Business is a game to the managers of TSR -- and they keep winning.
You are in a dim passageway with heavy oaken doors leading in all directions. Weak torches gutter along the dank stone walls. Your troops shuffle their boots restlessly behind you, waiting for you to decide which door to open. Behind any door, you might find a lucrative licensing agreement with a major manufacturer, an exciting movie deal with a Hollywood studio, or a new distribution avenue with a well-established publisher. Behind the same door, through, you may find a bottomless pit into which you will watch your capital drain sickeningly or a menacing black dragon that will snap up your untested employees and spit them out in the blink of an eye.
You are TSR Hobbies Inc. of Lake Geneva, Wis., the enormously successful publisher of the fantasy role-playing game, Dungeons & Dragons. In each of its eight years in business the company has opened more of the doors in its passageway. Using innovative management techniques and a dedication to the role of game-playing in business, it has deftly avoided the few dragons and pits it has encountered, and has nearly always discovered glittering mounds of treasure.
The company's success earned TSR Hobbies the sixth position on INC.'s list of fast-growing privately held companies (see "The INC. Private 100," December 1981). Founded in the basement of a house in 1973 and incorporated in 1975, TSR had revenues of $12.9 million and a payroll of 130 in the year ended June 30, 1981, and projects revenues of $27 million and a payroll of 170 in fiscal 1982.
The company is so profitable that it has never had to go hat in hand to bankers or other money sources to finance its spectacular growth. Though it has a $2.5-million line of credit at a Chicago bank, the company's debt-to-equity ratio was an enviable 1-to-10 at the end of fiscal 1981. Its return on equity was 116%, and by last December, the original investment of $3,000 had grown to $3.5 million.
In their business explorations, TSR's owners and managers have been called upon to use many of the skills that are required to play Dungeons & Dragons. "I quit playing the game about two years ago to get some objectivity," says Kevin B. Blume, 30, chief operating officer."I love to play, but it wasn't that difficult to forego. Now I'm playing a much larger game called business. That's why we're intuitively good businessmen -- because games are a great way to learn."
Dungeons & Dragons, or D&D for short, is different from the games most of us are familiar with, such as Monopoly or Risk. D&D is played primarily in the mind; there are no boards or player pieces, just a set of six odd-shaped dice and a rule book. "Individuals play the role of characters in a fantasy world where magic is real and heroes venture out on dangerous quests for fame and fortune," says the introduction to the rule book. "Characters gain experience by overcoming perils and recovering treasures. As characters gain experience, they grow in power and ability."
Participants in a game of Dungeons & Dragons -- there are now more than 3 million around the world -- soon discover that the game mimics real life. Indeed, at TSR, the line between playing the game and running the business sometimes becomes blurred. "It's a lot like business," says E. Gray Gygax, 43, co-founder of the company and a former insurance underwriter and shoe repairman. "In gaming, as you meet different situations, you have to innovate. I'd like to think that it teaches our employees to analyze and cooperate. Game players have to learn to look beyond the obvious and see the number of variables they have to deal with. They learn to know their limits."
Gygax, who wrote the original set of rules for Dungeons & Dragons, has been playing games and living in a semi-secret fantasy world for most of his life. When he was six or seven years old, he most enjoyed playing with nickel-and-dime lead soldiers, reading fantasy and science fiction books, and listening to his father's tales. "My father told me fantasy stories," says Gygax. "He was an excellent storyteller and could make them up on the spur of the moment."
For Gygax, the years between childhood and the founding of TSR were really no more than an interlude when he had to keep fantasy in the closet. He never graduated from high school, and spent 15 years as an insurance underwriter analyzing the actuarial experience of client groups. "There were too many boundaries in insurance," he says. "All I really wanted to do was write and design fantasy games."
In 1970, he quit his job and started living out his fantasy. He paid the bills by repairing shoes in his basement. He also got a trickle of royalties for writing and editing rules for war games, and was paid 60 cents a page for typing up the rules. In 1971, he published his own set of rules for a war game, which he called Chainmail. A year later, in the second edition, he added something called a fantasy supplement, describing an imaginative setting for playing the game.
To his surprise, all of the inquiries about Chainmail began to focus on the fantasy supplement. So in 1973, he persuaded his boyhood friend and fellow gamer Donald Kaye to borrow $1,000 against his life insurance and the two of them formed a partnership called Tactical Studies Rules (TSR). With Kaye's money, they published a set of wargame rules for lead miniatures, called Cavaliers & Roundheads.
In January 1974, Gygax and Kaye were joined part-time by another gamer, Brian Blume, who had been a tool-and-die maker for his father's company for five years. Blume invested an additional $2,000 and the three of them published the rules for Dungeons & Dragons. It took a year to sell the first 1,000 copies of D&D. The next January, Donald Kaye had a fatal heart attack: He had been scheduled for heart surgery, but had never told his partners. "The key to having a lot of success is enjoying what you do so you don't mind thinking about it all the time," says Gygax. "Donald never got a chance to participate like that in TSR."
The partnership moved into Gygax's basement and printed another 2,000 copies of D&D, which took only five months to sell out. "We had to compete with my shoe-repair machinery," recalls Gygax. "But the assembly process wasn't complicated. My wife, my kinds, and I would march around the diningroom table picking up the pieces and putting them in the box."
In October, a newly incorporated TSR Hobbies, with Brian full-time, and the printing and assembly subcontracted, began to get serious about business. The third printing of 3,000 copies of D&D also took only five months to sell out.In the next fiscal year, 1976, the company had $300,000 in revenues. "We knew it was good," says Gygax, "but we didn't know just how good. We decided in 1975 to compete with Milton Bradley and Parker Brothers."
Like a character in D&D, the company has ventured into new areas and gained power and ability from its experiences. From the original rules published in 1974, D&D has become a virtual industry in itself. The company began by splitting Dungeons & Dragons into two games, basic D&D and Advanced D&D. For the latter, there are five hardcover books that set out character types in more detail, a monthly magazine that keeps players up to date, numerous "modules" (specific scenarios for players), annual regional gaming conventions, and a new players' association. TSR has also licensed the game to Martel Inc. for an electronic version that was introduced last fall, to St. Regis Paper Co. for a line of notebooks and school supplies, and to one smaller company for a line of lead miniatures to represent the characters in the game. Gygax also hopes to be able to produce a full-length feature film based on the game, since negotiations with a major studio fell through last year.
The company has been expanding in other ways, too. It originally distributed D&D directly to hobby stores, but has since expanded into toy stores, drugstores, bookstores, and department stores, with a distribution network unrivaled in the game industry. It has also set up two international subsidiaries, begun publishing new role-playing games and new board games, is experimenting with software for computer games, and plans to integrate backwards first into assembly and then manufacturing of its games.
Now the company has grown into one of the major employers in Lake Geneva and has the resources to really operate in a kind of business-fantasy world. It has never had a major failure and it has no head-to-head competition (see "Why TSR Hobbies is so profitable," page 71). It can afford to treat its employees royally, and there doesn't seem to be a plateau for its growth in the near future. "We've done analyses of the market for Dungeons & Dragons," says Kevin Blume, "and we figure that the game is still well below the halfway point on its growth curve."
A company that's had it that easy could be spoiled and casually managed, but TSR is a well-run operation. Its balance sheet and its income statement are two of the prettiest business documents around. The company spends money only with the greatest of reluctance and makes a mission of finding ways to boost its operating margins, by bringing the assembly in-house, for example. And TSR has such a reputation as a well-managed company that it has persuaded a number of key people to take cuts in pay to move to the hinterlands of Wisconsin. "They've got one guy from the game industry and that's me," says Mike Gray, a professional game designer with 15 years of experience, whom TSR lured away from Milton Bradley. "At this company, I can grow into anything I want. The company doesn't know its limits, and it doesn't know my limits."
Perhaps most surprising about TSR's management team is its lack of relevant experience. The nine top managers -- three principals (Gary Gygax and brothers Brian and Kevin Blume) and six divisional vice-presidents -- represent former occupations ranging from biologist to pharmacist to plumber. Of those nine, six are currently in formal management training programs, and only in the last year has the company begun to hire people with specialized business skills.
The company's dedication to playing games as a way of life has shown its managers how to run the operation. The common bond among the managers is that they are gamers. All of the original employees and half of the current staff joined the company because they played Dungeons & Dragons, not because of their business experience. "The game to a large extent mimics life," says Brian Blume, "and you can use it for pretty much anything you want. I've built a fair amount of economics into some of the games I've run, and it taught those people very quickly about economics."
As a result of the company's combination of inexperience and real-life fantasy, the organization operates in odd ways. Despite Gary Gygax's title of president, for instance, the company has no real chief executive. Rather it operates under the direction of a "presidential office," composed of Gygax and Brian and Kevin Blume. The company will not open the door on any new venture without a unanimous decision from these three. "We have an unwritten working arrangement where we sit down and thrash out major issues," says Brian Blume. "Philosophically we run in different directions. So if the three of us reach a consensus on what to do, we can be pretty sure of being right."
And when it comes to the future of TSR these highly imaginative people really let loose. "One of the reasons my wife makes great fun of me," says Gygax, "is that my mind tends to go off; I used to get my fingers caught in the shoe-repair machinery. But there is no boundary to Dungeons & Dragons. After all, what are the limits of imagination?"
Kevin, the day-to-day manager among the three, describes how they are pushing the company toward the paternalistic model of Japanese companies. "We will evolve the management styles and techniques that best serve the needs of the company," he says. "We're looking into things like a food co-op and a baby-sitting service for the employees. Eventually, I'd like to see us have a company pound -- you know, with a company store, school, housing."
"It's kind of like we have our own little town within Lake Geneva," adds Brian Blume.