The Principles of Market-Based Management

Subject: Management
Pages: 8
Words: 2208
Reading time:
9 min
Study level: PhD

Introduction

Market-based management refers to the approach of management whereby all the corporate functions are defined in terms of market equivalents. Charles Koch, the CEO of Koch, the largest privately owned firm in the US founded this theory. He found out that successful societies had some features or ways of doing things that were not present in unsuccessful societies. He, therefore, concluded that if a firm wanted to be successful it must then adopt the features and characteristics of the successful firms (Gable & Ellig, 1993). The approach treasures continued acquisition and use of new knowledge and are based on the free enterprise principles. These principles require that all operations that involve the organization and its members should be based on market process analysis, just conduct, and a price system. In addition, the principles of free flow of information and comparative advantage as well as property rights and market incentives should be adhered to (Cowen & Ellig, 1995).

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Market-based management, therefore, gives management a holistic approach because it integrates theory and practice. As a result, the organization is thoroughly equipped to face its challenges effectively. This approach is based on the fundamental principle of creating value for all stakeholders which includes the customers, the communities, and the company members (employees and stockholders). The approach encourages employees to be innovative and challenge the status quo which leads to the creation of more value for all stakeholders (Hackett, 1998).

The principles of market-based management

This refers to the guidelines that define the market-based approach. It outlines some standards by which procedures and individual’s actions are evaluated as well as how the goals of the firm are set and achieved. They are explained as below.

Vision

This starts by developing a vision for the company which should be clear and inspiring. It should not be a fancy vision statement that is found in every firm yet not understood by the members of the organization. The vision should be well understood by members of the organization and each of them should be able to identify with it. Therefore, it should be tied to what the members are expected to accomplish in the organization. This involves the creation of long-term value whereby the organization identifies the means and opportunities to create the greatest value. It involves evaluating the available opportunities to determine the one that not only produces the greatest value in the short-term but also in the long-term. Lastly, the members should have a shared understanding of what is to be achieved. However, they should be empowered to pursue the vision in the various ways provided that they are in line with the company’s practices (Varey, 2002).

Virtue and Talents

This is the process by which the management hires and retains and develops the employees with an aim of inculcating the right values and skills. Concerning virtue the management must ensure that those people it hires have the same understanding of values as promoted by the company. This means that the organization should seek to employee individuals with entrepreneurial spirit and who value integrity. The people to be recruited should also have the required skills and capabilities or they should be able to learn the required skills to fit in to the company’s system. For instance, the employees recruited should be able to work with minimal supervision and be innovative. Otherwise, the room created for decision-making and the authority delegated to subordinates will be of no use. This shows that if the employees brought into the organization are not equipped with the required skills and capabilities, then the benefits of delegated authority will not be realized (Koch, 2007).

On the other hand, the organization must ensure that all its activities and operations are conducted lawfully and with integrity. Secondly, the management must involve itself only in lawful operations. This includes sticking to lawful means even if it costs the company because this cultivates a sense of integrity within the organization and presents a good picture to the public. This will in turn result in a good reputation, which is an intangible asset. For instance, when a company can operate illegally without registering with required authorities and still do business. However, such benefits are short-lived because the company can be banned permanently from operation if discovered. On the other hand, when a company meets all its legal requirements it is assured of its long-term existence hence it can plan on a long-term basis (Best & Cram101 Textbook Reviews, 2006).

Virtues should go beyond adherence to rules and regulations whereby all processes are carried out ethically. The company’s activities should not be harmful to the environment in which it is operating. This involves sharing part of its earnings with the community by sponsoring or initiating development projects. The projects should address the needs of the target group, to ensure that they not be mere public relations act. This ensures that the community is not a threat to the company’s existence in the area. Instead the community views the company as a resource and they will be willing to contribute to its progress (Pohlman & Gardiner, 2000).

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Knowledge processes

This involves acquiring and sharing the best knowledge within the organization whereby the employees are involved in continued learning processes to gain new knowledge and ways of doing things. It also entails having an open mind and challenging the status quo to come up with new ways of creating more value. Therefore, the members need to be proactively involved in seeking, creating and sharing the best knowledge that can be used to promote the company’s vision. This means that the process is not a one-time event whereby the management organizes for a training session. Instead it should be a carefully planned and regular process where employees are challenged to seek new knowledge. The acquired knowledge is then harnessed and tested to determine its value to the firm and to its stakeholders (Cowen & Ellig, 1995).

Putting up such measures promotes a culture of learning within the organization which leads to employee empowerment. When employees are equipped with the required knowledge they will be able to develop products and processes that will ensure that the company’s performance is unrivalled. One of the ways of promoting learning among employees is by honoring the new inventions that are developed. This motivates the employees to come up with innovative ideas because they know that they will also have a share in the benefits. The organization must also measure constantly the values realized through the new knowledge. This will help in knowing the direction in which the inventions should be directed as well as determining how to improve the learning process (Best, 2009).

Decision Rights

Once the employees have understood the vision of the organization they should then be empowered to carry out their duties to the fulfillment of that vision. This is a clear shift from the traditional way whereby either one person or a few individuals in the organization make all decisions. The leader therefore assumes the role of a coach whereby he is supposed to harness the different knowledge and put it together to determine which one best suits the current situation (Koch Industries Inc., n.d). On the other hand, authority to make decisions is accompanied by responsibilities whereby an individual is responsible for the decisions he or she makes. Therefore, when provided with incentive and authority and armed with the necessary knowledge the decision maker is held responsible for the decisions he or she makes in the organization. This ensures that people do not just make decisions but make decisions they can account for (Whetten & Godfrey, 1998).

Incentives

This refers to appreciating employees’ contribution in creating value for the firm. An organization should put in place reward schemes that will motivate the employees to put more effort in pursuing its vision. This means that employees are rewarded according to the value they create in the organization. Most employees are stuck with new ideas because no one will recognize their efforts even if the idea succeeds. On the other hand, if the idea fails they will be subjected to punishment for doing things differently. However, an organization that encourages its employees to come up with new ideas makes work fulfilling when such ideas are successfully implemented. As a result, the employees’ commitment to the organization is enhanced. In addition, the employees will be motivated to realize their full potential (Novick, Morrow & Mays, 2008).

Value Creation

This involves making life better for all stakeholders. The organization should not be carrying out routine processes without any specified target. However, it should always direct it activities towards creation of long-term value. There should performance-measuring standards that should be put in place to be able to measure the amount of value created. These standards should be able to measure the performance an individual or a team. They should also be able to measure the performance of an asset, a given process or the performance of the plant. The measuring standards should be understood by the employees so that they can perform their tasks in line with them (Koch, 2007).

The performance standards should also be aligned to the company’s vision so that when a standard is attained the company will have made a step towards achieving its vision. However, there are some reward schemes that promote behaviors that are opposite of what they claim to be. For instance, organization policies can outline that sales people should focus on making the most profitable sales. On the contrary, such a company can have a reward scheme that rewards its sales people based on the volume of sales made. Therefore, the company will end up not achieving its vision because the employees will concentrate on making more sales instead of the most profitable so that they can be rewarded (Copeland & Dolgoff, 2005).

Customer Focus

Customer refers to all stakeholders of the organization; however, the consumers are given priority. This principle explains that every activity in the organization should be directed towards the identification and satisfaction of the customers’ needs. Hence, the consumer is given the highest priority when developing the company’s vision. The management should set up mechanism that will help in identifying and anticipating customers’ specific needs. One of the most preferred ways of identifying customer needs is through market research. As a result, the organization will be better placed to develop products and services that will surpass customers’ expectations. For instance, the organization can carry out a market research to determine the trends in customer’ tastes and preferences (Carolina Journal staff, 2009).

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Change

Every organization in the current business environment is subject to change; otherwise, it will be pushed out of business. This principle encourages organization members to be change oriented which means they should be ready to embrace change. Change therefore, starts with empowerment of the employees whereby authority is delegated to the lower levels of the organization. This is meant to encourage the employees to develop new ideas on how the company can create more value as well as adapt to its changing environment (Doğaç, Özsu & Ulusoy, 1999). The management should also create a culture whereby problems can be transformed into needs to be met. A company should be ready to re-structure its processes if that is the only way they will it has to continue to realize its vision. A case in point is whereby a product produced by a firm has reached maturity stage. Instead of sticking to conventional ways the company should reinvent the product or drop it all together in favor of a new product. This includes changing to a new sector if necessary (Koch, 2006).

Conclusion

Market-based management is based on the idea that a company that is successful has adopted some features and activities that those unsuccessful companies have not. Charles Koch, the CEO of Koch Industries Inc, first used the approach in the late 1980s. The company developed to become the largest privately owned firm in the world. This approach explains that in a free society companies that emerge as successful adopt some practices that others do not. Koch further came up with principles of the market-based approach which he believed would help any company to be successful. Vision is one of them and it states that a company should outline its vision clearly, in line with what it wants to achieve.

The second principle is Virtue and talents which explains the importance of adhering to lawful practices as well as operating with integrity and ethically. Thirdly, there is knowledge of processes which explains the importance creating and sharing new knowledge in an organization. Fourth, there is decision right which states that authority needs to be delegated to the employees to help them in developing new ideas for the company. The fifth principle is incentives which explains that the organization needs to appreciate the contributions that the employees make in the organization by rewarding them. Value creation is the sixth principle and it states that all activities are supposed to be focused on value creation. The last one is change which states that all members of the organization should have a positive attitude to change. The approach therefore explains that an organization that sticks to these principles will be successful.

References

Best, R. J. (2009). Market-based management: strategies for growing customer value and profitability. Upper Saddle River, NJ: Pearson Prentice Hall

Best, R. J. and Cram101 Textbook Reviews (2006). Outlines & Highlights for Market-Based Management by Best, ISBN: 013008218x. Ventura, CA: Academic Internet Publishers Incorporated

Carolina Journal Staff (2009). Head of MBM Institute explains basic concepts behind the buzzwords. Web.

Copeland, T. E. and Dolgoff A. (2005). Outperform with expectations-based management: a state of the art approach to creating and enhancing shareholder value. Hoboken, NJ: John Wiley and Sons.

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Cowen, T. and Ellig J. (1995). “Market-Based Management at Koch Industries: Discovery, Dissemination, and Integration of Knowledge,” Competitive Intelligence Review 6(4): p. 1-10.

Doğaç A. M. Tamer Özsu, Ozgur Ulusoy (1999). Current trends in data management technology. Hershey, PA: Idea Group Inc (IGI).

Gable W. and Ellig J. (1993). Introduction to Market-Based Management. Fairfax, VA: Center for Market Processes.

Hackett, S. C. (1998). Environmental and natural resources economics: theory, policy, and the sustainable society. Armonk, NY: M.E. Sharpe

Koch, C. G. (2006). Market based management: the science of human action applied in the organization. Houston, TX: Bright Sky Press

Koch, C. G. (2007). The science of success: how market-based management built the world’s largest private company. Hoboken, NJ: John Wiley and Sons Koch Industries Inc. (n.d). Overview. Web.

Novick, L. F., Morrow, C. B. and. Mays, G. P. (2008). Public health administration: principles for population-based management. Sudbury, MA: Jones & Bartlett Learning.

Pohlman R. and Gardiner, G. (2000). Value driven management: how to create and maximize value over time for organizational success. New York, NY: AMACOM Div American Mgmt Assn.

Varey, R. J. (2002). Marketing communication: principles and practice. London: Routledge.

Whetten, D. A. and Godfrey, P. C. (1998). Identity in organizations: building theory through conversations. Thousand Oaks, CA: SAGE.