What's the difference between a state-of-the-art company and yours?

There's a lot of loose talk these days about 'quality.' But what happens when a company really does make quality its guiding mission -- when every decision is based on making a product that's state of the art? How is R&D affected? Marketing? Human resources? Does being state of the art transform a company? Let's look inside Mag Instruments and see. -- P. B. B.

The very rich are different from you and me.

-- F. Scott Fitzgerald

Yes, they have more money.

-- Ernest Hemingway

You can't miss it. The "scrap," as it is known, sits in open boxes just inside the factory door at Mag Instruments. It's the first thing that catches your eye when you come to work, and it's the last thing you see before going home. Scrap is what Mag calls the flashlights its quality inspectors have rejected. And on this particular day, there is more than $80,000 worth of it piled all over the place.

Oh, most of the spurned flashlights worked fine, all right -- and to a visitor, nothing about them looked wrong -- but company founder Tony Maglica felt the workmanship was shoddy. He didn't like the way the housing containing the bulb fit against the base of the light. So he scrapped the entire batch. Then he put the scrap on display. And therein lies a story.

Mag Instruments doesn't make just any old flashlight. It makes, by any available measure, the best flashlight there is -- a state-of-the-art product. Not surprisingly, its prices are state of the art, too. A MagLight costs more than twice what you probably paid for the flashlight under your sink.

But the price tag, like the showcased rejection bins, is what we -- and Scott Fitzgerald -- would have expected from a company built on the strategy of pushing quality as far as it can go. State-of-the-art companies stand apart not in degree but in kind, went our premise. They're made of different metal, not just more of it.

It would then stand to reason that everywhere you looked inside a company such as Mag Instruments Inc. -- which may do $70 million this year -- you'd find an operation transformed by its decision to be a state-of-the-art producer. Or so we imagined. Spend some time with Tony Maglica, however, and you begin to see Hemingway's point. Being state of the art, as Mag Instruments is, may be both simpler and harder than you thought.

Tony Maglica is 58, and his story is a good one to remember the next time someone tells you America is no longer the land of opportunity.

Although from New York, Maglica's family moved to Yugoslavia when he was two and didn't return to the United States until after World War II. Not knowing English well, the 20-year-old Maglica looked for jobs that required manual, not verbal, dexterity. He started in machine shops and later opened his own job shop. There, while making parts for a long-since-defunct flashlight manufacturer, Maglica stumbled across the idea that would lead to Mag Instruments.

"I was a subcontractor," he says in accented English, "and I told the company that their quality was bad. I even offered to design a better light for them, but they just weren't interested."

Maglica, though, was. Here might be an opportunity for him to have a company of his own. And so 11 years ago he came up with a simple goal: he would make the world's best flashlight.

Now remember what was going on in 1978. Tom Peters and Bob Waterman were two obscure consultants at McKinsey & Co. In Search of Excellence wouldn't appear in your bookstore for another three years. Philip Crosby was still a year away from publishing Quality Is Free. And you would have been hard-pressed to find anyone -- with the possible exception of W. Edwards Deming -- who was preaching about the need for quality. So why did Maglica set off to build the perfect flashlight? Because his ego would accept no less. His name -- or at least the first syllable of it -- is on every one. "Why would you want to be associated with something that wasn't the best?" he asks.

The display of rejected product helps him make his point. For one thing, it reminds employees what poor quality means. But it also gives them something to celebrate, Maglica says. The scrap shows that Mag Instruments's standards are so high it won't ship goods its competitors might find acceptable. This is just the first example of Tony Maglica's devotion to quality that a visitor encounters on a tour of the Mag plant in Ontario, Calif., outside of Los Angeles. There are more.

On the same day he rejected the $80,000 batch of flashlights, Maglica spent several hours on the phone with his lawyers, trying to deal with the aftermath of yet another patent-infringement suit.

The two keys to Mag's quality are its unique design and its manufacturing process. Both are patent protected. And since 1983 Maglica has employed an army of attorneys in the battle to keep either from being duplicated.

So far, the high-priced lawyers have justified their keep. Mag is two for two suing companies that have infringed on its patents. More important, the number of imitators has dropped substantially. But Maglica is about to learn how worthless a victory can be. The defendant in his most recent suit, a tiny company that contracted to copy Mag in the Far East, has filed for bankruptcy. That means Maglica won't be seeing the roughly $4 million in court-awarded damages for a while, if ever.

"We expected them to declare bankruptcy if they lost," Maglica says. He sighs. "There is nothing I can do about it. Litigation has become a part of us doing business." What's so telling is just how big a part.

Lawyers, as a rule, bill in tenths of hours. That means every six minutes the meter clicks, and another $10, $20, or $30 is added to your bill.

For Mag Instruments that clicking has been as constant as a metronome, so that by now Maglica doesn't even hear it anymore. He has long since made peace with the fact that his legal bills are going to be absurd.

How absurd? He's spent $16 million on lawyers' bills over the past six years. That works out to $1,280 for every hour Mag's doors have been open during that time.

Does he like it?


Does he have a choice?

"Absolutely not."

If the company loses its patent protection, anyone could copy what Mag does, and then there would be no way Maglica could charge a premium for his product. Without the premium, there can be no Mag. The premium is what enables the company to be state of the art. It's what lets Maglica pay his employees more, spend thousands of hours on research and development, and reject goods others might ship. Without it, Maglica says, he might as well shutter the windows and lock the doors.

So ever since he learned that imitators were coming to market, Maglica has fought back on all fronts. He never knew how costly the battle would be. "Back when we first started, I said to myself, no matter what it takes -- even if I have to spend $250,000 -- I am going to win."

As Maglica and his wife, Claire -- the company's second in command -- tick off the endless rounds of discovery and depositions, lawyers, letters, and litigation, it's easy to understand how the bills climbed to $16 million so fast.

First, there was the work to ensure that Maglica's patents -- filed when he began manufacturing flashlights -- were airtight. Then came a lawsuit to keep imitators from importing copies of Mag's lights into the United States. At one point Maglica was told the hearing -- to be held in Los Angeles -- was about to start. So airline tickets were purchased, a suite of rooms was reserved, and Maglica brought everyone (four attorneys, witnesses, the Maglicas, their experts, and thousands of support documents) to L.A. Then they waited for six weeks. The judge wasn't ready. Finally, the hearing was postponed. Cost of the delay: more than $1 million.

Then there were the suits against the companies that did the copying (a third one will start in September), the pending litigation against the retailers who sold the copies, and the constant searching in the marketplace for other imitators.

And all the while, the meter keeps ticking.

"We have hired nothing but the best attorneys, and we haven't tried to cut corners at all," Maglica says. "If we didn't sue, there would be no way I could plan for the future. I can't think about new products or expanding my plant, if there's a chance that someone can copy me."

How else could Maglica have fought the imitators? He could have granted them a license to use his technology or subcontracted manufacturing to them.

"But then we wouldn't have had control of the quality," he says. "No, we had to do this."

So far the strategy of fighting back has worked. Mag's future appears secure. But it's security that to date has cost $16 million.

Of course, Maglica didn't know when he started Mag Instruments about all the litigation to come. All he knew was that he wanted to build the best flashlight the world had ever seen, and so he set to work. The decision could have been fatal. Suppose he built the perfect light and no one cared?

But Maglica got lucky. "In essence, he invented a brand-new category: high-tech flashlights," says Stanley Kravetz, a venture-management consultant and former head of Timberland and Rockport, two companies known for turning out quality shoes. "There was an untapped need for a flashlight that people knew would always work when you turned it on."

Indeed, that was the market Maglica was courting. But he went further. Not only would his flashlights work better, they'd look better, too.

"The light had to be distinguished, beautiful, a showpiece," Maglica says. "I wanted people to be proud to give it as a gift. Besides, if you are designing something to last a long time, you have to build it so that people are willing to look at it for a long time." This kind of obsessive attention to detail -- present from the very beginning -- set Mag Instruments on a course that allowed no turning back.

In designing the initial flashlights, Maglica specified incredibly close tolerances to make sure the parts fit together well. And he built safeguards into the design to eliminate some of the reasons traditional flashlights fail. For example, over time batteries leak, and the corrosive acid eventually dissolves the on-off switch, making the light useless. So in his prototype, Maglica created a switch that rubs off the buildup every time you flick the light on or off.

The design is clever, but there was no manufacturing equipment on the market that could meet Maglica's specs. He had to build his own, which meant an investment of time -- and money. After all, it's easier to open the box and plug in a machine than to build one from scratch.

It's within the company's work force, however, that the commitment to quality may exact its highest price.

The entire executive staff of Mag Instruments could fit comfortably into the Maglicas' Rolls-Royce. There are Tony and Claire, of course, and Jim Zecchine, who handles finances, and there are the two executives who oversee production and sales. That's it. To a large extent, Mag Instruments is a mom-and-pop operation that happens to have 400 employees.

You see that clearly when it comes to hiring people for the plant floor. Tony Maglica interviews almost everyone. No, he doesn't read all 30 résumés that drop through the mail slot after he advertises for a screw-machine operator. But after the supervisors have narrowed the list down to a handful, he gets involved, and no one gets hired until he approves. Interviewing, on average, takes up to two full weeks of his time per year.

Why does he do it? It's simple: these are the people who will determine Mag's reputation. While Maglica has built as many quality safeguards into the design as possible, it's still the people running the machines who ensure his vision becomes a reality. He wants to meet them.

And how does Maglica motivate his new employees once hired? By pointing with pride to the quality product they're turning out? By spending time on the shop floor trying to build esprit de corps? By "communicating"?

Yes, to some degree, says Maglica, clearly puzzled by the question. "But the biggest thing we do is pay them."

On average, that pay is $1 more an hour than they could get at similar jobs. Even though he pays more, however, Maglica is finding it harder and harder to attract new employees. "Working with screw machines is becoming a dying trade," he says. It has gotten so bad that Maglica is setting up a training school for willing but unskilled workers. He has no idea what the program will cost. "That would be the wrong way of looking at it," he says. "The question I ask myself is, what will this cost me if I don't do it?"

However he looks at it, Maglica has pursued a way of doing business that not only guarantees his costs will be higher, but that they'll be higher forever. For example, if you're positioned as a state-of-the-art company -- which is how Mag justifies its high price tag -- you have to allocate huge sums of money to R&D just to stay ahead of the pack. You can't copy. You must innovate.

But if costs are higher, you must charge more. That simple conclusion has amazingly complicated effects.

Charging more influences where you can sell your lights, who can sell them, how many you can sell, and the way you have to position your product. Your entire marketing effort has to be different from the efforts of your lower-priced competitors.

Maglica sells through independent reps, but the kind of rep he can use is dictated by the cost of his flashlights. The company's best seller, the Mini-Mag, retails for about $16.95, double the price of the flashlights you'll find in most stores. Mag's top-of-the-line model -- once you add the AC converter, battery pack, and wall-mounting bracket -- lists for about $150. These prices mean Maglica must deal exclusively with salespeople who handle high-quality goods and are good at explaining why their product costs more than anyone else's.

But with prices this high, the reps have a limited number of retail outlets. They need stores where (a) there are sales clerks and (b) the clerks know enough about Mag to explain to shoppers why the flashlights are worth the money. To have any hope of moving the product, the reps must concentrate on selling to your local hardware store, not to the cavernous discount center out on the highway.

Limiting distribution doesn't directly take money out of Maglica's pocket. But it does, of course, restrict sales. If people don't see your flashlight, they can't buy it.

Is there an upside to being state of the art? Obviously, yes. First, your marketing costs are less. If customers like their Mag lights -- and with hardly any provocation, Maglica pulls out fistfuls of letters from delighted buyers -- they're likely to tell their friends. And while U.S. companies spent more than $100 billion on advertising last year, a word-of-mouth recommendation is still the best marketing there is.

What would come a close second is a rave from objective observers such as Consumer Reports. And that magazine rated Mag best in its category, over better-known rivals Black & Decker and First Alert. This reputation for quality makes it easier to add new products. The Mini-Mag, a palm-size light, and the Solitaire, a tiny flashlight that attaches to a key chain, became best-sellers with virtually no marketing support. For people familiar with the company, having the Mag name on the product was good enough.

Each year, thanks to word of mouth and consistent quality, the number of people who recognize that name steadily increases. Magazines such as Fortune routinely include Mag in lists of the best American-made products, and the flashlight has appeared in books that celebrate the finest in American design. As a result of all this, the flashlight has become a status symbol. Folks who will buy a Mont Blanc pen for the perceived prestige are likely to pick up a Mag light as well. Could the Mag name be extended beyond flashlights? "I think about that sometimes," Maglica says. "But for the time being, at least, we'll stick to flashlights. I think we've barely scratched the market's surface."

Even if he never extends the name, Maglica still owns a brand-name flashlight. And people who own brand names can charge more than those who don't. The result, Maglica says, makes the company very profitable, although he won't discuss specifics.

But could it have been more profitable without the $16 million in legal bills, the scrap, the heavy R&D expenditures, the higher labor costs?

Maybe, Maglica says. But then Mag wouldn't be Mag. It would be just another run-of-the-mill company turning out run-of-the-mill goods, and there'd be no way to maintain the profit margins that come with charging twice as much as everyone else.

When you try to determine why he can charge so much, you realize there is only one secret to Maglica's success: his obsession.

He created a niche -- high-quality flashlights -- out of his dissatisfaction with the shoddy ones he was forced to build. He demanded more of his flashlights and their appearance. After all, he was a craftsman. And a craftsman with good timing at that. His product appeared just as consumers were demanding higher quality, and its sleek appearance played to the growing appreciation of good design.

But look at the corner Maglica has painted himself into as a result of this way of doing business. There's no way he can change his marketing or positioning without risking everything he has created over the past 11 years. Maintaining his company's good name requires constant vigilance.

How constant? Well, consider this: Tony and Claire Maglica, who have been married for 19 years, always take separate vacations. They have to, they say. That way, there's always a Maglica minding the store.

Not surprisingly, though, the Maglicas don't view their obsession with quality as a hardship. In fact, they can't imagine doing business any other way.

"We all take pride in what we're doing," says Claire Maglica, whose desk is at a right angle to Tony's. "Maybe it's our naïveté, but we define success as putting out the best products we can."