Berkshire Hathaway SWOT and PESTLE Analysis

Strength

1. Diverse portfolio of businesses across sectors: Berkshire Hathaway owns many businesses across different sectors like insurance, media, utilities etc. This portfolio of diverse investments ensures that the company can tide over slowdowns in a particular sector through favourable returns obtained from other high performing sectors. However, in case of a booming economy with all sectors rising, the combined returns obtained by the company would be phenomenal. The company can then choose to exit that sector and focus on other sectors, or alternatively choose to move into the renewable energy business if it finds a suitable investment target. Berkshire also has stakes in 15 companies in different sectors that had the largest market value as of the end of 2017. Some of these investments are in major corporations like American Express, Apple, Moody’s, Coca Cola and Wells Fargo.

2. Strong liquidity position with no debt: Berkshire Hathaway maintains strong liquidity with low debt levels. Buffett has reduced the average maturity of Berkshire’s bond portfolio so he can act quickly. With more than $100 billion in cash and cash equivalents as of 2018, Berkshire Hathaway now one of world’s largest owners of Treasury bills. This large cash pile ensures that Berkshire never faces any financial obligations and the company can leverage on investment opportunities at the appropriate time.

3. Sound investment decisions of Berkshire Hathaway led by Warren Buffett and team: Berkshire Hathaway was originally a textile company in which Warren Buffett had invested in 1962. When the company could not compete with foreign lower cost textiles, he decided to turn the company into a holding company that would be dedicated to investment in companies that have a sustainable business advantage, also called ‘wide-moat businesses’. This led to Berkshire having a presence in many sectors today. Buffett and his team could also manage to make money from the company’s insurance business by tactfully using the excess cash (float) gained from the insurance business to buy companies. Buffett and his team have made bold investments in businesses where other investors feared to invest.

4. Consistent 5-year growth rate despite economic slowdown: In Q3 2018, most of Berkshire’s businesses showed high growth rates of operating income: 100% for insurance, 9.9% for BNSF (railroad), 14.6% for energy, 5% for apparel and 8% for Duracell. Only manufacturing and service & retail businesses showed a fall in operating income of 24%. These growth rates were for just one quarter and during strong economic conditions. However, during the last 5 years, the economy’s growth rate was below 3%. Even then, Berkshire’s 5-year CAGR of revenue and net income (8.3% and 24.8% respectively) far exceeded the combined 5-year CAGR of revenue and net income for S&P 500 companies (1.8% and 3.5% respectively).

Weakness

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Opportunity

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Threat

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Political

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Economic

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Social

1. Rising demand for renewable resources: Due to rising awareness of the environment pollution, there is a trend of societies leaning towards a preference for renewable sources of energy. Local communities in some places have set up their own solar power generation units and stopped consumption of power from utility companies. Excess power generated by these communities is sold to these utility companies. In such a scenario, energy companies like Berkshire Energy have to consider changing their business model. For instance, communities are likely to face difficulty in maintaining the power generation infrastructure, which is an opportunity for the companies to collaborate with the communities and showcase their expertise in helping maintain the infrastructure.

2. Balance of power in insurance sector shifting from companies towards customers: Traditionally, the insurance sector’s sales were mostly driven by agents selling the products to customers. However, nowadays there is a trend towards customers proactively buying insurance products, that too directly from the company instead of products being pushed on them by agents. This is because of the rise of social networks enabling people to connect and share information. The buying behaviour of the people is being influenced by trusted friends rather than by insurance agents. In this new reality, Berkshire’s various insurance businesses, being critical sources of cash for the company’s investments, must change with the trends and come up with new business models and more consumer friendly policies to remain relevant.

3. Rise of sharing economy: The rise of sharing economy would impact various sectors. There would be threats to existing business models of companies, but sharing economy can also be an opportunity for these companies upon changing business models to accommodate this trend, or there could also be an opportunity in the form of new markets. For instance, in the manufacturing sector, the threat would be customers who used to buy products would highly likely stop buying if they feel sharing is a cheaper alternative. However, there is also an opportunity because people who would normally not buy the product because they might not use it frequently, would now buy the product with the intention of sharing it with other people whenever they are not using it, thereby earning some money in the process. Thus, new markets open up for the company’s products. Similarly, retail companies are also threatened by the sharing economy but they can adapt by changing their business model to partner with sharing-oriented platforms like Uber, TaskRabbit, etc. to create a win-win scenario for everyone. Businesses are slowly moving to platform-based business models that enable sharing of resources. This is a lucrative investment opportunity for Berkshire. It is a win-win scenario for the new companies as well as Berkshire. The new companies in need of funding can benefit from the huge cash reserves of Berkshire, whereas Berkshire can benefit from high ROI upon investing in these companies.

Technological

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Legal

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Environmental

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