Mbm presentation yek2008
79
Market Based Management® Principles and Practice YEK, August 22, 2008
Transcript of Mbm presentation yek2008
Market Based Management®
Principles and Practice
YEK, August 22, 2008
The goal of this seminar is to provide you with:
• A clear understanding of the principles and mental models underlying MBM
• Examples of what MBM looks like in practice• Challenges to your thinking• Ideas about how to apply MBM to improve your
organization• An excuse to have a little fun.• But only just a little, so sit up straight.
What makes MBM so great?
• In 1987, Forbes republished its original “Forbes 100” list and compared this to its 1987 list of top companies.
• Of the original group, 61 had ceased to exist.
• Of the remaining 39, 18 had managed to stay in the top 100.
• Of the 18 that stayed in the top 100, only 2 performed better than market average.– (Kodak and GE)
In 1917, Forbes formed the first list of 100 largest American companies
Standard & Poor’s 500
• Of the 500 companies originally in the S&P 500 in 1957, only 74 (14.8%) remained on the list through 1998.
• Of these 74, only 12 outperformed the S&P index itself over the 1957-1998 period.
HOW WILL WE SURVIVE?!?
The doomed 98 percent
• They didn’t change
• They changed, but not fast enough
Creative Destruction
“The world is too big for us. Too much going on, too many crimes, too much violence and excitement.
Try as you will, you get behind in the race, in spite of yourself. It’s an incessant strain, to keep pace…And still, you lose ground. Science empties its discoveries on you so fast that you stagger beneath them in hopeless bewilderment.
The political world is news seen so rapidly you’re out of breath trying to keep pace with who’s in and who’s out. Everything is high pressure. Human nature can’t endure much more!”
Atlantic Journal
June 16, 1833
The Question:
Is the world changingor
Is it not changing?X
The doomed 98 percent
• They didn’t change
• They changed, but not fast enough
• They changed, and they changed fast, but they changed the wrong things
Change happens Subjective value
Pride goes before a fall
Trust matters
Buy
low
, sel
l hig
h
Smarter than anyone ≠ smarter than everyone
Innovation drives markets
People crave fulfillment
Lesson:
To survive in the face of creative destruction, we must master timeless
principles
Lesson:
To survive thrive in the face of creative destruction, we must master timeless
principles
Timeless
1. Integrity
2. Compliance
3. Value Creation4. Principled
Entrepreneurship™
5. Customer Focus
6. Knowledge
7. Change
8. Respect
9. Humility
10. Fulfillment
Koch Guiding Principles
Market Based Management®
A management philosophy that enables an organization to succeed long term by applying the principles that allow a free society to prosper.
North Korea
South Korea
(the dictator’s pad)
High Income Countries ($11,456 or more annual income per capita)
Upper Middle Income Countries ($3,706 to $11,455/capita)
Lower Middle Income Countries ($936 to $3,705/capita)
World Development Report, World Bank, 2007Figures adjusted for cost-of-living differentials
Luxembourg 64,400
United States 45,850
Japan 34,600
Canada 32,600
Italy 29,900
New Zealand 26,340
S. Korea 24,750
Estonia 19,680
Romania 10,980
Brazil 9,370
China 5,370
India 2,740
Haiti 1,050
Rwanda 860
Ethiopia 780
N. Korea 580
Low Income Countries ($935 or less annual income per capita)
2007 Index of Economic Freedom
1. Hong Kong2. Singapore3. Australia4. United States5. New Zealand5. United Kingdom7. Ireland8. Luxembourg9. Switzerland10. Canada11. Chile12. Estonia13. Denmark14. Netherlands14. Iceland
143. Bangladesh144. Venezuela145. Belarus146. Burundi147. Chad148. Guinea Bissau149. Angola150. Iran151. Republic of Congo152. Turkmenistan153. Burma154. Zimbabwe155. Libya156. Cuba157. North Korea
Top 16 Bottom 16
Wall Street Journal/Heritage Foundation ranking of 157 countries
Lesson:
• Economic freedom entrepreneurial innovation and productivity
• Entrepreneurship and productivity
PROSPERITY
Economic Thinking
Subjective Value
Depends on
• Buyer expectations (taste and perception)
• Alternatives• Circumstances• Time
Does NOT depend on
• Cost to produce• List price
Value determined by the consumer’s expected satisfaction
• Stores used to pay 10¢/bag of whole carrots and sell them for 17¢/bag.
• They began paying 50¢/bag for baby carrots and selling them for $1/bag.
• American consumption rose from 6 to 10.5 pounds/person/year.
Digging the baby carrot By Elizabeth Weise, USA TODAYAugust 11th, 2004
...Tired of the wastefulness he was seeing (400 tons/day), Mike Yurosek whittled "babies" from grown-up castoff carrots.
Know Thy Customer“What we sell is the ability for a 43-year-old
accountant to dress in black leather, ride through small towns and have people be afraid of him.”
Harley Davidson Executive
Why Buffets Make Us Miserable
• Hidden cameras in pizza restaurant
• Random sample chosen for free buffet
• What do you predict happened?
• Why?
Sunk Cost
Cost already incurred in a project that cannot be changed by present or future
actions.
The value of the most valuable alternative foregone when you choose to use a resource in a particular way.
Opportunity Cost
Opportunity Cost
A = $100 B = $80 C = $30
• What’s the opportunity cost of B?
• What’s the opportunity cost of A?
• Have you ever seen a heading for “opportunity costs” in an accounting ledger?
Foundations of Prosperity
• Rule of law and a principles culture
• Property rights
• Freedom of contract
• Market mechanisms and free speech
Value-creating entrepreneurs• Self-interest
The MBM Framework
Value-creating entrepreneurs Vision
Rule of law, principles culture
Property rights
Freedom of contract
Prices, profits, losses, and free speech
Virtue & talents
Decision rights
Incentives
Knowledge processes
Prosperous SocietiesSuccessful
Organizations
VisionQuality
Teamwork
ExcellenceChange
Responsibility
Leader
Service
Success
Innovation
Initiative
Dilbert does vision
“The New Venture Mission is to scout profitable growth opportunities in relationships, both internally and
externally, in emerging, mission-inclusive markets, and explore new paradigms and
then filter and communicate and evangelize the findings.”
Vision Actions
Vision Actions
The way we’ve always done it
What makes us feel righteous
Value-creation process
CapabilitiesMarket
Opportunities Venture
ExperimentsValue
Creation
Lessons for Leaders• Leaders: eat, drink, breathe, sleep, and
SPEAK vision.
• Help people connect their daily work to the accomplishment of something big.
• Separate ends from means.
• Relentlessly and honestly assess capability.
• Play your strengths.
“The most pathetic person in the whole world is someone who has
sight but no vision.”
Helen Keller
The MBM Framework
Value-creating entrepreneurs Vision
Rule of law, principles culture
Property rights
Freedom of contract
Prices, profit, and loss
Virtue & talents
Decision rights
Incentives
Knowledge processes
Virtue and Talents
Virtue = Values and Beliefs
Talents = Skills and Knowledge
Knowledge and Skills
Values and Beliefs
Consistentwith desiredculture
Inconsistentwith desiredculture
4
2 1
3
Inadequate for job expectations
Adequate for job expectations
Somebody once said that in looking for people to hire, you look for three qualities: integrity, integrity, intelligence, and energy.intelligence, and energy. And if they don't have the first, the other two will kill you.
You think about it; it's true. If you hire somebody without the first you really want them to be dumb and lazy.
Warren Buffett
Lessons for Leaders• Never compromise on values.
• A principles-based culture frees managers to become leaders.
• Make assessment of principled behavior part of the review process.
ZZ
•Methodical•Analytical•Task-Oriented
•Visionary•Determined•Leader
ZZ•Bold•Innovative•Risk-Taker
Thinking of ordering pizza tonight
The MBM Framework
Value-creating entrepreneurs Vision
Rule of law, principles culture
Property rights
Freedom of contract
Prices, profit, and loss
Virtue & talents
Decision rights
Incentives
Knowledge processes
Decision Rights
Ownership Accountability
Roles
Responsibilities Expectations
Decision Rights
• The bank
• The Nike zone
• Best isn’t always best, or, what the Ph.D. economist learned from his secretary
Comparative Advantage
1. The ability of a person, business, or country to produce a good or service at a lower opportunity cost than some other entity.
2. Advantage of producing a particular good or service relative to producing other goods or services.
Comparative Advantage
“Are you working on the thing that you are best at?” (Gallup)
“An army of one.” (U.S. Army)
Lessons for Leaders
• Don’t make Michael Jordan the coach.
• Don’t base a person’s authorities on what the guy before him did.
• Connect everyone’s duties to mission.
• For the love of all that’s holy, assign refrigerator duty to someone.
The MBM Framework
Value-creating entrepreneurs Vision
Rule of law, principles culture
Property rights
Freedom of contract
Prices, profit, and loss
Virtue & talents
Decision rights
Incentives
Knowledge processes
Incentives
• Incentives are subjective
• Incentives include financial and non-financial
• Individual performance varies considerably
5Mean
# ofEmployees
Performance
1 2 16 32 64
A market-based approach to compensation:• Aligns individual incentives with the
organization’s goals
• Attracts and retains top performers
• Motivates improved performance
• Encourages principled entrepreneurship
A market-based compensation philosophy:
Pays for long-term value added, and not for:
• Job title
• Time with the organization
• Degrees and certifications
• Similarities in job classifications
But wait; there’s more!
A market-based compensation philosophy also entails:
• No guaranteed annual increase
• No centralized job evaluation process
• No centralized formulas, formal pay structures, ranges, limits, or budgets
The Lake Wobegon EffectOnline Dating Analysis: Highlights
– 4% of men claimed income of $200k v. 1% national average
– Men and women were 1 inch taller than national average.
– 70% of women claimed “above average” looks, 24% “very good” looks.
– 67% of men claimed “above average” looks, 21% “very good” looks, and less than 1% “less than average” looks.
Lake Wobegon meets Wall Street
• 1999 - HP had missed earnings projections for 9 consecutive quarters
• 75% of employees throughout this period were rated as “exceeding expectations”
The MBM Framework
Value-creating entrepreneurs Vision
Rule of law, principles culture
Property rights
Freedom of contract
Prices, profit, and loss
Virtue & talents
Decision rights
Incentives
Knowledge processes
Reality Curve
Perception Curve
Honestand
FrequentFeedback
Knowledge processes in a free market
Market mechanisms (e.g., prices, profits, and losses) and free speech convey information about value creation and destruction.
This information swiftly yields positive and negative consequences for market participants.
Knowledge processes in an organization• Key drivers of value
• Key cost drivers
• How are we doing?
• How could we be doing?
Knowledge Processes
• Internal Markets
• Measures
• Knowledge Sharing
• Challenge Process
Knowledge Processes
• Internal Markets– Company X websites– University space battles
• Measures
• Knowledge Sharing
• Challenge Process
Knowledge Processes
• Internal Markets
• Measures– Internal costs and profitability– Benchmarking– Opportunity cost
• Knowledge Sharing
• Challenge Process
Knowledge Processes
• Internal Markets
• Measures
• Knowledge Sharing– The bent part
• Challenge Process
Knowledge Processes
• Internal Markets
• Measures
• Knowledge Sharing
• Challenge Process– Its absence = lack of leadership and courage
Yes-men only, please“At a meeting, it is appropriate for a subordinate to
say nothing substantive until he hears his superior take a position or give a cue. Then it is appropriate for the subordinate to chime in with information and other statements tending to support the superior’s line. You don’t do this. You just say what you think.”
* Bill Niskanen, The Suicidal
Corporation: How Big Business Fails America
Lessons for Leaders• Shrink overhead
• No hidden time
• Striving to measure and failing is better than declaring something unmeasurable
• If your people don’t speak up, YOU are at fault.
Learning by Doing“People often assume that you have to have great hands to become a surgeon, but it’s not true. To be sure, talent helps… Nonetheless, attending surgeons say that what’s most important to them is finding people who are conscientious, industrious and boneheaded enough to keep practicing this one difficult thing day and night for years on end… And it works… Indeed, the most important talent may be the talent for practice itself… a person’s willingness to engage in sustained training.”
Atul Gawande, Surgeon.
"It is a common delusion that you make things better by talking about
them."
Dame Rose Macaulay
