Question

Take a look at some the brands/companies that Berkshire Hathaway owns:

Comment on the structure of the portfolio firm. Why is structure important and explain why it matters in this particular context.

Answer 1

Berkshire Hathaway owned companies were unique in terms of diversity. They owned companies of insurance operations, manufactured housing, regulated gas and electric utilities, wholesale distribution and other companies of retail, finance and manufacturing. The structure followed by the firm for all these companies was a model of decentralization where the firm did not hold the authority over the firms but let the local managers be responsible for the business performance. They did not follow strict controls to ensure management performance but instead gave the company authorities full freedom to work and get the performance and goals in their own way. They only required a financial statement from the companies at the end of each month and free cash flow generated by operations. The managers formed their own strategies and had their own methods of operations and profits in the companies they looked after.

The structure is one important aspect on which the success of a business lies. A structure may be appropriate for one type of firm and not for another. And a wrong structure can bring a lot of issues in the operating of the firm which can affect its growth. Hence understanding what type of structure, how much control and authority a firm should follow in the structure. In a firm like Berkshire Hathaway where it owns several companies and all are of different businesses, it would be very difficult to keep a centralized structure. Moreover, a firm with diversity runs best if the operations are decentralized as the managers are not shown authority and controlled but given responsibility and freedom to achieve the business goals in their own way. This makes the managers feel more obligated to work for the company's profits and growth and operate effectively without a centralized control.