Introduction to Market Based Management

Based onIntroduction to Market-Based Management

Wayne Gable & Jerry Ellig

Six Key Systems in Market Economies & Organizations

Market Economy1. Division of Labor2. Property Rights3. Rules of Just Conduct4. Price System5. Free Flow of Ideas6. Market Incentives

Organizations1. Mission System2. Roles & Responsibilities3. Values & Culture4. Internal Markets5. Open Communication6. Compensation &

Motivation

1. Division of Labor & The Mission System

SOCIETY

• “Social engineers” determine where society should go & how it should get there

• Social well being depends on the ability of planners to direct & coordinate activities in society

• Individuals must act in strict accordance with official regulations or face punishment

• Creativity & entrepreneurial activity reserved for those designated by social planners

• Individuals succeed or fail based on whether they meet with official approval or disapproval

ORGANIZATION

• Top management determines corporate mission & strategy in isolation from rest of organization

• Corporate “plan” translated into structure, job descriptions, regulations, & policies handed down

• Despite rhetoric, corporate plan not open to question or revision by rank & file

• Creativity & entrepreneurship discouraged, except as directed

• Individual success dependent on “pleasing” supervisors politically

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1. Division of Labor & The Mission System

SOCIETY

• Individuals are free to pursue their personal mission as long as they respect others’ rights

• Entrepreneurs earn profits by producing products or services that benefit consumers

• Through specialization and the division of labor, individuals migrate toward activities that utilize their particular knowledge and talents, benefitting themselves and society ini general

ORGANIZATION

• Individuals and organizations develop mission to create value by focusing on competitive advantage

• Individuals rewarded for helping organizations satisfy its customers

• Firms developing comparative advantage and pleasing customers earn long-term profits

MARKET

BASED

2. Property Rights, Roles, & Responsibilities

SOCIETY• Social planners make

decisions that determine structure & pre-coordinate all activity

• Orders are communicated downward through the hierarchy

• Everyone follows the plan or suffers punishment

ORGANIZATION• Planners at top of firm

determine structure based upon expert knowledge

• Orders are communicated downward through the hierarchy

• Workers do as they are told according to the structure and plan of top management

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2. Property Rights, Roles & Responsibilities

SOCIETY

• Private property right permit individual choice in use of resources (within legal guidelines).

• Income from property (the system of profit & loss) provides continuous feedback

• Transferability of property leads to effective stewardship of resources

ORGANIZATION

• Roles & responsibilities define sphere for individual responsibility and autonomy

• Employee responsibilities grow or shrink with individual’s record of success

• Roles & responsibilities change as corporate mission or individual knowledge and skills change

MARKET

BASED

3. Rules, Values, & Culture

SOCIETY• Respect for official

leadership• Refraining from criticism of

official policies & regulations, and acceptance of plan for society

• Accumulation of power by hoarding key information

• Obedience to official authority

ORGANIZATION• Respect for top

management• Acceptance of corporate

plan as “given.” Attitude of compliance, often without commitment.

• Accumulation of power by hoarding key information.

• Obedience to corporate authority.

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3. Rules, Values, & Culture

SOCIETY

• Respect for private property and individual rights

• Honesty in dealing with others

• Tolerance of alternative views and lifestyles

• Respect for individual initiative and entrepreneurship

ORGANIZATION

• Respect for others’ knowledge& expertise

• Intellectual honesty & humility

• Openness to new ideas or ways of accomplishing corporate mission

• Freedom to question current practices or suggest improvements

MARKET

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4. Price System & Internal Markets

SOCIETY• Money prices either don’t

exist or are determined politically and convey little information

• People “pay” by waiting in line, currying favor, etc.

• Planners must substitute their knowledge for the knowledge contained in prices

• Bureaucracy often grows excessively

ORGANIZATION• When internal prices exist, they

tend to be used for manipulation rather than determining value

• Projects wait in line until internal service providers can get to them

• Top management determines the level of internal service investments, with vey little knowledge of true value added

• Corporate overhead often grows excessively

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4. Price System & Internal Markets

SOCIETY

• Prices summarize information about scarcities and consumer values

• Price changes indicate need for reallocation of resources

• When consumers react, prices allow adjustments to occur “automatically”

ORGANIZATION

• Internal markets convey similar information to market prices

• Investment in corporate services is determined by value added, not politics

• Corporate staff grows or shrinks according to ability to serve internal customers, not set by arbitrary limits

MARKET

BASED

5. Knowledge of Generation & Communication

SOCIETY• New ideas and knowledge

are unwelcome unless consistent with official “party line”

• Communication media are tightly controlled by authorities

• Independent thinking is considered disruptive and dangerous to society

ORGANIZATION• Decisions made by higher

ranks and communicated “down” the hierarchy

• Communication takes place through paper channels

• New ideas are resisted; questioning managerial decisions is improper

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5. Knowledge of Generation & Communication

SOCIETY

• Individuals are free to communicate & act on new ideas

• Entrepreneurs can mobilize resources to fulfill their visions if they can “sell” venture capitalists on their ideas

• Dissent from official dogma is safe; pathbreaking dissention can be highly rewarded

• Authority in any field of knowledge conferred by mutual agreement among peers

ORGANIZATION

• Decisions are made by those with best knowledge and right incentives

• New ideas are welcomed and “filtered” by people who have responsibility and incentives to help generate knowledge

• All recognize that new knowledge may invalidate existing shared assumptions about business

• “Authority” is conferred (or lost) by one’s track record, not by political power or rank

MARKET

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6. Incentives, Compensation & Motivation

SOCIETY• Compensation of individuals is

according to the “plan” of society• Even if compensation is based on

“contribution,” evaluation is done by officials with very little knowledge of individual’s true product

• Most compensation rewards are for compliance with official dogma, and for achieving a positio9on of official authority

• Criticism of government or dissent from official dogma is punished severely

ORGANIZATION• Compensation is based upon

seniority, title, number of employees managed, etc., rather than value added

• Where compensation is based on measured performance, specific measures and targets are often developed by top corporate brass

• Rewards for climbing corporate ladder are based on compliance with corporate plan and adherence to corporate dogma

• Dissent from official assumptions is especially dangerous

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6. Incentives, Compensation & Motivation

SOCIETY

• Profit opportunities encourage entrepreneurs to serve consumers

• Successful entrepreneurs get control of more resources, unsuccessful ones are separated from control of resources

• People have financial incentives to work in jobs where they can add the most value to society

ORGANIZATION

• Changes in compensation are linked to mission, including helping overall organization & commitment to corporate values & culture

• Changes in responsibilities depend on employee’s record in using resources to advance the mission

• Employees are rewarded for moving to new jobs where they can better contribute to the mission

MARKET

BASED