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Lego A/S

 


Address:
DK-7190 Billund
Denmark

Telephone: 75 33 11 88
Fax: 75 35 33 60


Statistics:
Private Company
Incorporated: 1944
Employees: 8,800
Sales: $2 billion
SICs: 3944 Games, Toys, and Children's Vehicles


Company History:

Managed by the founding company, Lego A/S of Billund, Denmark, the Lego Group consisted of 45 companies which distributed Lego toys in 133 countries around the world in the mid-1990s. Owned exclusively by the Kristiansen family of Denmark, this intensely private company has never released sales figures for public review. However, industry analysts have estimated annual revenues at about $2 billion, making Lego the fifth largest toy company in the world. The tremendous global success of Lego can be attributed both to the ingenuity of the Lego System toys and to the integrated marketing approach of this one-brand corporate group. Lego products, including the Duplo line for preschoolers and the Lego Technic line for older children, can be found in about 75 percent of American and 80 percent of European households with children.

The Lego brand of toys was created in 1932 when Ole Kirk Kristiansen, a Danish carpenter, decided to extend his carpentry business by manufacturing a line of simple, hand-carved, wooden toys. 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 Kristiansen always claimed that this double meaning was purely serendipitous. During the bleak years of the 1930s, Kristiansen 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, Kristiansen 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 Kristiansen decided to rebuild his enterprise. A larger and more modern factory was built near the site of the old warehouse in Billund and the company was converted from a sole-trading firm 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.

The concept for the Lego System was born in 1954 when Ole Kirk Kristiansen'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 5 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 10 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 sales of Lego products. By 1976, annual retail sales in the U.S. had reached $100 million, accounting for almost one third of Lego sales worldwide.

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 1 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, space, 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 has 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 their Basic product line oriented specifically for 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 10 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 4 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 has also proved to be a liability in which 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 U.S. and Hong Kong courts but, after four years of litigation, they were unsuccessful in stopping sales of Super Blocks. Tyco's copy-cat product, while never approaching Lego sales volumes in the U.S., nonetheless managed to capture some 10 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 their 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 was scheduled to open outside London in 1996 and plans for an American park in Carlsbad, California, were also underway.

Lego marketers attributed the tremendous success of their construction system to their integrated marketing approach and their 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." In spite of these predictions, Lego sales have continued to grow in the 1990s, largely due to increases in sales of Lego Technic and the popular new lines for girls. With its stable base and continually evolving new product lines, Lego Systems remains poised to dominate the plastic construction toy segment of the industry well into the 21st century.

Principal Subsidiaries: Lego Futura ApS (Denmark); Lego Dacta (Denmark and Germany); Lego World (Denmark, Great Britain, and United States); Lego System A/S (Denmark); Lego Systems Inc. (United States); Lego Overseas A/S (Denmark); Lego Produktion AG (Switzerland).





Further Reading:


"A Danish Toymaker Puts It Together in the U.S.," Business Week, September 6, 1976, pp. 80, 83.
50 Years of Play, Billund, Denmark: The Lego Group, 1982.
Fitzgerald, Kate, "Lego: Dick Garvey. (The Marketing 100)," Advertising Age, July 8, 1992, p. S20.
------, "Toyland's Elusive Goal--Win Over Both Sexes," Advertising Age, February 8, 1993, pp. S2, S18.
Kaye, Marvin, The Story of Monopoly, Silly Putty, Bingo, Twister, Scrabble, Frisbee et cetera, New York: Stein and Day, 1973, pp. 155--159.
Kestin, Hesh, "Nothing Like a Dane," Forbes, November 3, 1986, pp. 145, 148.
"Lego and Tyco Blocks," New York Times, November 15, 1988, p. D13.
"Lego Taps New Markets, but Keeps an Eye on Its Image," Brandweek, February 8, 1993, p.28.
Meeks, Fleming, "So Sue Me," Forbes, November 28, 1988, pp. 72, 74.
Morais, Richard C., "Babes in Toyland?," Forbes, January 3, 1994, pp. 70--71.
Oates, David, "The King of the Lego Castle," International Management, January 1974, pp. 32--36.

Source: International Directory of Company Histories, Vol. 13. St. James Press, 1996.




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