LEGO: Business Model Canvas and History: How a Carpenter’s Dream Became the Most Successful Toy Company in the World

One way or another, you’ve encountered a LEGO piece. If you’re one of the lucky ones, your encounters with the beloved toy were not while clearing a blocked vacuum clean or worse, painfully stepping on one.

The Danish multinational group has been a significant part of many childhoods. In fact, some experts state that for every person on the planet, there exist 62 LEGO pieces. That’s the magnitude of the reach LEGO has had.

With over 80 years in the toy industry, LEGO has been through some ups and downs. At some point, it almost went bankrupt. Thankfully the toy giant managed to turn things around. Today, LEGO is enjoying something of a renaissance after a few brutal decades.

Despite the pandemic forcing retailers to close, 2020 saw 134 new LEGO Stores open globally, including 91 in China. Additionally, LEGO.com saw a traffic increase to 269 million visits last year alone, almost double the number in 2019.  By 2020 the total LEGO brand revenue was $7.54 billion, with over 678 open stores in multiple countries.

The fact that a product so simple is still relevant in an increasingly digital world is truly amazing. But this relevance did not come without its fair share of obstacles. So how did an idea as simple as a toy brick become one of the most successful and profitable businesses in the world?

So let’s take an in-depth look at how LEGO has managed to grow and sustain its business model.

LEGO: Business Model Canvas and History: How a Carpenter’s Dream Became the Most Successful Toy Company in the World

1932-1948: The Origin of Lego

The year is 1932, and the Great Depression has just hit Europe. In a little Denmark town called Billund lived a man named Ole Kirk Kristiansen, the tenth son of a poor Danish family.

Ole, 41 at that time, was a carpenter. He supplied Billund with all its woodworking needs such as doors, windows, kitchen cabinets, cupboards, coffins, drawers, tools for digging peat, and bodywork for carts. He had purchased a woodworking workshop in 1924 where he was also building houses and other large projects.

The workshop and his adjoining family home burnt down after a fire that his kids had started. Luckily, he was able to secure a loan to rebuild a bigger workshop. Unfortunately, the Great Depression caused the demand for large-scale projects to plummet.

Ole realized he needed to adapt to keep supporting his kids. So to save costs, he decided to create products that consumers could actually afford, given that no one had money to waste at that time. 

He experimented with different wooden products starting with ironing boards, step ladders, and chairs, which failed to get any response from his customers. Eventually, he settled on children’s toys such as piggy banks, pull toys, cars and trucks, and houses. Creating toys was his saving grace as his wife had recently passed away. Making the toys brought him some comfort and a bit of joy for him and his four sons. 

Unfortunately, the business was not profitable at first because of the Great Depression. Most of his customers were farmers who had no money and would sometimes trade food for his toys. So Ole continued producing practical furniture in addition to toys to try and stay afloat.

As the mid-’30s rolled by, a yo-yo toy wave gave Ole a brief respite, but it was short-lived. He faced bankruptcy but refused to stop making toys when his siblings tried to make it a condition of a bailout loan.

Ole was not one to be held down long by a disaster. He used his capacity to adapt to find a new solution to the hundreds of unsold yo-yo’s that now littered his workshop. He decided to use the leftover yo-yo parts as wheels for toy trucks which became a bestseller along with toy trains. His son Godtfred began working for him.

LEGO’s Business Model Canvas: The Experimenting Days

At this point, LEGO’s Business Model Canvas looked like this:

Value Proposition

  • Affordable wooden furniture and a few toys

Customer Segments

  • Poor rural farmers

Customer Relationships

Channels

Revenue streams

  • Selling furniture (and sometimes toys) 

Key activities

  • Experimenting with different wooden toys
  • Manufacturing other wooden products (iron boards, chairs etc)

Key resources

  • Employees

Key partners

  • Wood suppliers

Cost structures

  • Wood (highly available during the war)
Business Model Canvas of Lego: The Experimenting Days

1934-1935: Rebranding and LEGO’s first Investment

In 1934, realizing that he needed a strong brand name that appealed to children, Ole held a contest among his staff to name the company. The incentive was a bottle of homemade wine. Eventually, settling on LEGO, the first two syllables of the Danish phrase Leg Godt which means “play well.”

The focus from the beginning was to produce toys with high quality, just like the company did with their other wood products. So, the quality control process that LEGO is well known for today started from the company’s inception.

Ole was convinced that even children deserved toys of high quality, made of the finest materials so that they would last for many years of play. In fact, his son Godtfred coined LEGO’s first motto, “Only the best is good enough.” There was a placard hung on the factory wall reminding employees of the company’s attitude towards quality.

Ole was not one to shy away from new technology which could improve the quality of his products. He had a gift of spotting potential, so he bought his first milling machine in Germany for DKK 3,000. This amount was one-third of the company’s total profit the previous year.

1939: Impact of WWII on LEGO

Using wood to make his toys had been out of necessity. Most toy manufacturers at that time were using metal which Ole or his customers could not afford. However, the use of wood turned out to be a brilliant decision as WWII started.

During the first two years of the war, the demand for toys was greater than ever. LEGO was able to double its sales because all import activity was halted. This naturally favored the sale of Danish goods.

Metal was now being preserved for making war tools. Many traditional European toymakers suffered huge losses, with some even closing. LEGO was one of the few toy manufacturers left making toys for children during the tumultuous period.

LEGO’s Business Model Canvas: The Early Days

At this point, LEGO’s Business Model Canvas looked like this:

Value Proposition

  • High quality, affordable children toys

Customer Segments

  • Poor rural farmers

Customer Relationships

Channels

Revenue streams

  • Selling affordable toys (mainly wooden piggy banks, pull toys, cars and trucks, and houses)

Key activities

  • Manufacturing and selling toys

Key resources

  • Inventory
  • Employees

Key partners

  • Wood suppliers

Cost structures

  • Wood (highly available during the war)
  • Staff
Business Model Canvas of Lego: The Early Days

1940-1948: Rebuilding LEGO

1942: The Great Fire

Tragedy struck once again, and the whole LEGO factory was gutted by fire. Fortunately, this time around, his home was saved. But it was almost too much for Ole to take. At this point, he considered not rebuilding the factory at all.  The insurance refused to cover the loss and construction of a new production facility, so Ole took a two-year break.

1944-1947: Rebuilding LEGO

Probably out of a sense of responsibility towards his then 15 employees, Ole decided to start again. He got a loan from Vejle Bank and rebuilt a bigger factory in 1944, which now incorporated an assembly line. By the end of 1944, the company had over 40 employees and was steadily growing.

When WWII ended in 1945, the traditional materials used to manufacture products were not readily available. Plastic became the next best alternative. Additionally, it was increasingly difficult to source beechwood of the right quality from South Stenderup Forest near Kolding.

Noticing the shifting trend, Ole decided to ride the wave of plastic adoption. He set out to purchase Denmark’s first plastic injection molding machine and began making plastic toys.

Employees began experimenting with plastics soon after the arrival of the plastic injection-molding machine in late 1947. While still getting acquainted with plastic molding, the company introduced its first plastic products in 1948, but it was not until 1949 that plastic production started gaining traction.

In 1947, Hilary Fisher Page, who worked at a London-based company called Kiddicraft, sent drawings and samples of his interlocking blocks idea to Ole. Ole was skeptical at first and didn’t adopt Page’s design.

1949-1969: The Iconic Lego Brick

However, he changed his mind a few years later and, in 1949, LEGO began manufacturing plastic interlocking bricks similar to Page’s model. He called them “automatic binding bricks.”

Ole gave the brick toy an English name as a tribute to the Allied forces, which had liberated Europe and ended World War II in 1945. As with all of the company’s other toys, the bricks were sold exclusively in Denmark because of export restrictions in other countries

This first design was anything but perfect; for one, the blocks were not stable and tended to fall when stacked on top of one another. They were not LEGO’s most popular toy at that time, but they sold pretty well.

This gave LEGO the go-ahead they needed to try and diversify their product offering. The company launched LEGO plastic building bricks in 1949. These bricks were bigger than the Automatic Binding Bricks and intended for younger children aged 1-5.

LEGO markets their new product as “the perfect bricks for daycare centers,” with the packaging featuring Ole’s grandson playing with the bricks as a toddler.

1953: Expansion to Norway

Always looking to the future, Ole tries to predict how the toy market could develop once post-war import restrictions are lifted. So far, LEGO had been restricted to local operations; expanding into exports would mean more revenue.

He begins looking beyond the Danish market. He decides the first step towards global expansion would be to set up operations in Norway. Unfortunately, Norway had strict import restrictions at the time so LEGO could not directly export the finished toys. 

To circumvent this problem, LEGO signed a licensing agreement with Svein Strømberg & Co. A/S, a plastics manufacturer in Norway.

Strømberg set up a manufacturing and sales division, called Norske Lego A/S, and licensed the molds and technical knowledge from LEGO’s Billund factory. In exchange, LEGO received royalties from equipment sales, and technical assistance from their Norwegian partners.

1954-1968: The modern LEGO brick

Ole’s son, Godtfred, became the junior managing director at the Lego Group in 1954. While the company was doing okay, LEGO’s customers rejected plastic products at the beginning.

Many preferred wooden or metal toys for various reasons, including durability. LEGO was dealing with many product returns from Danish retailers following poor sales. Godtfred realized the company needed to change and fast!

During a conversation with an overseas buyer, he was struck by the idea of a toy “system for creative play” that would include many toys in a line of related products. Godtfred wanted to market the idea that a child could craft LEGO bricks into whatever they dreamed up.

He realized they needed a solid marketing plan to get sale numbers up and compel parents to buy the LEGO brick. The value proposition for parents was that purchasing a LEGO toy was not just about playing; it was an outlet for their kids to improve their creativity and imagination.

1955: The Town Plan

In 1955, LEGO launched the “Town Plan” as the first of such a system. While they didn’t come with an instruction manual on how to build the town, these sets were the first LEGOs designed with the intention to be built into a specific thing. Before this the company was just designing sets of building blocks, without any specific models in mind.

Fortunately, the Danish economic boom meant that more and more Danes could now afford their own cars. LEGO capitalized on this and marketed its new product as an educational tool to teach children how to behave in traffic. 

From the very beginning, LEGO had been producing products that reflected the surrounding society. Unfortunately, the toys received a lukewarm welcome because they weren’t stable, their “locking” ability was limited, and they were not versatile.

Since the original patented design belonged to Kiddicraft and Hilary Fisher Page, LEGO contacted them to ask whether they would object to improvements of the original design. Fortunately, Kiddicraft didn’t have an issue with this. Surprisingly, they wished the company luck with the bricks because they had not enjoyed much success with their product version.

Then, in 1957, LEGO introduced their instruction manual system that gave buyers a step-by-step guideline on how to build the specific LEGO sets. This new system catapulted LEGO into success and made the new sets more appealing because now buyers could easily replicate what they say on the packaging of the sets they bought.  

1958: The modern LEGO brick, a roaring success!

It wasn’t until 1958 that the problems plaguing the bricks were solved. LEGO added tubing on the underside of the brick, allowing for more stable construction. LEGO was the first producer of bricks on the market to find a solution to the problem of “hollow” bricks that had a limited locking ability. The patented design was so perfect that LEGO would never alter it again.

Unfortunately, that same year, Ole Kirk Kristiansen died, leaving his son Godtfred at the company’s helm.

The following year, Godtfred decided to set up a separate molding factory in Vejle, 30 km away from Billund, because the original factory was failing to meet production demand. There was a strong need for added production capacity.

This department, together with the tooling department set up the previous year in Hohenwestedt, Germany, supplied the necessary extra precision-made molds.

1960-1969: A complete shift in the organizational structure

Another warehouse fire struck LEGO in 1960, which destroyed most of the company’s inventory of wooden toys. Godtfred had had enough of the fires and decided that the plastic line was now strong enough to replace the production of wooden toys. He was right, and sales soared.

LEGO was now in desperate need of new skills to move the company forward. So in 1961, the company decided to hire several experts to head up different areas such as legal, marketing, and manufacturing. LEGO also hired Hans Schiess, a Swiss plastics expert, who was in charge of developing molds, raw materials, injection molding machines, and the actual molding process.

That same year, LEGO entered into an agreement with an American company called Samsonite who would become their North American producers. LEGO closed off the year by expanding its plastic line by building cars, trucks, buses, and other vehicles.

In 1963, LEGO wanted to improve quality control and the speed of the manufacturing process. So Godtfred set up a quality control department with 13 employees, which significantly improved the company’s manufacturing process efficiency.

In 1964, LEGO switched from cellulose acetate plastic to ABS plastic, non-toxic and less prone to warping, discoloration, and more heat, acid, chemical, and salt resistance.

A few years later, in 1965, LEGO set up a special product development department called LEGO Futura. The department was meant to concentrate solely on developing products and testing their ideas together with children. The department was responsible for one of LEGO’s most successful products, the LEGO train system, released in 1966.

The focus now was on improving products, so the company wanted to add a range of functions to its toy sets. For example, trains and cars needed to do more than just drive, and doll furniture had to have actual cupboards and drawers.

The company also realized that older children needed a greater degree of realism, and that’s what LEGO Futura set out to do.

The company closed off the decade by opening the first Legoland Theme Park in Billund in June 1968. The three-acre park attracted 625,000 visitors in its first year alone.

LEGO’s Business Model Canvas: The Rebuilding Days

At this point, LEGO’s Business Model Canvas looked like this:

Value Proposition

  • High quality, affordable toys for kids, with step-by-step instructions

Customer Segments

  • Schools
  • Families
  • Children

Customer Relationships

  • Co-creation with kids (encouraging creativity)

Channels

  • Local distributors
  • Retail stores
  • Adverts

Revenue streams

  • Selling toys
  • LEGO theme park entry fees
  • Royalties from Norway partner

Key activities

  • Product development and expansion
  • Expansion into Norway, America, and across Denmark
  • R&D

Key resources

  • Patent
  • Manufacturing plants and infrastructure
  • Employees(especially, Hans Schiess, a Swiss plastics expert)

Key partners

  • Svein Strømberg & Co. A/S (Norway partner)

Cost structures

  • Distribution
  • R&D
  • Plant and factory maintenance
Business Model Canvas of Lego: The Rebuilding Days

1970-1999: Expanding, Establishing & Losing Dominance

From 1970 to 1990, LEGO went on a product launch spree:

  • In 1971, they began to target girls by introducing furniture pieces and dollhouses.
  • In 1972, they added boat and ship sets, with floating hull pieces
  • In 1974, they added human figures with posable arms
  • In 1975, the “Expert Series” sets were introduced, geared towards older, more experienced Lego builders, followed by the “Expert Builder” sets in 1977.
  • In 1978 the “Minifigure” was added.
  • In 1979, Lego introduced the Scala series, which had jewelry elements and was marketed towards young girls.
  • In 1989 the LEGO Pirates theme was released, and it featured a variety of pirate ships, deserted islands, and treasures.
  • In 1990 a new LEGO series designed for advanced builders was launched, and it featured a race car and an off-road vehicle. The level of detail and realism on these sets was utterly new. 

LEGO also set out expanding into different countries. In 1974 the company opened its first North American production facility in Enfield, Connecticut, in the United States. A few years later, in 1988, Canada was their next target. In August that same year, 38 children from 17 countries took part in the first Lego World Cup building contest, held in Billund. Finally, in 1990, LEGO expanded into Malaysia. 

1992-1999: The Decline Begins

As the ’90s rolled around, LEGO had a firm grip on the toy industry, but the world was starting to change. Digitalization and other fun things like video games were dominating the toy market. It was clear LEGO was losing its grip and could not compete in this new tech-savvy world.

The company panicked and started to make bad decisions. They launched a series of disastrous new product ideas that cost the company its reputation and money. LEGO launched a TV cartoon named Jack Stone, which, unfortunately, nobody watched. Then, they released a live-action, futuristic series called Galidor: Defenders of the Outer Dimension. The show tanked.

By the end of 1992, profits were starting to decline. A few years later, in 1996, LEGO made one of the worst decisions that exacerbated the problem. They let go of many LEGO designers who had created the wildly successful LEGO sets from the late 1970s.

LEGO replaced them with 30 new ‘innovators’ who graduated from the European design colleges around Europe. These new designers knew very little about toy design and even less about LEGO building.

Everything LEGO churned out from this point failed dismally because the new design team was trying to cut production time down. The old LEGO sets could take over a year to progress from the design stage to store shelves. Still, the new designers sacrificed set details for faster building times (with fewer pieces).

The difference was noticeable, and the market rejected the new LEGOS. In 1998 the company posted its first-ever loss of £23 million since inception. That same year, the company laid off 1,000 employees.

1999: LEGO movie characters

In a bid to offset the loss, LEGO landed a licensing deal with Hollywood. This was the first time the company was producing non-in-house LEGOS. They produced LEGO Star Wars and Winnie the Pooh Duplo. This was followed in 2000 by LEGO Harry Potter characters.

This temporarily boosted profits during the release of blockbuster movies; however, sales would taper off after public excitement died down. Furthermore, LEGO was bleeding money paying the license fees for these sets. Because they had passed the cost down to the customer, these movie LEGO sets were more expensive.

The rising costs, reduced availability of comparable sets that were not based on the movie licensing deals, and declining quality spelled disaster for LEGO.

The company had failed to understand the principle of consumer demand. The Star Wars launched LEGO had underestimated the market and had not produced enough toys to keep up with consumers. Within weeks, the products completely sold out.

The following year they got it wrong again by overproducing LEGO-themed toys during a year when no new movie was released. LEGO ended up with too many toys sitting on the shelf.

They had always relied on the fact that their brand was popular. People loved LEGO, not realizing that children of the 90s were now driven by the media they consumed.

LEGO’s Business Model Canvas: The Expansion Days

At this point, LEGO’s Business Model Canvas looked like this:

Value Proposition

  • Video games, series, and toys for kids

Customer Segments

  • Schools
  • Teachers
  • Adults
  • Children

Customer Relationships

Channels

  • Retail stores
  • Ads
  • Cinemas
  • TV

Revenue streams

  • Selling LEGOs
  • Theme park entry fees

Key activities

  • Product launch
  • Developing video games and children movies
  • Global expansion

Key resources

  • New designers
  • LEGO brand
  • Retail stores
  • Movies related licences (brand, characters, etc.)

Key partners

  • Hollywood
  • Suppliers
  • Wholesalers

Cost structures

  • Amusement parks
  • Licensing fees
  • Distribution costs
  • Expansion
  • R&D
Business Model Canvas of Lego: The Expansion Days

2000-2010: Trouble in Lego Paradise & LEGO Renaissance

By 2003 LEGO was in big trouble. Sales were down 30%, and the company was shouldering an $800m in debt. An internal report revealed that LEGO hadn’t added anything of value to its portfolio for a decade.

In 2004, LEGO had a loss of £174 million, things were not looking good.  Many within the company management felt that the company should look to Mattel, who was producing Fisher-Price, Barbie, Hot Wheels, and Matchbox toys.

Mattel has a comprehensive and varied portfolio that LEGO tried to emulate. This brought the company to the brink of complete failure. They introduced jewelry for girls, clothes, opened theme parks that cost £125m to build, and lost £25m in their first year.

They built their own video games company from scratch, despite having no experience in the field. LEGO brick toys still sold, particularly the movie character sets; the rest sat on shelves. There was no innovation, and children were getting less and less time to play.

Ole’s grandson Kjeld Kirk Kristiansen resigned as CEO in 2004 and appointed Jørgen Vig Knudstorp, as the first non-family CEO. Under Jørgen’s leadership, the company sold the four Legoland parks to Merlin Entertainment. Manufacturing that had been primarily outsourced was returned to LEGO’s control.

LEGO Bionicles

Fortunately, Jørgen knew what he was doing and started to steer the company away from bankruptcy. He heard of Christian Faber, a former art director for an advertising agency known as “Advanced” who had an inoperable brain tumor. He decided to ask him for permission to adapt his story for a new LEGO series.

LEGO Bionicles was a story of robots fighting off a dark presence called the Makuta, an entity modeled after his cancer. The set was a hit and became the basis for a profitable children’s series.

Building on the success of the Bionicles series, LEGO released a new set called the Ninjago. It was followed up by a show based on the same characters, and the kids loved it. This laid the groundwork for the renaissance of the classic LEGO brick sets, the LEGO movie that came out in 2014.

The flailing giant had made it to the other side. From 2015 until now, the “Apple” of the toy industry has been on an upward trajectory.

LEGO’s Business Model Canvas: The Renaissance Days

At this point, LEGO’s Business Model Canvas looked like this:

Value Proposition

  • Durable, high-quality, and a variety of toys

Customer Segments

  • Children
  • Adults
  • Schools

Customer Relationships

  • Global LEGO subculture
  • Online store
  • CRM

Channels

  • Website
  • Retail stores
  • Ads

Revenue streams

  • Product sales
  • Movie sales

Key activities

  • Making movies
  • Product expansion

Key resources

  • LEGO brand
  • Patents

Key partners

  • Merlin Entertainment
  • Hollywood and TV Networks
  • Plastic suppliers

Cost structures

  • Employees
  • R&D
  • Manufacturing
  • Marketing
Business Model Canvas of Lego: The Renaissance Days

Conclusion

The core issue for LEGO wasn’t their business model per se; it was in the execution. They got complacent, relied heavily on their established brand, and forgot that specialization, innovation, and adaptation were vital to longevity. Thankfully LEGO learned that lesson before it was too late and has managed to keep its business model profitable.  

Sources

  • https://techacake.com/lego-facts/
  • https://fee.org/articles/brick-by-brick-how-lego-became-the-largest-toy-company-in-a-digital-era/
  • https://www.brickfanatics.com/lego-will-open-more-than-100-new-brand-stores-in-2021/
  • https://www.lego.com/en-us/history/
  • https://www.saga.co.uk/magazine/entertainment/nostalgia/brickipedia-the-history-of-lego
  • https://en.wikipedia.org/wiki/History_of_Lego

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