Tom wanted to grow the business rapidly with outside investors and Nancy preferred downsizing the business to retain majority ownership and control
The Thompson Companies is a specialty retailer of children toys. Tom and Nancy Thompson founded the business in 2002, together shortly after they were married. The business started out as a hobby, but rode the wave of a strong economy and flourished enough for both of them to leave their full-time careers and dedicate themselves to the new business. As the business grew, both were in agreement on most business issues.
The business came to a crossroad.
By 2005, the company had grown to $50 million in sales and found itself positioned in a gray area between the small niche businesses and the larger conglomerate companies. The company had grown faster than most niche businesses and the medium-size companies had consolidated into large conglomerates, leaving them in the middle. This left the company in the precarious position of being too large to compete with the “niche” firms and too small to compete with the “big guys”. The cost structure and overhead of the business was too unwieldy to compete with the smaller niche businesses and they didn’t have the economies of scale and resources of the larger conglomerates. The company’s dilemma was deciding whether to grow or downsize to compete. Standing ground in the gray area could result in failure.
Couple disagreed on the growth strategy for the company.
The couple both agreed that the best strategy was to grow the business rather than downsize. Both strategies were risky, growth would vault the business into a much more competitive market with more seasoned players, downsizing would mean cutting overhead and force layoffs rapidly, to keep pace with the lower sales volume. Although the couple agreed on the need for growth, they differed on the pace of growth. Tom desired to grow the business rapidly, and Nancy favored a slower growth strategy. Growing rapidly would mean taking on additional debt to fuel the expansion and loss of controlling ownership. Slower growth could result in missed opportunities, and not keeping pace with the larger conglomerates, leaving the business in the dreaded “gray” area.
Being a family business only complicated the decision.
In addition, to the two of them, they had a second generation of two children coming into the business. As in many family businesses they were very reluctant to give up control and ownership for the business they started. One of the driving reasons for starting a business is to control your own destiny by having the control of being your own boss and full ownership. In addition, the growth strategy would almost certainly require outside non-family talent in key management positions. Some of these positions currently occupied by family members.
Both Tom and Nancy were entrepreneurs.
They enjoyed the hands-on duties in their specialized areas. Tom managed Finance and Marketing, Nancy oversaw Operations and Merchandising. As the company grew, they both were pulled away from their hands-on duties and thrust into more general management roles. Tom welcomed the change, but Nancy missed the more entrepreneurial hands-on involvement. Tom was greatly influenced by his business reading and attending academic programs on the newest concepts and strategies in small business. He learned that successful small businesses often brought in talent from larger companies to help them grow. He felt this was the best strategy to keep the business viable. Nancy, on the other hand, felt the business had become less exciting as it grew larger and the growth brought along a lot of complexities and risk. The company had been successful and supported a comfortable lifestyle for all of their family at a smaller size. She felt it was more enjoyable when they could be more in control of their destiny with a smaller scale business. The decision really came down to did they want to change into a large formal business or return back to being a lifestyle business.
After debating both growth strategy scenarios, Nancy reluctantly agreed to give in to the faster growth strategy concept. Tom was armed with evidence and research showing the merits of the faster growth strategy. Nancy who was more involved in the daily operations of the firm didn’t have the time or endurance to mount a challenging option. She felt debating this further with Tom would become a distraction to the business. The company began to hire outside key executives and the company gradually transformed itself into a larger formally structured organization. They stopped short of bringing in outside financing, deciding to finance the growth and expansion of the business through increased traditional bank borrowing, however, it now required significant, onerous personal guarantees.