• Growing for Broke (HBR Case Study and Commentary)

    Paragon Tool, a thriving machine tool company in an increasingly tough industry, has been pouring money into growth initiatives. These efforts have shrunk the company's margins, but CEO Nikolas Anaptyxi believes they'll provide the foundation for a profitable future. Now Paragon is weighing the acquisition of MonitoRobotics, a company with proprietary technology for monitoring the functioning of robotics equipment. The acquisition, which would nearly double Paragon's revenue, could help transform Paragon from a slow-growth manufacturer into a high-growth technology company, bolster its struggling services business, and ultimately allow it to set the standard for how machines communicate with one another. At least, that's what the CEO thinks. Paragon's CFO, William Littlefield, isn't so sure. He says the move would introduce all the risks that come with acquisitions and put further downward pressure on profits. Paragon's management team is divided, and Anaptyxi must decide how to move forward. This case study explores growth issues that companies in many industries currently face. The specific dilemma here is, How far should Paragon go in sacrificing profits up front with the aim of generating real profits down the line? In R0209A and R0209Z, commenting on this fictional case are Rand Araskog, former CEO of ITT; Ken Favaro, CEO of consulting firm Marakon Associates; W. Brian Arthur, an economist known for his work on the idea of increasing returns; and Jay Gellert, CEO of Health Net, a managed-health-care company.
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  • Growing for Broke (Commentary for HBR Case Study)

    Paragon Tool, a thriving machine tool company in an increasingly tough industry, has been pouring money into growth initiatives. These efforts have shrunk the company's margins, but CEO Nikolas Anaptyxi believes they'll provide the foundation for a profitable future. Now Paragon is weighing the acquisition of MonitoRobotics, a company with proprietary technology for monitoring the functioning of robotics equipment. The acquisition, which would nearly double Paragon's revenue, could help transform Paragon from a slow-growth manufacturer into a high-growth technology company, bolster its struggling services business, and ultimately allow it to set the standard for how machines communicate with one another. At least, that's what the CEO thinks. Paragon's CFO, William Littlefield, isn't so sure. He says the move would introduce all the risks that come with acquisitions and put further downward pressure on profits. Paragon's management team is divided, and Anaptyxi must decide how to move forward. This case study explores growth issues that companies in many industries currently face. The specific dilemma here is, How far should Paragon go in sacrificing profits up front with the aim of generating real profits down the line? In R0209A and R0209Z, commenting on this fictional case are Rand Araskog, former CEO of ITT; Ken Favaro, CEO of consulting firm Marakon Associates; W. Brian Arthur, an economist known for his work on the idea of increasing returns; and Jay Gellert, CEO of Health Net, a managed-health-care company.
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  • Increasing Returns and the New World of Business

    Our understanding of how markets and businesses operate is based on the assumption of diminishing returns: products or companies that get ahead in a market eventually run into limitations so that a predictable equilibrium of prices and market shares is reached. The theory was valid for the bulk-processing, smokestack economy of Alfred Marshall's day. But in this century, Western economies have gone from processing resources to processing information, from the application of raw energy to the application of ideas. The mechanisms that determine economic behavior have also shifted--from diminishing returns to increasing returns. Increasing returns are the tendency for that which is ahead to get further ahead and for that which is losing advantage to lose further advantage. If a product gets ahead, increasing returns can magnify the advantage, and the product can go on to lock in the market.
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