The Science of Success. Market Based Management. But first, a few words about the Austrians. The Use of Knowledge in Society Fredrick Hayek 1944 American Economic Review. In the context of the planning problem: P S Q* Q Is finding Q the whole problem?.
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Market Based Management
The Use of Knowledge in Society
American Economic Review
Is finding Q the whole problem?
Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.
The economics of hurricanes:
The plywood problem: A grand web of coordination.
How is it done?
Charles Koch and Koch Industries
KII (Koch Industries Incorportated)
One of the largest privately held firms in the world
Revenues, 2006, 90 billion
Koch Industries uses economics, often quite explicitly, in selecting the structure of the businesses and its conduct.
You will frequently find, in SoS, direct use of economic principles.
Structural and resource-based approaches are in evidence, though not equally.
The Five Dimensions
“An example from the late 1960’s concerned one such introductory concept that, in spite of being widely taught, was not widely practiced. We were addressing a question of when to sell some inventory. I suggested selling it immediately, but was told the price was below what we had originally paid, so we should wait until it recovered. I pointed out that this shouldn’t be the test, because what we paid was now a sunk cost. “
(This is followed by a statement of the sunk cost rule. )
Anchored in people’s willingness to pay, which is a matter of preferences.
Discusses diminishing marginal valuation and the diamonds and water paradox
Unless two people (nations) are exact multiples of each other in terms of productivity, they will each have a comparative advantage, even if one is absolutely better in each activity.
The more productive party will benefit from practicing the activity in which it has the greatest advantage. The less productive party will benefit from practicing the activity in which it is least disadvantaged.
P. 37 shows something that looks like a supply curve. Sort-of. It reflects that firms have different cost structures. Firms will enter and exit an industry as price fluctuates.
The diagram and related discussion shows how knowledge of competitors cost structures can provide useful productions about the market.
The economics is less explicit.
But note this:
“To its credit, the development group pioneered the use of internal markets… . This helped us more fully appreciate the value of having measures based on economic reality.”
This is transfer pricing.
“Determine where and how the organization can best create value in society to maximize its own value long term through a value of experimental discovery.”
“Determine where and how the organization can best create value in society to maximize its own value, long term, through a process of experimental discovery.”
Porter? RBV? Something else?
Any novelty here?
(Regarding the erosion of profitability over a product’s life…)
The wide range of strategies available to slow this decline include: developing good customer relationships; maintaining a strong brand with the quality and consistency to back it up; developing hard to duplicate distribution channels; establishing long term sales or supply contracts; developing new applications;”
(continues with IP protection, benefit/cost improvements.)
It is apparent from Koch Industries’ vision and the diversity of its businesses that we view ourselves as bound by capabilities, rather than our industries or products, as is more typical.
Insure that people with the right virtue and talents are hired and retained. Maintain a culture based on the MBM principles.
Virtue is singular, but talents is plural.
(It takes all kinds to make a world)
It takes all kinds to make a world
All of us are better than any of us.
(Actually, this one is nonsense)
Different kinds decisions require different processes