STRATEGY

Strategies: The Don't-Take-It-to-Market Alternative

Sometimes getting smaller is the only way to get bigger.
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Strategies

Barely two years ago Freeplay Energy Group was a 450-employee, $40-million manufacturer and distributor of rechargeable radios and flashlights. Today the company employs just 50 people and is forecasting $30 million in sales for 2003. Revenues and staffing levels may have dropped, but productivity seems to have increased dramatically at Freeplay. Which begs the question -- what exactly happened over the past two years?

In four words: a new growth strategy. More specifically, one that required a complete and radical overhaul of the company's entire business model and, indeed, the way its management viewed the company's mission.

From its founding, in 1994, until 2000, London-based Freeplay developed, manufactured, and distributed what it termed "renewable energy technology" in the form of windup radios and flashlights powered by Freeplay's patented generator. The simple but highly efficient generators are hand-cranked and store the resulting mechanical energy; they then serve as backup or primary portable power sources that can be incorporated into all kinds of small electronics. "Our core mission is to provide access to energy to everybody all the time," says founder and CEO Rory Stear, a 43-year-old South African who since the age of 18 has run a variety of companies, ranging from a restaurant to a mergers-and-acquisitions advisory firm.

From 1996 to 2000, Freeplay successfully sold 3 million windup radios and flashlights through high-end retail stores like the Sharper Image. But Stear wanted to extend the company's distribution further, into hard-to-reach markets in Asia and Africa. He knew that it would require lots of capital -- primarily to establish distribution offices in each location and to build inventory. He also realized that the ongoing quest for that capital, as well as for the financing necessary to run the company's existing operations, would mean exhaustion for him and dilution for his shareholders (who included Body Shop founders Gordon and Anita Roddick).

Stear had always steeped himself in literature about business models and management theory. By the late 1990s he was reading more and more about companies that were outsourcing all their ancillary activities so they could remain free to focus on their core business, often with great success.

After meeting with his board to discuss and refine his own strategy, Stear terminated the company's manufacturing contracts with factories in South Africa and China. He wanted to free up capital that had been invested in the manufacturing process, in both purchasing materials and maintaining inventory. "I think it's without question the toughest thing I've ever had to do in my life," he says of closing the factories, which during peak manufacturing season employed as many as 500 people. (To ease the pain of the transition, the company's board founded Freecom, an independent business that refurbishes computers; Freecom took on 100 of Freeplay's former factory workers in South Africa.)


STEAR-ING COMMITTEE: Freeplay's CEO rethought his company's mission and its methods.

Jettisoning manufacturing contracts wasn't the only change needed to transform Free- play into the new entity Stear envisioned. He also looked at the company from the perspective of a new buyer. "It was an opportunity to say, 'OK, how do we repackage this business while preserving its essence?" he says. "As we went through every part of it, the mantra became 'Does that add value?"

The results of Stear's clean sweep? The patented intellectual property along with the engineers who created it stayed. Nearly everything else went, including the company's four distribution centers.

As they stripped the business down to its core essentials and refocused it on research and development, Stear and his management team simultaneously set out to identify potential partners who could bring Freeplay's technology to the consumer market. "One of our biggest problems was a lack of brand recognition," says Stear. "Being able to partner with known brands that had effective distribution networks already in place made enormous sense to us." Stear also searched for new companies in Asia that could make Freeplay's products at a competitive price while taking over all aspects of manufacturing.

With help from New York City market-research company Lubin Lawrence, Free- play's management identified where its products would sell and who would make the best partner for various offerings -- from sporting goods to cell phones -- in the United States, Europe, and Asia.

The Coleman Co., a venerable sporting- goods manufacturer, was at the top of the resulting wish list of candidates for forming partnerships. A Freeplay board member asked a business acquaintance to refer him to Jerry Levin, CEO of Sunbeam, Coleman's parent company, and from that connection a meeting was arranged. With Levin's backing, Stear then approached Coleman in October 2000, proposing that the company partner with Freeplay to create windup radios and flashlights using Freeplay's generator technology.

Meanwhile, Freeplay's engineering chief had had several conversations with staff at Motorola about partnering possibilities, but no concrete deal had emerged. Only after the telecom giant appointed Gary Brandt as head of its accessories division did the door fully open for Stear and his team. Brandt's primary mission was finding exclusive accessory ideas beyond mobile-phone cases and faceplates. Given Freeplay's existing product lineup, Brandt recognized the company's potential as a promising partner. The two companies agreed to work together to develop rechargeable cell-phone-battery packs.

Under the partnership agreements that Freeplay has developed, products are cobranded, with "Freeplay Driven" emblazoned on the outside, much like the ubiquitous "Intel Inside" logo that appears on many PCs. Freeplay engineers work as go-betweens, first with staffers at Coleman and Motorola to customize products and plan marketing strategies. They then provide the engineering guidance and specifications to Freeplay's selected manufacturers. Ultimately, Freeplay buys the finished product from the manufacturers at a predetermined price and then turns around and sells it to Coleman and Motorola at an agreed-upon higher rate. The big-name distribution partners funnel the goods into their established channels and take responsibility for sell-through. "We do the bit in the middle," says Stear, "but we're out of the front end and out of the back end."

How did a small, fairly unknown company convince executives at two big corporations that they should form a partnership? By doing so much research before approaching the prospective corporate partners that Freeplay's leaders could talk knowledgeably and very specifically about how their products would appeal to the larger companies' customers. Additionally, Stear's team came armed with a detailed, carefully thought-out plan covering every aspect of how a partnership could work. And Stear relieved the partners of worries about manufacturing, since Freeplay selects the factories and oversees quality control.

According to Dan Glidden, senior vice-president of product management at Coleman, the people at Freeplay "had pretty clearly thought through how the fit would work between Freeplay and Coleman and were able to articulate that very conclusively." Gregg Locher, business manager in the personal-communications sector at Motorola, was won over in similar fashion. "Freeplay really understood their business plan, what they were bringing to the table, and what they were looking for from us," he says. That focus, coupled with Freeplay's successful track record in selling retail products, helped the big-company decision makers see how much they had to gain from the partnership. Now, says Stear, other large corporations are approaching him to talk about potential agreements.

Although Freeplay's revenues are still slightly below what they were in 1999 (when the company was a multitasking developer, manufacturer, and distributor), Stear predicts his company will be "significantly profitable" in 2003. Stear's role as CEO has changed along with everything else at Freeplay. Now, instead of managing distribution offices on different continents, he's focused on managing the brand as well as the partner relationships that can make or break it. "I feel far more in control of the business now," he says.


Kate O'Sullivan is a reporter at Inc.


The Whole New Business Catalog

IncQuery: My Business Is at a Crossroads
Design: Not Just a Pretty Typeface
Hands On: Picture This
Digital: Going Mobile
Search: December 2002
Strategies: The Don't-Take-It-to-Market Alternative
Hands On: (No) Casual Mail


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Last updated: Dec 1, 2002




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