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!

Hey, Let's Create a New Language!

I've been reading up on a special case of spontaneous order lately: language. Hayek's conception of spontaneous order--order that is the result of human action but not human design--is a fundamental explanation of how markets work, and it's application is an interesting (if not hard-to-apply) aspect of "Vision" in MBM.

A recent article from Discover Magazine Online explores a unique phenomena, the creation of an altogether new language in the form of Nicaraguan sign language.

"In the 1970s, a group of deaf Nicaraguan schoolchildren invented a new language. The kids were the first to enroll in Nicaragua’s new wave of special education schools.... Its child inventors created it naturally by combining and adding to gestures that they had used at home. Gradually, the language became more regular, more complex and faster."

This new way of communicating grew spontaneously as the children adapted and learned from one another.  But what about well-established languages?  The Lexicographer's Delemma, by J. Lynch, describes how the English language has evolved without the guidance of intellectual elites imposing grammar dictates from the top down (the same is true for France, despite their efforts to the contrary).  Rather, the author quotes a grammarian as saying that the "'the spirit of English liberty will hinder or destroy ' any such scheme" of command-and-control language planning (pg. 107).

Sorry grammar freaks; your services aren't needed, according to Mr. Lynch.

Are the formal rules of grammar needed to keep language useful, or does spontaneous order suffice?  As managers, how do we balance letting employees go "laissez faire" vs. providing active, detailed guidance?

Which manager are you?

A supervisor finds out from HR that one of his direct reports wants to work for another supervisor in a different division.  Knowing this other supervisor and believing himself to be better, he is perplexed and calls the report into his office.

"I don't understand," he says to the report.  "I am smarter.  Our division has higher revenues.  I treat you well - aren't I nice to you?"

"You are very nice to me," says the report.

"Don't I pay you well?"  he asks.

"You pay me quite fairly," the report agrees.

"I don't get it, then... why are you talking to this other supervisor - what can he possibly offer that I cannot?"  the supervisor asks.

The report responds: "Look, you're right - in some things you are much more accomplished - you have some wonderful strengths.  But this other supervisor has capabilities and strengths that are different from yours and matter more to me."

"Like what?" the supervisor challenged.

"Well, he's been teaching me many interesting things - like how to read minds!  Would you like me to read yours?"

The supervisor smiles and says, "sure.  What am I thinking right now?"

"Give me a second - concentrate - it's hard for me since I am new at this..."

"Okay, I'm focusing..."

"I have it!" the report says .  "You are asking yourself, 'How can I help my reports better understand and develop the ability to apply MBM in order to contribute in ways that will maximize the long term profitability of the company.'"

"Ha!!  That's not at all what I was thinking!" the supervisor says triumphantly.

"I know," says the report.  "And that's why I want to work for the other supervisor."

[I adapted this from a humorous anecdote relayed by Harold S. Kushner in his book, Overcoming Life's Disappointments.] 

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.

Vision

Athletes often use "guided imagery" to enhance their performance.  Jack Nicklaus describes how he does it:

"I never hit a shot even in practice without having a sharp in-focus picture of it in my head.  First, I 'see' the ball where I want it to finish, nice and white, sitting up and high on the bright green grass.  Then the scene quickly changes, and I 'see' the ball going there: its path, trajectory, and shape, even its behavior on landing.  Then there's sort of a fade-out, and the next scene shows me making the kind of swing that will turn the previous images into reality.  Only at the end of this short private Hollywood spectacular do I select a club and step up to the ball."

This approach is useful in the business world also.  Industrial / Organizational researchers call it a "visioning process."  The idea is to imagine yourself in the future achieving some goal or result that is difficult to do now.  Then, like Mr. Nicklaus, work your way back in your imagination to where you stand today.  What will it feel like, look like, what will it take to get there, who can help you, etc.  The more you work at this visualization, the better you get at it.

Having such personal visions can be powerful.  Just like when you're driving, it keeps your eyes looking to where you want to go.  You don't tend to get sidetracked, and setbacks don't seem to matter as much.   Your chances of achieving the result also go way up.

If this works so profitably at the personal level, imagine what a shared vision can do for a team or a larger organization. 

Exploration Place needs your (a) attendance, or (b) tax dollars

The Wichita Eagle is reporting today (no subscription required) that Exploration Place needs 2.8 million dollars per year to stay open.  With an operating budget of 4.7 million for next year the muesem is in financial trouble - even considering dipping into their endowment to pay for operating expenses.

"The consultant, Diane Frankel, said the museum would need permanent help from the public, either the city or county, and possibly even a special arts tax."

Just what we need, a special arts tax to go alone with our sports (arena) tax. It reminds me of a joke. 

Have you heard about the new simplified tax form for businesses? It has only three boxes. In the first box you write your revenue, in the second total expenses, and the third (the difference between box one and two) is the amount you remit to the government. 

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.

Debt forgiveness: The African Panacea?

President Bush has recently praised the democratically elected leaders of five African countries.  He also believes that debt reduction will help turn the tide of poverty on that continent. In his own words:

"We believe by removing a crippling debt burden, we'll help millions of Africans improve their lives and grow their economies."

Public opinion seems to think that debt forgiveness is a marvelous way to help the poor of developing nations. Unfortunately for its advocates there is no evidence supporting this argument. In fact debt forgiveness may well have a detrimental impact - increasing the default rate and therefore increasing the interest rate responsible borrowing nations face. 

It would be nice to believe that our AID dollars are helping the world's poor. However evidence suggests the worlds poorest countries are mired in corruption with weak property rights.  Giving the governments of these countries money does not help the poor and in fact may hurt them - a ruler channeling money to his Swiss bank account enjoys the benefit while the poor of his country will share in the repayment of that loan through future taxes while missing out on any potential benefit. 

An interesting question might be - perhaps a country that isn't corrupt with secure property rights would benefit from AID loans.  However, the research indicates that the loan doesn't make any difference because the country is growing and will continue to grow.  Research has found loans making no difference in this case.

Anyone interested in reading more about the failure of the development project and the institutions who run it (the World Bank, IMF and USAID) would enjoy Easterly's The Elusive Quest for Growth a very accessible critique of 50 years of development programs from an insider.