Case 28

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

CHALLENGES FACING A NEW CEO
I.

CASE ABSTRACT
In 1981 John Sortino founded Vermont Teddy Bear Company; he sold handsewn 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 fastestgrowing 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."

____________

28-1

Case 28
The 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.
2.
3.
4.

Sales (1997 - 1994): $70,781,443

Losses (1997 - 1994): $(5,855,998)
Losses in three out of four years
Loss: 8.3 / $1.00 of sales

Decision Date:

Summer 1998

1998 Sales:
$17,207,543
1998 Loss:
($1,683,669)
(1997 Fiscal Year [FY] was from July 1, 1997 to June 30, 1998)

II. CASE SUBJECTS AND ISSUES

Toy Industry
Change Name and Rechanged
Core Competencies
Distinctive Competency
Survival
Stock Price
Entrepreneurial Venture
Executive Leadership
Corporate Governance
Growth Strategy
Propitious Niche
Differentiation Strategy
Industry Analysis
Threat of Substitutes
Structure
Corporate Culture
Entrepreneurial Mode
ROI
Retail Stores - open/closed
Equity Investment by Shepard Group
Turnaround Strategy
Unmanaged Growth Strategy

28-2

Operations Strategy

Offshore sourcing of labor

and materials
Stages of Corporate Development
Hung up between Stage I-II
3 New CEOs (1995-1998)
Female CEO/President/CFO
Catalog
Marketing Strategy
Financial Strategy
Human Resource Strategy
SWOT Analysis
Strategy Implementation
Evaluation and Control
Mission
Executive Succession
Production by Home-Workers
Resignation of Founder
Direct Marketing with (800)
number
Purchasing Strategy

Strategic
Posture

Corporate
Governance

External
Factors

Internal
Factors

Strategic
Factors

Review MBO
& Mission

Strategic
Alternatives

STEPS COVERED IN STRATEGIC DECISION-MAKING PROCESS

(see Figure 1.5 on pages 20 and 21)
Strategy
Evaluation &
Strategy Formulation
Implementation
Control
Performance

III.

1A

1B

5A

5B

Emphasized in Case
IV.

O =

X = Covered in Case

CASE OBJECTIVES
1. 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 CASE
1. 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.
like doing research on this company.

The students

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
the class. We suggest this
in three years (1998-1995);
- totalling $1,683,669; (3)
distinctive competency.
5.

this case toward the middle or end of

due to complexities of (1) three CEOs
(2) losses in three out of four years
offshore outsourcing going against its

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 QUESTIONS
1.

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?

as to his/her background and skills.)

Is Elisabeth Robert the correct CEO?

(Be specific

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 SITUATION
A.

B.

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.

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 GOVERNANCE
A.

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 Sales
Robert 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 niche
Direct-mail target markets
Increased retail presence
Company-owned stores

Booming collectible market for bears

Threats:
Fragmented industry
No trademark on "Bear-Gram"
Order-by-phone competitors
Substitutes 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 people
Commitment to quality and service
U.S.-built bears
Quality products only
C.
1.

2.

Corporate Resources:
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)
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 RECOMMENDATIONS

A.

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. IMPLEMENTATION
SF = Strategic Factor from Exhibit 3 - see SFAS
SF1

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 1

EFAS (External Factor Analysis Summary)

External Strategic Factors

Weight

Rating

Weighted
Score

Good economy

.15

.60

Booming collectible bear

market

.05

.15

Direct-mail

.20

.80

800#

.20

.80

Competition

.25

.75

Unrestricted entry by
competitors

.10

.30

No trademark on "BearGrams"

.05

.15

Opportunities

Threats

TOTAL SCORES

Comments

IX.

IFAS, EFAS AND SFAS EXHIBITS

Exhibit 2

IFAS (Internal Factor Analysis Summary)

Internal Strategic Factors

Weight

Rating

Weighted
Score

New management team /

strategic management

.18

.36

Leadership in market

.15

.30

Stage I-II issues not resolved

.10

.30

Made in US / offshore
outsourcing

.10

.30

Direct mail / 800#

.08

.32

Customer service

.07

.21

Quality / variety

.07

.28

Finance

.20

.40

Retail stores

.05

.05

Strengths

Weaknesses

TOTAL SCORES

Comments

IX.

SFAS, EFAS AND IFAS EXHIBITS

Exhibit 3

SFAS (Strategic Factor Analysis Summary)

Strategic Factor Analysis Summary

Weight

Rating

Weighted
Score

Key Strategic Factors

Finance

.15

.30

New management team / do strategic

management

.13

.26

Lack marketing leadership

.11

.22

Stage I-II issue must be resolved

.10

.30

Made US/offshore outsourcing

.10

.30

Direct mail / 800#

.10

.40

Customer service

.10

.40

Competition

.10

.30

Quality / variety

.06

.24

Retail stores

.05

.05

TOTAL SCORES

Duration
S

Comments
L