K’NEX Brands LP has been taking a bigger and bigger bite out of its market ever since Michael Araten took over as president and CEO in 2006. In the past six years, the manufacturer of building toys has formed partnerships linking the K’NEX brand with brands such as Nintendo, Sesame Street and NASCAR.
This year, the company will introduce a line of toys licensed by Rovio Entertainment, makers of the “Angry Birds” video game franchise.
The tie-ins that Araten and his leadership team have orchestrated are having a major impact on the company’s bottom line. In 2008, K’NEX produced about $100 million in North American sales. In 2011, the company’s North American sales had jumped to $150 million.
Given all the success that K’NEX has had, what is Araten’s first tip on managing growth?
“I would tell other leaders to be lazy,” he says.
No, Araten hasn’t discovered the secret to building a highly successful enterprise from your living room couch. But he has developed a good grasp of what a CEO should and shouldn’t be doing when piloting a company through a growth phase.
“What I mean is, the first question when I’m looking at a task is, ‘Who needs to be doing this, and is there a way I can put this in someone else’s hands?’” he says. “The key for the CEO suite is to recognize who has what talents, and make sure they do what they are great at. If you don’t have the ability to do something yourself, what you want is someone on your team who can help you accomplish the key things you need to do, so that you can execute your growth strategy.”
Araten has been able to successfully manage the growth of K’NEX through strategic planning and effective delegation — knowing where he wants his company to go, and who can take it there.
To Araten, the plan is the known quantity, and the people are the variables. The success of K’NEX — or any company — is dependent on how well the team executes the strategy.
“If you have the right people executing on the plan, it will go really, really well,” he says. “If you don’t, it doesn’t matter how good the plan is, it just won’t happen. That’s why the linchpin in all of this is assessing the talent of your people and making sure they’re doing what they are really good at.”
Draw a map
The first step in any journey with a destination is to plan a route. When plotting a journey for your company, your route is outlined in your strategic plan.
Araten gathers all his top thinkers together for periodic strategy sessions, during which the team assesses growth opportunities that have either been presented to K’NEX or that the company is considering pursuing. The strategy team members weigh avenues for growth against a number of internal and external factors.
“It’s a risk-reward calculation, really,” Araten says. “How much reward do we think we can get for a given opportunity, and how much risk is related to that reward? We look at how much risk we want to take, how much inventory we want to build, what does our distribution channel look like, and build a plan around that. Once we agree on how much upside there is related to how much downside, we go and execute on that plan.”
To develop an accurate strategic plan, you have to know what market factors stand the biggest possible chance of affecting your business. K’NEX exists in a market that is seasonal in nature, and produces a product with a very specific appeal to consumers. With that in mind, he set boundary lines for what his team could consider regarding growth opportunities.
“We’re a seasonal business, so there is a little extra risk involved with that,” Araten says. “With every opportunity that comes along, we also have to ask ourselves if it makes sense as a building toy. Not to single out ‘American Idol,’ but even though the show is very popular, it probably wouldn’t make sense as a building toy.”
When Araten and his team did research prior to signing a licensing agreement with Nintendo last year, they started by figuring out the type of reach Nintendo had with its brand and video game characters, and by extension, the type of reach K’NEX could expect with cross-branded building toy products.
“We started by asking how many users of Nintendo products there are in the U.S. and around the world,” Araten says. “For example, we know that 40 million Wii units have been sold and another 70 million Nintendo DS units. We looked at Q Scores of various characters, and those scores have always been in the top five over the past decade.
“We also did a survey of our key customers, so we knew that retailers were open to carrying a new product. So we took all of that information, looked at our budgets in several categories, where we’d find placement in North America, Europe, Australia and other places, and decided that we were comfortable making, let’s say, a $10 million investment in inventory.”
Good growth opportunities in the manufacturing sector usually center on two areas: new customers and new products. You either increase what you offer to customers, or you increase the pool of customers to which you offer your existing products. In most cases, your growth will result from a mixture of the two, and you need to account for that in any strategic growth plan.
In the toy industry, executives such as Araten are fighting a constant battle to stay current. Kids quickly grow bored of their current toys and parents are always on the hunt for the next smash-hit birthday or holiday gift, so the leaders at K’NEX have to harness their creative and collaborative power to stay a step ahead of demand.
In that battle, the wins you already achieved can act as a critical springboard for future wins.
“When you look at our history, our first big licensing deal was with ‘Sesame Street’ back in 2007 or ’08,” Araten says. “Once we had ‘Sesame Street,’ and people saw how good we were performing and how well we could capitalize on the opportunity, licensors started coming to us with ideas.
“We were the ones who approached Nintendo for that deal, but we’ve had a lot of other brands come to us. That is where you want to build a checklist into any strategic plan that it makes sense for you. That you can reach consumers with marketing and distribution, and that the idea is a good match for your company. As I said, we want to make sure it’s an idea that makes sense as a building toy.
“We’re also starting to leverage technology so that we can ship directly to consumers in pretty much every country on earth. We want to be able to ship to anywhere from our warehouses in the U.S., so we are modifying our websites to be able to launch in a variety of countries that make sense. We’re working on both of those, and that is why we’re so interested in product relationships with global appeal.”
Invest in human capital
A strong culture that embraces solid core values is a central component of any high-growth organization. But to have that type of culture, you need to first build a team that can embody and promote your values.
Many leaders reference the principle of getting employees in the right seats on the bus, as popularized in Jim Collins’ book, “Good to Great.” No matter what metaphor you use to illustrate it, the concept is true: In order to have a strong culture that can enable growth, you need the best possible people positioned throughout your organization in a way that allows them to grow as employees, and allows you to leverage their talents and skills for the best possible effect.
Araten says much of what he has learned about people stems from years of experience, which has helped him develop a reliable gut instinct regarding whether a prospective employee fits in the company, or whether a given team member fits in a specific role. But that isn’t enough. You also need to be able to ask the right questions.
“Some of what I do I’ll refer to as a ‘friendly deposition,’” Araten says. “You ask people a lot of questions about why they are doing what they’re doing, you apply common sense to what the answers are, and you see if they’ve thought about all the potential angles to a given problem or scenario.
“If they have experience dealing with that scenario in the past, that is something to consider as well, Araten says. “In some cases, you’re going to have some new employees with limited experience, so some of what you are able to do is going to depend on where you are in your life cycle as an organization.”
In assessing a person for a job, promotion or assignment, you need to get to the core of their thought process. If you can peel back the onion layers on how they process information and solve problems, you’ll get a much clearer view regarding how they might fit your team.
“You have to look at the thought process of how they came to their decisions,” Araten says. “If it makes sense, it looks like the probabilities are in your favor, and you can move forward.
“There is never a scenario where you have perfect information or a guarantee of success, so you just try to get as close as you can, make the move with the information that you have at the time, and the results are the results. More often than not, when we take that approach, things seem to pan out in our favor.”
If you hire or promote an employee into a new position, and the person falters out of the gate, making decisions that don’t bear fruit, you need to get to the heart of what is going wrong. It might be the person, or it might be the process. In either case, you need to get your hands on as much information as possible so that you can address the issue.
When K’NEX launched its line of Nintendo products, the team overseeing the launch made a miscalculation in the budget. Admittedly, Araten was not happy, but he didn’t go on the warpath, point fingers of blame at everyone involved. Instead, he used it as a learning opportunity.
“On a couple of the items, we underestimated somewhere on the order of $100,000,” he says. “We thought it was going to cost $100,000, but it ended up costing $200,000. As part of our review on all the product lines, this comes up, and you could tell the person who was telling this to me was a little nervous. But we went through why it happened, whether we missed anything, and found that our logic was sound.
‘In the end, we learned some things about what we could have done differently. We ended up improving some of our internal mechanisms.”
If you encounter a similar situation, Araten says you should do three things.
“One, figure out if the person in charge asked the right questions, and if the questions were based in logic,” he says. “Second, if you would have done anything differently, what is it and did the person you put in charge know it – or should they have known it? Three, teach them how to ask better questions. Oftentimes, as the CEO, you will have a much broader view of the organization, and will think to ask questions that the team or department leader didn’t. That’s part of the learning process. If everybody knew all the questions to ask, we’d have hundreds of CEOs in the organization.
“If you value teaching in your organization, teach people what questions to ask so they improved their logic. Then, the next time a situation arises, it goes smoother and reaches an even better outcome.”
How to reach: K’NEX Brands LP, (215) 997-7722 or www.knex.com
The Araten file
Education: Political science degree from Stanford University; juris doctor from the University of Pennsylvania Law School
First job: I worked as a part-time sales guy at a leather and fur store in suburban Philadelphia.
Araten on building a high-growth organization:
I think you have to develop a culture, along with some mechanical things. You need to be able and willing to reinvest in the mechanical infrastructure, but to me the more important thing is that you need to create a culture where it is OK to take a chance going fast, where you forgive people their mistakes as long as their logic is good. So I think it is setting that tone from the top and letting your leadership team say it to the rest of the crew.
We are going to go a hundred miles an hour to try and take advantage of these opportunities, and we are going to miss some stuff. But as long as the logic is sound, what we miss shouldn't be critical. Whatever mistakes we make, we will learn from and move on. It is easy to say, but the more critical part is the first couple of times you make those mistakes and learn from them and move on. That is what people really remember.
Araten on reinforcing a culture through communication:
I have one-to-one meetings with my leadership team every week. We are sitting together for at least an hour each week making sure that we understand what the priorities are and the logic behind the major decisions that we are making. When things go awry, it starts with me asking how we are going to learn from it so that it doesn't happen again, and then moving on. Then, encouraging them to do the same thing with their teams.
On the flip side, you want to make sure that you are giving positive feedback whenever possible, whenever they are doing things that you really like. We have a few mechanisms in place for that, such as awards that any employee can give to any other employee when someone goes above and beyond the call of duty.