Milestone 2

1

Milestone 1

Sarah E. Brennan

University of Arkansas at Grantham

MGT500 – Management

Professor Esplin

1/26/2023

Milestone 1

Berkshire Hathaway is an American multinational corporation’s holding company. It has its main office in Omaha, Nebraska. The company holds a minority, majority, or entire stake in a number of public and private companies. Berkshire Hathaway owns GEICO, Coca-Cola, American Express, Wells Fargo, IBM, and Apple, among other companies. In 2016, Berkshire Hathaway had $621 billion in total assets, $283 billion in total equity, and $224 billion in total revenue (Chen et al., 2021). The corporation is the fourth-largest public company and the ninth-largest conglomerate by revenue in the world. The current paper discusses the culture of Berkshire Hathaway, how it deals with uncertainty in the market, and the environmental factors that impact it.

The Culture of the Company

Buffett had an interest in business and investing at an early age. He is renowned for saving $35 on his first tax return by delivering newspapers while riding his bicycle and watching television. Buffet has adopted the economic philosophy of “value investing,” which combines “behavioural finance” and “investor psychology” and aims to comprehend how institutions, organizations, investors, and consumers make decisions based on how they act and think (Hartwig, 2019). Graham, an American economist, established his investment strategies while working as a financial consultant. Buffet’s investing strategy, which has grown into the company’s guiding principles and philosophy since he acquired Berkshire Hathaway over four decades ago, is largely responsible for Berkshire Hathaway’s success. People have used his reputation for frugality in his personal life as leverage in negotiations. Even when losses have occurred, liabilities are considered sources of stress and strain in order to fulfill debtor commitments. This notion and value shape the culture of the organization. A “buy-and-hold” investment is one in which you purchase an asset and maintain it even if it loses value in the short term. This is based on the assumption that the nation’s economy will eventually revive. Fundamental Analysis: According to this method, a company’s financial statements can be used to determine the company’s financial health. A contrarian perspective delays investing in a popular trend until it has been prevalent for some time. Activist investment is when an investor uses their ownership share in a company to exert pressure on management to perform well. Diversification requires placing only some of one’s eggs in a single basket.

Berkshire Hathaway’s investment strategy is founded on its fundamental principles and beliefs. It achieves this by investing in profitable companies that have been in business for a long time and are seen as necessities by ordinary customers, such as clothes, airlines, insurance, etc. Buffet has established a small core of dependable individuals to assist the company’s success. This group consists of family members and Charlie Munger, his longtime friend and co-chair, who worked with Buffet as a teenager (Hartwig, 2019). By sharing their personal learning experiences and developing hypotheses based on behavioral economics, these individuals have become less anxious about navigating the market and accomplishing their goals.

How the Organization Deals with Uncertainty in the Market

Playing a Simple Numbers Game that Favors the Patient

Warren Buffett plays a numbers game with Berkshire Hathaway’s investment portfolio, expanding on what has been mentioned previously. This game strongly favors investors with patience. If you examine the roughly 400 stocks in Berkshire Hathaway’s investment portfolio or the 500 companies it has acquired over the past 50 years, you will notice a reoccurring theme: they almost always move in a circle (Loviscek & Xie, 2022). As the American economy develops, so do cyclical businesses. The difficulty is that economic expansions tend to last considerably longer than recessions. Buffett and his colleagues may relax and enjoy the fruits of their years of hard work and foresight now that they have diversified Berkshire’s investment portfolio with companies that may benefit from sluggish growth.

Dividend Stocks

People typically miss the fact that dividend stocks contributed to Berkshire Hathaway’s extraordinary success. Buffett’s company, Berkshire Hathaway, is projected to earn nearly $6 billion in dividend income over the next 12 months. This is owing to the fact that it owns more than 30 stocks that pay regular dividends, which will provide this revenue. Monthly dividend-paying companies are often well-established and almost always profitable; otherwise, they could not afford to do so. These companies have proven their ability to endure challenging economic conditions and emerge stronger in the end. Moreover, dividend-paying stocks typically outperform those that do not pay dividends. The average annual return for public firms that began paying dividends in 1972 and grew them between 1972 and 2012 was 9.5%. During the same time period, non-dividend-paying public corporations generated an annualized return of only 1.6% (Salzar, 2019).

Environmental Factors that Impact the Organization

Using PESTEL analysis, Berkshire Hathaway could improve its strategic decision-making by identifying the major external environmental forces that influence its competitive landscape and strategy. To develop effective strategies and accomplish its long-term growth objectives, Berkshire Hathaway must conduct a PESTEL analysis. This is because Berkshire Hathaway wishes to expand and capitalize on its core skills.

Political Factors

The political components of a PESTEL analysis have a substantial effect on Berkshire Hathaway’s long-term profitability potential. Because the company operates on a worldwide scale, it is more aware of political changes in other nations. In today’s fast-paced, global economic environment, it is essential for political success to disperse systematic risks. There are various aspects that influence the political atmosphere of a country. During the course of strategic planning, Berkshire Hathaway must examine the following political issues: A high level of political stability produces a steady, favorable business climate with predictable market growth. However, political instability deters investors, erodes people’s faith in the economy, and diminishes organizational performance. Each of the countries in which Berkshire Hathaway operates is undergoing political turmoil. Globally escalating political tensions and volatility could impede the expansion of the gold sector and make it more difficult for Berkshire Hathaway to expand. Changes in government policy frequently reduce the clarity of the environment, which is detrimental to economic success. Berkshire Hathaway should investigate current political trends because a change in leadership could alter the government’s growth ambitions for specific businesses.

Economic Factors

Berkshire Hathaway must be cognisant of economic factors such as the foreign exchange/interest rate, the state of the labor market, inflation, and saving rates because they influence the economy as a whole. The economic understanding of Berkshire Hathaway enables the company to predict the growth of an industry or organization. Berkshire Hathaway must consider the following economic aspects when making decisions: The economic prosperity of a country has a direct effect on the performance of an organization. As economies expand, Berkshire Hathaway has a great deal of room to grow. Similarly, it is essential to comprehend the current stage of the industry. Because the market is already saturated, it may be more difficult to enter a mature industry than one that is currently expanding. Berkshire Hathaway’s financial performance is also affected by the amount of money spent on basic infrastructure by the host country’s government. The country’s infrastructure supports business and contributes to the expansion of its gold industry. The rate of GDP expansion will affect Berkshire Hathaway’s capacity to achieve its long-term growth objectives (Koekebakker & Zakamulin, 2021). A high GDP indicates that consumers have more disposable income to spend on goods. A high unemployment rate means that there are a lot of additional jobs available for lower pay. Berkshire Hathaway could cut its production costs if it enters this market. The business should also monitor the impact of the interest rate on people’s capacity to borrow money and make investment decisions. The high-interest rate will boost investment and give Berkshire Hathaway extra growth opportunities. Lastly, fluctuations in the exchange rate can have an impact on global earnings and trade, and Berkshire Hathaway may have a lot to worry about depending on how the local currency varies.

Social Factors

Society’s norms, values, and tendencies have a substantial impact on an organization’s culture. By doing a thorough PESTEL analysis, Berkshire Hathaway can create effective marketing messages and attain its business goals. This is due to its familiarity with demographic patterns, power structures, consumer purchasing patterns, and popular ideas. Using sociological and environmental research data, Berkshire Hathaway’s marketing department may target specific consumer groups and make its products more appealing to potential buyers. Berkshire Hathaway must incorporate the following sociological issues in its macro environmental analysis: For multinational firms like Berkshire Hathaway, demographic shifts such as an aging population, migration trends, and socioeconomic factors are crucial. Berkshire Hathaway can find the market segment or sectors with the highest growth potential by analyzing the demographic characteristics of each market segment (Koekebakker & Zakamulin, 2021). Additionally, migration influences how businesses run and sell themselves. Berkshire Hathaway must understand how the general public feels about migration, as this could impact the ease with which enterprises in the host country can recruit foreign managers. In every civilization, the power distance represents how people feel about hierarchy and economic differences. The corporate management practices of Berkshire Hathaway must adjust as it enters markets with a high or low power distance. As inequality increases, the power structure of many nations is shifting. This has a substantial effect on multinational firms like Berkshire Hathaway.

Technological Factors

Technology is the fourth component of PESTEL. Due to the rapid development and global diffusion of technology, it is more important than ever to comprehend technical components while making strategic decisions. A comprehensive analysis of the technical environment can aid Berkshire Hathaway in capitalizing on technological advancements and enjoying corporate benefits such as improved profits, rapid innovation, and more effective operations. The financial performance of Berkshire Hathaway may be affected by the following variables: As a result of the development of information and communication technology, it is now simple to utilize cutting-edge marketing techniques to increase consumer collaboration. Today’s corporate sector is replete with social media users. Berkshire Hathaway can increase corporate performance through social media marketing (Koekebakker & Zakamulin, 2021). The firm can initiate innovative social media marketing by utilizing cutting-edge technologies to build online communities around your business. To maintain a competitive advantage, Berkshire Hathaway should continuously monitor the development of technology. It is essential to keep an eye on how 5G could improve business outcomes by delivering a better user experience, faster speeds, and more access. These technological advancements have the capacity to completely change an industry and rewrite the rules of commercial success. It is also essential to assess how the technology is evolving and its industrial maturity. By entering new markets where technology has yet to reach its full potential, Berkshire Hathaway can expand its market share.

Conclusion

The company holds a minority, majority, or entire stake in a number of public and private companies. Warren Buffett plays a numbers game with Berkshire Hathaway’s investment portfolio, expanding on what has been mentioned previously. Buffett’s company, Berkshire Hathaway, is projected to earn nearly $6 billion in dividend income over the next 12 months. To develop effective strategies and accomplish its long-term growth objectives, Berkshire Hathaway must conduct a PESTEL analysis. For example, Berkshire Hathaway must be cognisant of economic factors such as the foreign exchange/interest rate, the state of the labor market, inflation, and saving rates because they influence the economy as a whole.

References

Chen, A. S., & Yang, C. M. (2021). Optimal statistical arbitrage trading of Berkshire Hathaway stock and its replicating portfolio. 
Plos one, 
16(1), e0244541.
https://doi.org/10.1371/journal.pone.0244541

Hartwig, K. (2019). Magic and the Market: A Case Study of Warren Buffett and Shareholders of Berkshire Hathaway. In 
Culture and Economy (pp. 89-98). Routledge.

Koekebakker, S., & Zakamulin, V. (2021). Warren Buffett versus Zvi Bodie: Should You Buy Or Sell Put Options? 
The Journal of Wealth Management, 
24(2), 65-81. https://doi.org/10.3905/jwm.2021.1.137

Loviscek, A. L., & Xie, K. (2022). In Search of Market Outperformance: Another Look at Berkshire Hathaway. 
The Journal of Wealth Management, 
24(4), 90-108.
https://doi.org/10.3905/jwm.2021.1.163

Salzar, J. (2019). Berkshire Hathaway Inc. Strategic Audit.