Berkshire Hathaway has only two main requirements for operating managers: submit financial statement information on a monthly basis and send free cash flow generated by operations to headquarters. For the large part, local managers are left to operate their businesses without supervision or corporate control. This gives the local managers more leeway to operate their businesses how they see fit. This method is in stark contrast to what many leading companies view as an effective management style. The decentralization of supervision has the innate risk of allowing management to engage in “self-serving behavior.” However, this decentralization allows the local manager a certain autonomy that does not exist in any other firm. In addition, this allows managers to take pride in the value their office adds to Berkshire Hathaway. This has provided a competitive advantage to Berkshire Hathaway and has been an effective style of management thus far.
Before the 2000s, Berkshire Hathaway had concentrated on large equity investments in publicly held companies. However, in the 2000s Berkshire began to concentrate on acquiring companies outright. Buffett claims that he makes acquisition decisions based on companies that: 1)Berkshire Hathaway can understand, 2) with favorable long-term prospects 3) operated by honest and competent people, and 4) are available at an attractive price. These “great” companies that Berkshire invests in are generally characterized by: high levels of free cash flow and by not requiring extensive investments of capital for expansion. In addition, most of these companies operate in a fairly stable environment so that their cash flows will be consistent in the long-term. Because these investments require less difficult investment decisions, Buffett views them as being few and far between. Due to this, Berkshire has to be ready to act and invest quickly.
Berkshire believes that it was purchasing the manager along with the business and, in fact,...
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