Market-Based Management®

The Inventor of “Franglais” Dies at 66

Miles Kington, the man who coined the term “Franglais” died at the age off 66 today. Mr. Kington had no official power over language. He could not tell people what to say, yet many people have adopted Franglais. I’m no sophisticate and don’t speak French, but I do mix in French words every once and a while when the 2.5 million words in the English language let me down or are inconvenient. For example, je ne sais quoi? is a lot easier than saying, “there’s just something about that person that I can’t put my finger on—do you know what I mean it’s just the way you know….?” Declaring détente with someone is a perfectly polite way of saying “I want peace with you but you’re still a jerk.” The French have more than returned the favor by adopting such English words as le weekend, le e-mail, and, most recently le rogue trader. However, such adaptations of the English language are not always flattering; I have heard that in France to get an American deal means you got swindled.

Mr. Kington’s death reminds me of Freidrich von Hayek’s description of language as spontaneous order. No one person or committee “invented” language, a lot of different people just kept experimenting with lots of different grunts and gestures, until they all used the same grunts and gestures. Eventually, people began assigning symbols to these grunts and gestures and voila!—written language. Mr. Kington picked up on how people tended to mix the two languages, wrote the phrases down or invented knew ones, and watched and listened as folks either ran with his ideas or rejected them. Franglais is a reminder that language is a product of ordinary people. The people decide what is a word and what isn’t—not the dictionary or the self appointed language police. For example, many people tell me that “incentivize” is not a word (spell check just did), but I think it is a word because a lot of people use and understand it. Rest in peace Mr. Kington, and thank you for your wit and insight into how the world around us really works.

Bah Humbug! Economists Accidentally Ruin Christmas

Ordinarily, there is nothing wrong with honest enquiry into how the world works, and we like to encourage economic thinking. However, every Christmas the same argument is presented that Christmas is “inefficient". The argument goes something like this: Al spends $20 on a fruitcake for Mom. Since Mom only values the fruitcake at $5, and would have instead placed a value of $40 on $20 worth of cosmetics, then Al is out 20 bucks and Mom is missing $35 in consumer surplus. Perhaps it is the thought that counts, but in a nation of 300 million people, the deadweight costs of Christmas gift giving added up to an estimated $4 billion in 2001.  Sentimentality and thought are not taken into account, but the fact remains that gift givers are less likely to fully understand the subjective values of gift recipients.

Of course, folks can overcome this inefficiency by giving cash, but cash can sometimes seem impersonal; and we worry that recipients will not use the money to “treat themselves”. So instead of money, we go to stores and purchase gift cards which, offer more fungibility and say, “hey, I cared enough about you to brave the crowds and go and buy this rather than just cutting you a cheque.” Unfortunately, gift cards present deadweight costs of their own. A percentage of recipients may lose them or fail to use the full amount. Furthermore, the lag between purchase and use is essentially an interest free loan to the issuing retailer.

Although gift cards may lessen the subjective value problem of gift-giving, they do not completely alleviate it. A parent may give a gift card to child for a store the child would not be caught dead in. If Al gives Mom a gift card for Home Depot, and Mom gives Al a gift card for Tiffany’s, then the deadweight loss will be considerable. Fortunately, the rise of internet exchange (via e-bay) has created a secondary market in gift cards. Unfortunately, according to this article, these gift cards tend to fetch 80 percent of their value, which still appears to diminish the gift, despite increasing the consumer surplus for the recipient (they presumably still value the 80 cents in cash more than the gift card dollar). Some gift cards do better than others in both redemption percentage and in the secondary market. Supermarkets enjoy the highest redemption rate (98%), while gift cards for large “big box” retailers sell for about 90 percent of their value on the secondary market. Specialty stores suffered both the lowest redemption rates (85%), and only traded at around 80 cents on the dollar. Lastly, higher denomination gift cards were more likely to find their way onto to secondary market and tended to trade at steeper discounts.

So if you don’t feel like braving the stores and want to spare your friends and loved ones the bother of re-selling their gift cards and suffering dead-weight losses, then there is nothing wrong with gifting a little medium of exchange this holiday season. Please feel free to enclose this post as an explanation for your gift and to highlight the extra 20 percent in consumer surplus included in your gift. However, please note, this advice does not extend to either diamonds or ponies.

Looking for Adventure and Finding Economics

Economics is not a popular topic, and understanding of it is not widespread.  Accordingly, literature, film, music, and popular culture in general are almost completely devoid of solid economic understanding.  Economists usually confound the problem by writing for fellow economists and not the public at large—although the latter trend has been shifting of late.  Indeed the giants of economics (Adam Smith, von Mises, Hayek, etc.) can be almost unreadable—at least on the first try.

With this in mind, I was delighted to find an excellent piece of good economics in an unlikely place.  Being a big history geek with a fondness for swash and buckle, I have been going through Bernard Cornwell’s Sharpe series of books, which are set against the backdrop of the Napoleonic Wars.  The following little speech by Colonel McCandless to Private Sharpe struck me as a succinct and clear summation of the forces behind a prosperous (not to mention livable) society.

Without trade there is no wealth and without wealth there is no society worth having. Without trade, Private Sharpe, we would be nothing but beasts in the mud.  Trade is indeed worth fighting for, though the good Lord knows we don’t appreciate trade much.  We celebrate kings, we honor great men, we admire aristocrats, we applaud actors, we shower gold on portrait painters, and we even sometimes reward soldiers, but we despise merchants.  But Why?  It is the merchant’s wealth that drives the mills, Sharpe, it moves the looms, it keeps the hammers falling, it fills the fleets, its makes the roads, it forges the iron, it grows the wheat, it bakes the bread, and fills the churches and the cottages and the palaces.  Without God and trade we would be nothing.

If only there was more such economic wisdom in literature, film, and the arts.  Of course, it might put me out of a job, but it would be worth it.

The Five Percent Solution

I had always thought that the Dilbert cartoon strip was created from the beginning to make fun of the "cubicle culture" - the modern dysfunctional workplace.  Not according to Scott Adams:

When Dilbert launched in newspapers, the response was underwhelming. In the early years, it wasn’t a workplace strip. It was about Dilbert’s life in general. He just happened to have a job. I was surprised to learn, via my e-mail, that readers loved the relatively rare comics featuring Dilbert in the office. Personally, I didn’t think those were my best work. My ego told me to do it my way. My readers told me I was wrong.

Receiving negative feedback - from the market, customers, bosses, co-workers, employees - is never fun.  But we ignore it at our peril.  Ego can get us into a lot of trouble if we don't manage it.    We can feel threatened when we receive feedback telling us we're not doing as well as we could be... and that causes us to get defensive.

What the hell do readers know? After all, they aren’t syndicated cartoonists, and I was, albeit in only a few dozen newspapers. But this time, fortunately, I ignored my ego, changed the focus of the strip to workplace humor, and it took off.

My grandfather once told me, "if someone calls you a donkey, laugh at them... but if everyone is calling you a donkey, buy a saddle and start selling rides."  In other words - think about what people are telling you and don't ignore reality. 

A colleague once told me that when listening to feedback he assumes 5% of it is true.  This allows him to avoid getting defensive and to start getting curious about which 5% - so he has to consider all of the feedback.  It is good advice that might lead to some rather spectacular breakthroughs in your performance. 

Give it a shot - it worked for Dilbert.

MBM Summit Stirs Memories of MBM Past

The second annual MBM Summit was held this week in Atlanta, Georgia, and it was great to finally meet many of the folks who teach MBM around the world—especially those who do so in German, French, Chinese, Spanish, and Portuguese.

Although we spent a lot of time talking about how hard it was to build an MBM culture, I couldn’t stop thinking about the first MBM class I ever attended as a sixteen year-old lab technician in Medford, Oklahoma (summer of 1994). Although by that time MBM had been simmering in Mr. Koch’s head for decades, the actual teaching of MBM to employees was pretty new. Looking back, those doing the teaching did a great job and really brought the lumber; it’s just that the lesson was heavy on straight shots of Hayek, von Mises, Polanyi, and Schumpeter. As these great thinkers often puzzle professors and graduate students, you can imagine the impact on a sixteen year-old kid and his colleagues involved in the storage and movement of gas liquids. Needless to say, the result was an excellent academic lesson that few people could understand, let alone conjure up ways to apply in their day to day jobs.

Now fast forward thirteen years to an MBM Academy I sat in on two weeks ago. Although the philosophy was the same—as was the invocation of the aforementioned great thinkers—the presentation was smooth, easy to understand, and peppered with teaching activities and examples of real life applications which did much to personalize the philosophy. Different employees from many different companies were nodding their heads in agreement and understanding, while the token few surly types who were obviously not happy to be there gradually got in to it and soon accepted the fact that this was worth their time.

I am in no way, shape, or form trying to disparage those who rolled out the first MBM classes for employees; they did a fantastic job and provided an ideal starting point. I just wanted to point out that as difficult as it is to build an MBM culture, those teaching MBM have done a tremendous job of refining and developing the courses over time. MBM Academy is light years ahead of where it was, and this is due to the people involved at every stage of the process. As employees leave academy today, they may not remember the philosophers’ names or who said exactly what, but they retain an understanding of philosophical principles that many academics take years to learn and, in many cases, often fail to completely wrap their heads around.

Understanding and applying MBM is not easy, but thanks to some of the tools painstakingly developed, I’d say the chances of eventually realizing a vibrant MBM culture are pretty good.

Profit and Ethics

Koch Industries CFO Steve Feilmeier was the guest speaker in our MBM class at Wichita State University yesterday, and he had some interesting things to say about ethics in business. While widely-publicized recent corporate scandals have fostered in many people's minds the notion that the pursuit of profit by its very nature leads to poor behavior, Feilmeier has a very different perspective. Profit, in a system of free exchange, is an indication that someone has created value for others. When companies fall into ethical lapses, more often than not it is because they have failed to discover how to create real value. As Feilmeier noted, "At the root of many of these  scandals is a business model that isn't working."

When companies have discovered how to deliver sustainably superior value to customers, in other words, they don't need to engage in creative accounting, or political efforts to restrict competition. Their successful pursuit of profit is one of the key things that distinguishes them from unethical companies. It's an inability to legitimately turn a profit that leads some corporate actors to behave poorly.

With this in mind we can begin to see one of the ways that the concepts embodied in the term "Principled Entrepreneurship" fit together. Effective entrepreneurial action produces profit, making unethical behavior a waste of time. A culture infused with strong principles, meanwhile, makes unethical behavior a non-starter. One of the advantages of building a company based on principled entrepreneurship, then, is that it will be filled with people who, most importantly, will not tolerate any violation of law or integrity, but also who would never need to do such a thing, because they are focused on creating genuine value for customers.

A Visit from Pete Boettke

Yesterday, the Market-Based Management Institute was delighted to host Professor Pete Boettke from George Mason University. Pete spoke to my evening Sustainable Economic Development class at Wichita State and was his usual jovial and animated self. Aside from his obviously erroneous assertion that Red Dawn is “a bad movie,” Pete presented an otherwise flawless and excellent account of not only the failures of Soviet-style socialism but the equally import tale of how the fall of communism was hardly replaced with anything resembling free-market capitalism.

While I learned much from Pete’s talk, I was happy to hear him simplify much that was already familiar. For example, Pete stressed that if the students should take anything from his lecture it should be the three P’s and the three I’s. The three P’s are property, price, and profit/loss. These three things are the foundations of prosperity, because they allow for the three I’s – incentives, information, and innovation.

While the three P’s are well know to us in society, they are often missing from within the firm. For example, employees often lack any sense of ownership in their jobs. They are expected to do as they are told and only those at the top “own” any authority or decision rights. Secondly, price signals are usually alien to the internal workings of the firm. Employees often conduct activities or consume internal goods with no idea what they cost the firm or contribute to the bottom line. Lastly, while profit is often misunderstood, it simply describes the spread between the value society places on the finished good as compared to the resources used to make it. Losses indicate that resources are being wasted and better uses need to be employed, while the wasteful activity is discontinued.

Employees need to know how they contribute to the firm’s profit and loss, so that they can devote their time accordingly, cut out unwittingly wasteful behavior, and ensure that the firm’s resources are devoted to their most value-added uses. Simply put, the things that make countries prosperous can also work for the firm. Whether you are new to Market-Based Management or an old pro, it certainty couldn’t hurt to take a look for the three P’s in your business, because you might find that your problems dwell wherever the three P’s are not at home.

Long Live the King?

Roger Ehrenberg has an interesting post about the newly crowned king of the auto world, Toyota. Ehrenberg evokes Schumpeter's creative destruction model to suggest that even a successful company like Toyota faces the danger of being made obsolescent by its competitors. In fact, maybe Toyota faces even greater danger than other companies, Ehrenberg suggests, because of its size and success. We forget that in the past, companies now viewed as dinosaurs (or at least stumbling giants) -- Montgomery Ward, Sears, Kmart -- were feared to be unstoppable juggernauts who would crush all competitors.

If a company's very success can be its undoing (a thesis advanced more recently in Clayton Christensen's The Innovator's Dilemma, among other places), then is there any hope of surviving creative destruction? Only by internalizing a creative destruction mindset, so that we continually view all of our activities, processes, systems, and products with the eyes of the hungry competitor, the demanding customer, and the unsentimental investor. Making onself obsolete, as Drucker noted, is far cheaper than waiting for the competition to do it.

So will Toyota be able to continually renew itself from within? That's the question its customers, owners, and employees are hoping it will get right. It certainly seems to focus rigorously on cultivating the creative destruction mindset within. We'll see if it's enough to overcome size and success.