The Playskool Institute was established by Lucille King in 1901 as a division of the John Schroeder Lumber Company in Milwaukee, Wisconsin. King, an employee at the company, developed wooden toys to use as teaching aids for children in the classroom. In 1935, the Playskool Institute became a division of Thorncraft, Inc., and established offices in Chicago, Illinois. In 1938, Playskool was purchased by the Joseph Lumber Company, where Manuel Fink was placed in charge of operations. In 1940, k, along with Robert Meythaler, bought Playskool and established the Playskool Manufacturing Company.

In 1943, Playskool bought the J.L. Wright Company, the manufacturer of Lincoln Logs. In 1958, Playskool merged with Holgate Toys, Inc., a wood product manufacturer, and in 1962, they purchased the Halsam Company, a producer of wooden blocks, checkers, dominoes, and construction sets. In 1968, Playskool became a subsidiary of Milton Bradley; both companies were acquired by Hasbro, Inc. in 1984.

After the acquisition, Playskool began operating out of Pawtucket, Rhode Island as a division of Hasbro. In 1985, Playskool released a line of infant products under the Tommee Tippee brand name, including bibs and bottles. Many Hasbro products targeted at preschoolers were rebranded with the Playskool name, including Play-Doh and Tonka. Playskool also began licensing toys from other designers, creating licensing agreements to manufacture Teddy Ruxpin, Barney, Arthur, Teletubbies, and Nickelodeon branded products. Hasbro also began licensing the Playskool brand name to other vendors, manufacturing a number of products under the Playskool name, including books, baby care supplies, video games, and children's apparel.