It's no secret that small toy retailers depend on healthy revenues during the holidays to keep business rolling all year long. But what about the suppliers? BEKA, a St. Paul (Minn.)-based independent toymaker specializing in wooden blocks and art supplies, is dealing with the same issues as its retailer customers -- and many of the same fears. With the increasing clout of big-box stores, BEKA President Jamie Kreisman says diversifying the product line and staying loyal to the specialty market are his key defenses.

He and his 14-member staff, who do all the design, manufacturing, and shipping of their toys in-house, are committed to running the 30-year-old family business the old-fashioned way. BusinessWeek Online reporter Erin Chambers recently spoke with Kreisman, who founded the business in 1973 with his brother Peter, about the holiday season and the pressure from the big guys. Edited excerpts of their conversation follow:

Q: How are things looking for the holidays?
A: We're very optimistic. Our sales have been pretty strong through summer and fall, and we're getting reorders from many of our smaller retail-store customers. We've also been getting a lot of inquiries through our Web site. We expanded to include more children's products and even evolved into a line of furniture.

We've adapted our business to sell in several different categories. We sell to school-supply companies who buy unit blocks in higher quantities, we sell to day cares and preschools, and then to small retail stores who usually buy in smaller quantities of different sets or assortments. When the small retailers look at people like me, they say, "You're not selling to Wal-Mart," which is attractive to the small retailers.

Q: As a small toy supplier, how does the mega-retailers' increasing influence affect you most?
A: We definitely see an impact in the marketplace. It's the Wal-Mart (WMT ) effect, and we're aware of it on multiple levels. The impact that's most evident is that it has affected many of our customers, the smaller retail stores. They carry a wide variety of products and are struggling to compete on price with Wal-Mart. But in most cases, they offer a qualitatively superior product and fantastic customer service.

The Wal-Mart effect has been more directly threatening in the last couple years when the economy hasn't been as robust. Through the '90s, we looked at Wal-Mart as just selling an inexpensive product, but there was still plenty of room for everybody. Back then, we had more concern from Toys "R" Us (TOY ) and Zany Brainy. It's that mid-tier market that has almost disappeared in our economy today.

Q: Have you ever considered selling to Wal-Mart or another big-box retailer?
A: For me personally, it would take changing the way we operate. The mid-tier market provided a large volume for some manufactures, and now they've turned to Wal-Mart now that the middle tier is disappearing.

Over the years, we've been approached regularly by large companies asking us to produce product, but they want to tell you how to cut corners to cut costs. We as a family group have regularly just said we don't want to do that. That's not how we do business. Yes, we could sell many more products, but it wouldn't be our product or what we want our name on. So we said: No, thank you.

Q: But how do you plan to compete and expand your business?
A: We've evolved as a small entity. Somebody like Wal-Mart and Target (TGT ) wouldn't be interested, but the specialized market likes us. We're a well-equipped, versatile wood shop with not much overhead at all. Because we're small, we can provide a personal service that larger companies have to farm out. If you have a problem with a BEKA product, you actually speak with someone at BEKA who knows the product and can say: Here's what we can offer you, or here's what you're doing wrong.

Q: You earned an MBA from Michigan State in 1989. How has that education helped in running your own startup?
A: I use the tools from the MBA program constantly. There's no question it was very valuable and practical. Now, I'm able every day to look at things with a professional academic orientation. It's not just seat-of-your-pants anymore. I can look at ratios, inventory management, ROI, and a lot of financial management issues with a trained eye.

My brother is the hands-on one with the physics degree. I'll speak with customers about a product and mock up a sample, and then Peter will work out all the details and figure out how to build it safely, solidly, and as economically as possible. He's the scientist, and I'm the people person and the number-cruncher. I think the key is that our real interests are different enough that they don't clash. We really don't compete.