The simplest definition of conglomerate is – a number of different things or parts that are put or grouped together to form a whole but remain distinct entities.
What a perfect description of a construction company! As I have said so often in the past, each time a construction company takes on a new project, it’s like going into a new business. When a general or CM construction company grows to $50 or $100 million in annual revenues or a specialty subcontractor grows to $10 or $20 million and handle multiple distinct projects at the same time, these companies cease to be owner operated small businesses and require the same unique management agility it takes to run big industrial conglomerates. Beliefs about how to run a small business are good enough to get a contractor started but go wanting when the small contracting business begins to emerge as a multi-project conglomerate.
Warren Buffett
Berkshire Hathaway is one of the largest publicly traded holding companies in the world with a market capitalization of more than $600 billion. Warren Buffett, its founder and legendary CEO, stands alone in the annals of business lore. How was he able to cobble together the diverse companies that add up to the cohesive group that comprise the mighty Berkshire Hathaway? What is his secret? What does Buffett know that few others seem to understand?
Buffett’s Beliefs
Buffett’s folksy wisdom and keen business mind merged to engender simple but profound beliefs that guide his investor/manager decisions. His beliefs set him apart from the rest.
What can contractors learn from Buffet as our companies grow beyond the owner/operator stage and begin to look like a holding company made up of diverse (project) profit centers?
Buffett Speaks
In his annual letters to stockholders Warren Buffett revealed his beliefs about business in the form of folksy practical observations. Let’s take a glance to see how his business beliefs apply to our industry.
- “Rule #1 – Never lose money”.
- “Rule #2 – Never forget rule #1.” – These two Buffettisims contradict the belief widely held in the construction industry that some projects lose money. It’s just part of contracting. Many construction professionals start with the belief that losses are to be expected and accepted. However, we see here that perhaps the greatest business analyst in history begs to differ.
- “Risk comes from not knowing what you’re doing.” – I have been advising contractors for many years to manage risk by avoiding growing too fast or taking on work that they have limited experience with. Buffett apparently agrees.
- Known as the Oracle of Omaha, Buffett analyzes and comments on business investing and management strategy with a great sense of humor and keen common sense. Here’s what he had to say about growth. “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth and then earns little or no money.”
- “When management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” In other words, an inferior estimate cannot be turned profitable by even the most brilliant contractor. Beware the dangers of an uninformed bid.
- “Only when the tide goes out do you discover who’s been swimming naked.” While I was completing projects for sureties, I was always surprised by how many contractors were shocked that they had run out of money. Rarely had any of them analyzed their own ongoing capital capacity. In other words, until their credit and cash dried up, they hadn’t seen the need to carefully analyze their ability to finance their projects. Buffett’s quote above often came to mind.
Common Sense
Many of Buffett’s observations are just common sense. I’ll close this blog with a couple that I can’t resist.
- “It takes 20 years to build a reputation and five minutes to ruin it. If you think about that, you’ll do things differently.
- I don’t look to jump over 7-foot bars (barriers): I look around for 1-foot bars that I can step over.
- There seems to be some perverse human characteristic that likes to make easy things difficult.
- It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.”
Next week we’ll talk about how to identify and train the next level of management as a company grows beyond the “one man shop”.
For a deeper look into business development, read more here: DEVELOPMENT
For a broader view into growth, read more here: GROWTH
To receive the free, weekly Construction Messages, ask questions, or make comments, contact me at research@simplarfoundation.org
Please circulate this widely. It will benefit your constituents. This research is continuous and includes new information weekly as it becomes available. Thank you.
