Market-Based Management®

On the Integrity of Nations (and Business)

I find great pleasure in discovering Market-Based Management principles in books completely unrelated to business or economics. While reading The Second World War by Sir Winston Churchill, I came across this remarkable passage in chapter 16:

Honesty is the best policy, several examples of this will be shown in these pages. Crafty men and statesmen will be shown misled by all their elaborate calculations. … If a government has no moral scruples, it often seems to gain great advantages and liberties of action. But all comes out even at the end of the day, and all will come out even more even when all the days are ended.

Churchill was speaking of Molotov-Ribbentrop Pact of 1939, in which Nazi Germany and the Soviet Union agreed to ten years of mutual non-aggression and the division of Poland (the non-aggression part ended in June 1941). Neither party to this pact possessed much in the way of scruples, and both eventually suffered horribly for short-term gains. Business is much the same (minus the death and destruction), which is why MBM stresses acting with integrity and maintaining a commitment to a vision of long-term value creation. Businesses can (and do) often make strong short-term gains by sacrificing their integrity or skirting the limits of legality, but the chickens inevitably come home to roost. As Charles Koch has said many times, “if we wanted to make a quick buck, then we would just rob banks.” No business or nation can succeed long-term without integrity, which is why integrity is MBM’s Guiding Principle Number One. Too often folks respond with more than a little cynicism to the emphasis MBM places on integrity. “We’ll, your just saying that because it sounds nice,” is a common response. However, if, as Churchill suggests, lacking integrity can lead to the demise of nations, then it can spell only doom for any business. True, preaching integrity in business does sound nice, but it is also essential for long-term success and—most importantly—survival.

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.

You in the kilt—got a license for that?

Ah the kilt, the very symbol of every Scotsman’s freedom and virility. Unfortunately, under a new law proposed in Scotland, those of us partial to these manly skirts will have to obtain a license for sporrans, which are the fuzzy leather and fur pouches worn at the front of the kilt (where the frugal Scot hides his hard-earned money). The law is intended to protect endangered species such as otters and badgers, but I cannot help but feel that there is something very wrong and patently un-Scottish about having to have a license for a sporran. Perhaps if William Wallace had been picked up for carrying an unlicensed sporran, then maybe that whole “Scottish Wars of Independence” thing would have never happened.

While it is my hope that my countrymen may rediscover their freedom-loving ways and do something about this—rather than “standin aboot havering”—my feelings about the sporran license must be tempered by the MBM principle of compliance. Governments make plenty of rules and regulations that the people and businesses don’t like—many of which seem too superfluous, trivial, and/or pointless to bother adhering to. However, while grumbling about the rules is certainly everyone's right and seemingly favourite pastime, failing to comply with laws and regulations is simply not an option. Ten thousand percent compliance (100 percent compliance, 100 percent of the time) is not intended as a gimmick or to fit handily on a bumper sticker (although it does); it is an integral part of MBM, because non-compliance can cost the firm its life—no matter how well it excels in creating value for its customers and society. So while I say fie on the sporran license, if I ever get transferred to the Aberdeen office, then it looks as if I will be getting one.

P.S. The maximum penalty for possession of an unlicensed sporran is a $10,000 fine and six months in jail.

The Rule of Law and the Cafeteria

One of the hallmarks of a free and prosperous society is the rule of law, and more importantly that those rules apply to everyone. All should be equal before the law, which should not award different legal status or rights to various “classes” of people. Such was the triumph of English law, which applied to King, noble, and commoner alike (at least de jure but not necessarily de facto—however the latter seldom ended up in writing). If the laws apply to the governors as well as the governed, then society will likely benefit from better rules, as the governors will feel the same pain or benefits they impose on everyone else. People will also feel more secure in their persons and possessions and thus create more value for society if they know they can rely on rules, like “thou shall not steal” applying to those who rule over them.

The same should be true inside the firm. Although different rules may apply for different job descriptions, the same core rules should apply to everyone, so that those making the rules can personally experience feedback on their burdens or blessings. The result should be good rules for the firm that promote a healthy work environment.

A good example can be found in the in the cafeteria at Koch Industries (Café Koch). A few months ago, Koch changed food vendors. The food had always been pretty good, and many employees speculated that the company was trying to save money and that they were about to lose what had been a benefit. That was until someone said, “Hey, Charles Koch (the CEO) eats down here too, so it’s not like he’s not going to know if the food goes bad.” All of a sudden people stopped worrying about the impending switch in food vendors. If employees know that changes affecting them will also affect those making them, then they are less likely to worry and more likely to “buy in” to the changes made.

Incidentally, more people are eating in Café Koch, which is undoubtedly improving morale and productivity. And if the food ever slips, Charles Koch won’t need a memo, just his lunch. 

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.

Appreciate the Value of Diversity

Things (products, services) do not have value in and of themselves. Their value derives from what we as individuals place on them.  Because each of us is unique, we subjectively value the same product or service differently.  This difference in how we value things is a major factor creating the basis for trade.

We also differ in the kind and degree of an array of numerous different talents, as well as in our varying preferences for different kinds of work.  This allows for comparative advantage and the possibility for specialization, which can lead to increased productivity and greater prosperity.

When this diversity of knowledge, opinion, subjective value, experience, and perspective (and many other differences) is placed into a system of private property, freedom, and rule of law, human nature (self-interest) can be expressed in a principled and peaceful way: a market process.

The resulting ever-changing pattern of relative prices, profits and losses becomes a North Star for entrepreneurs, guiding their continual search for new and better ways to anticipate and profitably satisfy customers.  The overall result is a more prosperous and peaceful society.

It's easy to forget that this process, so vital to the survival of our civilization, rests on diversity.

From the simple to the complex, the obvious to the subtle, differences should be celebrated. We should all appreciate the value of diversity.

Customer Focus

Here's a message to the customer service department of Typepad, which provides our blogging service:

"Guys... Great -- no -- Awesome service. But if you can't handle problems like the one I am having then you're headed for a cliff. I am a customer who CAN and really really WANTS to pay you. You are not helping me... this is a little frustrating, which is enhanced by the fact that there's no way to talk to any of you... ever... even after multiple attempts via your ticketing system have failed to resolve this problem. Would you PLEASE have the owner of your company call me so I can get this resolved... If costs are an issue re: support then call me collect if you have to. -- Benjamin Pratt"

Sure, it's a bit whiny and annoying.  In my defense, this message is the culmination of several months of attempting to resolve a pretty basic billing isssue -- I'm using a valid credit card that works for Amazon and everyone else, they (according to my bank) aren't posting to my account (i.e. I am the typical customer and think it's their problem). 

Here's the response I got:

Hello Benjamin,

Thank you for your note, and the compliment.

I know billing issues can be very frustrating. I do apologize, but nobody is currently available to offer you telephone support. All of our support is done online through the Help Ticket System.

It looks like your account has been updated with a new card as of today, and is currently up-to-date. Presently, the system is showing that it has been accepted without a problem, but we will have to see if we receive a message from your creditor that payment has been verified and processed after the billing cycle runs again.

Please let us know if you have any further questions. We do appreciate your patience.

Thanks Benjamin,

Vanessa

The response, typical to the others I have received, was patient, curteous, and kind.   But not very helpful, since I've updated the credit card info every time to no avail - so this is  a "do the same thing and expect a different result" cycle.  In fact, given the long history, it was actually perplexing to me and I started thinking... What's driving this behavior?  Isn't it weird that someone would say that they can't use the phone?  Are they in India and the phone expenses would be cost prohibitive if they are a small company?  Are the service reps given the policy, "no phone calls, ever, no matter what?"  Is it the fact that the do have the authority to use good judgment and resolve issues by phone, but my case in comparison doesn't warrant that in Vanessa's opinion?

I don't know enough about the company's vision and operating model / competitive environment to say her approach  is right or wrong.  As a customer, though, I don't have to know anything other than it didn't address my issue to my satisfaction.  I'm left now with a choice -- is the value of the service greater than the cost of dealing with the service?   So far it is...  Basically because I contintue to receive premium service without getting charged.  But I have started shopping around to see if there are other blog services that are better, which I hadn't done up until this response...

I'm curious to hear what others think.  If you would be so kind,  and give me your thoughts by clicking on the "comment" just below the last line of this post.  Given the limited information at hand, is this company customer focused?  What else would you want to know?

Employee selection - reducing the gamble

Why should a company do background checks when evaluating potential hires?

A recent survey reported in an Australian national newspaper (available here) found that of 1000 respondents 21% had deceived their employer to get the job. You might think that lying to get a job is problematic - people are simply putting a huge 'spin' on their past in order to get the job.

Unfortunately for the hiring firm, the candidate who lied to get a job is more likely to lie to keep the job, lie to secure a bonus or pay-raise. Background checks help minimize, but certainly don't eliminate a firm making a very costly hiring mistake.   

Book Review: Winners Never Cheat

Jon Huntsman articulates in a short, easy reading book what it means to conduct business with integrity.  One of my favorite quotes is:

“One might even be tempted to believe that the near-sacred American Dream is unobtainable without resorting to moral mischief and malfeasance.  Nonsense.  Cutting ethical corners is the antithesis of the American Dream.”

He articulates that what’s needed in today’s business environment is a booster shot of commonly held moral principles from the playgrounds of youth:  be fair, don’t cheat, play nicely, and tell the truth. 

Much of Jon’s message is in line with our company principles:  surround yourself with people who have the courage to say no; treat others with respect; leadership requires risk and responsibility; and compete fiercely, but no cutting in line.

There is one chapter that I didn't fully agree with.  It is titled “The Obligation to Give Back.”  I don’t like the term “give back,” as it implies that a successful business must have conned its customers and communities in order to make a profit.

Philanthropy is great and Jon Huntsman is a very generous man.  In his situation (private, family-owned company), donating company profits to charities and other philanthropic endeavors is fine.  I’d be cautious about making the statement that all businesses have the obligation to do this.  A publicly-traded company (which is what Huntsman Chemical is now) is obligated to be profitable for its shareholders.

Overall, worth a read. It contains some great quotes!

Arrogance, Humility, and the Law of Proportionate Belief

Arnold Kling has a nice post over at Tech Central Station on "The Law of Proportionate Belief" as a guide to navigating away from arrogance:

"The Law of Proportionate Belief states that one should believe in a certain proposition or policy prescription in proportion to the arguments for that position.  The Law is a core ideological principle with me.  I have problems with anyone -- liberal, conservative, libertarian, or otherwise -- who violates the Law...  Another term for violating the Law of Proportionate Belief is 'arrogance.'  Conversely, following the Law can be viewed as 'humility.' "

Check it out and post your thoughts in the comment section -- do you agree with Kling's point of view?