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Mbm presentation yek2008

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Mbm presentation yek2008

  1. 1. Market Based Management ® Principles and Practice YEK, August 22, 2008
  2. 2. The goal of this seminar is to provide you with: <ul><li>A clear understanding of the principles and mental models underlying MBM </li></ul><ul><li>Examples of what MBM looks like in practice </li></ul><ul><li>Challenges to your thinking </li></ul><ul><li>Ideas about how to apply MBM to improve your organization </li></ul><ul><li>An excuse to have a little fun. </li></ul><ul><li>But only just a little, so sit up straight. </li></ul>
  3. 3. What makes MBM so great?
  4. 4. <ul><li>In 1987, Forbes republished its original “Forbes 100” list and compared this to its 1987 list of top companies. </li></ul><ul><li>Of the original group, 61 had ceased to exist. </li></ul><ul><li>Of the remaining 39, 18 had managed to stay in the top 100. </li></ul><ul><li>Of the 18 that stayed in the top 100, only 2 performed better than market average. </li></ul><ul><ul><li>(Kodak and GE) </li></ul></ul>In 1917, Forbes formed the first list of 100 largest American companies
  5. 5. Standard & Poor’s 500 <ul><li>Of the 500 companies originally in the S&P 500 in 1957, only 74 (14.8%) remained on the list through 1998. </li></ul><ul><li>Of these 74, only 12 outperformed the S&P index itself over the 1957-1998 period. </li></ul>
  6. 6. HOW WILL WE SURVIVE?!?
  7. 7. The doomed 98 percent <ul><li>They didn’t change </li></ul><ul><li>They changed, but not fast enough </li></ul>
  8. 8. Creative Destruction
  9. 9. <ul><li>“ The world is too big for us. Too much going on, too many crimes, too much violence and excitement. </li></ul><ul><li>Try as you will, you get behind in the race, in spite of yourself. It’s an incessant strain, to keep pace…And still, you lose ground. Science empties its discoveries on you so fast that you stagger beneath them in hopeless bewilderment. </li></ul><ul><li>The political world is news seen so rapidly you’re out of breath trying to keep pace with who’s in and who’s out. Everything is high pressure. Human nature can’t endure much more!” </li></ul>Atlantic Journal June 16, 1833
  10. 10. The Question: Is the world changing or Is it not changing? X
  11. 11. The doomed 98 percent <ul><li>They didn’t change </li></ul><ul><li>They changed, but not fast enough </li></ul><ul><li>They changed, and they changed fast, but they changed the wrong things </li></ul>
  12. 12. Change happens Subjective value Pride goes before a fall Trust matters Buy low, sell high Smarter than anyone ≠ smarter than everyone Innovation drives markets People crave fulfillment
  13. 13. Lesson: <ul><li>To survive in the face of creative destruction, we must master timeless principles </li></ul>
  14. 14. Lesson: <ul><li>To survive thrive in the face of creative destruction, we must master timeless principles </li></ul>
  15. 15. Timeless <ul><li>Integrity </li></ul><ul><li>Compliance </li></ul><ul><li>Value Creation </li></ul><ul><li>Principled Entrepreneurship ™ </li></ul><ul><li>Customer Focus </li></ul><ul><li>Knowledge </li></ul><ul><li>Change </li></ul><ul><li>Respect </li></ul><ul><li>Humility </li></ul><ul><li>Fulfillment </li></ul>Koch Guiding Principles
  16. 16. Market Based Management ® <ul><li>A management philosophy that enables an organization to succeed long term by applying the principles that allow a free society to prosper. </li></ul>
  17. 18. North Korea South Korea (the dictator’s pad)
  18. 19. <ul><li>High Income Countries ( $11,456 or more annual income per capita) </li></ul><ul><li>Upper Middle Income Countries ( $3,706 to $11,455/capita) </li></ul><ul><li>Lower Middle Income Countries ( $936 to $3,705/capita) </li></ul>World Development Report, World Bank, 2007 Figures adjusted for cost-of-living differentials Low Income Countries ( $935 or less annual income per capita) Luxembourg 64,400 United States 45,850 Japan 34,600 Canada 32,600 Italy 29,900 New Zealand 26,340 S. Korea 24,750 Estonia 19,680 Romania 10,980 Brazil 9,370 China 5,370 India 2,740 Haiti 1,050 Rwanda 860 Ethiopia 780 N. Korea 580
  19. 20. 2007 Index of Economic Freedom 1. Hong Kong 2. Singapore 3. Australia 4. United States 5. New Zealand 5. United Kingdom 7. Ireland 8. Luxembourg 9. Switzerland 10. Canada 11. Chile 12. Estonia 13. Denmark 14. Netherlands 14. Iceland 143. Bangladesh 144. Venezuela 145. Belarus 146. Burundi 147. Chad 148. Guinea Bissau 149. Angola 150. Iran 151. Republic of Congo 152. Turkmenistan 153. Burma 154. Zimbabwe 155. Libya 156. Cuba 157. North Korea Wall Street Journal/Heritage Foundation ranking of 157 countries Top 16 Bottom 16
  20. 22. Lesson: <ul><li>Economic freedom  entrepreneurial innovation and productivity </li></ul><ul><li>Entrepreneurship and productivity </li></ul>PROSPERITY
  21. 23. Economic Thinking
  22. 24. Subjective Value <ul><li>Depends on </li></ul><ul><li>Buyer expectations (taste and perception) </li></ul><ul><li>Alternatives </li></ul><ul><li>Circumstances </li></ul><ul><li>Time </li></ul><ul><li>Does NOT depend on </li></ul><ul><li>Cost to produce </li></ul><ul><li>List price </li></ul>Value determined by the consumer’s expected satisfaction
  23. 25. <ul><li>Stores used to pay 10¢/bag of whole carrots and sell them for 17¢/bag. </li></ul><ul><li>They began paying 50¢/bag for baby carrots and selling them for $1/bag. </li></ul><ul><li>American consumption rose from 6 to 10.5 pounds/person/year. </li></ul>Digging the baby carrot By Elizabeth Weise, USA TODAY August 11th, 2004 ...Tired of the wastefulness he was seeing (400 tons/day), Mike Yurosek whittled &quot;babies&quot; from grown-up castoff carrots.
  24. 26. Know Thy Customer <ul><li>“ What we sell is the ability for a 43-year-old accountant to dress in black leather, ride through small towns and have people be afraid of him.” </li></ul>Harley Davidson Executive
  25. 27. Why Buffets Make Us Miserable <ul><li>Hidden cameras in pizza restaurant </li></ul><ul><li>Random sample chosen for free buffet </li></ul><ul><li>What do you predict happened? </li></ul><ul><li>Why? </li></ul>
  26. 28. Sunk Cost <ul><li>Cost already incurred in a project that cannot be changed by present or future actions. </li></ul>
  27. 29. <ul><li>The value of the most valuable alternative foregone when you choose to use a resource in a particular way. </li></ul>Opportunity Cost
  28. 30. Opportunity Cost <ul><li>A = $100 B = $80 C = $30 </li></ul><ul><li>What’s the opportunity cost of B? </li></ul><ul><li>What’s the opportunity cost of A? </li></ul><ul><li>Have you ever seen a heading for “opportunity costs” in an accounting ledger? </li></ul>
  29. 31. Foundations of Prosperity <ul><li>Rule of law and a principles culture </li></ul><ul><li>Property rights </li></ul><ul><li>Freedom of contract </li></ul><ul><li>Market mechanisms and free speech </li></ul><ul><li>Self-interest </li></ul>Value-creating entrepreneurs
  30. 32. The MBM Framework Value-creating entrepreneurs Rule of law, principles culture Property rights Freedom of contract Prices, profits, losses, and free speech Prosperous Societies Successful Organizations Vision Virtue & talents Decision rights Incentives Knowledge processes
  31. 33. Vision Quality Teamwork Excellence Change Responsibility Leader Service Success Innovation Initiative
  32. 34. Dilbert does vision <ul><li>“The New Venture Mission is to scout profitable growth opportunities in relationships, both internally and externally, in emerging, mission-inclusive markets, and explore new paradigms and then filter and communicate and evangelize the findings.” </li></ul>
  33. 35. Vision Actions
  34. 36. Vision Actions The way we’ve always done it What makes us feel righteous
  35. 37. Value-creation process Capabilities Market Opportunities Venture Experiments Value Creation
  36. 38. Lessons for Leaders <ul><li>Leaders: eat, drink, breathe, sleep, and SPEAK vision. </li></ul><ul><li>Help people connect their daily work to the accomplishment of something big. </li></ul><ul><li>Separate ends from means. </li></ul><ul><li>Relentlessly and honestly assess capability. </li></ul><ul><li>Play your strengths. </li></ul>
  37. 39. “ The most pathetic person in the whole world is someone who has sight but no vision.” Helen Keller
  38. 40. The MBM Framework Value-creating entrepreneurs Rule of law, principles culture Property rights Freedom of contract Prices, profit, and loss Vision Virtue & talents Decision rights Incentives Knowledge processes
  39. 41. Virtue and Talents <ul><li>Virtue = Values and Beliefs </li></ul><ul><li>Talents = Skills and Knowledge </li></ul>
  40. 42. Knowledge and Skills Values and Beliefs Consistent with desired culture Inconsistent with desired culture 4 2 1 3 Inadequate for job expectations Adequate for job expectations
  41. 43. <ul><li>Somebody once said that in looking for people to hire, you look for three qualities: integrity, intelligence, and energy. And if they don't have the first, the other two will kill you. You think about it; it's true. If you hire somebody without the first you really want them to be dumb and lazy. </li></ul><ul><li>Warren Buffett </li></ul>
  42. 44. Lessons for Leaders <ul><li>Never compromise on values. </li></ul><ul><li>A principles-based culture frees managers to become leaders. </li></ul><ul><li>Make assessment of principled behavior part of the review process. </li></ul>
  43. 45. Z
  44. 46. <ul><li>Methodical </li></ul><ul><li>Analytical </li></ul><ul><li>Task-Oriented </li></ul>
  45. 47. <ul><li>Visionary </li></ul><ul><li>Determined </li></ul><ul><li>Leader </li></ul>
  46. 48. Z <ul><li>Bold </li></ul><ul><li>Innovative </li></ul><ul><li>Risk-Taker </li></ul>
  47. 50. Thinking of ordering pizza tonight
  48. 51. The MBM Framework Value-creating entrepreneurs Rule of law, principles culture Property rights Freedom of contract Prices, profit, and loss Vision Virtue & talents Decision rights Incentives Knowledge processes
  49. 52. Decision Rights <ul><li>Ownership </li></ul>Accountability Roles Responsibilities Expectations
  50. 53. Decision Rights <ul><li>The bank </li></ul><ul><li>The Nike zone </li></ul><ul><li>Best isn’t always best, or, what the Ph.D. economist learned from his secretary </li></ul>
  51. 54. Comparative Advantage <ul><li>The ability of a person, business, or country to produce a good or service at a lower opportunity cost than some other entity. </li></ul><ul><li>Advantage of producing a particular good or service relative to producing other goods or services. </li></ul>
  52. 55. Comparative Advantage “ Are you working on the thing that you are best at?” (Gallup) “ An army of one.” (U.S. Army)
  53. 56. Lessons for Leaders <ul><li>Don’t make Michael Jordan the coach. </li></ul><ul><li>Don’t base a person’s authorities on what the guy before him did. </li></ul><ul><li>Connect everyone’s duties to mission. </li></ul><ul><li>For the love of all that’s holy, assign refrigerator duty to someone. </li></ul>
  54. 57. The MBM Framework Value-creating entrepreneurs Rule of law, principles culture Property rights Freedom of contract Prices, profit, and loss Vision Virtue & talents Decision rights Incentives Knowledge processes
  55. 58. Incentives <ul><li>Incentives are subjective </li></ul><ul><li>Incentives include financial and non-financial </li></ul><ul><li>Individual performance varies considerably </li></ul>
  56. 59. # of Employees Performance 5 Mean 1 2 16 32 64
  57. 60. A market-based approach to compensation: <ul><li>Aligns individual incentives with the organization’s goals </li></ul><ul><li>Attracts and retains top performers </li></ul><ul><li>Motivates improved performance </li></ul><ul><li>Encourages principled entrepreneurship </li></ul>
  58. 61. A market-based compensation philosophy: <ul><li>Pays for long-term value added, and not for: </li></ul><ul><li>Job title </li></ul><ul><li>Time with the organization </li></ul><ul><li>Degrees and certifications </li></ul><ul><li>Similarities in job classifications </li></ul>
  59. 62. But wait; there’s more! <ul><li>A market-based compensation philosophy also entails: </li></ul><ul><li>No guaranteed annual increase </li></ul><ul><li>No centralized job evaluation process </li></ul><ul><li>No centralized formulas, formal pay structures, ranges, limits, or budgets </li></ul>
  60. 63. The Lake Wobegon Effect <ul><li>Online Dating Analysis: Highlights </li></ul><ul><ul><li>4% of men claimed income of $200k v. 1% national average </li></ul></ul><ul><ul><li>Men and women were 1 inch taller than national average. </li></ul></ul><ul><ul><li>70% of women claimed “above average” looks, 24% “very good” looks. </li></ul></ul><ul><ul><li>67% of men claimed “above average” looks, 21% “very good” looks, and less than 1% “less than average” looks. </li></ul></ul>
  61. 64. Lake Wobegon meets Wall Street <ul><li>1999 - HP had missed earnings projections for 9 consecutive quarters </li></ul><ul><li>75% of employees throughout this period were rated as “exceeding expectations” </li></ul>
  62. 65. The MBM Framework Value-creating entrepreneurs Rule of law, principles culture Property rights Freedom of contract Prices, profit, and loss Vision Virtue & talents Decision rights Incentives Knowledge processes
  63. 66. Reality Curve Perception Curve
  64. 67. Honest and Frequent Feedback
  65. 68. Knowledge processes in a free market <ul><li>Market mechanisms (e.g., prices, profits, and losses) and free speech convey information about value creation and destruction. </li></ul><ul><li>This information swiftly yields positive and negative consequences for market participants. </li></ul>
  66. 69. Knowledge processes in an organization <ul><li>Key drivers of value </li></ul><ul><li>Key cost drivers </li></ul><ul><li>How are we doing? </li></ul><ul><li>How could we be doing? </li></ul>
  67. 70. Knowledge Processes <ul><li>Internal Markets </li></ul><ul><li>Measures </li></ul><ul><li>Knowledge Sharing </li></ul><ul><li>Challenge Process </li></ul>
  68. 71. Knowledge Processes <ul><li>Internal Markets </li></ul><ul><ul><li>Company X websites </li></ul></ul><ul><ul><li>University space battles </li></ul></ul><ul><li>Measures </li></ul><ul><li>Knowledge Sharing </li></ul><ul><li>Challenge Process </li></ul>
  69. 72. Knowledge Processes <ul><li>Internal Markets </li></ul><ul><li>Measures </li></ul><ul><ul><li>Internal costs and profitability </li></ul></ul><ul><ul><li>Benchmarking </li></ul></ul><ul><ul><li>Opportunity cost </li></ul></ul><ul><li>Knowledge Sharing </li></ul><ul><li>Challenge Process </li></ul>
  70. 73. Knowledge Processes <ul><li>Internal Markets </li></ul><ul><li>Measures </li></ul><ul><li>Knowledge Sharing </li></ul><ul><ul><li>The bent part </li></ul></ul><ul><li>Challenge Process </li></ul>
  71. 74. Knowledge Processes <ul><li>Internal Markets </li></ul><ul><li>Measures </li></ul><ul><li>Knowledge Sharing </li></ul><ul><li>Challenge Process </li></ul><ul><ul><li>Its absence = lack of leadership and courage </li></ul></ul>
  72. 75. Yes-men only, please <ul><li>“ At a meeting, it is appropriate for a subordinate to say nothing substantive until he hears his superior take a position or give a cue. Then it is appropriate for the subordinate to chime in with information and other statements tending to support the superior’s line. You don’t do this. You just say what you think.” </li></ul><ul><li>* Bill Niskanen, The Suicidal Corporation: How Big Business Fails America </li></ul>
  73. 76. Lessons for Leaders <ul><li>Shrink overhead </li></ul><ul><li>No hidden time </li></ul><ul><li>Striving to measure and failing is better than declaring something unmeasurable </li></ul><ul><li>If your people don’t speak up, YOU are at fault. </li></ul>
  74. 77. Learning by Doing <ul><li>“ People often assume that you have to have great hands to become a surgeon, but it’s not true. To be sure, talent helps… Nonetheless, attending surgeons say that what’s most important to them is finding people who are conscientious, industrious and boneheaded enough to keep practicing this one difficult thing day and night for years on end… And it works… Indeed, the most important talent may be the talent for practice itself… a person’s willingness to engage in sustained training.” </li></ul><ul><li>Atul Gawande, Surgeon. </li></ul>
  75. 78. &quot;It is a common delusion that you make things better by talking about them.&quot; Dame Rose Macaulay
  76. 79. Questions & Answers <ul><li>[email_address] </li></ul>

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