Distinctive Technological Competences

Distinctive Technological Competences.

Case II

Advent Corporation

R. S. Rosenbloom

Reference:

Buegelman, Robert A., Maidique, Modesto A., and Wheelwright, Steven C. (1996). "Strategic Management of Technology and Innovation", pgs. 12-19, Second Edition, Irwin, ISBN 0-256-09128-5.

Early in November 1970. Henry Kloss was reviewing the progress Advent Corporation had made in the preceding months. The September profit and loss statement had registered a net profit of almost $30,000, against a cumulative loss of nearly $165,000 in the preceding 10 months. The new Advent cassette recorder, Model M200, had just completed its third month on the market. The M200 recorder, with its sophisticated circuitry, was felt to represent real potential as a replacement for the phonograph as the central element in any home entertainment system. With the financial turnaround, Mr. Kloss felt confident that a sales level of $40 million to $50 million was achievable by Advent within five years. His problem was how to organize for continuing innovation.

Introduction

Mr. Kloss was a well-known figure in consumer electronic product design and manufacturing. Prior to Advent, he had participated in the founding and operation of Acoustic Research, Inc (AR), and later, KLH Corporation. He had been the mind behind the products at KLH, an organization that was renowned for its very high quality, slightly oddball electronic products. He left KLH in 1967 after 10 years as president.

The formation of AR had originated during the Korean crisis. While stationed in New Jersey, Mr. Kloss was able to attend the City College of New York, where he was a student of Edgar Vilchur. He and Vilchur had mutual interests in an acoustic suspension speaker because of its immense reproductive advantages over conventional mechanical speaker systems and its small size. With Mr. Kloss providing some capital and a garage, Acoustic Research, Inc, was formed. Financial guidance of the business was provided by Anton (Tony) Hofmann, who was later to become a principal of KLH, and then treasurer of Advent.

Mr. Kloss and other active management sold their share of AR, Inc., after irreparable disagreements with Vilchur over company policies. KLH was initiated shortly thereafter with $60,000 in capital and Mr. Kloss as president, Malcolm Low as manager of sales, and Mr. Hofmann as financial manager. After seven years and a series of innovative audio products that were producing a $4 million level of sales, KLH was sold because of sheer tiredness of the managers and uncertainties associated with KLH's growing size. With the sale, Mr. Kloss agreed to remain as president for three years, and he left in 1967.

Mr. Kloss incorporated Advent Corporation in May 1967 for the purpose of manufacturing specialized electronic products for home entertainment use. The actual justification for forming the company was to do work in television, especially to create an organization, which would support the R&D and marketing of a large screen (4' X 6') color television system. Formal development work on the television system had been suspended in 1970.

With the formation of Advent Corporation, Mr. Kloss embarked on a plan to see what a big company could do. He felt that growth was always a primary goal, always desirable, but that one had to think in terms of what was realizable without beating one's head against the wall. Mr. Kloss sought to retain strong financial control of the company, having sold his share of Acoustic Research, Inc., under duress and his share of KLH Corporation with mixed feelings. He had this to say to the case researchers about financial policies:

The size one desires is really only limited by the dollars available for working capital. There's a firm intention to reach the middle tens of millions of dollars certainly in less than five years; one anticipates a faster accumulation of staff, faster than the 30 percent one might be able to do from profits, so the question becomes how fast does one dribble out equity if you're not staff limited?

Mr. Kloss continued:

Eighteen months ago, there was a small private offering of 12 percent of the company in which we offered 20 units consisting of $10,000 in 8 percent convertible debentures, and 300 shares of equity common at $7.50 per share, 10 cents par value. I retained 75 percent control; company directors and others have 13 percent. It was simply that circumstances warranted our doing that. In addition, we have a $1.15 million line of credit, of which $600,000 is revolving and $550,000 open, secured by the directors and pegged to 80 percent of the accounts receivable. I will not offer any further equity until a really big push (for which the sales are guaranteed) requires it, and when a price several times the $7.50 price per share is attainable. Beyond that, we are working hard to slash overhead and to build profits.

Financial data regarding the operations of Advent Corporation are given in Exhibits 1 and 2.

Current Operations

In the fall of 1970, Advent Corporation manufactured and sold five products for home entertainment use: the Advent loudspeaker; the Advent Frequency Balance Control, which allowed the listener to alter the relative musical balance in any audible octave; two models of the Advent Noise Reduction Unit, which allowed virtually hiss-free tape recording and playback; and the new Advent Tape Deck, which also featured noise-free recording and playback. These products, as well as a special recording tape that Advent sold under license from Du Pont, are described in detail in Exhibit 3, in a piece of Advent promotional literature.

Several specific policies of Advent Corporation served to interlock the company with the consumer electronics market. Most important, perhaps, was product policy. Mr. Kloss felt that there were several repugnant aspects to direct competition with the industry giants such as Zenith, Magnavox, and Motorola. Advent sought to turn to specialized areas of the audio market, the 5 percent or so where no competition existed, where whole new classes of products might be developed. Quality was an important Advent byword; to make the most efficient piece of equipment at the lowest possible price to the consumer was the primary objective. Such product sanctity was not protected by patent but rather by the product itself, which had a real name, which gathered equity as it