An entrepreneurial spirit pervades Berkshire culture. Berkshire managers tend to be self-starters by nature, propagating cultures of experimentation, innovation, and tenacity. Like the protagonists of Horatio Alger novels, they offer many tales of rags to riches, of transforming mom-and-pop operations into multi-million-dollar businesses. Buffett set the example, as a quintessential entrepreneur in the field of acquisitions, where his persistent opportunistic agility transformed a dying textile business into a galactic conglomerate. Entrepreneurship feeds on another Berkshire trait inherent in business models such as Acme Brick’s distribution centers and Dairy Queen’s franchisees: the philosophy of hands-off management that gives people autonomy, where the next chapter will pick up.
8
Hands Off
At corporate headquarters in Omaha, Berkshire employs two dozen people; worldwide, Berkshire subsidiaries employ more than 300,000. The practice at the top is hands-off, stressing decentralization and individual autonomy—values that define Berkshire culture. In contrast, most business organizations are hierarchies with a bureaucratic chain of command. They act through committees and meetings, with multiple layers of reporting and review.
Berkshire’s hands-off management approach was made by choice but became necessary by default—with such a large number of subsidiaries in such a broad range of businesses, strict hands-on control would not be feasible. The choice to operate in a decentralized manner from the beginning reflected a belief in the value of autonomy and a conviction that people properly entrusted with authority will generally exercise it faithfully.1 Business value results from letting responsible people make decisions, whether about manufacturing, distribution, customer service, acquisitions, or any other aspect of running a business.
And just as Berkshire Hathaway takes a decentralized approach, so do many of its subsidiaries; throughout the Berkshire universe are scores of companies in which individuals are supported by a larger corporate structure but empowered to drive their own success.
The Pampered Chef, founded by Doris Christopher, provides a vivid illustration of some advantages—and pitfalls—of organizations that grant broad autonomy. Although a hands-on manager, Christopher’s business model is based principally on empowering others.
During the late 1960s, Christopher taught home economics in a special program at the University of Illinois.2 In 1980, at age thirty-five and with her children in school, she faced the challenge of finding a work—family balance that would allow her to enjoy a rewarding career and joyous parenting.3 In resolving this challenge, Christopher earned both a Horatio Alger Award and an Ernst & Young Entrepreneur of the Year designation.
At her husband’s suggestion, Christopher seized upon a modern version of the old-fashioned Tupperware business model: direct marketing of sophisticated cooking tools sold at gatherings in people’s homes. In 1980, she borrowed $3,000 under a life insurance policy—the only debt the company would ever incur. Christopher bought an inventory of gadgetry wholesale and began her business. She hosted “kitchen shows” (not Tupperware parties) and would dub her sales team “kitchen consultants” (not Avon ladies). At the shows, consultants demonstrate wares by cooking dishes, and all guests then enjoy a feast.
The business, initially operated from Christopher’s basement, grew slowly at first. Year-one (1981) sales totaled $67,000, with twelve kitchen consultants on board. In 1984, sales reached $400,000, outgrowing the basement. By 1989, two hundred kitchen consultants generated revenues of $3.5 million.
As the number of kitchen consultants steadily rose, revenue grew in tandem: 1991, $10 million; 1993, $65.3 million; 1995, $200 million; 1997, $420 million.4 By this time, the Pampered Chef had grown to twenty-five thousand kitchen consultants—a figure that would double and then triple before long.
Christopher chose products carefully, with an eye toward making the cooking experience enjoyable for professionals and novices alike.5 She experimented with all tools before marketing them and even developed recipes and menus to demonstrate their use.
The key to the company’s success, however, was its team of kitchen consultants. An exquisite example of decentralization and autonomy, consultants make a modest initial payment for a starter demonstration set to use in their shows. The company adds new items a few times a year that consultants must buy and market. It supplies consultants with guidance for demonstrations, including recipes and care instructions.
Adding consultants increases revenue and profits—without increasing expenses. Consultants earn a starting commission of 20 percent on gross sales plus an additional 2 percent for gross sales above a target level. Consultants work as little or much as they wish, so long as sales reach a relatively low monthly minimum. Additional sales incentives include bonuses in the form of all-expenses-paid family vacations.