Berkshire Beyond Buffett(96)

Berkshire’s secret to managing a large complex organization is to manage parsimoniously—as little as possible. Berkshire appears well managed based on an exceptionally successful performance record and might therefore be a model of business management, worthy of study. But the results of such a study might surprise. You will not find tutorials on organizational charts, budgeting reviews, presentations, client meetings, deal pitches, human resources management, present value analysis, or other business school staples. Berkshire uses none of these tools.

Rather than typical textbook lessons, the stories of Berkshire subsidiaries animate a few fundamentals. First among these is to be budget conscious, especially by cost minimization that underlies the business model at GEICO and the furniture and jewelry stores, where low prices multiply volume and profits. A related implication: avoid costly debt. Ben Bridge experienced the perils of leverage during the Great Depression, and his sage aversion to it lives on at his fifth-generation jewelry store chain. Other Berkshire subsidiaries learned this lesson later in their corporate histories, for example when Bill Child inherited RC Willey from his spendthrift father-in-law, after the excesses of leveraged buyouts bankrupted Fruit of the Loom in the 1980s, and both Forest River and Oriental Trading more recently.

Reinvest profits in promising businesses; this is the central bastion of Berkshire culture driving its acquisitions. Do this to stimulate a complacent workforce as James Hambrick did at Lubrizol; to build a company through steady bolting-on and tucking-in the way MiTek does; or to become an industry force like Berkshire Hathaway Energy. But avoid adding capital to businesses that do not generate high returns, such as the Buffalo News and See’s Candies. A residual point: commit to permanence but know when to walk away, as Buffett shuttered the mills of Berkshire Hathaway in the 1980s and the manufacturing plants of Dexter two decades later.

Nurture entrepreneurship, where rewards can be great, as illustrated by the multiple revenue streams Clayton Homes built around the manufactured housing business; the successful branding of cowboy boots and bricks by the tenacious John Justin Jr. or the Garanimals line at Garan; and the creation of whole new industries to fill a void in the marketplace, whether training of aviators at FlightSafety or fractional aircraft ownership at NetJets. Encourage small businesses to grow and expand one step at a time, even if haphazardly, as the accumulation of individual achievement can add up to huge enterprises, like the many success stories in building Dairy Queen. Let entrepreneurial energy fuel growth through geographic expansion of existing products, done so well at McLane as it blanketed the country with grocery distribution centers.

But also stick to your knitting, as BNSF Railway has done for a century and a half, and as other Berkshire subsidiaries teach by their mistaken diversions: GEICO offering credit cards to insurance customers or Shaw Industries futilely attempting to brand commodity carpets and compete with its retail customers. Learn from these and other mistakes, whether perilous underwriting at Gen Re or life-threatening myopia to the hazards of asbestos at Johns Manville.

Offer autonomy to business teammates, as they are likely to thrive on it, as proven by distributors of Benjamin Moore paints, divisional managers at Clayton Homes, franchisees at Dairy Queen, dealers in Scott Fetzer’s products, or consultants of the Pampered Chef. And have their backs, as Berkshire stood behind the Pampered Chef consultants to avoid boycotts of their products and supports Benjamin Moore distributors despite economic challenges. But do not allow anyone to damage business reputation, being ruthless with managers skating close to the edge of thin ice.

For family businesses, address the inherent vexing challenges by promoting the values of family identity and legacy. Family businesses sold to Berkshire—See’s, Fechheimer, Jordan’s, Nebraska Furniture Mart, Star Furniture, RC Willey, Helzberg Diamonds, Ben Bridge—all boast strong cultures that likely would have sustained the companies absent of Berkshire. But the sale both fortified this longevity and added flexibility as families grew and interests became complicated.

Make money, lots of money, but without losing sight of the long term. Compare what happened to Brooks, the running shoe company: it struggled for decades under short-term serial ownership then prospered when able to adopt a fifty-year time horizon. Manage knowing that people value intangibles, especially permanence, as seen in numerous Berkshire acquisitions made at discounts to business value: most of the family companies; all those acquired out of bankruptcy, such as Fruit of the Loom and Johns Manville; and several others, including Dairy Queen and NetJets.