OSAGE businesscases The Startup Company Skusion and the Challenges it Faces in Trying to Outsource Development of an Electronic Toy Author: Stephen L. Golden, John H. Friar Pub. Date: 2023 Product: SAGE Business Cases DOI: https://doi.org/10.4135/9781529617283 Keywords: teams, outsourcing, factories, software, open innovation, manufacturing Disciplines: Creativity & Innovation in Business, Entrepreneurship, Business & Management, New Venture Creation Access Date: February 28, 2023 Publishing Company: SAGE Publications: SAGE Business Cases Originals City: London Online ISBN: 9781529617283 @ 2023 SAGE Publications: SAGE Business Cases Originals All Rights Reserved.Web Software and Cloud The \"cloud" element software would be critical to the product's success. The product would be required to collect data, integrate the van'ous data seamlessly, and be effective in engaging students in such a way that they enthusiastically worked on the associated academic exercises because the product was fun and en joyable for both parents and children. Creating the Stiggy was a massive project that required expertise in several technical aspects and gamication, as well as signicant components of creativity. Through industry connections, Steve contracted with the rm ButterJAM. ButterJAM was a software design firm based in New York City that created software packages for van'ous clients, from nonprofits to consumer applications. The principal of EtutterJAM, Joseph Leung, agreed to help Steve with the Skusion project, betting on a long-term relationship based on Nigel and Steve's industry background. He agreed to manage the creation and launch of the Stiggy website for an initial USD 15,000 and the promise of a longterm working relationship. Educational Content The STEM team began to work at specifying the STEM curriculum modules. After several weeks of work, the team proposed a gamication approach that included 12 learning modules that would meet STEM learning requirements for the age level (3 to 13 years or in grades 3 to 6}. Each module would include a single learning exercise, on topics such as average speed, acceleration, force, fn'ction, torque, power, and energy. The modules consisted of (a) a short video demonstrating how Stiggy could be used to solve the problem presented in the module, (b) a coloring book with Stiggy characters ex plaining the lesson, and (c) a quiz about the content covered. Once a child successfully passed the quiz, they were awarded a virtual trophy; when 12 trophies were collected, they could redeem Stiggy accessories. Michael explained: By engendering STEM play, students could nd the \"fun" in learning fundamental STEM concepts and vocabulary. What was particularly exciting about the Stiggy concept was that it would engage students early. Early enough to serve as a "stealth learning" tool. If an engaging quality of \"Play\" \fon them needs to begin well before the nal version is selected. The writer, an independent contractor based in Cambridge, Massachusetts, indicated that she needed at least six months to produce and test the manual. She also required updated samples to understand the product and accurately describe the use and care. The copywriter's fee was USD 4,000 paid in advance. Throughout the development process, requests were made to Wooden for working samples of the RC car. Wooden charged Skusion at cost for the roughly 400 samples, a total of USD 12,000. The nal round of sam- ples, rated as P2 (preproduction), was run in early July. The P2 samples were proof of concept, handbuilt, fully functioning samples meant to be representative of the nal production. The P2 production runs were typically short assembly line runs, in which between 1 and 500 units were man ufactured. It was the nal test of the factory to ensure that the factory could build the product to specication. The resulting samples were used for quality testing at the factory plus they could be given to customers for their reactions. Steve requested 10 samples for nal testing. The P2 samples arrived at Skusion headquarters in mid-July. Steve gave the samples to Toys R Us, who had children playr with them. He received a devas- tating call from Toys R Us: When children tried to play with the cars, they crashed. This unsatisfactory result prompted the team to endeavor to ascertain why the samples crashed and what was needed to move the project forward. Redesign Steve and Nigel investigated what went wrong. One of the exciting features of the car was its speed, 12 feet per second (fps). Note that 12 fps is fast for an RC car, but it had been what the customer desired. Upon reflection and review, Nigel learned that, on average, the fastest that an RC car being controlled by Wi-Fi can travel and be reliably controlled is 8 fps. Stiggyr was racing 50% faster than it could be controlled effectiver using WiFi. The car was destined to be undn'vable because of a design specication error. Although no productionready cars were ever made, the handmade prototype cars had a manufacturing de sign aw that also made the prototypes undn'vable. It seemed that, in the car's design, some tolerances were variable and unpredictable. The factory installed a tiny calibration gear on the car to compensate for these variances. At the end of the production line, a factory worker, the assembler, would test the car for steering and adjust the calibration gear. If the assembler did not adjust the calibration gear correctly, the car would FEET Off course. The speed of the car and the manual calibration combined to make the car difcult to drive via Wi-Fi. Fixing the problems would require a complete car redesign, such as larger gears to provide slower speeds and more rotation force. Larger gears would require a larger car body, which would in turn require new tooling at the tactory. Furthermore, repositioning axles and gears would result in a complete re-layout of the printed circuit board and electronics, and major modications to the rmware and application software. A redesign would result in thousands of dollars in engineering development cost. Decision Time Steve and Nigel had been tunding the company out 01 their own pockets. They had obtained a USD 500,000 loan against their assets. Steve and Nigel also had not been earning a salary during the year since Sku- sion was founded. They had limited expenditures by outsourcing parts of the project and by promising their employees compensation derived from Jture revenues rather than paying them salaries. But they had been paying their outsourcing partners. Steve and Nigel realized that they would have to take a more decisive lead- ership role in managing outsourcing partners, which would require another hire. However, if they brought de- velopment and manutacturing inhouse for greater quality control, they realized they would need to raise even more money. Steve and Nigel had to decide whether this design failure was something they oould recover trom. They had to decide whether to change the design and outsource the development again, which would still mean another major investment and their employees not being paid for another year. Or, in order to have better quality overthe process, to bring the development inhouse, which would require even more money and even more time. Or, to decide whether they should just walk away. @ Discussion Questions . 1. Assess the skill sets the company founders brought into their enterprise. What skills or talents should they have brought into the company to develop the product? How expen- sive would that be? Abstract Skusion LLC is a Massachusetts-based company started by two entrepreneurs who had exten- sive experience in retailing and technology. The entrepreneurs conceived an idea for a techni- cally sophisticated toy, a data-collecting remote control car, that could be used to teach young people about science and technology. After vetting the product concept with a major retailer, the pair decided to outsource the actual development of the product to several partners, include ing international partners. Product development outsourcing has become more common in re- cent decades, especially for startup companies with few resources. The case concerns the chal- lenges that startup companies face in outsourcing development because startups do not have sufficient intemal resources to manage the process, as do large companies. When the entrepre- neurs gave prototypes of the toy to the retailer to allow children to test them, they found that the product did not work. Students will be asked to analyze where the entrepreneurs went wrong and what next steps should be. Case Learning Outcomes By the end of this case study, students should be able to: discuss the resource constraints of a startup company; analyze the potential benefits of outsourcing; evaluate the risks of outsourcing for a startup company; and describe the management practices needed for outsourcing. Case Steve and Nigel, founders of Skusion LLC, a one-year-old Massachusetts-based company, had just received Page 2 of 16 The Startup Company Skusion and the Challenges it Faces in Trying to Outsource Development of an Electronic Toysome bad news: their prototype remote control (RC) car did not work. Although they did the design work in- house, they had outsourced the development and manufacture of the educational toy to eight different sup- pliers. Each of these suppliers developed different components. Startup companies often outsource develop- ment and manufacture to save time and money. But now that the components were assembled, the product did not work. As they had been self-funding the company, Steve and Nigel had to decide whether they could salvage the product and their company. The Founders Nigel Waites had an extensive background in electronics and wireless communications with a career path that included engineering at Apple and chief technology officer at Best Buy. Steve Golden had a diverse career at Polaroid, including finance and marketing, after which he held executive roles in several startup companies before establishing his consultancy. Historically, Steve supplied many tier-one retailers with consumer elec- tronics products, including Best Buy, Brookstone, CVS, Radio Shack, Staples, and Wal-Mart. As for Nigel, he had been responsible for the design and launch of more than 3,000 electronic products at Best Buy. Best Buy had recently experienced difficult times financially, and Nigel took the opportunity to leave due to a reduction in the workforce. Nigel and Steve came together while Nigel was at Best Buy, where the two developed several popular private brand wireless electronics products. Nigel left Best Buy to join Steve to establish Skusion LLC, developing cutting-edge wireless portable electronics. Product Idea Steve developed a product concept of an RC car that could be used in a classroom setting to help elementary school teachers teach engineering and science concepts. An RC car would collect telemetric data to formulate a science, technology, engineering, and math (STEM) curriculum. The vision was that children would race the car while the vehicle would collect data and push it to the Cloud. Teachers could then use the data to develop STEM concepts. When it was still a simple idea and nothing more, Steve wanted to obtain initial customer feedback. After presenting this high-level idea to a buyer at Toys R Us, Steve received a positive response, so he and Nigel decided to develop the product idea further and named it Stiggy. Page 3 of 16 The Startup Company Skusion and the Challenges it Faces in Trying to Outsource Development of an Electronic ToyThe idea evolved to deliver an RC car with STEM leaming content at a USD 99.99 retail price. The entrepre- neurial team presented the following: . RC car controlled by Wi-Fi, Android with iOS and web applications. . Rugged construction, fast speed (12 feet per second), Li-polymer battery. Embedded camera for still images and streaming video. . Integrated sensors that collect telemetric data that could be pushed to the Cloud. Included exercises that supported STEM leaming. After additional brainstorming, the founders again showed their idea to the Toys R Us buyer, who again was optimistic about the concept. The buyer was enthusiastic about the speed of the car, as he said the faster these toys are the better. However, he also mentioned somewhat in passing that any toy connected to the In- temet and involving children must be certified according to the Children's Online Privacy Protection Act (COP- PA). COPPA imposed specific requirements on operators of websites or online services directed to children 13 years of age and younger and on operators of other websites or online services that have actual knowl- edge that they are collecting personal information online from a child younger than 13 years of age. The Outsourcing Approach and Risk At this point, and because of Toys R Us's increased interest in the project, Nigel and Steve committed to bring- ing in help. Andrew Chung and Michael Bastoni were brought on board. Andrew lived in Hong Kong and was an expert in finding suppliers who also did product development. Michael was a popular high school teacher renowned for his robotic passions and understanding of mechanics and electronics. Michael also brought a comprehensive knowledge of STEM learning requirements and applications. Michael commented on why he joined the team: The project was a compelling challenge from an educational perspective. It presented an opportunity to develop a "stealth learning" toy. An entertaining product that engages students in lightly competi- tive "Play" requiring a fundamental development of STEM vocabulary and understanding. Realizing that objective would be a satisfying experience for the production team and the children who played with the toy. Educators recognized that STEM proficiency was best achieved by introducing STEM "thinking" at increasingly younger grade levels. (Interview, 27 Jan. 2022) Page 4 of 16 The Startup Company Skusion and the Challenges it Faces in Trying to Outsource Development of an Electronic ToyBoth new team members were added with only a verbal promise of revenue sharing once the project was successful. In the meantime, the new team members would receive no salary, but Nigel and Steve would pay their expenses. Andrew went to work immediately, interviewing neany 3t.) RC toyr factories in Shantou, Guangdong Province, in southeastem China, a hot spot for RC toy factories. Qualications the team used in selecting outsourcing partners were: {a} experience producing RC cars; {b} quality of products; (c) reputation for honesty and relia- bility; {d} proximity to trading ports; (el English language speaking team; {f} record of treating employees well; and {g} likelihood the factory could meet the cost target. Andrew said: The challenge for me was nding the right factory for the team while recognizing that the toyr industry was a cutthroat business that operated on tight margins. Factories were focused on high-volume easy-to-mahufacture toys that they could pump out without much thought. This philosophy was dy- namically opposed to our design of a complex product that involved hardware, software, and team- ing content. (Interview, 2? Feb. 2022} Andrew also strongly prefened to work with a factory that was \"looking to partner with us, and not just take an order.\" He visited each tactory, performed an audit, reviewed the product portfolio, and metthe staff. After nanowing the eld, a selection was made. Wooden Industrial Limited produced modest amounts of RC cars, mini drones, and other small electronic toys in Shenzhen, China, about 10D miles to the southwest of Shan- tou. Andrew indicated that the factory seemed competent, was relatively clean, close to transportation, some spoke English, and the cost was correct. Andrew recalled: Wooden seemed nancially stable and able to purchase the expensive components necessary to make a toy into a sophisticated data collecting device. However, it wasn't clear whether this was due to private money or government subsidies. The factory would tend to be much more conservative in investments if private capital, so this was a concern. (Interview, 27 Feb. 2022) At this point there was one clear risk that worried the team: the core ofWooden's hardware was running on a Realtek processor, which appeared to have no English documentation, and the factory was very reluctant to share information about it. At the time, streaming video over Wi-Fi from an access point with command and control owing down the same connection was new, and the amount of processing power involved was on the cutting edge. The team was balancing time to market versus dealing with an arm's length understanding Page 5 of 15 The Startup Company Skusion and the Challenges 'rt Faces in Trying to Outsource Development of an Electronic Toy ofwhat they had to work with. Nigel was blunt, \"The factory has our destiny in their hands, but unfortunately, we don't trust them as they just won't share information." Michael worked to develop the STEM lesson content by identifying the type of data that could be collected from atoy car being raced at high speed. Since STEM content varied by age and grade, adecision was made to narrow the target customer demographic to children aged 3 to 13 years or in grades 3 to ES. The narrowing of the demographics allowed for a tighter cumculum, simplifying the design. It was understood that ifthe car could deliver STEM content successfully for this target, the target market could eventually be expanded by adding more sensors to collect additional data. Nigel and Michael collaborated on integrating sensors into an existing RC car, such as the one Andrew iden- tied as produced at the Wooden factory. Work was done to patent the nal design to avoid infringement by Wooden or other toy manufacturers. Steve believed the design was tar enough along to show it to Toys R Us to get their nal approval. After this review with Toys Fl Us, Steve received a purchase order from them. Because toy sales were seasonal, Toys R Us wanted to receive shipments by the end of the summer, which was only four months away. To speed development, two additional engineers, Alex and Dan, were hired to work with Nigel, Michael, and factory per- sonnel. Michael's daughter Rae was enlisted to help Dan (a STEM accredited educator) develop the STEM content. The team had now grown to seven, and everyone shared the sense of urgency to get the job done. With promised revenue sharing, Nigel and Steve compensated the latest hires as they did the others. Build Plan As with any new product, the design was only one of many elements that needed to be managed through to commercialization. To manufacture and assemble the product, each part must be completed in time and ready to be etciently assembled into the nal solution. Should one or more of the components be delayed or not met, the entire project would be delayed, and the delivery date missed. Seven projects, not including ad- ministrative tasks, involved seamless cooperation with third-party suppliers for this project. The team needed to select the supplier, who would agree on the design and have the components produced and assembled as a nished product in a short period of four months. See Figure 1 for a schematic diagram of the various components and who was working on them. Page 5 of .15 The Starlup Company Skusiorl and the Challenges 'rt Faces in Trying to Outsource Development of an Electronic Toy Figure 1. Schematic Diagram of the Various Components of Skiggy and Teams Working on Each Component Stiggy & Kid2Cloud Software & Firmware MPERFO MANLER C'CAR Skusion owned Android 105 Wooden owned Skusion owned Firmware in the car. Core firmware owned by Wooden Separate Dev Teams for Platforms. Web Site & Cloud Storage [factory) Nigel directed dev teams for functionality Steve directed dev teams for style Nigel was modifying the core to Steve directed dev teams for style One creative team for elements meet our needs (accommodate One creative team for elements One team for STEM content One team for STEM content One person for user manual sensors, respond to APP requests) Steve tested for functionality and Nigel integrated data collection with website compatibility & Cloud Factory (Wooden) integrated apps with Car ButterJam (3" Pty - NYC) designed and hosted website and content Source: Skusion Hardware With the design complete, Andrew could now commit to Wooden with firm numbers in terms of quantity of products and a delivery schedule. Steve visited the factory to meet with Wooden management and close the deal. According to Andrew: Relationships and trust were important in developing a complex product. It seemed that Wooden had the team and capabilities to manufacture the product. While they were not a major toy manufacturer, Page 7 of 16 The Startup Company Skusion and the Challenges it Faces in Trying tothey understood the product and were excited by the challenge. (Interview, 2? Feb. 2022) Steve agreed with AndreWs assessment, "It seemed a good factory, relatively clean, in a good location, with a good product, and the staff seemed welcoming and willing to work.\" As with any factory tour, it was limited to certain areas of the factory, and clearly the factory team had prepared for a formal visit. At the dinner reception with the factory owner, it became apparent to Steve that the owner did not speak English. All discussions were funneled through the vice president of sales, Wendy, who was uent in English and friendly and accommodating. Andrew, however, still felt comfortable that the team could communicate well regarding the toys development. He explained: Wendy was uent in English and Mandarin and put a good face on the team. When I asked her if the engineers spoke English, she told me that they could read English well and that they often worked with American clients. Wendy convinced me that her team was comfortable working with clients that did not speak Mandarin. I felt comfortable that communications would not be an issue. (Interview, 2? Feb. 2022) The overall assessment by Steve was that the factory was a good choice for assembling Skusion. Wooden manufactured an RC car that was available and worked at specications different from what Skusion desired for Stiggy. The strategy was to modify the car, add some proprietary software, and do the development. As the project advanced, it became clear that the technical capabilities of the engineering team at the factory had been overstated. Wooden had two fulltime electn'cal engineers and outsourced the mechanical engineer ing work. Andrew spent most of his time at the factory working with the engineers and translating requests sent from Nigel and Michael. Since Andrew himsetf was not an engineer, translations of instructions were of- ten misinterpreted or misunderstood. The challenge was further compounded by the 12-hour time difference between Massachusetts and Shenzhen. Application Software The final design called for the RC car to be controlled via mobile phones or tablets. Because mobile phones and tablets were either Android or iOS based, the application software would have to be produced on both platforms; otherwise, a large share of the available market is eliminated. At this time, application developers specialized in one platform but not the other. Rarely would a developer be good at both. However, the team felt it critical that the nal application looked, felt, and operated well on both platforms. This meant two devel- opment teams would need to collaborate and integrate their work with a third team developing the software that controlled the car. The application design and functionality would be proprietary to Skusion. Wooden believed that their existing software for both platforms could accommodate the Stiggy design requirements. Wooden wanted to bid on the jobs at an additional non-recoverable expense of USD 5,000 per platform (USD 10,000 total). Steve de- cided that it seemed to make sense to keep the app development with the hardware. Tabeo Tablet Part of the deal with Toys R Us was a tiein with their new Tabeo tablet product, to be launched simultaneously with Stiggy. Because the Tabeo could control the car, clean integration with the Android software app in the RC car and the thirdparty tablet manufacturer was necessary. The challenge quickly became apparent as coordinating between the car factory Wooden and the tablet man- ufacturer was a nightmare. The relationship was not a priority for either factory (they may have seen the rela- tionship as a competitive one between factories, a cultural artifact), and delays and misunderstandings were constant. Each request by the software teams for samples was deferred to management, and often when the samples nally arn'ved, they were late, defective, or not the newest version of rmware. Andrew spent a great deal of unnecessary energy babysitting the two factories, at least in his opinion. Time that could have been better spent testing the car at Wooden