Every senior manager makes a critical decision every day of his or her working life. Mostly, the decision is unconscious, but is no less vital for that. The issue is simply stated with three questions:
What work do I reserve for myself? • What work do I delegate to other people? • How do I control their performance?
Two friends provide a most remarkable case study of two totally contrasting sets of answers - the world's two richest men, Bill Gates and Warren Buffett. The software czar has kept his fingers in every pie and has ruled the actions of his delegates by constant and fierce interrogations - which have often reversed their decisions. The great investor (some of whose other ideas were discussed here last month) reserves only two functions for himself: allocating Berkshire Hathaway's capital (which he loves to do) and helping 15 or 20 senior managers to 'keep a group of people enthused about what they do when they have no financial need whatsoever to do it'.
WHOLLY OWNED COMPANIESThe wholly owned companies managed by these people hold assets worth twice as much as Buffett's marvellous stock portfolio - in which seven major holdings from Coca-Cola to the Washington Post are dominant. The seven cost $4.4 billion: they were worth, at end-1998, $32.1 billion, out of a total share portfolio of £37.3 billion. The wholly owned assets, however, come to $80 billion, and the companies concerned employ 47,566 people, which is 60% more than Microsoft's roster.
In one sense, Buffett makes no distinction between the two types of investment. Whether you are buying all of a company, or just a fraction, you should, he believes, be vitally concerned with the same criteria:
1. Is the company simple and understandable? 2. Does it have a consistent operating history? 3. Does it have favourable, and predictable, long- term prospects? 4. Is the management competent and honest? 5. Is the underlying business undervalued?
The need for predictability and understanding rules out companies like Microsoft. Buffett doesn't understand the technology and has no intention of learning how. And Gates, even before he nearly missed the Internet boat, saw clearly that the technology has a mind of its own. His own titanic success, however, has been built on controlling the technology. By making MS-DOS and Windows the universal, all but inescapable entry into personal computing, Gates created a degree of market control that, until the Internet arrived, gave Microsoft's business a very high degree of predictability (and profit).
Control is basic to Gates's nature and his management practice. He has an obsession with detail and with checking up (he even used to sign expenses for his right-hand man, Steve Ballmer). The obsession is so well-known that few believed Gates's evidence in the Microsoft anti-trust trial. For astonishing example, when asked if he had ever read the complaint in the case, Gates said no. But did he know if the complaint made any allegations about a meeting between Microsoft and Netscape? Even though the latter's browsers were a huge threat to his business, his lame and incredible reply was: 'I think somebody said that that is in there'.
Thanks to the anti-trust case, the Internet and other developments, Microsoft's predictability has vanished. So, in theory, has the egocentric system by which the company was managed. Under the previous dispensation, groups (deliberately kept small) were continually formed and reformed to carry out specific tasks. Tight financial controls were applied, but the true organisational cement was Gates himself (backed up by Ballmer). As Business Week puts it, 'With decisions large and small funnelled to the top, the pair became a bottleneck. Worse, they undermined the confidence of managers below'.
NEW ORGANISATIONUnder the new organisation, which has the grand-sounding theme of 'Vision Version Two', Microsoft is split into eight new, customer-oriented divisions, each under a top manager who is supposed to exercise delegated, autonomous power over his domain - the classic system, derived from the military, of divide and control. Gates is supposed to stand clear of the day-to-day management of these divisions and to concentrate on broad strategy. The hope is that this will 'free Microsoft from its bureaucratic morass'. But even with the reforms, Gates's management is plainly going to stop far short of Buffett's practices and principles.
Buffett wants Berkshire Hathway's managers to think like owners. Since many of his chief executives actually did own the businesses before selling them to Buffett, that should come naturally to them. Buffett also likes to leave them with a significant stake (10 to 20%) to make the ownership practical as well as theoretical. Their rewards are tied exclusively to the achievements of their own businesses, not those of Berkshire Hathaway - a principle to which Buffett holds very strongly.
PERSONAL INFLUENCEIt's hard to argue with his idea that managers must be judged only by what they personally influence. The only contrary argument is where divisions relate directly to each other. If the managers are held responsible only for their own results, that intensifies the natural (but heinous) tendency to ignore other divisions, losing the potential, and sometimes essential, benefits of cooperation. That was one of the reasons for Microsoft's notorious inability to get people to work with each other across boundaries. You may need to have a significant part of the rewards tied to overall performance.
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This doesn't arise in Buffett's case, though, because See's Candies has no conceivable connection with the Nebraska Furniture Mart or the Buffalo Evening News. It's therefore easy to treat each business and each CEO on their individual merits. Buffett gets regular financial reports, of course. Otherwise, CEOs can contact him (usually by phone) as they want (he rarely rings). They only have to follow some elementally simple rules. One of these rules, possibly the most important, runs as follows. 'If there is any significant bad news, let me know early'.
That is Buffett's 'only caveat'. He is clear that 'All of you do a first-class job in running your operations with your own individual styles. We are going to keep it that way. You can talk to me about what is going on as little or as much as you wish'. His other advice is of a piece with the above. 'Look at the business you run as if it were the only asset of your family, one that must be operated for the next 50 years and can never be sold'. He adds that 'We can afford to lose money - even a lot of money. We cannot afford to lose reputation - even a shred of reputation.'
This humane, collegiate approach is incomprehensible to many managers. The key to Buffett's ability to live up to his own credo is confidence in others. He truly means it when he congratulates his executives on their excellence. The more typical attitude elsewhere is:
1. You are not doing a first-class job, and will not do so unless I apply considerable pressure. 2. You will run your operation the company way (and my way), not your way. 3. I want you to keep me fully informed all the time, and will intervene forcefully if I don't like what you tell me. 4. If you bring me bad news, you may well be fired. 5. You will only run this business, or part of a business, for a short time and will be judged on your short-term results.
SUPERIOR SYSTEMThe great superiority of Buffett's system (or lack of it) is self-evident. A climate of confidence and freedom must surely generate better performance than one of suspicion and control. Yet in some ways, suspicion and control have ruled Microsoft - and its results have been sensationally successful. How can this paradox be resolved?
One answer is that both Buffett and Gates believe in financial incentives, making their managers extremely rich. Buffett doesn't like to use stock options, but his purchase prices have the same effect: the man who sold Buffett a company called Dexter Shoe in 1993 now owns Berkshire shares worth $1.5 billion. Even Buffett's generous bonus schemes - sometimes hitting six times the salary - can't compete with such rewards.
Nor can Microsoft compete with $1.5 billion. About a third of its employees are thought to be millionaires: a few veterans could be worth $100 million, but only a few. And the wealth isn't enough. According to the Wall Street Journal, tired of 'gruelling deadlines, frustrated by the bureaucracy that has accompanied Microsoft's explosive growth or lured away by the boom in high-tech start-ups, dozens of Microsoft's most capable leaders, all around 40, have opted out - at least temporarily'.
Microsoft's response, to reduce Gates's span of command, and give the new business unit managers more autonomy, was partly governed by 100 interviews with programme managers and team leaders. But stopping the brain drain will depend on the reality or otherwise of the autonomy that Microsoft's able, rich people understandably crave.
Meeting their wishes may come hard to a company which is accustomed, for instance, to having public relations people sitting in on interviews and taking copious notes of what the executives say to the media. Buffett doesn't even have any PR staff. It is, of course, unfair to compare a large, integrated corporation like Microsoft with a widely diversified holding company like Berkshire. But most companies can be readily split into discrete, free-standing businesses which can be managed and controlled along Buffett lines.
The secret is to treat the unit manager as a CEO in his or her own right. Don't impose targets, for a start, but let them tell you what they are going to achieve and how. Second, don't have a fixed idea of how long people (or yourself, for that matter) should stay running an operation. If they are happy and doing an excellent job, only move them if you both feel they are not living up to their full potential: or you have another, more important post for which they are ideal.
As Thinking Managers has elsewhere advised, you should always have a reservoir of able internal candidates for any such promotion. Characteristically, Buffett delegates this aspect of his responsibility, too. Thus, his top managers were asked to 'send me a letter updating your recommendations as to who should take over tomorrow if you became incapacitated tonight. Anything you send me will be confidential'.
SUBORDINATES AS EQUALSThat, you may be sure, rarely happens at Microsoft or most other companies. It means treating subordinates as equals, as grown-ups who know their businesses and their people and who can be trusted with anything - from accounting honestly for their expenses to thinking about succession. Trust is what ultimately distinguishes the Buffett and Gates styles. On results, you would have to say that Gates wins - but that has depended far less on management style than on the ruthless exploitation of a monopoly position which is unlikely to last.
For the long haul, Warren Buffett's way must be best. As an associate says, 'somehow Warren has been able to keep a diverse cast of characters working harder for him than they did for themselves. I see it every day - and I still don't know how he does it'. Having read all the above, though, you will have a good idea of the maestro's magic methods. Use them.
THE WEALTH OF BILL GATES AND WARREN BUFFET
Bill Gates and Warren Buffet are two of the richest men in the world. Does the concept of scarcity apply to them?
Interesting question.
I think that it is fair to say that Bill Gates receives money quicker than he can spend it. For many consumer goods Gates is sufficiently rich to avoid having any feeling of scarcity. If we wants a bigger house, more cars, private aeroplanes, his own island he can buy them.There is a theoretical point when he wouldn’t be able to afford to buy any more cars, but this number would be so high, that in practical terms it is meaningless. Using indifference analysis we could also assume that Bill Gates would be indifferent between having 2,000 cars and 3,000 cars. The marginal utility of owning an extra 1,000 cars is zero (unless you get joy from collecting cars or something). Therefore, in practical terms he can buy as many cars as he wants to maximise his own welfare.
By the way, it is interesting to note that Bill Gates, even when rich, used to travel second class as he didn’t think first class was ‘worth the money’ This is an interesting insight into the mind of the world’s richest person.
Bill Gates was said to be unexpectedly spendthrift, e.g. he didn’t like paying a car parking charge so used to walk. However, his wife has been encouraging him to spend his money.
Scarcity and Bill Gates and Warren Buffet
These are examples of how scarcity could come into play.
Supposing someone kidnapped his wife and as a ransom they demanded 99.5% of his wealth in return for his wife. Would he pay it? He would soon be exposed to the issue of scarcity.
Time. We could argue time is an economic good, therefore, this does apply to Bill Gates. In fact his time has a higher opportunity cost. If working gives Bill Gates an hourly wage of $10 million per hour there is a high opportunity cost of leisure.
Charity. The Bill Gates charitable foundation gives money to worthy causes, there is always more his foundation could do.
Undermine an Economy. Maybe an international investor like Warren Buffet would like the dollar to appreciate by 10% (for political reasons) he could spend all his wealth on the dollar, but, even this is unlikely to be sufficient to overcome the market forces bringing the dollar down. Warren Buffet’s wealth is vast, but, it is not unlimited. He would face the issue of scarcity.
How much is Bill Gates worth?
Warren Buffett has overtaken Bill Gates to become the world’s richest and wealthiest person. Known for his frugal lifestyle, Warren Buffett is unlikely to get too excited about the news. When he got married recently, he bought a cheap discount ring for his wife. Warren Buffet makes most of his money from investing. 2007 saw a particularly good year as he made good choices on the Brazilian currency.
Top 10 Rich List
1. Warren Buffett Investments $(bn) 62.0
2 . Carlos Slim Helu Telecoms 60.0
3 . Bill Gates Software 58.0
4 . Lakshmi Mittal Steel 45.0
5 . Mukesh Ambani Petrochemicals 43.0
6. Anil Ambani Diverse sources 42.0
7. Ingvar Kamprad Ikea stores 31.0
8. KP Singh Property 30.0
9. Oleg Deripaska Aluminium 28.0
10. Karl Albrecht Aldi stores 27.0
The richest Britain is the Duke of Westminster with $14bn (ranked no. 46). The richest young person is Mark Zuckerberg, the founder of Facebook, currently worth $1.3bn.
According to the Forbes list, Bill Gates has been the richest person for the last 13 years
VERY NICE ARTICLE......................
"Look, we can't fall into old patterns.We have to think of a plan!"-
Lisa Simpson Dear colleague,That quote is from the cartoon series The Simpsons. Lisa is talking to her Dad, Homer Simpson, about the need for fresh thinking.
The quote belongs on every manager's wall. It's a good reminder that as soon we stop learning we start to decline.
But can you teach an old dog new tricks?
Often, it's not that you can't teach old dogs new tricks; you can't teach some dogs any tricks at all.
Let's take the example of the international conglomerate Imperial Chemical Industries (ICI).
Harvey-Jones was appointed CEO at ICI because he had shown himself to be a maverick, a radical by temperament and ideas. His ideas created breakthrough growth at ICI and made Harvey-Jones a household name.
Yet at ICI after Sir John Harvey-Jones retired, old managers resurfaced, gave a sigh of relief and returned thankfully to their previous unproductive ways. The ICI vets even opposed the Great Man publishing his account of what was by any standards a terrific turnaround.
What often holds a company back from growth is the company itself. Like the in-house top appointee who maintains the status quo, the corporate being can become deeply conservative, very unwilling to change and, even worse, loath to concede that change is required.
In any turnaround, it's real reform of the human relationships which determine performance. Read on to discover why:
How old dogs fail to implement changeAt the troubled electronics giant Philips, the chief executive Kleisterlee didn't reform; he reorganised. That meant dropping businesses worth $850 million, cutting operating expenses by $1.2 billion, closing 12 factories and outsourcing nearly all consumer electronics and appliance manufacture - plus chip production. That's a classic (or standard) downsizing prescription.
The human side had some attention; there's a drive 'to break down the walls separating Philips' fiercely independent divisions' and get them to communicate, to become transformed into a single company, under the legend 'One Philips'.
This sounds exciting and revolutionary, but is again standard - and dubious.
The reality is that Philips is not one company, and never will be. Some of its major remaining businesses have little in common.
Change managementThe true change manager starts with redefining the purposes of the organisation in the light of fully analysed external change. Next come the internal changes required if those purposes are to be met. Then you tackle the people, starting at the top. Will they or won't they whole-heartedly accept the new purposes and internal reforms? If they won't or can't, they can't stay - especially if their job is chief executive.
Solutions like these may be tough to implement ≠and we are the first to admit it. But unless you are aware of what needs doing, it's unlikely you'll ever become a top manager.
Letter to Thinking Managers is a problem-solving, creative newsletter for senior executives interested in learning and implementing best practice techniques.
We provide solutions to hundreds of common management problems (like the one above) on both a micro and macro level. I'd like you to try it, at no risk, over the next two months.
You'll find that practically every management issue has been faced before ≠and the right way to deal with it has been found. That dilemma or issue that's been at the back of your mind for the last three weeks has a solution ≠if only you knew who to talk to.
Letter to Thinking Managers offers that missing connection. Our two editors, Edward de Bono and Robert Heller explain how others did it and how it relates to your business.
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