Paragon Tool is pouring money into growth initiatives. How long can it afford to wait for profits to bounce back?

Look, you’ve got to grow. It’s what our econ- omy is all about. Hey, it’s what our country is all about! Certainly, it’s what drives me. My fa- ther, Constantine Anaptyxi, came to America from Greece because he saw big opportunities here. He worked hard, took a few risks, and re- alized his dreams. I came to this company as CEO five years ago—giving up a senior VP po- sition at a Fortune 500 manufacturer—because I saw big potential for Paragon Tool, then a small maker of machine tools. I didn’t make the move so that I could oversee the company’s downsizing! I didn’t intend to create value—for our customers, for our employees, for our shareholders—by thinking small!! I didn’t intend to shrink to greatness, for God’s sake!!!

Okay, so I’m getting a little worked up over this. Maybe I’m just trying to overcome my own second thoughts about our company’s growth plans. I know it isn’t just about growth; it’s about profitable growth, as my CFO, Will-

iam Littlefield, is always happy to remind me. “Nicky,” he’ll say, “people always talk about getting to the top when they should be focusing on the bottom…line, that is.” Quite a comedian, that Littlefield. But lame as the quip is, it tells you a lot about Littlefield and what, in my opin- ion, is his limited view of business. Sometimes you’ve got to sacrifice profits up front to make real profits down the line.

To me, acquiring MonitoRobotics holds just that kind of promise. The company uses sensor technology and communications soft- ware to monitor and report real-time informa- tion on the functioning of robotics equipment. By adapting this technology for use on our machine tools, we could offer customers a rapid-response troubleshooting service—what consultants these days like to call a “solu- tions” business. Over time, I’d hope we could apply the technology and software to other kinds of machine tools and even to other

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kinds of manufacturing equipment. That would make us less dependent on our slow- growing and cyclical machine-tool manufac- turing operation and hopefully give us a strong position in a technology market with terrific growth potential. It would also nearly double our current annual revenue of around $400 million—and force Wall Street to pay some attention to us.

What does Littlefield say to this? Oh, he gives a thumbs-down to the acquisition, of course—too risky. But get this: He also thinks we should sell off our existing services division— a “drag on profits,” he says. With the help of some outside consultants, the senior manage- ment team has spent the last few months ana- lyzing both our services business and the pros and cons of a MonitoRobotics acquisition. To- morrow, I need to tell Littlefield whether we should go ahead and put together a presenta- tion on the proposed acquisition for next week’s board meeting. If we do move forward on this, I have a hunch a certain CFO might start returning those head-hunter calls. And I’d hate to lose him. Whatever our differences, there’s no denying that he’s capable and smart—in fact, a lot smarter than I am in some areas. On this issue, though, I just don’t think he gets it.

Mom and Apple Pie In 1946, when my father was 21, he left the Greek island of Tinos and came to New York City with his new bride. He worked at a cousin’s dry-cleaning store in Astoria, Queens, then started his own on the other side of town. When I was seven, he took his savings and bought a commercial laundry in Brooklyn. Over the next several years, he scooped up one laundry after another, usually borrowing from the bank, sometimes taking another mortgage on the three-family home in Bensonhurst where we had moved. By the time I was a teen- ager, he was sitting on a million-dollar busi- ness that did the linens for all kinds of hotels and hospitals around greater New York. “Ni- kolas, growth is as American as Mom and apple pie,” my father would say to me—he loved using all-American expressions like that. “You gotta get bigger to get better.”

My mom was somewhat less expansive in her outlook. She kept my father’s accounts, having studied bookkeeping in night school as soon as her English was good enough. And she

had her own saying, one that deftly, if inad- vertently, bolted together two other platitudes of American slang. “Keep your shirt on,” she would say to my father when, arms waving, he would enthusiastically describe some new ex- pansion plan for his business. “Or else you might lose it.” My father was the genius be- hind his company’s growth, but I have no doubt that my mother was the one responsible for its profits.

When I was 15, we moved to a nice suburb in Jersey. I never quite fit in: too small for sports, a little too ethnic for the social set, only a mid- dling student. I worked hard, though, and went to Rutgers, where I majored in economics and then stayed on to get an MBA. Something clicked in business school. I seemed to have a knack for solving the real-world problems of the case studies. And I flourished in an environ- ment where the emphasis was on figuring out what you can do instead of what you can’t, on envisioning how things could go right instead of trying to anticipate how they could go wrong. (Thank God I didn’t follow my uncle’s advice and become a corporate lawyer!)

When I graduated, I got a job at WRT, the Cleveland-based industrial conglomerate where I’d interned the summer before. Over the next 15 years or so, I moved up through the ranks, mainly because of my ability to spot new market opportunities. And by the time I was 45, I was heading up the machine-tool division, a $2.3 bil- lion business. Both revenues and profits surged in the three years I was there, it’s true. But I still found my job frustrating. Every proposed acquisi- tion or new initiative of any substance had to be approved by people at headquarters who were far removed from our business. And whenever corporate profits flagged, the response was mind- less across-the-board cost cutting that took lit- tle account of individual divisions’ performance.

So when I was offered the opportunity to head up a small but profitable machine-tool maker in southern Ohio, I jumped at the chance.

Sunflower Tableau I still remember driving to work my first day at Paragon Tool five years ago. Winding through the Ohio countryside, I saw a stand of sunflow- ers growing in a rocky patch of soil next to a barn. “Now there’s a symbol for us,” I thought, “a commonplace but hardy plant that quickly grows above its neighbors, often in fairly

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tough conditions.” I was confident that Paragon—a solid, unexceptional business op- erating in an extremely difficult industry and economic environment—had the potential to grow with similarly glorious results.

For one thing, Paragon was relatively healthy. The company was built around a line of high-end machines—used by manufacturers of aerospace engines, among others—that con- tinued to enjoy fairly good margins, despite the battering that the machine-tool industry as a whole had taken over the previous decade and a half. Still, the market for our product was essentially stagnant. Foreign competition was beginning to take its toll. And we continued to face brutal cyclical economic swings.

I quickly launched a number of initiatives designed to spur revenue growth. With some aggressive pricing, we increased sales and gained share in our core market, driving out a number of our new foreign rivals. We ex- panded our product line and our customer base by modifying our flagship product for use in a number of other industries. We also made a string of acquisitions in the industrial sig- nage and electronic-labeling field, aiming to le- verage the relationships we had with our machine-tool customers. No question, these moves put real pressure on our margins. Along with the price cuts and the debt we took on to make the acquisitions, we had to invest in new manufacturing equipment and a larger sales force. But we were laying the foundation for what I hoped would be a highly profitable fu- ture. The board and the senior management team, including Littlefield, seemed to share my view.

Indeed, the CFO and I had developed a rapport, despite our differing business instincts. Early on in our working relationship, this sixth-generation Yankee started in with the kidding about my alma mater. “Is that how they taught you to think about it at Rutgers?” he’d say if I was brainstorming and came up with some crazy idea. “Because at Wharton, they taught us…” I’d just laugh and then tell whoever else was in the room how proud we were that Littlefield had been a cheerleader for the Penn football team—like that was his biggest scholarly accomplishment. One time he “let it slip” that in fact he was Phi Beta Kappa, and we all just groaned. I said, “Give it up, Littlefield. You may have been Phi Beta Kappa, but, despite those letters on your gold

pin, you’ll never out-Greek me.” To tell the truth, our skills are complementary, and between us we manage to do a pretty good job for the company.

As Paragon grew, so did the sense of excite- ment and urgency among our managers— indeed, among the entire workforce. People who once had been merely content to work at Paragon now couldn’t wait to tackle the next challenge. And that excitement spread through- out the small Ohio town where we are based. When I’d go with my wife to a party or speak at the local Rotary Club or even stop to buy gas, people would show a genuine interest in the company and our latest doings—it helped that we always mentioned the job-creation im- pact when announcing new initiatives. There’s no doubt it stoked my ego to be one of the big- ger fish in the local pond. But even more important for me was the sense that this was business at its best, providing people with a justified sense of well-being about the present and confidence in the future.

Anyway, my point here is that we’ve grown fast since I arrived, but we still have a long way to go. I’ve come to think that the real key to our future is in the company’s services divi- sion. We currently offer our customers the op- tion to buy a standard service contract, under which we provide periodic machine mainte- nance and respond to service calls. But we’ve been developing technology and software, similar to MonitoRobotics’, that would allow us to respond immediately if a machine at a customer’s site goes down. The division cur- rently accounts for less than 10% of our reve- nue and, because of the cost of developing the new technology, it’s struggling to turn a profit.

But I can see in the services division the seeds of a business that will ultimately trans- form us from a manufacturing company into a high-tech company. Such a transformation, re- quiring an overhaul of our culture and capabil- ities, won’t be easy. And it will surely require significant additional investments. But the po- tential upside is huge, with the promise of sales and profit growth that could make our current single-digit gains seem trivial by com- parison. Besides, what choice do we have? A number of our competitors have already spot- ted these opportunities and have begun mov- ing ahead with them. If we don’t ramp up quickly, we might well miss out on the action altogether.

“Keep your shirt on,” my mother would say to my father. “Or else you might lose it.”

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harvard business review • september 2002 page 4

Paul Hemp is a senior editor at HBR.

A Company in Play Just over a month ago, I was sitting at my desk preparing a presentation for the handful of an- alysts who cover our company. Until recently, most of them have had only good things to say about all our growth moves. But last quarter, when we again reported a year-on-year drop in earnings, a few of them started asking pointed questions about our investments and when they could be expected to bear fruit. As I was giving some thought to how I’d answer their questions in the upcoming meeting, the phone rang. It was our investment banker, Jed Nixon.

“Nicky, I think we should talk,” he said. I could tell from the sound of his voice he was on to something big, and then he told me what it was: “MonitoRobotics is in play.”

We both did some calendar juggling and managed to get together for lunch the very next day at Jed’s office in Cincinnati. The rumor was that one of our direct competitors, Bellows & Samson, was about to launch a hos- tile takeover bid for MonitoRobotics. As it hap- pened, we had just started a conversation with MonitoRobotics’ management a few months before, about collaborating on remote servic- ing technology for machine tools. But Jed’s call had had its intended effect, changing my thinking about the company: Why not acquire it ourselves?

Although MonitoRobotics’ technology was designed to detect and report operating failures in robotics equipment, managers there had told us when we met that adapting it for use on other industrial machinery was feasible. Indeed, MonitoRobotics had re- cently licensed the technology to a company that planned to modify it for use on complex assembly lines that experienced frequent breakdowns. Our engineers had confirmed that a version could be developed for our machines—though in their initial assessment they hadn’t been exactly sure how long this would take.

Still, the potential benefits of acquiring MonitoRobotics seemed numerous. It would give us a powerful presence in a fast-growing business while preempting a competitor from staking a claim there. Whatever the time lag in adapting MonitoRobotics’ technology for use with our products, we would almost certainly be able to offer our customers this valuable troubleshooting service more quickly than if

we continued to develop the technology our- selves. And though our products were differ- ent, MonitoRobotics and Paragon potentially served many of the same manufacturing cus- tomers. “Think of the cross-selling opportuni- ties,” Jed said, as he took a bite of his sandwich. The greatest opportunity, though, lay in the possibility that MonitoRobotics’ software tech- nology would become the standard means for machine tools—and ultimately a variety of in- dustrial machines—to communicate their ser- vice needs to the people who serviced them and to other machines that might be affected by their shutdown.

This was a fairly speculative train of thought. But a MonitoRobotics acquisition had for me the earmarks of a breakthrough oppor- tunity for Paragon. And our earlier conver- sations with its management team had been cordial, suggesting the company might wel- come a friendly offer from us to counter Bel- lows & Samson’s hostile bid. Of course, even if we were able to get MonitoRobotics at a fair price, an acquisition of this size would further delay our return to the margins and profit growth we had known in the past. And that, I knew, wouldn’t sit well with everyone.

Management Dissension The day after my meeting with Jed, I called to- gether members of our senior management team. There was a barely suppressed gasp when I mentioned the potential acquisition, particularly given its size. “Boy, that would be a lot to digest with everything we’ve got on our plate right now,” said Joe McCollum, our senior VP of marketing. “It also might repre- sent the chance of a lifetime,” countered Rose- mary Witkowski, head of the services division. Then Littlefield spoke up. His skepticism wasn’t surprising.

“I was just running a few simple numbers on what the MonitoRobotics acquisition might mean to our bottom line,” he said. “Besides the costs associated with the acquisition itself, we’d be looking at some significant expenses in the near term, including accelerated software research, hiring and training, and even brand development.” He pointed out that these costs would put further pressure on our earnings, just as our profits were struggling to recover from earlier growth-related investments.

Littlefield did concede that a bold acquisi-

As Paragon grew, so did the sense of excitement and urgency among our managers—indeed, among the entire workforce.

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tion like this might be just the sort of growth move that would appeal to some of our analysts—and might even prompt a few more securities firms to cover us. But he in- sisted that if our earnings didn’t start bouncing back soon, Wall Street was going to pillory us. Then he dropped his bombshell: “I frankly think this is an opportunity to consider getting out of the services business altogether. Elimi- nating the continued losses that we’ve been experiencing there would allow us to begin re- alizing the profit growth that we can expect from the investments we’ve made in our still- healthy machine-tool business.”

Littlefield argued that, whether we acquired MonitoRobotics or not, it wasn’t clear we’d be able to dominate the machine-tool services market because a number of our competitors were already flocking there. Furthermore, the market might not be worth fighting over: Many of our customers were struggling with profitability themselves and might not be will- ing or able to buy our add-on services. “Last one in, turn out the lights” was the phrase Lit- tlefield used to describe the rush to dominate a profitless market.

As soon as she had a chance, Rosemary shot back in defense of her operation. “This is the one area we’re in that has significant growth potential,” she said. “And we’ve al- ready sunk an incredible amount of money into developing this software. I can’t believe you’d throw all of that investment out the window.” But a number of heads nodded when Littlefield argued that we’d recoup much of that investment if we sold the money-losing business.

Several days later, I polled the members of the senior management team and found them split on the issue of the acquisition. And, to be honest, I was beginning to doubt myself on this. I respected Littlefield’s financial savvy. And no one had yet raised the issue of whether Paragon, a traditional manufacturing com- pany, had the management capabilities to run what was essentially a software start-up. We decided to hire two highly regarded consulting firms to do quick analyses of the proposed MonitoRobotics acquisition.

The Sunflowers’ Successor Today, the consultants came back to us with conflicting reports. One highlighted the market potential of MonitoRobotics’ technology, not- ing that we might be too far behind to develop similar technology on our own. The other fo- cused on the difficulties both of integrating the company’s technology with ours and of adapt- ing it to equipment beyond the robotics field.

So as I drove home tonight, the dilemma seemed no closer to being resolved. In many ways, I am persuaded by the cautionary mes- sage of Littlefield’s number crunching. At the same time, I firmly believe the pros and cons of such a complex decision can’t be precisely quantified; sometimes you just have to go with your instincts—which in my case favor growth. As I turned the issue over in my head, I looked out the car window, half-consciously seeking inspired insight. Sure enough, there was the barn where the sunflowers had been growing five years before. But the bright yellow blos- soms, highlighted by the red timbers of the barn, were gone. Instead, a carpet of green kudzu was growing up the side of the increas- ingly dilapidated building. This fast-growing vine, which already had ravaged much of the South, was now spreading, uncontrolled and unproductive, into southern Ohio.

My mind started to drift and the image of kudzu—a more sinister symbol of growth than the sunflower—began to merge with thoughts of my father, who had died of lung cancer two years before, and my mother, who these days spends most of her time managing her invest- ments. Suddenly, my parents’ favorite phrases came to mind. It occurred to me that kudzu was now becoming as American as Mom and apple pie. Even so, its dense foliage certainly seemed like a place where, if you weren’t careful, you could easily misplace your shirt.

Should Paragon Tool further its growth ambitions by trying to acquire MonitoRobotics?

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