Note: Cunningham is a contributor as well as editor of the essays that Buffet wrote over the years, many of them included in Berkshire Hathaway’s annual reports as “Berkshire Hathaway Chairman’s Letter.” For those who really are serious about gaining a wider and deeper understanding business, this is a “must read.”
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An Essential Source for Business Wisdom
Over the years, I have read several of the essays that Warren Buffett included in Berkshire Hathaway’s annual reports. After reading two biographies of him (Alice Schroeder’s The Snowball: Warren Buffett and the Business of Life and Roger Lowenstein’s Buffett: The Making of an American Capitalist), I purchased a copy of this volume and began to work my way through the contents selected, arranged, and introduced by Lawrence A. Cunningham. I began with Cunningham’s Introduction (all by itself, worth much more than the cost of the book) in which he reviews what he considers to be key points about Buffett and his leadership of Berkshire Hathaway.
For example, “The CEOs of Berkshire’s various operating companies enjoy a unique position in corporate America. They are given a simple set of commands: to run their business as if (1) they are its sole owner, (2) it is the only asset they hold, and (3) they can never sell or merge it for a hundred years.” With regard to investment thinking, “one must guard against what Buffett calls the `institutional imperative.’ It is a pervasive force in which institutional dynamics produce resistance to change, absorption of available corporate funds, and reflexive approval of suboptimal CEO strategies by subordinates. Contrary to what is often taught in business and law schools, this powerful force often interferes with rational business decision-making. The ultimate result of the institutional imperative is a follow-the-pack mentality producing industry imitators, rather than industry leaders – what Buffett calls a “lemming-like approach to business.”
Cunningham organizes the essays within seven sections between Buffett’s Prologue (Pages 27-28) and his Epilogue (Pages 273-282):
I Corporate Governance
II Corporate Finance and Investing
III Alternatives to Common Stock
IV Common Stock
V Mergers and Acquisitions
VI Accounting and Valuation
VII Accounting Policy and Tax Matters
As Buffett explains in his Prologue, members of Berkshire Hathaway’s shareholder group receive communications directly “from the fellow you are paying to run the business. Your Chairman has a firm belief that owners are entitled to hear directly from the CEO as to what is going on and how he evaluates the business, currently and prospectively. You should demand that in a private company; you should expect no less in a public company. A once-a-year report of stewardship should not be turned over to a staff specialist or public relations consultant who is unlikely to be in a position to talk frankly on a manager-to-owner basis.”
Those who share my own keen interest in Warren Buffett’s leadership and management principles will learn a great deal from a careful reading of these essays. They are quite literally “from the horse’s mouth.” The substantial value-added benefits include the fact that Buffett thinks and writes so clearly, duly acknowledges bad decisions and personal regrets (yes, there were several), explains what he learned from them, and meanwhile reveals a playful (albeit dry) sense of humor. He also includes a number of personal observations about America, especially about its culture and economy, at various times throughout the last 25-30 years. The two aforementioned biographies indicate that throughout his life, Buffett thoroughly enjoyed each and every opportunity to increase others’ understanding of sound business principles that include but are by no means limited to investments.
Readers who are not among Berkshire Hathaway’s shareholders will especially appreciate the fact that, in each of these essays, Buffett establishes and then sustains a direct and personal rapport. The tone is conversational and, better yet, inclusive. He never talks down to his reader. He never “dumbs down” the material. Inevitably and appropriately, he cites Berkshire Hathaway situations when illustrating certain key points but, really, most of the material in this book will have wide and deep general interest to executives as well as to shareholders who otherwise have no association with either Buffett or his company. I highly recommend this book without hesitation or qualification.
This is one of the titles in the “Memo to the CEO” series published by Harvard Business Press, each less than 200 pages in length and superbly produced. In fact, none is a “memo” or written solely for a CEO. In this volume, Steve Steinhilber (Vice President of Strategic Alliances at Cisco Systems) explains “five basic criteria to identify and characterize” relationships that will achieve significantly higher and more consistent shareholder returns, enabling a company to grow faster and more profitably by leveraging those relationships rather than going it alone. The criteria are identified on Pages 2-3. Steinhilber then identifies three reasons why alliances are a “must-do” investment for any company competing in the global marketplace. With regard to the three ways to make strategic alliances work, identified as “essential building blocks,” they are (1) the right framework, (2) the right organization, and (3) the right relationships. A separate chapter is devoted to a remarkably thorough examination of each of the three.
It is worth noting, as Steinhilber does, that more than 2,000 strategic alliances are launched worldwide each year and this number increases about15% annually. More than half fail and only about 9% of the companies “build alliances well.” Of these, Cisco Systems probably has been among the most successful and Steinhilber heads those initiatives so he is well-qualified to explain what to do, what not to do, etc. As I began to read this brief but content-rich book, I wondered why Cisco allowed Steinhilber to reveal so much about what the company does and how it does it; more specifically, to explain in detail the mindsets applied to prospective allies and then to business partners, respectively. Perhaps there is a parallel with the chairman’s letter that Warren Buffett contributes each year to Berkshire Hathaway’s annual report. By the way, there is a recently published second edition of those essays, selected, organized, and introduced by Lawrence Cunningham. In these essays, Buffett shares everything he has learned about Corporate Governance, Corporate Finance and Investing, Alternatives to Common Stock, Common Stock, Mergers and Acquisitions, Accounting and Valuation, and Accounting Policy and Tax Matters. Of course, knowing what Cisco does and does not do insofar as strategic alliances are concerned by no means ensures the same outstanding results that Steinhilber and his associates have achieved. However, such knowledge will certainly improve the chances fort success.
To me, some of the most valuable material in this book is provided in last chapter in which Steinhilber explains how Cisco manages complexity. He addresses specific issues concerning intellectual property such as those involving jointly developed technology, solutions, residuals, branding. With regard to refining business goals, he recommends that two questions be answered: “How do we achieve our desired global market?” Also, “Which pieces of the value chain are central to sustaining our long-term profitability in a market?” Then, once objectives and the specific market(s) have been analyzed, he suggests taking one of three different approaches: (1) Partner with market leaders, (2) Partner with market leaders/challengers, or (3) Partner with both. Steinhilber acknowledges that there may be times when it makes sense to “spread your bets with dealing with uncertainty.”
To evaluate the breadth of an alliance portfolio within a market space, he identifies five criteria: market share, market segmentation, competitive overlap, potential acquisition strategy, and ability to execute. Steinhilber concludes with these comments: “In a globally linked business world with shortening life cycles and flattening value chains, building alliances capabilities will give you the chance to tilt the competitive playing field in your favor and significantly enhance your company’s or organization’s chance for long-term success.”
Credit Steve Steinhilber with presenting a wealth of rock-solid information and real-world wisdom about an immensely complicated business subject. Even more remarkable, he does so within relatively few pages (only 134 plus an Appendix). This will be an excellent resource for decision-makers in companies that plan to compete — or now do so — in the global marketplace but also for decision-makers in other companies that wish to do business with them.