Berkshire Hathaway and General Electric Company

Case Analysis: Berkshire Hathaway and General Electric Company

Introduction

General Electric Company (G.E.) and Berkshire Hathaway are both American multinational companies which are both conglomerates. The successes of these two companies have often been associated with them having similar corporate strategies. Yet, their financial performances have always been dissimilar between 19997 and 2017. For the last 20 years, Hathaway has performed much better as compared to G.E. This report analyses different reasons; from leadership to acquisition approaches to find out why Hathaway leads the pack as the most successful company more than G.E. Berkshire Hathaway’s carefree attitude in its operational industry, coupled with strategic management and leadership have increased its financial productivity between 1997 and 2017.

Overview and Background of the Companies

The backgrounds of both companies are quite vast. General Electric Company has its headquarters in Boston but is incorporated in New York while the Berkshire Hathaway is headquartered in Omaha, Nebraska (Lu, 2016). Thomas Edison established G.E. in 1892. Between 1997 and 2017, the company was under the leadership of CEO Jeff Immelt, who had been quite influential in the accomplishments of the company (Casey and Pearce, 2018). Also, under his leadership, the company managed to increase its total number of workers. However, the number is below that of Berkshire; G.E. has 313,000 employees worldwide while Berkshire Hathaway has 360,000 employees worldwide (Hartwig, 2019).

Conversely, Berkshire Hathaway was founded and is still run by Warren Buffett in 1965, but started as a cotton mill in 1888. Both companies are unbeaten in their various fields of operations. General Electric Company deals with electrical products, electric engines and the installation of such devices in the healthcare, education and residential homes and institutions. According to Hartwig (2019), Berkshire Hathaway started as a manufacturing company as previously stated but later evolved to a company that mainly acquires other companies for the sole purpose of improving their operations in their industries. Albeit old, these two companies have had numerous successes in the past.

Analysis of the Companies

Leadership

The vast leadership experience of Warren Buffet and his leadership style have managed to keep Berkshire way above General Electric Company. Warren Buffett is the current Chief Executive Officer of Berkshire Hathaway. Apart from being the CEO of Berkshire Hathaway, he is also an investor and a philanthropist. Buffett has a lot of experience as an investor, and his vast leadership experience is shown in the 20 years at the helm of Berkshire Hathaway (Hartwig, 2019). The leadership style of Buffet has also been attributed to the 20-year success of Berkshire Hathaway Company. Buffett’s leadership style is known as the Laissez-Faire, also identified as “delegative leadership” (Lu, 2016). However, this leadership style is known to cause lower levels of production. Buffet none the less has been using this style to increase the company’s resources so that employees and their teams can have enough resources to increase their productivity (Hartwig, 2019). Buffett selects workers who are motivated and have unlimited skills and leaves them to come with solutions to the company’s problems. His leadership style has focused on long term goals of the company as opposed to short term goals.

The leadership of G.E. was, however, dissimilar to that of Berkshire Hathaway. Between 1997 and 2017 the company was under the leadership of Jeff Immelt. His 20 years reign as the leader of G.E. received a lot of praise, and the company had a lot of success. The leadership style of Jeff Immelt was a transactional leadership style in which he promoted a strict compliance of employees through rewards and punishments (Casey and Pearce, 2018). By using a rewards and punishments system, he was able to keep employees motivated but for a short period. These two leadership styles were different because the laissez-faire motivated employees while the transactional style somehow diminished the morale of employees, thereby preventing them from showing their true potential (Casey and Pearce, 2018). These affected the long term financial performance of the two companies. At the same time, the laissez-faire motivated employees to be creative and work harder, thereby increasing the financial productivity of the company, the transactional style may have prevented employees from being creative since they feared being punished. Therefore the financial productivity of G.E. lagged behind Berkshire’s.

Culture

Culture is a determinant of a company’s success and the different cultures of Berkshire and G.E. companies for 20 years have separated them in terms of financial performance. A company’s organizational culture or corporate culture creates the customs, conducts and standards that have an effect on employee behaviors, particularly in executive decision-making processes (Lu, 2016). Berkshire culture is centralized around trust. Trust takes a lot of time to nurture but only takes a second to destroy, therefore, Berkshire has been nurturing the culture of trust in each employees by offering them confidence through minimal supervision (Lu, 2016). By doing this each employee in the company since 1997 has had a feeling of being valued and so other values such as integrity, focusing on the customer and acting morally have always come naturally to Berkshire’s employees.

In contrast, the organizational culture of G.E. has often appealed to the external environment (customers and to an extent, investors). Its culture of customer-centric simplification was developed because of modifications in the business and its surrounding. For instance, G.E.’s customer-centric cultural method has been catering to the changing customer needs and penchants linked to technologies that are disruptive and equivalent trends in the industry (Casey and Pearce, 2018). These differences have, in the 20 year period seen different financial performances in the two companies. Berkshire’s culture of trust is internal to the business, thereby motivating employees to do what is necessary to increase financial productivity since they have the confidence of the organization. However, for G.E. their culture values customers more than the employees, therefore, it is assumed that during the 20 years, employees were devalued and so did not do well to improve the financial productivity of the company. It goes to show that organizational culture is vital to a company’s success.

Compensation

The compensation strategies or plans of Berkshire and G.E. are quite different. Berkshire’s compensation plan has often been referred to as weird since the top leadership of the company receives less payment when compared to the lower administration. For instance 2017, the CEO, Warren Buffet and the Vice-Chairperson of the board, Charles Munger received a payment of $ 100000, while the senior vice president received $2288500. This payment system has been the norm at Berkshire, since it believes in the principle of being paid what one has worked for, instead of being paid according to ranks (Hartwig, 2019). Contrastingly, G.E. since 1997 has been compensating its executives according to rankings and even giving those bonuses yearly. The compensation system was however, scrapped off last year (Casey and Pearce, 2018). Through its compensation system, Berkshire for 20 years has been finically stable, and productivity since finances were compensated well while G.E. financial system dwindled, mainly because of additional executive bonuses.

Management Oversight

While Berkshire uses a decentralized system of management, G.E. uses a centralized one. CEO Buffet has strong belief in a decentralized management system and has been using it since 1997 to 2017 and uses it till to date. On significant outlay of the system is the CEO consults Vice Chairman Charlie Munger, and, in the past decade, the CEO employed two investors; Todd Combs and Ted Weschler. These two were assigned to manage approximately $10 billion each of Berkshire’s $122 billion securities portfolio (Hartwig, 2019). This management style leaves management to lower levels of leadership. G.E.’s management style has been a centralized system where the then CEO Jeff Immelt made all decisions and made sure other lower levels of leadership implemented his decisions (Henderson, and Evans, 2000). This type of oversight prevents the top leader from getting meaningful advice from the juniors who have a clear outlook of a company’s activities. By adopting such a system, G.E. was not able to upscale its financial numbers since bad authoritative, and the CEO may have enforced bad decisions without proper consultations (Henderson, and Evans, 2000). Unlike G.E, Berkshire’s numbers did well for 20 years since Buffet allowed decisions to be made by lower executive leaders who had a clearer outlook of things than him (Casey and Pearce, 2018). Also, proper consultations may have been significantly used in the management style.

Approaches to Acquisition

Berkshire does not have specific acquisition strategy. The CEO at one time said that the company acquisition strategy was based on what makes sense for them. None the less, their strategy has been referred to as the acquisition-driven growth strategy. This strategy compares active and passive investments, and so acquires companies based on these two factors while choosing the former. Conversely, G.E. has used an acquisition approach which seeks to acquire companies that operate in their industry or similar industry of electric technology (Casey and Pearce, 2018). Even though they have acquired a lot of companies in 20 years, their financial incomes have not been able to match Berkshire’s since their strategy restricts their operational areas and activities to electrical. Berkshire’s strategy has increased its financial revenues immensely since they acquire companies from all industries.

Conclusion

The seeming lack of restrictions in leadership, management, compensation, culture, and in approaches of acquisition in Berkshire Hathaway have placed it way above G.E. in the last 20 years. G.E. Company has been conservative, adhering strictly to conventional management leadership styles for 20 years while Berkshire has been carefree for 20 years but it has emerged as the more profitable company. It, therefore, shows that companies should embrace change and find new ways to function just like Berkshire did for 20 years.

References

Casey, D., & Pearce, D. (Eds.). (2018). More Than Management Development: Action Learning at General Electric Company. Routledge.

Hartwig, K. (2019). Magic and the market: A case study of Warren Buffett and shareholders of Berkshire Hathaway. Culture and Economy, 89-98. doi:10.4324/9781315195469-6

Henderson, K. M., & Evans, J. R. (2000). Successful implementation of Six Sigma: benchmarking general electric company. Benchmarking: An International Journal.

Lu, Y. (2016). Inside the Investments of Warren Buffett: Twenty Cases. Columbia University Press

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