So Duncan redefined the concept of bootstrapping. He located a vacant facility where he could blend specialty chemicals and persuaded the owner to sign on as a partner; Duncan gave him one-third of the fledgling company in return for a year of free use. He found an experienced sales manager willing to take another third of the company in lieu of a year's salary. Duncan bought used equipment for "pennies on the dollar"; he ordered free samples from chemical companies for his initial raw materials. He lived on unemployment benefits.
Even in a depressed industry, however, Duncan quickly found customers. The reason was simple: his costs were so low that he could charge 10% to 20% less than the competition. He made a little, sold a little, poured the profits back into the company, and made a little more. Soon he had a modest loan from the local bank, and by the end of his second year he had bought the blending facility from his partner. Since 1987 the company has grown more than eightfold. Even with growth, though, Duncan never lost sight of Integrity's key advantage, which was its ability to maintain rock-bottom costs. "We're able to make healthy profit margins and keep prices low by maintaining extreme efficiency in our operation," he explains.
What makes for efficiency in this near-commodity industry? For one thing, not only does Duncan blend chemicals, he designs and builds his own blending equipment. A plant for making "soap sticks" -- products dropped into a well to help the oil or gas flow more freely -- uses a unique hot-water heating system and requires only one operator, compared with the three or four attendants required to run conventional equipment. Another custom plant, for oil-based drilling fluids, allows one employee to do the work of five. What makes such a quantum jump possible, says Duncan, is the fact that the specialty-chemicals end of the energy industry has been a kind of backwater, largely ignored by engineers. "So we took some time and spent some money in making the plants do a hell of a lot better job than what was already on the market."
Integrity's work force gives new meaning to the term lean. Duncan expects this year's sales to rise 10% over last year's. Yet the head count remains at only 18: Duncan, three people in sales and marketing, an accountant, a secretary, and 12 production and delivery people. Production managers work alongside line workers; everyone is trained in the operation of every piece of equipment. People fill in for one another as necessary. Repairs and maintenance are done on the spot, by the same people who run the equipment. "They're extremely knowledgeable about every phase of our operations," says the CEO.
Integrity spends money to make sure the employees keep all that knowledge within the company. Wages average 50% above the current industry standard. The company pays for health insurance. A pension plan matches up to 15% of an employee's earnings, and a bonus plan distributes up to 25% of profits. Duncan makes a point of both training employees and letting them know how the company is doing. ("It's kind of an open-book-type policy," he says.) The result: turn-over at Integrity is virtually nil. "We have high levels of expertise because all of our people are experienced in our own operation."
Competitive Edge: Getting Shelf Space
Question: How does a young company compete in the toy business? If you said, Get on the shelf at Toys 'R' Us, you win. The giant retailer has up to 50 times as much space for toys as other toy sellers do, and smaller merchants watch closely what their big competitor buys. Trouble is, not much of that extensive shelving is up for grabs. Giants such as Mattel and Hasbro claim sizable chunks. Classic toys -- from Monopoly games to the Fisher-Price preschool line -- occupy much of the rest.
Such obstacles don't faze John Osher, founder and president of Cap Toys Inc. (#92), who has built his Bedford Heights, Ohio, company around just such a strategic focus. "You're not competing with other companies head on, you're competing for shelf space," he explains. "You're trying to create toys that buyers have to buy because they feel that everyone else is going to buy them."
Osher's methods: spend at least two months a year on the road visiting the professional toy inventors who come up with most of the industry's new products. ("To get 10 or 12 products, we probably look at 3,000 concepts," says Osher.) Keep an eye out for toys that have some unusual features without being too far out. (Example: Cap's Giant Bubble Gun, a battery-operated device that blows soap bubbles.) Stay away from dolls, action figures, and other fashion-driven categories; they're too unpredictable. Make sure you have plenty of manufacturing capacity available, but keep overhead low. (Cap collaborates with a Hong Kong partner that oversees manufacturing; the partner is paid entirely on commission.)
Most important: work closely with Toys 'R' Us buyers. Show them concepts. Develop packaging themes together. Discuss pricing. If they don't want it, don't argue; chances are there's something wrong with your approach. "If Toys 'R' Us doesn't like the toy, we don't do the toy," declares Osher. Finally, make sure the toy can sell itself on the shelf, since TV advertising is both costly and risky.
