Generations of kids have grown up playing with Lego's building blocks but the profits are no longer slotting neatly into place for the largest toy manufacturer in Europe. The famous Danish company is expected to report the first loss in its history next month and will be cutting 1,000 jobs - about one-tenth of its global workforce. While the company's chief executive, Mr Kjeld Kristiansen, says it is "not in crisis", he adds that "action is needed".

After 65 consecutive years of strong revenue and high profits, Lego is suddenly being outpaced by glitzier rivals in the lucrative children's toys market - which is worth an estimated $50 billion (€47.27 billion) worldwide. The main problem facing Lego is that today's children are no longer content to play with the same toys their parents did. Seduced by a whole range of new electronic games which come complete with flashing lights, buzzing noises and all sorts of "virtual delights" it is difficult to convince children of the appeal of building blocks.

With cyberkids now having easy access to the Internet, children are outgrowing traditional toys at a quicker age - why bother with a cumbersome train set when on a computer screen you can construct a bullet train carrying nuclear warheads and through a series of thrilling escapades, you can make plans for world domination.

Set up in Denmark in 1934, the family run Lego business is named after the Danish phrase Leg godt which means play well - it is a mere fortuitous coincidence that the company later discovered that Lego in Latin means "I study" or "I put together".

Producing more than 100 million Lego sets a year and selling them in more than 130 countries, the company puts a large premium on the educational aspect of its toys - the very act of putting together the brightly coloured blocks to make houses, bridges or cars is meant to encourage motor skills and logical thinking, as well as providing play value.

By niche marketing its toy sets, Lego aims to cater for children aged from just a few months to 16 years of age. The pre-school Primo range consists of basic stacking bricks - multifunctional elements that are easy to combine, which leads on to the Duplo range with its themed range of toys (garages, villages etc). From around aged seven onwards, a System range is available which caters for more adventurous tastes - all Wild West and Adventurous Castle types of sets, before users typically graduate to the Technic range around about age 11.

It is in this latter range particularly, that Lego is fighting back against the newest toys on the block by introducing elements of information technology to its sets. Some Lego Technic sets now contain CD-Roms and boast features that allow you to move your finished Lego product around by typing on your computer keyboard.

Just recently, the company also unveiled a new range called Lego Media which includes software, music, video and film products - thus opening up the possibility of virtual Lego sets and combining the traditional educational aspect of the sets with all the benefits of the modern computer age. To hammer home the message of New Lego, the company has devised Star Wars sets, which are tied-in with the opening of the Star Wars prequel film later in the year. Lego users will be able to construct their own versions of the famous Star Wars wing fighters alongside other delights such as Darth Vader's TIE fighter - all of which is seriously good news if you're a Star Wars fan.

Also coming on stream is the Mindstorm Robotics Invention System which allows Lego users to create their own robots, thanks to a gadget called the RCX - which is the first programmable Lego brick - it can handle up to 1,500 commands simultaneously. Using a PC, users can design a programme for the RCX with specially developed CD-Rom software. Related websites and home pages complete the technology-friendly package.

What Lego now has in its favour is that of all the high-tech games now on the market, it is one of the very few that can provide an educational element to its toys. It is this core strategy says CEO Mr Kristiansen that makes it such a strong brand name - "and our growth strategy is to use these values", he says. With more and more questions being raised about the "trivial" nature of many computer games, Lego's "play and learn" philosophy may yet give it the competitive edge to stay on top of the game.