Robert Heller of www.thinkingmanagers.com looks at the secrets behind the success of Warren Buffett.
The Buffett way of business management
The once obscure business of Warren Buffett, Berkshire Hathaway, might be a strong candidate for the prize of World’s Best Company. That means Buffett is a prime contender for World’s Best Manager. That epithet can be added to his undisputed title of Best Financier, Investor or Allocator of Capital - whatever name you prefer for the activity which raised Buffett to his great prominence.
The business management skills demonstrated by Buffett’s example and words are perfectly teachable and imitable - which raises another powerful and valuable question: if the winning methods are so effective, why does Buffett have so few imitators?
This is particularly surprising when you consider the range of Buffett’s successes. They cover such weighty topics as: how to select winning investments (shares, etc.); how to find and purchase takeover targets; how to manage diversified investments; and how to optimise success in the long term.
Don’t be fooled by the apparent simplicity. Not only is Buffett an incredibly intelligent man; he has unrivalled experience in every aspect of his craft, both in day-to-day experience and in intellectual foundations.
By no means has Berkshire been static. Actually, its decisions have had deep consequences on the scale and profits of the enterprise. Long term or short, the cash is derived from sound managerial practice on all grounds. There are only three ‘musts’, but how do you fair in these tests?
1) Is management rational all the time?
The final game is quite irrational. The average company will imitate the practices and policies of its rivals in the same business without so much as a study of the sense or suitability. This should never happen in Buffett’s own empire, partly because it isn’t an empire (units are wholly independent) and partly because his whole business management ethos is based on contrarian ideas.
As Buffett observes, “the big thing” is always the rationality. Simply take the rational course and you’ll discover that you have “the ability absolutely to do anything [he does] and much beyond”. IQ and talent are likened to the horsepower of the car. The output is “the efficiency with which that motor works” - that can only come with rationality. It’s impossible to quibble with simple Buffett arguments like “a lot of people start out with 400 HP motors but only get 100 HP of output. It’s way better to have a 200 HP motor and get it all into output”.
However, ask yourself why, being clever as you are, you fail by several HP to equal a Buffett performance level? What’s behind all that waste? People acquire bad habits over time, and “the chains of habit are too light to be felt until they are too heavy to be broken”. Buffett goes for Nurture over Nature - we are what we make of ourselves and possess the power to change. But there lies another paradox. Your own good rules will lead you to test your own actions and their consequences, which will invariably bring about change. Your unchanging mode is to change when you need to - because your reason says so.
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