Monday, May 23, 2011

Feeding Off Buffett’s Formula

Warren Buffett’s management record is even more successful than his phenomenal investment record. He uses a management strategy that is surprisingly simple yet promises successful outcomes to newcomers and seasoned professionals alike.

Warren Buffett is widely regarded as one of the most successful investors in the world. Often referred to as the "legendary investor," he is ranked the third wealthiest person in the world as of 2011. He is also the primary shareholder, chairman and CEO of Berkshire Hathaway, a conglomerate holding company that oversees and manages a number of subsidiary companies.

Why Emulate Buffett’ Management Style?

Besides being a genius at investing, Buffet is also a genius of a manager. His record speaks for itself. His company, Berkshire Hathaway, employs 233,000 employees around the globe with over eighty-eight CEOs of different companies reporting directly or indirectly to him. The company’s operational annual net income grew from USD18 a share in 1979 to USD4,093 a share in 2007. This equates to a compounding annual growth rate of 21.39 percent - substantially better than Berkshire’s investment portfolio that grew at an annual compounding rate of 19.78 percent in the same period. This record clearly illustrates that Warren and his managers are doing a fantastic job of minding the store.
What management philosophy underscores this success? Mary Buffet and David Clark give us an insider’s view of his managerial style by culling his most important strategies into a book titled ‘Warren Buffett’s Management Secrets: Proven Tools For Personal And Business Success.’ Here his managerial philosophy is distilled into five primary segments that combine to create a winning formula:

1. Pick the Right Business

Buffet is clear on the fact that not all businesses are created equal. The first step to success is to own, manage or work for the right business with the right economics working in your favour. To zero in on the right businesses look for those that tend to burn considerably less capital than they earn. This is usually because they produce a brand-name product that never has to change (e.g. Coca-Cola ) or because they provide a key service which gives them better profit margins that amounts to a durable competitive advantage.

2. Delegate Authority

If there is a single management skill one could pin on Buffett, it would be his willingness to delegate authority way beyond boundaries that most CEOs would be comfortable with. In his words, “We delegate almost to the point of abdication.” The norm of managers is to try and control as many events and people as possible. But micromanaging leads one to juggle too many tasks at once and the end result is neglect or lack of competence in undertaking many of these tasks.

3. Find A Manager With The Right Qualities

When picking managers, he seeks out people with an internal locus of control. These are people who are in control of themselves and their environment, who take responsibility for their failures and in the process learn from their mistakes. He also looks out for people who love what they do as these personalities end up going the extra mile and inspire others to do the same. He places emphasis on honesty too. As he puts it, “You don’t want to be in business with people who need a contract to be motivated to perform.” Another management trait Buffett values is cost consciousness as a way of life and not just when the business is failing. He determines this criteria by seeing how managers handle the seemingly little costs. He explains, “If managers aren’t disciplined on the little things, they will probably be undisciplined on the large things as well.” Lastly he looks for a manager who is a great investor, responsible for investing the firm’s money in people, products and new businesses with a long-term perspective in mind. (Buffett is a firm critic of a short-term focus as he believes it tends to make managers poor allocators of resources.)

4. Motivate Your Workforce

In this respect, Buffett is a student of the Dale Carnegie school that uses praise and criticism in a very specific way. His rule is simple: praise by name but criticise by category. As an example, he is quick to praise an individual banker but if he is unhappy with the banker, he criticizes the banking profession as a whole. And if he has to criticise someone personally, he makes it a point to praise the person first. It creates a sense of trust and the recipient is subsequently more likely to accept and act on constructive criticism as a result. When he wants something done, he frames it in such a manner that he speaks to the other person’s wants and needs and therefore gets rewarded with the appropriate response.

5. Buffett’s Managerial Axioms For Different Problems

“Leverage is very tempting and always leads to trouble.” Buffet is an old - school manager reluctant to use debt to improve earnings.

“Only in fairy tales are emperors told that they are naked.” This one pertains to the danger of managers surrounding themselves with sycophants. Buffet’s solution is to surround himself with as few people as possible and when he does, they are people with a great track record of making good calls when they are called on to do so.

“We rub our noses in mistakes of omission.” This relates to missed opportunities. Even the best managers miss opportunities, but they ask the hard questions as to why they missed them. This primes them to spot and seize a good opportunity the next time it turns up.

Source: Calibre, May 2011

No comments:

Post a Comment