Culture beats strategy. Free Prize™: It kicks bureaucracy's ass too.

Apropos of the last post and what seems is becoming "Culture beats Strategy" week here at Fouroboros Worldwide, some very good stuff from Ellig and Gable's Rise of Market-Based Management:

"Survival is very uncertain in an environment filled with risk, the unexpected, and competition. Therefore, a company must have the commitment of the minds of all of its employees to survive.... We know that the intelligence of a few technocrats - even very bright ones - has become totally inadequate to face these challenges."

-Konosuke Matsushita

For years, American business was dominated by a central-planning paradigm credited to Frederick Taylor. Taylor argued that management is a science that can be taught. In search of higher productivity, Taylor advocated systematic study to improve upon the best prevailing production practices of his day. Aided by time-and-motion studies, managers would ascertain the best way to perform each task, select the best people for each task, and teach them the one best way. Taylor laudably sought to increase business productivity so that both wages and profits would rise. Thus, he sought to replace labor-management confrontation with a harmony of interests founded on greater productivity.

In Taylor's view, managerial direction was key to enhancing productivity, because manual laborers were generally incapable of understanding the best way of doing their jobs.

...Taylor's methods generated significant productivity increases when applied to uneducated workers doing repetitive tasks. But followers tried to develop his ideas into a universal approach to be used in contexts quite different from the ones Taylor originally studied. A school of thought, "Scientific Management," emphasized that management's job is to give orders, while labor should follow these orders. This worldview has shaped labor-management relations for most of the twentieth century.

Advocates of Scientific Socialism also cited Scientific Management in support of their grand vision for society. In the Soviet Union, both Lenin and Trotsky admired Scientific Management and thought it was one of the important features of capitalism that socialists should imitate. In their view, centralized planning of the entire economy was just a logical extension of centralized planning within the factory.

...Though motivated by humanitarian concern, Scientific Management possessed a major blind spot: it ignored the importance of dispersed and tacit knowledge. In an organization of any significant size, authoritarian managers can be little more effective than central economic planners, because they lack the requisite knowledge. Much relevant knowledge is dispersed in the heads of many people in the organization, and much of it cannot be communicated to a central point for processing. Firms built on the central-planning model suffer from the same "fatal conceit" that afflicts centrally planned economies.

Memo to me: Do an org chart of the Communist system and Corp XYZ, unattributed. Show them at staff meeting, then ask, 'Can anybody tell me the difference?'

Market Incentives and Motivation

Entrepreneurs earn profits by thinking up new ways to create value for others. No one orders them to be creative; they simply find that they can make themselves better off by making their customers better off as well.

In business, though, employees frequently get raises and promotions for following orders, building political skills, attaining a specific rank, or simply hanging around for a long time. Some of this occurs because of union contracts, but such incentives are also widespread in managerial compensation schemes. As one corporate executive noted, "There must be better reasons for giving raises than the fact that the earth went all the way around the sun again."

Nucor Corporation has found a better way. At Nucor, substantial employee bonuses, paid weekly, are tied to production results that specific teams of employees can directly affect. Higher output leads to higher bonuses, and bonuses can easily exceed a worker's base pay. As a result, workers show up for work early to ask the previous shift how the equipment is running. They take extra care in maintenance and discourage each other from taking unnecessary sick days. In short, the incentives of Nucor's work teams are so well aligned with the corporate mission that little "management" of employees is required.

Free Flow Ideas and the Use of Knowledge

Freedom of action and freedom of exchange are critical elements of a market economy, and so is freedom of speech. Prices summarize a great deal of information, but because real-world markets are disequilibrium markets, prices do not summarize everything entrepreneurs and customers need to know. As a result, individuals need the freedom to exchange ideas, debate new suggestions, and advertise their products and services to potential customers.

Most corporations today espouse these ideals, but many would do well to ask themselves questions like the following.

* Do operating units supply detailed operating data to headquarters?

* Are employees directed because they lack access to information they need to make business decisions?

* Are accounting systems designed for management control instead of furnishing information to operating personnel?

Do performance evaluations include only the views of the boss, instead of information from all of an employee's major "customers"?

An organization that can answer "yes" to these questions is fundamentally channeling information to the decision-makers; at the top of a pyramid, instead of letting employees make decisions based on their own local knowledge....

Damn those Commie Business Roundtable people!

As I said, good stuff. It's not short, not too long, but very accessible. Mucho fodder for a compelling answer the next time you're at a cocktail party and someone asks: "Why are you an entrepreneur?"