Berkshire Hathaway Case study Analysis & Solution

Introduction

An American multinational company, Berkshire Hathaway Inc. has its main office in Omaha, located in Nebraska. It is a multifaceted holding firm with subsidiary companies involved in manufacturing, retailing, services, energy distribution as well as generation, freight rail transportation, and insurance (Berkshire Hathaway Inc. 2019). Insurance is its primary line of business and source of funding, and it invests all the retained premiums or the float in a diverse range of equity positions, subsidiaries, and other securities. Warren Buffett, the company's chairman and CEO since 1965, and Charlie Munger, the vice chairman since 1978, are noted for their support of value investment ideas to the company. The company partially owns firms like Apple (5.57%), Pilot Flying J (38.6%), American Express (18.8%), Kraft Heinz Company (26.7%), The Coca-Cola Company (9.32%), and Bank of America (11.9%) (Berkshire Hathaway Inc. 2019). Berkshire is one of the top-ranked firms enlisted in the Forbes Global 2000, and it evaluates both fundamental data and market value. It also constitutes the seventh largest component of the S&P 500 index. Due to Buffett's decision not to split the stock, its class A shares have had the highest price per share of any publicly traded corporation in the world, which reached up to $500,000 in March, 2022.

Vision and Mission Statement of Berkshire Hathaway

The vision statement of Berkshire Hathaway is “to be the provider of choice in our communities for comprehensive real estate and financial solutions.” The integrity of this organisation is highlighted through this statement. The statement has two components- Financial solutions, and provider of choice (Comparably 2019). Berkshire Hathaway owns a number of multinational corporations that have a major impact on a wide range of industries. The organization recognises the requirements of its clients and directs them to the best locations where they may get the best assistance.

The mission statement of Berkshire Hathaway is “to deliver the right parts exactly on time, exceed our internal and external customer requirements through continuous improvement, and provide a place for hard-working, dedicated, knowledgeable and ethical people who believe in the company.” The statement indicates that the organization prioritises control and leadership at the core of all its initiatives. The statement has two components- improving lives, and exceeding expectations. From the first component, it becomes clear that Berkshire Hathaway places a great importance on the advancement of everyone with whom it interacts, especially its employees. From the second component, it becomes clear that the organisation is proactive and dynamic in order to improve while satisfying the requirements of its customers. Its mission statement puts a strong emphasis on excellent corporate governance that respects everyone.

Vision and Mission Statement of Berkshire Hathaway

Berkshire Hathaway Inc. Situation Analysis

The company has a good portfolio with its diversified business and several investments. Warren Buffet has been a boon to the company for several decades, and has held the company structure firmly.

Industry Structure and economic feature

Under the corporate structure of the Berkshire Hathaway, Warren Buffet has consolidated a wide range of firms. It includes the major structure Berkshire, its reporting segments, and its subsidiaries such as Berkshire Hathaway Manufacturing, Service, and Retailing Segment, Berkshire Hathaway Insurance Segment, Berkshire Hathaway Utilities and Energy Segment, and Berkshire Hathaway Railroad Segment.

Berkshire Hathaway Strategic

i) Business Level Strategies

The business model of the company is straightforward but effective- a closed-end fund with a policy of long-term close engagement and commitment with the firms invested in, whose shares can only be redeemed by selling to any other investor. The mutual trust between the organisation, its operating firms, and its investors is the basis of Berkshire's success. It is a very different outlook from the concept of a company as a hub for contracts between people who, at the time, consider it advantageous for both parties to collaborate together on a project. Warren Buffet has the habit of reading the previous annual reports before investing. He conducts in-depth research before taking thoughtful, infrequent action.

ii) Corporate Level Strategies

Berkshire Hathaway makes investments in businesses with a long track record of delivering dividends. Buffett's policy is to invest these dividends rather than paying them to shareholders of Berkshire Hathaway.

Competitive Analysis and Advantage in the industry

The industry in which the company conducts business is quite competitive. Deregulated motor carriers, railroads, pipelines, ships, and river barges in certain regions, may put pressure on service levels and prices, depending on the market. The market for time-sensitive freight is impacted by the existence of sophisticated truck lines with subsidised infrastructure, and faster rate of delivery. The Union Pacific Railroad Company is the main rail rival of Berkshire. Numerous markets where Lubrizol competes see the company as the leader in the sector. The three main companies that compete with it for lubricant additives are Afton Chemical Corporation, Infineum International Ltd., and Chevron Oronite Company. Price, customer service, and product quality and style are the three main areas where businesses compete. The promotion and pricing strategy of the company has advantages over the product of others.

SWOT Analysis

Strengths

· High growth rate (Fern Fort University 2023)

· No debt

· Strong liquidity

· Sound investment ideas

Weaknesses

· Increased volatility

· Lack of successors (Fern Fort University 2023)

· Dependency on a handful of people

Opportunities

· Bargain hunting

· Investment in emerging markets like China and India

Threats

· Cyber attacks

· High competition

· Regulatory changes by the government in the country of operation

PESTLE Analysis

Political Factors-

ü Political stability of the country (Swot & Pestle 2023)

ü Intellectual property rights

ü Level of hostility

ü Minimum wage

ü Rate of corruption

Economic Factors-

ü Unemployment

ü Exchange rate

ü Efficiency of financial markets

ü Interest rates

ü GDP growth rate

Social Factors-

ü Educational background of employees

ü Health standards

ü Population demographics

Technological Factors-

ü Cyber attacks

ü Improvement in blockchain technology

ü Social media usage

Environmental Factors-

ü Rate of natural disasters

ü Environmental regulations

Legal Factors-

ü Regulatory changes by government

ü Data protection laws

Target Market Analysis of Berkshire Hathaway

i) Geographic Characteristics of Market- Because potential customers have varied cultures, administrative systems, and preferences geographic segmentation is quite effective for Berkshire Hathaway in the overseas markets. It is also wise to conduct regional segmentation if the transportation cost is a crucial issue in the delivery, the costs of providing clients in various places would vary greatly (EMBA Pro 2023).

ii) Demographic Characteristics of Market- Given that Berkshire Hathaway's products offer a greater value proposition, it must divide its customer base based on two primary demographic factors- life cycle stage and customer's income.

iii) Psychological Characteristics of the Market- The potential clients can be split into various segments by Berkshire Hathaway using psychographic segmentation based on- consumption opinion, buying patterns, leisure activities, personality characteristics, and many other factors. People have a variety of psychographic traits depending on their life experiences and upbringing.

iv) Behaviours of the Target Market- The firm can focus on critical features with the use of behaviour segmentation, which is done on the basis of product uses, product knowledge, and attitudes. Higher rates of customer satisfaction and a high promoter score result from continuous engagement.

v) Strategies Appealing to Market- Berkshire Hathaway can employ the cross-market segmentation method, which involves identifying and pursuing similar consumers across markets. In order to describe and recognize the target groups and segments, it is important to aim to incorporate a number of features more accurately.

Marketing Mix of Berkshire Hathaway

i) Product Strategy (Product Mix)- The company has several products to earn revenue and does not rely on a single source (Mba Skool 2023).

ii) Pricing Strategy- It prices its products to obtain maximum value in the market.

iii) Promotional/ Advertising Plan- It promotes its products through print media, social media, and TV commercials.

Berkshire Hathaway Competitive Analysis

a) 4Ps’ comparisons with competitors

i) Product- The subsidiary companies of Berkshire Hathaway have several products like insurance, services in railway and logistics, food services, and grocery and beverage distribution. It also has financial products like manufacturing, furniture leasing, and transportation leasing.

ii) Price- It is one of the top financial institutions in the world. It serves the needs of numerous people. In a competitive market where Berkshire offers a wide variety of goods, price policies are subject to change.

iii) Place- Berkshire Hathaway seeks to provide its services at a reasonable cost. Though it has its headquarters in Nebraska, it owns a wide range of subsidiaries to function across the U.S.

iv) Promotion- The promotional strategy that they follow include discounts on their items like jewellery, furniture, and other consumer goods. They use social media platforms, TV commercials, and print media to advertise their products.

b) Strengths’ comparisons with competitors

Diverse portfolio
Sound investment decisions
No debt and string liquidity position
Consistent growth rate inspite of economic slowdown, according to the estimates of the last 5 years

c) Weaknesses’ comparison with competitors

Dependency on limited people
Lack of successor after Buffet
Increasing volatility

d) Organization’s Competitive Advantage

Diversification- It has several sources to earn its revenue.
Durability- All the subsidiary organisations have crossed the “50-year test”, thus, they have survived several decades (The Motley Fool 2023).
Numerous investments- The company has outlined a specific acquisition methodology through which they make investments without any fear. They know the ways to take risk and earn profits from it.
Leadership- Buffet’s leadership qualities are incomparable and it has led to the success of the company.

Key success factors

Operating costs and retained earnings- The earnings that the companies keep each year are, in Buffett's opinion, more significant than the dividends. Retained earnings should be evaluated instead of dividends since the investee firms can always repurchase shares, which raises the economic worth of investors' holdings with no additional effort on their part (Fs.blog 2023).
Financial fortress- The investment of the company in several firms and the securities like fixed maturity securities and treasury bills it holds act as financial fortress of the company. It has a minimum of $20 billion which helps to guard the organization from external calamities.
Insurance funds- Casualty and property insurers collect premium payments up front and make claims afterwards, leaving them with massive quantities of cash to invest for their own interest.
Trust- Buffet’s behaviour is good toward the employees, hence, people with innovative minds desire to work with the company.

Problems and Issues in Berkshire Hathaway Organization

Covid pandemic- The large shortfall in the year 2020 was caused by the COVID19 pandemic-related profit losses experienced by the majority of business segments of the organization (Investopedia 2022).
Credit Downgrade Risk- It is one of the pressing issues faced by the company. It had been placed in the Credit Negative Watch list by the credit rating agency, S&P, twice.
Lack of successor- The likelihood that no one could surpass Buffett's performance is one of Berkshire's biggest risks. Thus, the company administrators require to sit down and suggest some names to become Buffet’s successor.
Regulatory challenges- The U.S. government regulators do not consider the company as systemically important, hence, it has several liquidity requirements, and capital restrictions. These issues can make growth and profitability in the future more difficult, thus, hurting the future prospects of the company.
Climate risks- Due to Berkshire Hathaway's poor performance on several ESG metrics, it may be exposed to substantial climate risk. Warren Buffett has additionally rejected investors who want Berkshire Hathaway to take major action to reduce emissions of greenhouse gases.

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Berkshire Hathaway Case study