How Buffett taught us to run away from companies doomed to fail

How does Warren Buffett teach us to evaluate a healthy organization, whether big or small?

In the shareholder letter written by Buffet in 1989, he coined the term “institutional imperative” to suggest “ … rationality frequently wilts when the institutional imperative comes into play.”

What is institutional imperative?

1. how an entire organization can rise to help a boss justify some deal he’s inclined to do, regardless of its merit

2. any company’s inherent propensity to do dumb things (or avoid doing smart things) simply for the sake of doing them.

_{From urban dictionary}

If you still feel confused, let me give you an example.

Do you still remember Kodak?

When we were kids, we took photos on our field trips, and we always had to bring a couple of films in our pockets in case we ran out of them during the day. After the trip, we headed to the store and ask the lady(or dude) behind the counter to wash out the good, the bad, and the ugly photos we took, without the choice to pick. What a fond memory, huh?

The digital camera came to play, and it change the photography industry. And who’s the first one to figure out the digital photography technology? You guess it, it’s Kodak.

But wait? where is Kodak right now? I saw Sony, Canon, Olympics…👀

Kodak is focus too much on its organization process and structure at that time. They refuse to adapt and introduce the new technology because it will hugely jeopardize their film business, which is what they do for a living!

Hence, the institutional imperative leads the company to risk aversion and not thinking in long term, and eventually, Kodak filed for bankruptcy in 2012.

How is this related to an employee?

When a company is not adopting a growth mindset, it stifles innovation and creativity among its employee. This can lead to decreased employee engagement and satisfaction, as employees may feel that their ideas and contributions are not valued.

And while the company focuses on its process and structure without taking in new ideas or adapting to changes. This will inevitably deprioritize other important goal, such as employee well-being and career growth.

Furthermore, since prioritizing their survival is their sole focus, there will be lots of inefficiencies happen in their operation. They will not want their employees(or anyone🙄) to know that, so they won’t be held accountable.

If you are in the organization, try to watch out by answering the following questions:

1. Does the company take risks to change its current structure and process? and how long does it take? A quarter is enough to make some visible differences.

2. Are you clear about why they are making certain decisions? Are companies transparent about their decision-making process? Or you are told to trust your team member to do the right things?

3. Do they hold themselves accountable when they miss the target? or they just brush it off as if nothing happened.

I am sorry if your answer to these questions pointed to “institutional imperative” in your organization. But also, congrats to take the first step to understand what kind of shit show you are in right now. Plan your next move based on it!

Update your resume, build your portfolio, apply for other positions, etc.

Do whatever you see fit. You know your value, so find a company that embraces changes and brings your utmost potential!

That’s all for this week, until then, take care!