Diversity is a key mental model in MBM and a key part of our culture. The Guiding Principle of Respect is:

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

With so many things in the news lately – some good, some very bad – that seem to draw attention to the many differences among people, I believe now more than ever that MBM organizations need to appreciate the value of diversity.

This mental model can be difficult to understand because (at least in the US) the word “diversity” has come to have two connotations:  legality (in terms of protected classes) and physicality (only visible differences matter). The result of these two strong connotations is that many companies have a legally-driven approach to diversity. In other words, the diversity they care about the most is the kind of diversity that keeps them from getting into trouble or physical diversity that can look good on publicly-facing websites.

In MBM organizations, we absolutely follow the laws and regulations of the land. So the part of diversity that many companies spend a good deal of time and energy on, is actually part of the Guiding Principle of Compliance. I’m assuming all MBM organizations are doing that piece of it, and if you’re part of an MBM organization where you have questions about the compliance part of diversity please reach out to your HR community, as they are typically the best people to answer questions.

There’s an aspect of diversity that is so much deeper than the compliance-related parts. If you look at the dictionary definition of diversity, it simply means “differences” or “variety.”  So if I were to take the phrase from the Guiding Principle and replace it with a synonym, it would read “appreciate the value of differences.” To my ear, that has a different ring to it that the on-the-street definition of diversity – one that is much broader than just physical differences.

So what value can we get from differences among employees?

  • Connection with our customers: It seems to me that the US is getting more diverse all the time – people with different passions, backgrounds, living situations, etc. — if we cannot understand our customers, then how are we going to find ways to create value for them? Having employees that help us understand the wide variety of people who we want to serve can create tremendous value.
  • Innovation: Innovation by its nature requires divergent thinking. For those of you who have formally studied innovation, divergent thinking is often a core of any innovation process. It’s much easier to have a wide variety of ideas if you have folks with diverse backgrounds, experiences, educations, etc. While some of this is reflected in physical differences, much of it are things we cannot see.
  • Staying connected with reality: We operate in a quickly evolving world. Imagine the value we could get from having a bunch of different employees who read different websites, move in different social circles, read different books, attend different conferences, are passionate about different things, etc. Think of the value that could be created from the knowledge that abounds if employees were exposed to all sorts of different things going on in the world. We would better connected to reality.

The Guiding Principles aren’t just the values and beliefs that we share at MBM organizations – they are a competitive advantage. Appreciating the value of diversity is one way we can be better than our competition and create more value than we would without a diverse workforce.

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More on comparative advantage

When it comes to applying any mental model discipline is key. We have to have the discipline to recognize we need to use a certain mental model, the fortitude slow down to take the time to do it properly and the courage to do something differently if that’s what needs to get done. In my last post, I listed some situations where using comparative advantage can be useful. Let’s look at applying it properly and why it may require courage.

Once you realize that comparative advantage might be a good mental model for the situation you face, here are some questions that can help you think through it:

  • Who or what is the comparison group? If you’re trying to assign a new project, it’s silly to include someone who couldn’t get the work done. Writing down the names of the people who might be involve helps you define the comparison group.
  • What are their alternatives? Once you’ve written down the comparison group, think about what they’d have to give up working on to do the project. If you’re a supervisor, this may mean pulling out the RR&E Summary Documents.
  • What is the highest valued alternative (opportunity cost) for each? Just writing down the alternatives doesn’t get you to opportunity cost. You have to identify the highest valued alternative. Also, be disciplined to just include the things they’d have to give up doing — not everything they might do. (In other words, if you have to choose between golfing, sleeping or cooking, if you choose sleeping, you don’t give up golfing and cooking — you just give up the 1 you’d be doing if you weren’t sleeping).
  • Who is giving up the least? Once you know the opportunity cost for each person or thing involved, you can decide who has the comparative advantage by identifying who is giving up the least valuable activity. This is not always as easy as it seems. A good understanding of the vision is necessary to compare and contrast different value creating activities.
  • Is there anything else I need to consider? Don’t blindly follow comparative advantage. There may be some very good reasons to choose someone without the comparative advantage – perhaps a development opportunity or something – but we have to be deliberate about it and not use it as an excuse to get out of making hard choices.

Applying comparative advantage requires more courage than a typical mental model because it can result in doing things in a counter-intuitive way. One of the famous conclusions from this mental model is that the person who is the best at something isn’t always the right person to do a job. Having the courage to do things differently – going against the grain of just looking at strengths – is a requirement of using this mental model. The good news is that if we can apply comparative advantage even some of the time, we’ll create more value than if we just did things the same ol’ way we always have.

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A few stray thoughts on comparative advatange

I’ve been doing a lot of thinking about comparative advantage lately and have a random assortment of thoughts about how it is applied (or misapplied) inside an organization.

Comparative advantage is NOT just another way of saying strengths:

  • The word “comparative” is key — you have to have a comparison group.
  • There’s nothing wrong with talking about strengths. Knowing one’s strengths and weaknesses is critical for making good decisions about a variety of things.
  • Comparative advantage should evolve as opportunity cost evolves. By making it about strengths (which tend to evolve, but at a slow rate), we can fool ourselves into thinking that if we have it figured out once we’re set.

Comparative advantage must be about opportunity cost:

  • By definition, the person with the comparative advantage is the person who has the lowest opportunity cost (gives up the least). If you aren’t thinking about opportunity cost -the highest valued alternative – you are not thinking about comparative advantage.
  • As alternatives change we must reevaluate opportunity cost. For instance, the opportunity cost of an accountant may change drastically during tax season. We cannot fall into the trap of thinking that once we “get it right” our work is done.

There are a number of circumstances in which comparative advantage can inform your thinking:

  • Assigning new projects among a team
  • Re-optimizing
  • Recommending an employee to a new position
  • Reallocating responsibilities when someone leaves
  • Forming a new team
  • Combining people from several different areas to work on special projects
  • Deciding which facility should make a product
  • Choosing outsourcing or building in house
  • Others

Anytime you must choose among a group of people or facilities, comparative advantage is a good mental model to work through because it will help you to maximize throughout the organization.

These thoughts hardly scratch the surface. What do you want to know about comparative advantage?

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A few links

The Magna Carta was a key turning point for freedom in the world and it turns 800 years old this year. Check out this article if you want to learn more about it.

Want to learn more about some of the key thinkers in MBM? I’ve come across two books that are worth checking out:

What have you been reading lately? Leave a comment with any articles or books you think I should check out.

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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.


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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