Salomon Brothers – 7 Paradigm shifts

Machine age to organic – Meriwether saw the light of how to successfully pick arbitrage men. He sought men of scientific and mathematical backround, instead of men with degrees in business. Meriwether recruited with high technical skills so that their analysis would be more mathematical and scientific, resulting in an innovative and extremely successful arbitrage group. Monolithic to Pluralistic – When Salomon Brothers was attacked by Revlon, Gutfreund was able to call on Warren Buffet to bail him out, but at a cost. They lost 108 million in capital and now had to pay 63 million in dividends every year.

This takeover stemmed from Gutfreunds lack of ability to control stakeholders, and an inability to shift to pluralistic management. Salomon’s largest shareholder was looking to sell its shares, and Gutfreund wasn’t accommodating. They therefore went elsewhere to get sell them and gave nemesis Michael Milken an opportunity to attempt a takeover. Milken’s motivation towards attacking Salomon and Grutfreund was the insulting actions of Grutfreund such as treating Milken as an inferior and broadcasting damaging information to his clients.

Instead of letting Milken sleep he woke him and angered his financial power. Competition to Collaboration – Gutfreund was successful in making Salomon a collabarating entity in the ’80s. With the growing market and opportunity high volume deals, he saw the need for a large amount of capital. He sold Salomon to Philip Brothers for a relatively cheap price, but gave a large his traders a large financial base for them to gamble with. The result was a increase in the types of deals Salomon could make and in turn, ended up making more money than Philip Brothers.

Almost immediately Salomon was the leader in a number of different industries and markets. Structure to Process – Gutfreund was a trader by nature and never really appreciated the role of manager. Thus when he was at the reigns he set up things so that the traders could operate freely without restrictions. Traders were allowed to trade as much as they want, and as a result made as much money as they could. There was no structure to restrict them, only their own process to make money. Gutfreund tripled the size of Salomon in 5 years so that they had the manpower to take over a market.

However visionary, Salomon Brothers never realized the importance of the junk bond market, to which Milken came to dominate, and Salomon had only a small part in. Except for the money making aspect of Salomon, the management didn’t effectively handle administrative duties such as costs and authoritative duties. Partners would have their wives take company cars out on weekends, and upper management (Grutfreund himself) would make decisions paternally. National to Transnational – Gutfreund took the risk of expanding to accommodate the growing/linking international market.

He opened offices all over Europe and Asia so that Salomon would be all over the global marketplace. Also he expanded the foreign currency exchange operations. This shift is one of necessity due to the constant competition resulting from globalization. Corporations now compete in markets around the world creating hyper-competition in most industries. If Gutfreund doesn’t implement a global prespective, than the next firm will. Short-tem to Long-term thinking – Grutfreund in compensating his employees didn’t realize that not compensating them properly, by not giving them a cut of their earnings they made for the company he would loose them.

Other firms were dying to get their hands on the skills and inside information that Salomon brothers possessed and would pay them the millions they wanted. Many traders left decreasing the market position at Salomon and increasing it at competing firms. Nor did he change to accommodate the growing junk bond market when other firms did and missed out on those profits. Gutfreund was also blind to market change and new markets once Salomon had reached the top. Getting Salomon to the top was one of good shifts, but Gutfreund failed to see the long term picture.

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