The enforcement rests in the reasonable nature of the agreement. A noncompete agreement is defined as being reasonable if it is (1) required for the protection of the employer, (2) does not impose undue hardship on the employee, and (3) is not injurious to the public.
The general rule in Ohio is that noncompete agreements that are reasonable can be enforced. Those that are unreasonable, however, may still be enforced to the extent necessary to protect an employer's legitimate interest.
Courts have the authority and discretion to modify unreasonable agreements. Thus, one of the important components of noncompete agreements is the existence of a legitimate business interest.
Common legitimate business interests are:
* Trade secrets
* Valuable confidential business or professional information
* Substantial relationships with prospective or existing customers, patients, or clients
* Extraordinary or specialized training
Trade secrets are generally any formula, device, pattern or compilation of information that affords a business an advantage over its competitors and that is kept secret through consistent vigilance. Valuable confidential business or professional information refers to documents, videos and other materials which are used in the day-to-day function of the business and are kept secret.
Courts view any training as extraordinary or specialized that is unique and particular to the business and that is not an ordinary, common and widely known practice in the industry. They view client access, involvement and contact that is continuous and business-driven as a business interest.
Noncompete agreements can be an excellent tool to protect a company's legitimate business interests. However, before one is utilized, these factors and others should be considered. Any business or company considering the use of a non-ompete agreement should consult an attorney. David L. Drechsler practices Buckingham, Doolittle & Burroughs LLP in the Litigation Practice Group. He specializes in commercial, intellectual property and employment-related litigation. He can be reached at (330) 376-5300.
While ethics classes are also a mandatory part of most business schools' curriculums, we are finding lately that many business owners could use a refresher course. Maybe they took it so long ago, they've forgotten its value, or, like many entrepreneurs, they never went to business school.
Or, as the case may be with Enron and WorldCom's CEOs, they probably took the class, but found out through practice that monetary success and high ethical standards are not always correlative.
So just as the economy recovers from the external attacks of last September, the stock market is spiraling again in response to domestic attacks from these CEOs, which are proving to be just as damaging.
Consumers are losing confidence in corporate America and investing elsewhere. But it's not too late to reverse the trend. Whether you are at a private or public company, you can help stop this downturn by taking a hard look at the ethical standards by which you run your business.
Many leaders in Washington are calling for a stricter watch over CEOs by proposing tougher penalties for rule-breakers, CEO certification of financial statements and a mandatory listing of stock options offered as compensation as an expense.
In addition, many have suggested that businesses keep a stricter watch over their relationships with their accountants. If you use an outside firm to audit your books, you should scrutinize more closely its role as a consultant to your business.
Don't wait for these ideas to become mandates; put them into action at your company while you still have a choice.
Tangier resists peddling its logo
By Teresa Dixon Murray
When Tangier Restaurant & Cabaret opened in the World War II era, management developed a logo because that's what businesses were supposed to do.
The simple script logo had a half-dome built into the T, which identifies the restaurant's Mediterranean roots.
Forty-five years later, the logo is one of the most recognizable in the Akron business community. But items bearing the logo are hard to come by. You don't see Tangier ballcaps or dome-covered T-shirts or keychains with a sea-blue T.
"If you're an exclusive restaurant or exclusive anything, it's probably not a good idea to have your logo splattered everywhere," says Ellen Zban, director of customer relations and marketing. "But with the entertainment aspect of what we do, we have a little bit of leeway to be more lavish."
The restaurant had a gift shop until about a year ago, which featured Tangier merchandise, including a coffee mug with the logo and a wine with the Tangier label.
The only other premium products-existing in a few customers' cupboards-are practically collector's items: sherbet-style dessert dishes the restaurant once gave away with lavish desserts.
The famous logo was nearly dumped about 10 years ago, when owner Edward George agreed it was time to tweak it with a more modern look.
The T in the logo was stripped to eliminate the dome. Executives thought maybe it was cleaner and they began using it on some internal documents. But the new logo was ditched because it just didn't feel like Tangier.
When you've got a good thing, George decided, keep it.
While Tangier has resisted mass marketing its logo in the past, it might start distributing some premium products in the future, Zban says. Management has toyed with distributing Tangier pens or other items at various travel shows.
The closest the restaurant comes now, Zban says, is new buttons for the staff with the logo and the employees' names. Management developed the large buttons to help customers know who can help them navigate through the 50,000-square-foot complex. "This place is so huge, we really try to make it as personal as possible."
While the size could be an intimidating, executives bring the concept full circle back to the logo. Marketing efforts carry the familiar image and the slogan: "You'll find everything under the dome."
Introducing a new feature-about fun
By Robert G. Rosenbaum
All work and no play, as they say, makes Jack a dull boy. To help Jack lighten up, I'm pleased to introduce a new feature, which you'll find every month on the last page of the magazine.
Akron After 5 is about what you do after (or instead of) work. To make sure we're highlighting the kinds of places and events that interest you, we've tapped two of Akron's most out-and-about businesspeople to write it.
Each month, Linda Truby, of Above The Crowds Travel & Meeting Planning, and Claudia Bowers, of The Conflict Management & Mediation Center, scour the Akron area to give you a heads-up on what to do when you head out. We're pleased and proud to have them aboard as contributing editors.
Among the topics they plan to cover are: Benefit events, cultural offerings, nightlife openings, weekend outings, high-end retail offerings, special events and short profiles of people in your social circle who are doing interesting things outside of work.
If you have any events you'd like to see highlighted, just send a fax or letter to Small Business News containing details of your event, to the attention of Akron After 5. We can't promise to get everything into print, but we'll try our best.
I hope you'll like this new departure from our regular package of business information. Its goal is to entertain you, help you entertain yourself, and help all of those businesses and institutions throughout Greater Akron that work so hard to show us a good time.
If you do enjoy it, please reserve your thanks for the Akron Summit Convention & Visitors Bureau. As the sponsor for this feature, it's their support that makes it possible.
Now go out and play.
But before you do...
How much are you like a high-performing Entrepreneur Of The Year? Working with Ernst & Young LLP, the founder of the annual Entrepreneur Of The Year program-of which SBN is a proud sponsor-we surveyed all previous Northeast Ohio award winners.
Our questionnaire mirrored a study done late last year among Entrepreneurs Of The Year across the United States, allowing a meaningful comparison between all the best and the best around here.
If you assume that these people have succeeded by developing some of the best management practices, you'll be interested to find out where they get financing, how many times they capitalize, where they ultimately plan to take their businesses and much more. It may give you some ideas on what to think about next.
As for us, we've already moved on to the next Entrepreneur Of The Year feature: full coverage of Akron's players in this year's awards program. You'll find that in the July issue.
Bob Rosenbaum can be reached at (216) 529-8587, or by e-mail at email@example.com.
In 2 1/2 years, sales at the extrusion manufacturer and fabricator tripled. That rapid growth left Smith, Anderson and their employees in a blur. Quality had dropped, morale was low and the partners were exasperated.
One day Smith and Anderson realized they barely recognized the company they had once been so proud of.
"With rapid growth," Smith says, "you spend most of your time filling orders. It's difficult to detach yourself and look at the big picture."
Two years ago, they did just that. The pair put a moratorium on growth and forced themselves to reclaim their business. Today ESI has 30 employees and nearly $5 million in annual sales. Smith is CEO; Anderson is president.
They don't pretend to be a model business yet, but Smith says, "I think we're a whole lot stronger now than we were six months or a year ago." Here are some of the ways they did it:
Create a sense of ownership
ESI designs, manufacturers and assembles some 100 pieces of custom equipment a year for the rubber and tire industries.
ESI had developed loyalty among manufacturers who wanted quality with a personal touch. On many jobs, it wasn't unusual to have nearly every employee involved at one point or another.
"A lot of the guys in the shop knew the customer when they walked in," Anderson says.
When quality began to suffer, they hired a quality technician to check the final product. But more importantly, they adopted a system that tags every job with a sign-off sheet: Each employee must sign off on his portion before sending it down the line.
"When people have to put their name on something, they take more pride in it, and they're going to make sure it's right," Smith says.
The system started in late 1997. Today a piece of equipment might contain anywhere from 10 to 25 different sets of initials. "They like the approach, but they had to get used to doing it," Anderson says.
Back that ownership with money and authority
It's one thing to expect your employees to take ownership; it's another to show them the feeling is mutual.
Two years ago the owners launched a 401(k) program with benefits paid based on profits. Their money became the employees' money.
In addition, Smith and Anderson tried to recreate the atmosphere that existed in the good old days. With only 10 employees, there were few formal meetings. When workers had ideas, they simply spoke up. If people thought the idea was good, it was rolled out the next day.
ESI drifted away from that, to the point where many didn't feel like they had input.
Today, Smith and Anderson frequently ask the 16 shop workers what can be done better on a given job or with a certain procedure. "Maybe it's something we hadn't thought of," Anderson says.
The owners jumped on the chance to get employee input when they moved three years ago into a new 25,000-square-foot facility off Home Avenue.
Employees were asked ways to make the layout of the new building better.
"If the employees feel they have more control over their work," Smith says, "they'll do a better job."
Don't forget to talk
ESI had few systems for communicating. It wasn't critical in a workplace where you could yell across the shop and everyone could hear you.
But as sales mounted and employment grew, that tin-can-and-string method broke down.
The engineering department overbooked projects, assuming the shop would want to work overtime. Or a shop worker would learn that a customer was upset about an order, but wouldn't tell the salesperson. Then the salesperson would walk in for a service call and get blindsided by the angry customer.
"We were always rushing and running so fast, the communication started getting less and less. We had to make sure we got it back, like it was when we had only 10 people," Anderson says.
Design meetings now include both the engineers and the shop workers. "Before, engineering would meet by themselves and then say to the shop, 'Here, build it,'" Anderson says. ESI has found that jobs can be completed better and faster when everyone involved in a job helps plan it.
Communication issues involving customers have been addressed through the hiring of a customer service liaison. All customer service issues come through that central source, and she distributes memos and information to everyone.
Smith still shakes his head remembering times when two people who sat next to each other didn't always pass along information. They just assumed the other knew. "It isn't just a big company problem," Smith says.
Realize employees work to live
Three years ago, many ESI shop employees were working 50 to 60 hours a week and salaried employees were topping 70 hours. Smith and Anderson, meanwhile, were working what they called "unproductive" 80-hour weeks.
While some shop workers enjoyed the fat paychecks, the harried atmosphere affected morale and efficiency, Smith says.
"You burn people out that way," he says. "Some people quit, and we had the potential for losing people we didn't want to lose."
Smith and Anderson say they had no choice but to nearly double the shop positions, and today they keep shop workers' weeks at about 45 hours. In addition, they allow each worker to set his own starting and quitting times, as long as it's the same every day. This allows workers to accommodate personal or family needs.
As for Smith and Anderson, their work weeks have slimmed to 55 to 60 hours, almost on their own. Anderson says much of their time was spent handling problems and unexpected phone calls. As the management of their company improved, the demands on their time have dropped.
You must spend money to save money
Smith and Anderson wrestled with creating new positions for various reasons.
The sales department has expanded from one to four as ESI has stopped its reliance on manufacturers' reps. On the engineering side, the company had two engineers five years ago. Last year it had four. Now it has eight. Smith and Anderson hope that translates into higher sales, because they believe ESI will be doing such a better job on design and quality.
"It was one of those decisions," Anderson says. "'Which comes first-the chicken or the egg?' We just said, 'This year we've got to bite the bullet.' Now the pressure is on."
The workload on the engineers before might have led to some of ESI's quality problems, he says. Now the engineers have a longer and more relaxed concept-and-design phase, and they're not pressured to spit out designs on impossible deadlines.
"If you don't have time to do something right on the front end, you'll have to take care of it on the back end," Anderson says.
"Sometimes before we would just make the same mistake over and over again, and that would cost money ... These positions are well justified."
Good customer service is proactive
ESI historically had few written procedures or systems for documentation. That wasn't a problem when ESI had only 15 regular clients. The details were easy to remember.
"We were a little bit loose before because everybody knew how to do things, or at least we thought that," Anderson says.
In addition to the new customer service position that feeds communication through a single source, ESI now keeps a central filing system on each customer with information such as service calls and warranties. "It's just better documentation and relying less on memory," Smith says.
Part of the documentation is a structured customer service follow-up procedure, including calls the day of delivery and a week after delivery to ensure everything was received, to check whether the equipment works well and to answer any questions. ESI also asks for feedback on the design.
"We had an erratic follow-up system before," Anderson deadpans. "If you remembered, you called them."
This new process helps the custome r and ESI. "You learn from what you did right. You learn from what you did wrong," he says.
Adds Smith: "We're finding out some things we might not find out otherwise."
And everything is documented. A suggestion now might help with another job next month or even with a job still in the shop.
Smith and Anderson can't help but look ahead as their potential market grows beyond its North American core. They hope to expand international sales from 15 percent to 20 to 25 percent next year. Overall sales could double again five years from now.
But the partners have a bigger goal. "One of the things we want to make sure we do now-that we didn't do before-is control that growth," Anderson says.
"Improvement is a continuous effort," he adds. "We've made more steps forward than backward, so we're OK."
With enthusiasm and an open and honest approach, Wetzel was able to package and sell an idea where others have failed.
His multimillion-dollar idea becomes a reality this fall when the Center Ice Sports Complex opens its doors just south of the Akron Canton Airport in the new Port Jackson Industrial Park. The complex will house an ice arena for competitive hockey and figure skating, recreational skating and lessons; party and meeting rooms; concessions; a game room; pro shop; and seating for more than 400 spectators.
There are 17 rinks that serve Cleveland-area residents but the closest rinks to the Akron and Canton area are in Kent, Wheeling, Columbus and Athens. For Wetzel, who works from his home as a computer consultant, that wasn't close enough.
Here is how the hockey player raised $2,550,000.
Wetzel first contacted 250 potential investors, including many of those who had tried and failed to build a rink in the area during the past 20 years.
"I tried to find what their stumbling blocks had been so I could avoid them," Wetzel says. "I was selective on who I brought on board. I wanted a cohesive group of investors who could bring more to the table than just the money."
Wetzel spoke to Rotary and Kiwanis groups to spread the word. And to provide evidence of the public's interest to investors, he organized a pep rally of sorts to announce his plan. Several members from both the Cleveland Lumberjacks and the Pittsburgh Penguins attended.
With just one week's worth of advertising, Wetzel managed to attract 300 families to the event. This provided him with a mailing list. Word quickly spread, and soon he was receiving phone calls and faxes from as far away as Wooster and Dover. To date, he has a list of more than 600 families who have shown an interest in using the rink on a regular basis.
Wetzel contacted vendors who supply ice skating rinks and attended the first ice rink management course offered at the University of Michigan to get a better understanding of the business.
He researched other similar markets that had rinks and compiled a business plan that fills a 2-inch binder to capacity. In addition to the research, legal documentation and surveys, Wetzel included a conservative pro forma financial statement that shows revenue returns within two years.
Wetzel says he didn't "wine and dine" potential investors. In fact, his headquarters for awhile was a booth in a local Applebee's.
"I'm not a salesman in a true sense," Wetzel admits. "Lots of people told me I had to sell the idea. But I thought if I shared the facts as I see them without a lot of glitz, I would do better.
"People told me I was crazy but either you believe in the idea or you don't."
Wetzel raised $300,000 from his own investment plus those from nine individuals. He approached several banks and eventually raised an additional $250,000 through a National City Bank loan. Finally, the major obstacle he faced was conquered when he joined forces with Whipkey Construction, which is providing a $2 million piece of the financial pie.
Whipkey signed a 99-year land lease on the land and agreed to construct the building and then lease it to Wetzel and his investors with an option to buy both the land and the building in six years.
"The risk for the developer is minimal," Wetzel says. "If-God forbid-we failed, Whipkey could sell the building as warehouse or office space."
A few investors dropped out in the early stages, but Wetzel says other opportunities surfaced quickly.
"I've been told the loan decision meeting at National City was not a typical one because so many of the officers are true hockey fans," Wetzel says. "I guess they were pretty enthusiastic about the whole thing."
Robert Eames, vice president for National City Bank, says Wetzel did many things right in approaching the bank.
"He got us involved very early in the process, took our feedback and understood our parameters before finalizing the structure of the deal and before approaching his equity investors," Eames says. "He knew what he needed to raise for the equity and the initial risk the equity holders would have to take.
"Mark's perseverance was essential. He overcame a lot of hurdles that would have stopped many people with less fortitude," Eames adds.
Wetzel says one major stumbling block was having to scratch his original plan, which included two 35,000-square-foot ice arenas-one for hockey and one for figure skating.
"We wanted to raise $1 million (for a total of $3 million) and build two rinks right away," Wetzel says. "But when that didn't work out, we looked at other options."
Future plans include an expansion of the building, which will house the additional rink.
Wetzel credits his thorough preparation for his success with investors.
"There's no better way to convince investors than being prepared," Wetzel says. "I think luck helps, but I also believe we make our own luck."
He stresses the importance of having enthusiastic investors he can rely on for other resources beyond money.
Tom Schervish joined as an investor about halfway through the fund-raising phase. Wetzel says he relied on Schervish for business consulting. Another investor, Dr. Bernie Bubanic, provided marketing expertise. (Bubanic also serves as team chiropractor for the Lumberjacks, Penguins and the St. Louis Blues.)
To save operating expenses, Wetzel, who will manage the new complex, will lease the concessions and pro-shop functions and "concentrate on programming and core activities."
How to reach: Center Ice Sports Complex (330) 966-0169<
Last fall, Gary Smith was looking for an investor for Signa StorTech Systems Inc., the North Canton company he purchased two years ago.
What he found instead was a job offer-one too good to pass up.
Smith, past chairman of the Canton Regional Chamber of Commerce, this spring was named CEO of High Plains Corp. in Wichita, Kan. The publicly traded $100-million-a-year company is among the nation's largest producers of ethanol.
High Plains' board of directors courted Smith because of his executive and sales management experience in the fields of alternative fuels, automotive engines and industrial manufacturing, says board Chairman Daniel Skolness. Prior to StorTech, Smith served in executive positions with Canton-based Hercules Engine Co., White Engines Inc., Cummins Engine Co. and Hoerner-Waldorf Paper.
As president of Hercules, he successfully directed the company through a transition from focusing solely on the military market into one branching to commercial truck and bus markets for its natural gas engines.
Smith, 55, will retain ownership of Signa along with partner Skip Dragoli. Smith's son, Chad, whose title has changed from director of sales to general manager, now runs the 30-employee specialty fabricator and powder-coating firm.
"Truly I wasn't looking for this," Smith says. He had broached conversations with a couple of the High Plains board members he knew through the industry and his Minnesota roots. One of the board members is a former boss.
"I hoped maybe they would be interested in investing in Signa. Their interest was in getting me involved with High Plains."
The 16-year-old High Plains has seen sales turn flat and hasn't deployed its assets as well as it might, Smith says. "They needed somebody to help them solve some problems. If we turn things, I'll be well rewarded."
Smith and his wife Jan, who adopted Canton as their home in the mid-1980s, will keep a home here and will retain local ties, including returning for Hall of Fame week and continuing a few volunteer efforts.
"I sit here sometimes at night and I miss my friends and I miss the things I built there," Smith says. "If I don't like it at High Plains, I can come back. When you can have the best of both worlds, it's nice."
When the pressure builds, can you stay in 'The Zone?'
The Pro Football Hall of Fame isn't the only Canton-based business with an NFL connection. The Tuscany Institute is a performance consulting company gaining national recognition for its work with football players like the San Francisco '49ers' J.J. Stokes.
Timothy Moore founded the company 11 years ago while living in Michigan. During his tour of duty in Vietnam, Moore became fascinated with the performance of soldiers under the pressure of battle. Some succeeded and some failed. Moore decided to try to answer the question of why.
Moore is a filmmaker by trade, so he is not an expert in either psychology or physiology. But he says he has made a few useful observations by watching and talking to people working under pressure. "The thing that they give up the quickest is their emotional stability," he says. Without that stability, they leave what professional athletes call "The Zone" and they fail.
Moore developed a package of techniques to help his clients regain their emotional stability, to relax so they can focus on doing their best. "It comes down to how we perceive the world. Do you have more energy to go on vacation or to have a root canal?"
Moore has a proprietary sound system called Sensoria, which he is protecting as a trade secret; customized series of movie clips; a book of motivational words, images and resources he calls Tuscany's curriculum; and a 100-question Sensoria Enquiry, which he gives at the beginning of his work with clients.
The description of his consulting techniques is foggy because Moore doesn't share details with people until they are clients and have signed non-disclosure agreements. It's a corporate necessity, he says, but a marketing handicap. His limited circle of clients are professional football players, corporate executives and professional golfers who have all had performance crises that endangered their jobs. He found them through whispered word-of-mouth referrals.
Moore says he has had success with athletes because they understand instantly that being in "The Zone" means having relaxed confidence. He has had a harder time getting his message to executives, because so many believe that they work better when stressed out and meeting others' demands. Moore would like to turn their thinking around. "If you're the leader, you have to make sure that you get what you need," he says.
Two years ago airlines capped commissions at $50 for all reservations made through travel agencies, including his Roys-Stow Travel. Then, last October, they dropped the commission on all sales from 10 percent to 8 percent.
Lately, the airlines have become more clever and aggressive at luring customers away from their traditional distribution arm. The trend, says Roy, president of the agency, is to offer perks to individuals but not to travel agents.
Roy is not alone.
Jerry Lichty, president of Gordon Air Travel in North Canton, lost 20 percent of his operating capital in one week that October. Since then, he's watched the subtle new tactics, which seem to strip his livelihood away, one piece at a time.
Lichty says the relationship between airlines and travel agents had always been mutually beneficial. But the symbiotic relationship the two shared has gone the way of the passenger rail.
"We really believe the airlines are trying to put us out of business," Lichty says. "We don't understand why. We are an industry distribution system for the airlines. The airlines don't pay unless we produce, and I don't understand why they want us out of the loop. For the airlines to service the public, they will have to hire more ticket agents, provide more work space and equipment, and pay benefits and salaries."
"My brother flies with Southwest," Roy says. "Every time he books four tickets through his [home] computer, he gets one free. But the airlines don't offer this to me as a travel agent.
"I would call it an unfair trade practice, but the government doesn't seem to care what the airlines do."
Lichty shares similar experiences.
"One of our longtime clients suddenly stopped buying tickets from us," Lichty says. "When one of our agents saw him, she asked if there was a problem. Northwest [had] called him up and offered to give him double frequent flyer points if he reserved with them directly. So he said he didn't have much of a choice, and I don't blame him."
Lichty says the airlines "dump seats onto the Internet" when flights are not sold out. The tickets are sold at discounted rates not offered to the travel agents.
A changing world
The problem for the travel agencies now is that the airlines are competing with them for the same customers. The airlines have little sympathy for the travel agencies.
Kathy Peach, a representative from Northwest Airlines, says the airlines' were simply responding to market demand.
"The reality is the world is changing," Peach says. "Technology is changing the way we do things. The people who do well are the people who can adapt. The people who did horseshoes probably felt the same way about the auto industry."
Lichty's lost customer is the perfect example. Peach asks, "whose customer is he? If the travel agency feels [he's] their customer ... they need to understand the customer is buying our product.
Southwest Airlines Spokeswoman Linda Rutherford says her company "is committed to paying the traditional 10 percent commission" until the year 2000.
Three other airlines Small Business News contacted, American, Delta and Trans World airlines did not return calls.
A changing industry
"When the airlines started all of this, we became convinced it was just another way to bypass us," Lichty says. "But we've turned it around so we can still survive."
Like most travel agencies, Gordon Air and Roys Travel added a $5 service fee to all airline ticket purchases.
Lichty and his team have since made a list of 24 things their agency can do for clients that the airlines cannot.
"These are things we offer, but we can't do it for free anymore because of the airlines," Lichty says.
Electronic tickets, pre-assigned seats, meeting planning and ticket delivery are a few of the services listed. Ranking first on the list is unbiased airline pricing.
"You are either going to have to call your favorite airline or call every airline that flies out of your airport," Lichty says. "For example, a lot of times we can get the same price departing from Akron/Canton as Cleveland."
Roy says travel agents provide quality control for businesses.
"We're still the experts and we can still save people money," Roy says. Lichty and Roy agree travel agencies are reinventing themselves by offering specialized services or targeting niche markets.
Roy says his father, who founded Roys Travel in 1966, has been doing all along what many travel agents have been forced to do in the past two years.
"We've specialized in [Las] Vegas tours since the beginning," Roy says. "My father knew he had to specialize in certain markets to remain competitive, so he picked Vegas."
But Roy sees pressure in those niches, too. He expects that cruise lines and tour operators will soon be offering reservation
services via the Internet.
"If you want to spend all of the time and energy with only the possibility of saving a few bucks, is it worth it?" Roy asks.
Lichty says he feels betrayed by an industry he once trusted.
"I feel like we helped them build a golf course; but now they won't let us play," he says.
How to reach: Roys-Stow Travel (330) 929-4426
Gordon Air Travel (330) 497-9349
Little Tikes, with about 3,500 employees worldwide, posts more than $500 million in annual sales. Step 2 stands at $100 million in sales and 1,000 employees.
Today there are rumblings that Rubbermaid might sell the toy company, which last year saw a double-digit drop in saleseven as Step 2 sales rose 4 percent before an anticipated 1998 increase of 15 percent. Meanwhile, Rubbermaid is being restructured to reduce jobs and expenses by as much as $200 million a year by the end of 2000.
For a man with a competitive streak like Tom Murdough, all of this must be an energizing call to action. Murdough himself is as circumspect in his public comments as you would expect a smart CEO to be. But to an outsider, it seems like an obvious moment for him to do something bigtake advantage of the moment to somehow gain the upper hand, or even try to buy back Little Tikes.
It would be the ultimate competitive stroke. The thought, when placed on the table before him, elicits a mischievous smile.
But Murdough has another little project hes been working on for most of this year. Hes in the last weeks of his effort (according to the vague schedule available at press time from the National Football League) of his effort to buy the new Cleveland Browns franchise.
Murdough recently took time out to talk with SBN about the growth of Step 2, about the nature of competition, and about whether hes going to reclaim his first love.
Step 2, like Little Tikes, has been known for its big outdoor toys, but now you seem to be focusing on smaller products priced under $20. Why?
We came out with the under-$20 retail products two years ago and they were tremendously successful. Theyre very effective in opening up a lot more shelf space for Step 2. This move [also] has been the result of recognizing a trend for consumers desire to spend less money....
How do you determine these market trends?
We do it by listening, by actively seeking out consumer preferences. Our questionnaires, which go on every new product, tell us a lot about what the consumer is thinking...
These are open-ended questionnaires. Theyre not computer [tabulated], which means people actually say what they mean. We get 8,000 to 10,000 of these in a given year. We learn a lot from these.
We also ... log 800 to 1,000 calls a day on our 800 number, and at any given time, in an eight-hour period, we can do a survey of people who call that day and get a quick response. They are bona fide consumers of our products. If we have something specific we want to look at, we can just ask everyone that day and do great research fast.
You mentioned the written surveys you get in. How many of those do you yourself actually look through?
I look though almost all of them. And besides me, usually three or four other people, people in marketing and manufacturing, also go through them.
Is that where you started getting the idea a few years ago to move toward some smaller products?
Most of our top retail customers supply us with shelf-life information. We get reports ... that give data on every product we sell to them. Those tell us exactly how many they sold, sales by region, sales for that week, how many they sold that week vs. the same week last year, and at what price.
So theres a wealth of information in reports like this. Staying close to your customers is the key.
Youve said you get ideas from consumers, from employees, from your R&D staff, from your retailers. How much of a decision to go with a particular product is just gut instinct?
Its a pretty significant percentage. A lot of it has to do with our approach to manufacturing. I dont want to elaborate too much on this, but many of our competitors use a process that requires them to spend a tremendous amount of capital dollars in developing a product.
Our process, for all of its deficiencies, and there are manyour process is very labor-intensive. Its unable to hold high tolerances ... can get into a new product considerably faster and for considerably less money than our competition. Thats because were buying cast aluminum molds. That allows us to get finished product into the marketplace, into our test stores (as fast as eight weeks from conceptualization) ... and find out early on what the reception is to that product.
So, well probably take a greater degree of risk with certain of our products than much of our competition. When we see weve had a winner, then we add additional molds, maybe as many as 20, if the volume so dictates.
Whats a product that was a sleeper success?
The most recent one, I dont want to tell you. Its going to be big, and our competitors dont know it yet.
But a recent sleeper was our building-block table. ... To be quite honest, I wasnt even sure we should make the product because there are so many Lego play tables out there.
Whats unique about our product is the storage underneath this nice sturdy table. It retails for $20, and when we introduced it two years ago, it just flew out of here.
Do most of those products end up having a long cycle?
The ones Im talking about, yes, and that has a lot to do with our approach to marketing. ...
We spend a very low percentage of our sales dollar on advertising. A lot of people are critical, thinking wed move things a lot faster if we spent more on advertising. ... [But] you cant have a $20 price-point if youve got a big advertising load. We think that $20 price- point and our customers margins are more important than the short-term burst you get from the advertising. Its not that we dont do advertising. We did close to $1 million in advertising in 1997. And thats just print media.
We take this approach: Let the product be king. The mothers are so quick to pick up on something good.
You hesitated a second there, like you thought it was stereotypical to say mothers. Is that un-PC?
I say it all the time. Mothers buy 80 percent of our products. And you women spread the word so fast it boggles my mind.
How much attention do you pay to what your competition is doing?
A lot. We constantly worry about our competition. I want to knowits a natural instinct I guess. It is a very, very competitive industry. All of the industries were in, like with the home-and-garden products, are very competitive in this day and time.
Its quite unlike the first go-around with Little Tikes. It was a competitive industry then, but we stood alone with rotational-molded plastic products and virtually did not have a direct competitor. Now we have Fisher Price and Little Tikes and of course all toy manufacturers are competing for the buyers dollar ...
So I want to be aware of what my competitors are doing. We take great pride in being unique and innovative and being a leader in this industry. Our objective is none other than to be No. 1 in the industries were in.
How much do you look at what others are doing, either to validate your own efforts or to snicker at what theyre trying to push?
We get knocked off a lot, we get copied, and we want to know about things like that. We want to know what theyve done, what their price is. Unfortunately, in this day and time, integrity has to a large degree gone out the window. Thats sad. We cant protect ourselves with patents. The only way we can protect ourselves is by being the low-cost producer, by getting out in the market first, and then counting on the buyers [retailers] to respect all of those issues we ;ve provided to them... If consumers can get a buck off a product from somebody else, theyll overlook your brand.
When you were with Little Tikes, you didnt deal with Wal*Mart or some of the other big discounters. What happened?
Thats all thats left. Wal*Mart, Kmart, Target, Toys R Us. Those accounts and probably six others represent 70 percent of our business. And they have a finite amount of shelf space.
We believe our long-term success hinges on our customers ability to sell our product in volume and to be able to maintain a reasonable margin.
Which brings us to the sensitive topic of retail pricing. What are the issues you deal with?
When you allow a Wal*Mart or Kmart or somebody like that to irresponsibly use you as a loss leader, it destroys the market opportunity for your other customers and effectively shortens the life of the product. Because when a customer can no longer make money on a product, they drop it.
Lets say one store sells your product at $24.95 instead of the $29.95 we ask. All of a sudden, that becomes the expected price in consumers minds.
If the others still sell it at $29.95, all of a sudden their business slows down like hell and theyre going to look at their shelf space, and they dont want to give product away....
There are retailers in this extremely competitive environment who would take those products that theyd paid maybe $14 for and run them out at $14.99.... They dont care what effect that has on the manufacturer. We fight with our retailers to make sure they dont do that.
I called one just yesterday and said, You broke the price on our Wagon for Two. ... We can legally control it .... They will forfeit their advertising rebate. We give them a rebate at the end of the year of maybe up to 3 percent of the sales dollars based on their adhering to our minimum ad pricing policy.
And yet, we see these kinds of products on sale all the time.
Thats the Rubbermaid influence. It may work in housewares, but the nature of the toy industry is very, very different and I dont want to get on that subject.
What about stores like Marcs that have prices way below everybody elses for your products?
Thats the classic case of people cutting the price, and were actually going to stop selling to Marcs for a while.
Retailers, it seems, are putting the squeeze on manufacturers. And we all know that times are tough at Little Tikes. Theres talk that Rubbermaid might be willing to sell Little Tikes. Are you interested in buying it?
I dont think Id better comment on that. There are lots of different issues surrounding that question. Let me just say that ... um, I dont know ... I dont know. Id love to tell you more but I shouldnt.
It seems you might have your hands full anyway with the NFL bid right now. If everything worked out and you purchased the franchise, how would that affect operations at Step 2?
Initially, getting the staff in place would take some time, and Ive already talked to all of our people in the company about that ... Im expecting to put in long days, and theres no question the Browns are going to take time initially... Once Id get the right people in place, and the direction is set, then Ill be able to continue to focus on Step 2 again. Believe me, were not going anyplace. Step 2 is more important than ever.
Ive gotten into this thing with the Browns because I want to make sure Its done right, and I mean that. This is a big chunk of my familys net worth tied up in this. If it doesnt happen, Im going to be upset. Im going to do it.