Over the past twenty-five years Koch Industries, Inc. has been under careful observation for their innovative management practices. The CEO Charles G. Koch and other executives Richard Fink and Paul Brooks have worked closely with authors Dr. Wayne Gable and Dr. Jerry Ellig to put together a booklet entitled “Introduction to Market-Based Management. ” This booklet unfolds the secret to managerial success in a changing economy. As the authors believe organizational success is no longer found in a command-based management but instead with a more liberating market-based structure.
Changing from a hierarchal leadership structure takes hard work and an open mind but the end results is fulfilling to employees as well as management. The market system is broken up into six key elements including: division of labor, property rights, rules of just conduct, the price system, free flow of ideas, and market incentives. After thoroughly understanding the key concepts along with the organization objective this new way of organizational leadership allows for maximization of a company’s potential. To begin one must first understand what market-based management is and how it works.
In the original total quality management system it is believed that leaders and technical experts know what is best for the company and everyone in it. In order for an employee to change a procedure or show any type of creativity it must first be brought to management and in turn be approved before changes can be made. This traditional type of system depressed the initiative for employees to be innovative and creative. The market-based system instead operates under the “invisible hand” coordination allowing employee interaction to take place independently while being coordinated at the same time.
This system is not a mindless copying of external practices in the market but instead is a focus on structure, employee responsibilities, ethics, and, incentive type motivation to achieve the common goal of the company (Gable & Ellig, 7). Next, this system does not operate like a robot but instead uses the employees or team with the best knowledge in a particular area to make decisions and monitor the outcome of the new approaches. Lastly, a firm operating in the market-based capacity should encourage competition and cooperation through emphasis on the firm’s common mission.
The market approach has stemmed from market process analysis and using specific firm examples a six element system has been developed. There is a collection of six key elements in the markets and organizations and the goal of each is to “facilitate economic growth and social progress through a highly complex process” (Gable & Ellig 8). The first system examined is division of labor and the mission system. The idea behind division of labor is to allow employees or firms to specialize or use “comparative advantage” to maximize production levels.
The mission statement of the firm gives a breakdown of what the firm specializes in to produce the long-term maximum profit. Comparative advantage is a way to explain why people produce some things and buy others. Each individual is born with an innate ability to be better at some things than others. For example if I can produce shoes better than chickens, all the time I waste trying the produce two chickens I might be able to produce ten pairs of shoes. I have a comparative advantage in producing shoes so I can then take extra shoes and trade with the chicken farmer.
Division of labor is a way for companies to take advantage of each individual’s strong point thus increasing their (the firm’s) comparative advantage. There are other things that can influence comparative advantage as well such as education, experience, and exposure for example. When a business does not specialize in comparative advantage they are wasting resources that will be gone forever. In order to effectively implement comparative advantage a firm needs to have a mission system.
Koch industries use the mission system as “an ongoing process in which employees systematically improve their understanding of the firm’s capabilities and markets, define goals, plan ways to achieve the goals, and monitor progress” (Gable & Ellig 11). Similar to Koch industries my employer (South Florida Educational Federal Credit Union) is somewhat the same in the area of mission systems. My company provides a service not necessarily a product so there are some differences. Within the company there is a division of labor from the bottom being a teller all the way to the CEO at the top.
Almost all employees start out as tellers and as they realize your potential they cross-train you in other areas. As positions open up people apply and are hopefully promoted. There is not a set mission system including a mission statement but there is a division of labor with employees being trained in specific areas. This allows employees to be proficient in a particular area and are able to help members quickly and efficiently. All employees know that the unvoiced message is to make sure our members are taken care of.
The next system is property rights, roles, and responsibilities. In any company property plays a fundamental role with three characteristics. An individual can decide how they would like their property to be used, they can use it to make money, or they can choose to sell it to another individual or firm. The ownership of property can relay several messages to a company. It allows people to put a value on the resources the property can produce. When a person trades their money for a product it is not just an exchange of money for a good but instead an exchange of information.
When this happens the buyer is making a declaration of what is important to him (what’s being purchased) and what is important to the firm (the money). Another principle is the feedback received from profits or losses. In a free market a profit tells a firm they have found a way to use fewer resources while delivering more value to the customer. On the contrary a loss demonstrates how a firm depleted the value of valuable resources. Property rights are an important part of any economy because ownership creates a vested interest to maintain the resources it provides to receive value in return.
With common property no one has any incentive to not over use and protect the property. “The goal is to understand the crucial functions played by private property in a market economy, and then allocate rights and responsibilities in ways that harness independent judgment, provide continuous feedback, and capitalize the future impact of current decisions” (Gable & Ellig, 15). Overall in order for a firm to receive the full benefit of property rights without having an employee bring their owns tools to do their job they instead must hold each individual accountable.
At my company each employee works with management and together set achievement goals. Also at the end of each year employees are required to complete an appraisal. This is a way of evaluating work ethic to determine if employees are aware if they are or are not meeting goals and complying with company guidelines. After the appraisal is reviewed it is determined if an employees goals need to be adjusted or if more training is necessary. In order for companies to be profitable each employee has certain roles and responsibilities.
Rules, values, and culture are determined by a society or structure to create a standard of acceptable behavior. Organizations that are successful are ones with specific rules that increase the well being of members involved. When there are rules that are established it allows for more predictable behavior, allowing others to accomplish their own goals easier. Informal rules are unwritten codes of business ethics that increase profit because time and money does not have to be allocated to enforcement and policy writers.
When just conduct diminishes so do profits because people’s behavior is no longer predictable allowing for long-term planning and investing. Formal rules are specific guidelines that companies set that are enforced and list specific disciplinary action. These policies are a way to ensure employee behavior. Values and culture are another way companies influence employees with the intention of advancing the common mission. In a market based firm there is no argument of what is right verses what is profitable but instead the discussion is between long-term and short-term profitability.
The behavior of employees is derived from the message the firm portrays. At my credit union there is a straightforward set of rules that each employee is governed by. The employee handbook expresses what is expected of everyone working for the credit union. Managers and supervisors do not like to stand over you but instead manage from a distance. If they notice you exemplifying behavior not part of company policy they will bring it to your attention, if not corrected they will take disciplinary action. No manager likes to take it this far; they often explain that management has rules and guidelines they must follow.
What I enjoy about my company even more is that they will often explain why certain rules or values are in place. I believe this method gives employees an appreciation for the rule and more of an incentive to follow because there is an actual reason behind them. Companies that set arbitrary rules that have no bearing often encourage employees to act against the rules, as I myself have done in the past. One specific example is at a past employer if you wanted a day off you were supposed to give two weeks notice. After following the rules I still was scheduled to work so I was forced to call in sick.
More importantly than employees following the rulers employers must hold up their end in order to motivate hard work. Next each firm must have a price system and internal markets. Market prices provide the information firms need to see what value consumers place on goods. Market prices give helpful information and incentives that make the goals of firms possible. The prices allow firms and individuals to make decisions and consider an alternative, taking into account others plan and desires. When price levels go up or down individuals respond sensibly to the indicators the price is relaying.
For example when gas prices go up consumers do not have to be told to conserve gas. When a firm has internal pricing it “creates more transaction costs than are profitable” (Gable & Ellig, 21). The more innovative companies have found a way around this by establishing internal service providers as separate business entities. By doing this it allows them to bill different prices for specific services. This forces management to purchase only the specific services, training, and other internal services needed to operate and conserve cost. I haven’t worked for a company where there was a market system for prices.
For example at my current employer we have a department that specifically deals with training employees so this is not outsourced to another company. Instead the CEO saves money by having that department on the payroll and they have an incentive to make sure training is done effectively otherwise that reflects poorly on the management of the training department. When it comes to decision making within a firm knowledge should be generated and communicated. The objective is to make sure valuable information is at the disposal of the right people.
Market-based management has three important knowledge focuses in generating and utilizing ideas: “much knowledge is dispersed (or “local”), much knowledge is difficult to articulate (or “tacit”), and potential knowledge needs to be tested” (Gable & Ellig, 23). Knowledge must be dispersed among a firm allowing the appropriate information to be shared so decisions can be made while creating decentralized decision-making. Knowledge cannot be to localized or it creates a situation where the individual “can’t see the forest for the trees” which is just as bad as a command-based management.
Companies must also understand that many individuals posses “tacit” knowledge or information they know but are unable to articulate to others. Many companies have harnessed this by allowing people to be creative and not always follow the traditional approach. “Freedom of expression, multiple idea filters, and mutually agreed upon standards of evaluation are positive features of a non-authoritarian scientific community described by Michael Polanyi as a “society of explorers”” (Gabel & Ellig, 25). The most forward moving and innovative firms are those that allow the free flow of ideas.
Some of the most meaningful discoveries were either by accident or because someone continued to try new things. My current employer is always encouraging employees to come up with new ideas and try new things. Employees that take the initiative because they see there is a need write many of the procedures manuals given to new employees or for reference purposes. Another co-worker and myself are beginning to work on a procedures manual for the lending department. Often times those who do something on a daily basis can teach someone or make more informed decisions better than an executive sitting in an office.
It is not that an executive is not intelligent but he is removed from the situation and knowledge is not always learned in a book, but instead from hands on experience or what we often cannot explain. Lastly we discuss incentives, compensation, and motivation. When working individuals are pushed by incentives. Corporations for example want to maximize long-term income streams rather than short-term earnings so the company has a viable future. However when quotas govern employees the incentive was to do just that and nothing extra. In order to avoid this, employers must find the right balance of market motivators.
Employees work harder and have better attitudes when there is some type of incentive but there must be a balance. Many employers merely need to give the intrinsic motivation in most individuals a boost. Almost every human has an inherent desire to accomplish goals and be good at something, with the right motivation this can be achieved. “Employees who make greater contributions to profit should enjoy greater opportunities to determine their own work and make decisions about the use of company resources” (Gabel & Ellig, 28). Every company including my own has to find a way to motivate employees.
My employer chooses to give raises based on how well you worked during the year. Also those who work hard are promoted which is another motivator to always do your best. The departments that produce more money for the credit union, usually the lending department has more weight on certain company decisions. Right now the company that underwrites the extended vehicular warranty is doing an incentive program where employees receive extra money for selling this product. By doing this it pushes employees to sell the product making money for the insurance company and the credit union.
Every company has a way of encouraging employees to produce more and that is usually through motivation and incentive programs. Whenever a company chooses to redirect from a command-based management system to a market-based system it is difficult. However it will produce so many benefits for the company from increased profits to more satisfied employees. This system requires combining business and economics to achieve the overall package. The six key systems described above are the framework for market-based management.
They all are interdependent of the other however they are most effective as a total package. The companies that choose to continue as command-based systems will eventually be left by the waste side as market-based alternatives provide people-including employees, consumers, investors, and managers are looking for. Knowledge needs to continually be passed through a firm to encourage and promote new ideas and innovation. Future organizations will be governed by market-based management allowing for the free flow of knowledge and ideas allowing for long-term profits and employee satisfaction.