Chances are you've either played with Lego when you were young or you had a
friend who did. The plastic construction sets are one of the best ways to promote
creativity, and there are very few companies out there that have as much of
an impact on the lives of children as Lego. Their business model is pretty
simple:
they buy plastic for one dollar and sell it for 75. Beneath this simplicity, however, is a
very interesting story, and in this week's video we'll learn where these
plastic bricks really come from. The father of Lego was a Danish man named
Ole Christiansen. He came from a poor family of farmers near the small town of
Billund and his favorite hobby was carving stuff out of wood.
When he was old enough to travel he practiced carpentry in Germany and Norway,
earning just enough money to buy the local woodworking shop in Billund when
he returned in 1916. For the next 16 years he worked as a carpenter and he
got pretty good at it.
During that time he also married a woman he met in Norway and together they
eventually had four sons. Life was good, but then the Great Depression happened
and things took a turn for the worst. Prices across Europe crashed and the
Danish farmers could barely earn enough money to get by.
Ole Christiansen was forced to fire most of his shop's staff because he couldn't
pay them. To top things off his wife died that same year, leaving him alone to take
care of their four sons. Ole got them to work in the shop and in exchange he
would make for them wooden toys.
The kids like them very much and soon Ole started making toys in addition to
his regular business.
The local farmers didn't really have the income to buy them though, and most of
the time they would offer food in return.
In the end Ole had to sell his toys door-to-door in nearby cities where
people actually had the money to afford them.
In 1934 he came up with a name for his toys: he called them Lego from the Danish
phrase "Leg Godt",
which means plays well. Coincidentally the word Lego also means to assemble
in Latin. In 1942 after a disastrous fire burnt down his shop, Ole borrowed
money to build an actual factory to manufacture his wooden toys. From then
onwards the toys became his main business and the Danish people loved them.
Ole made his eldest son Godtfred a manager of the new company and together
they began expanding their clientele not only in Denmark, but also in Norway. By
1947 the company's workforce had increased to 40 employees and they were
selling over 150 different wooden toys. In 1949, while
attending a toy fair in Copenhagen, Ole found a merchant who so plastic building
blocks that you could use to build towers. Ole liked the idea very much so
he brought samples back to Billund to study them. One year later Lego
started selling a modified version of these blocks called automatic binding
bricks. They look a lot like modern Lego bricks but their underside was hollow,
which made them clunky and hard to combine. Most customers didn't like them and by
1954 the binding bricks barely made up of five percent of the company's revenue.
That same year while traveling to the UK to attend a toy fair,
Godtfred met a very enthusiastic department store manager. They talked
about the state of the toy industry and the manager complained how little
incentive people had to buy new toys.
His argument was that ready-made toys were actually harming the business
because parents wouldn't need to buy more toys frequently. As soon as Godtfred
came back to Billund, he started thinking of a system that would
encourage people to buy more of his toys. He drafted up a list of qualities that
he wanted his new system to have: some of the things he listed were, for example,
unlimited play potential, development of creativity, and being suitable for
children of any age and gender.
The obvious choice for this new system were the automatic binding bricks and
one year later in 1955 Godtfred released the first real Lego
construction set: the Lego System of Play.
Unlike previous iterations of the binding bricks, this time kids could build entire
cities, not just individual buildings, and the only limit was how many sets they had.
Included in this new set where tiny cars, trucks, and street signs and as you
can imagine it became extremely popular. Just two years later Godtfred developed
the modern Lego bricks we know today by introducing tubes on the underside,
which made the bricks more stable and allowed for more combinations. Godtfred
became the official leader of Lego in 1958 when his father Ole passed away.
His first order of business was to accelerate the companies overseas
expansion. Lego's first international office open in 1956 in Germany and soon
after that they started spreading across Western Europe. In 1961 Lego entered the
American market by licensing their toys to Samsonite,
the guys who you probably know today for their suitcases.
By that point Lego had stopped making wooden toys altogether after a fire in
1960 destroyed their only wooden toy factory. Over the next decade
Lego became one of the world's largest toy manufacturers.
By 1976 they had around $300 million sales across the
world and they made up 1% of Denmark's total GDP.
They released new sets based around various themes, but they always remained
true to their design principles of simplicity and compatibility.
A brick made in 1957, for example, would have no trouble fitting in a modern
construction set and although they've added a bunch of new parts over the
years, everything is backwards compatible. One of Lego's biggest hits was the Lego
Minifigure from 1978, which has since become one of Lego's most
iconic symbols. Estimates from 2003 say that over four billion of these tiny
figures have been made, and today you'll find them in almost every construction
set.
They even made a movie with them in 2014, which is actually pretty good, it's got a
7.8 rating on IMDb. Lego was doing great in the 1980s. Their sales were
growing it around 10% annually and by 1992 they controlled 80%
of the construction toy market with roughly $600 million
in annual sales. Lego's patent for their bricks, however, had expired in 1981 and
in the early 1990s other copycat brands were already popping up
across the world.
They would mass produced nearly identical construction sets and they
would sell them at a cheaper price, rapidly cutting into Lego's profits.
Things got so bad that in 1994 the company saw its first annual sales
decline by 2% in Germany and 8% in the United States. The
situation in the asian market was even worse, since you know how loose they are
over there with copyrighted and patents. In 1998 Lego posted their first ever
annual loss at $30 million and by 2004 the company was almost bankrupt,
having lost $228 million in that year alone. The CEO at the time was Gotfred's
son, Kjeld Christiansen, and he felt so helpless that he resigned and appointed
the company's first non-family CEO: Jørgen Vig Knudstorp. His solution
to the crisis was a bit radical, but it was definitely effective.
Over the next three years he cut Lego's workforce by half and moved their main
manufacturing activities to Mexico.
This was a huge cut in expenses, but what really saved the company was Jørgen's
decision to actively pursue licensing deals.
You know all those expensive Lego sets based on Star Wars, Lord of the Rings, or
Minecraft? Jørgen's idea of combining Lego with popular culture was brilliant and
the success of these new sets saved the company from bankruptcy. In 2008 licensed
Lego products made up about 60% of their total sales, and
although the world was in the middle of the Great Recession, people were buying
more Lego than ever. Since then the company has become even larger and in
2014 they overtook Mattel to become the world's largest toy company.
Their most recent report from 2015 put their global sales it's $5.3 billion,
larger than Mattel and Hasbro combined.
Lego have become so huge that Mattel and Hasbro are actually considering merging
just to stay relevant.
The success of Lego as a concept is due not only to its unique design, but also
to the impressive marketing behind it.
One of Lego's best marketing decisions was to build their Legoland theme parks.
If you haven't visited one you definitely should. There are seven
Legoland parks around the world right now with another 4 under construction.
All the parks have these huge model cities built out of millions of Lego
bricks and they're definitely worth seeing. The first one, by the way, is in
Billund and Lego had to build an airport there just because of how remote
it was. I hope you enjoyed the story of Lego. If you did hit that like button,
subscribe, and check out my other videos for the stories of more cool companies.
Tell me in the comments below which company you'd like me to feature next,
and as always: stay smart.