Market-Based Management®

The Entrepreneur in Literature

Unless you're reading Ayn Rand and a small handful of other authors, you're not going to find many positive descriptions of entrepreneurs in literature.  One of my favorite books, Catch-22, by Joseph Heller, does its absolute best to cast unfavorable aspersions on the entrepreneur in the guise of Milo Minderbinder, the Mess Officer.  The chip on Heller's shoulder is mainly focused on authority, but business and entrepreneurs become collatoral damage in the process.

Some of the funniest parts of Catch-22 are the dialogs between Yossarian and Milo regarding "the syndicate" and how Milo can make money by buying eggs for 7 cents and make a profit by selling them at 4 cents.  The conversation is spread out over the entire story and it isn't until the end that you learn how Milo pulls it off.   

Another funny interaction is this excerpt below, where Milo gets back McWatt's stolen bedsheet.  Notice Heller's attempt to make entrepreneurial activity look absurd:

...

Milo had rigid scruples that would not even allow him to borrow a package of pitted dates from the mess hall that day of McWatt's stolen bedsheet, for the food at the mess hall was still the property of the government.

"But I can borrow it from you," he explained to Yossarian, "since all this fruit is yours once you get it from me with Doctor Daneeka's letter.  You can do whatever you want with it, even it sell it at a high profit instead of giving it away free.  Wouldn't you want to do that together?"

"No."

Milo gave up.  "Then lend me one package of pitted dates," he requested.  "I'll give it back to you.  I swear I will, and there'll be a little something extra for you." 

Milo proved good as his word and handed Yossarian a quarter of McWatt's yellow bedsheet when he returned with the unopened package of dates and with the grinning thief with the sweet tooth who had stolen the bedsheet from McWatt's tent.  The piece of bedsheet now belonged to Yossarian.  He had earned it while napping, although he did not understand how.  Neither did McWatt.

"What's this?" cried McWatt, staring in mystification at the ripped half of his bedsheet.

"It's half of the bedsheet that was stolen from your tent this morning," Milo explained, "I'll bet you didn't even know it was stolen." 

"Why would anyone want to steal half a bedsheet?" Yossarian asked.

Milo grew flustered.  "You don't understand," he protested.  "He stole the whole bedsheet, and I got it back with the package of pitted dates you invested.  That's why the quarter of the bedsheet is yours.  You made a very handsome return on your investment, particularly since you've gotten back every pitted date you gave me."  Milo next addressed himself to McWatt.  "Half the bedsheet is yours because it was all yours to begin with, and I really don't understand what you're complaining about, since you wouldn't have any of it if Captain Yossarian and I hadn't intervened in your behalf."

"Who's complaining?" McWatt exclaimed.  "I'm just trying to figure out what I can do with half a bedsheet."

"There are lots of things you can do with half a bedsheet," Milo assured him.  "The remaining quarter of the bedsheet I've set aside for myself as a reward for my enterprise, work, and initiative.  It's not for myself, you understand, but for the syndicate.  That's something you might do with half the bedsheet.  You can leave it in the syndicate and watch it grow."

"What syndicate?"
...

The character Milo is re-created in the kinder, gentler form of Radar O'Reilly in the book / movie / TV series M*A*S*H.  He's more fully expressed in the character Klinger that inherits Radar's role on the TV show. 

In addition to envy, there are deep philosophical and ideological currents in our culture that cause an instinctual mistrust of the entrepreneurial ideal. Literature is chalk full of examples that show most authors have had the static view of economics -- that the world has a fixed amount of stuff and it's a zero sum game: you can't get ahead without someone else falling behind.   Bedsheets are no different in the end to Heller than oil, jobs, or cotton.

The fact that most of us chuckle at Milo's ventures and mind-twisting explanations shows how deeply ingrained this viewpoint is.  We're all too ready to swallow hook, line, and sinker, the morality play that Heller hands us: business is bad, unethical -- it takes advantage of us through misdirection and confusion to trick us out of our money.  To Heller, Steinbeck, and so many others, business is either some faceless, bureaucratic, souless machine, or it is the more personal embodiment of the trickster, snake-oil salesman.

Reading from a different perspective however, there is much of Milo to be desired.  A respect for property rights, a disdain for coercion, a constant searching out for new opportunities to make a profit, and the ethic of making everyone better off by serving their interests in our attempt to satisfy our own.  Even in the hands of Heller, where these ideas are expressed more like an "honor among thieves" ethic, the good at least partially seeps through despite his best efforts.

Works like Catch-22, The Grapes of Wrath, A Light in August, and authors like Dickens and so many others have taught me much about the human condition and I recommend them highly.  But most of them had an appalling lack of the economic insight into the nature and causes of prosperity in a society.  We should approach them, as everything, with the openness, curiousity, and skepticism of a critical mind.

Entreprenuership - Wichita City Council Style

Its seems the Wichita City Council styles itself as a holding company. Sure they do local government but they also do hotels, downtown redevelopment, museums and staking rinks. I think it's time to change the name to Wichita City Holdings (WCH for short) .

The Skating rink saga continues with the court awarding Canlan Ice Sports (the management company) US$ 119,000.00. (Wichita Eagle - no subscription required) This represents the amount Wichita City Holdings was obligated to pay according to the terms of the contract they voluntary entered into in 1996. 

And who can blame WCH for wanting to renege on the deal? They didn't want to keep paying the management company and also have to pay for the losses that have continued to accumulate.  Who would? Unfortunately for WCH that's how capitalism works - fail to provide services that consumers demand and you will find that your revenue will not be enough to cover your expenses. A rational investor would realize it's time to liquidate this investment and find a new opportunity.

Unfortunately for taxpayers Wichita City officials are oblivious to such reasoning. After all they can just raise taxes to fund the ice skating rink. But if consumers don't make it viable now why should city officials be allowed to 'legally plunder' the wealth of those of us who have no interest in ice skating. I have just one word of advice for the officials of the Wichita City Council - privatize.

Leading Change

Recently, McKinsey Quarterly (membership required) interviewed Corrado Passera, CEO of two successful corporate transformations.  He led revitalization efforts at Italy's state-owned postal service, Poste Italiane, and Banca Intesa, a bank/financial institution. 

A number of Passera's tactics for leading change should sound familiar, as they are closely aligned with some key components of market-based management.  Here are a few words from Passera describing his approach. 

...at the beginning you really have to understand where you are, what happened in the past, and why it happened.  You have to identify the remaining strengths and assets you can use to build for the future.  You have to appreciate the main constraints on developing the organization.

You need to propose a mission that is, at one level, a dream but is also achievable. Too much of a dream and people will not believe in it.  Too much emphasis on survival and they will not accept the sacrifices. I personally wrote what amounted to a short book -- not like an analyst's presentation, with figures and graphs, but a book written in human language, telling people where we were, where we wanted to go, and how we were going to get there.

Each person in the organization has to find a credible reason for making an effort and supporting the project.  I call this the 'return on sacrifice.' If you fail to get the right mix of sacrifices and benefits, the process will either start with various components moving in different directions or it will not get under way at all.

Change initiatives only take root through a well-functioning top team and committed leadership across the organization....And in each of the big boxes of the organizational chart, you must have people...who not only support your business but share your values.

Obviously, there are healthy tensions...If necessary, you have to get rid of individuals -- even the talented ones -- who quarrel and cannot work together.  If you choose the right people, everything else is a lot easier.

You also have to be clear about which responsibilities are individual and which are collective....That calls for a compensation mechanism that simultaneously rewards personal results, groups results, short-term results, and long-term results.

Finally, Passera says that you have to manage restructuring AND growth at the same time.  Efficiency/cost initiatives alone won't likely save a dying company and focusing on growth without getting expenses in line will not work either.

Cell Phones: Creative Destruction Abound

Creative destruction is everywhere in the market.  No where is it more evident than in technology based businesses.  Often we don't comprehend the power of creative destruction.  Instead of being in awe of the transforming power of the market, we marvel at the latest PDA application or cell phone ring tone.

There is a great article at USAToday.com highlighting the fact that cell phones have changed and will continue to change the way we live.  It is hard to imagine that by 2009, 1 billion cell phones will be sold per year.   This growth is not a phenomenon, it is market forces at work.   

The challenge in the firm is to drive creative destruction.  All companies have the task of continuously innovating to create value for customers.  The difference is whether the firm is driving that change, or if they are waiting for the change to occur.  Joseph Schumpeter said, "Capital markets reward shareholders of competitive corporations and then rapidly, and with no remorse, forget them when they lose their ability to innovate."   

   

Colombian Drug Lords - rational business owners

In the New York Post today (free access through FOXNews.com) there is a story about Bin Laden's plot to spike large quantities of cocaine bound for America with poison.  The plot failed to get off the ground because the Colombian drug lords decided it would be bad for their business.

The article reports "sources said the feds were told that bin Laden personally met with leaders of a Colombian drug cartel in 2002 to negotiate the purchase of tons of cocaine, saying that he was willing to spend tens of millions of dollars to finance the deal. Bin Laden hoped that large numbers of Americans dying from poisoned coke would lead to widespread terror."

So even thought the drug lords potentially stood to gain millions of dollars they rejected Bin Laden's offer because it had the potential to destroy the American market for cocaine for years to come. And besides there are indications some where fearful of U.S government retaliation "once its citizens started to die from drugs."

So what's the point? Simply that even drug dealers, if they have their eye on long term profitabilty will behave very much like rational business managers.  Leavitt in his book Freakonomics has a chapter dedicated to the business model of a drug gang.  It is worth buying the book just for that section.

Life Is Good

I do not like shopping for clothes.  However, I do enjoy purchasing and wearing T-shirts produced by Life Is Good.  I am sure that you have seen these quirky shirts with either a screen print of a stick figure named Jake or his dog Rocket.  The Life Is Good T-shirts retail for around $25.

I have alternatives to the Life Is Good T-shirt.  However, I didn't think twice paying $25.  I actually enjoyed the transaction and I profited because I valued the shirt more than $25.  There must be many more people like me because Life Is Good has grown from $80,000 in sales in 1994 to a projected $55M this year.  To read an article on the company click here.

As consumers we often look at transactions through a periscope instead of through binoculars.  Our periscope view analyzes the cost to produce an item less the price being charged, or seller's profit.  A binocular view includes the other side of the transaction, buyer's profit. 

In the firm it is vital for us to understand that transactions are not zero sum games.  We need to use our binoculars and not our periscope.  To create real long-term value, both the buyer and the seller have to profit.

A Decision That's Good and Wrong

On Sunday morning, my wife, eldest daughter, and I decided we'd like to see a matinee showing of Wedding Chasers.  Friday was its debut in Wichita and my wife mentioned in passing that because of that it might sell out. 

Sitting in my chair with hot coffee and a good book in hand, I got the silly idea that I might be able to call ahead and reserve the tickets.  I found the phone number, struggled through the confusing (and annoying) voice menu system, mis-typed my credit card, re-entered it, and ended up paying $1 more per ticket for this effort.  But I had achieved my purpose. I had reserved spots for us in case the movie sold out, which I proudly declared for all the house to hear.

Later, driving into a half-empty parking lot at the theater, my wife asked, "did you have to pay anything extra to get the tickets over the phone?" 

With intellegence and wit, I responded, "uhhhh..."

Facing the "you bonehead" look on my wife's face and the smirk on my daughter's, I did what any good husband would do -- I blamed my wife for telling me that the movie might sell out.

When that didn't work, I resorted to the Decision Rights dimension in MBM -- since mine were seriously in jeopardy at that point.

Did I make the right decision?  No.  But did I make a good decision?  I think so.  The difference in those two answers comes from the perspective of where you're standing in time.  Ex-post (after the fact), after a decision has played out, we can see the consequences and can judge if it was right or wrong.  However, ex-ante (before the fact), when we're making the decision and looking into an uncertain future, we can't know what the consequences might be - we can only speculate.

Ex-post, my decision was wrong - I paid $3, a hot cup of coffee, 15 minutes of reading (and a lot of guff from my wife and daughter afterwards) for the right to advance purchase tickets to a show that wasn't even close to being sold out. 

Ex-ante, I didn't know if the show would sell out or not, but I was operating on an assumption (provided by my wife I might add) that there was a distinct possibility it just might.  We really wanted to see that movie at that time.  It would have been costly to show up and not get in due to a sell-out crowd -- psychologically to us anyway.  That created a lot of uneasiness for me -- and it was worth $3 and the hassle to get rid of that uneasiness.

Determining if a decision was right or wrong is less subjective than deciding if it was good or bad.  That's why a healthy challenge processe and following our guiding principles are so important.  It usually starts with holding yourself accountable (as in not blaming my wife - she offered her perspective, I chose to make it a key, unchallenged, assumption).  Good decisions don't guarantee good outcomes (although it sure increases the odds) -- and sometimes bad decisions can have good outcomes (that's called luck). 

Regardless, decisions that turn out to be wrong ex-post are not supposed to feel good, and we shouldn't expect our customers (my wife in this case) to be happy about them even if they agree we made a good decision (for the record, she does not think "we" made a good decision).

Would I make the same choice again if faced with a similar situation?  I don't know...  Past results inform future decisions.  I will definitely re-examine the sell-out assumption (did I mention that it was my wife's assumption? Oops, sorry, I regressed). 

Creative Destruction in Cement

Here's a story saying that Italian producer Italcementi has created a "smog-eating" cement road surfacing product that's been shown to reduce various pollutants by 40-65% outside of Milan.  It's getting another test in the alpine region of Alto Adige.

The company says it's product can also be used for flooring, roof tiles, cement-based masonry paint, building siding, and noise barriers. 

Making cement's pretty straightforward.  Get some clay, a lot of limestone, grind it up into a powder, mix and bake at 2700 degrees Farenheit.  There's some variations -- your competitors might throw in a bit of gypsum.  Then someone says, "hey, what if we could put stuff in this that would react with light to absorb smog?" 

Were customers asking for smog-eating cement surfacing for their roads?  Were they saying to cement makers, "gee, if you only made cement that could eat smog..."  Customers don't know what they want because they don't know what the alternatives might be.  It's producers that drive innovation by anticipating what customers will want (and pay for).   

Origins of MBM: Human Action

On page 305 of Mises' Human Action, the role of the managerial system in a business is discussed.  One can clearly see the influence on MBM Knowledge Processes:

"It is the system of double-entry bookkeeping that makes the function of the managerial system possible.  Thanks to it, the entrepreneur is in a position to separate the calculation of each part of his total enterprise in such a way that he can determine the role it plays within his whole enterprise.  Thus he can look at each section as if it were a separate entity and can appraise it according to the share it contributes to the success of the total enterprise.  Within this system of business calculation each section of the firm represents an integral entity, a hypothetical independent business, as it were.  It is is assumed that this section "owns" a definite part of the whole capital employed in the enterprise, that it buys from other sections and sells to them, that it has its own expenses and its own revenues, that its dealings result either in a profit or in a loss which is imputed to its own conduct of affairs as distinguished from the result of the other sections."

The consequences are then discussed, and you can see the influence on the idea of General, Guiding Principles:

"Thus the entreprenuer  can assign to each section's management a great deal of independence.  The only directive he gives to a man whom he entrusts with the management of a circumscribed job is to make as much profit as possible.  An examination of the accounts shows how successful or unsuccessful the managers were at executing this directive.  Every manager and submanager is responsible for the working of his section or subsection.  It is to his credit if the accounts show a profit, and it is to his disadvantage if they show a loss.  His own interests impel him toward the utmost care and exertion in the conduct of his section's affairs."

Profit management, discussed above, is then juxtaposed with bureaucratic management:

"There is furthermore a readiness to confuse the manager with a bureaucrat.

Bureaucratic management, as distinquised from profit management, is the method applied in the conduct of administrative affairs, the result of which has no cash value on the market.  The successful performance of duties entrusted to the care of a police department is of the greatest importance for the preservation of social cooperation and benefits each member of society.  But it has no price on the market, it cannot be bought or sold; it can therefore not be confronted with the expenses incurred in the endeavors to secure it.  It results in gains, but these gains are not reflected in profits liable to expression in terms of money.  The methods of economic calculation, and especially those of double-entry bookkeeping, are not applicable to them."

Entrepreneurial activities are directed by consumers' wishes as reflected in market prices.  For public services like a police department, there are no market prices, and thus no marginal analysis can be done -- at least not in the normal sense of that term.

This shows the influence on MBM in our discussions of general principles vs. detailed rules.  For the most part we rely on the general principles -- the MBM Guiding Principles -- to direct individuals in the pursuit of Principled Entrepreneurship (TM).   The employees of a firm are directed  generally to pursue profit, using the guiding principles to ensure it is done in a principled and disciplined manner. 

We know success in such cases by the measure of profit or loss, the sole arbitor of whether our customers believe we are adding value.  Market prices of consumer products and the various factors of production necessary to produce them thus inform and guide sound behavior.

Detailed rules must be substituted in cases where there is no economic calculation -- areas of business where prices can't be used to determine results and guide sound behavior.  This is the case in Environmental, Health, Regulatory, and Safety compliance.  For instance, our Safety Vision, posted at the entrance of the Koch Cellulose Brunswick, GA plant, states: "Nothing is so important as to jeopardize anyone's safety."  That includes profits.  Without prices, profit, and loss to guide behavior, other bureaucrative mechanisms must be instituted.  Detailed rules must be established and strictly administered. 

Safety is a great example to show that being "bureaucratic" is not bad.  We cannot put a price on safety, so how will we know if we're doing it well and what can be done to do it even better tomorrow?  We use bureaucratic methods to establish rules and safe practices, educate and drive awareness, and rigorously measure for success. 

A bureaucratic approach used in a business area that can use market prices to make economic calculations of profit and loss is a waste of resources.  That same bureaucratic approach applied in an area where there are no market prices (and thus no economic calculation is possible) is essential and can be value adding when done well. 

The (new) French Revolution?

From Jonathan Mann, fellow MBM'er, based in England:

Recently both France and the Netherlands held referendums on the European constitution and both overwhelmingly rejected it.  At the same time there is a growing opinion base that believes the way the European Union is funded and budgeted needs a radical review in light of globalization and the need to remain competitive. 

Even the stalwarts of social policy seem to be starting to question if this is the right way forward as they struggle to pay for the public expenditure and services, bureaucracy, and crippling social charges.

There continue to be a plethora of newspaper articles in France, Germany, the UK, and many other countries on this subject at the moment.  This is one example.  It contains an interesting (UK) perspective on the current mood in France.