Description
The foundations, principles and dimensions of Market-Based Management (MBM), a management system that allows organizations to be successful by applying the principles that enable free societies to become prosperous, is analyzed and reviewed. Pioneered and trademarked by Charles G. Koch, Chairman of the Board and CEO of Koch Industries, MBM seeks to adapt the principles of a free society and market economy to improve management practice in organizations.
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
126
PRINCIPLES & DIMENSIONS OF MARKET-BASED MANAGEMENT
® (MBM)
Harlan D. Whatley
Raffles Design Institute Tianjin, China
E-mail: [email protected]
Submission: 16/03/2013
Accept: 21/03/2013
ABSTRACT
The foundations, principles and dimensions of Market-Based
Management® (MBM), a management system that allows
organizations to be successful by applying the principles that enable
free societies to become prosperous, is analyzed and reviewed.
Pioneered and trademarked by Charles G. Koch, Chairman of the
Board and CEO of Koch Industries, MBM seeks to adapt the principles
of a free society and market economy to improve management practice
in organizations.
Keywords: market-based management; Koch Industries; management
system
127
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
1. INTRODUCTION
The purpose of this essay is to analyze and discuss the foundations,
principles and dimensions of Market-Based Management® (MBM), a
management system that allows organizations to be successful by applying
the principles that enable free societies to become prosperous (CHARLES
KOCH INSTITUTE, 2013). Pioneered and trademarked by Charles G. Koch,
Chairman of the Board and CEO of Koch Industries, MBM “seeks to adapt the
principles of a free society and market economy to improve management
practice in organizations” (ELLIG, 1996, p. 73). Holian (2007) added that
MBM “attempts to harness the power of markets inside a firm” (p. 23).
Moreover, Evans (2013) argued that MBM allows workers more access to the
decision-making process in large firms. Finally, Gable (1995) concluded that
MBM fosters a decentralized decision-making process despite the job title. In
addition to a review of the literature, case studies of corporations utilizing
MBM will be discussed as well as applications of MBM outside of the private
sector. Let us review some of the economic theories that are the foundations
of MBM.
2. FOUNDATIONS OF MBM
In order to develop MBM, Koch (2007) relied heavily on the Austrian
school of economics, particularly the theories of Hayek, Mises and
Schumpeter. Hayek (1979) emphasized that there are differences between
orders and organizations where orders occur when “individuals mutually
adjust their behavior to each other based on some general rules” while
organizations are created when “someone consciously plans how the
individuals will relate to each other” (ELLIG, 1995, p. 33). Spontaneous or
extended orders are superior to any order that can be achieved by the human
mind due to the specifics of the information or data required (HAYEK, 1991).
In essence, the members of the economic system use their knowledge and
energy to create value (GABLE, 1995).
Coase (1937) defined the role of the firm in economic systems where
the firm is a consciously planned organization while the market is more of a
spontaneous order (ELLIG, 1995). Moreover, firms have an explained
128
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
existence, boundaries and internal organizations that are identified via the
employment contract and the notion of authority (FOSS, 2002).
Jensen & Meckling (1992) argued that a firm’s decision-making
authority should be moved to where the knowledge is located as opposed to
vice versa (ELLIG, 1995). In Central and Eastern Europe and the former
Soviet Union, centrally planned enterprises failed and are now benefiting from
the efficiencies associated with the free market (COWEN & PARKER, 1997).
Even China’s state-owned enterprises, such as their Big Four banks, are now
being publicly traded on stock exchanges and are expanding outside of China
into foreign markets including Africa, the Americas and Europe. These
definitions and notions, amongst others, provided the foundation for Market-
Based Management® (MBM). Let us review the elements of market
economies and organizations.
2.1. Elements of market economies and organizations
Based upon the economic theories of the Austrian school, such as
property rights and free markets, MBM “seeks to improve organizational
performance by exploring analogous elements in market economies and
organizations” (ELLIG, 1996, p. 740). MBM focuses on six key elements of
the market economy: 1. Specialization through comparative advantage 2.
Rules of just conduct 3. Property rights 4. Market incentive 5. Free flow of
ideas 6. Price system (ELLIG, 1995, p. 36).
Adam Smith argued in his Wealth of Nations that an advanced division
of labor was fundamental for economic prosperity. An extended definition of
this theory is often referred to as comparative advantage, which shows how
an individual can create wealth by specializing in activities that will create the
most value with the least amount of resources (ELLIG & GABLE, 1995, p.
436).
Based on Hayek’s rules of conduct, the market economy system
referred to as rules of just conduct includes a firm’s values and its culture.
Values such as respect for personal dignity and property, intellectual honesty,
humility, an open mind and the freedom to question the status quo are ones
that lead to prosperity (ELLIG & GABLE, 1995, p. 436). Koch Industries has a
129
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
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ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
statement of corporate principles that includes: humility, intellectual honesty,
openness, receptiveness to new ideas, treating others with dignity and
respect, recognizing and using everyone's unique knowledge and abilities,
and instilling a commitment to the common mission (ELLIG & GABLE, 1993).
According to Mises, property rights are akin to the rights of decision-
making within a firm (BOETTKE, COYNE & LEESON, 2008). In a market
economy, property rights are controlled by those who create value and can be
lost when they do not.
Market incentive includes motivation as “entrepreneurs earn profits by
thinking up new ways to create value for others” (ELLIG & GABLE, 1995, p.
437). Nucor Corporation incentivizes their employees’ production output on a
weekly basis (ELLIG, 1995, p. 39).
Free flow of ideas and the use of knowledge include both freedom of
action, exchange and speech. By allowing employees to make decisions
based on local knowledge, productivity is increased within the firm and the
focus is more “client centric” (ELLIG, 1995, pp. 39 – 40).
Price system and internal markets relate to Hayek (1945) and his view
of the price system in a market economy (ELLIG, 1995, p. 40). The practice of
having internal customers pay for a firm’s overhead is widely popular with
firms such as Bell Atlantic, Weyerhaeuser and Koch Industries (ELLIG &
GABLE, 1995, p. 437). Many firms today outsource services such as
accounting and information technology in order to control costs and increase
profitability.
Moreover, there are six parallel elements within organizations: 1.
Mission system 2. Values and culture 3. Roles and responsibilities 4.
Compensation and motivation 5. Generation and use of knowledge 6. Internal
markets (ELLIG, 1995, p. 36). Now let us review the guiding principles of
MBM.
2.2. Guiding Principles
According to the Charles Koch Institute:
130
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
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DOI: 10.14807/ijmp.v4i1.63
Market-Based Management
®
requires a culture centered on specific
characteristics. These attributes set the standards for
evaluating policies, practices and conduct, establishing norms of behavior,
and building the shared values that guide individual actions. The
guiding principles articulate rules of just conduct along with values
and beliefs. (CHARLES KOCH INSTITUTE, 2013)
There are ten guiding principles of MBM:
1. Integrity - Conduct all affairs with integrity, for which courage is the
foundation. Honor donor intent.
2. Compliance - Strive for 10,000% compliance with all laws and
regulations, which requires 100% of employees fully complying 100%
of the time. Stop, think, and ask.
3. Value creation - Contribute to societal well-being by advancing the
ideas, values, policies, and practices of free societies. Understand,
develop, and apply MBM to achieve superior results by making better
decisions, eliminating waste, optimizing, and innovating.
4. Principled entrepreneurship™ - Apply the judgment, responsibility,
initiative, economic and critical thinking skills, and sense of urgency
necessary to generate the greatest contribution, consistent with the
organization’s risk philosophy.
5. Customer focus - Discover, collaborate, and partner with those who
can most effectively advance free societies.
6. Knowledge - Seek and use the best knowledge and proactively share
your knowledge while embracing a challenge process. Develop
measures that lead to more effective action.
7. Change - Anticipate and embrace change. Envision what could be,
challenge the status quo, and drive creative destruction through
experimental discovery.
8. Humility - Exemplify humility and intellectual honesty. Constantly seek
to understand and constructively deal with reality to create value and
achieve personal improvement. Hold yourself and others accountable.
131
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9. Respect - Treat others with honesty, dignity, respect, and sensitivity.
Appreciate the value of diversity, including, but not limited to, diversity
in experiences, perspectives, knowledge, and ideas. Encourage and
practice teamwork.
10. Fulfillment - Find fulfillment and meaning in your work by fully
developing your capabilities to produce results that create the greatest
value (CHARLES KOCH INSTITUTE, 2013).
The guiding principles of MBM are clearly linked to the tenets of the
Austrian school of economics. The principles of integrity and respect tie into
Hayek’s “rules of conduct” notion and the principle of knowledge can be
paralleled to Hayek’s 1937 and 1945 essays on knowledge. Under the broad
notion of competition, the principles of entrepreneurship, value creation and
customer focus follow the economic theories of Schumpeter, Hayek and
Kirzner (ELLIG, 1996, p. 83). Let us review the five dimensions of MBM.
2.3. The Five Dimensions
According to the Charles Koch Institute, there are five dimensions to
MBM:
1. Vision - Determining where and how the organization can create the
greatest long-term value.
2. Virtue and Talents - Helping ensure that people with the right values,
skills, and capabilities are hired, retained, and developed.
3. Knowledge Processes - Creating, acquiring, sharing, and applying
relevant knowledge, and measuring and tracking profitability.
4. Decision Rights - Ensuring the right people are in the right roles with
the right authority to make decisions and holding them accountable.
5. Incentives - Rewarding people according to the value they create for
the organization. (CHARLES KOCH INSTITUTE, 2013)
3. CASE STUDIES AND APPLICATIONS
Clark Equipment utilizes the organizational system of internal markets
by breaking its corporate staff and departments such as accounting, data
132
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processing, legal and trucking into profit centers, which eliminated
bureaucracy within the firm (GABLE, 1995).
Koch Industries is a privately-owned holding company that includes
businesses such as Georgia-Pacific, Invista and Dixie Brand Products.
Accounting, information systems, legal, and other staff services are bought
and sold through an internal market system (GABLE, 1995). Rather than
being vertically integrated, as many energy companies are, Koch Industries
focuses on industry segments such as “gathering, transportation, refining and
trading” and does the same with related industries in order to exploit
comparative advantages (ELLIG, 1995, p. 37).
Nucor Corporation is a steel company based in Charlotte, North
Carolina that, on a weekly basis, rewards its production employees with
bonus pay, solely based on team productivity (GABLE, 1995). The
management of the firm understands that employees will make mistakes and
encourage values that promote prosperity (ELLIG, 1995).
Semco, a Brazilian manufacturer, utilizes alternative management
practices such as no dress codes, expense reimbursement policies and does
not set work hours or have time clocks (ELLIG, 1995, p. 38). This is an
example of the market economy system known as the “rules of just contact”
(ELLIG & GABLE, 1995, p. 436).
Tamko Roofing Products of Joplin, Missouri uses the concept of
property rights via decision-making as they have replaced budgets with
“spending authorities that allow them to exercise wide discretion about
corporate purchases” (ELLIG, 1995, p. 36).
Market-Based Management (MBM) is applicable to not only
corporations, but can be applied to the public sector as well. Education
systems can benefit from MBM as schools depend on knowledge as their
primary method of creating value (STANFIELD, 2007). Another possible use
of MBM is in the management of American and British police forces as they
embrace the use of statistics, empowering police sergeants and their
precincts (HOLIAN, 2007).
4. CONCLUSION
133
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Conversely, there are scholars that have some concerns about MBM
“because they perceive all the market based talk as a form of ‘economic
imperialism’ that seeks to reduce all human behavior to hyper-rational self-
interested optimizing’ (ELLIG, 1996, p. 73). “Markets and organizations differ
in a fundamental way, and there is no guarantee that one can transplant
techniques that are successful in organizations to markets or vice versa”
(HOLIAN, 2007, p. 28).
In addition, there are management theories that are related to MBM
including Total Quality Management (TQM) and Stern & Stewart’s Economic
Value Added (EVA). MBM is broader than Total Quality Management (TQM),
because TQM deals only with the values/cultures, roles/responsibilities and
knowledge systems of a firm (PYZDEK, 1996). MBM is a scientific approach
to management that integrates theory and practice, and provides a framework
for dealing with the ongoing challenges of growth and change (KOCH, 2007).
The Austrian concept of opportunity cost of capital is related to EVA as is
providing ownership opportunities to employees (SKOUSEN, 2008).
MBM abandons Keynesian economics and the centrally planned
organizations of Communism and embraces the knowledge-based enterprises
of the free market economy. When people are empowered and are treated
with dignity and respect, they are able to generate more value for both
themselves and their firm as they feel as though they are part of the new
breed of knowledge entrepreneurs.
REFERENCES
BOETTKE, P. J., COYNE, C. J. & LEESON, P.T. (2008). The Continuing
relevance of F.A. Hayek's political economy. Advances in Austrian
Economics, n. 11, p. 79-98 Retrieved from http://ssrn.com/abstract=1696102
CHARLES KOCH INSTITUTE. (2013). Market-based management. Retrieved
from http://www.charleskochinstitute.org/mbm/
COASE, R. (1937). The Nature of the firm, Economica, n. 4, p. 386–405.
COWEN, T. & PARKER, D. (1997). Markets in the Firm – A Market-Process
Approach to Management, IEA Hobart Paper 134, London: Institute of
Economic Affairs.
ELLIG, J. (1995). From Austrian economics to market-based
management. Journal of Private Enterprise, v. 11, n. 1, p. 73-88.
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ISSN: 2236-269X
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ELLIG, J. (1996). Organizational economics and the market-based
management framework: Toward a common research agenda. Journal of
Private Enterprise, v. 12, n. 1, p. 31-41.
ELLIG, J. & GABLE, W. (1993). Introduction to market-based management.
Fairfax, VA: Center for Market Processes. Retrieved from
http://www.huizenga.nova.edu/5012/textbooks/mbm.htm
ELLIG, J. & GABLE, W. (1995). The Rise of market-based management. The
Freeman/Ideas on Liberty, v. 45, n. 7, p. 433-438 Retrieved from
http://www.unz.org/Pub/Freeman-1995jul-00433?View=PDF
EVANS, A. J. (2013). Workers are to be extensively involved in the decision
process. Poslovni dnevnik. Retrieved from http://www.poslovni.hr/svijet-i-
regija/evans- radnike-treba-intenzivno-ukljuciti-u-proces-odlucivanja-229312
FOSS, N. J. (2002). 'Coase vs Hayek': Economic organization and the
knowledge economy. International Journal of the Economics of Business, v.
9, n. 1, p. 9-35. doi:10.1080/13571510110102958
GABLE, W. (1995). Market-based management. Corporate Board, 16(91), 21.
Retrieved from
http://web.ebscohost.com/ehost/detail?vid=7&sid=9a1e7b26-b700-4e1a-
ae3082d056c4b6cf%40sessionmgr111&hid=123&bdata=#db=bth&AN=95031
53116
HAYEK, F. A. (1945). The Use of knowledge in society, American Economic
Review, n. 35, p. 519–530.
HAYEK, F. A. (1979). Law, Legislation, and Liberty. Chicago, IL: University of
Chicago Press.
HAYEK, F. A. (1991). The Fatal conceit: The Errors of socialism. Chicago, IL:
The University of Chicago Press.
HOLIAN, M. (2007). Compstat, community policing and the science of
success: A Market-based approach to police management. Economic
Affairs, v. 27, n. 4, p. 23-29. doi:10.1111/j.1468-0270.2007.00776.x
JENSEN, M. C. & MECKLING, W.H. (1992). Specific and general knowledge,
and organizational structure. In Contract Economics, edited by L. Werin,
and H. Wijkander. Oxford, U.K.: Blackwell Publishers, 1992. Retrieved from
http://papers.ssrn.com/abstract=6658
KOCH, C.G. (2007). The Science of success: How market based
management built the world's largest private company. Hoboken, NJ: John
Wiley & Sons. Retrieved from
http://www.kochind.com/MBM/science_of_success.aspx
PYZDEK, T. (1996). The Pursuit of happiness. Quality Progress, v. 29, n. 5, p.
92 – 97.
SKOUSEN, M. (2008). EconoPower: How a new generation of economists is
transforming the world. Hoboken, NJ: John Wiley & Sons. Retrieved from
http://books.google.com.hk/books?id=LZBuZFcdeDkC&printsec=frontcover#v
=onepage&q&f=false
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ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
STANFIELD, J. (2007). Market-based management in education. Economic
Affairs, v. 27, n. 1, p. 88. doi:10.1111/j.1468-0270.2007.00719.x
doc_861083041.pdf
The foundations, principles and dimensions of Market-Based Management (MBM), a management system that allows organizations to be successful by applying the principles that enable free societies to become prosperous, is analyzed and reviewed. Pioneered and trademarked by Charles G. Koch, Chairman of the Board and CEO of Koch Industries, MBM seeks to adapt the principles of a free society and market economy to improve management practice in organizations.
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
126
PRINCIPLES & DIMENSIONS OF MARKET-BASED MANAGEMENT
® (MBM)
Harlan D. Whatley
Raffles Design Institute Tianjin, China
E-mail: [email protected]
Submission: 16/03/2013
Accept: 21/03/2013
ABSTRACT
The foundations, principles and dimensions of Market-Based
Management® (MBM), a management system that allows
organizations to be successful by applying the principles that enable
free societies to become prosperous, is analyzed and reviewed.
Pioneered and trademarked by Charles G. Koch, Chairman of the
Board and CEO of Koch Industries, MBM seeks to adapt the principles
of a free society and market economy to improve management practice
in organizations.
Keywords: market-based management; Koch Industries; management
system
127
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
1. INTRODUCTION
The purpose of this essay is to analyze and discuss the foundations,
principles and dimensions of Market-Based Management® (MBM), a
management system that allows organizations to be successful by applying
the principles that enable free societies to become prosperous (CHARLES
KOCH INSTITUTE, 2013). Pioneered and trademarked by Charles G. Koch,
Chairman of the Board and CEO of Koch Industries, MBM “seeks to adapt the
principles of a free society and market economy to improve management
practice in organizations” (ELLIG, 1996, p. 73). Holian (2007) added that
MBM “attempts to harness the power of markets inside a firm” (p. 23).
Moreover, Evans (2013) argued that MBM allows workers more access to the
decision-making process in large firms. Finally, Gable (1995) concluded that
MBM fosters a decentralized decision-making process despite the job title. In
addition to a review of the literature, case studies of corporations utilizing
MBM will be discussed as well as applications of MBM outside of the private
sector. Let us review some of the economic theories that are the foundations
of MBM.
2. FOUNDATIONS OF MBM
In order to develop MBM, Koch (2007) relied heavily on the Austrian
school of economics, particularly the theories of Hayek, Mises and
Schumpeter. Hayek (1979) emphasized that there are differences between
orders and organizations where orders occur when “individuals mutually
adjust their behavior to each other based on some general rules” while
organizations are created when “someone consciously plans how the
individuals will relate to each other” (ELLIG, 1995, p. 33). Spontaneous or
extended orders are superior to any order that can be achieved by the human
mind due to the specifics of the information or data required (HAYEK, 1991).
In essence, the members of the economic system use their knowledge and
energy to create value (GABLE, 1995).
Coase (1937) defined the role of the firm in economic systems where
the firm is a consciously planned organization while the market is more of a
spontaneous order (ELLIG, 1995). Moreover, firms have an explained
128
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
existence, boundaries and internal organizations that are identified via the
employment contract and the notion of authority (FOSS, 2002).
Jensen & Meckling (1992) argued that a firm’s decision-making
authority should be moved to where the knowledge is located as opposed to
vice versa (ELLIG, 1995). In Central and Eastern Europe and the former
Soviet Union, centrally planned enterprises failed and are now benefiting from
the efficiencies associated with the free market (COWEN & PARKER, 1997).
Even China’s state-owned enterprises, such as their Big Four banks, are now
being publicly traded on stock exchanges and are expanding outside of China
into foreign markets including Africa, the Americas and Europe. These
definitions and notions, amongst others, provided the foundation for Market-
Based Management® (MBM). Let us review the elements of market
economies and organizations.
2.1. Elements of market economies and organizations
Based upon the economic theories of the Austrian school, such as
property rights and free markets, MBM “seeks to improve organizational
performance by exploring analogous elements in market economies and
organizations” (ELLIG, 1996, p. 740). MBM focuses on six key elements of
the market economy: 1. Specialization through comparative advantage 2.
Rules of just conduct 3. Property rights 4. Market incentive 5. Free flow of
ideas 6. Price system (ELLIG, 1995, p. 36).
Adam Smith argued in his Wealth of Nations that an advanced division
of labor was fundamental for economic prosperity. An extended definition of
this theory is often referred to as comparative advantage, which shows how
an individual can create wealth by specializing in activities that will create the
most value with the least amount of resources (ELLIG & GABLE, 1995, p.
436).
Based on Hayek’s rules of conduct, the market economy system
referred to as rules of just conduct includes a firm’s values and its culture.
Values such as respect for personal dignity and property, intellectual honesty,
humility, an open mind and the freedom to question the status quo are ones
that lead to prosperity (ELLIG & GABLE, 1995, p. 436). Koch Industries has a
129
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
statement of corporate principles that includes: humility, intellectual honesty,
openness, receptiveness to new ideas, treating others with dignity and
respect, recognizing and using everyone's unique knowledge and abilities,
and instilling a commitment to the common mission (ELLIG & GABLE, 1993).
According to Mises, property rights are akin to the rights of decision-
making within a firm (BOETTKE, COYNE & LEESON, 2008). In a market
economy, property rights are controlled by those who create value and can be
lost when they do not.
Market incentive includes motivation as “entrepreneurs earn profits by
thinking up new ways to create value for others” (ELLIG & GABLE, 1995, p.
437). Nucor Corporation incentivizes their employees’ production output on a
weekly basis (ELLIG, 1995, p. 39).
Free flow of ideas and the use of knowledge include both freedom of
action, exchange and speech. By allowing employees to make decisions
based on local knowledge, productivity is increased within the firm and the
focus is more “client centric” (ELLIG, 1995, pp. 39 – 40).
Price system and internal markets relate to Hayek (1945) and his view
of the price system in a market economy (ELLIG, 1995, p. 40). The practice of
having internal customers pay for a firm’s overhead is widely popular with
firms such as Bell Atlantic, Weyerhaeuser and Koch Industries (ELLIG &
GABLE, 1995, p. 437). Many firms today outsource services such as
accounting and information technology in order to control costs and increase
profitability.
Moreover, there are six parallel elements within organizations: 1.
Mission system 2. Values and culture 3. Roles and responsibilities 4.
Compensation and motivation 5. Generation and use of knowledge 6. Internal
markets (ELLIG, 1995, p. 36). Now let us review the guiding principles of
MBM.
2.2. Guiding Principles
According to the Charles Koch Institute:
130
INDEPENDENT JOURNAL OF MANAGEMENT & PRODUCTION (IJM&P)
http://www.ijmp.jor.br v. 4, n. 1, January – June 2013.
ISSN: 2236-269X
DOI: 10.14807/ijmp.v4i1.63
Market-Based Management
®
requires a culture centered on specific
characteristics. These attributes set the standards for
evaluating policies, practices and conduct, establishing norms of behavior,
and building the shared values that guide individual actions. The
guiding principles articulate rules of just conduct along with values
and beliefs. (CHARLES KOCH INSTITUTE, 2013)
There are ten guiding principles of MBM:
1. Integrity - Conduct all affairs with integrity, for which courage is the
foundation. Honor donor intent.
2. Compliance - Strive for 10,000% compliance with all laws and
regulations, which requires 100% of employees fully complying 100%
of the time. Stop, think, and ask.
3. Value creation - Contribute to societal well-being by advancing the
ideas, values, policies, and practices of free societies. Understand,
develop, and apply MBM to achieve superior results by making better
decisions, eliminating waste, optimizing, and innovating.
4. Principled entrepreneurship™ - Apply the judgment, responsibility,
initiative, economic and critical thinking skills, and sense of urgency
necessary to generate the greatest contribution, consistent with the
organization’s risk philosophy.
5. Customer focus - Discover, collaborate, and partner with those who
can most effectively advance free societies.
6. Knowledge - Seek and use the best knowledge and proactively share
your knowledge while embracing a challenge process. Develop
measures that lead to more effective action.
7. Change - Anticipate and embrace change. Envision what could be,
challenge the status quo, and drive creative destruction through
experimental discovery.
8. Humility - Exemplify humility and intellectual honesty. Constantly seek
to understand and constructively deal with reality to create value and
achieve personal improvement. Hold yourself and others accountable.
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9. Respect - Treat others with honesty, dignity, respect, and sensitivity.
Appreciate the value of diversity, including, but not limited to, diversity
in experiences, perspectives, knowledge, and ideas. Encourage and
practice teamwork.
10. Fulfillment - Find fulfillment and meaning in your work by fully
developing your capabilities to produce results that create the greatest
value (CHARLES KOCH INSTITUTE, 2013).
The guiding principles of MBM are clearly linked to the tenets of the
Austrian school of economics. The principles of integrity and respect tie into
Hayek’s “rules of conduct” notion and the principle of knowledge can be
paralleled to Hayek’s 1937 and 1945 essays on knowledge. Under the broad
notion of competition, the principles of entrepreneurship, value creation and
customer focus follow the economic theories of Schumpeter, Hayek and
Kirzner (ELLIG, 1996, p. 83). Let us review the five dimensions of MBM.
2.3. The Five Dimensions
According to the Charles Koch Institute, there are five dimensions to
MBM:
1. Vision - Determining where and how the organization can create the
greatest long-term value.
2. Virtue and Talents - Helping ensure that people with the right values,
skills, and capabilities are hired, retained, and developed.
3. Knowledge Processes - Creating, acquiring, sharing, and applying
relevant knowledge, and measuring and tracking profitability.
4. Decision Rights - Ensuring the right people are in the right roles with
the right authority to make decisions and holding them accountable.
5. Incentives - Rewarding people according to the value they create for
the organization. (CHARLES KOCH INSTITUTE, 2013)
3. CASE STUDIES AND APPLICATIONS
Clark Equipment utilizes the organizational system of internal markets
by breaking its corporate staff and departments such as accounting, data
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processing, legal and trucking into profit centers, which eliminated
bureaucracy within the firm (GABLE, 1995).
Koch Industries is a privately-owned holding company that includes
businesses such as Georgia-Pacific, Invista and Dixie Brand Products.
Accounting, information systems, legal, and other staff services are bought
and sold through an internal market system (GABLE, 1995). Rather than
being vertically integrated, as many energy companies are, Koch Industries
focuses on industry segments such as “gathering, transportation, refining and
trading” and does the same with related industries in order to exploit
comparative advantages (ELLIG, 1995, p. 37).
Nucor Corporation is a steel company based in Charlotte, North
Carolina that, on a weekly basis, rewards its production employees with
bonus pay, solely based on team productivity (GABLE, 1995). The
management of the firm understands that employees will make mistakes and
encourage values that promote prosperity (ELLIG, 1995).
Semco, a Brazilian manufacturer, utilizes alternative management
practices such as no dress codes, expense reimbursement policies and does
not set work hours or have time clocks (ELLIG, 1995, p. 38). This is an
example of the market economy system known as the “rules of just contact”
(ELLIG & GABLE, 1995, p. 436).
Tamko Roofing Products of Joplin, Missouri uses the concept of
property rights via decision-making as they have replaced budgets with
“spending authorities that allow them to exercise wide discretion about
corporate purchases” (ELLIG, 1995, p. 36).
Market-Based Management (MBM) is applicable to not only
corporations, but can be applied to the public sector as well. Education
systems can benefit from MBM as schools depend on knowledge as their
primary method of creating value (STANFIELD, 2007). Another possible use
of MBM is in the management of American and British police forces as they
embrace the use of statistics, empowering police sergeants and their
precincts (HOLIAN, 2007).
4. CONCLUSION
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Conversely, there are scholars that have some concerns about MBM
“because they perceive all the market based talk as a form of ‘economic
imperialism’ that seeks to reduce all human behavior to hyper-rational self-
interested optimizing’ (ELLIG, 1996, p. 73). “Markets and organizations differ
in a fundamental way, and there is no guarantee that one can transplant
techniques that are successful in organizations to markets or vice versa”
(HOLIAN, 2007, p. 28).
In addition, there are management theories that are related to MBM
including Total Quality Management (TQM) and Stern & Stewart’s Economic
Value Added (EVA). MBM is broader than Total Quality Management (TQM),
because TQM deals only with the values/cultures, roles/responsibilities and
knowledge systems of a firm (PYZDEK, 1996). MBM is a scientific approach
to management that integrates theory and practice, and provides a framework
for dealing with the ongoing challenges of growth and change (KOCH, 2007).
The Austrian concept of opportunity cost of capital is related to EVA as is
providing ownership opportunities to employees (SKOUSEN, 2008).
MBM abandons Keynesian economics and the centrally planned
organizations of Communism and embraces the knowledge-based enterprises
of the free market economy. When people are empowered and are treated
with dignity and respect, they are able to generate more value for both
themselves and their firm as they feel as though they are part of the new
breed of knowledge entrepreneurs.
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