MNO 2009 / BSP 2009

Individual Assignment MNO: Case Analysis

Instructions

Please answer the following questions (in parentheses, you find the weightage of each

question):

1. Explain in detail what theories and concepts you learned in class are helpful to

understand the case. What were crucial factors that determined success or failure?

What characteristics of the entrepreneur enabled their success? (12.5%)

2. What were problems encountered by the entrepreneur and how did the

entrepreneur deal with the problems? How did the entrepreneur overcome the

problems? Given the knowledge and skills you acquired in class, would you have

done anything differently and if yes, what? (10%)

3. According to you, what is the best way forward for Geoff: should he focus on selling

the game to a toy manufacturer, or should he form his own business to manufacture

and distribute the game himself? If you think he should choose to sell the game,

where should the manufacturer be located, and what kind of manufacturer should it

be: large or small? If you think the best way forward is to open his business, what

type of retailers should be target? Please provide good reasons for your answer.

(7.5%)

Your case analysis should not exceed five pages (Times New Roman, 12 Pt., 1 inch margins, line

spacing 1.5). Please submit your case analysis by the end of week 13 (upload softcopy to IVLE

folder Case Analyses).

Geoff Knox (please include Sweet House and Zandiger! in your case analysis)

(adapted from Entrepreneurship Theory & Practice)

Introduction

Geoff Knox contemplated the presentation he had just made as he drove back to his office in

Hamilton, New Zealand. He was the owner of a successful small business headquartered in

Hamilton. Called The Sweet House the business owned a New Zealand distribution network of

confectionary products that were sold nationwide. Geoff started the business in his garage and

in its fourth year of operations, the company's total sales approximated NZ$4 million. Geoff's

presentation addressed a fourth-year class of entrepreneurship students at the University of

Waikato in Hamilton. The topic of the presentation was not the Sweet House but rather his

newer venture, which at the time of the presentation in August 1996, had no sales or

customers. Despite the uncertain beginnings, the first slide in Geoff's presentation made the

venture's mission clear to the students: To take 'Zandinger!' to the world! For nearly one

year, Geoff had been trying to launch a venture based on a new board game created by his

uncle, Trevor Green. Trevor was raised in a working class, low-income family. His parents never

had a car and consequently, the family spent nights and weekends together, often playing

Scrabble, cards, or working crossword puzzles. As an adult, Trevor spent two years developing

the game. It was originally called Link Words (which described the main objective of the

players) but later was changed to Zandinger! on the advice of an intellectual property

attorney. Trademarks are not allowed on phrases or names that are overly descriptive, so Link

Words could not be trademarked. Zandinger! was the name concocted by Trevor, and while

it has no special meaning, it was trademarkable because of its uniqueness.

Background

Geoff Knox was thirty-three years old at the time he began working on Zandinger! He had been

raised outside Hamilton by parents who both worked for large companies (in

telecommunications and insurance). At the same time, however, his parents leased a block of

farmland and employed Geoff and his siblings to provide the labor to work the farm. In later

years, both his parents resigned from their corporate jobs and focused their attention on

farming and ranching. Geoff graduated from high school, and rather than enrolling in college,

he got a bookkeeping and administrative job in the banking industry. Four years later he took a

sales position for an investment company in which he sold insurance and personal financial

planning to individuals. Sales experience opened more opportunities for Geoff, and he accepted

a job as the confectionary sales manager with Pro-Life Foods, a large New Zealand food

manufacturer He spent five years in that position, during which time he developed skills in

selling to companies (rather than individuals) and he learned the details of the confectionary

industry. In March 1993, he resigned from his position with Pro-Life Foods and launched his

own business (the Sweet House) as a confectionary broker and distributor. From his experience

in the confectionary industry, Geoff recognized that candy had unusually high gross profit

margins and often was purchased on impulse by consumers in many different retail outlets. He

realized that if he could devise a way to sell candy through nontraditional outlets, he could

probably sell sufficient volumes to create a successful business. He began thinking of how he

might sell candy through retailers other than the traditional channels of supermarkets,

convenience stores, and gas stations. Because gross profit margins were typically high, he

looked for trade-offs in the value chain: he looked for ways to incur an extra expense that

would allow a broader distribution. He wondered, for instance, how he could persuade dry

cleaners, pubs, restaurants, barber shops, hardware stores, etc., to sell his candy. He realized

that most of these retailers would not agree to sell candy unless doing so could be linked to a

charitable or socially responsible cause. From that reasoning, he arranged partnerships with

several non-profit charities that would receive a portion of the proceeds from the candy sales.

The retailer and customer would be supporting a good cause while Geoff would sell enough

candy to absorb the cost of the charitable contributions. Geoff became the first person in New

Zealand to employ the honesty box as a business model for distribution. These cardboard

boxes were filled with a variety of candy and placed conspicuously in the store (e.g., near the

cash register or customer service desk). Shoppers could drop coins in a slot and take a few

pieces of candy. The shopper and the retailer were supporting a good cause, and Geoff's

business model became successful at opening a new channel for distributing candy. Financing

for the Sweet House came from a $10,000 loan (at a 20% interest rate!) from Geoff's father.

With the money, Geoff provided working capital and bought candy and 1,000 honesty boxes.

He began cold-calling on businesses in Hamilton and within six weeks had placed all of the

boxes. The garage in his home was the original warehouse, and he traded his small car for a

pick-up truck from which he made deliveries of candy to refill the boxes. Throughout 1993 and

1994, the Sweet House continued to grow. Geoff repaid the loan from his father, rented a

warehouse, and then a second and third warehouse as he required larger inventories. He

concentrated on building relationships with charities and on establishing new retail locations.

He hired employees to manage the deliveries. By 1995, the Sweet House had expanded to

many of the small towns around Hamilton. Geoff was ready to expand nationally and decided

to sell franchises in the Sweet House. The franchise fee was $25,000 to $40,000 depending on

the size of the region surrounding the prospective franchise. The franchisee received rights to

run the business model franchise, training, a uniform, and inventory to serve the region for one

sales cycle. By August of 1996, the Sweet House was composed of 16 franchises throughout

New Zealand, its honesty boxes were placed in approximately 5,000 retail locations, and total

sales were almost NZ$4 million.

The Game of Zandinger!

During an interview with the case writer, Geoff Knox explained: Personally, I was never much

of a game player. When my uncle first showed me this game, I didn't like it much. It was too

long, complex, and a bit ho-hum. Some of my uncle's friends said the same thing. He made

major modifications to the game and now it's really fun. I like the game and I really believe in

Zandinger! as a product. Geoff Knox described Zandinger! as a cross between crossword,

Scrabble, and chess. It is a word game designed for 2 to 8 players, individually or in teams. The

length of the game can be regulated to last less than an hour, or allowed to continue for several

hours. The playing board is divided into an Inner Zone and an Outer. Accompanying the game

board is a set of plastic letter pieces similar to those used in Scrabble. Play begins by each

player writing four letters (the letters must be organizable into a word) on his or her Game

Sheet. This is an important aspect of the game that differentiates it from most existing word

games. Rather than letters being chosen randomly (as in Scrabble) or being dependent on a

dice roll, players choose four letters from the alphabet to begin their turn. According to Geoff,

allowing players to choose their starting letters adds an element of strategy not found in other

word games. The first player spells a word in the Inner Zone using plastic letter pieces. In turn,

the other players add new words, starting with the Inner Zone and building toward the Outer

Zone.

Current Status of Zandinger!

Geoff Knox had done some informal market research. There were currently six or seven word

games available in the New Zealand market. For the most part, these potential competitors

employed lettered game pieces and used dice to allocate letters randomly to each player. In

Hamilton, Geoff determined the average retail prices of several competitors: Scrabble was

NZ$35, Upwords was NZS34, Balderdash was NZ$60, and Rummikub was NZ$45. While

Monopoly was not a word game, it was a popular game title that retailed for about NZ$50.

Because Zandinger! was less reliant on luck than several other word games, Geoff believed that

Zandinger! offered an attractive variation on the typical word game. He had conducted a name

search to demonstrate that Zandinger! was not already in use. Next, he applied for a New

Zealand patent, at a cost of NZ$4,000. A patent attorney estimated that a worldwide patent

could be established for about NZ$30,000. Next, Geoff applied for a grant from the New

Zealand Development Board, and was approved for $4,000. However, the grant would not

cover expenses already incurred. At that stage, Geoff began to seek evaluations from game

experts. Trevor Green made a full-color, fully functional prototype of Zandinger! Geoff

approached both Milton Bradley (NZ) and Holdworth & Sons (the major game maker and

distributor headquartered in New Zealand), but at that stage, neither company was willing to

buy rights to the game. The product manager for Holdworth & Sons told Geoff that Zandinger!

was unique, complete, playable, and there is definitely a market for it. Unfortunately,

Holdworth & Sons was the exclusive distributor of Scrabble in New Zealand and could not

manufacture or distribute Zandinger! due to contract arrangements with Milton Bradley (the

game division of U.S. toy maker Hasbro). Geoff also mailed the game to the U.S. and paid

US$300 to have it evaluated by a toy broker (a person who helps inventors find manufacturers

and vice versa). The summary of the broker's appraisal was that Zandinger! was a clever game

concept, but there were three weaknesses. Namely, it lacked a hook to entice shoppers to

choose it over other word games, a Wow! factor (a combination of novelty and the ability to

induce intrigue and curiosity), and a feature that could be leveraged into effective TV

advertising. Geoff then contacted Hasbro, Inc. in the U.S. and learned the following: Hasbro

distributed 70% of all the games in New Zealand, made all its product decisions in the U.S.,

required that a new launch in New Zealand sell 30,000 units in its first three years (or 500.000

units in the first year in the U.S.), and paid a 5% royalty fee in return for manufacturing rights to

the games it wanted to buy from inventors. Regarding Zandinger!, the Hasbro contact said the

game was a little too complicated, needed a TV hook, and was targeted toward adults in the

strategy/word game niche, which was a notoriously difficult portion of the game market.

The Toy Industry

Worldwide, the toy industry (Standard Industrial Classification Code #3944: games, toys, and

children's vehicles) was dominated by two U.S. manufacturers, Mattel and Hasbro. Worldwide

sales were estimated at US$60 billion in 1996. In late 1996, Mattel bought the third-largest

toymaker, Tyco Toys Inc., which had 1996 revenue of US$715 million. By year end 1997, Mattel

recorded total sales of US$4.8 billion (21.2% share) while Hasbro maintained its position as the

.second largest toy manufacturer with sales of US$3.2 billion (14.2% share). The size of the U.S.

retail market was US$22.6 billion in 1997 (excluding video games), which represented an

increase of 7.8% over the 1996 figure. The U.S. market was the largest in the world, and

represented approximately 36% of total worldwide revenue. Other regions shares were as

follows: Western Europe 28%, Asia 13%, and Japan 10% (TMA Factbook97). The toy industry

worldwide is under strong pressure from many sides. It is being compressed as children mature

earlier, as families get smaller, and as other manufacturers target children particularly the

clothing and sporting goods industries. The huge development of video and home computers

has also helped pressurized the market (Peddie, 1997). Sales in the toy industry have been

notoriously seasonal. Traditionally, fourth-quarter sales have comprised about two-thirds of

annual sales. However, two trends were working to reduce this seasonal concentration. More

aggressive marketing by manufacturers and retailers have encouraged consumers to buy toys

throughout the year rather than waiting until the pre-Christmas rush. In the U.S., retail

competition had intensified in recent years, with one notable trend being the aggressive entry

by discount retailers (Wal-Mart, Kmart, and Target) into a full line of toy sales. Discounters

often carried toys as loss-leaders, with the result that traditional toy stores experienced lower

profit margins and gradually lost market share to the discounters. From 1991 to 1996, the

market share of toy stores decreased from 33 percent to 28 percent while that of discount

stores increased from 36 percent to 40 percent. In 1996 Toys R Us still led the U.S. market with

a 19.1% share while Wal-Mart followed with a 15.2% share, up from 14.1% in 1994. The same

trend was evident in the Australian toy market, with specialty retailers accounting for about

37% of toy sales and discounters accounting for 50% (lead by KMart with a market share of 20%

in 1995). The other reason for the declining seasonality of sales was the increasing reliance on

licensing agreements between toy manufacturers and entertainment studios (TV and film). The

Toy Manufacturers Association (TMA) estimated that licensed products now accounted for 60

percent of all toys sold, generating worldwide retail sales of $7 billion. This trend had an impact

throughout the industry: of the thousands of new toy products that the manufacturers

considered launching each year, only those with potential for licensing and catchy television

advertising were selected. The net effect of these trends was that by 1996, fourth quarter sales

in the U.S. and United Kingdom represented only about 55% of total sales for the year. Another

unique characteristic of the toy industry was the unpredictability of sales volumes for new toys.

As a percentage, very few new toys ever survived for more than six months, and even fewer

became mega-hits (toys that generate at least US$100 million in a year). Toys that seemed to

be fun and well-designed (from the perspective of inventors and industry executives) could flop

at the retail level, while children may prefer oddities like Teenage Mutant Ninja Turtles,

Cabbage Patch Dolls, and Chia Pets. According to David Miller, president of the TMA, The

ultimate determiner is the will of the child to play with a toy constructively. And furthermore,

will they play with it more than once? (Kelleher, 1996) Children's idiosyncratic tastes actually

made the toy business more attractive to inventors. Head Toys 'R' Us buyer Jill Hall says she

gets an average of 40 calls per day from hopeful toy makers (La Franco, 1996). Each call had a

similar theme: an inventor claimed to have designed the next mega-hit and wanted Toys R Us

to carry it. Because so many amateurs attempted to invent toys, the TMA published the Guide

for Toy Makers and. The guide was intended to advise novice toy makers as they considered the

best way to enter the toy industry. Periodically, mega-hit toys did originate from individual

inventors rather than one of the large multinational toy makers. What keeps people in this

business is: one of those ideas can be a boom and you can never tell which one it's going to be

(Kelleher, 1996). Trivial Pursuit and Cabbage Patch Kids are notable examples of toys that either

were passed over by the large toy makers or were brought straight to market by their

independent creators. The beauty of the toy industry is that there is the potential for someone

with a uniquely creative or novel idea to become an instant millionaire (Kokmen, 1996). In

1982, the major toy makers all refused to buy the rights to ugly dolls dressed in secondhand

clothes. A small company named Coleco was willing to take the gamble and turned the decision

into sales of about US$75 million the very next year when Cabbage Patch Kids took the U.S. by

storm. Hasbro currently held the license, and to date, more than 73 million Cabbage Patch Kids

had been sold. Similarly, Trivial Pursuit flopped at the 1982 Toy Fair but went on to sell 20

million copies in 1984 alone. During the mid-1990s, the game was being produced in 13

languages and sold 1.5 million units annually. The allure for inventors to create the next Mighty

Morphin' Power Rangers or Barbie kept competition intense. In the U.S. alone, about 6.000 new

toys (excluding video games) were introduced each year, but only about four percent lasted for

more than one year. This is an industry that is extremely advertising-driven. It's next-to-

impossible for a toy inventor to get the attention of merchandising buyers or shelf space

without an elaborate promotional program (Deogun, 1995). The major manufacturers created

most of their new products in-house, and had their own professional design staff. It was usually

more cost effective to employ designers than to pay a royalty fee to outside inventors (TMA,

1997). Furthermore, because television advertising is so important to success, the major

manufacturer's main buying criterion was whether a new toy could be made the subject of

catchy advertising. Occasionally, however, small and medium-sized toy makers considered

buying the rights to toys and games invented by outsiders.

The Australia/New Zealand Toy Industry

Both Australia and New Zealand had been British colonies and were still members of the

Commonwealth. While British influence was still evident, the influence of American business,

media, and entertainment also was obvious. In Australia and New Zealand, per capita spending

on toys was traditionally about one-half of that in the U.S. and Western Europe. The toy

industry's retail category killers emerged in the Australian market in 1994. Toys R Us (based in

the U.S.) and World 4 Kids (based in Sydney, Australia) did not increase the size of the AZ$1.2

billion market as much as expected, but instead introduced tremendous price competition.

The falling price of toys has resulted in an increase in the volume of sales, but the retail value

of the industry is, at best, static (McKenzie, 1996). World 4 Toys, a division of Coles-Meyer

(Australia's largest retailer), made losses exceeding AZ$20 million in both 1994 and 1995. Many

industry experts suspected that the chain would go into receivership rather than continue to

face declining margins and a stagnant market share. Another large competitor, Toy World, was

Australia's largest buying and marketing co-operative of independent toy stores and had more

than 200 members throughout that country. Together, this collection of independently-owned

stores had earned a 10% market share, despite each store being about one-fourth the size of

the category killers. Membership in the network enabled a store to purchase and advertise in

large volume, while maintaining its own identity and local niche. Toys R Us had 23 stores in

Australia and planned to continue expanding. In New Zealand, Toy World was the only national

chain of toy stores, and was organized as a co-operative of 60 stores. As in Australia and the

U.S., the toy market in New Zealand was not experiencing rapid growth but was tracking just

above the annual inflation rate. The market was estimated at NZ$140 million in 1996 by Dixon

McMillan, general manager of Toy World New Zealand. The move by discount retailers into the

toy business (as practiced in Australia and the U.S.) was also evident in New Zealand. The

Warehouse, a chain of discount retail stores similar to Wal-Mart, had a noticeable impact on

the toy industry beginning in the mid 1990s when it began carrying a larger line of toys. Toy

World positioned ourselves deliberately to not compete with The Warehouse (McMillan,

1998). Toy World (and other smaller toy stores) had resorted to selling more New Zealand-

made toys, since The Warehouse traditionally sold imported goods.

Board Games

Products in the toys and games industry were categorized into ten groups. As with the toy

market, the industry for games attracted many amateurs. There are pretty low barriers to

entry. It can cost $30,000 to start a business and have a finished product. But the biggest

companies in the industry have convinced the largest retailers that the only way to sell games is

through television advertising. Now all of a .sudden you need $30,000 plus $1.5 million for TV

ads (Elson, 1996). However, many of the mega-hit games have originated from individual

inventors or small game makers. Trivial Pursuit, Pictionary, Scruples, and Jenga were invented

by individuals. Eventually, the titles were sold to major game makers and their inventors

became millionaires. The prospects for board games were very cloudy. Some experts predicted

that the virtual reality (VR) market would increase 50-lold to US$6 billion by 1999. Also,

Microsoft Corporation promoted Windows 95 and Windows NT as being especially game-

friendly for game players and for programmers. In early 1996, Microsoft released its Windows

95 Game Software Developers' Kit that was intended to help programmers write computer

game programs more quickly, easily, and with enhanced animation and performance. As PCs

became more powerful, games became more sophisticated and required more and more

practice before users become skilled. Typical buyers of word games (like Scrabble) were

educated adults aged 35 and above. Based on his discussions with industry experts, Geoff

learned that younger game players were more interested in games that were either

computerized or action-oriented. According to board game advocates, however, computer

games could never overcome their fundamental limitation: they encourage human-to-

computer interaction but not human-to-human interaction. The common sentiment among

board game players was summarized as I like the old-fashioned game that gets people

together and interacting (Hequet, 1995). Since computers could not duplicate the complexity

and richness of competing and co-operating with other humans, board games seem likely to

maintain this inimitable feature.

Consumer and Financial Markets in New Zealand

New Zealand was a small country in the South Pacific Ocean, located approximately 1,300 miles

south southeast of Sydney, Australia, and 6,500 miles southwest of Los Angeles. Its population

in 1996 was about 3.6 million people with roughly one-third of the total living in Auckland. New

Zealand's economy was roughly 1% the size the U.S. economy, and the per capita GDP was

much lower as well. In 1984, the New Zealand economy was one of the most regulated in the

industrialized world. In that year, the government began to deregulate and privatize many of

the state-owned enterprises that dominated the national economy. In a sense, the country was

still learning capitalism, and as such, the country's financial markets were smaller and less

developed. In fact, in New Zealand, a formal venture capital industry does not exist (Gautier,

1996 p. 42).

The Future of Zandinger!

Armed with the prototype of the game, his experience in successfully creating the Sweet House,

and his optimism for turning Zandinger! into his second successful venture, Geoff set out to

make Zandinger! the world's favorite word game for the twenty-first century. He knew that

launching a successful board game would be much different from selling confectionary

products through honesty boxes. He knew quite a bit about the industry and its rules of the

game but was not sure whether his game could become commercially viable. To pursue this

venture would require weighty decisions and the investment of much more time and money.

After his classroom presentation and the short drive through Hamilton, Geoff pulled into his

parking space wondering what decisions needed to be made, what contacts should be

established, and how to prioritize his activities. He had a good product with a strong

endorsement from an industry expert. It seemed like a good start, but he wondered what

sequence of events needed to happen next.

Appendix

Guide for Toy Makers and Designers

This appendix summarizes the decision on whether toy inventors should seek to manufacture

and distribute a toy themselves, or sell the rights to a toy making company. The information

contained represents a portion of the Guide for Toy Makers and Designers published on the

Web site of The Toy Manufacturers of America, Inc. (http://www.toy-tma.com/). The

information is used by permission of the Toy Manufacturers of America, Inc.

Selling Your Invention

Your best chances may lie with contacting small- and medium-sized manufacturers directly.

These companies are more likely to have smaller budgets for product research and

development, thus increasing the chances of their interest in purchasing outside ideas. Keep in

mind that many ideas from in-house designers get rejected, too. Be certain the manufacturer

you contact and your product are compatible; dont make the mistake of approaching a doll

manufacturer with your board game idea! You can determine a companys product line through

your toy store research, or obtain a list of toy manufacturers which includes a product line

description. Next determine if your targeted list of companies accepts outside ideas; call the

manufacturers directly to ask if they do and if so, to whom and where you may address

correspondence if you cannot speak directly to the correct party. Although expensive, you will

save time and money in the long run, as you can quickly eliminate those companies which do

not review outside ideas. Before a manufacturer asks to see your invention, you will probably

be asked to sign what is referred to as a disclosure, or idea submission, form or agreement.

These forms will vary in content; their primary purpose is to protect both you and the

manufacturers, as they establish exactly what you have revealed to them, and at the same time

release them from certain liabilities regarding what has been disclosed. If a manufacturer wants

to buy your invention, a royalty payment agreement is usually made between both parties, and

a confidential agreement. Royalty payments usually range from 210% of the gross sales, with

5% the average. If your idea has been sold through a third party, you will have to pay that party

a percentage of the royalty you receive.

Check the toy industry trade magazines for classified ads placed by manufacturers or design

firms who are looking for new product ideas. You also might want to place your own classified

ad offering your invention for sale. Example: For Saleunique strategy board game combining

elements of backgammon, checkers, and chess. For ages 12 and up. Patents and trademarks

applied for. Professionally test-marketed. Reply to PO Box 12.

Manufacturing and Distributing Your Invention

Although this path is more time-consuming and costly, as well as requiring general business

skills, it may lead to success in one of two ways: the personal satisfaction of establishing a

thriving business of your own; or having a toy company purchase your idea after you have

made it successful. Toy companies are more willing to purchase an idea that has demonstrated

consumer appeal. Another advantage to this method is that it is relatively easy to enter the toy

industry as a start-upa much less expensive proposition as compared to other industries.

Many large toy manufacturing enterprises began as small, entrepreneurial businesses.

If you decide to form your own business to manufacture and distribute your invention yourself,

you must be able to raise capital; contract for production services at an affordable cost; obtain

orders from toy retailers and ensure timely delivery; and continue promotional activities to

increase consumer interest and sales. You will face competition for retail shelf space, especially

from major toy manufacturers who are well known for their competitiveness.

Some other areas of consideration are legal matterspatent and/or trademark protection is

only one; safetythere are Federal government regulations covering over one hundred areas,

including small parts, sharp points and edges, flammability, toxicity, electrical hazards, proper

labelling, etc. for many toy items, especially those intended for children under age three;

product life cycle and stability of demand; new competition; and distributionmaking sure that

as many retailers nationwide who sell toys are carrying your product.