What Business Are You Really In? Rospatch Corp.
The biggest change Joe Parini has brought to Rospatch Corp. (pronounced rose patch) isn't the recent foray into defense-related high technology, but a program of disciplined self-examination at every level of the company. There have been surprising effects, the most surprising of which may be that, in addition to its newest lines of gyroscopic guidance systems and sonobuoy receivers, Rospatch still makes underwear labels -- and makes money at it, too.
Parini, now 51, has been president and chief executive officer of the 72-year-old Grand Rapids company since mid-1980 He has not imposed change; instead, he has created an environment that allows change. There is a difference.
The company, until 1968 called Rose patch & Label Co., has traditionally been one of the country's largest makers of garment labels -- not woven labels like the ones on neckties, but printed labels like those on Fruit of the Loom briefs or Levi jeans. It also manufactures label-making equipment and the supplies those machines consume.
Beginning in the 1950s, Rospatch diversified. First it acquired a company that converted plastic films into printed packages for snack foods apparel and cleaning aids. Later it bought a producer of wood laminates that were sold to makers of stereo speakers and television cabinets. Publicly held since the founder sold his shares in the 1930s, Rospatch has always been solid, progressive, and profitable. It hasn't missed a dividend payment in 154 quarters.
Under Parini's predecessor, however, Rospatch had grown a bit stodgy. Not that it was in trouble. The 1979 balance sheet carried $4.8 million in long-term debt -- just 26% of stockholders' equity -- and $11.7 million in working capital. The current ratio was 3:1. Sales, which had been running flat at about $35 million for the previous three years, jumped to $51.7 million in 1979.
But none of that sales growth was internally generated. Rather, it was entirely the result of the 1978 acquisition of Jessco Inc., a particle-board laminator.
Anyone could see what was happening to Rospatch by glancing at the annual reports. Flexible packaging, which accounted for nearly half of corporate sales during the period 1974-78, was generating a progressively smaller percentage of corporate profits, 26% in 1978, compared with 45% in 1974. The cloth-label division was barely holding its own at roughly 30% of sales and 25% of profits. Only the equipment division was improving its performance. Sales there remained relatively flat, but equipment and supply sales contributed an increasing share of the company's profit, 48% in 1978, compared with 27% in 1974.
The Jessco acquisition only boosted revenues. It did nothing for corporate profit margins. After tax earnings remained less than 5% of sales. Rospatch stock sold over the counter at five or six times earnings. Investors, correctly, assumed the company was going nowhere.
The board of directors, consisting mostly of outsiders, knew what was wrong but not why. "We couldn't get a professional evaluation of the company's options from management," recalls Glen Walters, a management consultant and Rospatch director. They pressured Parini's predecessor to bring in a strong No. 2 executive, someone who could succeed to the presidency in two or three years. He found Parini.
During five years as head of Lear Siegler Inc.'s Grand Rapids-based Instrument Division, Parini had more than doubled sales in the mid-1970s. Then he moved to LSI's California corporate headquarters. In six or seven years, maybe less, he thought, he would have had a shot at the top job at the $1.3 billion (sales) aerospace company. But the Rospatch offer, an opportunity to run his own show in just a couple of years, lured him back to Grand Rapids. Three months later his boss died.
With Parini as president and CEO, two kinds of changes took place at Rospatch. The first kind, reporting relationships and dealing with people, any reasonably competent manager could have made.
Serious personnel deficiencies in the management ranks, for example, were repaired. Managers who couldn't meet their own monthly projections were eased out. "If those people didn't know what was going to happen 30 to 60 days in the future," Parini says, "how could they survive a year?" He tried, in most cases successfully, to find jobs outside the company for those he let go.
Centralization at the company had gone too far. Too many line functions had drifted up to the corporate level. All research and development, for example, had been moved into the Grand Rapids headquarters building. True, it was more efficient to do all the R&D there, but managers at the plant level tended to ignore the results, a perfectly normal response to a top-down flow of ideas. Parini dismantled the corporate effort and returned R&D responsibility, and incentive, to individual divisions. He also dotted the solid-line reporting relationship between divisional controllers and the corporate controller. Bill Malpass, Rospatch's vice-president for finance, still gets the same routine financial reports, but now they come through the line managers, an arrangement that heightens the line managers' sense of responsibility, Malpass says. Likewise, the data processing function is being decentralized.
But these changes, salutary though they were, could not fix what was wrong with Rospatch. To do that someone would have to figure out why sales were flat and why margins were shrinking.
Consider the options a CEO has in seeking these kinds of answers. He can dig into each division and its markets one at a time. Or, he can hire consultants in each industry area to tell him what his divisions are doing wrong. Or, he might organize a task force of vice-presidents to do the same thing. The problem with each of these approaches, however, is their top-down orientation. Whatever changes are suggested by the findings of the consultants, the CEO, or the task force must then be imposed on organizations and people who had been given no part in formulating those changes.
In contrast, Parini took the time to create an environment at Rospatch that encouraged and, more important, permitted managers at all levels to ask the right questions themselves and to act on the answers.
A business school professor would call Parini's approach "strategic planning," and indeed Parini has introduced to Rospatch a formalized system of reporting, forecasting, and evaluating the performance of each division, each of the four groups into which the divisions are organized, and the corporate totals. But there is more to it than the standard, textbook flow-chart that Parini reproduces quickly on his conference-room chalkboard.
First, the process begins, in practice as well as in theory, all the way down at each product line. Managers at that level, and in turn at the division and group levels, forecast market size and growth and their own sales for three (soon to be five) years. The refined numbers that Parini eventually takes to the board months later originated as close to the market and the production floor as you can get, and -- just as important -- they have been subjected to consensus judgments all the way up the line. Everyone has participated in the process.
Second, the entire planning process occurs in the context of clearly stated, long-term, corporate financial goals: 5% return on sales, 10% return on assets, 15% return on equity, and 20% compound annual growth rate. Management at each level can use these as benchmarks. Is my product line, division, or group supporting the goals? If not, what can I do about it? The planning process "keeps your feet to the fire," says Cecil Jackson, general manager of the label division.
But the system is also flexible. Not every part of the company has to meet every quantitative goal. For example, annual revenue growth in the identification-products group, which produces the labels and label-making machinery, will never reach 20%, says Bill Zinser, the group vice-president. On the other hand, profits in the technical-products group, which includes the newly acquired defense-electronics businesses, will be low or nonexistent for a time. "So," says technical products group vice-president Bob Borlet, "Zinser's job is to generate cash, and mine is more growth-oriented."
Mutual dependency permeates the management process at Rospatch. Aside from Parini and Malpass, the vice-president for finance, no one wears a full-time corporate hat. Most of the group vice-presidents are also corporate officers. Each has an interest in how the others perform, because executive compensation is based on corporate as well as individual performance.
Finally, Parini has made sure that no one at Rospatch has reason to be anything less than honest -- with his colleagues or with himself. You can be fired for not doing your job, but you won't be fired if the job can't be done.
At a corporate planning session some time ago, Charles May, vice-president of the flexible-packaging group, got well into his presentation, but the numbers he brought forward just didn't look right for Rospatch. "What are you telling us, Charles?" someone finally asked. "I guess," May said, "I'm telling you we ought to sell it." He could make that recommendation, May says, because Parini had assured him, as he had everyone else, that he had a job with Rospatch in any case.
Zinser, whose identification-products group doesn't have fantastic growth potential and lacks any high-tech allure, nonetheless speaks candidly about its strengths and weaknesses. "Why aren't I paranoid? Because I'm absolutely certain that I'm not going to be blind-sided. If the time ever comes to sell one of my divisions, or the whole group, I'll probably be the one to recommend it."
Since Parini's arrival, Rospatch has sold the flexible-packaging group. May and a partner bought it.
Zinser's identification-products group has developed a spate of new products and moved into woven labels as well. Its best margins are earned from the sale of label-printing equipment and supplies. Isn't it competing with itself? Yes, but some company was going to profit from that part of the label business, and it might as well be Rospatch. Now, whether a customer wants woven or printed labels, and whether he wants to buy them or print them, Rospatch has something to sell him.
Jessco, the laminate-maker, acquired a ready-to-assemble furniture line to give itself a high-margin consumer product.
The technical products group has acquired three businesses in the past 12 months, most of which will require careful nurturing.
"Reconceptualization?" says Parini. "It's a process. We review the whole damn thing from scratch every year."