Market-Based Management

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Over the past twenty-five years Koch Industries, Inc. has been under careful observation for their innovative management practices. The CEO Charles G. Koch and other executives Richard Fink and Paul Brooks have worked closely with authors Dr. Wayne Gable and Dr. Jerry Ellig to put together a booklet entitled “Introduction to Market-Based Management.” This booklet unfolds the secret to managerial success in a changing economy. As the authors believe organizational success is no longer found in a command-based management but instead with a more liberating market-based structure. Changing from a hierarchal leadership structure takes hard work and an open mind but the end results is fulfilling to employees as well as management. The market system is broken up into six key elements including: division of labor, property rights, rules of just conduct, the price system, free flow of ideas, and market incentives. After thoroughly understanding the key concepts along with the organization objective this new way of organizational leadership allows for maximization of a company’s potential.

To begin one must first understand what market-based management is and how it works. In the original total quality management system it is believed that leaders and technical experts know what is best for the company and everyone in it. In order for an employee to change a procedure or show any type of creativity it must first be brought to management and in turn be approved before changes can be made. This traditional type of system depressed the initiative for employees to be innovative and creative. The market-based system instead operates under the “invisible hand” coordination allowing employee interaction to take place independently while being coordinated at the same time. This system is not a mindless copying of external practices in the market but instead is a focus on structure, employee responsibilities, ethics, and, incentive type motivation to achieve the common goal of the company (Gable & Ellig, 7). Next, this system does not operate like a robot but instead uses the employees or team with the best knowledge in a particular area to make decisions and monitor the outcome of the new approaches. Lastly, a firm operating in the market-based capacity should encourage competition and cooperation through emphasis on the firm’s common mission. The market approach has stemmed from market process analysis and using specific firm examples a six element system has been developed.

There is a collection of six key elements in the markets and organizations and the goal of each is to “facilitate economic growth and social progress through a highly complex process” (Gable & Ellig 8). The first system examined is division of labor and the mission system. The idea behind division of labor is to allow employees or firms to specialize or use “comparative advantage” to maximize production levels. The mission statement of the firm gives a breakdown of what the firm specializes in to produce the long-term maximum profit. Comparative advantage is a way to explain why people produce some things and buy others. Each individual is born with an innate ability to be better at some things than others. For example if I can produce shoes better than chickens, all the time I waste trying the produce two chickens I might be able to produce ten pairs of shoes. I have a comparative advantage in producing shoes so I can then take extra shoes and trade with the chicken farmer. Division of labor is a way for companies to take advantage of each individual’s strong point thus increasing their (the firm’s) comparative advantage. There are other things that can influence comparative advantage as well such as education, experience, and exposure for example. When a business does not specialize in comparative advantage they are wasting resources that will be gone forever. In order to effectively implement comparative advantage a firm needs to have a mission system. Koch...
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