Market-Based Management®

I'm Being Taxed HOW much?!

Creating as much freedom as possible for principled individuals--while not impinging upon another's freedoms--is one of the fundamental assumptions that MBM rests upon. Whether it be an entrepreneurial employee in the firm, or a citizen in a society, this tends to be critical for long-term prosperity.

In general, every decision a government makes for an individual--whether it be allowing individuals freedom to make choices about what they say, what religion they follow, or how they spend their money--is a tradeoff of freedom for some other thing.

In the link below, you can calculate your entire tax burden (I suggest taking a strong drink of your favorite beverage first). Seen all at once, it's hard not to think about the economic freedoms being given up, and what's being traded off for them. Instead of you deciding to spend that $5,000 on education, a county clerk is spending it on X; instead of you deciding to spend that $10,000 on charity, the state government took it for Y; instead of you spending that $15,000 on your daughter's wedding, a politician is paying for Z (or perhaps to cover Z up). Many of the X's, Y's and Z's the government spends money are good things (national security, for example) but unfortunately many of those things aren't so good, aren't well implemented, and aren't necessarily what you would like that money to be spent on (say, if you're a pacifist supporting a war, or environmentalist subsidizing a farm with heavy pollution).

We believe that--in general--an individual can better use resources (in this case, her money) than a detached individual far away because she is the only person on the earth who is uniquely aware of her wants/desires, knowledgeable about her local conditions, and ultimately will be the one person who bears the accountability of spending her money well or poorly. For similar reasons, we believe that--in general--we want individuals in an organization to use their local knowledge and feel the good-and-bad of the decisions they make where it makes sense to do so (caveat: this doesn't mean we decentralize every decision all the time).

Tax calculator.

MBM Readings

Frequent reader and commenter Tammy C asked in Ben's recent post: “I want to learn more about free markets/economics and how it can relate to me, as a manager…. What would you recommend to someone for their first book on how the idea of prospering societies was used to create the MBM philosophy?”

I thought this was an excellent question and one that others might experience, so I threw together a few thoughts.

Of course--as Ann mentioned--one of the best places to start is The Science of Success which succinctly lays out a myriad of philosophical ideas and how they apply to economics. 

 

Other than that, though, you have to do a little of the connection-making yourself.  We've found that pairing two readings--one philosophical and one managerial--is a good way to see how the big ideas impact the day-to-day.  Below are some thoughts on such pairings that Ann, I, and the rest of the MBM team have put together over the years.

• Incentives--Tocqueville's essay on “Interest Rightly Understood” and Adam Smith's thoughts on “Justice & Beneficence” discuss how individuals are self interested (both found in Boaz' The Libertarian Reader), and Sowell's Basic Economics discusses what motivates individuals in society (chapter 6 "The Role of Profits--and Losses" and chapter 9 "Productivity and Pay").  This can be paired with Abernathy's The Sin of Wages which looks at the problems with typical motivation systems in many organizations.
• Decision Rights--The importance of property rights are vividly discussed in both DeSoto's The Mystery of Capital or Anderson/Hill's The Not So Wild Wild West.  But how do feelings of ownership and accountability transfer over to management?  A good place to start is with Freedman's Corps Business (chapter on "Directing People," pg. 97).
• Knowledge Processes--I don't have a good reading about free speech and how that helps societies share knowledge, but Sowell's Basic Economics (chapter 2 "The Role of Prices" and 6 "The Role of Profits--and Losses") does a great job of explaining how prices, profits and loss share knowledge.  This could be paired with Senge's The Fifth Discipline (chapter 11 "Team Learning") about how you can help your team share and use knowledge productively.
• Virtue and Talents--Hayek's The Constitution of Liberty (this one is pretty dense) has a good set of chapters that discusses the concept of the Rule of Law and how important that is to creating stability and equality of treatment in societies (chapters 10-16).  In a similar way, we want productive cultures inhabited by employees we can trust--which creates organizational stability: a few good books could be Corps Business (chapters on "Developing Mangers," "Motivating People," and "Culture") and Collins' Good to Great (chapter 3 "First Who...Then What").
• Vision--The concepts of "creative destruction" (see Schumpeter's "The Process of Creative Destruction" in Capitalism, Socialism and Democracy (and if you're just starting out, I wouldn't suggest reading more than just that section)), "spontaneous order" (see Hayek's Law, Legislation and Liberty, chapter 2), and "experimental discovery" (see Hayek's essay “Competition as a Discovery Procedure” [PDF]) look at how free people interact and find ways to better themselves and others.  This can be paired with Senge's "Shared Vision" discussion (chapter 11) in The Fifth Discipline.  I see the connection as you want to create the boundaries in which your smart employees have freedom to act entrepreneurially in a way that no central planner could manage.

Of course, this is just our thoughts.  There are many, many other resources out there, and no book will ever take the place of simply going out and trying to apply MBM, but these can spark good ideas for how to better manage people and resources. 

Please let us know if you have other ideas or suggestions!

Nesting

So, let's say you are in charge of a project.  You started it last year, but now you have a direct report who you think is ready to take things over.  She's been working with you on it for a long time, and you feel that she's ready to "own" this thing.

After a month, you see she's about to make a mistake; one that--in your opinion--might cost some money and potentially kill the project.

What do you do?

Do you let her possibly fail, or protect her since you're invested in her personal development?  Do you assume she has better knowledge but challenge strongly, or does your opinion trump hers?  Do you step in; and if so, did you really delegate responsibility in the first place?

To complicate things, I think decision rights are always "nested," in that the supervisor is ultimately responsible for the actions and projects of her direct report.  

I don't know the answer, but I am interested in hearing your thoughts.  What do you think?

Responsibility, Accountability and Authority

I've struggled with the practical application of decision rights. Allow me to use a clip to motivate my questions:

I appreciate that responsibility, accountability and authority are the elements of getting things done, but I'm not sure that a project driver needs to have all of them to appropriately align incentives. For instance, I have been a project lead where I have had little authority, but still had responsibility and accountability. I didn't have much authority because I lacked the perspective and track record to have high potential to make optimal decisions for the project. 

What do you think? How do accountability, responsibility and authority interplay to get the best results? In your experience, what are the trade offs between having all three with one person versus pulling the authority to a higher level? 

Starvation in the Land of Plenty: how property rights saved America

On the occasion of America’s birthday, it is probably a good time to reflect on this nation’s troubled beginnings and pay homage to the institution of private property that made this country possible. As children we are all told that that the first English colonies in North America nearly failed because the colonists were gentlemen—fellows unfit and unused to labor and more inclined to games of bowls than hacking a new nation from the wilderness. True, the early colonists were lazy, but was it because they were gentlemen? You would think the prospect of starvation would stir even the most indolent Elizabethan dandy to fruitful labor. However, the truth of the matter was that the laziness of these early colonists sprang from their lack of property rights. The Virginia Company expected those it sent to North America to labor on common land and contribute to a central store, which would be shared out accordingly. Not surprisingly, as each individual colonist saw no benefit from his labor but could expect his share of the communal store, then he naturally tended towards idleness. In a desperate move to stave of starvation, the colony resorted to private property.

The historical record remains a little hazy, but the source of the land reforms appears to have been Sir Thomas Dale, who arrived in Virginia as high marshal in May 1611. Sometime in 1612 or 1613, Dale dismantled the system of communal ownership and awarded each man in the colony three acres to till as his own. Of course, the colony still had to pay for itself, so Dale levied a yearly “flat tax” of two and a half barrels of “corne” (wheat). These changes produced immediate effects. Colonists threw themselves into their work and set about innovating, improving their land, and taking up all manners of crafts. In short, they started acting like Americans. By 1616, the Virginia colony was not only out of the woods, but carrying on a brisk trade exporting food to many Native American tribes.

An almost identical situation prevailed in Massachusetts, where communal ownership produced nothing but starvation and conflict amongst “godly and sober men.” Governor Bradford responded by allocating families their own plots of land in the spring of 1623. He recorded the results soon after (updated for spelling and punctuation):

“This had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better contentment. The women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability; whom to have compelled would have been thought great tyranny and oppression.”

I took these examples from Tom Bethell’s superb book The Noblest Triumph: Property and Prosperity through the Ages. Private property is no tool of oppression, but, rather, the key to a free and prosperous society. Too often we forget exactly how important an institution it is, but without it we would have neither things to eat, nor a country.

1.3 Billion People Get de Jure Property Rights

“Communist” China’s parliament recently passed a law guaranteeing the protection of private property.  Although many years in the making, this is truly a momentous occasion for China’s market economy and for the Chinese people. 

In his excellent book, The White Man’s Burden, William Easterly takes a few pages to tell the story of the beginning of modern property rights in China(see page 107).  In 1978, a small group of families in the tiny village of Xiaogang held a secret meeting in which they decided to divide their communal lands into family plots and farm them as their own.  As private property was forbidden in China, the conspirators could have very well ended up dead, but even the prospect of speedy executions seemed preferably to slow starvation.  As each family could now keep the output form their own land, rice production in Xiaogang shot up.  Hungry neighboring villages became curious, and de facto property rights soon spread throughout the region.  Faced with such a large spontaneous outbreak of property rights and the accompanying dramatic rise in rice production, Communist Party officials wisely granted their tacit approval, and by 1984 communal farming in China effectively ceased.

In Market-Based Management employees have their own version of property rights, which we call decision rights.  Decision rights represent the authority earned by individual employees.  Like property rights in a market economy, employees who successfully employ their decision rights to create superior value are rewarded with additional decision rights.  For years, Koch Industries, Inc. has emphasized to employees that they “own” their roles and authority and, much like the farmers of Xiaogang, can expect to reap the rewards of ownership. 

Of course, like private property owners, employees who do not take care of the decision rights they own can expect to see them diminished.  However, this responsibility is what makes property rights and decision rights so effective at building a free and prosperous society – something that one sixth of humanity just took a very big step towards.

Sure you're smart, but remember others can and should contribute

Interesting article in Entrepreneur Magazine (no subscription required) discussing the level of control a CEO/entrepreneur really has in their business. The future is unknown and any leader must realize what they can and can not influence.  The article states "[you] can't control external factors, but [you] should be in control of the general direction of the company, what it focuses on and who it hires early on."

Employees, no matter where they are or what they do, must and should contribute. Leaders must continually assess and understand the contribution individuals can make and assign employees' decision rights accordingly (the freedom to make decisions consistent with the demonstrated results they have obtained in the past). Leaders become more productive when they hire and develop employees who contribute, share their knowledge, speak up and challenge the status quo.  Employees who constantly try to do these things grow their ability to make value-adding decisions. Sometimes this is misinterpreted as advocating complete decentralization of the organization. Rather, it is the value adding mix of both approaches. Centralizing or decentralizing consistent with what is best for the organization while also considering the ability of the employees to make value-adding decisions. The article includes this little gem:

today's leaders need enough confidence to act but enough humility to realize they don't know everything. They should let employees influence decisions and listen when they say the company is getting off course. "If you're going to make all the decisions, you might as well hire idiots," says Pfeffer. "They're cheaper."

I might qualify the last sentence - Idiots are only cheaper in the short run.

Through the Eyes of a Child

While driving down the road just a few days ago, my son (seven years old) asked me a fun question, "Mom, have you ever ridden in a convertible?"  After thinking for a moment, I said, "Yes, but it's been several years."  As you can imagine, he likes cars and thinks we should have a convertible.  I told him there are several reasons why we don't have a convertible, one being that the weather in Kansas is such that there are several weeks out of the year that we wouldn't be able to enjoy the "convertible" top.   

I wasn't expecting his next comment.  He proclaimed, "I bet there are a lot of convertibles in Africa."  "Why do you say that?" I asked.  "Because it's hot there.  They would have great weather for convertibles!"  After a few seconds of thinking "Should I go there or not?" I decided to expose my son to some harsh reality.  I briefly explained to him that there probably aren't a lot of convertibles in parts of Africa because many of the people there are poor--not because they aren't smart or hard-working, but because they live in societies where they either can't own property or where their property can be taken away by those in power.   I gave him a little more context, but that was the gist of my explanation.

His response..."What's the point in working or building a house or buying a car if someone could just come a take it from you?"  "Exactly," I said, "what's the point?"

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).