Prices Convey Knowledge

As a graduate student, I spent many hours in a computer lab writing code to run statistical models (yes, it was almost as awful as it sounds). One afternoon, after hours of doing battle with my code, I picked up my plastic soda bottle and walked over to the trash and recycling cans. I stood for a moment between the two cans and then threw the bottle into the trash. A student nearby snorted. I asked if she had a problem. She said she did have a problem because I didn’t recycle my bottle, even though the recycling bin was “right there.”

Little did she know that I was an economics student who had a dedicated and intellectually honest environmentalist for a professor. Here’s a taste of some of his research.

 

 

You see one of the many problems with the way we currently recycle is that there’s no price mechanism to tell me what is worth recycling and what is not worth recycling. If I knew my empty bottle was worth 5 cents, I would have the knowledge I need to know it’s worth recycling. If I knew no one was willing to pay for my bottle, then I would know it was trash. If you look at the data, the majority of household level recycling isn’t worth it (some exceptions are shown in the video). Without prices, I have to rely on (costly) studies that cannot be up-to-the-minute. This is just one of many examples of how prices convey knowledge and when you take the knowledge away it gets difficult. Without that knowledge there is more waste than there would be otherwise.

In MBM®, we try to take a concept from free societies – like prices—and translate it into our organization. The idea of prices is one of those concepts we can’t take one-for-one into the company (imagine how awful it would be negotiate prices with your co-workers every time you needed to work together). Instead, we want to take the essence of what prices do for a free society. Prices convey knowledge. They send signals that allow us to make better decisions. If you want to get the essence of prices into your organization, you want to ensure that people have appropriate measures that help them make decisions. You want to make sure that people have the appropriate knowledge to eliminate waste and know what is valued.

What has your experience with knowledge seeking and sharing been? Do you have an example where certain measures helped people make better decisions? What else about prices would you want to bring inside the organization?

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Bureaucracy

Below is a video telling the story of a person with an entrepreneurial spirit that is crushed by bureaucracy. As you listen to the story, think about how it translates into the organization.

 

What are some ways we can eliminate bureaucracy inside the organization? What are some signals a process or procedure isn’t useful? What are signs your culture has become bureaucratic?

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How would you coach?

Below is a made up situation that represents known misunderstandings or misapplications of MBM®. Use the comments to leave your thoughts about how you would coach in this situation.

Sarah is a member of a branding team. She’s asked for you to help her with her RR&Es and has brought a draft of her RR&E Summary Document. You noticed on her summary document, one of her roles is “Brand Manager for Zepher” and an associated responsibility is “Manage Zepher Brand.”

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How to Fight Global Poverty

Here's a video with some great reminders about how amazing free societies are and why MBM(R) is based on the ideas of a free society.

 

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How would you coach?

Below is a made up situation that represents known misunderstandings or misapplications of MBM®. Use the comments to leave your thoughts about how you would coach in this situation.

William comes to you in a panic. He says, “We have to come up with a talent strategy pronto. My team doesn’t have all the capabilities we need. Of the six listed in the new vision statement, I think we have 3 at best.” 

 

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Studying the Guiding Principles: Respect

Guiding Principle 9 – Respect:

Treat others with honesty, dignity, respect and sensitivity. Appreciate the value of diversity. Encourage and practice teamwork.

Many of you know that there are no idle words in MBM®. Each word is there for a purpose, and often the ordering of words is important as well. If you want to learn more about MBM, get good at studying – not just reading. You can discover answers to your questions if you develop the ability to look closely and ask thoughtful questions.

Let’s take a look at the Guiding Principles of Respect as an example of how studying, reading closely and asking a few questions can help discover some deeper layers of MBM. Below are some questions that I think would come up naturally if you were really studying this guiding principle:

  • Why does the word honesty come up first in that list of four things?
  • Why even have honesty in this guiding principle – we have a guiding principle of integrity?
  • What does sensitivity mean? How can I both treat someone with honesty and sensitivity if I have to tell them something that will hurt their feelings?
  • What is the value of diversity? What do we mean by diversity?
  • Why does it call out teamwork and not teams? How can I practice teamwork?
  • Why is this a Guiding Principle in the first place? How does it help us create value?

These are just examples of some of the questions you might come up with if you really study this guiding principle. I’m sure there are endless others. What questions do you have about the Guiding Principle of Respect? What if someone asked you one of the questions above, how would you answer?

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Competitive Advantage versus Comparative Advantage

Often, when I get the chance to hear about a new project or initiative I’m told, “we have the comparative advantage.”  My immediate reaction to this is (sometimes voiced, sometimes not): “Compared to whom or what?” The beauty of comparative advantage is that you are comparing among different people or things in a group and figuring out who or what has the lowest opportunity cost. If you do this for the whole group, the group will maximize its output. So if I say, “Joe has the comparative advantage,” I’d better be prepared to tell you who is in the comparison group and why I believe Joe has the lowest opportunity cost.

Comparative advantage is different from competitive advantage and is meant for a different purpose. Competitive advantage is about looking at your competition. Most of the time, we don’t know our competitors opportunity costs. What we can do is make an assessment of how well we are doing compared to the competition. Think of it as a foot race. While you don’t know the opportunity costs of each runner, you can tell who is fastest. So if I say, “I believe we have a competitive advantage in capital deployment,” I’d better be ready to tell you what competitors I was thinking about and show evidence about capital deployment.

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Responsibility without Decision Rights

In MBM, we’ve learned from free societies that owners bear the consequences of their actions (both positive and negative). We translate that idea into the organization by establishing responsibilities, and then holding employees accountable for their responsibilities. Notice that these statements make no guarantee that one will have all the decision rights s/he needs to accomplish his/her responsibilities.

It could be that one has all the decision rights, none of the decision rights or partial decision rights. This is done deliberately.  Below are several reasons why someone may have responsibility without having all the decision rights necessary to execute on those responsibilities:

  • Knowledge: It could be the individual doesn’t have the best knowledge. By having someone else holding the decision right, the two will have to meet and exchange knowledge.
  • Skill: Sometimes the responsible party isn’t good at making certain types of decisions, so it’s a deliberate way to make sure someone with better judgment is making the final call.
  • Perspective: It could be there needs to be a broader or different perspective to make the best decision. For instance, if I’m working on a research paper that is going organization-wide, it’s probably best for someone who is familiar with the entire organization to have the final say on when and how it is released.
  • Customer Focus: In certain cases, not having decision rights encourages one to treat the decision maker more like a customer. I think this is a bit like the president having a speech writer. The speech writer doesn’t have final say in what the president says, and that’s a good thing. The speech writer has to treat the president like a customer: talk to him to understand the goal, stay closely connected with likes/dislikes and so forth.
  • Challenge: It could be there are decisions that require a lot of challenge to make the best possible decision. For instance, supervisors do not have decision rights to change the base pay of direct reports – but they do have responsibility to ensure direct reports are getting base pay reviews. This is done deliberately to make sure that supervisors are getting lots of challenge around this very important decision.

I’m sure there may be other reasons why one may have responsibility without decision rights. This isn’t to say that this is always an ideal situation. There may instances where the person with responsibility has decision rights and it works quite well.

Regardless of the situation, we do not believe that one has to have decision rights in order to get things done. This is where our ideas about Principled EntrepreneurshipTM come into play. Out in free societies, successful entrepreneurs are not deterred by their lack of authority.  Inside the organization, if one lacks decision rights, they have to be entrepreneurial, find the person with decision rights, and work to convince that person to use resources.

Have you been a situation where you had responsibility but not all the decision rights you needed? What did you learn from that situation?

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Quick Takes: Spontaneous Order

While looking for resources about spontaneous order, I stumbled upon this quote. I thought it was too good to keep it to myself.

 Is this all so very differentFrom what Lao-Tzu says
In his fifty-seventh poem?:
If I keep from meddling with people
They take care of themselves,
If I keep from commanding people,
They behave themselves,
If I keep from imposing on people,
They become themselves.

Friedrich A. Hayek. Original epilogue to “The Principles of a Liberal Social Order,” delivered at the Tokyo meeting of the Mont Pelerin Society, September, 1966.

 

Source: The Online Library of Liberty

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Mentoring in an MBM Organization

Mentoring is almost always a hot topic in management circles. Most people agree that mentoring is crucial to developing new skills, expanding one’s network, and generally advancing one’s career. This is why so many organizations have developed extensive mentoring programs. Here are the usual hallmarks of a non-MBM® company mentoring program:

  • Centralization: one person (or a group of people) matches employees based on certain factors. Usually it’s impossible to know every important factor to ensure a productive mentoring relationship, but long forms are a typical way to attempt to get the right knowledge.
  • Group-based: Generally mentoring programs group people. Typical groupings of people who are to be mentored include things like “high potential,” “less than 5 years experience,” “women,” or “minorities.” Ironically, mentors tend to be grouped as well. The labels are less obvious, but they include things like “women in leadership positions,” “minorities with more than 10 years of experience,” “people with a title of director or higher.”
  • THE mentor: Usually there’s a bad mental model of one mentor per person. This mentor is supposed to help with all facets of one’s professional career.

From my experience, these type of mentoring programs just do not work. There are too many factors that a centralized program cannot take into account: personalities, individual goals, and logistics. Plus, overly relying on one person to be the subject matter expert for all things career-related is never good idea.

Instead, in MBM we turn to free societies to help us understand general principles we can apply. Here are a few important mental model/concepts from free societies that apply to mentoring:

  • Spontaneous order: Free societies are not centrally planned, but they aren’t chaotic/disordered either. Instead, free societies have institutions (structures) that allow individuals to make decisions based on their local knowledge. An MBM mentoring program cannot be a centralized program. Instead, we have to find ways to set up conditions so that individuals can make good mentoring connections, based on their own personal needs, career goals and personalities. These are the type of mentoring relationships that tend to be the most productive.
  • Individual-Based: Free societies are based on individuals. Individuals are the ones who will know the right things to help set a mentoring relationship up for success. For instance, a person being mentored will know what s/he is trying to learn from the mentor. The mentor will know if s/he is the right person for the job. Often, a sentence or two on a form isn’t enough to capture this type of knowledge. This type of thinking blows away ideas that a particular group “must” be mentors or “must” be mentored.
  • Experimental Discovery: Most people learn by trying out a bunch of different things. This means many of us can benefit from having multiple mentors. They don’t all have to be deep secret-sharing type mentors. It can a short mentoring relationship that allows you to learn a particular skill. It can be as simple as an informal lunch that allows you to learn more about a position you’ve been thinking might be a good fit for you.

What does this look like in a practical sense? In an MBM organization, there are many mentoring relationships. One of the most important is the supervisor-direct report mentoring relationship. Supervisors help direct reports define what they’d like to get from a mentoring relationship and help connect direct reports to someone who may be able to help. HR is a critical partner in this process. HR can help employees make connections to others and support supervisors in their mentoring responsibilities.

What questions do you have about mentoring? What were the conditions that led to the most productive mentoring experiences you’ve had?

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