A thousand years ago a plant manager would protect his facility from dragons and black knights with a well-constructed castle, knights in shining armor, faithful steeds, and a wide moat. Our 11th century manager would be exposed to familiar headlines: Pestilence, war, natural disasters, and Lord Trump somehow getting lost in the forest in the company of a comely maiden. While fiefdoms and indentured servitude have fallen out of favor, managers over the centuries have all wondered how to protect and enhance the property over which they steward.
Our 21st century Merlin The Magician, a business soothsayer named Warren Buffett, has invoked the Medieval moat to model a protective strategy, an approach that safeguards your business by encircling it with a competitive advantage. Preferably an advantage that is as wide, deep and enduring as an alligator infested moat around your castle. Warren The Magician calls it an “Economic Moat”.
What is your moat? May I suggest your employee group is a good candidate?
The basic idea of a manufacturing facility is not complicated. We buy raw materials, combine and assemble them in a way that adds value, and sell the finished goods at a profit. Can you buy your raw materials at a meaningfully lower price than your competitors? Doesn’t sound like a good foundation for moat-building. Can you cleverly finance or maintain your production machinery so it out-performs your competitors? Maybe…a little bit. Though smart and talented competitors demand that we pay attention to all these factors, these business characteristics don’t really provide a sustainable, alligator-filled protective strategy.
The one factor that most impacts the value-added equation in your plant is your labor. That’s right…the largest and lowest paid employee group in your building, for most manufacturing businesses, weighs more heavily on your profit equation than any other discreet feature of the process. Get it wrong and you’re among the knaves and ne’er-do-wells, wondering where your profit went. But get it right and you have a moat. A defensible, sustainable, significant business advantage that’s difficult for others to attack.
A higher quality workgroup will impact your profitability in surprising ways. It requires focus and an organizational commitment, but the economic moat you’ve built will add the perfect shine and sparkle to your suit of armor!
Here’s a good explanation of Warren Buffett’s “Economic Moat” concept.