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Introduction to Market Based Management

Based on Introduction to Market-Based Management Wayne Gable & Jerry Ellig

Six Key Systems in Market Economies & Organizations


Market Economy 1. Division of Labor 2. Property Rights 3. Rules of Just Conduct 4. Price System 5. Free Flow of Ideas 6. Market Incentives Organizations 1. Mission System 2. Roles & Responsibilities 3. Values & Culture 4. Internal Markets 5. Open Communication 6. Compensation & Motivation

1. Division of Labor & The Mission System


SOCIETY
C O M M A N

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

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

1. Division of Labor & The Mission System


SOCIETY
M A R K E T

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

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 B Through specialization and the division of labor, individuals A migrate toward activities that S utilize their particular E knowledge and talents, D benefitting themselves and society ini general

2. Property Rights, Roles, & Responsibilities


C
O M M A N D

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

2. Property Rights, Roles & Responsibilities


SOCIETY
M A R K E T

ORGANIZATION
Roles & responsibilities define sphere for individual responsibility and autonomy Employee responsibilities grow or shrink with individuals record of success Roles & responsibilities change as corporate mission or individual knowledge and skills change

Private property right permit individual choice in use of resources (within legal guidelines). Income from property (the system of profit & loss) B provides continuous A S feedback E Transferability of property D leads to effective stewardship of resources

3. Rules, Values, & Culture


C
O M M A N D

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.

3. Rules, Values, & Culture


SOCIETY
M A R K E T

ORGANIZATION

Respect for private property and individual rights Honesty in dealing with others Tolerance of alternative B views and lifestyles A S Respect for individual E initiative and D entrepreneurship

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

4. Price System & Internal Markets


SOCIETY
C
O M M A N D

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

Money prices either dont 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

4. Price System & Internal Markets


SOCIETY
M A R K E T

ORGANIZATION

Prices summarize Internal markets convey information about scarcities similar information to and consumer values market prices Price changes indicate need Investment in corporate for reallocation of resources services is determined by B value added, not politics A When consumers react, S prices allow adjustments to Corporate staff grows or E occur automatically shrinks according to ability D to serve internal customers, not set by arbitrary limits

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

C
O M M A N D

5. Knowledge of Generation & Communication


SOCIETY
M A R K E T

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 ones track record, not by political power or rank

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 B Dissent from official dogma is safe; pathbreaking dissention can A be highly rewarded S E Authority in any field of knowledge conferred by mutual D agreement among peers

6. Incentives, Compensation & Motivation


SOCIETY
C
O M M A N D

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

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 individuals 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

6. Incentives, Compensation & Motivation


SOCIETY
M A R K E T

ORGANIZATION
Changes in compensation are linked to mission, including helping overall organization & commitment to corporate values & culture Changes in responsibilities depend on employees record in using resources to advance the mission Employees are rewarded for moving to new jobs where they can better contribute to the mission

Profit opportunities encourage entrepreneurs to serve consumers Successful entrepreneurs get control of more resources, unsuccessful ones are B separated from control of A resources S E People have financial incentives to work in jobs D where they can add the most value to society

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