Growing for Broke

Growing for Broke

Executive Summary

Paragon Tool is deciding whether the company should further its growth ambitions by trying to acquire MonitoRobotics. Facing the foreign competition, the company launched a number of initiatives designed to spur revenue growth. They increased sales and gained share in their core market with aggressive pricing which drove out their some new foreign rivals. When the acquisition proposal was presented, the management split on the issue. One main reason was that the significant additional investments would put heavy pressure on the company’s earnings. However, with huge potential upside and the promise of profit growth, Paragon Tools should MonitoRobotics to stay on top of the company’s service market.

Industry Dynamics:

Paragon was a relatively healthy company. It was a machine-tool manufacturing company that built machines used by manufacturers of aerospace engines. They continued 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. However, the market for their products was essentially stagnant and foreign competition started to come into play. In order to drive out new foreign rivals, Paragon Tools decided to take a price cuts to increase share and gain share in their core market.

Situational Analysis:

From the perspective of Porter’s Five Forces:

• Power of Suppliers: Low. Most of the critical production inputs are similar. There is usually large number of substitute inputs.
• Power of Buyers: Moderate. These machine tool products are important to these customers, which lower their bargaining power. However, with the new foreign competition, they have a little more options to choose from which increase their bargaining power.

• Threat of New Entrants: Low. This industry requires strong distribution network, advanced technologies and economies of scale.

• Competitive Rivalry: High. Foreign competitors are coming in play to steal market share. . Paragon Tools has to cut price to drive out competition.

• Threat of Substitutes: Low. There is not much substitutes in the market or the substitute has lower performance

Solution Criteria:

1. Short term cost: How costly it is to implement?

1. Long-term ROI: Will it create a good long-term ROI?
2. Competitive Response: Could competitors affect the company with aggressive response?
3. Brand Image – Can Paragon Tools maintain its high quality brand image after the acquisition of MonitoRobotics?
4. Time to Market: How long will it take to introduce the new service?

Alternative Solutions:

In this case, there are three main alternatives that Nikolas could do:

1. Acquire MonitoRobotics and offer new service to allow immediate response calls if a machine at a customer’s site goes down. This will help generate positive cash flow in the long run. It allows the company to stay ahead of the competitionCustomers can now enjoy the benefits of the quality add-on service that come with the products.

1. Eliminate the continued losses by getting out of the services business industry. This allows the company to focus on their products and begin realizing the expected profit growth from their investments

1. Avoid changing anything and leave the company at the current state.

Evaluation Matrix

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