Let's Play: The Berkshire Hathaway Approach

[buells]

Introduction:
I thought I would provide a walkthrough of how I built a $168 billion company in my latest attempt. I am running Subsidiary DLC with the settings set forth in the screenshots below. I like to play with lots of cities and competitors and high AI expertise. I tend to experiment with different Product settings, but I always have macroeconomic realism set to high and inverse inflation. I set the price competition settings for this game to moderate to see how it compares to what the game was like before.

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Beginning: I started the game as a public company (largely by mistake). My first move was to max out my borrowings and build discount megastores in Lanzhou and Atlanta to sell imported goods. I built a bunch of apartment towers and commercial buildings in Lanzhou early on given that it was largely undeveloped.

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I used the cashflow I was generating from those enterprises to begin investing in R&D after hiring a chief technology officer with the right know-how. My main interest was getting into the market for appliances even though my expertise was in Body Care products. The Lanzhou seaports were bringing in Electronic Components and Steel, so I built my first factories in the seaport zone once my technology was competitive in 2007. I have attached a picture of the seaport zone in 2092.

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After developing a chain of Electronic Stores spanning the globe to sell appliances, in 2015, I bought several technologies in the Electronic Goods space. I built out an R&D capability in electronics to build on my acquired technological assets and hired a new COO with expertise in that space to run the research and improve my factory efficiency. However, my profits were declining because margins were beginning to come under pressure due to intense competition. My main competitor was Logic Logic. I slowly built up a position in their stock and used as much debt as I could to acquire them. In order to successfully integrate the acquisition and paydown the debt, I had to rationalize their operations once I had consolidated the market. Significant synergies were generated by closing down underutilized factories and redundant R&D facilities. Before I could buy them out, I had to issue shares to generate enough cash to remain in operation. Once the cash began flowing, I quickly bought back as many shares as I could to bring my ownership back to 70%. To generate more cash, I put their media assets up for sale and got $300 million for their TV station.

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My next move in 2028 was to purchase a controlling stake in a company called Speedy Avion, which I renamed Celeris Systems. Speedy Avion started as a stock focused company that went on to develop a small computer business. Over the next few years, I massively expanded their computer business to dominate the market with a focus on tablet computers and desktops. I sold Celeris Computer Stores I had acquired from Logic Logic and my next acquisition, Shining Star, which I renamed Horizon Mobility. Horizon was another tech play, this time focused on Smart Phones and HUD Glasses. These nascent markets were hardly being served and there was tremendous opportunity to grow. I transferred their Electronic Goods division to my holding company, Buell Corporation, and built more stores to sell their products. At this point, I noticed a problem with my operating model. All of divisions were operated as Internal Sales only so I could sell products to my retail stores at cost. This meant I couldn’t cross sell my products across divisions. While this was hardly ideal, I felt the benefits of highly competitive retail prices outweighed the dissynergies. I also could not sell my high quality semi-products (electronic components and CCDs) to my subsidiaries. However, I did transfer them the technologies required to make the best products possible. Horizon’s performance improved dramatically under my ownership, while Buell Corporation’s core operations were nicely augmented.

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In the early 2040s, I made two more deals. I acquired Round Petal and Three Brothers. I split up their retail networks and manufacturing between Horizon and Celeris to increase each company’s scale and merged the shells of each company flush with cash into my holding company.

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In 2049, with echoes of Kirk Kerkorian, I made my next big acquisition. This time, I took a controlling stake in a company called Target Strike, which I made especially to get into the automotive business. Buell Corporation had a great technology for steel, which I wanted to use in auto production. Target Strike was making about $170mm a year in gross profit from its car sales, but it only had 12% of the market. Its technology was behind the curve, but I had recently begun using Radical R&D to use my cash pile to drive big competitive advantages and catch up to competitors. I began building a massive automotive complex in Helsinki to begin taking share in the automotive market.

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Previously, Chariot had been purchasing its automotive inputs from competitors. I realized that the Car technology alone did not give me the quality advantage I sought, so I built out a whole supply chain to use newly improved technologies for Car Body, Wheel & Tire, and Engine to improve my products. I also built steel mills in the area under Buell Corporation that I used to supply the necessary steel at low cost. I managed these facilities myself to allow for external sales. Warehouses helped keep the supply chain running smoothly once the number of factories required to meet automotive demand exploded. Automotive sales reached nearly $2 billion a year with $1.45 billion a year in gross profit, even in a slow growth environment.

In 2067, I began increasing my stake in Mayfair’s predecessor company, Compass Point. Compass Point had been failing for years trying to operate as a huge conglomerate and the value of my stake in the company had dropped by $4 billion. To staunch the bleeding, I decided to take full control of Compass and orchestrate a turnaround. The first step was to shutdown the company’s failing Cosmetics, Leather Products, and Furniture divisions, which were far behind the competitors. Next, I changed the brand strategy to Range Brand to save several million a month in advertising costs. I decided to focus on the company’s Drug and Apparel divisions, which were the company’s gems. I bought another company called Beta Corp and merged it into Mayfair. I changed the management team and expanded significantly in the Apparel division, which seemed to have the best prospects.
In 2078, I acquired what came to be called James Corporation. I sold off its apparel division to Mayfair in order to focus it on Leather Goods and Footwear. Mayfair grew steadily as a result of these changes.

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[buells]

My next play was to try and do a roll-up of the Body Care and Cosmetics industries, which were controlled by a few weak companies in which I had acquired large equity interests over time. Spotlight Brands became the vehicle for consolidation. I bought Spotlight’s predecessor company and its competitor Hyper Power in 2087. I merged the two companies and then acquired Serpentine and SSA using Spotlight. I closed numerous R&D centers and factories in order to bring down the cost structure. Spotlight went from having a small market share to totally dominating most of its markets in just a few years. Many of these companies I acquired at a discount to book value, creating huge ROI.

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Here are my gains on the companies I bought and kept public:
Celeris: 1,028%
Horizon: 312%
Chariot: 321%
Mayfair: (1%) because I bought most of the shares before the company tanked under previous management
James: 308%
Spotlight: 548%
Each of these companies also throws off a healthy annual dividend I remit to the holding company, which has allowed me to generate a $66 billion cash pile at my holding company. I have $72 billion in cash across the fully consolidated group. I have received a total of $109 billion of dividends, much of which I have reinvested in buying various businesses.

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[buells]

Corporate Overviews

HoldCo

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Horizon

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Celeris

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Chariot

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Spotlight

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James Corp

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[buells]

HoldCo Products

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Horizon Products

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Celeris Products

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Chariot Products

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Spotlight Products

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James Corp Products

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[VRBones]

Nice writeup and makes me want to try out the Subsidiary DLC.

I also built steel mills in the area under Buell Corporation that I used to supply the necessary steel at low cost. I managed these facilities myself to allow for external sales.

Is there a setting to have internal sales include subsidiaries as well?

[buells]

Unfortunately not. That's one of the big problems you need to deal with. That's why I organize the subs by product class. You can do technology transfers for semi-products, but you have to manually do it from time to time because it can't be automatic.

The other big issue is brands. Because they are not transferable, you need to be careful about how you restructure divisions. That being said, it is usually worth it to just spend money to rebuild brands from scratch to gain the benefit of simplicity.

One other problem is using unique brands when corporate brands or range brands would do. I think it is much cheaper to use the latter when you have a rational product mix. However, you need to be careful if you start putting low quality or unlike products in a corporate shell that is using corporate brand because all of a sudden your brand rating goes to zero and profitability goes off a cliff.

[David]

Hi buells,

A really nice article! I've added it to the Strategy Tips page of the official Capitalism Lab web site: https://www.capitalismlab.com/resources/strategy-tips/

I will also post it on the Capitalism Lab Facebook page.

Best,
David

[colonel_truman]

Hello!

I had to comment about a couple of things, and then ask a question.

1- I use "Group" sales to be able to sell stuff across subsidiaries.
2- If you found cumbersome to transfer firms between your subsidiaries or after merging with AI corporations, there´s a poll here to improve that aspect.
https://capitalism2.com/forum/viewtopic.php?f=14&t=7060

The question: why do you use discount megastores instead of a combination of department stores & supermarkets?
Ok another one, how would you evaluate how well you have been using your cash?

I wonder if my laptop could stand such a massive scenario... without melting down...

[buells]

Truman,

1. I never noticed that option before. Is there a one-click way to apply it to all firms in your subsidiary group? Either way, thanks for the tip!
2. Yes, I voted for that. It would be helpful. Similar to the batch change training option in HQ, which is great for making farm training changes, for example.

For the discount megastores, I think the main reason is just laziness because I know that they will generate a ton of cash early on (kind of an exploit tbh) and it is easier than placing more stores per city. My retail headstart is kind of a throwaway strategy just to boost capital for investing in more defensible businesses. The one upside is that regardless of what products I begin making later, I can channel them through my discount megastores as well as smaller specialty stores without having to waste any space on low margin products I have to buy from competitors.

Speaking of which, the game really, really seems to reward vertical integration. I think there should be more ways to earn an excess return as a pure play retailer, but I don't have any brilliant suggestions on that. Maybe the private labeling strategy would work for this?

One problem with cap lab up until now regarding cash deployment and capital allocation has been that there is no clear investment hurdle rate. Any investment that generates positive cash is better than leaving cash lying around, especially when inflation is on. The new DLC (finance and banking) changes all that by offering unlimited passive investments in bank deposits, bonds, and the global stock market.

Early on, you just have to deal with the opportunity cost of finding the best possible investments. However, there comes a point in the base game when you have many billions in cash when anything with a positive expected return looks good because the cash is coming in faster than you can optimally spend it.

If we want to look at the real Berkshire Hathaway for guidance on how to spend our cash, they have historically looked at growth in stock price and book value per share as their key metrics for success (note they never pay dividends, which would interfere with this calculation). Interestingly, recently they have begun to focus on stock price as U.S. GAAP has introduced a lot of noise into the book value metric. In my game, I tend to look at the same. Stock price can be volatile, but it should track growth over time. Book value is calculated on a more reasonable basis in the game than in real life, but private subsidiaries tend to be undervalued in this calculation. I also focus on Player Wealth because it is fun to climb the Billionaires list, and let's face it, real tycoons usually focus on the same.

This goes beyond the scope of your question, but in terms of analyzing a particular business's performance, I like to calculate its Return on Invested Capital (also known as ROIC or alternatively Return on Net Operating Assets). The calculation in-game is Operating Income / (Equity + Debt - Cash - Stocks). I find in the game, a sustainable ROIC for a dominant business can be up to 30-40% assuming it doesn't hold land, apartments, or other lower return assets. I like to group real estate assets in one subsidiary to make it easier to audit performance of the underlying businesses. You can decompose ROIC into Operating Margin x Operating Asset Turnover. Operating margin is operating profit / revenue. Operating asset turnover is revenue / net operating assets calculated as (Equity + Debt - Cash - Stocks).

To raise ROIC in a mature business, I focus on eliminating idle capacity, exiting underperforming products, eliminating unnecessary R&D, replacing overpaid corporate executives, optimizing the brand strategy, selling off underperforming media assets, merging with competitors to improve pricing ( ), or trying to improve quality in the core business by various means. I find price wars are not helpful for reducing competition unless you have far superior quality in which case they can help you take share to some extent.

Just remember, optimizing ROIC is not an end in itself. It is only worthwhile in theory to close a biz earning $1mm a year if the cash generated by the liquidation can be invested to make more than $1mm a year. However, ROIC is a useful benchmark of something more fundamental. Rather than thinking about it like a bean counter, it is preferable to focus on building strong, cashflow generating businesses by any means at your disposal and closing business lines in which strong profitability is not likely.

Ultimately, the goal is to increase cash and assets that could turn into even more cash in the future. Cash is king after all, Cash Rules Everything Around Me, etc.

[jondonnis]

I still love this game. Play it on and off but I've unfortunately, even after all these years never managed to get this successful and understand the deep business side of it.

Would love a lets play of someone doing exactly as in this thread but explaining each part in easy to understand steps. So we keep the business speak but the person would explain what it all means and how to play it in the game.