generic Warren Buffett on How Good Managers Can Make or Break a Business
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Today, Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) is one of the world's largest conglomerates, with more than $700 billion of assets spread across different companies and industries. As the business has grown, its CEO, Warren Buffett (Trades, Portfolio), has increasingly distributed his responsibilities to other managers.
While this has almost certainly been a good decision, as having just one man in control of such a large business would be entirely irresponsible, it also means we learn much less from his annual letters.
Indeed, back in the 1970s and '80s, Buffett spent more time analyzing the companies he was buying and explaining why he was buying them in his annual shareholder correspondence.
This is why I think we can learn more from these early annual letters than from more recent ones. These early annual letters dig deeper into different topics and provide more analysis on the individual businesses, their strengths, weaknesses, opportunities and threats.
Buying great managers
In his 1986 letter to investors, Buffett used a great deal of space writing about why he liked to buy businesses with great managers.
At the beginning of the letter, the Oracle of Omaha wrote, "Charlie Munger (Trades, Portfolio), our Vice Chairman, and I really have only two jobs." He went on to add that the first job is to "attract and keep outstanding managers to run our various operations."
Buffett continued to write that this was not hard, as all he had to do was stay out of their way:
"This hasn't been all that difficult. Usually the managers came with the companies we bought, having demonstrated their talents throughout careers that spanned a wide variety of business circumstances. They were managerial stars long before they knew us, and our main contribution has been to not get in their way. This approach seems elementary: if my job were to manage a golf team - and if Jack Nicklaus or Arnold Palmer were willing to play for me - neither would get a lot of directives from me about how to swing."
The other job Buffett and Munger had to do was make sure they allocated capital efficiently, seeking out the best businesses with the highest return on capital and not overspending on these acquisitions.
Compared to finding the right managers, allocating capital is relatively easy. Good managers are few and far between, but Buffett has been able to find them over the years.
Indeed, in the CEO's 1986 letter, he took a look at some of his business stars of the time.
These stars were Stan Lipsey, manager of the Buffalo News and Murray Light, the editor, Rose Blumkin, the founder of the Nebraska Furniture Mart, Chuck Huggins, the long-time manager of See's, and Ralph Schey, manager of Scott Fetzer.
Reading through Buffett's comments on these managers, they all seem to have one thing in common: a relentless focus on the customer. Buffett wrote:
"Chuck [Huggins] rightfully measures his success by the satisfaction of our customers, and his attitude permeates the organization. Few major retailing companies have been able to sustain such a customer-oriented spirit, and we owe Chuck a great deal for keeping it alive and well at See's."
If one is looking for a single characteristic that can define a good manager or quality that can help a business stand out, this is it. Good customer service is at the core of all non-monopoly businesses. There are some great examples of this outside of Berkshire.
Amazon.com Inc. (NASDAQ:AMZN) is the best example. The company's relentless focus on keeping costs low and improving customer service has enabled it to take over the retail industry.
Another example is Apple Inc. (NASDAQ:AAPL). This consumer electronics business might not always have the customers' best interests in mind, but its commitment to improving and developing its products to make it the best it can be while streamlining the customer experience is the reason why it has grown to the size it has.
This article first appeared on GuruFocus.
