Royal Little: a "simple lesson" about expanding capacity

Another story from Textron founder Royal Little (1896-1989), author of "How to Lose $100,000,000 and Other Valuable Advice." In spite of his wealth of mistake stories, Little was one of the most successful US businessmen of the mid-1900s.

Here he discussed some of his struggles with his company Atlantic Rayon Corporation in the aftermath of the Great Depression.

Atlantic Rayon Corporation, 1940

With all our expansion of dyeing and throwing capacity and optimism and enthusiasm for the future, what happened in 1940: Sales were approximately $7,500,000 and we lost $19,000. What a business! Here we had struggled successfully for many years without a loss through 1937 and then in 1938 and 1940 after all our expansion and optimism we lost money. It certainly looked as though there must be some better way of making a return on stockholders' equity than in the yarn processing business. That year's report stated:

The greatest contributing factor to the company's unsatisfactory results for the year was the low level of prices for throwing during its last nine months. Processing charges which the company obtained during and after the second quarter averaged 36% below those for similar services in the first quarter.

Since we had increased our plant capacity to service the New England textile companies' thrown yarn requirements, we made the false assumption that prices for the services would hold up even though increased capacity meant that we had to take business away from competitors, and we foolishly assumed that this extra competition would not create price cutting. Obviously, if one wants to expand one's position in an industry it is far safer to buy a competitor's business and not increase overall capacity. It took me many years to learn that simple lesson. At the end of December 1940, after eighteen years in business, we had built up the net worth of the company to only $1,765,000. No wonder we were getting discouraged.