Author Box
Articles Categories
All Categories
Articles Resources

The Strategic Wisdom of Warren Buffett

August 20, 2012 | Comments: 0 | Views: 352

Warren Buffett is often praised for his success as an investor but I am much more impressed with his strategic views as CEO. In fact, I think much of his investment success came from being an early mover in the field of value investing and that those inspiring to repeat his success will find themselves falling short. I believe people will gain more value from learning how Warren Buffett manages than trying to replicate him as an investor (I know this won’t be popular for those with Warren Buffet delusions of grandeur).

Warren Buffett (and Bill Gates) is a bridge player. Bridge is a game of luck and skill just like investing and business. He approaches all three with the same mathematical mind, laying out strategies based on probabilities.

In my opinion, the most powerful strategic concept that Warren Buffett has popularized is the institutional imperative. The institutional imperative has four components:

  • As if governed by Newton’s First Law of Motion, an institution will resist and change in its current direction.
  • Just as work expands to fill available time, corporate projects or acquisitions will materialize to soak up available funds.
  • Any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops.
  • The behavior of peer companies, whether they are expanding, acquiring, setting executive compensation or whatever, will be mindlessly imitated.

Dissecting the institutional imperative I walk away with 4 basic ideas for strategic management: (1) corporations will naturally try to hold the status quo, (2) change needs to be strategically geared towards enhancing the customer experience (not the whims of management), (3) corporate projects are bottomless pits that will soak up all funds you allow them to, and (4) there is a lack of innovate strategic thinking among competitors.

If the institutional imperative holds true then companies that break out of this will be successful. We should see clear examples of high caliber companies focusing relentlessly on enhancing the customer value proposition, innovative thinking, and maintaining a high Return on Invested Capital (ROIC) on its projects.

Steve Jobs has been quoted as saying, “You’ve got to start with the customer experience and work back toward the technology – not the other way around.” As the strategy firm Booz & Company puts it, “When you focus on priorities, costs are not a problem. They are choices.” This means high priority areas are ones that increase the value proposition for the customer and thus warrant a higher level of investment. See their strategic resource allocation chart below. Google follows a very similar strategy in resource allocation in what it calls the 70/20/10 model. In this model they allocate 70% of their money and time to core business tasks, 20% to projects related to the core business and 10% to projects unrelated to the core business. As you can see, this type of strategic budget planning is a defense against one aspect of the institutional imperative.

Knowing what a customer will want and finding a way to deliver that product to them is really the key to business, but it is only half of the value proposition for the customer. The other is delivering the product at a reasonable cost. Henry Ford stated, “The man who will use his skill and constructive imagination so see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed.” Today, Ikea won’t even authorize an ongoing expense without considering would the customer want to pay for that item themselves. Another aspect of the institutional imperative is maintaining high project ROIC. When making decisions regarding asset allocation Booze and company offers a three part algorithm: What do we do?, Where do we do it?, and How well can we do it? By doing this analysis you are naturally working towards a state of constant improvement.

For those that follow Ray Dalio’s Bridgewater investments (macro hedge fund), he loves the concept of perpetual improvement and illustrates this concept with a simple line. He explains that the squiggle below represents a feedback look for an individual or company. One is flat, not intentional in self-improvement, and does not learn from mistakes. The other is on an upward trajectory, intentional and relentless in its goal, despite setbacks.

Working towards a constant goal of innovative products that customers want and driving costs down to deliver those products is the heart of business, but as we have shown it is not easy. It requires both strategic thinking and budgeting lest the institutional imperative will take another victim.

Article Source:
Was this Helpful ?

Rate this Article
1 vote(s)

Article Tags:

Business Management


Strategic Management


Investing Management


Strategic Thinking


Value Investing


Warren Buffett

In India, employment opportunities are set to grow by a good margin in the coming year, a phase which was started in the turn of the second decade of the 21st century. organisation, candidates with

By: Sarkariexam l Business > Careers Employment l April 01, 2013 lViews: 11708

Sometimes it is amazing to see that certain jobs can precipitate huge turnouts in the recruitment drives. It is as if thousands of people were waiting for the vacancy advertisements and the moment

By: Sarkariexam l Business > Careers Employment l December 30, 2012 lViews: 690

In recent times, jobs in healthcare segments have grown tremendously. It is anticipated that this growth curve will continue for the times to come. Various factors are responsible for this

By: Sarkariexam l Business > Career Advice l December 27, 2012 lViews: 447

Are you in a dilemma whether to choose web based CRM or not? If yes, don’t worry. You aren’t the sole person having this doubt.There are numerous firms trying to make out whether investing in a

By: Reneta Vasileva l Business > Customer Service l December 23, 2012 lViews: 409

If you think about it you will realize the fact that each business has its own set of risks that are involved in it.The trade secrets that you have and the information related to the business is what

By: brumbrum1 l Business > Risk Management l December 23, 2012 lViews: 263

As the time is changing, concierge management services are now growing despite the slowing economies of the world. The main reason of it is the need that is highly specific to the people who like to

By: willsmith10 l Business > Management l December 23, 2012 lViews: 333

As the time is changing, concierge management services are now growing despite the slowing economies of the world. The main reason of it is the need that is highly specific to the people who like to

By: willsmith10l Business > Managementl December 23, 2012 lViews: 333

Let us start with the intent behind Project Portfolio Managing To expect making the most of value of stage business purchases based on a corporation's proper goals and also threshold with regard to

By: jaime jamesl Business > Managementl December 12, 2012 lViews: 1902

Do you ever have a feeling that you are leading a robotic life where you are working non-stop for unlimited hours to make sure that everything is completed on time. As soon as you finish one task

By: willsmith10l Business > Managementl December 11, 2012 lViews: 251

The people of London have a very busy lifestyle and this is evident from the fact that they are always in a hurry to reach a particular destination and mint money. Not only London, this frenetic

By: willsmith10l Business > Managementl December 03, 2012 lViews: 228

Life gets busy and important things can slip away from the mind. So that you don’t miss on such crucial of your life, concierges are given the charge. There are many things that a concierge can be

By: willsmith10l Business > Managementl November 05, 2012 lViews: 188

Prince2 can now be used in the human resources department. This is new as before it was thought it was made simply for the project management arena. Therefore anyone who is in HR can now benefit from

By: theknowledgeacademyl Business > Managementl October 25, 2012 lViews: 306

Traditional analysis of debt and deleveraging (the process where households, corporations and governments are forced to reduce their overall debt) is often biased and incomplete. Opinions of how to

By: Ben Esgetl News & Society > Economicsl August 11, 2012 lViews: 295

Many investors are unaware of new tax that will be levied as part of the Supreme Court’s decision to uphold President Obama’s health care reform. The investment tax, as it is being referenced,

By: Ben Esgetl Investing > Retirement Planningl July 17, 2012 lViews: 404

Discuss this Article

comments powered by Disqus