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HandsOnToys Inc.




HandsOnToys Inc. are the inventors of Toober&Zots, a soft-foam, large-scale construction toy for children ages 3 to 99 years. In a show of tireless effort, virtual organizing and unique creativity, HandsOnToys brought their flagship product from concept to market in one year’s time, and successfully generated six figure sales during the 1994 Christmas Season, the busiest for the $20 Billion dollar toy industry, and forecasts of over $3 Million dollars in revenues for all of 1995.

The following story profiles the foundation of HandsOnToys Inc. from its kitchen table beginnings in early 1993, to its Holiday season and Toy Fair successes today. Read on to learn first hand about the efforts, hurdles, and strategies the founders of this successful toy company experienced as they described it to EM.

Table of Contents




I. Company Background

Founders

HandsOnToys Inc. is located in Woburn, Massachusetts and was founded as the result of a partnership that was formed between Andrew Farrar, Rustam Booz, and Arthur Ganson, all of Massachusetts, in March of 1993.

Andy Farrar is a graduate of Amherst College and has a background in sales and marketing, and product development and production consulting. Rustam Booz worked as a consultant in marketing communications to Fortune 500 companies, and is a graduate of Brown University. Arthur Ganson has worked for 15 years as a self-employed kinetic sculptor and inventor, and has developed a renowned national reputation.

The three friends had known each other for some time, and during that month of March decided to formally create a partnership in order to go into business with each other. At that time, their efforts were confined to evenings and weekends as product concepts were evaluated and modified for potential development. The loose partnership eventually gained direction to begin new business activities through the concept of a mechanical toy aimed at stimulating the creativity of children through animation. For six months they researched the viability of this product concept and became very familiar with the toy industry to asist them in entering that arena. As time went on and the business evolved, that original concept took a step aside as the founders conceived and brought a new idea to market that turned out to be a huge success.

Industry Direction - The Toy Industry

As the trio began in-depth investigation into the toy industry they were cautious not to jump in with both feet until they felt they were prepared to build a company and raise the resources necessary to successfully launch a product. Thus they all kept their jobs while they pursued information about the toy industry to support their start-up activities. In August of 1993 Arthur Ganson, described as the creative rce and the engineering genious of the group, came up with the concept of the Toobers&Zots product. In just two days the oup had developed a rough prototype of the product, literally with a coat hanger and some household foam, and came to the nclusion that this was a product concept that was strong enough to form a company around. In November of 1993 the company was incorporated as a C corporation in Massachusetts, and Andrew Farrar and Rustam Booz quit their successful corporate jobs to work full time on the development and launch of this new product concept. “To launch a company requires full-time participation,” Mr. Farrar said, “Many, many companies with good ideas do not get off the ground because they cannot put a business plan together. They can’t do the planning and thinking and the organization that is necessary. It is not a part-time job.”

Andrew Farrar assumed the tasks of strategic and business planning and sales, while Rustam Booz was responsible for operations, management, and marketing. Arthur Ganson was principally responsible for product ideation, engineering, and prototype development, and was the only one of the three to not be working full-time on the project once the company began to be established. During that next whirlwind year, the HandsOnToys team assembled a business plan, further developed the Toobers&Zots concept, sought seed capital, developed a new manufacturing technology to create the most important component of the product, went into production, shopped the toy to retailers, and began taking orders by August of 1994, and shipping product in October 1994. All this, from product concept to market in 12 months. Their efforts have been very fruitful with strong sales for the portion of 1994 they were in business, the forecasts of over $3 Million dollars in revenue for 1995, and the growth of the company in size to twenty employees.

II. Toobers&Zots Development

Concept Development and Manufacturing

The central idea that Toobers&Zots is based on is the theme of what HandsOnToys centers all its product concepts on, “...the design, development, and marketing of imaginative toys which stimulate interactive play and learning.” Because the members of HandsOnToys knew they were a small company and new player in the toy industry, they decided to pursue the market in the toy industry described as the Specialty Toy Market. According to Mr. Farrar this segment accounts for 5% of the $20 billion dollar toy industry, and is very entrepreneurial lending itself to a slower pace of product development and marketing than the mass market. It was this company strategy and market positioning that HandsOnToys conceived with which to pursue the development of their first product release.

It was less than 48 hours from when the Toobers&Zots concept was conceived to when a rough prototype was made. This was done to get a more in-depth look at the concept. The prototype development went through several iterations from August of 1993 to February of 1994. It was in February when they had a prototype that looked similar to the product that eventually went to market. All work done on the concept prototyping was done by hand with simple materials and rudimentary technology, no industrial or industry specific manufacturing technology was employed at that time. During that same window of time the company was assembling its business plan with which to solicit seed-capital to fund the more sophisticated product development and scale-up activities. February was when the plan was at a point of being ready to be shopped out to potential investors with which to accumulate funds. All solicitations were done on a private level, no VC’s were employed and the company is a privately held company. Estimates of $1 MM were made for the amount of money the company would need to develop and bring the product to market.

It was during this same time of prototype development and business plan writing that the company had employed a professional testing laboratory to test their product under ASTM regulations. This was done to ensure it was a safe product to market, and that it adhered to all established safety codes created by appropriate regulatory bodies. These test results were included in the business plan as a testament to the product safety and further reinforcement of the thoroughness of the founders business development activities.

As the product concept solidified and the company was ready to pursue the efforts for production scale-up, they conducted extensive efforts necessary to support such mass production. Mr. Farrar said, “A lot of R&D went into finding the right materials and the right configuration. We went through a lot of materials to find the right cost point, the right handling, how to make the product, and figuring out how to get it assembled. We went to top level graphics designers to put the packaging together.” When it came to addressing the various needs that exist to manufacture and develop a product such as this, the founders demonstrated extensive prudence in determining the most cost effective way to get their product to market, and to have it done by the right technical expertise. They had maintained a business model for the company of being a nearly completely virtual organization. All the manufacturing was to take place outside the company by being contracted out. The same is true for the package printing and manufacturing, the assembly of the product into its deliverable form, and the shipping. An adult rehabilitation house is used to employ handicapped workers to assemble the product and to handle all the shipping. “We know what we know and we know what we don’t know. We have no problem paying for the right kind of service and we went out after the best talent we could afford,” said Mr. Farrar.

The flagship product would consist of a kit containing 100 pieces of various shapes and colors of the Toobers and Zots and sell for $29.99 retail. Preliminary market testing was done by testing the appeal of the product in informal focus groups that were held with several pre-schools, as well as with the founders’ children and the children of the founders’ friends. At that time the feedback was used to modify the product to a small degree, however the company now employs more formal feedback procedures and uses that information to a greater extent to modify the product.

Problems

The Toobers&Zots concept was a product that employed a new type of product component that was unknown to any existing manufacturing techniques. The Zots component of the product are foam shapes stamped out of square colored material into circles, waves and crowns which have holes for the Toobers, the long foam tubes, to slide into. This is a standard manufacturing dye and punch process. The Toobers however, are a soft foam extruded tube that have an aluminum wire embedded in the center of the tube to allow the product to be bent and to maintain its shape. The company saught contract manufacturing agreements to source the Toobers product from, and after 10 months of searching concluded they could not find the appropriate facilities able to make this new Toobers product. Therefore the founding group looked to their engineering expertise in Arthur Ganson to create a manufacturing process to make the Toobers. This was a complete shift from what the company had intended to become involved with, “We didn’t start out wanting to be a manufacturer, but we ended up being a manufacturer,” said Mr. Farrar. This shifted their business model fundamentally and their capital plans fundamentally, but it was what was necessary to get the product out on the market in 1994.

This new manufacturing technology proved to not be the only glitch in the Toobers&Zots development and manufacture. Other problems included an adhesives problem in the Toobers manufacture that took almost three months to solve, and many others involved with starting up a machinery line. “We’re not factory guys,” said Mr. Farrar, “We were not afraid of the challenge but when you’re doing something you don’t know how to in a short period of time, that’s a lot of pressure.” Their perseverance and enthusiasm for their new business allowed them to meet their aggressive schedule and conduct their initial product runs and shipments in August of 1994. All in time for the Christmas season of 1994 which was their primary goal for getting the product on the market to test its salability, which will be described in next section.

When asked if the efforts that were undertaken for the Toobers&Zots product development would represent the norm for future products Mr. Farrar replied, “Toobers&Zots required a new technology to make the toy, not true for the other toys we have invented. Others will go through a more standard development process and can go to existing factories to get them made.

Importance of New Products

Andrew Farrar described the importance of new product development to the ongoing success of HandsOnToys as “critical”. “You can’t rely on the success of one product. Anything could happen...so you’ve got to be ready to move onto something else.” Understandably a young company growing rapidly based on the success of its first product is focusing all its efforts on maintaining the success of that product and ensuring it is positioned and developed to its fullest potential. But unlike a larger more established company that must rely on a continual stream of new product development ideas to maintain its market share and to keep up with changing customer needs, HandsOnToys is in a stage where their Toobers&Zots product concept is the foundation of the company’s growth. Their one unique product idea is generating the strength in their company so they do not have the luxury to actively pursue new product concepts as aggressively as they have with the Toobers&Zots. “We quit our jobs to launch this product. We feel it has the potential to be a $100 MM dollar product so we are going to pursue that as best we can.” When asked about contingencies based on speculated drop-off of Toobers&Zots sales Mr. Farrar replied, “We are not doing anything now to bring out other products but we are actively looking at others products. The other two concepts we have taken up to full prototype development are on hold right now. If Toobers&Zots were to drop off right now I wouldn’t have something to go into right away, but I wouldn’t be starting from ground zero.” Despite this being a risky position to be relying on only one product for the sales and growth of a company, the fact that HandsOnToys is a start-up company makes sense that they are portioning their limited resources to best exploit the one successful product concept they have. As time progresses and the company grows, they can learn from their experiences with the first product launch to more effectively repeat the process when they are ready to launch a new product.

III. Marketing and Success

Product Launch

“The product was brought from concept to market in 12 months. The typical time period for the toy industry is 18 to 24 months,” said Mr. Farrar. There are many reasons behind this aggressive schedule, and the strongest appears to be based on capitalizing on a window of opportunity. “We had market sources that told us that someone else might be moving in on an idea like this,” said Mr. Farrar, “We filed patents to protect ourselves but the only real protection was to get to the market first.” On this same note, another reason for the aggressive product release was to have the product on the market for the Christmas season of 1994 as a proving ground for the products salability. This as a first step in the marketing strategy for Toobers&Zots to establish it as a product with demand so marketing and sales efforts could be augmented the following year to grow the product’s sales. Mr. Farrar commented, “The retail market is very conservative. They don’t want to take the risks because they have been stuck with bad product in the past. By proving the product during the 1994 Christmas season, we can now go to the retailer and use the 1994 Christmas sale performance to show new retailers the proven track record of the product. If we missed Christmas we would have missed a year.”

To facilitate the Christmas season availability, HandsOnToys main product launch effort was to display at a gift show in New York in August of 1994 to hopefully generate the interest and sales to launch the product, primarily to retailers. “We were not in the distribution channels yet, so we had to first convince retailers to buy it. We hired a sales force and brought the product to the gift show and put it on display. That is where we got the bulk of the initial orders. The follow up orders largely consisted of re-orders from those initial customers.” For HandsOnToys their strategy was a successful one based on sales of 18,000 units for the Christmas season of 1994. Now they are confident with that established performance that they can grow their product as aggressively as they planned.

Target Market

It is apparent that the founders of HandsOnToys are seeking to create products that not only offer entertainment and occupancy for the users, but also foster creative thinking and imagination. This logic plays out even further from the product as seen by the target market that the Toobers&Zots are being aimed at, “We focus on adults as the target, not the children. We think the adults should have a role in what products their kids play with. The buyer of our product is a 25 to 40 year old woman with small children.” Evidently the thought here is that parents who can choose what products to buy for their children are being targeted to appeal to their desire to offer their children a fun, colorful toy that encourages creativity. Furthermore, this sort of thinking on the consumers part is augmented even further based on the locations the product is sold at. Retail outlets that maintain the sort of environment of educational learning that the customers are seeking, and offer the consumer advice on what to buy. These include retail stores such as the Learning Smith, Learning Express, Imaginarium, J.L. Hammet & Co., Zany Brainy, World of Science and museum stores. These stores represent the profile of educational oriented stores that the Toobers&Zots market positioning is geared towards. In total, in 1995 Toobers&Zots have grown to be sold in 5,000 retail stores across the United States and in Canada. This up from a couple of hundred in 1994.

Promotion

Public relations is the only media advertising the company does. “We don’t advertise on Saturday morning.” Thankfully their product has generated enough appeal and success that this vehicle has worked to positively promote it because of all the variable in the marketing mix that a company handles, public relations is one that is the least controllable. Despite the efforts that a company may put in to show their product in a good light, one mistake by the company or misinterpretation by a reporter can spell negative press about a product that gets distributed to many potential customers.

Their benefit from this PR has been tremendously high considering that the two years they have been in business Toober&Zots have included in over 90 newspapers across the country, and profiled or mentioned in over 20 regional and national television broadcasts.

The other main channel of promotion that HandsOnToys relies on is word of mouth. Based on the products appeal to parents and children alike, the founders have seen a large degree of talking and endorsements happening that increase consumer awareness of the product and generate more interest. “At the core you touch the product and you like it, parents like it, kids like it, people just like it. People say ‘you’ve gotta buy this’ and people go buy it. Word of mouth and experiential response have given it the potential it has.”

Success

The founders of HandsOnToys are very pleased with the sales volumes they have had to date with Toobers&Zots. From August to December of 1994 the product sold 18,000 units grossing $250,000 in sales, and as mentioned before 1995 revenues show a more than ten fold increase. 1995 also included the introduction and sales of product line extensions consisting of smaller kits with fewer pieces at a lesser price. Toober&Zots also extended its intriguing nomenclature of products with the introduction of Oobles, large solid geometric shapes of the same coloring and soft foam style that have holes to fit the Toobers into for more constructive creativity. “We want to capitalize on the success of the product and get line extensions out as fast as we can get them on the market.” This said from an eager Mr. Farrar in support of the company’s strategy of focusing on the Toobers&Zots product. Promotion efforts have increased to date as seen by the company’s attendance of Toy Fair in February of 1995 which was described by the company as being very successful for them, and the winning of many toy industry product competitions during 1995 as well.

When asked about the reasons for the product’s success Mr. Farrar made it clear that the basic concept and nature of the product is what makes it so appealing, “It’s a helluva lot of fun!” Thoroughness and detail appear to be traits that can also be attributed to the company’s success. “We have done a lot of thinking on how to make it a complete package. The bag and the color combinations are bright and full, and the packaging is different from what you’d expect to find in the toy industry. It’s different that what people have seen before, and it’s on a scale that people are used to having in a toy.” Referring back to the entrepreneurial nature of the Specialty Toy market Mr. Farrar commented, “Lot’s of people are in it who have no clue as to what they are doing. They don’t have any marketing or business savvy. They fail for those reasons.”

Mr. Farrar also attributes the company’s success to their small size and its need to get results without the mire of bureaucracy to slow things down. “We’re a small company, we move quickly, we don’t get bottled up in making decisions. We differentiated the tasks that we each had, we allow other people to make decisions, and when the decisions are complex we talk about them. But we just make them and go and don’t think twice about it.” That is the very intriguing nature of the entrepreneurial company which is its ability to be flexible and very reactive to situations that larger companies would have a more difficult time reacting to. This trait has been successful for HandsOnToys, and it is an environment they hope to maintain. “At our core we are fun people, we’re trying to make money, and trying to have an environment which people like to work and which they have space.”

It is this awareness of what their company’s capabilities are, what needs to get accomplished to get the product to market, and vision of where they are headed that offers HandsOnToys a very promising future with their first big success, the Toobers&Zots. “Everyday we plan not only for what’s good for today, but what’s good for tomorrow and where our vision is.”- ###


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