Volume 14, Issue 5 - September/October 2012
The Waterline in Business
We’ve all been around long enough to have heard of “waterboarding,” a form of physical torture where water is poured over a person’s face, causing the sensation of drowning. It is a terrible subject and a practice that can, and has, caused irreparable damage to people. There is a subject of similar consequence in the world of business that I’ve come to know as the “waterline.” It is an exact line of known capacity that divides those businesses that are successful from those that are not. Successful businesses remain afloat by expanding their investments to earn even greater returns, of which there is no limit. Operating below the waterline is a sinking business whose aim is to save itself into prosperity through cost reduction that is limited to one mere breath!
One of our world’s most renowned and respected investors is American business magnate Warren Buffet, who recently said during a CNN news interview that “the problem is that everyone is an expert on price, but no one knows the value of anything.” Mr. Buffet’s comment coincides well with my explanation of the waterline. He went on to say that it is far more important to make sure that you are getting more than what you are paying for, which makes the concept of “investing” vital toward profitable business growth.
What Your Investment Really Earns
My favorite example of this was when the Honda Corp. was receiving bids from auto glass manufacturers for a variety of vehicle platforms. The company responded to one of the bids provided by one of the leading glass manufacturers in the United States, stating its concern that the bid was too low and feared the supplier’s capability of remaining profitable through the term of the contract. The glass manufacturer was provided the opportunity to rebid with the consideration that they were going to be asked to help Honda improve its man-hour productivity by 5 percent each year that the contract was in effect. The end of the story indicated that the cost per glass part was higher but that their return on the achieved man-hour productivity made the investment a very good one.
Those living below the waterline focus on cost reduction. This is the practice of taking each category of business expense and reducing it in hopes of earning a profit. There is not one financial advisor worth their weight in salt who would not attest to this style of operation being “short-term.” I’ve referred to this as “one mere breath.” This practice may improve the bottom line of profitability for a while, but anything good that is experienced disappears as fast as it appeared. While it is important to be cost-effective, the danger in pushing cost reduction is that, when taken too far, costs increase: businesses lose valuable people and reliable suppliers, and no longer are able to provide reliable services and products, resulting in higher rework.
Staying Power Above the Waterline
Carl Tompkins is the global marketing resources manager for SIKA
Corp. in Madison Heights, Mich., and the author of “Winning at Business”.
He is based in Spokane, Wash.