W.L. Gore & Associates is a little-known company that has $2.5bn in annual sales, 8,000 employees and 50 manufacturing facilities worldwide. The company invented the water-proof, breathable Gore Tex fabrics and is a leading manufacturer of advanced technology products for the electronics, industrial, fabrics and medical markets. Gore is one of only 12 companies that have been on the Fortune 100 Best Places to Work list every year since the list started.

In Jim’s Collins latest book, “How the Mighty Fall”, Collins describes one of the core principles of Gore’s culture, known as the waterline principle. Essentially the waterline principle means it is ok to make a decision that might blow a hole in the boat as long as the hole is above the waterline so that it won’t sink the ship. You can repair the hole, learn the lesson and keep sailing the boat. But if you punch a hole below the waterline you will find yourself facing torrents of water flooding in which will make you sink. The bigger the hole the faster you’ll sink. Look at what happened with the recent collapses of Australian financial companies – Babcock & Brown, Allco etc. They sank fast because they bet the farm and took a hit below the waterline that ultimately sank the ship. The same happened to ABC Learning Centres and many others.

The waterline principle serves as a regulating force comparing the progress of a business with the progress of a ship. At Gore’s every employee is encouraged to innovate, provided that the downside risk scenario does not harm the long terms prospects or reputation of the company. When data is ambiguous or conflicting the potential outcomes of any decision are compared with drilling holes in the ship’s hull – best accomplished above the ship’s waterline.

Two questions need to be answered before risky decisions are taken:

§  Is the project worth doing? That is, is the upside good enough to justify the required investment in time and money?

§  If it all goes bad, can the company live with the consequences?

Making good educated decisions is as much about understanding the size of any potential opportunity as it is about limiting the possible downside. “Betting the farm” might sound courageous but it is rarely good business. The waterline principle, on the other hand, is a great “bet” if you want to build a business that prospers for the long term.

Have a great week!