Raychem made a better material for coating aircraft wire, then abandoned it. The product, Stilan, had received more research money than any previous Raychem project. But a competitor improved a cheaper alternative until it worked well enough. Customers had little reason to pay more.
For investor Philip Fisher, this exposed a gap between an impressive invention and a durable business. Customers must get value they will pay for. The company must earn enough to develop its next products, and its managers must keep a growing organization effective. Decades of growth depend on those abilities working together, including the ability to stop doing something that once looked promising.
Raychem's products often saved customers expensive labor. Those savings could support a price that left Raychem a good profit. Stilan shows the limit. Even an efficient supplier competes with other uses of the customer's money. Technical superiority does not settle that choice.
Canceling Stilan freed skilled researchers and money for other work. Within a year or two, Raychem had a broader range of promising developments. That redeployment mattered. Cancellation alone would have established only that management had stopped a failure; the new work gave Fisher grounds to expect further growth. Even excellent research could not deliver uninterrupted success.
Keeping growth profitable
Fisher wanted research guided by changing customer needs and a realistic route to profit. Food Machinery's engineers were developing a mechanical pear peeler and peach pitter, addressing customers' practical problems. Its projects offered substantial growth relative to the company's small size. Effective technical teamwork mattered, and improving a service could be as valuable as inventing a product. Research also had to renew an established lead. A company living on yesterday's invention could be overtaken while its current results still looked healthy.
Selling completed that work. A company had to discover what buyers needed next, explain the benefits, and watch the cost of winning sales. Food Machinery controlled its sales organization. Raychem went further, conceiving, manufacturing, and selling its own products. These arrangements suited those businesses; owning every stage was no universal requirement.
Success would invite competition. Food Machinery had production scale within specialized markets, satisfied customers, and machines already in service that needed replacement parts. A newcomer would have to build production and win customers while the established company responded. Difficult technology and patent protection could discourage copying, but Fisher's case never rested on patents alone.
Low production costs strengthened the position. Fisher favored lines where a company already led in efficient production or had a reasonable chance of getting there. Low production costs lowered the sales needed to break even, helping a business survive weak demand and gain ground as weaker rivals withdrew. A larger margin, the profit left from sales, also provided money for expansion. Less borrowing meant fewer fixed repayment obligations. Issuing fewer new shares meant existing owners kept a larger proportion of the business.
Growth could still drain cash. Equipment cost money, inventory tied it up, and customers might not yet have paid their bills. Managers needed reliable costs for individual products and controls over these commitments. Catching threats to planned profits early gave them time to act. Ambition needed daily financial discipline and limits on risks that could wreck the business.
The organization has to change too
Raychem had another problem as it grew. Divisions organized around manufacturing methods and product composition were making customers harder to serve. Management reorganized around customer industries. It had set the timetable before anyone expected Stilan to fail, so the two disruptions coincided. New bosses and working relationships temporarily reduced efficiency and earnings. Fisher admired accepting that immediate cost to build capacity for future growth.
Size could erase its own savings. Dow's president worried that additional layers of management would obstruct communication across departments and ranks. Control still mattered, but people needed to talk freely. Dow also reassigned capable employees who struggled in one role to work better suited to them. A disappointing assignment did not have to waste a promising career.
A leader could not handle every decision indefinitely. Fisher wanted authority delegated to capable colleagues with complementary skills, managers prepared for larger jobs, and successors developed before they were needed. Internal power struggles could undo that work. Employees needed decent conditions and benefits, respect, and safe ways to raise grievances and suggest improvements. Useful information had to reach people who could act on it.
Ability also needed integrity. Managers knew more than outside shareholders and could put themselves first. Fisher looked for people who treated shareholders' money as a responsibility and discussed embarrassing setbacks candidly. That candor let an investor judge both the mistake and management's response.
His own business began with few resources and no brilliant forecast. When his employer failed during the Depression, he started managing investments because the available clerical job was unappealing. Disappointed brokerage clients were willing to listen, and less-busy business leaders could spare him time. One future client later admitted he had agreed to meet Fisher because he had finished the newspaper's sports section. Low office expenses kept him going through tiny early profits while relationships developed into a profitable business with loyal clients. The bad economy created an opening in this case, without making downturns universally favorable. Those early earnings showed little of the business he was building; low costs gave it time to emerge.
Three things to keep
A better product must justify its cost to the customer.
Profitable growth needs financial control and an organization that keeps learning.
Failure helps only when money and people move toward better uses.