Case 28THE VERMONT TEDDY BEAR CO., INC. (1998)

CHALLENGES FACING A NEW CEOI. CASE ABSTRACT

In 1981 John Sortino founded Vermont Teddy Bear Company; he sold hand-sewn teddy bears out of a push-cart on the streets of Burlington, Vermont. Since this time the company's focus has been to design, manufacture, and direct market the best teddy bears made in the United States using high-quality U.S. materials and labor.

Until 1994, Vermont Teddy Bear experienced a great deal of success and profitability. In 1993, the company was named first national winner of the "Best of America Award" by Dun and Bradstreet. The company ranked 21st among Inc. magazine's 1994 list of the United States fastest-growing companies. Problems began to arise in 1995. John Sortino resigned on March 6, 1995 to run his new company. R. Patrick Burns served as President and CEO from August 2, 1995 until October 1997. Elisabeth B. Robert joined the company in 1995 as CFO and became CEO and President after Burns stepped down. Since 1995 the company has had two CEOs. It changed its name to the Great American Teddy Bear company and then changed it back to the Vermont Teddy Bear Company when customers got confused. From its inception, Vermont Teddy had been known for its Bear-Gram delivery service. In 1996 the company decided to shift emphasis away from Bear-Grams to other distribution channels. By 1998 the company had decided to renew its emphasis on Bear-Grams. Vermont Teddy has always been proud of the fact that its teddy bears were made in the United States with U.S. materials and craftsmanship. In 1998 the company changed this philosophy by exploring the offshore sourcing of materials, outfits and manufacturing in an effort to lower costs.

Elisabeth Robert assumed the titles of President and Chief Executive Officer in October 1997 and began to cut costs and position the company for future growth. According to Robert, there are many reasons to invest in The Vermont Teddy Bear Company. "I believe that there is growth potential in this company. We are going to regain our balance this year. This is a rebuilding year. We are taking key steps to reposition the company. The move offshore is going to provide this company an opportunity to become more profitable. We will gain additional flexibility with price points. There is opportunity for us to expand from a regional brand to a national brand. While we continue to emphasize the premium teddy bear gift business, we intend to expand into larger markets. There is now a whole new opportunity for us in the corporate incentives and promotions market as well as the wholesale market. We have weekly inquiries from companies who recognize our brands. These companies would love to buy and resell our product or use our product as a corporate gift. Our growth will come not only from expansion of our radio markets but in the corporate and wholesale markets as we use offshore manufacturing alternatives to move to broader price points."

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Case 28The Vermont Teddy Bear Co., Inc. (1998)

Copyright 1999 by Thomas L. Wheelen and J. David Hunger. Reprinted by our permission only for the 7th Editions of (1) Strategic Management and Business Policy and (2) Cases in Strategic Management.

According to CEO Robert, "When we made the decision to expand our distribution channels in the areas of retail and catalog, our focus was on being a teddy bear category killer. We thought we were in the teddy bear business. Now what I believe is that we are in the Bear-Gram business, the gift business, and the impulse business. This is a completely different marketplace. Our competitors are the people who sell chocolates, flowers, and greeting cards. We target the last-minute shopper who wants almost instant delivery." She further stated that "the primary focus of the Company would return to maximizing returns in the radio Bear-Gram business which constituted the majority of the Company's annual revenue." Gift purchases account for 90% of the companys sales.

Notes: 1. Sales (1997 - 1994): $70,781,4432. Losses (1997 - 1994): $(5,855,998)3. Losses in three out of four years4. Loss: 8.3 / $1.00 of sales

Decision Date: Summer 1998 1998 Sales: $17,207,5431998 Loss: ($1,683,669)

(1997 Fiscal Year [FY] was from July 1, 1997 to June 30, 1998)

II. CASE SUBJECTS AND ISSUESToy IndustryChange Name and RechangedCore CompetenciesDistinctive CompetencySurvivalStock PriceEntrepreneurial VentureExecutive LeadershipCorporate GovernanceGrowth StrategyPropitious NicheDifferentiation StrategyIndustry AnalysisThreat of SubstitutesStructureCorporate CultureEntrepreneurial ModeROIRetail Stores - open/closedEquity Investment by Shepard GroupTurnaround StrategyUnmanaged Growth Strategy

Operations Strategy Offshore sourcing of labor

and materialsStages of Corporate DevelopmentHung up between Stage I-II3 New CEOs (1995-1998)Female CEO/President/CFOCatalogMarketing StrategyFinancial StrategyHuman Resource StrategySWOT AnalysisStrategy ImplementationEvaluation and ControlMissionExecutive SuccessionProduction by Home-WorkersResignation of FounderDirect Marketing with (800) numberPurchasing Strategy

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III. STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS (see Figure 1.5 on pages 20 and 21)

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O O O O O O X O O O O = Emphasized in Case X = Covered in Case

IV. CASE OBJECTIVES1. To illustrate and discuss the problems of moving a company from

entrepreneurship (Stage I) to professional functional management (Stage II) of the stages of corporate development.

2. To discuss distinctive competencies, in light of the shift from bears made in the United States with U.S. materials and craftmanship. In 1998, the company was exploring offshore sourcing of materials, outfits, and manufacturing - in order to lower costs.

3. To discuss the role of a marketing executive in Vermont Teddy.

4. To discuss a major investment in an entrepreneurial business.Martin H. Martin owns 1,840,975 (35.5%) of common stock. Stock price after IPO (1993) ranged from $17.19 to $11.44, and now (10/30/98) at 75. The IPO stockholders have seen the stock totally crash.Students think IPO means instant wealth and never consider what can happen to a company over time.

5. To illustrate the importance of strategic management in a rapidly growing company.

The first reading by students - they see only a great growth company. After talking with instructors and re-reading the case - they see a company out of control.

6. To illustrate the evolution of a small company over a period of 17 years.

7. To discuss the impact of three CEOs in three years (1995-98).In particular, the impact on strategic planning.

8. To examine the "entrepreneurial spirit" of Vermont Teddy Bears management.

9. To discuss direct marketing with an 800 phone number.Ask the students how many ever bought or received a bear from Vermont Teddy Bear.

10. To discuss how to develop specific growth strategies for Vermont Teddy Bear.

11. To discuss the use of home-workers to make bears.Most students have no idea this method of production even exists.

12. To discuss the financial performance of the company over the past four years.

Sales (1997 - 1994) $70,781,443.Losses (19974 - 1994) ($5,855,996).

So, lose 8.3 on each sale.

13. To discuss the issue of survival and, possibly, bankruptcy.

14. To discuss private equity being invested by Shepherd Group in the company. Shepard got two Board seats for $600,000. What happens if Vermont Teddy really needed $1 million or more? The company will have to give up significantly more control and/or Board seats.

V. SUGGESTED CLASSROOM APPROACHES TO THE CASE1. Because this case creates a very high degree of enthusiasm and

identification on the part of the students, it can be placed anywhere in the course. It is an excellent comprehensive case. The students say it is a "fun, but difficult, case".

The previous version (6th edition) was most difficult for students. They had a hard time understanding a company hung up between stages of corporate development. This will hold true in this new case.They don't see the seriousness of the company's poor financial performance. Get the feeling, they say, put it on the credit card.I now place this case and ones like it (Ben & Jerry's) at end of course and talk with presenting students about stages of corporate development, and we cite the text. This greatly improves the students' presentation.

2. It is an excellent case for a team presentation. The students like doing research on this company.

3. It is also an excellent case for individual case analysis or exam. It makes a good final individual case exam.

4. We suggest the placement of this case toward the middle or end of the class. We suggest this due to complexities of (1) three CEOs in three years (1998-1995); (2) losses in three out of four years - totalling $1,683,669; (3) offshore outsourcing going against its distinctive competency.

5. SUGGESTION FOR DAILY CLASS PARTICIPATION

We have found it is difficult to get quality daily participation from our students. We suggest the following:

1. Have the class members prepare--individually or as a team--(a) EFAS, IFAS, and SFAS or (b) just a SFAS for the assigned case.*We have 1 or 2 individual students of a team bring their EFAS, IFAS, and SFAS or just their SFAS on a transparency. We have found in this 75-minute class that SFAS alone as a transparency works most effectively.

2. We compare the students work with that of the team or individual students making the presentation to the class.

*We also discuss how the WEIGHTS and RATING were developed and the Weighted Score for the case under discussion.

3. We ask each student at the beginning of the class to write down his/her Total Weighted Score for the case under discussion and pass it in.

*You can use the results to call on students whose scores seem to be out of line with the case.

**It allows for a discussion of the Total Weighted Score as his/her overall evaluation of how the management of the company is managing the companys internal and external environment.

***We ask the students whether they would buy stock in this company. Then the Total Weighted Score seems to have real meaning.

VI. DISCUSSION QUESTIONS1. What are the threats and opportunities facing Vermont Teddy

Bear?

2. What are the strengths and weaknesses of Vermont Teddy Bear?3. What are the strategic factors facing Vermont Teddy Bear?4. Does Vermont Teddy Bear have any core competencies? If 'yes,'

what are they?

5. Does Vermont Teddy Bear have a distinctive competency? If 'yes,' what is it?

6. If Vermont Teddy Bear outsources its materials and labor offshore, what impact will this have on its core/distinctive competencies? Please give specific examples.

7. What type of CEO should Vermont Teddy Bear hire? (Be specific as to his/her background and skills.)

Is Elisabeth Robert the correct CEO?

8. Why has Vermont Teddy Bear suffered losses in three out of the past four years? How long can the company suffer losses of 1997s magnitude?

9. Should Vermont Teddy Bear try to sell more of its products through retail stores, or stay with its direct marketing with a 800 phone number?

Why open and then close retail stores? Company stuck with an expensive New York City lease.

10. How many of you have purchased or received a bear from Vermont Teddy Bear?

11. Would you buy stock in Vermont Teddy Bear? I had a student contact a friend at a venture capital firm about the company. The venture capital firm considered buying stock at 50 and spending up to $1 million. It wanted to be given the right to place an executive of its choice in top management. It also provide a short-term loan. The student said the venture capital firm would hold stock until it rose to the $2-$3 range and then sell out. He said the time span was 6-9 months. The venture capital firm pulled the offer off the table, however, because of slow response by major stockholders.

12. What strategies would you recommend to the new CEO?

VII. CASE AUTHORS TEACHING NOTE - None was available.VIII. STUDENT STRATEGIC AUDIT / STUDENT PAPER

I. CURRENT SITUATIONA. Performance :

Losses in three out of four years - totalling $5,855,998 or loss of 8.3 on each $1.00 of sales. Sales declined from 1994 to 1997; slight increase in 1998. Considering offshore outsourcing of labor/materials. So we up distinctive competency. CEOs: John Sortino (1981-1995); R. Patrick Burns (1995-1997); Elisabeth Robert (1997- ). Open retail stores and close New York City, but still have lease. SEC filing (5/14/98) - operating without working line of credit since July 18, 1997. $600,000 equity investment by Shepherd Group for two seats on Board. Stock continuously falling.

B. Strategic Posture : 1. Mission :

The Vermont Teddy Bear provides our customers with a tangible expression of their best feelings for their families, friends, and associates. We facilitate, communicate, and therefore participate in caring events and special occasions that celebrate and enrich our customers' life experiences.Our products will represent unmatchable craftsmanship balanced with optimal quality and value. We will strive to wholesomely entertain our guests while consistently exceeding our external and internal customer service expectations.The Vermont Teddy Bear brand represents the rich heritage of the "Great American Teddy Bear" begun in 1902. We are the stewards of a uniquely American tradition based on the best American virtues including compassion, generosity, friendship, and a zesty sense of whimsy and fun.

2. Objectives : To survive as a company. To return to profitability. To stabilize top management. To develop a strategic plan, implement it, and stick to it. To re-evaluate retail stores. To do a cost/benefit study on the catalog. To fully explore offshore outsourcing. To increase repeat business (now 33%). To respond quickly to customer orders and complaints. To expand Bear-Grams into new markets. To design and manufacture the best teddy bears in America.

3. Strategies : Review present turnaround strategy since it's not working. Keep calm and don't panic company into bankruptcy. Base differentiation strategy on how bears are made and sold.

Develop a growth strategy around Bear-Grams and 800 number.

Hold off foreign expansion until U.S. act is in order. Be sure that outsourcing strategy doesnt destroy company's distinctive competency.

Establish a strategic management committee.

4. Policies : Offer lifetime guarantee on bears. Put quality and customer satisfaction first. Use only U.S. materials and labor. Create a unique look for every bear.

II. CORPORATE GOVERNANCEA. Board of Directors :

Seven members - three are internal.Stock ownership - 49.2%.

Joan Martin - 35.5%Fred Marks - 11.6%

l Falling stock prices killing their investment.Joan Martin owns all 90 shares of the Series B stock.Three Board members joined 1995-97.Board of Directors not seen as actively involved in strategic management.Past four years have been fire fights.Two women.Average age - 58.7.Shepherd Group gets two seats because of loan.

B. Top Management : Elisabeth Robert - CEO/President (1997 - ); Director (1995), CFO (1995 - ).Spencer Putnam - COO (1987 - ); Director and Secretary of the Board of Directors (1989 - ) R. Patrick Burns - former CEO/President (1995-97); Director (1995 - ); and now a consultant to the company.Katie Camardo - Vice President of SalesRobert Delsandro - Vice President of Marketing and Design

He was credited with creating a new, "edgier" look for the bears.

Strategic management looks like fire-fighting with a short planning horizon (if any).

III. EXTERNAL ENVIRONMENT (EFAS see EXHIBIT 1)A. Societal Environment :

Opportunities: Internet Vermont tourist industry Good economy Consumer confidence index is high. Offshore outsourcing

Threats: Increased competition Laws regarding patents and trademarks Foreign trade barriers

B. Task Environment :Opportunities:

Vermont Teddy has nicheDirect-mail target marketsIncreased retail presenceCompany-owned stores

Booming collectible market for bearsThreats:

Fragmented industryNo trademark on "Bear-Gram"Order-by-phone competitorsSubstitutes many - candy, flowers, etc.

IV. INTERNAL ENVIRONMENT (IFAS see EXHIBIT 2)A. Corporate Structure :

Stage II corporation - still many Stage I issues not fully resolved.Need more emphasis on marketing. This company has two primary functions: (1) manufacturer, and (2) sell the product. Need capable/strong marketing executive.

B. Corporate Culture : Bear peopleCommitment to quality and service U.S.-built bearsQuality products only

C. Corporate Resources : 1. Marketing :

Now have VP Target children ages 1 to 100 Bear-Grams: 70.2% of sales Direct mail: 9.2% of sales Catalog sales: 16.7% of sales Retail store sales: 18.0% 1997 NFL Teddy Bear Still use radio advertising Sales on internet (summer '97) Logo is registered Open retail store in New York City and close it - still have lease Selling expenses were $7,866,843 ('98); $7,961,0003 ('97); and $6,287,208 ('96)

2. Finance : Shepherd Group provides $600,000 equity loan - gets two Board seats. 10/10/97 - loan up to $200,000 for five years - 12% interest rate. Serious problems. Losses three out of four years - totaling ($5,855,998). Sales flat after declining.

No line of credit (7/18/97) and reported to SEC (5/14/98).

3. Research and Development : Robert Delsandro, VP Marketing and Design

Credited with new 'edgier' look for bear Successful test marketing in United Kingdom New NFL bears

4. Operations : Logo registered Vermont facility called Vermont Teddy Bear Common Outstanding customer service 1995 - built new plant - cost ($7,600,000) New York store lease

open/close

5. Human Resources Management : New executives No union Employees - "Bear People" Home-workers - independent contractors 181 employees CEO turnover

6. Information Systems : 800# answer system Not cited

V. STRATEGIC FACTORS (SFAS see EXHIBIT 3)

VI. STRATEGIC ALTERNATIVES AND RECOMMENDATIONSA. Alternatives :

1. Growth:Pros: Increased sales and profits.

More efficient use of plant.Cons: Cash flow issue - Shepherd loan may not solve cash flow

problems.2. Stability:

Pros: Time to get act together.Strategic plan for next 5 years.

Cons: Possible loss of more market share.Possible continued financial losses.

3. Retrenchment: Pros: Got here by poor fire-fighting.

Should focus on bottom line.Cons: Could lose market share.

Could lose some key employees if requires more downsizing.

B. Recommended Strategy: Dont commit to offshore outsourcing. Distinctive competency is U.S.-made quality bears. Finish turnaround strategy but develop a solid growth strategy based on new sales. Set target for sales increase, while managing costs.

VII. IMPLEMENTATIONSF = Strategic Factor from Exhibit 3 - see SFASSF1 Monitor daily financial key figures. Is the $600,000 enough

to solve problems? If not, next time will be costly - could lose control of the company.

SF2 Team-building and work as strategic management committee.SF3 Require an expert to head sales/marketing - a must for

survival.SF4 Become a full operational Stage II company.SF5 Outsourcing hurts company's distinctive competency. Loss of

market niche!SF6 Tie ordering to inventory control and shipping. This will

enhance 800# system.SF7 Keep checking on the quality of responses and services.SF8 See what new products are offered by competitors. Buy some of

their bears and take apart to compare our bears to the competitor's bears.

SF9 Keep offering a wide variety of bears with excellent quality - don't outsource overseas.

SF10 Have no more retail stores and get rid of New York City lease.

VIII. EVALUATION AND CONTROL Small group of executives, so all involved. CEO Roberts will have to spread work among staff. She will

wear many 'hats'. Buck will stop at her desk - long hours and stress.

IX. EFAS , IFAS AND SFAS EXHIBITS

Exhibit 1EFAS (External Factor Analysis Summary)

External Strategic Factors Weight Rating Weighted Score

Comments

Opportunities

Good economy .15 4 .60

Booming collectible bear market

.05 3 .15

Direct-mail .20 4 .80

800# .20 4 .80

Threats

Competition .25 3 .75

Unrestricted entry by competitors

.10 3 .30

No trademark on "Bear-Grams"

.05 3 .15

TOTAL SCORES

IX. IFAS , EFAS AND SFAS EXHIBITS

Exhibit 2IFAS (Internal Factor Analysis Summary)

Internal Strategic Factors Weight Rating Weighted Score

Comments

Strengths

New management team / strategic management

.18 2 .36

Leadership in market .15 2 .30

Stage I-II issues not resolved .10 3 .30

Made in US / offshore outsourcing

.10 3 .30

Direct mail / 800# .08 4 .32

Customer service .07 3 .21

Quality / variety .07 4 .28

Weaknesses

Finance .20 2 .40

Retail stores .05 2 .05

TOTAL SCORES

IX. SFAS , EFAS AND IFAS EXHIBITS

Exhibit 3SFAS (Strategic Factor Analysis Summary)

Strategic Factor Analysis Summary Weight Rating Weighted Score

DurationS I L

Comments

Key Strategic Factors

Finance .15 2 .30

New management team / do strategic management

.13 2 .26

Lack marketing leadership .11 2 .22

Stage I-II issue must be resolved .10 3 .30

Made US/offshore outsourcing .10 3 .30

Direct mail / 800# .10 4 .40

Customer service .10 4 .40

Competition .10 3 .30

Quality / variety .06 4 .24

Retail stores .05 1 .05

TOTAL SCORES