Understanding Of Market-Based Management - Term Paper Example

Understanding Market-Based Management I. Introduction II. The Information Revolution and the Metamorphosis of Management a) Market-based Management as an Approach b) The Vantage Point of Dispersed Knowledge III) Koch Industries and Market-Based Management IV) Values Theory and Market-Based Management V. The Whole is Greater than the Sum of its Parts VI. Conclusion I Introduction Charles G. Koch, the Chairman and CEO of Koch Industries, Inc., had pointed out that the strong performance and miraculous growth of his company is the result of the market-based management application. Market-based management was the management philosophy of the Kutch industries as it was developing from a medium player to a major stakeholder in the energy sector. Since market-based management is based on the dispersed knowledge at the hands of the at the bottom line market players, it helps to avoid the pitfalls of a centrally planned economy wherein expert knowledge often leads to catastrophic market collapses. Crucially, the paper examines the key postulate of the market-based approach that market logic organization is also applicable within the corporates and other business houses. II. The Information Revolution and the Metamorphosis of Management The world has changed phenomenally after the collapse of the Soviet Bloc and the subsequent rise of globalization assisted by the information and communication technology revolution. The customers have more say even in the very production process as they have very close information on the products. Management at present has become much more elaborate and complex wherein the traditional experts are unable to come up with all-encompassing solutions. The 21st century has proved that “superior minds can foresee every major contingency and find a course of action that is best for all” is just a managerial illusion (Gabble and Ellig, 1993, p. 4). De-centered coordination is what is necessary today for the effective understanding of the management of multi-faceted business structures. It is high time to realize that “the knowledge needed for sensible business decisions is inherently dispersed among many people, and much of it cannot be communicated to a central location for use by experts” (Gabble and Ellig, 1993, p. 4). The failure of experts is not their individual failures; rather, individualized ways of planning has become obsolete and the organizations that do not emphasize people-centric knowledge accumulation cannot sustain in an immensely competitive background. a). Market-based Management as an Approach It is difficult to say what market-based management is than what it is not. It is not a readymade program which any prospective manger could buy and implement at his/her organization to begin with. Market-based management is not magic tool to sort out the complex issues in the corporate management. Market-based management primarily is a set of principles which guides the management of an organization to stable growth and development. It is a holistic approach in the sense of being related to multiple aspects of management and enterprise. No individual possess enough knowledge to co-ordinate the production in the marketplace. Corporations need to become market systems than centrally planned economies. b). The Vantage Point of Dispersed Knowledge Dispersed knowledge possessed by the isolated individuals is better than centrally planned expert knowledge in coordinating human economic activities. It is argued that “historical experience shows that market economies, which rely on the dispersed knowledge and independent judgment of numerous consumers and producers, consistently provide a dramatically higher quality of life than centrally planned economies” (Gabble and Ellig, 1993, p. 5). It is important to note that the logic of market functioning is not only applicable to inter-businesses relations but also to the governing of specific business organizations. Simply speaking, the idea of dispersed knowledge possessed by the customers at the vantage positions of market is equally applied to the ‘within’ of the corporations too. III. Koch Industries and Market-Based Management At Koch Industries, the application of market-based management saw a 2000 fold increase in the book value after the policy was initiated in the early 1990s. For them, it is a “philosophy that enables organizations to succeed long term by applying the principles that allow free societies to prosper” (Koch, 2007, p. vii). Importantly, at Koch industries, “vision, virtue and talents, knowledge processes, decision rights and incentives” are the five dimensions of market-based management (Koch, 2007, p. viii). All these five dimensions were applied in a holistic manner at the Koch Industries so that the effect was always transformative. Vision was seen as a dynamic concept than a policy statement by the Koch management. What is important for the company was how they create values for customers and the society. IV. Values Theory and Market-Based Management According to values theory, commodities are n simply goods for economic exchange; rather they have certain intrinsic values. Economic exchanges also produce certain values in the society such as individualism, free spirit, civility and prosperity. According to Koch, “for business to prosper, it must create real long-term value in society though principled behavior” (2007, p. x). An organization must be a miniature of the values of a market society. In values theory, failures too create positive values; the same goes for market-based management as well. It is argued that “given the market economy is an experimental discovery process, business failures are inevitable and any attempt to eliminate them only ensures overall failure” (Koch, 2007, p. 17). Experimental discovery model is the bridge between market-based management theory and actual value creation. V. The Whole is Greater than the Sum of its Parts The gestalt viewpoint that the whole is greater than the sum of its parts is very much at the heart of the market-based management approach. Different techniques such as incentives and de-centralized planning in which are part of the market-based management approach are meaningless unless they are linked to the mission and organization policy. In other words, market-based management could only be applied as a set of management tools drawn from below than imposed from above by the top management officials. Certainly, market-based management is a lager framework of multiple management methods and practices by constantly improvising and reforming them. VI. Conclusion Although the market-based management is a collection of many systems of organizations, they are not independent from each other. To be effective, market-based management needs to be applied as a coherent and wholistic system. It is important to note that “a transition from command-based to market-based management is as fundamental a change as an organization can make. Effective change requires a strong understanding of how the market process really works not just how it works in textbooks-combined with a sense of how people will react to different structures and incentive systems” (Gabble and Ellig, 1993, p. 37). Needless to say, such a market-based management approach has to have close ties to the grass roots, especially with the bottom level employees and the customers. What is necessary is a synthesis of economic wisdom and business expertise which is the core defining feature of market-based management. References Gable, W. and Ellig, J. (1993). Introduction to market-based management, Center for Market Processes. Fairfax, VA Koch, C.G. (2007). The Science of success: How market-based management built world’s largest private company, New Jersey: John Wiley & Sons, Inc. Read More