Strategic Analysis of Berkshire Hathaway

This paper provides a strategic analysis of Berkshire Hathaway, including its market presence, growth history, top management, business objectives, and challenges. It also discusses the company's strategies, financial performance, and future recommendations.

Title page: Advance strategic management
Berkshire Hathaway
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Disclaimer
All the information in report is collected on the basis of secondary research, with best of our knowledge.
It is collected from publicly available sources such as annual report, balance sheet, cash flow statement
and online articles. Proper referencing has been done to acknowledge source of data collection. No part of
this report is ever used or copies in another paper, contains are 100 percent original and true.
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Abstract
This is a strategic analysis paper on Berkshire Hathaway. Major finding states its age old market
presence and strong growth history since last five decades. Its top management includes key
personnel and reason to its success. Business aims to expand its reach in worldwide market
provide maximum and long run return to its investors. Industry attractiveness is high but barrier
to entry is also high, therefore many companies cannot enter the market. There are several
competitors present but Berkshire enjoys leadership and strong financial position. Market
volatility, economic and social factors play key role in business performance in different
industry. There are certain core strategic values implemented to make any business decision,
which are described as business, market, financial and management perspective in the paper.
Organization culture play key role in employee management, continuous learning, succession
planning and execution. Key market challenges include poor value in technical charts and
downward trend in last two years. However, management is changing its strategy making
buyback system flexible and other action to ensure future sustainability.
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Table of Contents
Disclaimer...................................................................................................................................................2
Abstract.......................................................................................................................................................3
Introduction.................................................................................................................................................5
Background.................................................................................................................................................5
Company.................................................................................................................................................5
Business information...............................................................................................................................6
Methodology...............................................................................................................................................6
Corporate strategic objectives......................................................................................................................6
Data analysis and interpretation...................................................................................................................7
Pestle.......................................................................................................................................................7
SWOT Analysis...........................................................................................................................................9
Competitor analysis.....................................................................................................................................9
Strategies of Berkshire Hathaway..............................................................................................................11
Business performance............................................................................................................................11
Focusing on long term...........................................................................................................................12
Acquisition............................................................................................................................................12
Buying business.....................................................................................................................................13
Business factors.....................................................................................................................................13
Management factor............................................................................................................................13
Financial factor..................................................................................................................................14
Market factors....................................................................................................................................14
Corporate culture...................................................................................................................................14
Strategic model......................................................................................................................................15
Financial analysis..................................................................................................................................16
Interpretation of result...............................................................................................................................17
Future challenges.......................................................................................................................................17
Conclusions and Recommendations..........................................................................................................18
Bibliography..............................................................................................................................................20
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Introduction
Berkshire Hathaway is an unplanned success; there was no concrete strategic plan that company
followed in the beginning. Its unique philosophy, governance and management made it world’s
largest organization. Iconic leader Warren Buffet is considered as man behind its success with
the ability to pick savvy stocks with high returns. Company operates in a complex business
structure with a diverse portfolio with no common factor. Company has fifty wholly owned
subsidiaries, and these 50 subsidiaries also owned two hundred subsidiaries (Jain, 2010).
Berkshire follows extensive acquisition strategy, which is its sustainable competitive advantage;
it has distinctive culture that helps in keeping competitors away. This paper aims to evaluate
strategic analysis on Berkshire Hathaway. It includes in-depth analysis on company position, its
strategies, challenges, future and recommendations.
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Background
Company
Berkshire Hathaway is a publicly traded US based conglomerate holding company. It was
founded in the year 1839 as Valley fall company, headquartered at Omaha. It has a market
capitalization of $500 billion. Key person is its CEO and Chairman Warren Buffet. It manages
more than 100 different businesses, insurance holds major share. Company earner $4billion in
year 2018. Business turnover double since Warren Buffet joined the company in 1960, at that
time company had mere profit of $2 million, by year 2017 it reported profit worth $44.9 billion.
Company encountered furious expansion in last two decade, with stock delivering 19 percent
return on an average in last 5 decades (Krishnan, 2017). Company and consolidate subsidiaries
have 3, 89,000 employees.
Business information
Insurance and Reinsurance Company holds major share, it provides property and casualty
insurance in United States. It also provides reinsurance on health and accident. Another is
Utilities and energy group with 89.8 percent of MidAmerican energy holding company. It has
strong presence in clothing, building product companies, flight services, retail and other non-
insurance services (Cuba & Cunningham, 2018).
Methodology
This paper is based on secondary data, information is collected from company website, its annual
reports, different journal paper on financial management, warren buffer and Berkshire Hathaway,
it also refer different financial management and investment books to analyze the way strategic
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actions of the company shapes its success (Goddard & Melville, 2007). Researcher tried to
incorporate recent data within ten year time span to ensure research validity (Cooper &
Schindler, 2014). Further, proper reference has been provided to all information collected from
different sources.
Corporate strategic objectives
Its key objective is to buy good businesses at reasonable price. It aims to enhance company
earning power every day. Current business objectives include making firm stock buyback
policies flexible. It aims to become the largest and most influential investment company in the
world. Different business units have their separate goals and objective. As a whole, long term
business economic goal is to maximize average annual return rate to achieve intrinsic value on
per share. It also aims to own diversified business portfolio that ensure above average return on
capital.
Data analysis and interpretation
Pestle
Pestle analysis aims to evaluate various external factors impacting business, favorable conditions
make industry attractive, new players want to enter the market, investors also invest fund in that
industry. On contrary, poor conditions lead to unattractiveness.
Political
Lower taxation policy in western hemisphere has benefited the company since last two decades.
It helped in enhancing profit and investing more on research and development. In USA market,
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local government have strong role, they make policies and implement decisions. Berkshire
Hathaway also tries to follow local policies while making decision rather than implementing any
nationwide policy. Government new policies have direct impact on investment sentiments;
further USA is also under pressure to follow world trade organization’s policy on insurance.
Presently political factors favor the company and its growth (Lowe, 2000).
Economic
USA is a powerful economy with 31.28 percent of world economy, with strong market condition
to trade in global market. Exchange rates are volatile, impacting Berkshire investment and
business returns dramatically. Rising trade liberalization also help company in expanding its
business in different markets. There is availability of core infrastructure, increasing globalization
and availability of local resources helped the company in catering global demand.
Social
Society has dramatic impact on business growth, with ageing population, gender roles are
evolving in market, and Berkshire can make new strategies to cater this segment. There is rising
investment in public services to provide access to essential services among common people.
With rising preference towards alternative energy, Berkshire energy unit is committed to produce
100 percent renewable energy (solar and wind). It will have positive impact on company growth.
However, there is major risk from terrorism and corruption as it might cause unrest in global
operation.
Technology
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Immense development in web and mobile technology helped in enhancing customer
expectations, there is continuous customer interaction and information sharing. There is need for
lowering cost of production through technology, Berkshire also need to incorporate more
flexibility in its supply chain. There is risk of cyber-attacks, therefore company needs to invest in
research and development and innovate to protect information.
Legal
Different legal factors that might impact business in Berkshire include employment law, data
protection law, business law and intellectual property regulations.
Environmental
There is rising customer awareness towards environment protection, need to reduce global
warming factors. Rising demand for renewable energy can be tapped by the company, recycling
is increasing to protect environment.
SWOT Analysis
This sections aims to evaluate internal business position of the company, to ensure better
integration of positive and negative aspect and take advantage of market opportunities.
Strengths: Berkshire Hathaway has strong and diversified business portfolio with presence in
different industry segments and companies. It has strong liquidity position and brand value. It
has consistent positive and high growth since more than two decade.
Weakness: primarily market volatility impact business and return dramatically. It has
dependency on few people for key decision. warren Buffet is the major investor and decision
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maker, he has strong impact on business success however it also bring, strong dependency of the
organization on single person, he is 88 years old, no successor yet declared.
Opportunities: with increasing trade liberalization, there are chances of expanding its business
in different markets. It can also bargain and buy good companies at fairly low value in emerging
markets.
Threats include market competition, regulator changes and increasing cybercrimes.
Competitor analysis
Key competitors of the company include Allstate, Blackstone, Travellers, and AIG etc. Below is
cumulative analysis of Berkshire with total market competitors. According to data, in the year
2015 total increase in revenue was 17.35 percent; sales growth of the company was above 1.6
percent in comparison to its competitors. Below is revenue growth of Berkshire Hathaway’s in
comparison to its competitors;
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Figure 1: Revenue growth of Berkshire Hathaway’s in comparison to its competitors
(csimarket.com, 2015)
Below is Net margin comparison with total cost has been shown using diagram for Berkshire
Hathaway and its competitors;
Figure 2: Net margin comparison with total cost
In terms of net income comparison also, company net income grew by 104.2 percent, whereas
competitors were facing income contraction by 23.61 percent (negative).
(csimarket.com, 2015)
Strategies of Berkshire Hathaway
Business performance
Below is a comprehensive performance comparison of Berkshire Hathaway with S&P 500,
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BRK total cost
84.31 percent.
BRK net margin
15.69 percent
Competitor’s total cost
93.69 percent. Competitor’
net margin 6.31 percent

(Cashman, 2016)
Figure 3: Performance comparison of Berkshire Hathaway with S&P 500
Above diagram shows massive growth achieved by the company and now they have
reverted closely to the mean, however at this stage, small growth also leads to huge return as
they have massive base. Company focus on normalized earnings, in case of poor performance,
they try to understand factors that lead to underperformance. Another key strategy is to invest in
good and bad times, for example company made massive investment in infrastructure during
down period, it helps in gaining huge market. Period when other rail lines were trying to curb
their expenditure, Berkshire invested more to gain market share with a long term strategic view,
it helped company in differentiating itself from others and also long run success. Another
strategy is to get fairly good company at fair price and hire good management team. Company
operates with extreme decentralized approach of management; once management is finalized, top
management don’t interrupt in decision making. Company adopt a decentralized approach of
management, there are no separate functional departments such as sales, marketing, finance etc.
there is low to no involvement of different business units decision making by headquarter in
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daily operations. Corporate senior management team is responsible for capital allocation and
investment related decisions (Cashman, 2016).
Focusing on long term
Business leaders in the organization do not look for short run profit, they always stress upon big
picture and long term impact. Building sustainable business require team work and unionization
that all member work together.
Acquisition
It is a process of taking control over another organization by buying majority of the stakes in the
company. Acquisition is a growth strategy adopted by many of the organization (Frankel, 2005).
Different reasons for implementing this strategy include business development, expanding
market reach and share, diversification of business, buying undervalued firms for profitability
etc.
Buying business
According to Warren Buffer buying business is similar to buying stocks. Company focuses on
owning the company to ensure power towards capital allocation. Management aims to buy
companies with strong long term perspective, with good management and fair price. Key factors
consider while buying a business include business factors, management factors, financial and
market factors (Miles, 2003).
Business factors
Investment decisions are taken on the way business operates, so while evaluating a business,
management consider weather business is simple and understandable, weather it has consistent
history of operating income or not and its long terms prospect is favorable or not.
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Management factor
While evaluating management in new business expansion or acquisition, it considers weather
management team is rational or not, is management is candid with its shareholder or not and
finally weather it resist institutional imperative. Rationality helps in differentiating Berkshire
with others in the market. While evaluating financial perspective, company ensures to hire best
of managers who report true financial position, admits mistakes openly and share company
growth with pride. Berkshire Hathaway financial reports are prepared using GAAP regulation; it
helps in understanding actual worth of the company, ability of the organization to meet its future
obligations and ability of managers to meet financial requirements. Berkshire management
openly resents its economic and management performance in its annual report. Institutional
imperative is present when there is resistance to change, corporate projects will soak up available
funds, and behavior of competitors will be imitated without analysis (Hagstrom, 1997).
Financial factor
Berkshire Hathaway does not focus on yearly returns or result; rather it aims to evaluate at least
five year average return to evaluate company financial position. Key elements it consider include
focus on return on equity and less to no importance to earning per share, calculation of owner
earning, it ensure that for every retained one dollar it also create market value of equal amount.
According to Warren Buffet, cash flow is not right tool as it shows net income after tax plus
depreciation, it does not include capital expenditure, which in future cause fall in profit (Sunder,
2018).
Market factors
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It include weather management should purchase the company and the price is appropriate or not.
It aims to purchase company with high values, that new above average returns, but price below
their indicated value. Margin of safety rule is applied while purchase to overcome the risk of
downside price (Murray, 2015).
Corporate culture
Berkshire Hathaway culture is shaped by its founders, it has the ability to absorb different
business, according to Warren Buffet leadership is the key to successful culture, and it must
show care and commitment. Actions matter more than words. It comes from top to bottom.
Despite of having a conglomerate culture that varies between subsidiaries, there is unique
leadership that binds them all. Open culture offer innovation, clear communication and open
feedback, even top leaders admit their mistake openly. Further, Buffet uses culture as one key
criterion to select company for investment.
Strategic model
Below is the diagrammatic representation of strategic model of the company.
(Betz, 2018)
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Figure 5: Strategic business model of Berkshire Hathaway
According to above model the output of capital of various business portfolio of the company
provide profit for holding company. “The outputs of resource of holding company provide input
capital into Production Company for its purchase by holding company”. The insurance
companies in the portfolio fees generate capital for the company as a holding company to
purchase more firms without creating unnecessary pressure of excessive debt on production firm.
Further, Buffet has not split the company share, its price ranges from $100000 to $200000 per
share, therefore making it difficult for hedge fund operators to take control from Buffet as they
cannot buy much share at this price.
Key strategic values of the company are imbibed in its name only. BERKSHIRE represents
budget conscious, reputation, and kinship, and self-starter, hands off, investor savvy,
rudimentary and eternal. For instance GEICO one of major subsidiary of the company sell auto
insurance directly to customers to cut different sales commission charges and provide service at
low cost. According to Buffet, it takes 20 years to build a reputation but only few minutes to
break it; he states he can bear monetary losses but not reputational loss. Solomon brother was
once a vulnerable firm due to its involvement in bond market scandal but with Warren buffet
high ethical standard and reputation, it helped in overcoming the problem. Integrity is a moral
value that helps in attracting profit. On hand off represent autonomy to managers to work
according to their strategies (Cunningham, 2014).
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Financial analysis
Figure 6: Five year financial analysis of Berkshire
(Macrotrends.net, 2018)
Above diagram represent five year ratio analysis on the company to understand its financial
position, strategic success or failure.
Figures represent year 2014, 2015 and 2016 were high perfuming years however since last 3
years figures are showing a downtrend (Berkshire Hathaway, 2018).
Interpretation of result
Huge information is collected on company strategy, its culture, role of leadership, its strategic
model, financial position. It is clear that top management leadership is the key behind
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organizational success. There is no single model applicable in this company; rather complete
autonomy is given to various subsidiaries and managers to operate to gain maximum return.
However, certain core values that shape all business decision include long term perspective on
business decision, above average return, trust and honesty, open and innovative culture (Sorkin,
2014). Top management does not try to control everything; rather they try to buy a subsidiary
with strong management. Another key strategy is business diversification in different sectors
from insurance to construction, energy, much more; it helps in subsiding risk and earning from
different sources. Industry attractive is high but it is a complex industry, Berkshire Hathaway has
made its distinct market position through its innovative cultural practices.
Future challenges
It is among top financial companies worldwide. However, it has shown steel sell off this year
with 13 percent fall in market share with 11 percent decline in S&P 500, financial Select Sector
SPDR has fell by 19 percent. It shows decline in holding value of company in different business
and companies like Apple, Coco-cola and others. Though analyst shows positive revenue growth
by 3.5 percent in year 2019 and 4 percent in year 2020. However, Berkshire business is complex,
there are several revenue sources from different business, and last year major income was from
insurance business (77 percent) and rest from other business. But investors are worried about
industries it operates in, for example insurance SPDR id down by 14 percent from September.
Presently company is trading at low valuation. It trades at 1.8 times of book value and it is at
lower range since 2012. Another challenge is heightened volatility, option market shows neutral
perspective on the company, and it forecast its share price rise or fall as much by eighteen
percent. However, with the help of long-straddle option strategy, at strike price of $195 stocks
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are fairly even. Market challenge also includes poor performance shown in technical charts for
class B stocks of the company. They encounter steeper loss, failed at technical resistance and
shows bearish technical pattern. There is huge volatility in the market, which might make
insurance and transportation shares vulnerable in condition of poor economic scenario in coming
years. Technical analysis shows long term risk due to losses that company encountered in its
equity holding such as Apple, Wells Fargo etc. (Kramer, 2018).
Conclusions and Recommendations
To improve market position, company is planning to make its stock buyback policy flexible.
Above analysis helped in understanding business model and strategic system within Berkshire
Hathaway, world largest financial investment firm. Company has strong corporate culture that
will ensure sustainability beyond Buffet. Five year ratio data shows strong financial position of
the company. Key strategies of the company include turning intrinsic values into economic
values. There is need for on-going reinvestment to maintain such robust culture in long run.
Company focus on value investing at discounted price. Merger and acquisition is prime business
strategy used for expansion, with business diversification in different industry and market.
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