Market-Based Management®

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!

Rule-o-Law

The following photograph from the DC area says a lot about the concept of the Rule of Law.  As I understand it, RoL is the standard by which we evaluate laws in a society.  Usually, those standards are that all laws should be:

-stable and predictable
-equally applicable to all, even the rulers
-abstract and general; not created for specific times, places, or situations

I shot this photo for "equally applicable to all," but I need your help finding or creating the rest....  Any visual representations of the "stable and predictable" or "abstract and general" standards? Also, did I miss any criteria?

This sticker is on the parking meters in Arlington, Virginia. I think it gets at the concept of equality of treatment (unlike in New York City...).

 

Grounded in Reality

Today I re-watched the movie "Enron: The Smartest Guys in the Room." The Associates watch this movie during the first couple of weeks of KAP, and this year I'll be leading the session. We use the movie as an example of a decline in a company and pair it with Hayek's Road to Serfdom, which shows the decline of a society.

This is probably the fifth time I've seen this movie, and I found myself thinking a few things throughout the movie:

• "Egos" and "greed" aside, the lack of grounding in reality was rampant.
• Don't confuse value creation with profit.
• The movie claims that Jeff Skilling was an advocate of free markets and tried to foster free-market thinking in his firm. However, the Enron culture blatantly ignored how freedom of speech and standards (among other things) translate into the firm. I hope my family doesn't watch this film and think that I believe he was a free-market kindred spirit.
• With the rise of wide-spread internet use and decreasing costs in communication, could such a spectacular fall happen again? Would employees out their employers?
• Moreover, where were the whistle blowers? Was everyone top to bottom okay with the behavior or were people just leaving?
• I don't think we'll ever really know everything that went on there.

I'm looking forward to hearing what the Associates have to think about the movie. They always seem to surprise me with interesting questions that I can't answer (those are the best kind of questions). 

If you've seen the film, what did you think about it? What questions would you ask to people who are new to Market-Based Management?  

Hunches

How do you know when you should listen to a hunch?

I've been trying to work my way through Michael Polanyi's Personal Knowledge. It's a good read, but often makes my brain hurt! Anyway, Polanyi had a very interesting way of thinking about discovery and hunches. I've barely got my mind wrapped around some of his ideas, so consider this a preliminary lesson from Personal Knowledge and conversations about Personal Knowledge with my work colleagues.  

In short, I think we should investigate our hunches when we have personal knowledge about something.  I don't know anything about art, so if I view a work of art and have a hunch that something is fishy about it, it's probably not a good use of my resources to invest in my hunch. However, if you've read the book Blink, the introduction tells a story about a "Statue that Didn't Look Right." The art experts couldn't even articulate why they thought the statue wasn't an original. Those with deep knowledge about art had an instinct that something was wrong with it. In the end, the statue wasn't an original. 

With all that said, principled entrepreneurs don't blindly follow hunches even when they do have deep personal knowledge of the subject. I think personal knowledge increases the likelihood that a hunch is right, but we still have to use economic and critical thinking skills, be disciplined and make sure the risk is appropriate when investigating our hunches.

Reviews

Bob Sutton's recent blog post about reviews got me thinking about reviews. Everyone seems to have a take on reviews. Some of us hate reviews. Some of us view them as a necessary tool for growth. I don't know if anyone actually loves reviews? 

At any rate, I ended up talking with my colleague Mandy about reviews, and the conversation took an interesting turn. We ended up talking about how much we've learned from giving reviews. Most of the research and conversation focuses on the people being reviewed, but I had not thought about how putting together and delivering a review is a learning process. Since I'm pressed for time, I need some more time to think through this and put together a more coherent post about that process. 

One topic that often comes up around the time Associates get their reviews is how reviews contribute to culture. Often, there is at least one Associate who claims that confidential feedback for reviews gives folks incentive to not give each other open and honest feedback throughout the year. My response to this is to point out that reviews shouldn't contain surprises. They are a way to see the feedback you've gotten throughout the year in one place and talk about how feedback relates to the Guiding Principles.

What do you think of my response? Most people don't find it very satisfying. How do you see the review process contributing to culture? 

Pause

One of the cool parts of my job is that I get to work with folks who are encountering many of the MBM and Science of Liberty ideas for the first time. Not only is helping people learn awesome, but I often get the "fresh eyes" perspective. For instance, I recently worked on a workshop about the Guiding Principles. Running this workshop causes me to pause and examine each Guiding Principle. Often the questions from workshop participants force me to articulate and assess my assumptions. 

Below is a Guiding Principle. Pause for a second and focus on the text. After the jump, I've put some of the questions that often come up when discussing this Principle. 

Knowledge

Seek and use the best knowledge and proactively share your knowledge while embracing a challenge process. Measure profitability wherever practical. 

On Interruptions

Here is a video from Big Think (via Life Hacker) about interruptions. I couldn't get the embed to work, so I hope that you take a minute to link over to the video.

I don't disagree that interruptions are productivity killers, but it is a trade off. Interrupting managers are trading off productivity for something else (hopefully different and better productivity). His company's culture is at one extreme: almost zero interruptions and face-to-face interactions. I would love to ask him some questions:

• What does this imply about developing people?
• Do employees get the interactions and mentoring they need to increase their long term value creation potential? 
• Is this more likely to focus employees on short term results only? 
• What about the challenge process?
• Do you ever hire extroverts?

At the root of this is culture. What culture do you want your team or organization to have? What cultural attributes will make a team more productive? What do you think of this video? Do you think he's making a great case? What questions would you ask him?

Looking Busy

Let me tell you about my friend Gary. I met him in the 1980s. I was in school at Oklahoma City University. Gary was a several years older, about 25 at the time. He had a family, a house, and a full time job working in a small print shop. I looked up to him and occasionally I would drop by and visit with him at his shop. This was in the era before Kinko’s, and Gary’s little print shop did a very large volume. He was always busy. Gary’s shop had state of the art duplication equipment including one giant printing machine that flared so brightly that Gary would cry “flame on!” before he pressed the button to make it go. Anyone who happened to be standing nearby would cover his or her eyes. It was great.

One afternoon I dropped by to say hello to Gary. He was busy of course but for once he wasn’t printing anything. He was sweeping the floor. Now there’s sweeping, and there’s sweeping. Gary was sweeping like he cared. He was just an employee but he was sweeping the floor as if he owned the place. Each stroke of the broom was careful. He left no inch of floor untouched. It was mesmerizing. Perfect. Zen-like. In the back of my mind I was thinking, “This is it. This is work ethic like my Dad is always telling (yelling at me) me about.”

This went on for a long time, Gary sweeping, and me watching and talking about something or other. Suddenly it hit me. Something was wrong. The dirt on the floor, and there was only a tiny bit of dirt, contained two or three little white Styrofoam packing peanuts. No matter where Gary went with that broom those peanuts went too.

“Gary!” I said. “You are sweeping the same dirt around and around aren’t you?”

“Sure am.” He replied.

“Isn’t that kind of silly?” I asked.

Gary stopped sweeping. He put his hands on the top of the broom. In a low voice he said, “I don’t have anything to print right now, Mark.”

“So?” I said.

He whispered, “So, the boss is in the back room.”

“Yeah?” I said. “So what?”

Gary gave me a wise, 25-year old smile. “So, you got to look busy at all times.” He resumed his methodical peanut sweeping pattern.

Sometimes I tell this story during MBM seminars. I ask this question at the end. Do you suppose we have people who are “sweeping peanuts” in your operation? Just looking busy? Just working for time? The answer is always yelled back at me. “YES!”

Once I even got a “peanut sweeping” confession during a break. It was from an operator at a facility that shall remain anonymous. He said, “My boss told me that some VIPs were coming in for an all day meeting. The boss said the VIPs would pass by my station several times during the day. He said ‘I know it’s a slow day for you but for heaven’s sake look busy when they come around.’ That’s what I did too. I put a piece of metal on a grinder and you better believe it that every time the VIPs walked by the sparks flew. I looked busy as H----!” The operator laughed and then shook his head.

I tell these stories to make the point that sweeping peanuts or making sparks fly might fool some folks some times but it certainly does not create value. Our customers do not care how hard we work or how busy we look. They care only about the value they receive from the products and services we provide.

Value creation is common sense. All of us must re-evaluate our work, get rid of the peanuts and the sparks, and focus on doing those things that create real value for our customers, our company, and ourselves. We can’t afford to waste a minute “looking busy.”

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.

A Cautionary Tale

Over at Slate.com, Henry Blodget's got an interesting takedown of a web-cam interview Jim Cramer (Of CNBC's Mad Money fame) did late last year.  In the interview, Cramer recounts his glory days at a Hedge Fund, and describes some of the shady tactics he would use to make a quick buck.  A representative snippet:

What's important when you're in that hedge-fund mode is to not do anything that's remotely truthful. Because the truth is so against your view that it's important to create a new truth to develop a fiction.

It's hard to imagine a point of view more opposed to the notion of becoming prosperous by creating real, economic value.  And it could well be that Cramer's comeuppance is on its way, since not one but three major news outlets have carried stories on his confession. 

Cramer is no dummy.  He's a Harvard grad, respected columnist, and seems to have done pretty well for himself in the investment game.  But if his interview was an honest and candid discussion of his former dealings, it's pretty clear that he didn't have virtues to match his talents.  And, of course, there's a decent chance that this will spell the end of Cramer's lucrative career in financial media.

This serves as a good reminder that hiring the best and brightest without screening for virtue is a dangerous game.  Poor performers may not make you much money, but brilliant charlatans can bring your organization crashing down.