Eitan Wertheimer and Warren Buffett at the IMD business school campus in Lausanne, Switzerland, on May 20, 2008.

Last week, American investor Warren Buffett, CEO of Berkshire Hathaway Inc., and Eitan Wertheimer, Chairman of of Israeli company Iscar, visited the IMD business school campus in Lausanne, Switzerland to celebrate 20 years of family business research and education at IMD. The school also issued its World Competitiveness Yearbook 2008, this month.

90 MBA partcipants attended the IMD auditorium to discuss “The Oracle of Omaha Meets the Visionaries of Galilee,” a newly released IMD case study that focuses on how the Israeli family business ISCAR became a part of the Berkshire Hathaway dynasty, run by famed investor Warren Buffett.

MBA Program Director Benoît Leleux began by asking the two guests about ISCAR’s growth into a global enterprise and their decision to look to Berkshire Hathaway for a long-term solution to maintaining its future.

“The culture of ISCAR was set by my father,” said Wertheimer. “Starting with the basics: respect people, ask real questions and know what you want. Over time the business grew and became more complex. We wanted family members to have an option to join rather than feeling an obligation, whilst also maintaining our commitment to employees and customers. We heard of Berkshire Hathaway, investigated the company and knew we had found a match. I told Mr Buffett that I would either sell to him or to no-one.”

Warren Buffett explained how a 1¼ page letter was enough to convince him to open up investments outside the US by making a deal with ISCAR.“I usually know within five minutes if I’m going to make a deal. The letter gave the basic facts and told me something about the person who ran it – I could see in my mind a man with a passion for his business.”

Passion was a key theme that ran through the ongoing discussions as the IMD MBAs eagerly took up the challenge of adding their own questions. The answers that followed revealed a man who has maintained his philosophy even as he has evolved to being the richest man in the world. Buffet described his approach to selecting investments and assessing people, his management style and the strong culture of his company, his belief in applauding people’s achievements, and his definition of success. He interspersed the advice he shared with the MBAs with frequent one-liners that underlined a down-to-earth humor that seems to match his approach to business and life.

“I don’t have a master plan. I started in 1965 and went to the office each day and did what I like doing: I designed a business that fit me and that I thought would work. I allocated capital as it came in and seized opportunities… Every day is exciting... It’s an unfinished painting that keeps developing... I would get bored doing the same thing each day… I know my limitations and I know how to spot successful businesses.”

"Family-owned businesses share our long-term orientation, belief in hard work and a no-nonsense approach and respect for a strong corporate culture,"stated Buffett. "Family businesses and Berkshire Hathaway have a common philosophy and make a good team."

"The case of Berkshire Hathaway and Iscar is testament to the value of family business," concluded Professor Joachim Schwass, Director of the IMD Family Business Research Center. "IMD is one of the first business schools to offer world-class family business education. For almost a complete generation, we have addressed the challenges of family-owned companies and we are truly honored that Mr Warren Buffett and Mr Eitan Wertheimer decided to celebrate our 20-year anniversary with us here at IMD."

20th Year Anniversary Release !

Again this year, the United States is first in the rankings of the 2008 IMD World Competitiveness Yearbook.

But IMD asks will the United States’ run continue? In 1989, Japan seemed firmly in the number one position with the US in third. By 1994, however, the US took over leadership, a position it has held ever since. The downfall of Japan in competitiveness bears some similarities with the present situation. Will the US follow the same path?

Ireland get a 12the place ranking - - Scoreboard.

In the 20th Anniversary edition this year, the US is in the number one position. Singapore is closing the gap (score of 99.3) with the US and 2008 might be the turning point where the US falls from its leadership of top competitors. Will the country rebound and regain its famous competitive advantages?

Looking back over the 20-year history of competitiveness, IMD says that we may learn some lessons from another leading country’s experience – Japan.

Professor Stéphane Garelli said in a commentary titled: Towards a US remake of the Japanese tragedy?

“In 1989, when we first published our ranking on competitiveness, Japan was firmly in the number one position, while the US was third. Japan’s competitiveness seemed unassailable, with a strong domination in economic dynamism, industrial efficiency and innovation. Then all hell broke loose: the stock market went into reverse in 1989, land prices collapsed in 1992, credit cooperatives and regional banks came under attack in 1994, large banks teetered on the edge of bankruptcy in 1997 and a major credit crunch occurred in 1998. Does this ring a bell?

The past crisis in Japan bears some resemblance with the present turmoil in the US. It followed a period of economic boom, real estate price follies and exuberant assets expansion. In addition, the liberalization of financial instruments took place without the appropriate regulatory environment; corporate governance was inadequate with little accountability and transparency; and the government was quickly overwhelmed by the magnitude of the crisis.

The price? The crisis in Japan spread from the stock market to real estate and then developed into a credit crunch and finally into a major crisis of the financial system. As a consequence, no bank was too big to fail! The resulting cost of bailing out the financial system was huge: 15% to 20% of GDP over a 10-year period. Deflation spiralled down and interest rates dropped all the way to zero. The Japanese economy stagnated for a decade. Frightening… Will this happen to the US? Once it starts, the logic of a financial crisis seems hardly stoppable.

On the other hand, the differences between the two economic societies are quite large. Apart from a few notable successes (Canon, Toyota, etc.), by the 1990s, much of Japanese industry was in a paralyzed state. The Japanese never practiced “creative destruction”. The US, because of its openness, resilience and entrepreneurship, always seems to find the means to reinvent itself in ways that Japan (and much of Europe) often lacks.

In addition, the US has a few trumps in hand: the Japanese breakdown of the 1990s provides some forewarning. The Federal Reserve and the Treasury were thus quick to realize the magnitude of the risk, and will continue to take drastic action. Central banks are supplying massive liquidities to financial markets and act as lenders of last resort (e.g. in swapping mortgage-backed assets); emerging sovereign wealth funds seem to be willing to recapitalize financial institutions (such as CITI, Merrill Lynch or UBS); and the global economy is still buoyant (110 countries grew over five percent in 2007).

Will it be enough? The structural deficits in the US (balance of trade, budget and, as a consequence, national debt) have ultimately to be addressed otherwise the dollar will remain weak. A recession in the US is a strong possibility. Will it last and will it spread? In both cases the answer is yes… The financial sector represents 40% of US corporate profits. In addition, the IMF reckons that a 1% fall in US growth cuts European growth by 0.5%. Furthermore, high raw material and food prices trigger imported inflation at a time of low interest rates – pretty nasty… 2008 will be rough.

In the 20 years that we have ranked and analyzed competitiveness, we have learned one thing: no nation, however competitive, is immune to a breakdown, especially when it stems from the financial sector. In the words of Benjamin Franklin: “even a small hole can sink a big ship…”