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Business Analysis & Features

We just click: How Lego keeps building on its success

This year, Lego announced record profits. Gerard Gilbert visits its Denmark HQ.

David Beckham may be an official ambassador for the London Olympics, but two years ago he also became an informal envoy for Lego, the plastic toy that has given generations of children their first taste of bricklaying. In an interview, 'Becks' claimed that his second choice of profession, had the football not worked out, would have been to play with Lego – an admission wryly noted by Lego designer Will Thorogood.

"And they told Beckham, 'That's not a job'," chuckles the boyish 29-year-old. Thorogood did an MSc in car design at Coventry University before an internship at Lego's Danish headquarters led to a full-time position. "There's slightly more to it than that," he says, "but a lot of it is playing with Lego."

Thorogood is one of 30 Britons among a 120-strong multinational design team based in Billund, an otherwise rural backwater in the west of Denmark that, thanks to Lego and its adjacent theme park, Legoland, now boasts the country's second busiest airport. He is demonstrating the evolution of one of his most recent projects, the Lego Ninjago, a warrior-themed product line. "I think if you speak to most designers," he says, "Lego plays a big part in their creativity as a child because you can make anything."

Thorogood is patently flourishing within the paternalistic set-up at the Billund HQ – one that, for example, bans sugar or sugary drinks on site. Instead, bowls of fruit and carrots can be found at strategic positions. The staff canteen is a funky, free-flowing, open-plan affair with a bright green floor, no sharp edges and, of course, no sugar. The canteen at Google must look something like this – and indeed the search-engine giant apparently has a 'Lego room' at its New York offices, where software designers go to re-charge their creative juices.

Lego and Google – on the face of it, two companies with not a lot in common. While one is the behemoth of the internet age, the other seems to belong to toy prehistory. And yet, this year, Lego announced record profits of £660 million, making it the number-one toy manufacturer by market share in Europe and Asia, and number three in North America – where last year sales topped $1 billion for the first time. "They're killing it now," a toy-market equities analyst recently told Bloomberg Businessweek. "Lego is the hottest toy company in the boy segment, maybe the hottest in toys overall."

It's all a long way from the company's humble beginnings here in Billund. After lunch I'm taken next door to the so-called 'Idea House' that stands on the site of the 1924 home of Lego founder, Ole Kirk Christiansen, a local builder who took up making wooden toys during the Great Depression because no one was buying new houses.

It's a sort of private museum, or indoctrination centre, a linear journey back in time, starting with examples of the most recent products, and back through the 1990s, with Lego Mindstorms (programmable robots developed with the Massachusetts Institute of Technology) and Lego's lucrative licenced movie-based products (Star Wars was the first tie-in, Lord of the Rings the latest) and so on back through the decades, by way of Lego City, Lego Technic and the birth of the jug-headed, perpetually smiling, yellow mini-figure that introduced role-playing. A jolt of recognition will bring the visitor face-to-face with their own generation of Lego.

The company produced its first plastic bricks in 1949, based on a British design, but the important date is 1958, when Lego patented its click-fit technology – what it calls "clutch power" – the ability of the bricks to snap together, hold fast and yet somehow come easily apart. Precision engineering is key – the tolerance of its studs is one-fiftieth of a millimetre, 10 times finer than a human hair, although the exact formula for clutch power is as closely guarded as the recipe for Coca-Cola.

The enduring genius of Lego is that the bricks from 1958 will fit those manufactured today, illustrating a consistency that chimes with the company's motto – 'det bedste er ikke for godt', or 'only the best is good enough'. The founder came up with the name Lego by fusing the Danish words 'leg' and 'godt', meaning 'play well' – unaware that, in Latin, 'lego' means 'I put together'. Either way, the number of combinations in which even a small number of Lego bricks can be put together is staggering – just six eight-stud bricks of the same colour can be combined in 915,103,765 ways. "We had a mathematician calculate these numbers," says Christian Hauger, one of the company's several 'cultural mediators', perhaps noting my doubtful expression.

To illustrate what happens when the company's lofty standards are not maintained, Hauger shows me into a 'room of shame', where shoddily pirated Lego is on display. "At the moment it's mostly Chinese manufacturers," he says. "It's very hard to control. I built this copy and I'm not kidding I had to use a hammer."

Until recently, however, the principal threat to Lego was not from pirates, or indeed legitimate competitors such as the American toy giants Mattel and Hasbro, but from within. The company had expanded into so many different areas – a lot of which it did not understand – that by 2004 (according to Lego Group's own financial records) it was losing nearly $1 million a day. "People had been speculating that it was likely Lego would go bankrupt," says Chief Executive Officer, Jorgen Vig Knudstorp, the first CEO to be appointed from outside the founding family. "Hundreds of consumers were writing to us saying, 'Please don't die'.

"I would say it was some way from that for two reasons. One was that [the company] was still generating cash. Also, the owners of the company are quite wealthy and, being privately owned, it was not in immediate danger of liquidation."

A thousand employees were shed and performance-related pay was introduced, as well as a sense of urgency – so that instead of taking two years to develop a new product from idea to box, it now took 12 months. Meanwhile, everything non-core – from clothing ranges and video games to the four Legoland theme parks – were either sold off or outsourced. "I would say the company had lost its way," says Knudstorp. "What we have done is to refocus on the core business – the Lego brick business – and we're retrenching. In the case of the Legoland parks, we sold them – to the UK-based Merlin Entertainments."

Having stayed at the Lego Hotel in Denmark – and in the newly-opened Lego Hotel at Legoland in Windsor – I was curious to know how the company protected its brand from potential tacky exploitation. Not that the hotels are tacky – far from it, in fact, unless you happen to be the sort of fastidious parent who objects to waking up in a pirate-themed bedroom (my six-year-old daughter loved it). "Lego has a share in Merlin, and also grants a licence to Merlin on the Lego brand," he says. "That of course means there are certain things that must be observed."

Management also reined in the designers – or rather challenged them to be more creative on less. By 2004, the number of single 'elements' – an element being, typically, a brick – had grown to almost 15,000. "We took it down to just below 7,000... a 50 per cent reduction," says Knudstorp, who came at the reduction from a cost-cutting point of view, but discovered user benefits.

The drastic medicine worked financial wonders, and the company has tripled in size since bottoming out in 2005. There is, however, one sizeable market waiting to be tapped – the other half of the world's population of children. There have been several attempts to bring girls into the Lego fold. "Our last proposition to girls was called Clikits," says Knudstorp. "It was a sort of arts-and-crafty type of product where girls could produce picture frames or necklaces, that sort of thing – it was one of those things we shot down because we thought it was too far from the core."

After four years of intense research, which included embedding research teams with families, and which showed that boys and girls played in different ways (girls adopting more role-play – using the mini-figures as avatars of themselves), Lego Friends was launched. It's a range in which five mini-dolls inhabit a place called Heartlake City, featuring a pastel-coloured beauty salon, fashion design studio, bakery, vet's practice and an inventor's surgery. Lego Friends hit the shops last Christmas, to perhaps predictable howls of protest.

"I know it has been popular, but I think they've gone on an unfortunate route," says Peggy Orenstein, author of Cinderella Ate My Daughter, an investigation into the toy industry's exploitation of the 'princess phase'. "There are ways to include girls in building without beauty parlours and pandering to a budding Kardashianism. When you do research that says girls like this, this is already something that's being programmed into them. You can either continue to programme that into them, or you can broaden their perceptions."

"When something new comes, some people react," counters Rosario Costa, the designer in charge of Lego Friends. "This criticism is dying down, because now people are getting the product in their hands, they realise it's just a creative toy.

"We made the figures more curvy [because] girls kept telling us that the figures were too square, not realistic. The girls needed a figure they could identify with, that looks like them." But whether Mia, Emma, Andrea, Stephanie and Olivia – to give the Lego Friends 'mini-figs' their names – look like the average five-to-12-year-old (the target consumer) or the average contestant from America's Next Top Model, is a moot point.

"The skinny girls gotta go!" says Lise Eliot, a neuroscientist at the Rosalind Franklin University of Medicine and Science in Chicago, and the author of Pink Brain Blue Brain. "Why must we always present the same unattainable body images for girls, when the 'boy' characters are obviously just blocks?"

Lego faces a more insidious long-term challenge than boys versus girls, as the inexorable rise of computer games puts an increasing squeeze on the traditional toy market. Some relief is coming from a perhaps unexpected quarter – all those former child Lego users who now play with the bricks as grown-ups. Adults made up nearly 5 per cent of Lego's customers last year, a number that is increasing annually. They even have their own acronym – AFOL, for Adult Fans of Lego.

"The adult Lego users have been a steadily growing group since the late-1990s, with the internet playing a major role," says Joe Meno, co-author of the book The Cult of Lego, and editor of the fanzine, the BrickJournal. "What were isolated people became online groups, which led to meetings and events, like LegoWorld in Zwolle and Brickworld in the US."

Any AFOL would feel like Charlie in the chocolate factory walking around the manufacturing floor in Billund, as 800 individual moulding machines pump out different coloured bricks – consuming a daily 60 tonnes of plastic granules supplied directly from oil refineries. It's extraordinary to think that this vast and efficient enterprise is still essentially a family-run concern.

"There are benefits to being privately owned and especially by a family," says Knudstorp. "I'm realising that everything you say about Lego as a journalist or a user of Legoland parks or hotels is to the family like commenting on their children." In which case, let me say that from this perspective, their baby appears to be in safe hands.