Traditional toys may evoke many a nostalgic childhood memory, but today's children are an unsentimental bunch and are more keen to spend their time in cyberspace than on more tangible pursuits.

Meccano, Airfix, Hornby, Subbuteo — all have had trouble adjusting to the age of the computer game. Add to that list Lego, invented by Ole Kirk Kristiansen, the Danish carpenter- turned-wooden toymaker who coined the name in 1934.

The arrival of computer games hurt the company, which is still owned by the Kristiansen family and is based in the founder's home town of Billund. “We saw it first in the UK, in particular, along with America,” Marko Ilincic, Lego's managing director for the UK and Ireland, says. “It came later to Germany, which is our second-largest market. By the mid-1990s we were struggling to sustain profitable growth.”

An unlikely rescuer arrived in 1998, in the form of the Star Wars pantheon. Lego struck a deal with Lucasfilm to make products based on the films.

“We thought, great, we've turned the corner,” Mr Ilincic says. But the rescue had a hidden flaw. The products were heavily tied to particular films and children lost interest as the films faded in their memory.

“Licenses are great, but they are very shortlived. Eighteen months after the Star Wars film in 1999 [The Phantom Menace], we sustained a decline. To avoid the yo-yo effect, you have got to have a core business underpining the licences.”

In addition, the brand had been taken into areas such as theme parks, clothing, watches — even computer games. “We had lost our way. We had started to adapt Lego in a new and different manifestation and we had taken our eye off our core business, which was toys.”

By 2004, when the company lost about £60 million, Lego was, according to Mr Ilincic, almost bankrupt. The family agreed to put in more money and, with the aid of consultants, Lego started to implement a programme that it called Shared Vision. This meant getting rid of anything that wasn't the core business — that is familiar sub-brands, such as Lego City, Lego Pirates and Lego Castle. The four parks around the world, including Legoland near Windsor, were sold to Blackstone, the private equity group, which already had the Sea Life and Chessington Zoo attractions and some experience, therefore, in running theme parks (although the Danes retained a 30 per cent stake in the business). The other ancillary products were licensed out.

Last week Lego showed the benefits of this reorganisation. Sales in the UK were up 51 per cent and profits across the group were 24 per cent higher, after booming pre-Christmas sales.

Lego officially arrived in Britain in the early 1970s, when the product was licensed to Courtaulds, better known as a textiles business but with the necessary experience in injection moulding. By the end of the decade, the Danes had decided to set up their own operation, in Wrexham, North Wales. “In 1999 we decided to close the Wrexham plant down. It wasn't producing at all by then.” Now production takes place in Hungary and the Czech Republic, with a small amount in Billund. The British headquarters moved to Slough, to be nearer the big customers such as Argos, Woolworths and Toys ‘R' Us.

Woolworths is, of course, in the great high street in the sky. Mr Ilincic shares the general sadness at the loss of such a great retail brand, but says: “I don't think it was a shock to anybody. I think the brand was stronger than the business model. But it was a terrible blow to the toy industry.”

Lego had already looked at alternatives. “We've not seen a decline year-on-year through January and February. We're actually experiencing growth at the moment,” Mr Ilincic says. He is expecting 5 to 10 per cent sales growth this year, against a decline in the toy market generally of 2 per cent year on year. In a recession, most manufacturers cut back spending on new product development. Lego expects to increase this. “We see this as an opportunity to steal a march on our competitors. We continue to over-invest in new product.”

As a result, 60 per cent of Lego's range changes annually. “You have to be coming to the market with new product every year ... because children get bored.”

For instance, last year the biggest new idea was a range around the latest Indiana Jones film. Lego has just signed a deal with Disney to produce toys based on films such as the Toy Story franchise, Cars and the upcoming Prince of Persia.

The basic ranges are those Lego City/Pirates/Castle models, the Star Wars range and the Bionicle figurines, introduced in 2001. Mr Ilincic actually worked on the development of these, a “hybrid Lego” range. For those without children of the appropriate age, they are models of robotic organisms that arrive in kit form. They are ferociously hard to put together, even for adults, but once assembled they will fight like action figures.

Lego is determined to keep production in Europe. It looked at China, where other toy firms have outsourced, but was not convinced that the low wages there at present would remain so, while there were concerns over quality.

Mr Ilincic, a self-confessed “Lego nerd” from his introduction to the toy at the age of five, joined the company after university and has never worked anywhere else. “When I saw the ad I thought, this is unbelievable. It was the only job I ever applied for.”

He has introduced the toy, in its Duplo form for younger children, to his 18-month-old son. “We were building towers last night. Well, I build them, he knocks them down.” Any excuse for a Lego nerd.

Lego facts and fancies

Seven things you didn't know about Lego

There are 2,200 Lego elements, and they come in 55 colours

Seven Lego sets are sold around the world every second

Lego is the world's fifth-largest toy manufacturer

The core age for users is between four and ten years old, although there is a programmable robot for the considerably older

The first patent for Lego bricks, as we know them, was filed on

January 28, 1958, in Copenhagen

The Lego name comes from two Danish words, “leg godt”, meaning “play well”

In the early years, under the founder Ole Kirk Kristiansen, the Lego workshop burnt down twice

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