Every chief executive in Australia and every investor in Australia should sit up and take notice of the latest Warren Buffett strategic move on Kraft. And if Australian politicians and public servants were to embrace Buffett’s new plan we could slash the deficit.
Warren Buffett’s strategic thinking in recent decades has been an inspiration for all. But this new approach is achieving even more amazing investment returns.
To help readers understand the new Buffett approach and how it can apply to all Australian companies and governments let me take you back into history.
Buffett’s Berkshire Hathaway made its fortune by buying businesses and letting their existing management run them and create value. Buffett was a genius in picking the right managers to support.
But two years ago he did something very different. At Heinz, instead of backing the existing people as he had done in the past, Buffett joined with the 3G Capital group, an investment firm based in New York, to get control of Heinz.
Buffett had seen how 3G Capital had turned around Burger King and gave them the brief to do the same thing at Heinz.
In Australia, when Heinz was food processing, the company was one of the worst managed companies in the country and I have little doubt that what we saw in Australia was duplicated in the company around the world.
3G Capital went into Heinz and managed the company in the 3G style, enabling Buffett to quadruple the value of his investment in just two years. It was no fluke -- that’s exactly what Buffett and 3G expected to happen.
I am sure Kraft management are still using many of the outdated techniques that Heinz used, so there is every reason for Buffett to expect similar returns at Kraft to Heinz.
But the techniques 3G uses to create such huge profits can be applied to most Australian companies and to the public service.
I am indebted to Tim Worstall at Forbes and the Wall Street Journal for this description about how 3G transforms companies.
At Kraft, 3G will implement the technique it used at Heinz called “zero-based budgeting”, an austerity measure that requires managers to justify every one of their spending plans from scratch every year.
The technique triggered sweeping cost cuts at Burger King and Heinz, including eliminating hundreds of management jobs, jettisoning corporate jets and requiring employees to get permission to make colour photocopies. The technique insists that managers prepare each year’s budget starting with a blank sheet of paper.
I have done countless corporate budgets in my time and, apart from start-ups, they were all based on adjusting the previous year’s figures.
3G has found that when managers start with a blank piece of paper each year they are forced to actually think about how they going to justify each item of spending.
The concept that “we’ve always done it this way” or “last year plus a bit” doesn’t work. Zero-based budgeting produces totally different results from the commonly used budgetary systems.