Why bother with a management philosophy?

Once folks understand that MBM is a management philosophy, most people wonder why MBM organizations bother to put so much energy and effort into a philosophy. Below are some common questions on the topic.

What is a management philosophy?

A management philosophy is a set of values, beliefs, opinions, and mental models that direct how a business should be managed. Usually philosophies have to do with the people side of business. For instance, a common business philosophy may include ideas about how to hire people. Whole Foods is famous for having a team approach to hiring. Whole Foods management philosophy includes strong beliefs about teams and empowerment through group decision making. Google is famous for giving employees time to work on their self-directed projects. This practice is rooted in a belief that autonomy breeds innovation. These practices are part of their management philosophies (even if they don’t call it that).

Why dedicate resources to a management philosophy?

The reality is all leaders who are making decisions for businesses have management philosophies, even if they don’t realize it. What happens in the minds of leaders is important, as their values, beliefs, opinions and mental models will determine how they behave.

Some companies go through the trouble of articulating their management philosophies. The upside is that employees (and candidates for jobs) can decide if they like the philosophy. This can lead to a couple of good outcomes:

  • Employees and perspective employees can choose if they want to work for that type of company.
  • Customers and business partners can decide if they want to do business (or boycott) because the approach to business is clear.
  • Employees are more likely to adopt the behaviors necessary to uphold the philosophy because they understand the values and beliefs and opt in. So, when they make decisions on behalf of the company are more likely to faithfully represent the owners.
  • Employees can bring their ideas, ask questions, and find better ways of managing.

The downside is that it is difficult to articulate a philosophy, remain open to changing the philosophy as it makes sense, and hold employees accountable for acting accordingly when they make decisions on behalf of the business.

Why did MBM take so long to evolve? 

Like many management philosophies, MBM started with some deeply rooted beliefs. The earliest copy of the Guiding Principles was produced in the early 1980s – though many who have been around since before that will tell you there were mental models being used long before that. It wasn’t until the mid-1980s that there was a group of people dedicated to articulating, teaching, and developing MBM. In the 1990s, MBM got its name. If I had time and energy, I could probably develop a timeline of what mental models and tools were added when.

Part of the reason MBM took so long to evolve into what it is today is just that: it wasn’t designed, it evolved. For those of you who have studied spontaneous order or the rules of just conduct, you know that systems that are grown organically often take a long time to emerge and can be difficult to describe. Once they have evolved to a certain point, ensuring they continue to evolve and grow can be tough.

 

If you’re interested, spend some time searching the internet you will see many companies have written down some of their management philosophies. It’s not just MBM organizations that have discovered the benefits of articulating a management philosophy. What other questions do you have about the history of MBM or about management philosophies?

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The role of profit

In MBM, the Knowledge Processes dimension draws upon several important mental models: prices, profit and loss, and free speech. The video below features economist Walter Williams discussing the role of profit and loss in a free society.

 

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Lost In Translation

A recent work assignment involved helping with some translation work — it’s funny because I only speak English (and toddler). Basically, I was able to help by taking the translation and back translating it to English using software. The resulting English would give me a taste for what the reader would be seeing in their native tongue.

Of course, the translator doesn’t know MBM, so there were some interesting translations. However, what most caught my eye was the trends across multiple translations. It got me thinking about how even though MBM is developed in English, it’s still a language unto itself. There are going to be a few things lost in translation.

If the trends in formal translating work hold true, then here are some things we need to help people who are new to MBM with when it comes to the Guiding Principles:

  • The difference between responsibility and accountability can be subtle. English dictionaries often use the words to define one another. There are reasons accountability is in Humility and responsibility is in Principled Entrepreneurship.
  • The word “profitably” in Customer Focus is meant to indicate the way we go about doing business. It should be profitable — or mutually beneficial — for the parties involved.
  • The challenge process simply doesn’t translate. Know the definition and revisit it often. If you’re in a meeting and need a reminder, write it up.
  • “Fulfillment” can translate directly into “money” or something more touchy-feely. Like with all the Guiding Principles, don’t stop at the title: read the description.

What part of MBM have you found could use a little translation or explanation?

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A break in the new year

This is just a quick update to wish you a Happy New Year and let you know that I will not be updating the blog in Q1 of 2015. I’m working a sister project to this one that (has been and) will keep me very busy (and tired) during this first quarter.

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Business within your business

It’s not uncommon for large businesses and non-profits to face situations where one group draws upon the resources of another group in a way that looks more like a business transaction within a business (as opposed to a cross-functional work team). Here are some common situations I’ve come across:

  • IT, accounting, or legal resources are a separate group (or even business) that other parts of the business draw upon.
  • Organizations are set up so they are matrixed, which means a “dotted line” relationship exists with a capability group (like HR, operations, etc).
  • There is a centralized function that cuts across the business and just flat out makes more sense to have as a separate group. On example may be procurement.
  • There is a location-based structure so that you have employees who report into a main site and others who report into local sites, even though they are roughly focusing on the same things.

These types of situations tend have common problems:

  • Unclear ownership: who is making the final decisions? What team is actually responsible for that piece of the business?
  • Accountability becomes difficult, especially when priorities are mismatched. For instance, when my computer isn’t working I think IT should be helping me right now. What I don’t know is that my IT support is helping someone who is working on something more important than me. When I’m asked for feedback I complain because I had to wait for so long.
  • Costs and benefits often disconnected from one another: This often comes in terms of someone or something being viewed as a free resource. To carry my IT example over, if I just can call and get IT support without having to pay for it, I’m likely going to be calling IT a lot (versus trying to figure it out myself or prevent problems).

In MBM, when we encounter a new situation we try to step back and ask what the market does in similar situations and apply the principles to what we do. Let me start with the obvious solution and provide a strong dose of caution.

Internal Markets: Markets solve all of the problems listed above. They thrive on clear ownership, accountability happens automatically and costs and benefits tend to go hand-in-hand. One way these problems have been solved is to by making a market internal. Sometimes this is done by literally charging within the business to use certain resources. This often sounds like a good idea, but can have some serious downsides:

  • You lose some of the benefits gained by being in an organization together. You now have to have people who administer internally (billing, invoice, etc) just as you do with external customers. This will likely increase headcount.
  • Prices aren’t really “prices.” I mean this in the sense that internal markets require someone to set prices within the company, but rarely is there a large enough company or a good enough benchmark for it to reflect the complete reality of what a true market would achieve.
  • Some companies make it impossible for internal groups to feel the market pressure by requiring that you work with the internal group and not seek outside competitors. This almost always creates an unfriendly situation between groups and the internal group starts to lag behind the market.
  • There are all sorts of compliance implications (which I am in no position to brief you on) about how to handle this type of internal set up.

I’m not saying “don’t use internal markets.” I am saying that in my experience internal markets don’t work in as many instances as people would expect and they can create as many problems as they solve. Instead, let’s try to step back and think about the principles of markets that make this work so brilliantly out in free societies and how they might be applied inside the company.

Prices

One key aspect of markets that resolves a lot of the knowledge and accountability problems involves the price-setting mechanism. Of course internal markets can bring a literal price into the organization, but what are some key aspects of prices that we can translate into the organization? Prices direct producers as to where they should put their resources. Measures can serve the same purpose inside the company. Whether it’s a clear expectation on an RR&E Summary Document or a group-wide measure, measures should reflect the where the person/group can put their resources to yield the highest value.

Private Property Rights

Private property rights help individuals know what they own and what they can do with their property and help solve accountability problems. Inside an organization, responsibilities and individual decision rights can serve the same purpose. However, there are some big “ifs” associated with this one:

  • If leaders have the backbone to make these things clear to everyone involved.
  • If leaders have the courage to hold people accountable (both positive and negative).
  • If employees have the backing to say “no” when appropriate.
  • If visions are clear enough to have a good point of view on who should be doing what.

I find most of the time that this type of thing has to go up to a leader who can see the big picture. For instance, if I’m having a disagreement with another MBM person in another location about who has decision rights, it generally has to go to a level where a leader can understand the tradeoffs and implications, which may be several levels above where the disagreement is happening.

Free Speech and Competition

Free speech – the ability to endorse, complain, disagree, and so forth — and choices are key aspects of markets. Think about this in terms of an organization. If a person within your organization is stuck (or feels stuck) with whatever/whomever they have to rely on to get things done, it’s a recipe for disaster. The challenge process has to be alive and well in the culture to overcome this difficulty. If I cannot go my IT support and suggest a different way, lodge a compliant or give a positive feedback about a specific situation, then I’m just at their mercy. Coupled with this, is that generally there has to be some competition. This can be as simple internal recruiting group that knows the organization can use outside recruiters. If the organization starts using the outside groups and gives feedback it can serve much the purpose as free speech and competition do within the market.

 

I gave some high level things that I believe can help with internal transactions. What have you seen that works in these circumstances and is consistent with MBM? What are some things you’ve seen that have failed?

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Giving Thanks in the Office – A Cornucopia of Hidden Value

I put this post up several Thanksgivings ago. I thought it was time to dust it off as we celebrate Thanksgiving in the US this week.  

This is a guest post from Mallon Mackenzie. Mallon is an alumna of an MBM training program and works closely with training programs in an operational capacity. She is thankful to be part of advancing economic freedom and to work with so many intelligent and thoughtful people.

Over the last few weeks, I have received various forms of “thank yous” from colleagues. I’d like to think that it’s more than the upcoming holiday season that has prompted these gestures of gratitude, but I don’t mind if it is just the holidays.

At this time of year when thoughts of thankfulness for our country, family, friends, health, and happiness create joy and warmth in our homes and in the world, I’m thinking some thanks could do some great things in the office too. In fact, within this little concept there is a feast of MBM principles and models we can sink our teeth into.

A “thank you” is feedback. It provides a real time signal that you’ve done something of value for someone else. Receiving thanks from our customers is a good, small measure to help us know we’re doing something right. Giving thanks to our customers can also be valuable feedback for them and a smart investment in important relationships. For example, those working in development know that well timed, sincere and simple word of thanks can be the beginning of a prosperous and growing relationship between an organization and a committed donor. Thanks is also recognition and appreciation for a job well done – something employees crave and a valuable message for managers to send. It’s a valuable tool that is available to all of us all the time.

I’ll let you in on a secret: words of thanks can have incredibly long shelf lives. I keep a stash of unexpected thoughtful letters and brief emails from tough-to-impress customers to dip into when I need a little pick me up. No matter how much time goes by, those words of gratitude still connect me to the work I do, make me feel like my job matters and that I made someone else’s day better or easier.

But this time of year we often hear it’s more important to give than to receive. Can giving thanks be just as beneficial to the giver? At its core, I think giving thanks is a gesture of humility. It helps us acknowledge that we need contributions from other team members to get the job done. Giving thanks to others helps us be less focused on ourselves and more connected to team goals and outcomes that we all work towards together.

The exercise of true gratitude helps the giver see situations in a new light. There is a quote from the Roman philosopher Cicero, “gratitude is not only the greatest of the virtues, but the parent of all the others.” Deep and sincere thankfulness can open our hearts and minds to help us be thankful even for the struggles and opportunities to learn important lessons through failure. It gives us a chance for personal growth, to focus on opportunity and be principled employees.

At the end of a day focused on thanks, I don’t think we need a “thank you” for doing our jobs, but receiving thanks when it’s deserved reinvests us in our work. Giving thanks to others helps us build teams that appreciate each other. And isn’t it the darndest thing that giving thanks gives us a fresh perspective as well?

Thanks to Mallon for submitting this excellent Thanksgiving Day post and generally being awesome! How have you seen “thank yous” work for you in the office?

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The problem with sunk costs

Many of you are familiar with the idea of sunk costs — those costs that are unrecoverable. Economics teaches us we should ignore sunk costs if we want to make the best decision going forward. After all, we cannot change the sunk costs so why even think about them for the next decision.

Ignoring sunk costs for future decisions makes perfect sense on paper and in classroom activities. However, it’s easier said than done. Here are some common things I hear when I lead sessions on sunk costs:

  • Sunk costs can inform us if they are representative of recurring costs. For instance, I know after I’ve trained someone that time/money spent is a sunk cost, so I should not add that into my cost/benefit analysis when deciding if someone needs to be moved into a different role or let go. The issue is that I’ll have to spend the same time/money training a new person if I don’t keep this person. It seems like the sunk costs are relevant to deciding what to do.
  • There’s a psychological component to sunk costs. Imagine saying to a customer, “let’s not even talk about last year’s contract because those are sunk costs to you.” That’s just not how most people are wired to think. Instead, we have a psychological tie to what we paid last year or the last time we bought it.
  • There’s an emotional piece of sunk costs. The old joke is to not to come to an economist for relationship advice because if you say something like, “But we’ve had four good years together,” the economist will say, “ehh, just ignore those years, they’re just sunk costs.” (Economics is the dismal science after all.) While the economist is absolutely right, memories and shared experiences are a fundamental human condition. Asking someone to totally ignore that is a tall order.
  • The dollar part of sunk costs are often written down, so they’re in our faces when we’re trying to make decisions. There’s something about seeing a big minus sign in the ledger that is just tough to ignore.

What this all adds up to is that sunk costs are often easy to identify and hard to ignore for decision making. What have some of your experiences with sunk costs been? What are some good ways that we can make sure we’re thinking about and acting appropriately when it comes to sunk costs?

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“Rules”

I’ve started to realize how powerful “rules” can be. “Rules” are the artificial constraints individuals put on themselves even when there isn’t anything really in the way. Here are some common examples of how “rules” creep into the day-to-day activities:

  • “I thought about sending this proposal to Jane, but proposals have to have a 12% return rate for her to even think about approving them.”
  • “We’re having trouble filling this role because have to hire someone with 10 years of industry experience and knowledge about this niche area.”
  • “I really think that Joe deserves an extraordinary raise this year, but I know that type of thing will go under heavy scrutiny and get widdled away to a more typical level.”
  • “I can’t ask to work from home tomorrow – no one does that in our group right now.”

“Rules” can arise from many different places — a leader who has a pattern of behavior that is not intended to be a rule but becomes one, a past job/experience that had an explicit rule that you can’t let go of, an offhanded comment that gets turned into a detailed rule or an example that turns into the “rule”.

I think MBM organizations are particularly susceptible to “rules” because we tend to use general principles to guide our behavior, which leads to ambiguity. Yet, most people crave clarity, so they start making “rules” to help them guide their behavior. It doesn’t take long for a best practice to turn into a “rule.” What are some of the risks we run with “rules”?

  • “Rules” suffer from some of the same downsides as explicit rules, except you have the added problem of they aren’t written down anywhere. So the clarity you get in the short run degrades over the long haul.
  • “Rules” can quickly become part of the culture and it’s much harder to change culture than it is to change a written rule.
  • “Rules” can be unconscious. This means that individuals may not be aware they are following the “rules.” This can also lead to people not seeing opportunities because they don’t even realize they have the blinders on.

I know there’s more to this “rules” thing than I can write in a few hundred words, but hopefully this gives you a flavor for what I’m thinking about. Now I turn it over to you. What can we do to help people break away from the “rules”? What aspects of MBM help us to prevent “rules” from becoming major constraints to what we do?

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Interesting Articles

Over the past several weeks, I’ve come across or been sent some interesting articles. Some of these explicitly connect with MBM and some of them are more interesting management or economics articles that may spark some good conversation.

  • California’s Water Shortage” gives a prime lesson on what can happen when you start interfering with prices. We associate prices with our Knowledge Process Dimension because they convey the knowledge people need to make good decisions as individuals, which often adds up to better overall societal outcomes.
  • How to Validate Your Business Idea So you Don’t Lose $82,000 Like Noah Kagan” gives one example (not the example) of how doing some low cost experimentation of your value proposition can help avoid making a major mistake. Thanks to Gary for sending along this story. As Gary pointed out in his message to me, “The thought behind it lines up very well with several of our Guiding Principles, including Value Creation, Principled Entrepreneurship, Customer Focus, Knowledge and Change.”
  • Jimmy John’s Serves Up Lessons on Terrible Management” is an article about a fast food chain who has required every employee to sign a rigid non-compete. The author of the article isn’t fundamentally anti-non-compete. Instead, she points that just because something is legal it doesn’t mean it creates value and when management is done in order to exert power for power’s sake, it almost always comes off as mean and wasteful.
  • A key mental model in MBM is the economic means versus the political means. “Rent Seeking: America’s New Past Time” gives one example of a form the political means of profiting can take (note: economics often use the term rent seeking to describe political profit that comes through the use/abuse of government powers).
  • While I cannot vouch for these programs (I haven’t been through them), here are 33 online economics courses. Many of them are through reputable universities and can be taken on your own timeline.

Have you come across any interesting MBM-related articles lately? Leave us a link or two in the comments.

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2014 Economic Freedom of the World Report

The 2014 Economic Freedom of the World Report was released earlier this month. As many of you know, this annual report includes some of the research that grounds very foundations of MBM. One of our key mental models is that economic freedom unleashes individuals’ productivity and it’s productivity that brings prosperity. As in all the years past, we continue to see that countries with more economic freedom tend to have more prosperity.

According to the authors of the report, “Individuals have economic freedom when property they acquire without the use of force, fraud, or theft is protected from physical invasion by others and they are free to use, exchange, or give their property as long as their actions do not violate the identical rights of others. An index of economic freedom should measure the extent to which rightly acquired property is protected and individuals are engaged in voluntary transactions.” When a person enjoys economic freedom she lives in a country where she has reasonable control over her time, talent, and resources.

Here are some things of note from this year’s Economic Freedom of the World Report:

  • Hong Kong and Singapore remain the in the top two positions for economic freedom.
  • Venezuela remains as the least free country they studied. Note: countries like Syria, Somalia, North Korea and others are not measured because of lack of data or mistrust of data.
  • The U.S. jumped from 17th to tied for 12th. This was a result of a combination of factors — including some positive increases for the US and some countries near the US losing economic freedom, which makes the relative position go up.
  • The US had increases in 4/5 categories in the Index, including size of government (remember, this a relative measure of size of government versus the economy. This does not mean the government has actually decreased in size), legal system and property rights, sound money, and regulation. Only freedom to trade internationally dropped.
  • China’s economic freedom increased, but it still in the bottom quartile (least free) of the 152 countries ranked.

The link above will take you to the full report. The authors make transparency a priority. Anyone can download the data, use it in their own studies and have access to the report online free of change. The same website includes a country-by-country data snapshot if you just want to check out a country or two.

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