruited sales agents to sell the plastic bricks in Africa, Asia, Australia, and South America.

From the start of this international expansion, Lego executives had decided that only the Lego construction system would be marketed internationally. This decision would mark the first step in Lego's move to become a one product company as the small plastic bricks began to account for larger and larger shares of sales. The fate of the wooden toys that had been the mainstay of the business for more than 20 years was finally sealed in 1960 when a fire destroyed the portion of the factory in which they were produced. Lego managers decided not to rebuild the wooden toy division, but instead to concentrate all production facilities on the Lego construction toy system.

American distribution of Lego products began in 1961 when the giant Samsonite Corporation acquired the American and Canadian license to manufacture and distribute the popular Danish construction toy. Samsonite was looking to diversify its growing company and felt that its experience in plastics and retailing corresponded well with the plastic toy industry. Samsonite opened plants in Stratford, Ontario, and Loveland, Colorado, to manufacture Lego bricks and established a separate sales force to market the product. Although Samsonite managed to sell a respectable $5 million in Lego products annually in North America, the sales figures never matched the huge success that Lego was having in the European market. As a result, Samsonite relinquished its Lego System license in 1973. 'Our managerial expertise was better suited to consumer durables than to toys, so we eased out of the toy business,' a Samsonite executive stated in a 1976 article in Business Week. The Lego Group moved in immediately, establishing an American sales company, Lego Systems, Inc., in Brookfield, Connecticut. In only two years, through heavy investment in advertising and promotion, the subsidiary was able to raise sales levels by more than ten times; to meet this enormous increase in demand, the Lego Group set up a huge 143-acre site in Enfield, Connecticut, in 1975 for the manufacture and sale of Lego products. By 1976, annual retail sales in the United States had reached $100 million, accounting for almost one third of Lego sales worldwide.

Multinational Growth in the 1970s and After

By the early 1970s, the Lego company employed 1,000 workers at its Billund headquarters, was earning $50 million annually, and was responsible for nearly one percent of Denmark's industrial exports, according to toy historian Marvin Kaye. As the sales of the Lego construction toy system grew and new foreign sales subsidiaries were opened, it became imperative for Lego A/S to reorganize its administrative structure. Under the directorship of Godtfred Kristiansen, who had assumed control of the company after his father's retirement in 1956, Lego began to transform itself from a small family business into a multinational corporation. Although this evolution was begun in the 1960s, with the creation of separate divisions to handle product development, technological development, and sales and promotion, the pace and scale of these changes increased dramatically in the mid-1970s. In 1976, partly at the urging of Godtfred's son Kjeld Kirk Kristiansen, the Lego company was split into five sister companies.

International management and coordination was transferred to a new company called Interlego A/S (later to be renamed Lego A/S) and for the first time an outsider, Vagn Holck Andersen, was appointed to head overall operations. Lego System A/S would retain responsibility for the manufacture and direct supervision of European sales companies, Lego Systems Inc. would oversee North American sales and production, Lego Overseas A/S would coordinate sales in those countries without their own sales companies, and Lego Futura ApS would be responsible for product development. According to a 1974 article in International Management, Godtfred was reluctant to give up direct control over the day to day management of Lego, but he eventually agreed to create a more efficient management system. However, Godtfred was firm in his determination to keep the company private in spite of suggestions that going public would provide the capital for a more rapid expansion. In 1979, the Kristiansen family regained direct administrative control of the company with the appointment of Godtfred's son Kjeld Kristiansen as president of Interlego A/S.

The basic Lego brick remained virtually unchanged since its introduction in 1958. The mechanical properties and raw material of the bricks were improved so that they fit together more easily, but a brick made in 1958 would still join with one made in the mid-1990s. However, many new components were added to the Lego system with the basic requirement that all new products be compatible with all other elements of the system. In the 1960s, the Lego System sets began to be organized around specific themes, including trains, spaceships, and airplanes. By the 1990s, these theme-related sets had evolved into ten product lines: Freestyle, Belville, Town, Space, Castle, Pirates, Ships, Trains, Aquazone, and Model Team. Each product line included many different sets with components geared to each specific theme, but nonetheless compatible with the components of all the other product lines.

One of Godtfred Kristiansen's original principles for his toy system was that it be attractive to both boys and girls. Although girls had always formed a share of the Lego market, market research revealed that the majority of Lego sets were being bought for boys. Over the years, Lego had attempted to broaden its appeal to girls. In 1979, the company introduced a Lego block based jewelry set, but it failed to capture the imagination of the five- to seven-year-old girls for which it was designed; the line was discontinued after a couple of years of mediocre sales. Undaunted, Lego introduced a new segment of its Basic product line oriented specifically toward girls. Called Paradisa, the principal feature of the new line was its color. Pale pink, pastel, purple, and turquoise blocks were considered more attractive to girls than the traditional primary colors of the Lego System products. According to David Lafrennie, Lego's American PR director, the Paradisa line was very successful, and Belville, a girl-oriented set with a 'role-playing' theme, was launched in 1994.

Another of Godtfred Kristiansen's principles was that the toy system be fun for all ages. From its introduction, Lego System was designed for a fairly broad age range of three to 16 years, but the Kristiansens felt that they could strengthen either extreme of this range by adding lines specifically developed for pre-schoolers and the older child. In 1969, Duplo Toys were introduced. Using the same principle of the interlocking brick as the Lego System, Duplo bricks were larger and easier to manipulate with small hands; further, they could also be combined with the smaller Lego bricks as the child grew. Lego Technic, introduced in 1977, was designed to bolster the other end of the age range and bring Lego play into the teen years. With Lego Technic the older child could build technically realistic models using the gears, pulleys, beams, and other special pieces found in Lego Technic sets.

By the early 1980s, Lego had amassed an enormous share of the worldwide construction toy segment. Sales grew at an average rate of about ten percent a year through the 1980s and early 1990s in spite of overall slow growth in the toy industry. In the late 1980s, total sales had soared to about $600 million, much of the increase due to the huge gains made in the United States and Canada. This steady growth was capped by an astounding 18 percent increase in 1991, at a time when overall toy industry sales rose by only four percent. In 1992, Lego controlled about 80 percent of the construction toy market, according to Advertising Age. By the mid-1990s, the small Billund carpentry business had grown into a group of 45 companies on six continents employing almost 9,000 people.

The largest threat to Lego's dominance of the construction toy market in the 1980s and 1990s did not come from competing construction toys but from Lego imitators. One of the great virtues of the Lego System was the simplicity of its basic building blocks, but this simplicity also proved to be a liability, since other companies could easily reproduce the basic design. Compounding this problem was the fact that the patent on the design for the Lego brick expired in 1981, forcing Lego to enter lawsuits with other companies involving trademark infringement on packaging, logos, and accessories but not on the brick design itself. Although a number of small companies produced cheap imitations of Lego using names like Rego, Dalu, or even Leggo, these small-scale unpromoted brands proved to be little more than an irritant to the giant Lego Group. A much greater threat came from the established toy company Tyco Toys, Inc., which in 1984 launched its Super Blocks series featuring plastic building blocks that were interchangeable with Lego bricks. Lego Systems sued Tyco in both the United States and Hong Kong courts but, after four years of litigation, they were unsuccessful in stopping sales of Super Blocks. Tyco's copycat product, while never approaching Lego sales volumes in the United States, nonetheless managed to capture some ten percent of U.S. sales of construction toys in the late 1980s. Even more importantly, the lower price of Super Blocks put pressure on Lego to keep prices at a competitive level.

Although Lego had essentially been a single brand company since the early 1960s, the 1990s witnessed growth in the non-toy segment of the Lego Group. This new market included the extension of Lego licenses to a variety of children's items including clothing, children's room decor, and books. Since 1968, an invaluable part of the Lego marketing campaign in Europe had been the Legoland Park in Billund, Denmark. Built from some 42 million Lego bricks, the theme park attracted more than 20 million visitors, all of whom went home with a new vision of the potential of Lego toys. A new Lego theme park opened outside London in 1996, followed by an American park in Carlsbad, California, in 1999. A fourth park, in Gunzburg, Germany, was scheduled to open in 2002.

Lego marketers attributed the tremendous success of their construction system to an integrated marketing approach and an emphasis on brand building. 'We put all our eggs in one basket, and we market that basket,' Dick Garvey, vice-president of marketing, stated in a 1992 article in Advertising Age. However, a toy analyst with Kidder, Peabody & Co. told Advertising Age's Kate Fitzgerald in 1991 that Lego's phenomenal growth could not last: 'Lego's been allowed to grow by leaps and bounds for the past decade mainly because they had a lot of catching up to do. The construction-toy market in the U.S. was wide open. ... Lego is only now reaching the saturation point in the U.S. and they're going to have a hard time keeping up their momentum.'

New Product Lines in the Late 1990s

Lego seemed to take Fitzgerald's words to heart, and it worked particularly hard in the 1990s to build its brand image so that it could catapult into new market areas. Lego spent heavily on advertising, increasing its ad budget by 25 percent annually in the early 1990s. Marketing dollars went not only to plug new product introductions, but to touting the Lego brand in general. In the early 1990s, Lego's U.S. subsidiary flouted industry logic by refusing to hire executives with a background in toys. Its marketing vice-president came to Lego from Quaker Oats, and the company insisted that the Lego brand, not the toys, was its main interest. Yet 30 to 40 percent of the Lego line was new each year, with a range of products including girls' Lego sets, licensed home furnishings, and even at one point a test line of Legos for senior citizens. By the mid-1990s it was clear that the company would have to do more to retain its market share. Lego's largest national market had long been Germany, but sales dropped 2 percent there in 1994, even though Lego expected growth of more than 10 percent. Sales in the United States also fell around 8 percent, the first dip in 17 years. Lego hoped to expand sales into Asia and India, where rising incomes meant growing opportunity for toy makers. To facilitate movement into these markets, the company streamlined its management in the mid-1990s, breaking into 24 wholly owned subsidiary companies, each of which covered one national market.

By the late 1990s, the company had come up with a new goal. A company spokesperson quoted in Marketing for July 2, 1998 revealed the new mission: 'In the year 2005, we want the Lego brand to be the most powerful in the world among families and children.' What this seemed to mean was that Lego was willing to use its brand equity to bring out new sorts of Lego toys, entering areas it had previously shied away from. A U.S. Lego executive told the Wall Street Journal (December 27, 1994) that 'You'll never see us doing Pink Pony or E.T. ... they're fads that pass.' But the company began latching onto popular movies such as Star Wars in the late 1990s, marketing tie-in toys. Lego also began putting out building sets with electronic components, vying for a share of the electronic game market. Electronic games had held a growing piece of the overall toy market since the 1980s. By 1998, video games accounted for over 26 percent of the U.S. toy market, and more than that in France and the United Kingdom, other leading Lego markets. In 1998 Lego introduced Mindstorms, a Lego set aimed for older children, that had computer controls embedded in the plastic bricks. Kids could make remote-control robots from the Mindstorms set. Mindstorms was apparently also popular with adults. The core 700-piece kit retailed for under $300 in the United States, and included an infrared transmitter, motors, and light and touch sensors. A similar line extension in 2000 was a Lego video camera kit that could be connected to a home computer and programmed to react to sound, light, or motion. Lego pushed farther into the electronic realm in the early 2000s, entering a venture with computer giant Microsoft to help create content for some of Microsoft's computer games, and enlisting Hollywood film director Steven Spielberg to help market a Lego movie camera kit. Lego launched Lego Technic Bionicle in 2001, a line of toys and CD-ROMs accompanied by a mythic story available on a web site. Other new products for 2001 capitalized on the Harry Potter book series and the third of the Jurassic Park movies.

With its fourth Legoland theme park due to open in Germany in 2002, its clothing line a leading children's brand in Europe, and a slew of new electronic Lego kits and movie and book tie-in kits, Lego seemed to have moved beyond the 'classic toy' category it had held for so long. While the private company did not release full financials to the public, Lego seemed to be struggling in the late 1990s. It lost money in 1998, and in 2000 Lego again announced that it had run a deficit and had an extremely disappointing year. Even with these recent stumbles, in 2001 Lego reiterated that its overall goal was to make itself the world's leading brand for children by 2005.

Principal Subsidiaries: Lego Overseas A/S; Lego AG (Switzerland); Lego S.P.A. (Italy); Lego Systems, Inc. (U.S.A.).

Principal Divisions: Lego Dacta; Lego Lifestyles; Lego Software.

Principal Competitors: Hasbro, Inc; Walt Disney Company.

Chronology

• Key Dates:

• 1932: Ole Kirk Christiansen enters toy business.
• 1957: Modern Lego model is established.
• 1968: First Legoland Park opens, in Billund, Denmark.
• 1969: Duplos, for preschoolers, debuts.
• 1977: Lego Technic, a line for preteens and teens, is launched.
• 1981: Original Lego patent expires.
• 1999: Legoland theme park opens in Carlsbad, California.