A new strategy for Berkshire Hathaway presented on a McKinsey Case Championship in Moscow

1. McKinsey Case
Competition
Berkshire Hathaway
30 May 2009, Moscow

2. Why we are here today?
Task, our work, executive summary
Task
Pick a company from the Fortune 100 and explain how it should respond to one of 5 major issues
facing corporations today to dramatically improve their profitability over the next 5 years
What have we done?
1. We analyzed Berkshire Hathaway (BH) business and concluded it is highly dependent on Mr. Buffet.
For the sake of sustainable development in the future this dependence should be decreased.
2. We found how that dependence could be minimized – by investing in businesses which BH fully
controls. We called them MUFI businesses (Manufacturing, Utilities, Finance and Insurance).
3. We created a matrix showing influence of each of 5 major issues on MUFI businesses. Then points of
greatest influence were chosen.
4. Detailed strategy for each MUFI-business was developed targeting points of influence. Strategy allows
58-88% EBT increase by 2014.
Executive summary
1. Maximize profitability by targeting the issues of greatest influence.
2. Decrease BH dependence on Buffet by developing MUFI businesses and slowing down equity
investments (investments in blue chips with less than 20% stake)
“I can't change the direction of the wind, but I can adjust my sails to always reach my destination”
2
(Jimmy Dean)

3. Who is mister Buffet?
BH is a top investment fund with 40-year history
60 BH growth
S&P growth
40
20
0
1965 1970 1975 1980 1985 1990 1995 2000 2005
-20
ELITE FUND TARGETED INVESTMENTS LONG-TERM PHILOSOPHY
• Total equity – $109B • Thorough research • BH evaluates its
performance by book value
• CAGR – 20,3% • Invest in companies with
strong economy • Performance inside the
• Continuously over-
company measured by EBT
performed S&P by 10% • Find companies with perfect
management • Makes only long-term
investment
BH is a top fund with great principles and high dependence on Warren Buffet 3

4. Business Lines (1/2)
Financial highlights, Investment, Insurance
Share of each business line in total assets Net income distribution
Investments
10%
15% 35%
Insurance 2007 8% 18% 16% 53% 13
Manufacturing
19% Utilities 2008 -22% 33% 45% 35% 5
21%
Finance
EBT Main assets Key features Growth
Investments • Equity – 57% • Few accurate investments (15 • Past
• Derivatives - 38% shares account for 90% of New purchases,
Cash flow • Bonds (top corps) – 5% portfolio) increase in value
N/A
Crisis Weak • Long-term investments • Future
• Derivatives - Only short Increase in value
contracts (no counterparty
38,40 risk)
Insurance 27,90
• GEICO • Keeps money for free • Past:
15,50 • General Re • Auto insurance (GEICO) in a Organic growth of
Cash flow • BH Reinsurance very good condition auto insurance
Crisis Soso • BH Primary Group • Opportunities for reinsurance • Future:
-4,10 business New contracts for
02 04 06 08 reinsurance
2008 was a bad year for BH: earnings dropped 66% 4

5. Business Lines (2/2)
Manufacturing, Financial products, Utilities
EBT Main assets Key features Growth
3,95 4,02
Manufacturing 3,53 • Marmon • Diversified set of industries, • Past:
2,62 • Mc Lane many companies hit by the M&A
Cash flow (wholesale, groc) recession • Future:
• Shaw Industries • Fastest growing business line Efficiency
Crisis Soso (carpets) improvements
02 04 06 08
Financial 1,16 • Clayton (home • Strong financial discipline
• Past
1,02
loans) • True assessment of clints ability
products 0,79 to pay
M&A
0,58
• Furniture and • Future
• Companies use BH to get cheap
Cash flow transport leasing M&A
companies capital market financing
Crisis Weak • BHF –proprietary
02 04 06 08 trading
Utilities 2,20
• MidAm energy • Great management of holding • Past
1,72
• Pacific power company M&A
Cash flow • HomeServices • Focus on customer service and • Future
0,88
Crisis Soso 0,61 • Yorkshire electric renewable energy M&A
• Ability to turn around acquired
companies
02 04 06 08
M&A was primary source of company growth 5

6. BH Business Model
BH plays a role of cash flow regulator
Insurance • Insurance premiums fund
investment activities
$ • BH distributes funds among
attractive companies
• Performs assessment of
available opportunities
• Currently portfolio includes:
• Utilities, manufacturing
Utilities Finance
companies and financial
• Predictable • Needed cash is
organizations
investment needs volatile
• Bonds, shares and
Manufacturing Investments derivatives
• Predictable investment • Needed cash is volatile
needs
Insurance is a main BH business and the only source of FCF 6

7. BH Investment activities
Displace focus from investments to other sources of profitability
Ideas and implications Graphs to prove ideas
Situation with equity investments in 00-08 Equity inv. portfolio performance
Equity investments in BH terminology are investments in companies where
BH controls less that 20% of shares.
S&P BH
Equity accounts for 40% of the total BH assets
200%
Purchases on the case by case basis
150%
100%
Problems of equity investments in 00-08 50%
High dependence on Warren Buffett (all equity investments are made solely 00 01 02 03 04 05 06 07 08
by him)
Not very outstanding performance compared with S&P (see graph on the New equity investments/total assets
right)
Share of equity investments in total assets displays stable growth over the
last 10 years (see graph on the right) 8%
What to do? 6%
We recommend to diminish rate of growth of new investments in portfolio 4%
Forward cash to other segments of BH business 2%
By 2014 BH can invest to MUFI $17B 0%
01 02 03 04 05 06 07 08 09 10 11 12 13 14
Source: annual reports ; team analysis
By 2014 cumulative savings will be about 30% of current BH equity – $17B
7
Proposed strategy decreases company’s dependence on Mr. Buffet

8. Overall
BH strength and weaknesses
STRENGTHS WEAKNESSES
• Financial discipline • Dependence on Buffet
• Pile of cash • Buffet is old
• Can buy companies • Equity investments are not
cheaper than anyone else so efficient in 2000-2008
• MUFI businesses in crisis
usually outran competitors
• MUFI businesses are very
decentralized
GOALS
• Primarily develop MUFI businesses which do not require Buffet to be
profitable
• Reach greater financial synergy between MUFI
• Pay less attention to new equity investment purchases (but retain
previous)
BH strengths far outreach weaknesses. However dependence on Warren Buffet’s name is risky. To
8
reduce risk BH should invest in MUFI.

9. Issues
Matrix
Issue Insurance Utilities Manufact Finance Comments
>We consider
Climate change 5/ +5 3/ -1 0/ 0 0/ 0 opportunities:
+2. +1. +1. 0 +1. 0. -1. -1 0. 0. 0. 0 0. 0. 0. 0 > Growth
Emerging
4/ 0 3/ -1 2/ +0 5/ +1 > Buy/Sell
consumer
markets +2. 0. -1. -1 -1. 0. -1. -1 +1. 0. 0. -1 +2. 0. +1. -2
> Profitability
> Cash flow
Financial markets
instability
5/ +3 4/ +4 6/ 0 5/ +1 >Special
+2. +2. -1. 0 +1. +2. +1. 0 -1. +2. -2. +1 +1. +2. -1. -1 considerations:
>Sustainability
Constraints on
supply of natural 3/ +3 5/ -5 3/ -3 0/ 0 >Independence
resources +1. 0. +1. +1 -1. 0. -2. -2 0. 0. -2. -1 0. 0. 0. 0 >Ability to grow
Ease of obtaining
information/ 3/ +3 4/0 3/ -1 0/ 0
knowledge +2. 0. 0. +1 ±2. 0. ±2. 0 0. +1. -1. -1 0. 0. 0. 0 3/ -1 – Overall Influence /
favorability
Insurance is our top priority, stop investing in manufacturing
9
Invest in utilities, good opportunities in Finance

10. BH Business Model Transition
Proposed model will sustain BH and give sources for future growth
Insurance Manufacturing Transition to a new model
• Volatility goes up • Steady and will be finished
• Returns go up predictable cash flow Plusses of a3 years
in new model
• Increasing predictability of
cash flows
• Terrific growth opportunities
• Easy to manage
Utilities Finance
• Employs all BH strengths
• Predictable • Needed cash is
investment needs volatile and reduces weakness
Investments
• Invest on the case-by-case basis
• Eliminate all new investments by ‘14
10

11. Strategies
Insurance
2009-2014 action plan relating Points of attention, risks and mitigating
Financial highlights, 2014, $B
factors of importance strategy
Past based growth excluding M&A Beginning and final Past Financial instability
based growth Climate change
GEICO is growing via Inappropriate growth strategy
attracting new clients Float substantially increases due to GEICO past based
Risks: likelihood / impact 4/1
growth and new reinsurance contracts
GEICO offers products Risk mitigating strategy: Sensible choice
in allied lines 89-103
of markets and price policy
Go on developing on emerging 58 3-7
12-18
markets 16-20
Financial market instability
New reinsurance contracts Bad contracts Risk calculation is affected by climate change
General Re has competitive Risks: likelihood / impact 3/2
advantage of reliability Companies preferable with government Insurance market
back-up Insurers capital level
P(losses)
Climate change shift (25%)
Natural calamity in USA Changes in risk calculation models (fat RE market add
reinsuring tail, tail correlation) Initial RE market
Hotels and cities reinsuring Risks: likelihood / impact 2/2
(Venice, provinces of
losses
Setting higher prices; using climate
Netherlands) against losses analytics
caused by sea level rise
Source: annual reports ; team analysis; Reinsurance Association of America
Insurance is to retain its source of cheap cash position as float can be significantly increased x1,5-
11
1,8 times or by $ 31-45B.

12. Strategies
Utilities & Energy
2009-2014 action plan relating Points of attention, risks and mitigating
Financial highlights, 2014, $B
factors of importance strategy
Industry-based growth Beginning and final result Financial instability
Organic Growth Constraints on natural supply
• Growth on home markets is Target commercial segments
about 2% Assets will increase mainly due to aggressive renewable
• Price will be stable in 2009- Responsible for 50% of expansion and acquisition
201 growth 68
Customer service improvement 42 9
Launch 99,9999% initiative 4 13
Financial market instability
• One big acquisition in next Carefully assess regions:
5 years Revenue will increase mainly due to aggressive renewable
• Ability in win off the High population , economy, expansion and acquisition
market due to stable consumption growth rate 8
financial position Segments composition 5 0
Turn around acquired company 1 2
Constraints of natural resources supply
• Growth in wind generation Invest in wind and biomass EBT will increase mainly due to aggressive renewable
• Enter local gas generation generation expansion and acquisition
fast-growing segment 4x growth rate in 2009-2030 3,3
due to regulation and 2,2
decreasing costs 0,3
0,2 0,6
Lowers dependence on fossil
Source: team analysis, BH reports fuel
Efficiency, Customer service, Strong positions in renewable energy
Use synergies with gas
Strong financial standing enable us to grow fast
distribution 12

13. Strategies
Financial products
2009-2014 action plan relating Points of attention, risks and mitigating
Financial highlights, 2014, $B
factors of importance strategy
Past based growth excluding M&A Beginning and final result Emerging markets
Past based growth Financial instability
Clayton, XTRA and COST Pay continuous attention to financial
strengthen their leading positions discipline and customer attraction Assets will increase mainly due to entering auto loans
on market Risks: Clayton/s market shrink market and expanding BHAC operations
(likelihood: 4/5, impact: 3/5) 49,-73,0
Risk mitigating strategy: Clayton
conservatively waits others to go bankrupt 23,9
Emerging consumer markets
3,1 3,8-4,2 18,2-41,8
Clayton enters Mexican, Financial discipline and costs
Brazilian and Argentinean markets Risks: bad welcome on new markets Revenue will increase mainly due to expanding of BHAC
through acquisition and strong (likelihood: 3/5, impact: 3/5) operations and entering auto credit market
marketing campaign
Risk mitigating strategy: careful study 11,7-18,7
Financial market instability and attention to cultural differences
Clayton through M&A gets 45- Auto loans market is very diversified, big 4,9
1,1-1,2 5,0-7,9
55% of the US market players have small efficiency. Thus look on 0,7-1,7
BH buys on-captive issuers of small players.
auto loans with combined market Risks: auto market shrink (likelihood: EBT will increase mainly due to entering auto loans
share 1-2% 2/5, impact: 3/5), BHAC underestimates market and buying Clayton’s competitors
BHAC further widens second- risk (likelihood: 3/5, impact: 4/5) 2,0-2,7
and more-to-pay insurance
Risk mitigating strategy: do not hurry
with auto loans and second-to-pay 0,8
insurance 0,1-0,2 1,0-1,4
0,1-0,3
Source: team analysis, National automobile lenders association, BH reports
Financial products business is a new point of growth: x2,5 in assets and x3,0 in revenues. Main growth driver is
the financial market instability. 13

14. Strategies
Manufacturing
2009-2014 action plan relating Points of attention, risks and mitigating
Financial highlights, 2014, $B
factors of importance strategy
Organic Growth Beginning and final result Cost reduction
Organic Growth Financial instability
Manufacturing displays stable Because of the crisis we assume that
growth based both on M&A and industry growth in 2009-2010 will be 0% Revenue will increase mainly due to industry growth
industry growth of about 3% After recovery in 2011-2014 growth will
annually till 2008 be about 3% 84
66 11 1
Risks: Recession in industry may remain 6
longer with deeper contraction in
consumer demand (likelihood: 3/5, impact:
3/5)
Cost reduction
Reduce osts by 6% annually Pay attention to improving logistics and EBT will increase mainly due to cost reduction
Improve operational efficiency data sharing, conservation of energy and
raw materials 5,13
4 0,08
Risks: due to relatively higher operating 0,7
0,35
costs reduction may not give competitive
Financial market instability advantage (likelihood: 2/5, impact: 1/5)
Lower raw material costs of Improve consumer service and relations
about 2% for ‘09-’10 EBT margin increases to get back to 2004 result
Risks: increasing price competition
No margin growth in ‘08-’09 (likelihood: 3/5, impact: 4/5) 0,1
due to increased price competition 0,08
Contraction in consumer
0,06
spending => decreasing plant
0,04
operating levels
03 04 05 06 07 08 09 10 11 12
Source: team analysis, BH reports
Manufacturing business focus on efficiency and post-merger integration to gain 50% increase in EBT in 5 years
14

15. Conclusions
Secrets of success
MUFI EBT 2009, 2014
and growth sources 1. Maximize profitability by targeting the issues of greatest
influence.
2009 7,6
2. Decrease BH dependence on Buffet by developing
MUFI businesses and slowing down equity investments
Insurance 1,4-2,5
MUFI Mission
Utilities and 0,8-1,2 • Insurance Be a source of low-cost long-term
energy money supply for Utilities
• Utilities Capitalize long-term money from
Manufacturing 1,13 insurance business
• Manufacturing Gain substantial profit and provide
Finance and 1,2-1,9 cash flow for Finance
financial products
• Finance Capitalize cash from Manufacturing
and provide excellent returns
2014 12,14,3
No need for external borrowings
“Price is what you pay. Value is what you get. ” 15
Warren Buffet