Toromark Digital Marketing Expansion Strategy and Goals

Seven  years  ago (in  2013),  having  graduated  with  a  degree  in  Business  from  UTSC,  you  and two  of  your classmates started  a  small  web-design  and  e-commerce  consulting  business.  You  named  the  business “Toromark Digital Marketing” Using a combination  of your  life  savings,  plus family  gifts  and  inheritances,  you  each  put  $20,000  into  the business, and you each took 100 shares. This gave each of you a one-third ownership in the business. 
 
Beginning with just the three of you, Toromark enjoyed impressive growth in its first four years. Starting with just four clients, you managed to grow that number to eleven, while growing the revenue that you generated for each customer, by taking on more and bigger projects. 
 
Three  years  ago,  in  return  for  an  investment  of  $1  million,  you  sold  25%  of  the  shares  in  the  business  to Rachel  McClunkey,  a  wealthy  venture  capitalist  and  private  equity  investor.  With  the  capital  invested  by McClunkey,  Toromark  was  able  to  buy  its  closest  rival,  ‘Scarborough  Digital’,  and  absorb  seven  of  its employees (marketers and programmers). The acquisition helped to nearly double the value of Toromark’s revenues and profits and to nearly double the number of its clients. 
 
Since then, Toromark has grown to have  29 employees. Revenue for the year ended December 31, 2020
was $5.9 million, and the business made a profit of just over $1.7 million.   
  2014 2015 2016 2017 2018 * 2019 2020 forecast 
Revenue $000 480 900 1800 2200 4116 5025 5936 6665 7260 7840 
Rev / Emp $000 160 180 200 200 196 201 212 215 220 224 
Profit $000 130 279 576 638 1152 1407 1721 1933 2178 2352 
Profit as % Rev 27 31 32 29 28 28 29 29 30 30 
Employees 3 5 9 11 21 25 28 31 33 35 
Profit / Emp $000 43 56 64 58 55 56 61 62 66 67 
No. of Clients 4 6 9 11 19 22 24 27 29 31 
Revenue / client $000 120 150 200 200 217 228 247 247 250 253
 
While you take pride in your success to date, you (the three founders) and your investor are still hungry to grow. At a recent meeting of Toromark’s Board of Directors, Rachel McClunkey observed  “Look, 75%  of  Toromark’s  revenue  comes  from  just  8  clients.  Every  one  of  our  clients  is  located  within  a day’s drive from Toronto.  If  we  want  to  take  Toromark  to  the  next  level,  the  business  will  need  to  expand geographically.” 
 
Your team takes a month to brainstorm, and do some initial research into a variety of growth strategies. Since the web design and marketing communications business relies heavily on personal contacts and networking, you conclude that Rachel McClunkey is correct: Toromark will need to expand geographically if it wants to continue its (impressive) historic rates of growth. 
 
As a management team, you decide that Toromark should establish new goals: $12 million in revenue (an increase from  $7.8 million),  and  $3.5 million  in  profit  (up from  $2.35 million)  within  the  next  three years.  If Toromark  is  to  achieve  these  targets,  the  business  must  expand  and  open  in  a  new  location  in  a  new geographic market.  
 
McClunkey then sketches out her proposal. She indicates that she is willing to invest another $2 million into the business, in return for an increase in her ownership stake from (the current) 25% to (she proposes) 40%. The three original founders (you and your two friends from UTSC) would each retain 20%.  
 
McClunkey proposes that her new capital would finance: 
 
• Up to $300,000 to lease and fully outfit suitable office space, for up to 12 people, for an initial period of 24 months; 
• Up to $1,000,000 to recruit, and hire up to eight new employees for the new location. This includes hiring bonuses, if necessary;  
• Up to $300,000 to help to incentivize and relocate up to half a dozen members of the current staff; 
• The balance ($300,000 to $500,000) would finance the marketing launch of the new office 
 
As  a  team,  you  begin  to  discuss  potential  locations/markets  for  Toromark’s  expansion.  As  word  of  this discussion gets out, two of your experienced project managers and two of your top performing sales people, express a willingness (some are quite enthusiastic) about moving to a new office location, if it means being part  of  some  exciting  growth.  The  purpose  of  any  expansion  will  be  to  develop  new  clients,  and  generate more revenue, and more profit for the business.  
 
As part of the expansion, you will need to hire some local talent, at various levels of seniority and experience Your plan foresees Toromark having up to 36 employees in Toronto, and as many as 15 employees in the new location, in three years’ time You start with a long list of 20 cities and regions in both Canada and the United States, as possible locations for expansion. Over the course of three weeks, you winnow them down. Among the cities that you consider, but then reject are: 
 
Pros  –  An  attractive  and  prosperous  medium-sized  Canadian  city,  with  three  universities.  Less  than  3 hours’ flight from Toronto. Affordable housing and attractive lifestyle for your employees. Cons – Even though Halifax is the commercial, cultural and educational hub for the 3 Canadian Maritime provinces, even when combined, the region’s economy is too small to represent a really attractive market. 
 
Pros – A large and cosmopolitan city, Montreal is the commercial, cultural and educational hub for the Province of Quebec. Home to several, major (both English and French language) universities. Attractive lifestyle for young employees. Affordable housing. 
Cons – Neither you, nor any of your partners, speak French well enough to competently do business in the official language of the Province of Quebec. Some of your employees are concerned about Montreal’s dreadfully cold winters. 
 
Pros – Each is a large, prosperous and fast-growing city. Each is the commercial, cultural and educational hub for its region (Western Canada or US Pacific Northwest). Each could serve as the  springboard for eventual expansion into the Asia market. 
Cons – Distance from Toronto (5 hour flight). 3-hour time zone difference. Both cities are very expensive, making  it  hard  to  hire  and  retain good  young  employees  within  your  current  pay scales.  If  you  want to expand into Asia, it makes sense open an office in Asia - not the West Coast of North America. 
 
Your conversations with several of your key employees suggest that, should they be asked to relocate, they would want to move to a family-friendly city with affordable housing, and relatively short commutes. So, you also rule out the greater New York City area (and anywhere along the New York to Philadelphia corridor), as too big, too crowded, and too expensive.
 
As  you  discuss  and  reject  possible  destinations  for  future  expansion,  you  agree  that  your  criteria  have become: 
 
• A medium-sized city in the eastern or central United States;  
• “Medium sized” means the city population should be 500,000 to 1.5 million (Toronto = 2.4 million) 
• The population of the greater metropolitan area (GMA) should be 2 to 5 million (Toronto = 6.4 million) 
• 8 million+ people within a 2-hour drive. (“Golden Horseshoe” of Southern Ontario = 9.2 million); 
• 12 million+ people within a 1-day drive (Southern Ontario from Windsor to Ottawa = 14 million); 
• The city must be a recognized regional hub for business and economic activity; 
• The city must offer direct flights to and from Toronto; 
• The  city  must  offer  excellent  transportation  links  (air,  train,  roads)  to  its  wider  region  (other  nearby cities and states); 
• Minimum regional GDP of US $500 billion (Ontario = Cdn $744 billion = US$595 billion); 
• Steady population growth; 
• Steady economic growth; 
• A stable and business-friendly environment; 
• A young, well-educated, and technology-savvy work force; 
• High-quality educational institutions, including renowned universities and research facilities. These are necessary both to attract your existing employees to relocate, and to recruit talent locally.After another two weeks of following this process, you have reduced your short-list for Toromark’s possible future new location to two cities: 
 
The  team  that  you  have  asked  to  do  this  research  has  advised  you  that  both  of  these  two  cities  comply adequately or very well with each of the criteria listed above. They have advised you that either represents a suitable base from which Toromark could launch an ambitious expansion by developing business in the United States. Through your employees, you have a number of useful contacts (family, friends, former school-mates) in both of those cities. Your most senior project manager received her MBA from the University of Texas at Austin, while two other members of your team attended university in North Carolina.
 
Each of these cities has its attractions to an expansion-oriented, fast-growing business, managed by a team of ambitious entrepreneurs. Each of these can give Toromark access to a wider regional market. Each city is far enough away from the business’ current base (Toronto) to give Toromark access to a whole new set of clients, but not so geographically remote as to make travel and communications difficult.  
 
At  your  last meeting  with  Rachel  McClunkey  you  agreed that,  at  the  next  Board  Meeting,  you  would  have identified your choice of destination, and make a presentation to your fellow Directors. Toromark’s next Board Meeting will take place on Friday, November 26. The first item on the Board’s agenda is for you to identify and discuss your chosen destination.  
 
Instructions 
 
You have been instructed by Toromark’s Board of Directors to prepare a (roughly) 11 – 14 page report which you will circulate to your fellow Directors at its next meeting, which will be on Friday, November 26. (Note: 11 to 14 pages is a guideline. Your report can be longer (perhaps in needs editing?) or shorter (perhaps it is superficial and thin?) than that.  
 
Your principle investor, who has said she would contribute up to $2,000,000 to this project, has asked you to send her an advance copy of your final report. The report must identify your preferred choice among the two cities on the Board’s short-list. Your report to your fellow Board members must address both: 
 
The city/region’s  attractiveness  as  a  market in which  Toromark can  acquire  new customers  and grow its revenue. Discuss your chosen city (and surrounding region) in terms of its population, population growth,  level  of  economic  activity  and  economic  growth,  transportation  and  communication  links,  and  any other factors that it can offer to Toromark so that the business can realize its future growth targets.  
 
The city/region’s attractiveness in terms of Toromark’s ability to hire and retain  the talent which will  enable  that  growth.  If  Toromark  expands  to  a  new  location,  it  will  need  to  convince  some  if  its  best young employees to relocate. In addition, Toromark will need to recruit and hire up to a dozen new marketing and sales personnel,  project managers,  web-designers, programmers and application builders, in the next three years. You must provide relevant information about the city’s talent pool, and the cost and availability of that talent.