Berkshire Hathaway's Strategy - Essay Example

? Berkshire Hathaway Introduction Berkshire Hathaway is an American multinational company. It holds several subsidiary companies. It is a publically listed company. The company holds its businesses of insurance group, utilities and energy group, manufacturing, service and retailing group, financial products and also holds a stake in many well-known and established companies. Berkshire Hathaway has a very diverse conglomerate portfolio. Diversified investments, property and insurance are the products offered by the company. The company started off with the core business of textile but later diversified its business into new industries and started offering new products. The company is now a holding company that holds many diverse subsidiaries. What is the company’s Mission Statement? What is the company’s Vision Statement? Who are the Primary Stakeholders of the company? Primary stakeholders are those who have a direct interest or stake in the organization. The stakeholders of almost all the companies are same. Stakeholders can affect or be affected by the actions of a business. The primary stakeholders of Berkshire Hathaway include the owner of the company, the employees, its customers, suppliers, its creditors, the trade unions, its stockholders and the government. The employees of Berkshire have a great stake in the organization because they are directly linked to the company’s performance (BERKSHIRE HATHAWAY, INC 2010) Similarly the stockholders share the same stake in the business of Berkshire Hathaway. What are the five forces of Competition and how they impact on the company? The five forces of competition present in the environment and that affect the competition include the competitors of a firm, bargaining power of suppliers, bargaining power of the customers, new entrants and the substitutes available. Competitors of a firm result in rivalry. All other forces whether its suppliers’ bargaining power or the customers’ or the threat of new entrants or the threat of new substitutes, all lead to rivalry (DAVID, F. R. 2005) Berkshire Hathaway is strong and well-established firm. It is large in size and instead of being threatened by the new entrants, and because of its size and position in the market it sets a barrier to entry for the new entrants. Berkshire Hathaway has very good relations with its suppliers. Plus the company owns so many subsidiaries that it has a large numbers of suppliers, thus resulting in a low bargaining power of the suppliers. Looking at the customers as a force, they have a high bargaining power as opposed to the suppliers. Berkshire Hathaway honors its customers in every possible way. Then comes the threat of the substitutes. Berkshire has a very diverse range of business activities and it offers so many products to so many different markets. There is a threat of substitutes but Berkshire Hathaway has a very strong financial and capital position that whenever there is an alternative investment available in the market, it does not hesitate in acquiring that alternative. Berkshire faces competition but the competition is not very huge because the number of firms present in the holding industry is not very large. There are only few holding firms that equal the size of Berkshire Hathaway. So the competition is low as compared to other industries. All the forces of competition lead to rivalry, but in the case of Berkshire these forces are not that intense and thus do not result in huge rivalry. SWOT Analysis SWOT analysis is a tool that is used to look into the strengths and weaknesses of the company. It helps to determine the opportunities and threats posed by the external environment. Basically the analysis sets a direction for the organization as to how it should use its strengths to minimize the threats posed by the external environment and also to make use of the opportunities in order to overcome its weaknesses. Though Berkshire Hathaway is well established holding company but still it is not possible that it won’t have any weaknesses or threats. The following analysis will look into the strengths and weaknesses of the company and will also explain the threats posed to the company and the opportunities that the firm can avail. Strengths Berkshire Hathaway has a very good reputation as a company. Its top management is famous for its reputation and leadership. The financial position of the company is very strong which acts as great strength of the company (2003) In addition Berkshire Hathaway has a strong capital position. The company holds a diverse range of subsidiaries with different business activities. This diversity of portfolio reduces the risk and acts as strength for the firm. The diversified portfolio ranges from property and causality insurance to services and retailing activities. The company has had a very strong and consistent top and bottom line growth rates. Strengths are the internal factor of the firm. Weaknesses Berkshire has invested in many companies. In certain investments the company experiences a slower growth rate. These investments are not small-scale soothe slower growth rate results in a weakness of the company (2003) Another factor that contributes towards the weaknesses is that the company stock is inaccessible to most of the people. Because the company experiences slower growth rates in certain investments, it also experiences declining cash flows from these investing activities which further add on to the weaknesses. Then there is one subsidiary of Berkshire Hathaway McLane. McLane alone accounts for almost one-third of the company’s revenues and one-third of McLane’s business is tied to a single company and that it Wal-Mart. This overdependence of Berkshire on another company results in a weakness. Opportunities Opportunities are created externally and a firm can use its strengths to avail the opportunities available in order to reduce its weaknesses. The company has started investing in the energy industry. The alternative energy investments provide an opportunity for the firm. Rather than investing the conventional energy companies, it can go for alternative energy investments. Then acquisitions also present with an opportunity. The company has identified its areas of investments. Rather than going for setting up new companies, Berkshire Hathaway can acquire already existing companies which will prevent the company from incurring setup costs. This is also more likely to work because the acquired firm will then carry the name of well established Berkshire Hathaway. Threats The external environment is never stagnant. It always keeps on changing. Thought eh changing environment always brings along opportunities but it poses serious threats to the firms. Similarly Berkshire Hathaway operates in a violent environment and faces some serious threats. The company faces a threat of a financial and an economic turmoil. Then it also faces a threat if the potential capital requirement changes both in the US and Europe which are the backbone of the world’s economy. The worldwide weak consumer environment also poses a threat to the company’s business activities. Natural disasters are also a factor that can threaten the business of Berkshire Hathaway. Another factor that poses threat is that of high interest rates. High interest rates mean lower investments. The holding company also deals in investments and thus the industry will suffer due to high interest rates. How the company may capitalize on its strengths and opportunities, and minimize its weaknesses and threats? The company should try to achieve a strategic fit between its internal environment and the external environment. The company should focus on maintaining its strengths. For example the company’s financial and capital position is its strength, so it should work hard to maintain that strength. The company should use its strengths to avoid threats and should avail new opportunities available to overcome its weaknesses. It should perform an internal and external audit after a certain period of time. Check for the loopholes and come up with new strategies to form new strengths, to avail opportunities available and to cope with the possible threats and weaknesses. What are the various levels and types of strategies the firm may use to maximize its competitiveness and profitability? Berkshire Hathaway is a large company. There are four levels of strategies that are present in large organizations (DAVID, F. R. 2005) Berkshire Hathaway pertains to all these levels of strategies. In large organizations like Berkshire, the corporate level is mainly responsible for the most effective and the most important strategy implementation. Rest of the levels is equally important for strategy making. The model shows four levels and it also means that people from each level are part of strategy formulation and implementation. So the firm may focus on all levels of strategies because they are equally important (DAVID, F. R. 2005) When diversifying business, the firm should focus on the corporate level strategy. As mentioned earlier, the firm is a holding company with a diverse range of subsidiaries. It has used many strategies to gain competitiveness and profitability (MILES, R. P. 2002) The firm can use strategies like horizontal integration, market penetration, market development, related diversification, unrelated diversification, retrenchment and divestiture (DAVID, F. R. 2005) Retrenchment and divestiture are important strategies that the firm can use in order to lay off those divisions and business activities that are causing problems for the business with decreased revenues and high operating cost. Corporate Governance Corporate governance is a set of rules, laws, processes and policies that together form a code through which the business activities should take place within the firm. It helps to determine the accountability of different people involved in the business. Berkshire Hathaway is among the well-managed companies of the world (FORBES 2011) At Berkshire there are proper committees that have been formed to hire the board of directors (BERKSHIRE HATHAWAY, INC 2011) At Berkshire it’s not like that board of directors are not accountable to anyone. An annual evaluation of the board of directors takes place at Berkshire by the committees that are responsible for selecting them (BERKSHIRE HATHAWAY, INC 2011) This is done in order to see whether the board of directors has fulfilled their duty etc. The company is currently facing some serious corporate governance issues because the owner of the company himself suspended one of the members of the board of directors and did not comment about his actions later. This created a concern among the shareholders and other people who were a part of the board of directors or were either accountable to them. This emerged as a problem because then an issue of trust was under concern, whether the top management or the directors should be trusted or not. It also raised a concern whether the top management is working for their benefit only or for the benefit of all the stakeholders. References FORBES (2011). Corporate Governance at Berkshire Hathaway: Maybe It’s Not All That BERKSHIRE HATHAWAY, INC (2010). Annual Report 2010 MILES, R. P. (2002). The Warren Buffett CEO: secrets from the Berkshire Hathaway managers. New York, John Wiley & Sons. (2003). Berkshire Hathaway, Inc. SWOT Analysis. Datamonitor Plc. DAVID, F. R. (2005). Strategic management: concepts and cases. Upper Saddle River, N.J., Pearson Prentice Hall. BERKSHIRE HATHAWAY, INC (2011). Corporate Governance Guidelines: as amended on January 7, 2010 < http://www.berkshirehathaway.com/govern/corpgov.pdf> Read More