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    Berkshire Hathaway: Economies of Scale

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    Economies of scale question:

    Choose one of the top US firms on the list below:


    Do a little research into the company that you choose. Discuss the likely sources of economies of scale that are the foundation of their large size.

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    Berkshire Hathaway: Economies of Scale

    Warren Buffet's Berkshire Hathaway (BH) is a holding company that controls substantial percentages in other firms. A holding company is a firm that deal only with the financial planning of other concerns and produces nothing valuable of itself. Therefore, the question of scale does not deal with production, but must be found elsewhere. The single salient fact is that BH is an investment company that manipulates capital in such a way that returns are normally higher than if these were invested separately.

    In general, it is reasonable to hold that scale matters here due to more intellectual and otherwise intangible factors such as media presence, access to financing, political influence and a reputation for strong growth. As is well known, BH owns a substantial share in GEICO Insurance, Coca Cola, American Express, Acme, Shaw Construction and many others over nearly all sectors. Annual revenue is about $18 billion, and average growth since Buffet took over in 2010 has been about 35%. It does not hurt that the former President of Yahoo, Microsoft's Bill Gates and COSTCOs Charles Munger sit on the board.

    For media relations, the founder of Allen & Company also sits on the board, Donald Keough. The point is that with this expertise and media clout, opportunities come around to Buffet that no one else has access to. This is a scale issue of itself. If it were not so large and wealthy, a) these people would not sit on the board, and b) banks would pay them no mind, especially in an economic downturn. As of 2013, no bank dares to reject Buffett (as it happens, Omaha has more banks per capita than any other city on the planet except Hong Kong). The point is that the size of BH gives it the celebrity clout to get first dibs on anything that comes around.

    Now, any analysis of BH will deal with scale issues related to finance. Buffet's reputation and media presence, including his skillful manipulation of his own image, means that BH gets opportunities before anyone else. During a decline, BH would not be harmed at all, since they are one of the few firms that investors do not worry about as they put ...

    Solution Summary

    The economies of scales for Berkshire Hathaway are determined.